It's a simple question, with a fairly
simple answer: money is any asset that folks are universally willing
to accept as payment for goods and services. So we have cash,
that's money obviously, there's also your bank balance, that's money
you use with your EFTPOS card or cheque book.
Collectively, when you include other
sorts of bank assets, money is not as easy to
define as I have here, but that stuff is irrelevant for the average
citizen. The Reserve Bank has a measure of the total money supply,
it's called 'M3'. At the time of writing NZ's M3 is a about $243.14billion.
Money has two other functions as well
as facilitating trade, it is a 'unit of account', and it is a 'store
of value'. We use money to describe the value of a good or service –
e.g. maybe a 5kg bag of spuds is valued at $3.50, this is what is meant
by 'unit of account'.
We can also store money easier than any
other asset. Most things spoil, rust, or deteriorate in some way over time;
money does not. So money is a 'store of value'.
However, money can deteriorate in value, through inflation. The dollar you spend today generally would buy less stuff in 5 year's time.
However, money can deteriorate in value, through inflation. The dollar you spend today generally would buy less stuff in 5 year's time.
Here's the most interesting part, where does money come from?
You might think that an M3 of
$243B means there is $243B in paper money and coins, out
there, in people's pockets and bank vaults. You'd be wrong.
Actually, there is currently a shade under $3.8B in notes and
coins in circulation. The rest of that $243B simply exists as a number in a bank computer file. There's no stash of $243B in gold either. Our money exists and has value
simply because the government says it does.
This is know as a 'fiat currency',
which has nothing to do with cars. A fiat is a government decree. Our
government declares on each bank note that it is 'legal tender'. It is also backed up by laws about debts and taxes. So
these bits of paper and metal, which have virtually no intrinsic
value, and electronic money even less so, are ultimately only trusted by us - if we think about it at all -
because we all need it to pay our taxes.
It's the Reserve Bank's job to manage the money supply, but that doesn't mean simply giving money out to the banks to lend to us. Virtually all countries use the fractional reserve banking system. The trading banks borrow money - from the RB, from overseas banks, and from you when you make a deposit; this is their fractional reserve. They can then literally 'lend into existence' around 24 times as much money as they have reserves.
This is not a misprint. When you get a $300K mortgage, the bank does not transfer $300K from its own account into yours. It dedicates from its reserve about 4% (this can vary) of that amount to you. The rest is created by typing a few keys, literally. The bulk of the money you borrowed did not exist before you entered the bank. It only exists when you leave because of your promise to pay it back, or lose your security. When you pay the principal back, that money is extinguished from the money supply.
Often when people hear this for the first time they assume there is more to it than this, partly because economists and bankers use a lot of jargon which make things seem more complicated. But that really is the full extent of how most of our money is created, as debt to a bank.
There are many critics of the fractional reserve system, such as, Living Economies, and the political party NZ Democrats for Social Credit. There are some inevitable consequences of fractional reserve banking.
Reduced sovereignty:
NZ currency belongs to NZ citizens, to facilitate trade in our country. There's no intrinsic reason that private banks should be the only agencies allowed to issue it to us. Banks risk very little performing this task of issuing our own currency to us, yet they charge interest for the privilege.
Indebtedness:
Almost all of our money IS debt. In a recession, the only way to increase the money supply is for our government to go into more debt. The same principal works for individuals as well. If you want to start a business or buy something you can't afford right now, most of the time, the money is borrowed from a bank.
Constantly ballooning debt:
Almost all our money is our collective debt. When the debts were created, that principal was injected into the money supply. The borrowers have to pay that principal back, plus interest. If only the principal amount of money has been created, where, then, do we find the money to pay the interest? Under this system, at any one time, it is impossible for there to be enough money in circulation to pay back our collective debt and interest. The only way for us, collectively, to pay interest is to create more money, and the only way to create money in this system is - to create more debt.
You may have wondered, when listening to economists, bankers and politicians, why is it that we are constantly needing to grow our economy (and our population)? Why is it that the Reserve Bank is instructed by our government to maintain a small inflation rate - as opposed to keeping prices stable? These are the questions that started me learning 'Economese', and in the fractional reserve banking system I think I've found the answer.
The monetary system is designed to grow or collapse. It cannot remain at a stable level. It is impossible for the money supply/debt to stop increasing, other than through a recession or depression. In 1988 our M3 was $43B, now it is $200B higher. I'll explore some of the questions this raises in the following posts.
This is not a misprint. When you get a $300K mortgage, the bank does not transfer $300K from its own account into yours. It dedicates from its reserve about 4% (this can vary) of that amount to you. The rest is created by typing a few keys, literally. The bulk of the money you borrowed did not exist before you entered the bank. It only exists when you leave because of your promise to pay it back, or lose your security. When you pay the principal back, that money is extinguished from the money supply.
Often when people hear this for the first time they assume there is more to it than this, partly because economists and bankers use a lot of jargon which make things seem more complicated. But that really is the full extent of how most of our money is created, as debt to a bank.
There are many critics of the fractional reserve system, such as, Living Economies, and the political party NZ Democrats for Social Credit. There are some inevitable consequences of fractional reserve banking.
Reduced sovereignty:
NZ currency belongs to NZ citizens, to facilitate trade in our country. There's no intrinsic reason that private banks should be the only agencies allowed to issue it to us. Banks risk very little performing this task of issuing our own currency to us, yet they charge interest for the privilege.
Indebtedness:
Almost all of our money IS debt. In a recession, the only way to increase the money supply is for our government to go into more debt. The same principal works for individuals as well. If you want to start a business or buy something you can't afford right now, most of the time, the money is borrowed from a bank.
Constantly ballooning debt:
Almost all our money is our collective debt. When the debts were created, that principal was injected into the money supply. The borrowers have to pay that principal back, plus interest. If only the principal amount of money has been created, where, then, do we find the money to pay the interest? Under this system, at any one time, it is impossible for there to be enough money in circulation to pay back our collective debt and interest. The only way for us, collectively, to pay interest is to create more money, and the only way to create money in this system is - to create more debt.
You may have wondered, when listening to economists, bankers and politicians, why is it that we are constantly needing to grow our economy (and our population)? Why is it that the Reserve Bank is instructed by our government to maintain a small inflation rate - as opposed to keeping prices stable? These are the questions that started me learning 'Economese', and in the fractional reserve banking system I think I've found the answer.
The monetary system is designed to grow or collapse. It cannot remain at a stable level. It is impossible for the money supply/debt to stop increasing, other than through a recession or depression. In 1988 our M3 was $43B, now it is $200B higher. I'll explore some of the questions this raises in the following posts.
