Following on from the ‘8 characteristics of good money‘ detailed at Good Money let us begin an examination of the ‘Dollar’ with respect to each. Taking on an Australian perspective, this post asks the question – Are dollars scarce and difficult to create?
Are dollars scarce and difficult to create?
Few Australians actually understand how our dollars, being our national currency, are created. When they finally learn, they are generally shocked.
Whilst some of our dollars are created by the Reserve Bank of Australia and the Royal Mint, the vast majority of our currency is created by our banks. That’s right, the private banks of Australia. The banks of Australia essentially have a licence to print money… and that’s exactly what they do.
If you are like me, you might have assumed that our banks only lent out the money that people had deposited with them. There have been times in the past when this was the case – but not anymore.
Banks create currency every time they lend someone money. If the bank lends you currency to buy a home – they create it out of thin air and give it to you. Then they charge you interest for the next 20-30 years as you pay off the loan.
Think about credit cards. The bank again waves its magic wand, creates the money out of thin air and pays it to the shopkeeper when you make a purchase. And for this convenience, they are happy to charge you 20% per annum.
Wouldn’t this be wonderful? You and I could create money out of thin air, lend it to someone else; and, then charge them interest on it. The perfect business model really.
By now you are probably thinking – ‘this can’t be right?’ There is no way a government would let banks simply create money. Well don’t take my word for it, the following extract is from a speech made by the Assistant Governor of the Reserve Bank of Australia, Mr Christopher Kent in September 2018, titled ‘Money – born of credit?’
‘Money can be created, however, when financial intermediaries make loans. Accordingly, the concepts of money and credit are closely linked in a modern economy, albeit not one for one. When a bank extends a loan, it makes money available to the borrower, for example, to buy a car, a house or equipment for a business. The bank may credit the deposit account of the borrower, who withdraws the funds to make their purchase. Alternatively, the bank may directly credit the deposit account of the seller on behalf of the borrower. In either case, the loaned funds will tend to find their way into a deposit somewhere in the banking system. This process adds to the supply of money.’
Oh the irony – the recent Royal Commission into Australian financial sector has generally determined that the behaviour of the Australian Financial Institutions has been ‘inappropriate’ for many years. It concluded that the bankers had been acting in their own best interest, not the best interest of the customers. And yet it is these same banks and financial institutions, which are permissioned to create money as they see fit.
It would be remiss of me not to acknowledge that there are regulations imposed on the banks which do restrict the amount of currency they can create. We must also acknowledge that when a loan is repaid that the amount of currency in circulation is reduced. Nevertheless, our banking institutions are absolutely enormous. They are bigger than our mining companies. Bigger than our building and construction companies. Bigger than our infrastructure companies.
Does anyone really believe our banks would be as big as they are now, if they were not able to simply create money?
As far as the world governments, central banks and the private banks are concerned – this revelation on how currency is created, should not surprise anyone. They are very open with the fact that banks print money. They don’t promote it, but they do little to hide it. Let’s just say they are ‘quietly honest’.
According to these same people this debt-based, non-asset backed currency system (often referred to as ‘fiat currency’) is the pinnacle of modern economic thought, theory and reason. Regardless of the fact that these debt-based, non-asset backed, fiat currencies, created by banks and governments have been attempted many hundreds of times, by countless cities, nations and civilizations, for the past 2-3 thousand years. Yet each and every time the paper currency failed. They simply assume it will be different this time.
So in answer to the question, are dollars difficult to create? The answer is ‘No’.
Let’s examine ‘Dollars’ again in respect of the other qualities of ‘Good Money’ soon. In the meantime, you might want to read the Assistant Governor’s speech – just hit the link below.
We are sure to revisit this speech in future posts.