Commercial banks create 97% of money electronically when they issue loans, the remaining 3% is created by the Reserve Bank for notes and the mint for coins.
PMA is neither right nor left wing. The objective is to create a better system for money in Australia. This will provide benefits that could reduce government spending on debt interest, or reduce the rate of house price rises. Decisions to use the money saved from debt payments are political decisions and could be used for more government spending or tax cuts. PMA believes that people of all political persuasions can see the benefits of changing the system.
The supply of money is important for people who are buying houses, companies that need to pay their workforce and invest in new equipment and stock. Commercial banks create money through the issuing of loans and they do lots of this during good times and stop lending when the economy is slowing down. That makes inflation and bubbles in the economy worse and down-turns and recessions worse.
The impact of this is that governments/central banks have to intervene more often using interest rates and other blunt instruments to correct these distortions and hurt people and the economy. This is an inefficient use of the market. With commercial banks in charge of money creation they choose where the investment goes, based on their own risk and profit objectives. That approach preferences housing and commercial property over businesses and other loans that could be more productive for society.
Yes they do. This is the way modern banking works and people who believe that banks lend out depositors money misunderstand the nature of banking. Conventional economic textbooks have described banks as either an intermediary between borrowers and lenders or a fractional banking model. Neither of these are correct some banks with a banking licence are permitted to create money when they make a loan, similarly money is destroyed as the loan is paid back
Building societies, credit unions and other financial organisations don’t have a banking licence that allows them to create money so they have to have the money first before they can lend it out. They get that money from either depositors or borrowing themselves. This approach is now shared by all the big institutions but many people learnt economics when the teaching was different.
Money in the Australian Economy | Bulletin – September 2018 | RBA
Banks are essential for the economy and without them society would collapse. We need banks that provide the people with a utility that includes services like ATM’s, ability to open accounts and store money, transfers between people and facilities to pay for things like bank cards, electronic banking. Banks have existed for hundreds of years but only recently have they become such a big part of the economy instead of providing the services to support the economy. Four of the top five companies in the ASX (Australian Stock Exchange) are banks.
Banks have historically provided finance for small/medium size enterprises to help them expand and support their cash flow. This has been partially replaced by venture capital and many businesses struggle to expand and grow.
Yes they could. However since the 1990’s the RBA has a declared position on debt management that has relied upon bond purchases. The links below provide further details.
The Separation of Debt Management and Monetary Policy
About Monetary Policy
The following ABC News article from July 2022 proposed this issue be considered as part of with the upcoming RBA Review: It’s the last taboo in central banking. So will the RBA review look at how money is created?
Review Final Report: An RBA fit for the Future
This approach to financing government spending has been used in Canada and other countries where the government deficit is simply recorded by the Treasury as a debt liability by the Reserve Bank as an asset. There is no corresponding sale of bonds on the open market. For a system to be successful it would need to be designed carefully to avoid the risks of inflation.
There are a few things that can be done and PMA believes these need to be agreed and implemented through the democratic processes that exist within the Australian political system.
1. Better regulation to stop the bad practices highlighted in the Australian banking commission (information in the resources page). We need a regulated banking system that incentivises the industry to focus on providing services to encourage a productive economy. This could be done by introducing more rules for mortgage lending including restricting the ability of banks to create virtually unlimited amounts of money. Also the removal of the insurance requirements making the banks take the full risks for defaults instead of passing this onto consumers.
2. Direct monetary financing is where the government through the RBA or Treasury creates the money without using commercial banks which therefore saves interest costs on borrowing. Already done in part during quantitative easing this approach would need to be managed to avoid inflation and could be coordinated through a monetary policy committee or similar.
3. Introduction of a retail central bank digital currency (digital cash), to provide an alternative to commercial bank created money. This needs to be designed carefully to maintain privacy and PMA is reviewing the various international activities in this area. The resources section has some good links like this one from Brazil.
FAQ – Drex – Digital Brazilian Real
4. Reinforce the requirement that money should be available free at the point of use in either a physical form or digitally. This right for people to have cost free access to money should be protected by the state and not dependent upon the business model of the commercial banks. The banking licence should be like those of other utilities and should require the banks to provide essential services such as ATM’s, acceptance of cash etc.
PMA don’t believe that getting rid of commercial banks is the solution. Whilst a government owned bank like those in other countries could be beneficial PMA don’t have this as a central campaigning theme. Commercial banks are currently well placed to allocate financial resources effectively if they have the right incentives and don’t focus primarily on property. This will require good regulation and regulatory management and ensuring banks remain viable is important.
Yes. The big 4 Australian commercial banks have consistently exceeded the profitability of the rest of the ASX200 companies each year since shortly after the financial crisis. Their profitability exceeds that of other utilities by 50% in many cases and the large banks have significantly higher profits than the smaller regional banks. These changes will make banks profitable just not the excess profits they currently make.
Returns on Equity, Cost of Equity and the Implications for Banks
Implemented correctly, no. The money system is just one part of the system that leads to continuing growth in house prices and some of these causes require political decisions such as changing negative gearing, capital gains tax reliefs and the need to build more affordable housing. The changes to the money system should reduce the excessive lending by commercial banks and the availability of financing for some people. It is therefore anticipated that the implementation of the PMA proposals will have a minimal short term impact but in the long turn it will create price stability. This will reduce the risk of a housing price collapse like Japan.
The best start is to educate yourself about how the current system works and encourage your family and friends to do the same. When monetary reform legislation or petitions are put forward, it’s good to be able to make an informed choices about supporting them. If you have access to people who can influence change then make contact and build their awareness. Contact us so we can work together to make the money system work for everyone not just the few.