On 4 March 2020, Positive Money national spokesperson Don Richards and Auckland spokesperson Cliff Hall appeared before the Finance & Expenditure Select Committee to speak in support of our petition. (Video)
The following article from Select Committee News is reproduced with permission.
The petition asks: That the House of Representatives inquire into giving the Reserve Bank of New Zealand the sole ability to issue all New Zealand money, whether notes, coins or electronic.
Don Richards, spokesman for Positive Money NZ, told the committee changing the way money was issued could significantly improve the quality of life in New Zealand.
He said that currently the Reserve Bank issued notes and coins that made up less than 3 per cent of the money supply, while private banks created the other 97 per cent by way of loans and mortgages.
He quoted from a Bank of England paper issued in 2014 which said: “The reality of how money is created differs from the description found in some economic textbooks. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”
Richards said that put another way, banks created the money for a loan or mortgage “ex nihilo”, which was Latin for “from nothing”, and this system was followed in New Zealand.
He said that once a loan was repaid, that money disappeared from the economy.
“It was created from nothing and so it must return to nothing. For our money supply to grow, more people must get into debt than get out of debt. This becomes unsustainable as people’s ability to take on more and more debt impacts on their ability to pay for essential items.”
Richards said housing inflation was a major problem because banks had a profit imperative and put money into areas of the economy that provided the least risk and the best return, which was housing and land.
Conversely, they did not put much money into the productive economy because the risk was higher and the return lower. This starved the productive sector of badly needed capital.
“Governments and local authorities also borrow money from banks for infrastructure projects when they do not need to,” he said. “With the Reserve Bank issuing our digital currency to the government, that money can be used to construct roads, hospitals and schools, saving the government billions of dollars in capital and interest payments.”
Richards said the amount of money being created would be strictly controlled by an independent body outside of government called The Monetary Policy Committee. It would assess the amount of money required by the economy and would authorise the Reserve Bank to create that amount and no more. The government would then decide where to spend the money in a way similar to spending money raised from taxes.
He said using central bank money had been done before, in 1936 by the first Labour government when the Reserve Bank injected millions of pounds into the economy for the construction of thousands of state houses. There had been little or no inflation as a result of that.
The Central Bank of Canada did something similar for over 40 years to fund projects such as the St Lawrence Seaway, with no impact on inflation.
China’s Central Bank, responding to the coronavirus, was going to inject NZ$275 billion into the markets to ensure there would be enough cash. “This is a great example of a central bank helping out in times of need, without having to take on more debt,” Richards said.
He told the committee Positive Money NZ was not alone in calling for the central bank to issue New Zealand’s digital currency. “The central banks of Canada, England, Japan, Sweden, Switzerland and the European Central Bank, together with the Bank for International Settlements, are investigating the case for central bank-created digital currency.”
Richards said Parliament owed the people of New Zealand an urgent review of the money system, and it should include the answer to a question: who should create and control the money supply?
Greg O’Connor (Labour) asked what the difference was between what Positive Money NZ was proposing and quantitative easing. Richards said quantitative easing gave money to the banks and then the banks loaned it out as debt. “What we are proposing is to cut out the middle man, do not issue it as debt, provide it for infrastructure projects and then that money gets circulated into the economy.”
O’Connor then wanted to know on whose balance sheets the money from quantitative easing ended up, and where would it end up under Positive Money NZ’s proposal? Richards said under quantitative easing it ended up on the balance sheets of private banks. Under Positive Money NZ’s proposal, it would sit on the balance sheets of the Treasury or the Reserve Bank.
Duncan Webb (Labour) said Positive Money NZ appeared to be saying banks should not be able to create money in the way that they were. Was that correct? Richards said it was correct.
Webb asked whether Positive Money NZ was proposing ending the ability of banks to lend out more money than the reserves they held. Richards said that was correct, it was called 100 per cent reserve. In the 1960s and 1970s bank lending constituted 10 per cent of mortgage lending and it now constituted 90 per cent. “We had the trustee savings banks and they loaned a wee bit of money but the vast majority of mortgage funding was not issued by banks,” he said.
Webb said building societies had operated in much the same way as banks. “What you seem to be saying would in fact contract our money supply wildly,” he said. “And yes, it would drive down house prices catastrophically because credit would be pretty much unavailable.”
Richards said the credit would be injected into the economy via the Reserve Bank through infrastructure projects and the like. “Currently banks issue $40 billion a year, we’re proposing that the Reserve Bank, through the Treasury, issue between $20 billion and $30 billion to the government. And so that money is kept in circulation. It does not disappear once it is repaid.”
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