A fundamental conclusion of the NZ Royal Monetary Commission's investigation of credit and banking was that the payment of money into a customer's bank account, firstly created a liability for the bank in favour of that customer to repay that amount when called on to do so, and this would show in the bank's records as a specific sum less any charges.

Secondly, whether the deposit was by cash or other transfer method, nothing would be retained intact in the depositor's name. The only item remaining would be the recorded bank liability in favour of the customer. This led the Commission to conclude that as it is neither legal nor practical to lend liabilities then a bank cannot claim to be lending deposits, but it must instead be creating new credit and lending that.

Statistical evidence showing a direct relationship between bank lending and increases in M1 corroborated this conclusion and should have ended any further debate. Especially when a joint submission to the Commission from the Reserve Bank and Treasury conceded that in the process of banks 'extending loans' new credit comes into existence, and when spent creates new deposits.

The Commission also agreed with monetary reformers that the Reserve Bank could finance government activities in the future as it had sometimes done in NZ in the past; but it was for the state to decide whether such was in the national interest and to what extent.

However, these conclusions left the trading banks feeling uncomfortable to the point of being almost naked, and by a remarkable coincidence, the press virtually ignored these findings as being not newsworthy.

Academia follows suit.

By contrast, monetary reformers take the opposite view for several reasons. First, any credit which functions as money becomes an enforceable claim to existing goods and services, naturally produced by the community. What right has the banking system, to create out of nothing, claims on what is really community-created wealth? If the trading banks do not lend deposits, then why does the government indirectly borrow money from the private banks instead of using its own Reserve Bank? The answers explain why the banking fraternity are so anxious to maintain the deposit-lending myth, because that perception makes it plausible for the state to borrow from the trading banks.

But there are more significant implications. The present arrangement means that around 97% of the country's money supply is on hire from the trading banks, and helps explain why the foreign banks operating in NZ were able to take out as dividends, from a population of less than 4 million people, the sum of $1.4 billion last year. Recognition by the public that banks create new money rather than lending deposits would also encourage bright people in the community to put pressure on the government to build up the M1 Monetary Pool with some interest-free credits for a change, reducing the amount of debt the community has to borrow into existence.

Not only would the thought of reduced borrowing cause hysterics in the finance industry, and relationship stresses with the MPs whose campaigns get underwritten by the corporates, but there is the ultimate heresy.

The next logical step, after the state rediscovered that it could top up the M1 Pool with substantial community savings.. judicious creation of credit as a public service, rather than boosting the Public Debt, would have even greater effect.

Currently, according to Dr Finlay Thompson, new trading bank lending is expanding the NZ M1 Pool by a further $14 million per day and because of expanding production and GNP this is not causing our inflation to exceed the OECD average.

If some of the need for extra M1 were met by the Reserve Bank, rather than trading banks at commercial interest rates, then there would obviously be savings. In addition, if instead of the extra M1 being loaned into existence.. if it were created interest-free and direct-credited into the Consolidated Fund, then the potential to substantially reduce taxation while expanding state spending could be achieved. This is similar in principle to the James Robertson proposals which the UK House of Lords is going to have to consider in the near future.

But none of these options are available while the public is conned into believing the deposit-lending myth, and banks are allowed to continue creating and converting to their own use what is unarguably the community's own credit.

from Electronz issue no. 47, 26 November 2001 www.electronz.cjb.net