- What is wrong with money created by private banks?
- 1844 Bank Charter Act
- Digital Money
- 98% of all money is digital
- So the money in your bank account was created by private companies
What is wrong with money created by private banks?
Money creation by private banks is a risk-based capital system. Banks set the level of “money” they need to hold in reserve, before making a loan according to the weight of risk involved. This arrangement is set down in the Basel Accords – a set of “recommendations” by the Basel Committee on Banking Supervision (BCBS) in Switzerland.
In the UK the reserve can range from *3% for mortgages and 10% for business lending. They create the balance of the money (debt) that they lend – 97% for housing and around 90% for businesses - out of nothing. For the purposes of this site we will be referring to a reserve of 10%.
This is at the root of the financial crisis and is responsible for the situation that we're in right now. But how did we get into this mess? Following is an overview of how we got to where we are...
In the UK a couple of centuries ago, commercial banks were allowed to print their own bank notes, while coins could only be created by the state. Over time the banks started to issue (print) and lend out so many bank notes that they caused significant inflation and destabilised the entire economy.
In response, the government of Robert Peel (in the UK) passed the 1844 Bank Charter Act, which made it illegal for anyone other than the Bank of England to print pound sterling bank notes.
While New Zealand followed a different course, the end result was the same. The Reserve Bank of New Zealand became the only issuer of notes and coins..
However, this law did not make it illegal for banks to create ‘bank deposits’ or ‘number money’ - the numbers in your bank account, and in the bank accounts of any citizen or company in the country.
Originally this number money was simply written into huge ledger books in the bank, but is now stored in huge computer databases maintained by the banks.
With the rise in debit and credit cards, internet bank, direct debit and so on, this digital number money makes up 98% of all the money in the economy – June 2010 (Reserve Bank figures) around $168 billion (M3(R) excluding repos) compared to $3.4 billion of cash.
The numbers in your own bank account were all created, essentially out of nothing, not by the Reserve Bank or Treasury, but by commercial banks.
The banks are able to create this ‘number money’ through the accounting process that they use to make loans, using a business method known as risk-based lending. Rather than taking money from existing deposits and lending it to a borrower (as per the common understanding of banking), they simply write new numbers into the bank account of a borrower - creating new money.
Bank deposits (the numbers in your bank account) now make up approximately 98% of the total quantity of money in the economy. Consequently, the physical currency issued by the state has been almost entirely replaced by a digital currency issued by private companies.
The banks in essense do not have the money that they lend out to us. At best they have less than 10% that they pay interest on and create the balance (90%+) out of thin air, by simply entering the amount on a spreadsheet. We then borrow the full 100% of the loan, including the 90%+ the bank does not have and pay interest and the principal – including the bit the bank never had in the first place.
The children’s story “The emperor has no clothes” springs to mind. The banks do not have the money that they lend out and rather than operating on a margin of 2% their margin is a lot higher. They cannot help but make a profit!
As if that was not enough – in 2009 the Australian banks were “pinged” by the New Zealand IRD for $2,000,000,000 in tax avoidance. The banks had tried to hit New Zealand citizens twice – firstly through charging interest on money they created out of thin air and secondly trying to avoid paying taxes on their windfall profits.
These windfall profits explain how the CEO of Westpac can be paid $4,000,000 a year and how the New Zealand banks’ (mostly Australian owned) combined profits totalled $3,300,000,000 in 2010. Almost all of that money is then taken from the New Zealand
New Zealand’s money has been privatised. In addition much of the fruits of our labour, year in and year out are disappearing at an alarming rate.