The question of implementation

PART 5: Excerpt from Positive Money NZ’s submission to Parliament’s Finance and Expenditure Committee, September 2019.

New Zealand, Canada, Australia, and Guernsey have done it before.

New Zealand

Back in the 1930s, the Reserve Bank successfully created money to build the first state houses, fund infrastructure and new businesses. [1] ‘The sums advanced by the Reserve Bank were not subscribed or underwritten by other financial institutions. This action showed the Government’s intention to demonstrate it was possible for the State to use the country’s credit in creating new assets for the country.’ [2]

Many older people remember the low interest loans received from the State Advances Corporation (1936–74) for their homes or businesses. What they may not realise is that the source of these funds was Sovereign Money created by the Reserve Bank and issued directly into the economy. The money was not borrowed from commercial banks, not borrowed from overseas, did not come from Private Public Partnerships or Special Purpose Vehicles.

With the money created by the Reserve Bank, many Kiwis were able to buy houses, were lifted out of poverty, and were able to start businesses. New Zealand came out of the Depression faster than most other countries in the world. [3]

The Canadian (1935–1975) Experience [4]

As mentioned earlier, Canada also issued Sovereign Money directly into the economy during the Depression. In the prewar period between 1935 and 1939, the Bank of Canada issued money both to repurchase government securities and to pump large quantities of cash reserves into chartered banks.

Canada’s central bank continued these and similar policies to support the war industry during World War II. In 1944 the Canadian government created the International Development Bank to support Canada’s medium and small enterprise sector. In contrast to most public development banks, which were capitalized with taxpayer funds and leverage-in private finance, the IDB was entirely funded via money creation by the Bank of Canada. During the period 1960–75, the federal government introduced virtually all of the major policy innovations that make up Canada’s system of social programs: Canada-wide Medicare, universal pensions, the modern unemployment insurance system and cost-sharing with the provinces for higher education and welfare. It also relied on this money to build the St Lawrence Seaway. Despite this massive expansion in spending, the average federal deficit from 1950 to 1980 was an insignificant 0.3% of GDP. Inflation ranged between 2 and 5%.

The Commonwealth Bank of Australia [5]

The Commonwealth Bank of Australia was a government-run bank founded in 1911. In addition to assuming sole responsibility for issuing Australian notes, it funded the entire Australian World War I effort by issuing £350 million ($700 million) at approximately 0.5% interest.

At the time, private banks were charging 6% for loans that had to be negotiated via London. The bank also directly issued $872 million to help finance wheat, wool, meat, cheese, and sugar pools for primary producers, as well as lending $8 million for home purchases and $18.72 million to local government bodies for the construction of roads, railways, tramways, harbours, gasworks, electric power plants, and the like.

Despite the bank generating a total profit of over $23 million, Parliament voted in 1924 to take the Commonwealth Bank out of government hands and allow a consortium of private bank directors to run it. This change essentially eliminated its role as a creator of Sovereign Money.

Guernsey [6]

In 1816 the Governor of the island of Guernsey decided to bypass the banks and issue interest- free currency to pay workers to undertake essential infrastructure projects. These included rebuilding roads and seawalls that had been washed away and also building a market hall to shelter market traders. By 1837, notes to the value of £55,000 (issued by the State) were in circulation on the island, enabling Guernsey to build a new college and new schools.

The program is credited for greatly enhancing trade, tourism and prosperity on the island.

In the 1830s the first commercial banks moved in; after some years of persuasion and political pressure, Guernsey abandoned this interest-free source of funds and exchanged it for interest-bearing debt from the banks.

Transition to a Sovereign Money system in New Zealand

There are two broad choices for the transition process – either a phased-in approach, or an immediate switch. Our proposals ensure that either approach could be implemented without disruption to the wider economy. In the first, phased-in approach, the RBNZ would start to create money directly, transferring this money to the government for spending into the economy, as described above. However, banks would still be permitted to operate as they currently do, creating money in the process of making loans.

Over time, the amount of money that banks could create would be progressively restricted. A larger proportion of new money needed to replace the money cancelled out by loan repayments, and any necessary additions to aggregate demand, would come from money creation by the Reserve Bank. While in place, this hybrid arrangement would constitute a partial Sovereign Money system. Eventually a conversion date would be agreed, at which banks would be required to switch over to the structure of banking described above and would therefore lose their ability to create money.

A more rapid approach would be to transfer the power to create money from banks to the RBNZ overnight, switching immediately to a full Sovereign Money system. This could be done without changing the net wealth of banks, businesses or households and without causing a damaging contraction in the amount of credit available. In this overnight process, the bank-issued demand deposit liabilities to the general public would be taken over as liabilities of the Reserve Bank and converted into state-issued Sovereign Money held there in accounts for the public.

Instead of having a liability to their customers, each bank would then have an equivalent liability to the Reserve Bank (so that there would be no overall impact on the size or nature of each bank’s balance sheet and no windfall profit for the banking sector). The state-issued Sovereign Money would be recorded as an accounting liability of the RBNZ, balanced on the balance sheet by these new liabilities of the commercial banks and by non-interest-bearing zero-coupon bonds.


  1. State Housing in New Zealand, Cedric Firth, Ministry of Works, 1949, page 7.

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