Who creates our money now?
Private banks create 98% of NZ’s money electronically, and The Reserve Bank of New Zealand (RBNZ) creates the notes and coins (2%).
Why does it matter who creates our money?
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.
I am shocked to hear banks create money out of thin air. It sounds like a conspiracy theory. Is it true?
Yes! Contrary to common belief that banks only lend out their depositor’s money, they in fact create new money when they make loans. See https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy and https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2008/2008mar71-1lawrence.pdf
Are you saying banks and bankers are evil?
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 https://positivemoney.org/wp-content/uploads/2016/12/SovereignMoney-AnIntroduction-20161214.pdf (page 7)
Can the problem be solved? What is the solution?
Yes. There are a number of well thought out solutions. We favour the Positive Money proposal (see previous link). 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.
Are you saying the government should take over banking in NZ?
No, definitely not. We are saying that the RBNZ should take over the money creation powers of banks.
Will banks still make a profit under a Sovereign Money system?
Yes, although less.
With the Positive Money proposal, will small businesses be able to get loans?
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.
Will the Positive Money proposal crash house prices?
No. Prices will stabilise and grow much more slowly over time. Kids will be able to afford houses again as wages catch up.
How can I help the cause?
We have a whole list of things you can do to help. The best way to start 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. You may also make a donation here https://positivemoney.org.nz
Won’t removing the banking sector’s ability to create money reduce its capacity to make loans?
No, it is highly unlikely a Positive 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.
(The Positive Money proposal 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.)
What if there isn’t enough sovereign money created - will my kids still be able to get a mortgage?
Yes, there’s no reason a Positive 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 RBNZ would always have the option to create and auction newly created money to banks, on the provision they on-lend these funds into the real productive economy (i.e. to non-financial businesses).
Won’t ending private banks’ ability to create money cause recession and deflation by restricting banks’ ability to issue loans?
No, in the first place, a Positive 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.
Won’t adopting the Positive Money proposal cause hyperinflation, as in Zimbabwe and the Weimar Republic?
No, money creation can only become inflationary if it exceeds the productive capacity of the economy. And the publicly accountable Monetary Policy 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.
Can we trust politicians and government to decide how much money should be created?
Yes. The Monetary Policy Committee (MPC) 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 MPC 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 MPC 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 Policy 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.
Wouldn’t banks cease to be profitable under this model?
No, in a Positive 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 single day. MasterCard, Visa and various other payment networks all run successful businesses by 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 payments system.
- The lending/saving function. Banks would perform this function just like any other part of the financial sector, by getting funds from savers and investing them in financial assets and loans.
What will happen to my mortgage under a sovereign money system?
With the implementation of a Positive 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.
Isn’t there a risk of the Kiwi dollar being attacked if NZ is the only country to adopt Sovereign Money?
New Zealand has a number of options in resisting pressure from the outside. One would be to ally ourselves with countries enacting similar reforms. 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.
Help us to achieve real change in our money system and make sure that it works for the public good not just for private profits.
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