Until 1844 commercial banks in Britain could print their own banknotes.
In 1844 the Conservative Government of Robert Peel passed the Bank Charter Act 1844. This gave exclusive powers to the Bank of England to issue paper money and coins.
Likewise, the Reserve Bank of Australia “designs, produces and issues Australia’s banknotes, with the objective of ensuring public confidence in banknotes as an effective payment mechanism and a secure store of wealth.”
Seigniorage is the difference between the value of money and the cost to produce it. Seigniorage creates revenue for government without it having to collect taxes. In the 2016-17 Australian federal budget, seigniorage was listed as an “other source of non-taxation revenue”. It raised $107 million. But this seigniorage is only raised from the production of notes and coins. This is only about 3-5 percent of the total money in the economy.
Nobody suggests that private commercial banks should be given the right to print their own banknotes as they were able to do in the 19th century. If they did this would be the crime of counterfeit and there would be public outcry.
Yet commercial banks in Australia, as elsewhere, are permitted to create new digital money. They do this whenever they lend money to borrowers beyond the amount that the bank holds in reserves. The money is created digitally by an accounting entry, a credit, in the borrowers account. The borrower is then entitled to use that credit as legal tender, or cash.
As Nobel Prize-winning economist Joseph Stiglitz has written banks can “create loans essentially out of thin air. The bank can just enter into its books that an individual has a deposit (a right to spend money) of say $100,000. The bank in a sense owes the borrower this money. But lending the money means that at the same time the bank creates as asset of equal value- the loan itself.”
The banks do not have a completely free reign. They must observe the Australian Prudential Regulation Authority’s capital adequacy requirements. (1) Under these rules banks must have enough capital reserves to minimise the risk of insolvency.
But provided the banks do not breach capital adequacy requirements, it is perfectly legal for them to create new money. No seigniorage, or other tax, is captured by government in this process. And when the banks create money in this way it is created through the debt to the bank owed by the borrower, the bank is entitled to charge interest on the loan.
Meanwhile, most Australians must work to obtain their money.
The value of creating new money in the economy should be captured by government on behalf of the Australian people, not by private interests. The economic journalist Martin Wolf has estimated the potential of capturing this value at 4% of GDP. Nicholas Gruen, CEO of Lateral Economics, calculates this would be worth $70 billion for Australia. The 2017–18 budget had a deficit forecast of $29.3 billion, or 1.6% of GDP.
(1) Capital adequacy is a measure of a bank’s capital expressed as a percentage of a bank’s risk credit exposures. Minimum capital adequacy ratios aim to ensure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose depositors’ funds. The tier one capital adequacy requirement for Australia’s big four banks is 10.5%.