Eco-Economy: The Vision And The Challenge
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Speech for NZ Banking Reform Public Meeting
11 December 2000, Connolly Hall, Wellington
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Finlay Thompson, Department of Mathematics, Victoria
Ladies and gentlemen, thank you all for coming tonight. I want to hold out a simple idea, a vision of a hopeful future: that our beautiful world is big and rich enough to support an environmentally sustainable and socially inclusive economic system, providing us all with physical security and social prospect.
Our objective in this meeting is to open a debate on the fundamental nature of our financial system. We want to build consensus and public awareness of the issues. We need to have faith in our political and financial establishment, and hopefully they will have the good faith to enter into this debate.
The issues that I want to bring up challenge many of the basic assumptions of modern economics. It is, however, a constructive debate that I seek. The credibility of all parties is diminished by confrontation. All that we seek is clarity and transparency, surely we can expect at least that from our bankers.
I would like to thank Michael Reddell for his quick introduction of the functioning of our modern financial system. I agree with, indeed have learnt from, Michael about how this complex system operates. The debate here is not about "how the system works". The issue that needs to be confronted, in public, is why the system should allow private banks to create our money.
This debate is going on all over the world. The issues we bring up have become the central feature of many local efforts around the planet. Grassroots organisations, much like New Zealand Banking Reform, are being formed in Canada, England, Scotland, Australia, Spain, Mexico, Italy, etc. At the same time the Internet has provided these campaigners the communication channels to elevate the debate from the local to the global. The protests in Seattle, Prague and Melbourne demonstrate how real that potential actually is.
The Jubilee 2000 movement, whose basic principles are strongly supported the world over, also challenges the financial establishment head on. In the face of this widespread support it is notable that they have had so little success at relieving the Third World Debt burden that causes so much damage in our world.
As an example of the global nature of this debate I would like to report on an Italian initiative. Earlier this year I had the opportunity to visit Professore Auriti in central Italy. Since July he has been issuing a local currency, with much success, in the central Italian town of Guardiagrele. His objective is simply to highlight and publicise the idea that Italy's Lira is created as debt by private commercial banks. Of course the Banco d'Italia attempted to close down his experiment, they sent in hundreds of finance police and confiscated all the local currency. However he was able to win in court and the scheme is still running. Now he is receiving delegations from central banks all over Europe and the world, for example from Taiwan and Austria.
The point of his experiment is to demonstrate that immediate improvements in the economic health of even a small community are possible by regaining control of the money supply.
A Short History of our Money
The origins of our financial system here in New Zealand go back to the
Bank of England. Until then money was gold silver and copper coins. In 1694 the Bank of England was founded with a monopoly in London on the issuing of bank notes, and the protection of the Crown. The Bank of England operated on a fractional reserve: they issued much more paper notes than the gold and silver they actually held. The economy was growing very fast at the time in England, indeed all over Europe, and the demand for a useful currency other than metal was strong. The Bank of England played an amazing trick, converting paper into gold!
Note that the Bank was privately owned and paid dividends to its shareholders. Moreover, they only issued the paper notes as debt, lending to the government and to prominent private businessmen. These are the features that remain today: private ownership of the right to issue currency, and the creation of money as debt, but more on that later.
The Bank of England provided a reliable and inexhaustible currency for the British Empire. As the empire expanded, so did the role of the bank. A five-pound note was considered equivalent to the silver it promised: “to pay the bearer five pounds of silver”.
In 1844 the British parliament debated the issue of effective inconvertibility of the Bank of England notes. The result was to strengthen the bank against further criticism.
When New Zealand's parliament was discussing the Reserve Bank Act of 1933, it is clear that our politicians felt that the only secure reserve consisted of Bank of England notes. It is revealing to read the Hansard transcripts of the time. Money for them was gold and the bank notes were simply a convenient way of carrying it around.
The costs of the first and second world wars were largely paid by enormous borrowing from private and central banks. The money being lent did not exist before, and there was no gold to back it. By the end of the war, with the Bretton-Woods agreement, the world went back to a sort of gold standard. However the costs of the Vietnam War exposed the futility of backing bank credit with gold. In the early 70’s the United States of America unilaterally took itself off the gold standard and the trick was finally exposed, openly acknowledged.
Our money is fiat money. The paper, or electronic blips, has no value of its own. It becomes valuable because we, the general public, accept it.
The history of our banking system has been accompanied by almost continual debate. In the 17th century Newton, Locke, Hobbs and others wrote extensively on the "money question". Most of these people believed in metal as money.
In America, both the War for independence and the civil war were partially financed by the issuing of unconvertible paper currency. Lincoln’s famous greenbacks for example. In both wars there was an under-current of debate concerning the control of the right to issue paper money, leading to open conflict between politicians and bankers.
In New Zealand, and around the world, the Great Depression created much interest and debate around the "money question". Douglas' social credit movement developed out of that.
The fascist movements in Italy and Germany both insisted on monetary reform.
As we can see this
debate is certainly not new. In fact it is very old. However
I want to strip off the historical baggage that has been
collected along the way and look again at the issues,
especially as they relate to New Zealand.
New Zealand in the 1980's
When I was 13 New Zealand’s financial system was changed almost over night with the incoming Labour government of 1984. As promised in their election campaign, the old controls were thrown out the window and a new regime was introduced. Financial experts praised the government and watched to see how the "New Zealand experiment" would go.
The key features of the
1) Complete deregulation of the process of credit creation. Between 1984 and 1987 the money supply grew enormously as a consequence. All this money was created, out of nothing, by the private banks and lent to a new class of super businessmen.
2) The government was advised to stop creating money altogether. Strict budget controls were created and the political forces rallied around the idea of reducing public debt and reducing the deficit. The result, as we all know, was to begin the process of dismantling the public sector agencies and the sale of public assets. This process goes on and is still being advocated today.
One noticeable feature of the last fifteen years has been the deterioration of the "households net position": together we are sliding further and further into debt. Combined with deterioration in the quality of some public services, this has resulted in a real worsening of our standard of living.
The New Zealand experiment has been a failure. But what went wrong?
The Creation of
I believe that it is impossible to understand our modern economy without acknowledging the role that private banks have in creating money. Strangely enough, this aspect of economics is gently skipped over in the textbooks used at our universities, relogated to mathematical obscurity, a technicality. Indeed, Deirdre Kent’s inquiries to the Reserve Bank earlier this year regarding the creation of money were initially rebuked with comments advising her that she must be confused if she thinks that private banks create money.
Most people believe that our fiat money is only created by the Reserve Bank, and that commercial banks simply act as "financial intermediaries".
Luckily for us Michael Reddell has confirmed that commercial banks create money.
They create money by lending it: When you borrow $100,000 from a commercial bank, they do not get the money from somewhere else, they simply create new money with the click of a button.
But who really creates our money? As Professor Auriti points out, we create it by accepting it. It is created by our society, by the interconnectedness of our lives and the community we live in. We create the New Zealand dollar!
By acknowledging that private banks create new money we expose an enormous presumption: commercial banks presume to own the new money that they create when they lend it. They claim ownership that is not rightly theirs and profit from it. Effectively we pay rent for our money.
At the moment the money comes into existence how can we establish the relationship of debtor and creditor if we cannot establish ownership? We cant!
Banking Reform believes that:
When money is created it must be credited to the government by the Reserve Bank.
....and a Challenge.
I would like to extend a challenge to our esteemed economists and
the 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 we can do it ourselves.
If we did we could:
1) Retire most of our huge foreign debt,
2) Reduce taxes, taxes that go to pay interest on public debt,
3) Lower interest rates in the private sector, increasing employment and helping everyone to get ahead.
But to do this we need to understand what money really is, and make the system work for us instead of allowing the system to enslave us.
We will need strength and solidarity in front of the inevitable opposition from international banks.
But most of all we need to have hope, because there is a sustainable, just and rich future for Aotearoa.