Category Archives: Creating our national money

Until now private banks have been given this critical power to create money as interest-bearing debt. It also gives banks power to expand and contract the money supply at will. This has brought social and environmental chaos with growing debt, widening gap between rich and poor, a structural imperative for growth which imperils the planet. Now that cheap oil is a thing of the past, the whole system falls down. How would you like to see our New Zealand dollar created?

Summarising our whole system shift for a new economy

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Designing a new economy has major challenges politically. We want two major changes that actually aren’t politically realistic in the current world where eight individuals own as much wealth as the poorest 50%. There is too much concentrated power.

If we want monetary reform it is unavailable at national level because there are simply too many bank lobbyists in the world’s capitals who are spending far too much for any public interest lobbyists to match. Then again, if we want to replace

Then again, if we want to replace income tax with land tax, forget it. Not a goer either from a practical political viewpoint. No self respecting politician will touch it if taxing land reduces its market value and threatens a politician’s votes.

What about getting a Basic Income and replacing the intrusive welfare system? Well that depends on how you would fund it. The problem is most of the current solutions are a drag on the economy. You must not fund it from GST which is regressive or from income tax which is a drag on the economy.You must fund it by sharing the rent on land and other monopolies.

Well where do we go then? You have painted a dismal picture.

Most respond by saying “Oh well bring A or B in gradually”. That takes ages and moreover when A is implemented it affects B and C. So the idea of just imposing a 1% land tax and bringing it up gradually is quite impractical. We have to think in terms of whole systems. It is a whole system shift we need. Redesign the political economy from scratch.

The fact of the matter is that we must be politically savvy to come up with a solution. Many economists might agree that land tax is the most logical tax, but unless they are standing for office, they don’t have to face the public. It is one thing to be an economist and another to be a politician. Victoria University’s 2010 Tax Working Group which was stacked with economists from many government departments as well as consultants and academics, proposed a land tax. Did the government listen? Not that I can recall. I don’t remember their recommendations on land tax being discussed in the public arena for more than a day.

What about Positive Money and all its followers saying that money should be spent into existence not lent into existence? They make a very good case, you can’t fault it. And yes, the British Parliament took it seriously enough to have a parliamentary debate. But do you believe it will go further? You only have to read Nomi Prins book ‘All the Presidents Bankers’ to get an idea how close presidents have been to the big bankers for over a century. Hilary Clinton’s campaign was funded by investment bankers and Trump has six Goldman Sachs bankers in his cabinet. He has already moved to get rid of the weak regulations they now have.

When considering the political feasibility of putting in the idea of Michael Kumhof and Jaromir Benes’ Chicago Plan Revisited, a plan making bank debt illegal, Lietaer, Arnsperger, Goerner and Brunnhuber listed five reasons for not recommending it.[1]
“1.Replacing a monoculture with a monoculture is not the way to generate diversity in exchange media.
2. While it is true that a Chicago Plan reform would eliminate risk of widespread banking crashes and of sovereign debt crises, there would still be monetary crises.
3. If governments were the only ones in charge of creating money there might be a risk of inflation. Such a risk is real and demonstrated in 2009 by the hyperinflation crippling the Zimbabwean dollar after President Mugabe instructed the central bank to print its currency by the trillions.
4. The fourth reason can be summarised as ‘political realism’. Any version of the Chicago Plan will be fought to the death by the banking systems because it threatens both its power base and its business model. Even after the excesses triggering the 2007-8 collapse, or in the middle of the Great Depression of the 1930s, the banking lobby managed to deflect the implementation of any significant changes. In 2010, for every elected official in Washington, there were three high-level lobbyists working full-time for the banking system. The financial services industry including real estate spent $2.3 billion on Federal campaign contributions from 1990 to 2010, which was more than health care, energy, defence, agriculture and transportation industries combined.” (In USA, according to Gar Alperovitz, in 2010-11 the FIRE section (finance, insurance, real estate) section spent nearly $1 billion in lobbying against bank regulation.)

“5. The final argument is about risk. Nationalising the money creation process cannot be done on a small pilot scale. It must be implemented on a massive, national scale or, in the case of the euro, a multinational scale. Any change always involves the risk of unintended consequences. Logically, large scale change involves greater risk.”

Yes, there is a way to go. The ideas came from the permaculture teachers in our new economics movement. Reform the very structure of governance to give quite substantial powers to  local government, turn governance upside down as well and then we might have a chance. The centralised governance structure must be replaced with distributed governance. Then we need to rethink the powers given to or claimed by local governance. In fact central government is not going to give very local government big powers like money creation, land ownership or revenue raising power, so they have to claim it themselves. This is where rebellion must be focussed. 

So we have proposed spending money into existence at the very lowest level of government (in New Zealand that would be the Community Board). That money will gradually buy up land. The Community Board would then receive land rent from the property holder and pay the rates (local taxes) of that property holder. This process happens gradually, while closely monitoring inflation. If there is a sign of inflation, the rate of decay of money can be adjusted or the money spent at a higher level of governance.

So the Community Board claims the right to issue money, to buy land with that money, to receive public revenue. It could also impose certain resource rents to be determined.

With the growing revenue from land rent the Board would be able to distribute regular Citizens Dividends and build and maintain essential infrastructure.

There would have to be participatory budgeting so that the balance between infrastructure and dividends was maintained and the public was behind the Board.

Now if we are going to reclaim the right to issue money, we might as well design it properly while we have the chance. It is there we look to history and read Bernard Lietaer. He cites a period of 2000 years of a decaying Egyptian currency which had huge social, educational and economic benefits, 200 years of European currencies in the central middle ages that resulted in an age of prosperity, equality, high education and more leisure and finally a period in 1932-3 in a small Austrian town during the Great Depression. Each of these had a decaying currency, much as goods decay.

So the new money would be designed to decay. In practical terms, it would keep its face value but attract a regular payment to keep it valid. The local Board would develop a more equal relationship with its local Council who would inevitably end up accepting the new currency for rates. This would eventually pass on to central government who would have to accept it for taxes.

So what we propose is a new currency that soon is accepted by central government for taxes. This means it is a new national currency. They way this works out is that each local board keeps its currency from inflation so all are on a par. They flow into a stream that flows into a river towards central government.

Tax reform or monetary reform? Which is most important?

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The meshing together of Georgism with monetary reform remains a challenge, especially for ardent individuals who claim their cause to be the most critical. I have heard monetary reformers say Georgism is irrelevant and I have even heard a Georgist describe monetary reform as “heresy” and declare it must be “exorcised” at all costs. Then there are the moderates who say Georgism is more important than monetary reform but willingly acknowledge monetary reform is needed. Critics come in many varieties. Regrettably there is a tendency for advocates from both sides tend to promise a growing list of wonderful results from their reform. Maybe Henry George School people only see landlords as “the enemy,” and to mention money, credit and bankers confuses them. Do we see people on both sides arguing that the others should just get off their territory?

Recently I heard a Georgist argue that if you transfer land into community ownership then the money issue disappears.

So let’s tease this one out. To some extent he is right, but he misses several vital factors. For instance he doesn’t appear to understand the growth imperative will still be present, so he needs to work out where the excess money will go, and follow the results to their logical conclusion.

Take the important book Money and Sustainability, The Missing Link, a Club of Rome Report by Bernard Lietaer, Christian Arnsperger, Sally Goerner and Stefan Brunnhuber. The authors say there are five results of creating money as interest-bearing debt – amplification of boom and bust cycles, short-term thinking, compulsory growth, and devaluation of social capital where selfish behaviour replaces co-operative behaviour.

Or take another example of monetary reformers overpromising. While we can’t tell if she actually believes it herself or not, monetary reformer Amanda Vickers lists their extravagant promises. She writes in the Otaki Mail, “Sovereign money advocates extrapolate further that the outcome would also be far-reaching throughout our economy and our lives. They say it could also improve: the inequality gap, child poverty, housing bubble control, student debt, state asset sales, job security, local businesses performance (due to the 10% higher output gains), budgets for local community projects and facilities, health care and education.”

Positive Money in their little video says money is created every time someone takes out a mortgage. The money doesn’t come from someone else’s saving but is new money just created. The bank enters your debt as an asset on their accounts then enters the same amount in the liabilities column of their books, your deposit. The entire money supply is on loan from the banking system. When they charge interest on this money creation £200 billion a year is transferred from the public to the financial sector every year in UK. Since money is created as interest-bearing debt, if we all pay off our debts the current economic system would collapse. There would be no money in the system.The debt can never be repaid. The money creating power needs to be transferred to some democratically accountable body and spent into existence instead. He mentioned it has been pumped into property bubbles and financial markets.

They claim it would reduce inflation and that you would also be able to move towards a low carbon society this way.

dscn1459So what I take out of this is that Positive Money people, by not addressing tax reform, may think that if you create money by spending it into existence you will avoid rising land prices. By creating a monetary authority to control inflation they give their new monetary authority magic power to stop money going into a land bubble. It simpley wouldn’t happen this way.

So let’s go back to the Georgist’s claim that when you have land in community ownership the money issue disappears. Not so. If you continue to create money as interest bearing debt, then money still moves from the public to the financial sector. Though there is always the personal desire to pay off your debt the money supply would disappear if everyone did this. Moreover, there is always the mathematical imperative for the money supply to grow in order to pay off the debt with interest. That is what we don’t want on a finite planet.

It is true that when there is either no cost or little cost on the holding of land AND money is created without interest or with low interest, you get money pouring into land inflation. Anyone who has paid a mortgage knows that when interest rates decline, there is what they call a housing bubble (it is really a land price bubble). This is undesirable. And if you take land out of the market entirely money won’t go into a land bubble, but it will go into some other form of monopoly.

When Karl Fitzgerald of Prosper Australia did his 2013 study Total Resource Rents of Australia, he subtitled it “Harnessing the Power of Monopoly.” The list includes Land Residential, Land Commercial, Land rural, Land other, Subsoil Minerals, Oil and Gas, Water Rights, Taxi Licences, Airports, Utilities, Fishing, Forestry, Gambling, EMS, Satellite Orbit Rights, Internet Infrastructure, Domain Name Registration licence, Banking Licences, Corporate Commons Fee, Patents, Parking fees, Public Transport, Liquor Licences, Vehicle Rego Licences, Sin Taxes on Tobacco and Alcohol, Carbon Taxes, Non Tax Revenue (sale of goods). That’s quite a list of the things you can claim a monopoly right on. “Land” in its widest sense is actually a list this long and longer.

So if we just deal to land by taking it out of the marketplace, you just put your money into monopolising another part of the commons. You could buy a much desired personalised number plate. The plate “F1” fetched £14 m and the number plate with the number 1 was bought by an Emirati businessman for £7.25m in 2008. Perhaps you could buy a domain name? Sex.com sold in Nov 2014 for $10m and insurance.com in 2010 for $35.6m.

Or the extra money could go into the financial sector including securities, commodities, venture capital, private equity, hedge funds, trusts, and other investment activities like investment banking). Nothing productive here. Yale economics professor Robert Schiller says, “The classic example of rent-seeking is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free. If enough lords along the river follow suit, its use may be severely curtailed.” Yet that is where a lot of money and activity is going.

In June 2015 the Guardian reported that “Adair Turner, the former chair of the Financial Services Authority, gave a memorable critique of the UK financial services industry in the wake of the credit crisis when he said that some of the activities carried out by the City’s finance firms were “socially useless”.”

There are many places where the excess money can go if there is tax reform but no monetary reform. We haven’t even touched on fishing quotas, art investments, oil and gas, utilities, or forestry. Leaving the growth imperative firmly in place by leaving money created as interest bearing debt will invite trouble and plenty of it.

However there is no doubt that land price inflation would disappear if all land was owned communally and leased from a public entity instead. While the boom-bust cycles would exist for other parts of the commons that remain in the market place, these cycles would no longer be present for land prices.

As Professor Michael Hudson explains “In a nutshell,land rent today is paid out as mortgage interest. Ditto for oil and gas, and monopolies.In terms of reform, financial and tax reform must go together. What is not taxed will be capitalized into bank loans. That’s the basic message.”

In one of Michael Hudson’s papers he quotes from Tolstoy when discussing the issue with Henry George. “The land cultivator in a bad year, not being able to pay the rent exacted from him by force, would have to enslave himself to the man with money in order to keep his land and not lose everything.”
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The Land Dollar – how we came to offer this as an option

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The combination of allowing banks to create money interest bearing debt, together with a land tenure system that allows people to profit from rising land values have led to growing debt, a built-in growth imperative, inequality and a never ending series of boom-busts. Both the issues of land and money need to be addressed, especially in the light of the climate emergency and the growing inequality we live with.

In our search to design an economy that isn’t at war with the planet – one that doesn’t write in forced economic growth or widen the gap between rich and poor – we have opted to combine basic income, monetary reform, governance reform and tax reform (the latter closely related to land tenure reform). We want a world where everyone has a fair share of our common wealth. We want to replace the extractive model that is killing our habitat with one that is life-friendly.

While addressing these reforms together is a huge challenge, we know for our climate’s sake we must succeed. In reforming the system we know we can’t afford to shock the economy. So we need incremental change of some sort and must look to nature for guidance about design.

We realised early on that imposing a land tax alone was politically well nigh impossible, even at half a percent. Raising it to the a full land rental level would be just as hard. That sort of incremental change would not be possible.

Objections for instance to charging a full rent for monopoly use of land include:-

a. The banks would block it. They hold the power because they issue mortgages backed by land.
b. The public wouldn’t like it because the market value of their property would decline. This is unacceptable especially to those with big mortgages.
c. Property owners would argue they already pay rates and a mortgage so why should they have to pay a third time?

We realised early on that reforming the money system by spending money into existence to build infrastructure would result in rising land values for those with properties served by that infrastructure – be it rail, schools or ports. It would be difficult to control land inflation and therefore to halt the march to further inequality. The rich would also buy up patents and any natural monopoly they could get their hands on.

Funding a full Basic Income is also a considerable challenge. An extremely large sum is needed, even when the net public expenditure is calculated.

During the summer of 2001-12 Deirdre had had a series of Skype calls with a Cambridge academic, the late Dr Adrian Wrigley. His solution was for the Treasury to pay off the mortgage and for a full land rental to be paid. The property would then have a covenant on it requiring owners to pay a full land rental to Treasury. No rates would then be payable. If the property was sold, the next owner would still have to pay that rental.

We only wanted the land to be bought/paid for, not the whole mortgage, so we changed it to that.

We soon learnt that using the preferred “covenant” idea was hard to explain to the public so we reluctantly dropped it in favour of publicly owned leasehold land. However we started with a centralised model of public ownership and remained with that for almost 2 years. All the time we were a uneasy about land being owned by any agency of central government.

Adrian never talked of a parallel currency. It was our idea to have one. We thought the current system is so badly messed up we had to start again, and believe that this was also the way not to shock the economy.

We knew a lot of land is overvalued and although we recommended buying land at market value, we know this isn’t the total solution.

So we recommended designing a second parallel (and competing) national currency, and link it from the start to completely new tax laws. After all no public budget would ever stretch to paying for such a large quantity of land, no matter how slowly it was acquired. Treasury, not the Reserve Bank, would issue Treasury Notes to buy up land. We happily adopted Adrian’s excellent idea of having a Land Rental Index for each area and adjusting the rental each year accordingly. Only the land value needs assessing not the improvements, so that is easy. And you only need a sample of properties in each general area. Land rentals are valued each year and the index suitably adjusted.

Parity with the land dollar with NZ dollar became a hot topic of debate. After discussion we eventually said “issue it at par, redeem it at par and let it float in between.” The new currency would be valued by those who wanted to employ labour without tax or buy goods without sales tax.

The name of new currency changed many times – Tradeable Tax Credit, Treasury Note, Zeal and finally the Land Dollar. (We also went through a short stage of recommending Rates Vouchers for both Auckland and Christchurch.)

Then, in mid year 2014 we suddenly realised it didn’t have to be issued by Treasury at all. Eureka! It could be issued by Community Boards and the revenue could be shared by other levels of government and eventually flow to central Government. We said ‘turn the funding model upside down, replace centralisation with a model where decisions are made across the whole economy. Restore local democracy’. We gave a great deal of power to the local level of government – currency creation power, land buying power (compulsory where applicable), and revenue gathering power.

In this model the Community Board or its elected equivalent “owned” more and more land – a more politically acceptable solution. The local committee must have on it, by right, one or two representative from the local iwi or hapu grouping, who would have veto power over any decision to buy land, thus avoiding potentially sensitive land. Land would effectively go into a Community Land Trust. In this way land could be gradually taken out of the market place and the people who decide which land to choose would be answerable to the locals. (Adrian had hoped the land buying could all be done voluntarily to avoid legislation. Some will no doubt come in voluntarily)

A whole raft of tax laws applying to transactions using the new currency (the Land Dollar) would have to be passed right at the beginning. These would include all taxes on the rights to the use of natural monopolies. Natural monopolies are the rights to land, water, airwaves, minerals, fisheries, patents, domain names, hydro-electric power generation and supply, any public utility such as a port, airport or the monopolistic rights to reticulate wires, pipes, rails, roads and the like: the right to use water, air, land or the biosphere to absorb waste.

So what does the policy say now?

Our party wants to restore the concept of sharing the values of the commons, have a money system that doesn’t build in increasing debt and the need for competitive behaviour. We want to distribute the rent from use of the commons to all NZ citizens over one year old as a regular Citizens Dividend.

A new national currency the Land Dollar is to be slowly spent into existence at Community Board level to buy up land. No rates would be payable for those whose land is community owned. A local land committee would give local hapu/iwi veto power over decisions as some land may be sensitive even after Treaty settlements. The rent from the land would be shared with other levels of Government and as a Citizens Dividend – using participatory budgeting as there would be many simultaneous claims. Inflation would be controlled by a network of committees at different levels working with Treasury and Reserve Bank.

Transactions using the land dollar would attract no income tax, GST or corporate tax. But a whole set of different taxes is needed. This is because it must not be spent to plunder the earth, deplete resources, subtract from the social or cultural capital or pollute the water, air or biosphere. That means a full carbon tax for example.

For any currency to be effective as a means of exchange there has to be a circulation incentive built in. Adrian Wrigley suggested that rather than having a financial penalty built in for hoarding as recommended by Silvio Gesell, to make it easier each note should be issued with an expiry date.

The electronic version when received by Treasury would be refreshed and redated before issuing it as a Citizens Dividend. All citizens would receive it. Where there were dependents, the designated carer would receive it, thus changing the economic status of carers. In time this dividend would rise to a basic income, allowing a huge range of inventions and options for people who have been in unsatisfying jobs but have a passion or a hobby they want to pursue. Entrpreneurism would flourish – much needed in a post carbon age.

There are many unresolved issues. The property owner that has land bought with the new currency will have $100,000 plus to spend. Trades with the land dollar will not attract GST, income tax or company tax. We need actual examples, but believe a lot of it will be spent on labour to upgrade their homes or on the development of their small business.

We invite alternative solutions
This policy has been derived by discussing with a range of people at and between meetings and it has been largely driven by Deirdre, who has received feedback from meetings in Christchurch, Otaki, Wellington, Motueka, and two at huis held by the Living Economies Educational Trust hui. We are also aware there are some big issues we have not yet tackled, like the issue of Maori land. Our solution, we emphasise, is one solution. If you have another, please let us know!!
April 2015

Reserve Bank of NZ may explain money creation to the public in a new video

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Reserve-Bank-of-New-Zealand-generic-GettyHere is our 8 Nov 2014 letter to the Governor of the Reserve Bank of New Zealand on money creation and their reply. It is encouraging to think that they are contemplating producing a video explaining how money is created in New Zealand and we await it with interest. Hopefully it will start to make an effect on the media and will start to change their erroneous and misleading reports that the banks are only intermediaries. The public owns the Reserve Bank of NZ and we deserve to have the truth. Moreover they have an obligation to train the media on the topic of money creation and to correct any wrong impressions that are given by any media. The public is not stupid. More and more people are starting to understand that the bulk of the money in the country is created by private banks as credit and are starting to ask whey private banks should have this unique privilege.

We also note in their reply they didn’t challenge our statement about over 98% of the money supply being created by private banks.

The Governor
Reserve Bank of New Zealand
PO Box 2498
Wellington 6140

Dear Sir,

Re What is Money video
You posted your animated video What is Money? at http://www.rbnz.govt.nz/research_and_publications/videos/whatismoney.aspx
We have some questions to ask you:

1. Why don’t you tell the truth about money creation to the public of New Zealand? You give the impression that the Reserve Bank issues all of it – not just coins, notes. It makes no mention of the fact that over 98% of our money is created by banks as credit. It tells us that notes and coins are backed by the government, but fails to mention that bank credit is backed by government too. It omits any mention of bank credit, a major flaw in the whole video.

2. Are you aware that economists from the IMF have recently published papers on money creation, (see Michael Kumhof and Jaromir Benes https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf)? The Bank of England’s Michael McLeay, Amar Radia and Ryland Thomas have also published papers and released videos (see http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx) Both of them tell the truth to the public that the bulk of money comes from interest bearing debt created by banks.

3. Will you now do a video as a real contribution to Money Week, telling the public the truth?

4. Are you aware that the UK Parliament will have a three hour debate on money creation on November 20th? See http://www.positivemoney.org/2014/11/uk-parliament-debate-money-creation-first-time-170-years/

Yours sincerely
Deirdre Kent and Phil Stevens
New Economics Party

And here is the reply on email 9 December 2014:

Dear Ms Kent and Mr Stevens

Re What is Money video

Thank you for your interest in the animated video What is Money? that we published recently on our website, and thank you again for following up on the lack of response to your letter.

In response to your specific questions:

1. As implied by the title, the video explains what money is and as you’ve clearly identified it does not attempt to explain money creation. I note that the video is not titled “Where does money come from?”

2. Yes, the Reserve Bank is aware of papers from the IMF and the Bank of England and the associated video. Indeed, we’ve published similar material ourselves here:www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008mar71_1lawrence.pdf

3. We are currently planning our multimedia and web content for the next year and we may indeed create a video that covers money creation. As you’re not doubt aware, it is a popular topic and the paper referred to above is unlikely to be as accessible as a video presentation.

4. Yes, the Reserve Bank is aware of the UK Parliamentary debate. The Hansard record is here: http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm141120/debtext/141120-0001.htm#14112048000001

Regards

Deirdre Hanlon
Knowledge Advisor
RBNZ


We urge you to write to the Reserve Bank to ask them to create and publicise this video on money creation and to take responsibility for educating the media on the topic of money creation. Either a hard copy letter to the Governor, RBNZ, PO Box 2498, Wellington 6140 or send an email rbnz-info@rbnz.govt.nz to them.


High time the universities changed their teaching on money creation

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It’s disturbing when university professors tell lies about the money creation process. I thought universities were supposed to be repositories of knowledge and their statutory duty was to pass on knowledge. And when they fail in that duty and pass on myths to their students who then go on to hold jobs in banking, media and all the related jobs, how much greater the crime? And when journalists pick up untruths from the academics and their graduates, how can a society learn the truth?

Some years ago I was contemplating spending my remaining years suing a university for inaccurate teaching about money creation. I was enraged that a trusted societal institution should fail so profoundly in its statutory duties when the consequences were so enormous and profound. But I chose instead to co-found the New Economics Party and I don’t regret it.

Every now and then Professor Steve Keen from Sydney has a sparring match with Paul Krugman, the former Nobel Prize winner in economics and columnist for the New York Times. The publishing of a paper by three Bank of England economists – Michael McLeay, Amar Radia and Ryland Thomas – dispelling myths about money creation would have set it off again. They were so keen, they even did a youtube video filmed in the gold vaults of the bank. Writing on his debtdeflation blogspot, Keen said he eagerly awaited Krugman’s reaction to Threadneedle Street’s paper. He is not expecting university lecturers to change their lectures any time soon.

As for me I am a bit embarrassed that the first chapters of my book Healthy Money Healthy Planet – Developing Sustainability through New Money Systems pbl Craig Potton 2005 refer to “fractional reserve banking” and the “money multiplier effect” which, according to both the Bank of England and to Michael Kumhof and Jaromir Benes of the IMF are just plain wrong. I wish I could change it.

So how is money created? Well I actually wrote both versions of money creation in my book and the second one is right. I must have confused many readers and apologise.

The Bank of England paper dispels two myths. It says:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

They say “This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”

It’s a lovely clear paper, accessible and readable. The two videos with it are filmed against the unforgettable and authoritative background of gold nuggets in the vaults in the Bank of England, a clear statement in itself. It describes how some money is created by buying assets, outlines the constraints on bank lending and reminds us the way money is destroyed is by paying back loans. It says clearly “Banks do not act simply as intermediaries, lending out deposits that savers place with them”.

Knowing that commercial banks create most of the broad money supply and that savings takes money out of the total in circulation, I have always been suspicious of comments of bank economists, journalists and politicians who urge more savings. So here is a quote on saving that I like. “When households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend.” I like it. It makes sense.

So are universities the right place to start? I am not sure. It is logical enough to argue they train society’s professional economists and influence journalists and politicians. But it may also be useful to focus on educating journalists to be suspicious of academics in economics. After all do other disciplines have websites and books similar to “Unlearning Economics” and “Sack the Economists” and jokes about not letting facts get in the way of a good theory?

This blog is not about solutions. It is about getting the facts about banking and money creation right in the first place. When solving problems you have to start with facts not myths. And whether you are a Social Creditor, Positive Money adherent, New Economics Party member or anything else you will have your solutions to public money creation. This is not the forum to debate solutions.

Well so what should we all do? Any of these would be a start.

1. Send the paper’s link to top politicians through whatever media you fancy, be it twitter, facebook, email or snailmail.

2. Get active in any organisation or group that tells it like it is.

3. Have a look at a student’s economic textbook and write to the university who prescribed it pointing out the authoritative paper and urging they teach facts not myths.

4. Ring up any radio station that perpetuates the myth of intermediation pointing out it is wrong.

5. Join with others in this campaign.

6. Offer to help the New Economics Party

7. If you are a student, then organise petitions to your academic staff and changing the textbooks.

Zero Interest Rates aren’t the root cause of housing bubbles – wake up it’s the tax system

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imagesJesse Colombo is a great person to follow on twitter (@thebubblebubble). He posts information on bubbles – housing bubbles, commodity bubbles, any sort of bubble. He is a young man who was one of a handful of people to forecast the Global Financial Crisis. He has a superb website.

So when he drew attention to an article by him in Forbes Magazine I was an eager reader. Entitled Why Singapore’s Economy is Heading for an Iceland Style Meltdown. Page after page of interesting facts, graphs, and the usual good analysis of what is happening…

But then I came to a sentence which said “Ultra-low interest rates are the primary reason why credit bubbles inflate” and I realised that my much admired Jesse Colombo hadn’t gone the step further in his understanding. He was so focussed on his bubbles he didn’t allow himself time to think of the illogical tax system we all use (and which of course suits the banks very nicely thanks).

Of course zero interest rates will cause bubbles of all sorts but only when there are no land taxes or resource taxes to stop them. So the zero interest rate isn’t the root cause, it is the illogical tax system.

Unfortunately most of the world is completely unaware of this and my hero is no exception. They assume unthinkingly that there is only one tax system regime, and that is income tax, corporate and sales taxes! England existed completely on land tax from 1066 to 1216 and progressively declined since then. Income tax wasn’t introduced in England till 1799. It is half a lifetime since a New Zealand government legislated against having a land tax and people have forgotten. A thirty year old in this country can’t even remember that we once had no sales tax.

If there is no charge on the holding of land, of course the price of land will escalate. A land rent, ground rent, land fee paid regularly to society will stop housing bubbles in their tracks. If there is no charge on the holding of a commodity, the price of that commodity will rise. But with a tax system that taxes what you hold or take not for what you do or make will set this right. Finally the liquidity in the system will flow into productive enterprises not speculation.

Bernard Lietaer says our relationship to money is like a fish’s relationship to the water in which they swim. They don’t notice it. Well the human species has two large issues yet to notice in the environment we live in – the design of our national currency and the tax system. If awareness is half way to solving it, we had better become conscious of our tax environment and currency design environment and we had better raise that consciousness mighty quickly.

Alert: Environmentalists must start asking questions about currency design and tax reform

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Oh goodness me. I have been doing some searches on “climate action economy” and “climate change” “economic growth” and I find myself mad as hell.

Heavens where are their brains? Economists from the World Bank and IMF, Nicholas Stern and many others are talking about the topic as though the economic system is a given. Shucks. How did they really think we got into this mess? Can’t they ask themselves some basic questions?

Environmentalist Hunter Lovins is just as much to blame. She, like others, thinks that there is an economic case for climate change, but fails to look at the currency system we have and fails to look at the tax system we have. Gosh when she visited New Zealand a couple of years ago I gave her a copy of my book but she can’t have read it or she would understand that if you allow the creation of the country’s currency as interest bearing debt then you have a growth imperative built in to the whole system.

Now calm down Deirdre. Why should an environmentalist be interested in examining why there are flaws in the economic system we assume to be the only one?

Actually there is more to think about than the currency system. You also have to design a thriving low carbon economy as well and you can’t do this without addressing the fundamental change necessary to turn the tax system on its head. It is time to stop taxing labour and sales and start taxing the use of the commons. A post carbon economy will have a flowing currency, but not flowing into the overuse of natural resources. Those avenues have to be blocked. And it can’t flow into housing bubbles either. That is a no-brainer.

That is why my first e-book is going to be about climate change. Its about how currency and tax reform can save us from global warming. I am writing it now, well actually I’m researching for it now. We need a land-backed currency introduced in every single country. Comments like those from the UK Chancellor, George Osborne, after Doha in 2011 “We are not going to save the planet by putting our country out of business” are going to be a thing of the past.

As resourceful human beings, if we are clever enough to have google glass this year, we are also clever enough to start redesigning the political economy so we have both a thriving low carbon economy and we halt the death rush to a burning planet and death from drowning, starvation or drought. We can do both. We must do both. We will do both.