PART 1: Excerpt from Positive Money NZ’s submission to Parliament’s Finance and Expenditure Committee, September 2019.
Despite widely held and unfounded beliefs to the contrary, almost all of New Zealand’s (and the developed world’s) money is issued by private banks as interest-bearing debt. Our Reserve Bank has been relegated to issuing our notes and coins which make up only 3% of our money supply.
The current process of issuing new money is simple: a commercial bank issues a mortgage or other debt instrument and new money equal to the amount of the loan appears as a deposit in the borrower’s account.
The total money supply in the economy increases by the amount of the new loan. Conversely, when the loan (principal) is repaid, both the deposit in the borrower’s account and the bank’s loan book are reduced by the same amount. The repayment of a loan’s principal cancels money out of existence.
The process is dynamic. In New Zealand, thousands of new loans and tens of thousands of repayments are made every day. Almost always, more new money is being issued than is being cancelled out so the country’s debt and money supply both keep growing.
While there is considerable regulatory oversight from the Reserve Bank of New Zealand and the Basel Accords, any money created by a privately-owned institution is first and foremost about maximising profit. Social, environmental and economic wellbeing have become incidental in the issue and allocation of new money by privately owned banks. More and more it is being used in ways that increase income and wealth inequality and financial instability rather than for the public good.
Our submission is not about creating more new money but about thinking a little differently about how new money is used and created.
It is about using any new money for the wider public good.
We submit that much better economic, social, environmental, and business outcomes can be achieved by having the Reserve Bank of New Zealand commit to replacing private bank money with debt-free public money.
The decision not to allow the government to issue debt-free public money has been political, not economic. A common argument used against this proposition is that it would be inflationary. As we show later (in ‘The Inflation Myth’), the evidence used to justify this argument is fallacious.
It should be pointed out that all commonly-cited examples of hyperinflation from government- created money took place in the context of extreme social and economic disruption. There are no documented examples of hyperinflation affecting well-functioning societies in normal times.
The process of issuing debt-free public money (technically referred to as Sovereign Money) is very simple: the Reserve Bank issues new money to the government to spend into circulation for the public good. The Reserve Bank can also issue funds to private banks on the proviso that the funds are lent into the productive sector where goods and services are bought and sold.
An essential difference between the Positive Money approach and that of many alternatives is that how much money will be created is in the hands of an independent Monetary Policy Committee. Only after this independent decision can new money be transferred to government and the real economy.
Why act now?
We’re asking Parliament to take a fresh look and review this basic piece of ‘plumbing’ in our economy. Understandably, it’s not something that’s reviewed very often but we think that now is a good time for a number of reasons:
- Houses are unaffordable for new buyers and households are debt-stressed from too much bank-created credit inflating a finite pool of land
- Our current system is reaching limits previously considered inconceivable – such as negative interest rates
- The global economy and financial system faces historic challenges and New Zealand is a part of it
- Technology now exists that has the potential to cause massive economic disruption, including private digital currencies such as Facebook’s Libra. These digital currencies could circumvent the primacy of national currencies, with widespread adoption just around the corner
Our proposal presents an alternative that can improve and strengthen New Zealand’s monetary system to address these modern challenges.
Some of these challenges could unfold with frightening speed and scale, giving us even less time in the future to review all viable options and alternatives. By acting now, this committee has an opportunity to do what its predecessors in the 1930s did as they confronted their own set of (different) challenges: to look closely at the core of our money and banking system and make it fit for the new era.