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Open Letter To Independent Monetary Policy Review

Open letter to:

Professor Svensson, Dr Michael Cullen and the secretariat of the
Independent Review of the Operation of Monetary Policy.

C/- The Treasury, PO Box 3724, Wellington, New Zealand


Finlay Thompson,
Spokesperson of New Zealand Banking Reform.

Dear Sirs,

As Prof. Svensson prepares his report on the Operation of Monetary Policy he has a unique opportunity to explain to the New Zealand public why foreign bankers are allowed to create the vast majority of New Zealand’s money.
In a speech 11 December 2000 I presented a challenge to the economists and officials of our financial system:

“Please explain to the public why we should allow private, commercial and largely foreign banks to create our money when the Reserve Bank of New Zealand can and should do it for us.”

Surely it is not too much to ask for some clarification. We all have an interest in the operation of monetary policy, and control over the creation of money is clearly a central aspect of that operation. However there is some confusion/controversy around the role that commercial banks have in the financial system.

It seems that economists in our universities and officials at the Reserve Bank and Treasury see no contradiction between the two assertions:

1) Commercial banks are financial intermediaries: taking deposits from savers and lending to borrowers.

2) Commercial banks create money, creating new money as new loans are extended.

The implication of the first assertion is that the money made available for loans is already in existence, that it is simply taken from depositors’ accounts. However according to the second assertion new money is created when loans are made.

Which is it?

Both statements cannot both be true. Either banks lend depositors money or they create new money. I invite the Independent Review to clarify this issue, explaining to the public not only which statement is correct but also why it is correct.

As many economists believe, and contrary to the general public’s understanding, that the second statement is true: registered commercial banks create new money every time a loan is made. It is important to note that the Reserve Bank can also create new money, and does from time to time. However since the 1984 deregulations the Reserve Bank has attempted to reduce the proportion of currency to bank credit. Reserve Bank created money now accounts for less than 3% of the NZ dollar supply.

Corresponding to the banks’ expansion of the New Zealand dollar supply has been an enormous expansion in private indebtedness. But when we understand the money is created as debt it is obvious that this would be the case.

The huge current account deficit that New Zealand pays each year is the direct result of allowing foreign banks to create the money they lend us. Moreover this bind then forces us to increase our indebtedness in order to pay the interest on those loans. If those same foreign bankers created the money out of nothing, what obligation do we have to pay them back?

The financial deregulation of the 1980’s has resulted in the New Zealand people becoming heavily indebted, much as the third world is. Is it the considered opinion of the Independent Review that this is a successful outcome of the deregulation?

To repeat the request of this letter:

Could Prof. Svensson please explain to the New Zealand public how foreign commercial banks create our money, the New Zealand dollar, and why it is desirable to allow them to do so.

Yours respectfully,
Finlay Thompson
New Zealand Banking Reform.

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