BANKING AND THE ROLE OF THE RESERVE BANK
- Liz Griffiths
The best economic future for Government spending in NZ is for the Reserve Bank, which is Government-owned, to issue credit to the Government as required.
I am not about to say anything radically new. Henry Ford stated: "It is well enough that people of the nation do not understand our banking, and monetary system, for if they did, I believe there would be a revolution before tomorrow morning". This quote intimates that there is vast ignorance about the real nature of money, who owns it, how it is made, and who dictates what sovereign economies can do. I believe that this still exists.
Covid 19 time is a perfect time for discussion. This is a topic simply not covered in the school curriculum. Many of us think a bank lends the money that is deposited in it, via deposits; that we effectively "borrow" someone else's savings. We've all heard the old adage that "money is made out of nothing" - it's very weird. Surely that has to be impossible. But, if you go to a bank for a $100,000 loan, the banker will first want to know what you will potentially surrender, as collateral, should you fail to repay the loan or fall back on interest payments.
You will repay a loan with your hard-earned money, all tax paid - so your "repayment" will always be more than the original bank "loan". This includes the interest payments, for which no money is ever "created" - and is a continual, major cause of inflation. And, for that "collateral" agreement, the bank has the extraordinary power, a stunning "licence", to put an ink blob in your bank account, and yes, you can go and spend $100k as agreed.
So, what exactly did the bank give you? Surely more than an electronic ink blob. What about money they hold in peoples' savings accounts and Aunty Maud's term deposit? Don't they lend us other people's money held in the bank? John Kenneth Galbraith wrote, in 1975: "The process by which banks create money is so simple that the mind is repelled".
Banks Ordered To Hold More Reserves
In 2019 the NZ Reserve Bank publicly slammed the ANZ for holding insufficient required funding against the amount of money "loaned" out by the bank, especially to dairy farming in NZ. Shortly afterwards, the Chief Executive Officer, David Hisco, resigned in haste because of irregularities in his expenses. And we got a glimpse of the huge funding paid to those in the senior positions and on the boards of these banks. Plus, their big "bonuses".
ANZ in NZ was found to be holding less than 10% in term deposits etc, which is their bank form of "collateral", as a hedge against all the documented "loans" to people in NZ in case of borrowers defaulting en masse. Fractional Reserve Banking is a system that requires banks to hold a portion (very small) of the money deposited with them as "reserves". It used to be set at 17% - i.e. for every 17% deposited they could lend 83% backed by nothing.
In NZ today the Reserve Bank requires only a minimum 10.5% as the "reserves", and ANZ was holding less than this. Given that they hold real buildings and other assets as collateral over their client borrowers they expect these will cover major calamities if/when numerous borrowers cannot repay - as in 2008 - but, as we saw then, banks do collapse (the word "mortgage" is Latin in origin and literally means "death grip").
In December 2019 the Reserve Bank ordered large banks to increase their reserves to 18% and other banks to 16%. They were given seven years from July 2020 to do so. That start point has since been delayed by one year, to enable the banks to be able to meet lending commitments during the economic crisis caused by the 2020 coronavirus pandemic. Ed.
Also, be aware that should a bank actually collapse, the NZ taxpayer no longer bails the banks out to protect the depositors. Depositors' (us/our) savings accounts or term deposits can be raided to meet the bank's debt - so, when we deposit anything in a NZ bank today, remember that we are unsecured creditors. John Key's government paid nearly $2 billion of taxpayers' money to bail out South Canterbury Finance, and the late Alan Hubbard, to refund the depositors. Legislation stopping taxpayer bailouts was then passed, leaving depositors as "next call" to cover bank cash shortfalls. Google "Open Bank Resolution" for more detail. This practice has been exercised in Greece.
For the $100,000 loan, the borrower must repay with "real" earnings, tax paid, along with tax paid interest levied against that loan. It is little wonder that the Australian-domiciled banks reap some $NZ6 billion annually in profits from the NZ economy. The late MP Jim Anderton* often said that the NZ economy was haemorrhaging from profits going offshore, especially from the four banks. About 80% of bank activity in NZ is with these four Australian banks. * Murray Horton's obituary of Jim Anderton is in Watchdog 147, April 2018. Ed.
Prior to Rogernomics in the 1980s we had a very popular and good banking system. Regionally-owned banks such as Trust Bank* (which started off as the Canterbury Savings Bank) - managed under a trust for the benefit of the province - were sold to Westpac, except the Auckland Savings Bank (ASB) which was sold to the Aussie Commonwealth Bank (so the current name is a misnomer) and the Taranaki Savings Bank (TSB) - the lone survivor. Other NZ-owned banks are Kiwibank, SBS Bank and the Cooperative Bank - plus building societies.
*CAFCA was heavily involved in the 1990s' campaign that, unsuccessfully, tried to stop the sale of Trust Bank to Westpac. For example, there are several articles on the subject in Watchdog 82, August 1996. Ed.
As an indication of the wealth of banking, take Trust Bank as an example. All the profits had to be retained in the province for local charity and sporting type donations, plus some national charities (e.g. TSB today supports NZ coastguard lifesaving). The Canterbury money was held in the Canterbury Community Trust, now called the Rata Foundation, and still pays about $14 million annually in to the local economy - all from the returns from the invested profits accumulated from only a few decades that the bank was in existence.
Four Aussie Banks Aren't "Australian" Any More Either
As publicly listed companies they need to provide an annual report - and, in that, is listed the Top 20 Shareholders, as required by law. Hong Kong Shanghai Bank (HSBC) is the stand-out holder with 22 - 25% of each of the four banks, held by its nominee company - a cunning way of ensuring we never know who the actual investors are.
Although HSBC is headquartered in the financial "city" of London, it is closely associated with the Chinese Communist Party and is also the highest fined bank/corporation globally - for facilitating tax evasion, illegal gun and armaments trading etc. Next among the big holders of shares in those four Aussie banks is American JP Morgan with about 10%, followed by Citicorp with 6%. Paribas, which is French, is also a big holder with its nominee companies too.
Over 50% of these four "Australian" banks are now foreign-owned. The Commonwealth Bank of Australia was a much-revered institution until it was privatised in the 1990s under Prime Minister Paul Keating. And about that time, with the mantra of deregulation, privatisation, globalisation, "free" trade, the four banks were considered "big and solid enough to self-regulate" which ended, as you will know, with the recent Royal Commission exposing some of their amoral practices which have had really dire consequences and loss for many Australians.
My interest in banking is because I was a manager in one of these banks in the 1990s in NZ and was a whistle blower when there was pressure on the branch managers to (illegally) sell unit trust investments. One option, investing in the Government Stock trust, was the most popular, seen as the "safest", but was incorrectly advertised as having a 16% annual return, which was an historic and nominal once-off when interest rates fell after that surge up to 25% p.a. following the share market crash in 1987.
None of the branch managers could support me as seven of them were to be made redundant at the end of a prescribed six months term if they hadn't reached branch targets, set by the Wellington head office, to cream money out of generous term deposits and into these new trusts. And indeed, the bank did lay off seven good men. But the bank had also acted in breach of the Fair Trading Act, leaving many clients adversely affected as well.
23rd December 1913 is an important date in the US, deliberately close to Christmas when Congress was virtually closed, because the American Federal Reserve Banking system was established on that date. Basically, it is a secretive and fully privatised banking system in America and now imposed on the rest of the world wherever possible.
For example, the first settlement required of Japan after WWII was to privatise their banks; Sukarno of Indonesia was overthrown via the US Central Intelligence Agency (CIA) because he would not privatise their State-owned banks - but Suharto, his puppet successor, did sell them, took great loans from the World Bank, and was well rewarded - hence the Suharto family had new wealth and bought Flock Hill Station near Porters Pass in Canterbury and Lilybank Station at the head of Lake Tekapo, etc. The USA, post WWII, has a truly rotten record of interference globally.
So, where to now? China also has a rotten human rights record - but sadly is not unique in this. Take, for example the often-brutal British colonial rule and the Belgians in the Congo, or Germany during WWII against Slavs and Jews especially, and the US CIA-led covert wars post-WWII all over the world and in Iraq most infamously.
Advantages Of State-Owned Banks
But think about what has been achieved in China since 1970 - in only 50 years. They inherited many big publicly-owned companies and systems from Mao Zedong that have been invaluable. Their biggest banks are also State-owned. In fact, in this relatively very short time four of their State-owned banks are the biggest in the world, or at least close. Google Wuhan, the city of "wet markets" and see how huge and modern it is. NZ has no equivalent.
Should a Chinese State-owned engineering company want to create or modernise or enlarge a port it asks the relevant State-owned bank for a "loan" to pay for wages and equipment. But does it pay interest to the State-owned bank - effectively to itself? No, it doesn't. It is interest free funding. Nor does the capital need repaying. What China has achieved in terms of development is unprecedented. China could not have achieved all the development it has without its State-owned banks.
King Henry I of England was aware of this benefit as well and issued, around the year 1100, "tally sticks" for paying taxes - and when you go to London there are a few in the British Museum under "rare forms of coinage" (most were burnt under the House of Commons by Guy Fawkes). Google Tally Sticks too about the wide usage for over 600 years of this extraordinary currency in England, and in north west France. In England they were primarily a form of State-owned exchange that bypassed the control by the Jewish bankers' monopoly over trade.
19th Century US President Abraham Lincoln also wanted to bypass control of the new American states by the privately-owned Bank of England, and other European bankers, when he issued the "Greenback" dollar. "The Government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the Government and the buying power of consumers.... Money will cease to be master and will then become servant of humanity" - which his 1865 murder prevented happening.
State ownership of banking is not new. It has a wide and essential role to play in the economy. Globally, right now, as a result of the Covid 19 virus, much of the world is facing a critical cash flow deficit with millions of people unemployed, businesses collapsing and so many requiring both financial and welfare support on a scale most of us have never envisaged.
In NZ, the Government is dispensing billions and billions of dollars to people needing financial help. And the requests for help are ongoing. The Reserve Bank and Government are releasing a significant amount of cash into the economy. Privately-owned banks can ONLY pump new money into an economy through a loan, as I have described. And no one wants to borrow much money at present, and certainly not on the scale and for situations currently needed.
Creating Money Out Of Nothing
Many NZ economists support and advocate the role of the Reserve Bank to issue credit to the Government, as is lawfully established. The Reserve Bank Act of 1936 and amended in 1966 clearly confirms the right of the Government to issue credit for its own use. That it creates money "out of nothing" is simply the same as the private banks when also creating credit.
But if the Government is issuing all these billions as "borrowed" money through the private bank/bond holders, that would incur repayment, with interest, and could burden the future of the NZ economy for decades. There isn't crystal clarity but it appears that the bond market is very busy right now, and that private banking is busy clipping the ticket. Greece, Italy, Portugal, Spain and especially Japan are national economies close to collapse - as is California. We don't want to go that way - so clarity is needed. Is our Government using the bond buying approach to issuing cash and credit, rather than direct credit from the Reserve Bank with no interest attached?
If the Government now used the Reserve Bank to issue credit directly for the national benefit it would not be the first time - for example, 1935. The NZ housing/mortgage schemes in the 1930s were publicly funded through Reserve Bank credit. 40,000 houses were built, and finance for education, health, infrastructure - and NZ came out of the Depression ahead of any other nation. Meanwhile, the Government is also is advocating circumventing the Resource Management Act so that it can help to speed major developments in NZ to boost/save the economy, but where will the funding for those projects also come from? Again, from the Reserve Bank, as established in NZ law?
Reserve Bank Governor Adrian Orr denies that he has the legal right to create money. "In an interview with Stuff, Orr said he was open to the idea of money financing, that is, the Reserve Bank creating money to lend to the Government for its spending. 'You could shift, at an extreme, to something called money financing, where the Government says 'I want to spend 100, credit our account with 100' and that's just us creating money', he said".
"But the current legislation governing the Bank would prohibit Orr from moving in this direction. Finance Minister Grant Robertson would have to draft and pass legislation before the Bank could move to money financing. 'Currently, I wouldn't be able to do it - it would be outside our legislation', Orr said" (Stuff, 28/5/20). Ed.
1% Of People Globally Own 50% Of World's Assets
They do so thanks to globalisation, privatisation and especially deregulation, and they invest in physical assets like land, buildings, railway and road assets etc, etc. And, like American mega-capitalist John D Rockefeller (1839-1937) with his oil monopoly, and Monsanto today, they buy, then "kill off" all opposition to tighten their monopolies, among other amoral practices.
Where is all this taking us? Dire poverty is globally so widespread/mainstream (and, yes, there are too many of us which is also a problem, but hard to resolve). And currently in NZ there are advocates saying we could encourage some (more) of these super wealthy to come to NZ's aid and invest their money in "growth projects" at this time of capital need.
Western governments, including NZ, need to regain control of their economy and capital. The Reserve Banks are the issuers of all the notes and cash in circulation, up to 3% of the national value of all capital, which means that 97% is electronically issued - largely "owned"/controlled by private bankers, (money created through their loans to borrowers and basically created "out of nothing") and of value is the debt that is therefore owned by their "nominee company" investors.
"Let me issue and control a nation's money, and I care not who writes the laws" - Mayer Amschel Rothschild, the private banker ... ... compared to the State-ownership advocate of credit issuance, John Maynard Keynes, who observed "there may be good reasons for a shortage of land but there are NO good reasons for a shortage of capital".
The three large Icelandic banks, privatised in the 1990s, collapsed in the 2008 financial chaos, leaving the country deeply in debt, depositors' money gone, and a devastating grip on the economy. The State-owned Central Bank of Iceland used a State-created money supply, instead of "renting" any money from private banks.
Iceland is a textbook case to learn how a country can recover against great odds, and succeed - as has China. Google "Iceland's Fight for Survival" to get an idea how extremely dramatic this event was. Try to find a picture of the private jet painted with distinctive pin stripes to match the suit of one of the bank owners - pre crash. As with many of the 1% who own too much of the world's assets, just another case of inglorious greed.
Governments Need To Regain Control
The NZ Reserve Bank needs to issue and "own" the electronic money supply when it is issued to the Government for capital development and, as at present, for social welfare benefit (and Kiwibank should become the Government's banker too - so why is it still using Westpac ?!!!). Finally, note that our cash and notes are little more than the old "milk tokens". They have no intrinsic value since the gold and silver backing of them was abandoned in 1933 and completely severed under President Nixon in 1971. Our cash is effectively a milk token buoyed up only by Faith. And I just won't get in to Bitcoin which is every bit as ephemeral as bank-issued "credit".
For further reference: there are excellent documentaries on Youtube, and many books. For the very best documentary about banking, watch "The Money Deluge". Also: "Who Controls All Of Our Money?"; "The Spider's Web: Britain's Second Empire" - how Britain transformed an imperial power to a financial power - how the 1% evade paying taxes, etc. from London's financial centre; and "Banking Bad" - Adele Fergusson on the Royal Commission into Banking in Australia.
And some of the NZ economists and commentators advocating that the Reserve Bank could play a more important role in securing our democracy via Reserve Bank credit issuance for the Government include: - Bryan Gould, retired from Waikato University, Geoff Bertram at Victoria University, Ganesh Nana, head of BERL, and Bernard Hickey at Newsroom.