- All the money in your bank account represents someone else’s debt
- Implications of the current banking system
- Who set the rules?
Under the current banking system, there are three 'rules of money':
- When a bank makes a loan, it increases the amount of money in the hands of the public (by increasing the total quantity of digital bank deposits)
- When a member of the public repays a loan, it reduces the amount of money in the hands of the public (by decreasing the total quantity of digital bank deposits)
- When a member of the public pays interest on their loan at least part of that interest must involve the creation of additional new debt somewhere in the productive economy
Consequently, through excessive lending between 2000 and 2008, banks were able to double the money supply in just 8 years - an increase in the total money supply from $83 billion to $165 billion.
September 2008 signalled the start of the recession following the collapse of United States banks and this is reflected below in the money supply figures for the years 2008 – 2010. The chart below shows the increase in the Reserve Bank’s M3 measure of money supply, and therefore the total quantity of bank deposits, in each year.
Since all the number money in your account was created by banks making loans, this means that for every dollar in your bank account, someone else is in debt by an equal amount.
In fact, due to compound interest, the public’s debts are now greater than all the money that exists in the economy. According to Reserve Bank figures, if the NZ public collectively took all the money in our bank accounts and used it to pay down our debts, we would end up with no money at all.
In other words, we now have a debt-based money supply issued entirely by private, profit-seeking companies. Our money supply has been effectively privatised.
The damaging effects of this system to the economy and society are numerous and severe, and are covered in more detail further on.
There are two important implications of our current banking system that affect everything that happens in our economy and society:
- Australian banks have the power to shape New Zealand’s economy through their monopoly on the supply of money to the public and to businesses. Under the current system property carries a lower risk weighting than business lending. This leads to housing price bubbles. So the failure is caused by the financial system structure and poor government policy and regulation. If banks invest wisely in productive businesses, they can help the economy to grow, but if they choose to pump the money (bank deposits) that they create into housing and commercial real estate, we get destabilising asset price bubbles and a severe financial crisis. Should we entrust this huge power and responsibility to an industry concerned solely with short term profit, rather than the health of the wider economy?
- As the sole suppliers of money to the public, if banks lend, the economy functions. If they don’t, it contracts (as in every credit crunch). Our economy is completely without a stable, permanent money supply.
Who set the rules?
Without knowledge to the contrary, the general public assumes that banks only lend money that has been deposited with them. The general public has absolutely no idea that a very large proportion of banks’ deposits has actually been created out of thin air by the banks themselves. The banks have never made any effort to correct this misconception.
Many of those people who are aware of the current system are angry at the banks, but they are not doing anything illegal. The truth is that it is the government that sets the 'rules of play', and successive governments have failed to modernise the banking system.
Instead, after every crisis, the government and authorities focus on getting back to business as usual. They focus on 'getting banks lending again' without questioning why we are all so dependent on bank debt to keep the economy functioning.
Successive governments have repeatedly failed to fix the banking system, but the pressing concern is to do something about it.
But we also need to make sure that they don't make the same mistake again. We need to make sure everyone understands how the banking system really works, how money is created, and how we can fix the system.
As a consequence of the need to rebuild Christchurch after the devastating earthquakes, combined with the huge expenditure the nation faces to fix the “leaky home crisis”, our need to fix the banking system has never been greater.