Speaker’s notes
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.
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 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.
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 a debt to the bank owed by the borrower, upon which the bank is entitled to charge interest.
Meanwhile, most Australians must work to make 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 has a deficit forecast of $29.3 billion, or 1.6% of GDP. Further if government captures the value it can use it in the real economy, either through spending or tax cuts.
(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%.
The motion
“Creation of new money in the economy by private banks
Labor believes the right to create new money in the economy is a sovereign right that should lie with government acting on behalf of the Australian people.
This is the case with the production of notes and coins. If an individual prints notes this is a criminal offence- counterfeit.
But most of the money in the economy exists in the form of digital entries in accounts (digital money).
Most of this new money is created by private banks, in the form of debt, when they issue loans to clients in excess of the reserves (existing money) that they already hold in their accounts.
Labor will examine the extent to which new money in the Australian economy is generated by private banks and the extent to which this new money ends up in the real economy as opposed to inflating asset and share prices.
Labor will examine whether private banks should be permitted to continue to generate new digital money in the economy and if so, the conditions under which this should be permitted.”