Draft Legislation and Plain English Guide
It will require an Act of Parliament to enable the Positive Money system to be law, as opposed to the current system, which has no legislation to support it.
This draft Bill is taken from a similar reform movement in the UK – Positive Money UK and is written as a piece of legislation, so it is structured accordingly.
Plain english guide to the UK Bill
There is also the plain english guide to the UK Bill (2Mg), which summarises the legislation.
This proposal for reform of the banking system explains how we can prevent commercial banks from being able to create money, and move this power to create money into the hands of a transparent and accountable body. It builds on the work of Irving Fisher in the 1930s, and James Robertson and Joseph Huber in 2000.
Removing the power to create money from the banks would end the instability and boom-and-bust cycles that are caused when banks create far too much money in a short period of time. It would also ensure that banks could be allowed to fail without bailouts from taxpayers. It would ensure that newly-created money is spent into the economy, so that it can reduce the overall debt-burden of the public, rather than being lent into existence as happens currently.
Executive Summary of the Reserve Bank of New Zealand (Creation of Currency) Bill
- It is a proposal of this draft Bill that the New Zealand Government shall exercise its sovereign right to create all of New Zealand’s money supply. When this Bill is enacted, the Reserve Bank of New Zealand shall have the exclusive right to create all New Zealand money, that is, cash money and non-cash money (digital money in bank accounts).
- It is a proposal of this draft Bill that the Reserve Bank of New Zealand shall continue to seek to achieve monetary policy targets published by the elected government, and approved by Parliament.
- It is a proposal of this draft Bill that it shall be illegal for commercial banks and any other deposit taking institutions to create new non-cash money – just as it is illegal for them to create banknotes and coins.
- This Bill intends to provide a regular supply of money into the economy sufficient to meet the needs of the economy. This supply of money will be in accord with the monetary policy targets of the Treasury which have been approved by Parliament. It intends to free the economy from its dependence on the commercial banking and deposit taking sector for its money supply, and to protect in full the current accounts of all depositors. It intends to prevent the inflation of the money supply by the commercial banking and deposit taking sector and it intends to reduce and stabilise inflationary pressures in the economy. It also separates the payments system from risky lending activity to ensure that the failure of one bank does not threaten the entire financial system.
- In the Schedules, the draft Bill describes a mechanism to ensure that banks and deposit taking institutions will be unable to increase the money supply based on the contents of their customers' current accounts, while continuing to be able to make loans to suitable borrowers by utilising the saved funds invested by their customers for that purpose.
- Transferring responsibility for creating all new money to the Reserve Bank of New Zealand will update for electronic money what happened to banknotes under the UK’s Bank Charter Act of 1844. That Act finally recognised that, having originated as notes of credit from private banks and merchants, and having developed into means of payment over several centuries, banknotes were now being used as money.
- The UK’s Bank Charter Act of 1844 transferred the right to issue such banknotes to the Bank of England. Similarly today, the balances in bank current accounts ("sight deposits") are no longer just "credit" but are money instantly available for spending just like banknotes. Their total value is included in the "broad money" component of the money supply in the official statistics.
- This Bill "nationalises" the function of the creation and supply of money, but it does not nationalise the banking or deposit taking sector.
- It is a premise of this Bill that commercial banking is not a proper function of the state, and providing the nation's money supply is not a proper function of commercial banking, but should be a state prerogative.
- The Bill seeks to move New Zealand's money supply from a largely privately-created money supply where most money is supplied as a profit-making debt for the benefit of commercial institutions, to a fully publicly-created money supply where all money is created by a nationally-owned non-commercial public institution, free of any debt, in accordance with the needs of the country's economy as a whole.
- This Bill allows the private commercial banking and deposit taking sector to continue to compete for profit in the market for lending and borrowing already existing money, but it removes the ability of this sector to increase the money supply in the first place. The accounting privileges banks and other deposit taking institutions have of increasing the money supply through lending based on the contents of their customers' current accounts, will be stopped entirely. By so doing, it seeks to remove the financial instability which results when the banking sector is allowed to do both.
- Banks will remain private companies operating for profit in the marketplace. They will continue to be encouraged to act as intermediaries between their clients who want a return on their savings and those clients willing to pay for borrowing those savings, but they may no longer create any part of New Zealand's money supply
Explaining the Bill
- The Bill is split into two main bodies. The first body of the Bill sets out the rules which are to be followed. The second body of the Bill – the Schedules – explains the technicalities; that is, how the rules will operate.
- The Bill defines and uses the concept of "currency" rather than the concept of "legal tender" since it has not been found possible to change the historically accepted definition(s) of legal tender in all cases and circumstances in a manner suitable for the purposes of this Bill. "Currency", however, can be defined in terms which are already widely acceptable and the Bill defines "currency" in a way which covers "non-cash" money as well as cash money.
- Part 2 makes provision for authority to create all money to reside exclusively with the Reserve Bank of New Zealand; for it to create money in accord with monetary policy targets determined by the Treasury and approved by Parliament; and for the mechanism by which new money will enter society.
- Part 3 makes provision for the political and commercial independence and democratic scrutiny of the Monetary Policy Committee, including the appointments, re-appointments, and removals process.
- Part 4 makes provision for the appointments, re-appointments, and removals process to the Court of Directors of the Reserve Bank of New Zealand. This includes the Governor and the two Deputy Governors of the Bank, all three of whom have a statutorily-appointed seat on the Monetary Policy Committee.
- Part 5 establishes the creation of the Accounts in both the deposit taking institutions and the Reserve Bank of New Zealand, which will be necessary to ensure the operation of the Act.
- Part 6 establishes the Transition Process which will be necessary for the smooth changeover from the present system to the system under the Act.
- Part 7 identifies the Operational Changes which need to be made to prevent the present system continuing in a way which would undermine the intention of the Act.
- Part 8 establishes the process in the event of the insolvency of an institution. The further rules of this process are established in Schedule 7.
- The key difference between the existing system and the system proposed by this Bill is that banks and other such deposit taking institutions will no longer be able to create money when issuing loans. Such institutions will only be able to move money which already exists from one account to another, as per the Accounts described below.
Establishment of Customers’ Accounts with the Deposit Taking Institution
- Every authorised deposit taking institution may establish for any customer a "Customer Transaction Account" and a "Customer Investment Account", including more than one, at the discretion of the institution.
- A Customer Transaction Account will be a service provided by banks to their customers which replaces the existing "current account" facility. Under the existing system, when money is deposited in a current account, the commercial bank considers a large proportion of that money to be available for lending to other people. It can do this because it knows that customers, in aggregate, will normally only take out a small proportion of their money on any one day.
- This Bill is intended to ensure that any money deposited in such an account will stay in that account only, until such time as the holder of that account wishes to withdraw money or transfer the balance. The bank will be unable to use this money for its own lending activity. It is akin to putting money in a safe deposit box. It will always be there for the customer.
- Under the present system, a sight deposit in a customer’s current account at a bank are an accounting liability of the bank to the customer. This means that if the bank fails, those deposits are at risk. Under this Act, customers’ current accounts will cease to be accounts belonging to the banks. They will be electronic containers of money belonging exclusively to customers. The banks or deposit taking institutions will not be able to use them for lending. This provides complete security to each customer for every cent in the customer’s account. This rule ensures that there can be no ‘runs’ on any bank. Customers will be assured that their monies are always safe. Due to the watertight nature of these Accounts, we may also refer to them as Secure Customer Transaction Accounts.
- In the same way that one may have a "savings account" today, one will have instead a Customer Investment Account. No money would actually be held in this account since the money will be invested elsewhere – it simply represents the loan that has been made by the customer to the bank; and a claim on the part of the customer to be repaid the money, subject to its performance and the Terms and Conditions of the account, that the bank has borrowed from that customer.
- When the savings deposit has been made, the institution will then transfer the money to its Investment Pool at the Reserve Bank of New Zealand, as below, ready to be lent to someone else or invested in some way.
Establishment of Institution's Accounts at the Reserve Bank of New Zealand
- The Reserve Bank of New Zealand will be required to provide three Accounts for each of its authorised deposit taking institutions. These will be a "Customer Funds Account", an "Investment Pool" and an "Operational Account".
- The Customer Funds Account shall hold the sum total of funds in the authorised deposit taking institution's Customer Transaction Accounts. This is similar to a safe deposit box, and the commercial bank or deposit taking institution cannot use this money for anything whatsoever. It shall be managed by the institution but the funds within this Account shall be owned in full by the institution's customers, with regard to the money they have deposited.
- The Investment Pool shall be owned in full by the authorised deposit taking institution. It is where the commercial bank or deposit taking institution keeps funds that its customers have asked it to invest, before such funds have actually been invested.
- The Operational Account is where the authorised deposit taking institution can hold its own money, including funds injected by shareholders. It is the Account into which payments to the bank are received and from which payments are made, including but not limited to such payments as taxes, fees, and charges to the Reserve Bank of New Zealand.
- Schedules 1, 2, 3 and 4 explain the process by which money shall move between the above five accounts, ensuring that no new money can be created in the process.
- Over 160 Explanatory Notes have been appended to the draft Bill, and two Appendices.