PART 3: Excerpt from Positive Money NZ’s submission to Parliament’s Finance and Expenditure Committee, September 2019.
What Positive Money NZ proposes is a system of managing New Zealand’s money supply under which the Reserve Bank creates all the country’s money (coins, notes and electronic) debt-free. This type of publicly created money is commonly known as Sovereign Money. The decision on how much or how little money needs to be created would be taken by an independent body called the Monetary Policy Committee (MPC). The MPC would be completely separate and insulated from any kind of political control or banking industry influence — in other words, the elected government would not be able to specify the quantity of money that should be created.
Upon making a decision to increase the money supply, the MPC would authorise the Reserve Bank to create new money by increasing the balance of the government’s ‘Central Government Account’. This newly-created money would be non-repayable and therefore debt-free and would be added to tax revenue and distributed according to the elected government’s manifesto and priorities.
To the average person, banks would appear to operate very much as they do now. However, the necessary ‘behind the scenes’ changes required to prevent banks from creating money would mean that there are a few subtle changes to the terms of service on current accounts and savings accounts.
Banks would not be permitted to lend the money held in Transaction Accounts (the equivalent of today’s current accounts). Instead, any money held in these accounts would be held in ‘fiduciary trust’ by the Reserve Bank on behalf of the customers. In practical terms the money would be held in a ‘Customers’ Funds Account’ — the equivalent of putting the money into a safe-deposit box with the customer’s name written on it.
These Transaction Accounts could then be considered 100% safe. Since the money is technically held at the Reserve Bank, the customers are guaranteed to be repaid, even if their bank becomes insolvent. This guarantee does not expose either the government or the Reserve Bank to any financial risk since Transaction Accounts are inherently risk-free for the customer.
In order to lend money, banks would need to find customers willing to give up access to their money for a certain period of time. In practice, this means that the customer will need to invest their money for a defined time period or set a minimum notice period that must be given before the money can be withdrawn.
Banks would then operate in the way that most people think they currently do — by taking money from savers and lending it to borrowers.
Benefits of the Positive Money proposal
Money where needed
The money supply will be expanded based on the needs of the productive economy (businesses) and the need for infrastructure, not based on what maximizes bank profits. There will be money available for fixing water and wastewater systems, for transport projects, and for other key community assets such as schools and hospitals. Any infrastructure projects that are currently on hold because of fears of growing government debt can finally move forward.
Stable house prices, more affordable housing
New money will not be created for speculation on existing housing and shares. When people borrow money to purchase assets, it will come from existing money invested with banks. With bank loans created purely from existing funds, there will be far less pressure on house prices, and homes will become more affordable for the average New Zealander.
Lower interest costs for government
Instead of borrowing from banks, the government, via the Reserve Bank, will spend Sovereign Money directly into the economy to fund expenditures. This means government debt will decrease, along with the associated interest expense.
Instead the $4.7 billion of tax dollars currently spent on interest can be used to fund public services, reduce taxes, reduce public debt, pay a citizens dividend, and/or provide extra funds for business lending.
Safer, more reliable monetary system
The monetary system will be safer by design.
With private banks playing a purely intermediary role, private banks will cease to be ‘too big to fail.’ The risk of bank runs will be greatly reduced because deposits on Investment Accounts have maturities that are distributed over a longer period, allowing troubled banks more time to liquidate assets. With Transaction Accounts held separately at the RBNZ, if a commercial bank failed, the administration of its Transaction Accounts could be transferred to a different bank, with no loss to the taxpayer or account holders.
Ideal platform for digital currency
Sovereign Money is an ideal platform for a Central Bank Digital Currency (CBDC). Sovereign Money implementation would mirror the way Open Banking works but with an important caveat: the digital payments infrastructure will be publicly-owned.
The inflation myth
A common reaction to the proposal to allow the government to create our money is to claim it would be inflationary. This argument does not stand up to scrutiny. Transferring the creation of a similar volume of money from private banks to the government would not be, in itself, inflationary.
All commonly-cited examples of hyperinflation from government-created money took place in the context of extreme social and economic disruption.
Some critics point to the hyperinflation of the Weimar Republic after World War 1 which was supposedly caused by excessive government money printing. In reality, in May 1922 the Allies insisted on privatising the Reichsbank. This institution then allowed private banks to issue massive amounts of currency, as well as enabling speculators to short-sell the currency.
It was only when the government took back control of the Reichsbank that the hyperinflation was brought under control. In other words, this episode clearly cannot be blamed on excessive money printing by a government-run central bank. It rather resulted from excessive money creation by private speculators, aided and abetted by a private central bank, in addition to excessive reparations claims.
It should be pointed out that more recent cases of hyperinflation in emerging markets also took place in the presence of large transfer problems and intense private speculation against the currency. The example of Zimbabwe is a case in point.
In contrast, a paper for The Levy Economics Institute of Bard College entitled ‘Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75’ by Josh Ryan-Collins supports this view.
The abstract of the paper states:
We find little empirical evidence to support the standard objection to such policies: that they will lead to uncontrollable inflation. Theoretical models of inflationary monetary financing rest upon inaccurate conceptions of the modern endogenous money creation process.
This paper presents a counter-example in the activities of the Bank of Canada during the period 1935–75, when, working with the government, it engaged in significant direct or indirect monetary financing to support fiscal expansion, economic growth, and industrialization.
An institutional case study of the period, complemented by a general-to-specific econometric analysis, finds no support for a relationship between monetary financing and inflation. The findings lend support to recent calls for explicit monetary financing to boost highly indebted economies and a more general re-think of the dominant New Macroeconomic Consensus policy framework.
The paper makes reference to the pre-war period between 1935 and 1939, when the Canadian central bank played a major role in the country’s recovery from the Great Depression. It funded over two-thirds of government expenditure over these five years.
Nominal gross national product (GNP) expanded by 77% in contrast to the 70% contraction in the previous five years, with a sharp increase in capital investment and private expenditure.
Bank deposits expanded by a similar amount, while currency in circulation increased by 70%. Deflation was reversed but inflation remained stable despite the massive expansion in the money supply.