Yes. Contrary to the common belief that banks only lend out their depositors’ money, they in fact create new money when they make loans. See the Reserve Bank Bulletin (31 January 2023): Money creation in New Zealand (PDF), which explains that “The vast majority of money in circulation is created by commercial banks, through the process of bank lending.”

In other words, lending creates new deposits, not the other way around. It sounds odd, but that’s how it works.

The quantity of money in the economy, where it comes from 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—and, potentially, the less money the government can spend in the economy for public services and infrastructure.

Interestingly, this isn’t because there is a fixed quantity of money that the government and private sector have to battle over – both commercial banks and the government’s own bank, the Reserve Bank, can create new money. It is because of the juggling act for governments and central banks who must keep inflation in check.

Too much money, whether it comes from the government or the banking system, can be inflationary. Expanding the money supply through bank credit, even though this is good for banks, is often harmful to society as a whole. This can happen if that money goes on less productive or useful things than the spending it competes with.

No.  In fact, banks are necessary. Banks are acting legally, in their best interests, 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 that proposes changes on three interconnected fronts: banking, public finance and technology.

Yes. There are a number of well thought-out solutions. This explainer highlights some of the options that Positive Money believes can lead to a better, fairer financial system, in particular (1) much better bank regulation to reduce the amount of money created for unproductive uses, and (2) having the government issue more than just the 2% it does currently.

While banks lend their newly-created money into existence, the government spends its new money into the economy. So bank-issued money comes with interest and repayment terms, while government-issued money arrives more like cash into household and business bank accounts – no interest is owed and it is yours to keep.

No, definitely not. Banks are an essential part of the economy, and responsible private banks are needed.

No. Almost all of our money comes into existence when the government spends or banks make loans. The ultimate source in both cases is the Reserve Bank which makes accounting entries in the so-called settlement accounts held at the Reserve Bank by commercial banks and the government.

The national (government) debt arises when the government chooses to fund the spending not covered by its tax receipts, by selling bonds to banks (called primary dealers). They then on-sell the bonds to other banks and institutions at a profit in the so-called secondary bond market. The bond holders (lenders) receive regular interest payments for the term of the bond and get their money back at the end of the loan term. This debt is owed to NZ-based and foreign bond holders in roughly equal amounts – and it does, indeed, raise the national debt.

But the government is not like businesses, households or councils: while they are just users of our currency, the government is the issuer and has the option to avoid this debt. It can do this by using its own bank to finance this spending. For instance, with a process called direct monetary financing, it can issue bonds which the Reserve Bank buys directly, with more favourable terms, including low or zero interest.

This would not increase the national debt since the government would be both the borrower and the lender. In accounting entries (which is what our money is), both the asset and the liability sit on the same consolidated Crown balance sheet. To use a private sector analogy, so-called ‘related party’ lending is common – a subsidiary with spare cash might lend it to head office or vice versa and in the consolidated accounts, the loan and debt cancel each other out: the company has not increased its overall debt.

While the accounting works the same way, the government and Reserve Bank have one big advantage – they don’t need to have spare cash to lend, they can create new money and that new money ends up in private sector bank accounts, making households and businesses better off.

Yes, although less.

Yes. In fact, businesses in the productive economy will have much better access to funding. The present system has failed small businesses. The ratio of new money going to the productive sector will increase compared to today’s situation, where mortgage lending dominates.

No. Prices will stabilise and grow much more slowly over time. Young people and ordinary working families will be able to afford houses again as wages catch up. And with less of the credit-driven, boom-bust property cycles, builders and property developers will be able to plan and manage their businesses better.

Not necessarily. A Positive Money system will not reduce the banking sector’s ability to make productive loans but it will limit their ability to lend too much where it is not needed.

Positive Money’s proposals will reduce banks’ ability to create excess credit, which drives up house prices. However, the capacity to make good loans to the productive economy will increase.

Under the present system, the amount of money banks have created to pay for the economy’s goods and services has more than doubled as a share of the economy over the past two decades, i.e., banks created twice as much money as was needed for the same amount of goods and services—that causes inflation, and it appeared in house and land prices rather than general consumer prices because the bank-created money entered the economy through mortgage credit.

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