Interested New Zealanders have been discussing the story which appeared in the New Zealand ‘Herald’ recently:
“Bryan Gould: Brash doesn’t seem to understand banking” Friday Apr 28, 2017

Bill Daly explained:  
Brash was NZ Reserve Bank Governor a few years ago. Bryan Gould NZ born was a UK Labour member of parliament at one time and more recently associated with one of the NZ Universities.
Accused by Don Brash of “peddling nonsense” Bryan Gould responded:
It is no surprise a former Governor of the Reserve Bank should seek to defend the banking system from its critics. But in denying the accuracy of points I made in the Herald about how the banks operate, Don Brash accused me of “peddling nonsense”.

I made two basic points.
First, I asserted the banks do not, as usually believed, simply act as intermediaries, bringing together savers (or depositors) and borrowers to their mutual benefit.
Secondly, I said the vast majority of new money in circulation is created by the banks “by the stroke of a pen”, and they then make their profits by charging interest on the money they create.

If this is “nonsense”, the “peddlers” include some very distinguished economists. My legal training has taught me the value of being able to turn to reliable authority to support what I say.
In my original piece, I referred to a Bank of England research paper, published in the bank’s first Quarterly Bulletin 2014, which describes in detail the process by which banks create money.

First, they say, “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them...[that] ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money...Rather than banks lending out deposits that are placed with them, the act of lending creates deposits - the reverse of the sequence typically described in textbooks.
“Bank deposits make up the vast majority - 97 per cent of the amount [of money] currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.”

They then go on to say,
“Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money - the so-called ‘money multiplier’ approach...[but that] is not an accurate description of how money is created in reality.”

They go on.
“Banks first decide how much to lend depending on the profitable lending opportunities available to them - which will, crucially, depend on the interest rate set... It is these lending decisions that determine how many bank deposits are created by the banking system.

“The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve [to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements], which is then, in normal times, supplied on demand by the [central] Bank.”
It is a pity (and a surprise) that Don Brash seems unaware of these findings in one of the most important research papers published in recent years.

If he would care to proceed with his charge of “peddling nonsense”, I could introduce him to the authors of the paper, with whom I have corresponded, and he could put that charge directly to them.
He argued (and apparently regards as clinching) that it cannot be the case that banks create money, since otherwise, he says, why would they bother to do anything other than write cheques to themselves?

This simply betrays a failure to understand the process described in the Bank of England paper. As that paper says, “Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

“For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.
“Commercial banks create money, in other words, by placing loans [or credits] into the bank accounts of borrowers. They then charge interest on, and demand security for and repayment of, those loans.
They have no capacity to create money in any other way or for any other purpose [though the central bank can pursue “quantitative easing” to increase the money supply if it thinks that is needed].

But the capacity they do have is hugely important. I concluded by asking whether it was wise to entrust such wide-ranging powers - so significant in their impact on the whole economy - to the banks, and then to arrange that the only person able to regulate that impact was himself a banker - the Governor of the Reserve Bank.
That concern is surely heightened if a former Governor seems not to understand what is really happening.
- NZ Herald

Bill Daly remarked:
If Dr Brash doesn’t know how banks create money, then how was he ever trusted to be Governor of RBNZ? His appointment should perhaps be reviewed...??

To another correspondent Bill observed:
It would seem that Brash either is seriously mischievous or has alzheimers.  His own letter, written some years ago to a correspondent and recently commented on by yourself, clearly showed he did understand that banks create money.

Thanking Bill for the “interesting exchange” Wallace replied:

That Dr. Brash should give this contradictory opinion about the creation of money by bank lending is rather strange.  Perhaps the Establishment just prefers not to “confuse” the uninstructed public about such matters inasmuch as it might lead to doubts and questions of an awkward nature best left unearthed.  I have no doubt that Mark Carney, former Governor of the Bank of Canada, recently promoted to Governorship of that “Bank of all Banks” (the Old Lady of Threadneedle Street), the Bank of England, is more than aware of the money creating function of banks.  I am not so sure about his predecessor.  Possibly some appointments can be of a more political rather than professional nature and the permanent bureaucracy is depended upon for management behind the scenes.

Not long ago, I read about a paper delivered just prior to the 20th century that discussed the creation of credit as money by the banking system.  These matters were the subject of discussion at the Ottawa hearings on banking and commerce in Canada in 1923 and at the Macmillan Committee in Britain in 1930.  (C.H.) Douglas testified at these hearings and at a similar hearing in New Zealand in 1934—not to mention before the Agricultural Committee of the Alberta Farmers Government. Both he and Keynes participated in the Macmillan hearings.  At the Canadian hearings in 1923, Bank of Canada Governor Graham Towers both acknowledged and described the process.  When banks extend loans the loan precedes the deposit.  That we should still be debating this matter seems somewhat incomprehensible.

Banks Monetize the Real Credit of Borrower or Public
In making loans the banks create credit against, or monetizes, the real credit of the borrower, private or public, backed ultimately and respectively by the assets of the borrower or real credit (i.e., productive capacity) of the nation with the tax-payer being the ultimate surety for the loan.  When credit is extended it is for a specific purpose and when it is used to purchase whatever goods or assets desired, the money goes to the vendor and passes back to the producer where it is promptly cancelled when the producer’s original production loan is repaid.  This ends a credit cycle.  
The credit is ephemeral and does not have an extended lifespan.  Indeed, it is cancelled in respect of all costs including those for capital.  However, this involves a premature cancellation because money should be created at the rate of production and cancelled at the rate of consumption and real capital only depletes, depreciates or obsolesces over a variable and often extended period of time—sometime over many years, decades or possibly even centuries.  
The consumer is being rightly charged for capital depreciation but not properly credited for capital appreciation which greatly exceeds its rate of depreciation.  If as Douglas claims, the true cost of production is consumption then we should have a continued decline in retail (ultimate) prices because our total production greatly and increasingly exceeds our actual consumption.

Banks’ False Claim to Ownership of Credit
The banking system provides a vast and essential accountancy service for society in processing the countless transactions made in the modern economy.  The problem lies not in the creation of credit by the banks but in their false claim to the ownership of the credits which they create to monetize the real wealth of the community, which wealth, they, the banks, do not create.  They thereby appropriate the communal capital or Cultural Heritage by placing a perpetual debt burden or mortgage on society.  What Karl Marx would have done by outright expropriation, the banking system does by a means of financial legerdemain. While this artificial debt bears a burdensome tribute of interest, the interest is a consequence and not the primary cause of economic injustice.  The primary cause is the debt itself which constitutes a theft of our Cultural Heritage or Birthright, which should be realized in increased economic independence, falling prices, increasing leisure and freedom from dissension, waste and war.

What Douglas discovered is that all businesses in the modern capital intensive economy are creating costs and prices at a rate increasingly in excess of the rate at which they are paying out effective incomes—incomes which are required to liquidate the costs of production by means of consumer purchase.  We can carry on only by the creation of ever growing debt for additional production and/or to facilitate consumer access to existing production.  We as a society cannot access what we produce without first producing something else in order to earn incomes available to purchase goods produced in the past, which incomes will be cancelled and not available to purchase the goods upon which we are currently working, of which our current incomes will nevertheless be accounted as a cost to be registered in future prices.  
Today, as the inherent deficiency of consumer incomes grows exponentially, we as consumers are required increasingly to pledge future incomes to liquidate current costs—and to run faster and faster on a treadmill of increasing effort in order to service ever expanding debt which sabotages our actual marvellous increases in actual physical production efficiency.  Attempting to compensate for this intrinsic deficiency of domestic purchasing-power by exporting in excess of importing is impossible for all nations and is the fundamental cause of international friction eventuating in war.

Outstanding debt accounts for existing bank balances.  Because private debts must be repaid and are cancelled in the process, the State borrows increasingly and rather than repaying these public debts Governments simply “roll them over” into new and increasing debts.  This increases the flow of money payments via the State for its policies and programmes and suits the purposes of “planners” who regard the public debt as a means of “managing” the economy.  
The British were considered “incapable of making a revolution themselves” so it was determined to make one for them by other means.  Concrete or direct action is readily discernible, while few citizens are able to detect and understand changes made by means of abstract and obscure legerdemain. 
Further study:
·  (Robert Klinck - “Economists’ Failed Professionalism” - 2016)

Letter to The Editor