Printed from https://fyi.org.nz/request/10256-money-creation on December 22, 2024 14:46

Money creation

Martin Taylor made this Official Information request to Reserve Bank of New Zealand

The request was successful.

From: Martin Taylor

Dear Reserve Bank of New Zealand,

1. Can you confirm that money creation in New Zealand operates in the same way as described by the Bank of England (‘Money creation in the modern economy’, Bank of England Quarterly Bulletin 2014 Q1). In particular that:

"In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
"The reality of how money is created today differs from the
description found in some economics textbooks:
• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
deposits.
• In normal times, the central bank does not fix the amount
of money in circulation, nor is central bank money
‘multiplied up’ into more loans and deposits."

2. If there are any significant differences between the NZ and UK systems, can you highlight where the NZ system differs.

Yours faithfully,

Martin Taylor

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From: RBNZ Info
Reserve Bank of New Zealand

Hello Mr Taylor

 

Thank you for your Official Information request about money creation.

 

In response: yes, money creation in New Zealand operates as described in
the video produced by the Bank of England, and also as described in the
March 2008 article published in the Reserve Bank Bulletin. Both the NZ
article and UK video are on the Reserve Bank of New Zealand website, at
the following URLs

·        Video -
https://www.rbnz.govt.nz/research-and-pu...

·        Bulletin article -
https://www.rbnz.govt.nz/-/media/Reserve...

 

While the Reserve Bank article and Bank of England video use different
terminology (credit creation in one vs bank loans in the other), they
describe the same money creation process. Both the video and the article
say that central bank monetary policy acts as the limit on money creation.
Many modern economies have settled upon a system of credit creation by the
private sector, regulated by the Government and with monetary policy
conducted independently by a Central Bank, as the cheapest and most
efficient way to create and maintain the money supply. Credit creation
entails the simultaneous creation of countervailing obligations – i.e.
borrowers agree to pay back what they have borrowed. In order to repay
debt the borrower needs to do something that creates value (working,
trading, designing and/or creating new things etc). Excess credit creation
can lead to inflation, while insufficient credit creation acts as a brake
on economic growth. The Reserve Bank sets the Official Cash Rate at a
level designed to ensure that there is neither too much nor too little
credit creation, in order to maintain a stable general level of prices,
and contribute to supporting maximum sustainable employment within the
economy.

 

Regards

Angus Barclay

Reserve Bank of New Zealand   |   Te Pūtea Matua

2 The Terrace, Wellington    |   P O Box 2498, Wellington 6140

www.rbnz.govt.nz

 

The Reserve Bank is a government agency that regulates and supervises
banks and insurance companies, issues banknotes and coins to banks, runs
the inter-bank payment and settlement system, keeps inflation low and
stable, and manages approximately $25 billion of the nation’s foreign
reserves.

 

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From: Martin Taylor

Dear Angus,

Thanks for your prompt response and clarification. I have a related follow-up question which I've posted below. I can submit it as a separate OIA request if that is more appropriate, however please respond here if possible.

FOLLOW-UP QUESTION:
Can you confirm that the following statement is inconsistent with this view of private bank money-creation since it omits bank-created money.

"Banks get their money from two sources – either from the bank’s owners, its shareholders - or by borrowing it, from people like us, often in the form of deposits. The money banks get from their owners is the bank’s capital. The rest is borrowed – it is ‘other people’s money’.

-- Source: Geoff Bascand, Reserve Bank Deputy Governor and General Manager for Financial Stability, 26 Feb 2019: https://www.rbnz.govt.nz/research-and-pu...

Yours sincerely,

Martin Taylor

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From: RBNZ Info
Reserve Bank of New Zealand

Hello Mr Taylor

The statement by Mr Bascand that you refer to is not inconsistent with banks creating money. Mr Bascand's statement in his 26 February 2019 speech is not intended to be a full recounting of how money or banks work. That is not the context of the 26 February speech. The statement in the 26 February speech is a simplified explanation of a scenario relating to the Reserve Bank's proposal to alter regulations about the proportion of equity capital the owners of banks should invest in their business. The context is important and relevant to the statement. The statement by Mr Bascand in the 26 February speech does not purport to be about the creation of money and should not be misrepresented as relating to the creation of money.

Regards
Angus Barclay
Reserve Bank of New Zealand  | Te Pūtea Matua
2 The Terrace, Wellington | P O Box 2498, Wellington 6140
www.rbnz.govt.nz

The Reserve Bank is a government agency that regulates and supervises banks and insurance companies, issues banknotes and coins to banks, runs the inter-bank payment and settlement system, keeps inflation low and stable, and manages approximately $25 billion of the nation’s foreign reserves.

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