Sovereign Money FAQs
1. Who creates our money now?
A: Private banks create 98% of NZ’s money electronically, and The Reserve Bank of New Zealand (RBNZ) creates the notes and coins (2%).
2. Why does it matter who creates our money?
A: The quantity of money in the economy and where it is spent has a huge impact on people’s lives. For example, when banks (by issuing too many mortgages) create too much money for the housing sector, house prices skyrocket. Of course the more money banks lend, the more profit they make. Even though this is good for banks, it’s often harmful to society as a whole.
3. I am shocked to hear banks create money out of thin air. Is it true?
A: Yes! Contrary to common belief that banks only lend out their depositor’s money, they in fact create new money when they make loans. Refer to the 2014 Bank of England's quarterly bulletin for detail on money creation in the modern economy.
4. Are you saying banks and bankers are evil?
A: No. In fact banks are necessary. Banks are acting legally, in their best interest, according to the rules of our current system. It is the rules that need fixing. You will see banks are an important part of the Positive Money Solution: See Positive Money: Creating a Sovereign Money System (page 7)
5. Can the problem be solved? What is the solution?
A: Yes. There are a number of well thought out solutions. We favour the Positive Money proposal. Implementing this solution requires straightforward law changes, which in turn rely on the knowledge and democratic will of the people. Though straightforward, the process may not be easy as powerful people have something to lose.
6. Q: Are you saying the government should take over banking in NZ?
A: No, definitely not. We are saying that the RBNZ should take over the money creation powers of banks.
7. Will banks still make a profit under a Sovereign Money system?
A: Yes, although less.
8. Under a Sovereign Money system, will small businesses be able to get loans?
A: Yes. In fact, businesses in the productive economy will have much better access to funding. If banks make insufficient business loans, the RBNZ will create money earmarked especially for business. Rather than new money being allocated in a ratio of 90% for the financial/housing sector and 10% for the productive economy, that ratio will be reversed, with 90% of new money going to the productive sector.
9. Will a Sovereign Money system crash house prices?
A: No. Prices will stabilise and grow much more slowly over time. Kids will be able to afford houses again as wages catch up.
10. How can I help the cause?
A: The best way to help is to educate yourself about how the current system works and encourage your family and friends to do the same – when monetary reform legislation or petitions are put forward, it’s good to be able to make an informed choice about supporting them. Refer to our how you can help page for more detail.
11. Won’t removing the banking sector’s ability to create money reduce its capacity to make loans?
A: No, it is highly unlikely a Sovereign Money system will reduce the ability of the banking sector to make loans. In a sovereign money system, the money from loan repayments doesn’t disappear from the economy (as under the current system) but is available to be re-lent. Even if loan repayments and interest payments are insufficient to meet demand for new borrowing, banks can easily borrow from other banks or increase interest rates to attract new funds from customers.
(A Sovereign Money system will reduce banks’ ability to create excess loans, which drive up house prices. The capacity to make “good” loans to the productive economy will be increased.)
12. What if there isn’t enough sovereign money created - will my kids still be able to get a mortgage?
A: Yes, there’s no reason a Sovereign Money system should restrict banks’ ability to issue mortgages, for all the reasons listed above. If for some reason there were a shortage of funds across the entire banking system, the Reserve Bank could look at reintroducing the State Advances Corporation which loaned money for kiwis for over forty years.
13. Won’t ending private banks’ ability to create money cause recession and deflation by restricting banks’ ability to issue loans?
A: No, in the first place, a Sovereign Money system doesn’t restrict banks’ ability to issue loans (see Question 12). Ironically under the present system, there is already a credit shortage in the productive sector, which is the primary cause of current global deflation and recession.
Under the current system, banks lend too much in the good times (particularly to the non-productive financial sector), which creates booms and bubbles. And when the bubble bursts, banks cut back on lending. Because this reduces the amount of money in the economy, it only worsens deflation and recession.
We anticipate as inflows of sovereign money cause levels of private debt to shrink – without reducing the level of money in circulation - disposable incomes and spending in the real economy will increase. This, in turn, will increase revenue for businesses, making it easier for them to invest their own income in expansion, rather than borrowing.
14. Won’t adopting Sovereign Money cause hyperinflation, as in Zimbabwe and the Weimar Republic?
A: No, money creation can only become inflationary if it exceeds the productive capacity of the economy. And the publicly accountable Monetary Creation Committee would have a primary mandate to keep prices stable and inflation low.
If money creation feeds through into inflation, they would slow down or cease creating new money until inflation fell. Clearly this didn’t happen in Zimbabwe or the Weimar Republic (where the central bank was taken over by private interests that flooded the German economy with excess money). Likewise both cases were actually symptomatic of underlying economic collapse that led desperate governments to finance their spending through money creation.
15. Can we trust politicians and government to decide how much money should be created?
A: Yes. The Monetary Creation Committee (MCC) that makes these decisions will be independent from government, in much the same way as the current Monetary Policy Committee is independent from RBNZ.
The MCC doesn’t need to be perfect to make much better decisions than private banks do at present. Banks create the wrong amount of money for the economy about 90% of the time. The MCC will look at the needs of the economy as a whole, not just the profit opportunities of banks.
It makes far more sense for a publicly accountable Monetary Creation Committee to make decisions centrally about how much money the economy needs than to continue to allow thousands of individual loan officers (at private banks) to make these decisions behind closed doors. At present we allow government to decide how to spend our tax money, which far exceeds the amount of sovereign money that would be created.
16. Wouldn’t banks cease to be profitable under this model?
A: No, in a Sovereign Money system banks provide two essential functions, both of which can be highly profitable.
- The payments system. Billions of dollars are transferred between accounts every singleday. MasterCard, Visa and various other payment networks all run successful businessesby providing payment systems. It is unrealistic to think that banks would be unable to find a way to generate a profit given that they sit at the centre of the national paymentssystem.
- The lending/saving function. Banks would perform this function just like any other part ofthe financial sector, by getting funds from savers and investing them in financial assets and loans.
17. What will happen to my mortgage under a sovereign money system?
A: With the implementation of a Sovereign Money system, the demand deposits (loans) that make up 98% of New Zealand money stock would be converted into state-issued sovereign money held in accounts at the Reserve Bank of New Zealand. You would continue to make mortgage payments to your private bank. The bank would keep the interest payments and transfer principal repayments to the Reserve Bank.
18. If the government were to “create money” by accumulating assets without market funding, wouldn’t this increase push up involuntary holdings of settlement cash by banks, just as quantitative easing did in other countries? And wouldn’t this push down short term interest rates, causing a drop in the NZ dollar and inflation?
A: No, this critique equates our proposed sovereign money system with quantitative easing. Under quantitative easing, governments create money to invest in the non-productive financial sector. Under our system, government would only create money to invest in the productive sector.
Under a Sovereign Money system, banks would reduce excessive holdings of settlement cash by limiting borrowing.
19. How would a Sovereign Money system affect the Māori settlement process?
A: Under the current settlement process, iwi and hapū are only being paid a tiny fraction of the value of lands confiscated from them. Under a Sovereign Money system, where the government didn’t need to incur debt to make settlement payments, settlements could increase substantially, provided iwi and hapū are able to invest the funds in productive enterprises.
20. Is there a risk of the Kiwi dollar being attacked if NZ is the only country to adopt Sovereign Money?
A. New Zealand has a number of options in resisting pressure from the outside. One would be to ally ourselves with the booming BRICS economies (Brazil, Russia, India, China, South Africa) if Western interests threaten to attack our currency. Another would be to enact capital and foreign exchange controls (restricting movement of large sums of money out of the country) as Malaysia, China, India and Vietnam did when George Soros and other speculators attacked Asian currencies during the 1997 East Asian crisis.