Peter J Morgan
Peter J Morgan BE (Mech.), Dip. Teaching – professional forensic engineer, retired economics, mathematics and physics teacher
PART 3 of 18
Economic booms and bubbles are caused by the fact that the money supply expands when banks create new loans faster than old loans are being repaid. The corollary is that recessions, or worse, depressions, are caused when old loans are repaid faster than new loans are being granted, thus shrinking the money supply.
These facts were spelt out previously by Prof. Joseph Huber – one of the world’s foremost authorities on sovereign money, in his paper “Split-circuit reserve banking – functioning, dysfunctions and future perspectives”, published on 26 June 2017 in the Real World Economics Review, issue 80, in which he wrote:
“Banks create credit and bankmoney whenever they make payments to nonbanks, for example when granting loans and overdrafts, or purchasing assets such as bonds, stocks, other securities or real estate, and also when paying salaries and bonuses to employees or nonbank service providers. However, the latter payments to employees or service providers are charged to the loss statement of a bank and thus its equity, whereas credit claims or securities are booked as assets.”
However, these truths are not yet well known, most likely because practically all students who study economics, whether in a secondary school, a polytechnic, or a university, are erroneously taught that banks are financial intermediaries that take in money from savers, aggregate it, and on-lend it at a margin to borrowers! This is known by economists as the ‘loanable funds’ model of banking.
That banks are money creators, not money lenders, was pointed out by academic critics (Huber, 2014; Keen, 2014; Benes & Kumhof, 2012; Werner, 2005, 2014a, b; Bjerg, 2014), central bank governors (King, 2012, p. 3; Jensen, in Danmarks Nationalbank, 2014, p. 1), the former head of the UK Financial Markets Authority, Lord Adair Turner (Turner, 2013, p. 3), central bank economists (McLeay, Radia & Thomas, 2014a, b; Keister & McAndrews, 2009, pp. 7-8; Deutsche Bundesbank, 2012, p. 76; Bang-Andersen, Risbjerg & Spange, 2014; Sveriges Riksbank, 2013, pp. 74-77), informed members of the press (Wolf, 2014; Häring, 2013), and advocates of monetary reform (Ryan-Collins et al., 2011: Jackson & Dyson, 2012; Huber & Robertson, 2000).
We don’t trust banks to mint our coins and manufacture our banknotes, and only in our collective ignorance do we allow banks to create our electronic debt-money! It is my firm belief that ‘we the people’ are not so stupid as to ever knowingly vote for that! It is also my firm belief that after learning the truth about our money and banking system, maybe 90% of adult New Zealanders would vote, if given the chance, to have the RBNZ create ALL of our money – i.e. our notes and coins as well as our digital money. Please note that the previous sentence referred to the RBNZ creating all of our money. It did not advocate that the RBNZ, rather than banks, should allocate all of our money – that would be many steps too far – socialism some would call it! (More will be explained later in this series)
At present, for a typical mortgage loan of, say, $750,000 from, say, Westpac, in exchange for signing a contract whereby Westpac promises to pay $750,000 in notes, and the borrower promises to repay Westpac according to the agreed terms (i.e. the contract legalises both the borrower’s IOU to the bank and the bank’s IOU to the borrower). Westpac then credits the borrower’s Westpac account – by simply typing into it the symbols and digits $750,000. Westpac has thus created – out of nothing (ex-nihilo) – $750,000 of ‘funny money’. In our collective ignorance, borrowers from banks, and ‘we the people’, and our government, choose to turn this ‘funny money’ – these electronic bank IOUs (i.e. bank deposits) – into spendable money – making payments using our EFTPOS and credit cards, and direct credits through on-line banking – and we almost all accept them as being far more convenient to use than RBNZ notes and coins – even to buy a cup of coffee! We do this in our almost universal ignorance of the deleterious effects of this private, debt-based, ‘funny money’ system on the wellbeing of our society.
The system continually benefits the bankers and the well-to-do for whom new money is created, whilst making the poor get relatively poorer. When a loan principal or part thereof is repaid, the bank cancels the borrower’s IOU, in effect making the electronic money disappear back into the nothing from whence it came, thus destroying it and thereby reducing the total quantity of money in circulation – the money supply. Banks therefore do not really want their financially sound borrowers to repay their loan principal, but they sure do want any borrower who becomes financially unsound to repay their loan principal, because too many financially unsound borrowers can cause a bank to go belly-up!
If you’ve correctly understood the previous two paragraphs, you now know that in law, the ‘money’ in your bank account is merely the bank’s record of what it owes you. You (the payer) and the person or business (the payee) to whom you transfer it as a ‘payment’, make it become money by transferring it and accepting it as payment, respectively. When you use your EFTPOS card to ‘pay’ $5.00 for a coffee at a café, you are actually transferring your bank’s promise to pay you $5.00 in coins, to the café, and then, the café’s bank owes the café $5.00 in coins. Of course, if you and the café both bank with the same bank, say ANZ, all is sweet for ANZ, but, as explained below, with any luck, over a period of time, the banks never actually have to pay out any notes and coins, except for the 2% of the money supply that ‘we the people’ choose to hold as notes and coins – and that’s only about $6 billion, compared with about $310 billion of the banks’ ‘funny money’!
As explained later in this series, the law that legalises this transfer of debt obligations – the law that makes a debt negotiable – stems from England’s Promissory Notes Act 1704. Prior to the passing of that Act in 1704, a private debt contract was a contract between two parties only, and could not legally be transferred to a third party; i.e., private debt could not legally be used as money.
