Mum’s right – money doesn’t grow on trees

“Billions of dollars… were just created by the Reserve Bank…We owe it to nobody, we’ve created it… and we write most of it off…”.
Jim Bolger, former Prime Minister of New Zealand, speaking on 15 July 2020.

Jim Bolger speaking on Radio New Zealand’s Morning Report 15 July 2020.

It’s a common misconception that banks use their savers’ money to make loans to people such as you and I to buy something we don’t have the cash for. In reality, the money we borrow is created by the banks out of thin air at the time it is placed in our bank account.

The New Zealand government, along with all the government departments – such as housing etc – also get money in the same way; it offers commercial banks Bonds as collateral. A government bond is an agreement that the government will pay back what’s borrowed plus interest (using tax payers’ money).

But the country has its own bank that can create all the money we need – interest-free. It’s called the Reserve Bank of New Zealand (RBNZ). But one step at a time…

Commercial banks can create money out of thin air under New Zealand’s Reserve Bank’s rules. When you – or the government – take out a loan the lender simply types the loan amount into the borrower’s account as a credit (although it is really debt – digital money is debt).

When the loan is repaid the original loan amount is deleted from the bank’s computer, and the bank keeps the interest. The bank has charged interest on money it didn’t have.

The system is called credit creation or risk based lending and is based on the perceived risk the bank takes in advancing you credit in exchange for a charge on your assets (such as your home).

But don’t take my word for it. Consider this from the Bank of England publication Money Creation in the Modern Economy: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

Digital ‘money’ is debt

But it’s not really money (cash), it’s debt. We have a debt-based monetary system.

Lending on housing is relatively low risk so banks only need to hold about 8 per cent in value of depositors’ funds for the credit they create and lend in mortgages. A bank only needs $40,000 in the vault to advance you a home loan of $500,000.

Lending to businesses and helping job creation, research and development is a far riskier undertaking, so the banks hold more than 20 per cent in value of depositors’ funds for the credit they create and lend for these purposes. But good luck getting a loan to fund job creation…

Martin Wolf, chief economics commentator at the London Financial Times, said (video below) in 2014: “Why should we let such a social creation [money] be handed over to profit-seeking private enterprises?”

In plain English; why do we as a society allow private companies (banks) to create our money supply, pick and choose who gets a loan, and then charges interest on money they don’t have? Why are private profit-making enterprises allowed to have such awesome power over people, business, government, and countries?

It’s a good question, and one that is increasingly being asked – particularly as the New Zealand government is having to borrow $Billions to get us through the Covid-19 crisis.

The country’s debt is piling up and our tax dollars – for decades into the future – will be used to pay the interest banks will charge our government. Our children and grandchildren will be saddled with this debt forever more – unless the system can be changed or bold decisions made – such as writing it off, deleting the debt.

Remember, there is no ‘government money’ to pay off the loans back. It uses money collected through taxes to pay off bank loans. The people are saddled with the debt.

According to the Reserve Bank of New Zealand the amount of money we the people owe the High Street banks (in 2019) is $271 billion and that was just the household debt. Add in all private sector debt and it’s an eye-watering $456 billion.

Sad to say that under the current system, the debt we all owe can never be totally paid off. Even if we all tried really, really hard. There simply is not enough cash in our collective pockets to pay off all the debt we owe the banks. And that’s just us – it doesn’t include money Government has borrowed in our name.

Debt Jubilee

The only way to clear the debt is by way of a Debt Jubilee to wipe out all private debt to the banks.

Those looking to reform the monetary system say that instead of banks having the power to create interest-bearing debt, the Reserve Bank should issue our money debt-free. Or even at the current New Zealand Official Cash Rate of 0.25% (one quarter of one percent; a fraction of the current mortgage rate).

Now, before you choke on your tea and spill it over your credit card statement showing 20 per cent interest, consider this; the Reserve Bank already has the power to create money because it produces our notes and coins.

This cash makes up about three per cent of New Zealand’s money and the rest is digital ‘money’ created by private banks. If we move to a cashless society, then all money will be created by private banks.

To change the future, all our Reserve Bank has to do is create the debt-free digital money the government needs. That money could build homes, schools, hospitals…Oh and get us through Covid-19 and perhaps pay people a Universal Basic Income. Although the jury is out on whether UBI is the Utopian answer – do we want to live in a world where we are all beholden to government for a hand-out? I don’t think so.

And to keep money creation well out of the way of politicians – because we all know they couldn’t be trusted with such awesome power – a new independent body would have autonomy to manage the money supply as it sees fit (well away from the private banks and other vested interests).

This does not mean the end of the road for banks. They could still lend money — but not a cent more than is in their vaults. Banks could also continue to provide current and savings accounts, offer foreign exchange, provide financial advice, and sell insurance. They just won’t have a license to create money out of thin air and lend it out with interest.

Under a revised monetary system, once the bank loans are repaid the money can be lent out again.



Steve Hart is a writer and podcaster.