Many of today’s generation will have forgotten or be unaware of the brave and successful initiative taken by our Prime Minister in the 1930s – the great Michael Joseph Savage. He created new money with which he built thousands of state houses, thereby bringing an end to the Great Depression in New Zealand and providing decent houses for young families (my own included) who needed them.
Positive Money NZ, an advocacy group campaigning for monetary reform – I have the honour of being its patron – has just launched a petition to Parliament (which can be found here
. The petition calls for a review of how and by whom our money is created.
It takes as its starting point the almost incredible fact – one still contested by many supposed experts, although confirmed by detailed studies produced by the Bank of England and other central banks – that around 97% of our money has been created, not by the government, but by the commercial banks, which create the money by simply making a bank entry in the accounts of those to whom they lend money, usually on mortgage. Even our own Don Brash now agrees (after disputing it for some time) that the banking system creates money.
The banks, of course, charge interest on the money they thereby create ex nihilo (or out of nothing) and it is the interest they charge that produces their huge profits of billions of dollars which they then send back, in most cases, to Australia.
What is really astonishing about this state of affairs is that the money supply – one of the key elements in determining our economic success or otherwise – is almost entirely controlled, not by our government or the Reserve Bank, but by foreign-owned commercial banks which operate entirely for their own profit and are in no way accountable to the New Zealand public.
It is, however, the New Zealand public that pays the price and bears the burden of the inexorable and bank-driven increase in the money supply. That price is paid in the form of higher interest rates (which are needed to restrain the ever-increasing level of lending), an over-valued exchange rate (a consequence of the higher interest rates that attract “hot money” from overseas), a crippling level of private debt in our economy, a huge burden on our balance of payments, a diversion of capital away from infrastructure and productive purposes, and constantly rising housing costs – all of which we could do without.
The petition proposes that we should change this inherently unstable system of money creation to one in which new money is no longer created by private and largely foreign-owned companies whose only goal is profit, but is issued only by the Reserve Bank under the direction of our elected government which would then be accountable to the people for its monetary policy – as it should be, but currently is not. New money could then be directed to productive purposes and would no longer simply fuel asset inflation, particularly in the housing market.
This approach to monetary policy is not only endorsed by leading monetary policy experts, such as Lord Adair Turner. It is also supported by an IMF discussion paper entitled “The Chicago plan revisited” and is applied by governments in other countries, such as Shinzo Abe’s Japan. It also has a gold-plated pedigree right here in New Zealand, when Michael Joseph Savage’s Labour government in the 1930s authorised the Reserve Bank to issue interest-free credit in order to build thousands of state houses.
Let us hope that the Select Committee that will consider the Positive Money New Zealand petition is aware of this precedent and takes note.
Bryan Gould was a Labour MP in the United Kingdom from 1974-79 and 1983-1994.