Following in the path of other Central Banks, the Reserve Bank of Australia has released a brief meditation on the nature of money.   In Sydney this week, Assistant Governor, Christopher Kent spoke on the following subject  “Money – Born of Credit”. As is so often the case with the RBA, what was not discussed is often of most interest. In this instance what the RBA did not mention is that the privatisation of the public money power is just a policy choice and an increasingly controversial one at that.

To provide assistance to the time poor the following were key points of the speech:

•  When people think of money there are a range of things they think of:  cash, metal, coins, salt and shells.
• Notes and coins form a small share of money in modern economies ($75B in Australia)
• Most money consists of deposits in banks.
• Broad money, which includes the notes and coins, amounts to around $2 trillion (in other words notes and coins are about 4-5% of broad money)
• Some people are concerned about what they see as the ability of private banks to create money via the extension of credit at will.
• Money can be created when a bank makes a loan
• There are constraints on how much money a bank can create including:
  • There needs to be a willing borrower
  • The bank needs to be satisfied the borrower can service the loan
  • The bank needs to maintain sufficient liquid assets to satisfy withdrawals of deposits
  • The bank needs to maintain adequate capital to meet losses or loan defaults
  • The banks needs to earn enough interest to cover operating expenses
  • Regulators may impose specific additional constraints
• Changes to any of these constraints will alter the rate of growth of money in the economy.
• The RBA does not target a rate of growth of money directly but it does indirectly by influencing the demand for bank loans by manipulating the target rate for overnight loans between banks of their ES balances at the RBA.

Assistant Governor Kent then went on to outline some trends in ‘money’ including:

• Broad money as a % of GDP has grown significantly since 1980 …especially since the deregulation of banks.
• Credit as a % of GDP has grown even more

• In 1980 80% of bank liabilities were deposits and 60% of assets were loans
• By June 2018 only about 50% of bank liabilities were deposits and loans remained about 60% of assets.
• Prior to the GFC the growth of credit was usually faster than the growth of broad money
• Since the GFC the growth of credit has usually been slower than the growth of broad money.

The conclusion of the article (emphasis added)

“..Currency in circulation has increased as a share of nominal GDP – indeed it’s as high as it’s been in many decades. But the increase in money, which includes bank deposits, has been even greater over the same period. That increase has been driven by the extension of credit, which depends on the decisions of borrowers and lenders. Banks have been able to fund that additional credit via growth in other sources of funding, including debt securities and equity. The recognition that deposits are created by the banking system via the extension of credit suggests that we should not be concerned about the banking system facing a deposit funding gap. Moreover, it is consistent with simple empirical analysis that suggests that credit is a marginally more useful indicator of the near-term growth in the value of economic activity than money…”

So what was not discussed?   The effect privatisation of the power of public money creation!

The speech made clear that most ‘money’ (approx 95%) in the Australian economy is money created by private banks.  In effect it is describing an arrangement where public money creation in Australia is effectively privatised.

But there is absolutely no reflection on or discussion of that state of affairs in the speech.  While the speech may not have been the time or place to undertake a ‘deep dive’ into the issue,  it is disappointing that the speech did not even refer to the fact that post the GFC people (and other Central Banks) around the world have been discussing at length what is the appropriate approach to money creation after the privatised model managed to blow itself up, yet again, in a most spectacular way.

• Is an effectively privatised monetary system still appropriate?
• Is a privatised monetary system a driver of inequity?
• Do the costs of a privatised model exceed the benefits?
• What are alternative approaches to operating a monetary system?
• Should there be an enlarged role for deposits and other liabilities of publicly controlled central banks in the monetary system?
• Is an ineffectively regulated mostly privatised model of money creation a fundamental problem?
• Is effective sustainable regulation of a privatised monetary model even possible?
• What would effective regulation of a privatised money creation look like?
• How do we ensure that the regulation of a privatised model is democratic and equitable?
• What does ‘independent’ regulation of a privatised monetary system mean?
• Why would we want a privatised monetary system to be independently regulated anyway?  Does that reduce or increase the likelihood of regulatory capture.  Perhaps Royal Commissioner Haynes will step outside the Terms of Reference, that specifically excludes this issue, to comment?

It would have been helpful if Mr Kent spent a few minutes discussing an important policy choice implicit in Australia’s monetary system rather than simply taking privatised money creation as a given,  as though it was something entirely natural and beyond discussion.

After all it is not as though the RBA would not have a job if some reform of the current approach to the monetary system in Australia was undertaken.

An example of how privatisation of the monetary system is taken as given in the speech is the Table of Monetary Aggregates used in the presentation.  Though this is a standard formulation of aggregates it instructive that the money that is created by the publicly controlled central bank is described as the “Money Base”.   This implies that it is merely a base for the real business of privatised money creation by private banks.

The graph included in the speech also illustrates very well the trivialisation of the “money base” (money created by the public) as it does not even show the money base.  It only shows that part of the “money base” constituted by currency.

For those who are interested in questioning whether a privatised monetary system is a fundamental problem and requires reform the recent (and ongoing) series of posts on the Glass Pyramid may be of interest.

• Part 1 – Fixing Oz Banks: Why is “taking deposits” so important to bank “lending”?
• Part 2 – Fixing Oz Banks: Banks ‘leaning’ on the public
• Part 3: The best way to create deposits? – The RBA v the private banks
• Part 4 – One small step at a time

Part 1 discusses how private banks use their legal privilege to ‘take deposits’ to create deposits ‘out of thin air’ and extract interest in making these created ‘deposits’ available to the public.

Part 2 discusses how the private bank ‘deposit creation’ for profit model is dependent on and facilitated by the publicly owned Australian Central Bank – the Reserve Bank of Australia (RBA)

Part 3 discusses how the relationship between the RBA and the Private Banks with regard to ‘deposit creation’ should be reversed and instead the RBA become the exclusive and interest free creator of the deposits required by the public monetary system.

Part 4 discusses how the first step in the reform process involves nothing more than the RBA allowing any Australian to open a deposit account at the RBA so they can save conveniently and securely in 100% safe central bank liabilities.    See also the following additional post on how the RBA effectively forces Australians to save in the form of unsecured loans to private banks.

Part 5: What happens next….more small steps.

Part 5 is a discussion of some of the implications of allowing Australians to operate MyRBA deposit accounts at the RBA.

Enjoy