Where Money Comes From
Most people would say, no doubt, that they have a pretty good idea of what money is. They live with the reality of money every day. It is what is needed to buy the necessities of life and to maintain a decent standard of living.
You get money, they would say, by earning wages or selling something or getting a return on an investment or borrowing. There is no mystery about money; it just is – a constant part of the environment, like land or air or water.
But they don’t usually stop to ask where money comes from or who decides how much money there should be in circulation or what society as a whole should do with it. Most would say, if pressed for an answer to those questions, that the government has a role of some sort – but that would only be part of the answer.
The truth is a little more complicated, and surprising. The government does not make the decisions that matter on money. The institutions that have the biggest say on money matters are the banks.
It is the commercial banks the are responsible for creating virtually all the money in circulation in our economy. And the amazing aspect of this is that they create the money literally out of nothing.
They create money when they lend to their customers, usually on mortgage. What they lend is not actual money; it is merely a book entry by which they credit your account by the amount of the mortgage. They then charge you interest on the loan they have created.
All very interesting, you might say, but does it matter? Well, yes.
It matters because the amount of money in circulation has a big impact on our economy. For example, if too much money is created, we are likely to see a rise in inflation. And yet decisions on these issues are being taken in the commercial interests of privately owned banks, not in the public interest – and, in our case, the billions of profit made by those banks are then shipped back across the Tasman to their Australian owners and lost to New Zealand.
The only intervention made in the public interest is by the Reserve Bank which attempts, with only limited success, to influence the amount of new money created by controlling its price through setting interest rates. They calculate that if borrowing is made more expensive, people will be less wiling to take out loans.
But there is a further problem about the money created by the banks. Created and lent as it largely is on mortgage, it flows almost entirely into the housing market and thereby pushes up the price of housing – and it leaves a large proportion of the population in debt. At the same time, it fails to reach the places in the economy where it is most needed – to fund productive investment in the skills, technology, infrastructure and capacity essential to a modern economy.
There is an increasing realisation that this is no way to build a strong economy. I have the honour to be the patron of a campaigning organisation called Positive Money, which is part of a worldwide network of bodies dedicated to reforming our monetary systems.
Later this week, on Thursday, Positive Money will present a petition bearing over 5000 signatures to parliament. It calls on the Finance and Expenditure Select Committee to conduct an inquiry into our present monetary policy arrangements, and recommends that the Reserve Bank should have the sole right to issue money, so that the current system is replaced with something that serves our interests better.
It is surely time that our politicians recognised their responsibilities and took back from the commercial banks the monopoly power they currently enjoy to create virtually all of our money. We might then get some much-needed investment in the things that really matter
Bryan Gould
4 September 2019