Does the RBA really “print money out of thin air”?

I’m trying to understand the mechanics of how the Reserve Bank of Australia monetizes government debt by “printing money out of thin air”. Dr. Robert Murphy has written a clear and simple explanation about the Federal Reserve, but can someone tell me if Murphy’s explanation applies to the Australian context?

The key elements of Murphy’s explanation are:

  1. The central bank buys Treasury bonds from private dealers.
  2. The central bank pays for these Treasuries using cheques drawn on itself (it’s here that it allegedly creates the money out of nothing).
  3. The central bank remits interest payments on the bonds to the Treasury.
  4. The central bank “rolls over” government debt so that the government never really has to pay back the principal.

It’s evident that the RBA buys Treasury bonds from the public, e.g. the Commonwealth Bank of Australia, predecessor of the RBA, was involved in financing the World Wars. But does the Australian central bank create the money it uses to pay for these bonds out of nothing?

Update: The answer appears to be ‘yes’. See page 223 of The Evil Princes of Martin Place

Let’s say that the central bank decides to buy a house and that the owner of a particular house agrees to sell it for $100,000. To pay for it, the central bank writes a cheque and gives it to the seller. Where does it get the money? It simply conjures the money ex nihilo – that’s Latin for “out of thin air and the clear blue sky”.

30 thoughts on “Does the RBA really “print money out of thin air”?

  1. Don’t be naive, Sukrit! They use paper, plastic, and ink! If you mean- ‘Is there anything which is represented by the money?’, then probably not. Money has gone from being a token (when a pound note stood for a pound of copper coins at the bank) to just being shares in the economy- and lots of companies print new shares intermittently. I think that is the only way to understand government-issued money.

  2. Yes they do create money out of thin air. But because this is a counterfeiting racket and ought to result in jail time there is always obscurantism involved.

    The central bank is agent for the bankers. The bankers ponzi up money, and then the central bank will swap real cash for the ponzi-cash. This is exactly the same as if the central bank had handed them cash up front. So its theft.

    But always when money is created, until the last possible second its created as a PROMISE TO DELIVER. So that if the banks create new money they are promising to deliver cash. But if the central bank creates MONETARY BASE, they won’t actually send the trucks out from the mint at that moment. Because if they did so people would eventually click that they were a thieving agent for the bankers.

    So what they do is that they add to monetary base with a legally ensured promise to send the trucks out with the cash. This is only triggered when the banks decide they need the cash. The banks pay for the cash with ponzi-money, but its always better to let your competitors do this, if you can get away with it, since the central bank puts in an extra charge to it.

  3. You will not understand matters if you go with the normal, usually laudable, anti-government reflexes. Because monetary policy is not being run for the benefit of the government. Its being run exclusively for the benefit of bankers.

  4. Australia is extremely different to USA.

    In Australia when the government runs a deficit it raises its money by issuing bonds on the free market, and it must pay the interest rate the market demands. No money is created during this process. When the bond is repaid the government repays the money, with interest (or it just issues more bonds…). No money creation is involved.

    The creation of money is controlled by the RBA’s cash rate. The RBA sets an interest rate. Anyone in debt pays interest and anyone in credit collects interest. There are no reserve requirements so a bank can create any debt it wants – it just has to pay the interest.

    If too many people create debts and can’t repay the interest, the RBA has to still pay the creditors interest. The debt is written off – this is where money is ‘printed’, there will be a credit with no debt. This is why we have constant inflation. The RBA uses the interest rates to manipulate the economy. If it thinks the economy is slowing then it slashes interest rates to ensure people don’t default. If it thinks debt is being made faster than the economy is growing, it puts up the interest rates.

    The RBA does not dictate bond prices. They will buy and sell bonds like anyone else. The fact that they buy bonds is their actual banking side and not part of their monetary police / money printing side.

    Americas money system is completely different and insane. Their government sells bonds to private banks, where is how they fund their deficit. The banks then on sell the bonds to the fed, who give back more money than the government gave to the banks – creating money out of nothing.

    Not only that but if the banks don’t have the money in the first place the fed will lend them the money – at an interest rate that is currently 0.25%. This has insured that any deficit can be funded, not matter how ridiculously large.

  5. Physical currency is an RBA liability. The RBA can print notes to pay its debts but it does not improve its balance sheet by so doing. Currency is a central bank IOU; it’s not thin air.

    The profits of the RBA belong to the federal government.

    The federal government issues bonds to cover itself when in deficit. The RBA may acquire some of these bonds and it does so under no different terms to any other purchaser.

    When interest rates are positive, anyone with spare currency lying around will want to put it in the bank. As the RBA is the banker’s bank, any ultimately spare currency just finishes back at the RBA – consequently, when official interest rates are positive, the government can not ultimately “print” money, only borrow it.

    When a currency enters a liqiuidity trap and interest rates are zero, printing money can then occur as people will be as inclined to keep currency “stuffed in the matress” as in the central bank. This currency can cause a lot of problems when interest rates become positive again. Keynesianism does not adequately model these problems but Austrian Business Cycle Theory does.

  6. A good place to start on such matters is the RBA annual report. It shows how much Australian currency is in circulation as well as what the RBA has acquired with that currency. Generally it acquires government bonds, foreign currency, gold and other liquid assets.

    The notion that currency is created out of nothing is a useful provocation because it helps us to think about the issue. However like every producer they must find a market for what they produce. An artist that paints pictures uses paper and paint to create something worth more than paper and paint but only if it finds a buyer.

    Historically (pre 1910) Australian banks created currency in the form of promissory notes. These were a little like demand deposits but the bank treated whoever actually held them as the owner of the deposit. As such they were sometimes called bearer bonds. These created an obligation on the part of the bank as they were payable in gold coin on demand at the banks main branch (and at most branches in practice). An odd form of contract between the bank and some unknown party that may hold the note.

    Fiat currency does not create an obligation in the way that promissory notes did. They are more like Picasso paintings that have value but don’t entail any form of contract or obligation. That value is determined by supply and demand and not by obligation and reputation.

    The Swiss Dinar is the name sometimes given to the fiat currency used in Iraq prior to the first gulf war. When the Iraqi central bank stopped producing this currency and it lost it’s legal tender status it was still valued by the market. In fact it held value better than the new Iraqi currency, was the main currency in use in the Kurdish region and was still circulating after the second gulf war before the American administration went to market and bought them all back. The Swiss Dinar had value due to limited supply and enduring demand.

    One major source of demand for Australia currency comes care of the ATO. Anybody that produces in Australia will generally get a bill from the ATO denominated in Australian dollars. Even whilst that bill is usually paid electronically it is settled using currency. Producers need currency to keep the ATO off their back. Hence a major source of demand.

    The specific RBA mechanisms:-

    i) they look at inflation data and decide if currency in circulation should be tightened or loosened.
    ii) they revise their interest rate target. The relevant interest rate is the rate that banks lend to eachother in the overnight market. This rate is set by the market but heavily influenced by the very real need that banks have for cash. Cash-flow can make or break a bank (or any business).
    iii) the RBA then engages in open market operations to influence this market price. If the interest rate is below their target they will sell RBA assets (gold, currency, bonds) to take currency out of the economy. if the interest rate is above their target they will put currency in circulation by buying assets.

    Any profit the RBA makes from this activity is used to cover operating costs. Any profit left after that is remitted to their owner (The Commonwealth Government).

    Is the RBA able to make new currency as required? Absolutely. However that does not mean the system is without constraints. It is these institutional constraints that ensure we have a stable financial system. It isn’t my prefered system but compared to other nations it is pretty high class.

  7. Physical currency is an RBA liability. The RBA can print notes to pay its debts but it does not improve its balance sheet by so doing. Currency is a central bank IOU; it’s not thin air.

    I don’t regard this as accurate. There is no obligation associated with a fiat currency. It is not an IOU. Promissory notes are an IOU but fiat currency is not. An IOU gets value from the reputation of the issuer and the associated obligation created. A fiat note has value purely due to supply and demand at market. A fiat note is more akin to a valuable painting.

    For a privately created fiat currency check out bitcoins. They are not an IOU but they do have value. On the other hand private currencies like e-gold (now frozen) and goldmoney are IOUs.

  8. A comment on counterfeiting. If in the old days you made copies of promissory noted and then turn up at the bank with them demanding gold coin on the basis of the associated obligation, then this is quite clearly a case of fraud. However if you make copies of fiat notes, which like Picasso paintings entail no obligation on the creator, it is hard to see any moral crime being commited beyond breach of copyright.

  9. “There is no obligation associated with a fiat currency. It is not an IOU.”

    Without some unusual changes, yes there is an obligation, and it is an IOU. Banks can deposit any physical currency they have in their posession and gain credit from the RBA for their exchange settlement balances; it is their right to do this. They can convert these balances into interest bearing securities such as promissory notes by market activity. If this was a general trend, and the RBA does not respond to this by selling some of the securities in its reserve, it will have the increasing interest rates – this is how the OMOs work.

  10. Just to clarify:

    1. The Australian dollar succeeds as a *unit of measure of value* by fiat. Debts are denominated in Australian dollars only because the law states that they must be done so.

    Note that contracts/debts in the economy generally could be worded around this law, but this does not happen in practice because the dollar is more or less stable, and so it is not needed. Contracts are worded differently in hyperinflation countries, for example.

    2. A physical Australian dollar *in specie* has value because it can be presented to the RBA for credit that can be used to acquire securities. The securities themselves are debts denominated in Australian dollars, and have value due to (1) above.

  11. The RBA, like all central banks, allows fractional reserve lending to be viable for a far longer time than without a central bank.

    In a free banking system, like Australia in the 19th century, banks issue their own notes, which are IOUs. If the bank can’t cover its IOUs, then there is a run on the bank and the bank goes bust. Which is exactly what happened in Australia in the 19th century.

    A central bank ensures that private banks can continually expand the money supply via fractional reserve lending because all banks are using the same currency. When the Bank A takes a deposit from the Bank B, it doesn’t have to claim the currency against the Bank B for gold as in the past. With a central bank and fiat currency, everyone’s notes are as good eveyone elses.

  12. This is the most dispassionate post and commentary I’ve seen on monetary economics on a libertarian website for years.

    Keep it up, some good analysis as well, except from the first few commenters who obviously have never analysed how banks actually work, with no consideration of their asset-liability management etc.

  13. Please pardon my ignorance on this subject. I am trying to understand. I will order the ‘Evil Princes’ book this weekend. Is there no ignorant-friendly essays out there that will explain our monetary system to a bear of very little brain? (If it was all good and honest, why would it BE so hard to explain?)

    I cannot see how we can consider our money ‘stable’ unless by that we mean ‘inflating at a rate that most people seem to find acceptable’. Otherwise a fiat money system just seems to be a polite way of theft. And ARE the banks just making fools of us all? Are there people out there getting rich at our expense, because we will not have a system of exchange that has some value in and of itself?

    Last question. If we do have GFC mark 2 – which seems likely, at least to me – is there any chance of implementing a better financial system, or are there too many powerful people out there who have already planned what they want to do at such a time?

    Thank you.

  14. Welcome, Ellen! We need more female libertarians! Good to hear from you, and I hope you keep writing in to us!

  15. I cannot see how we can consider our money ‘stable’ unless by that we mean ‘inflating at a rate that most people seem to find acceptable’.

    That is pretty much the definition in use. It is geared to avoid deflation and run a low modest amount of inflation.

    I don’t think bankers are getting rich at our expense. At least not from retail banking. Banking is not intrinsically dishonest.

  16. “Physical currency is an RBA liability. The RBA can print notes to pay its debts but it does not improve its balance sheet by so doing. Currency is a central bank IOU; it’s not thin air.”

    Come off it. What do you think is going to happen? You think the Reserve Bank will pay this alleged debt off and all the cash will disappear? New cash coming from the mint is new cash creation. Out of paper and ink. Or these days plastic. And what we have done is we have allowed the banks to put their hands in the mint via their loyal agent the central bank. If this were not the case the mint would work directly for the treasury.

  17. “I don’t think bankers are getting rich at our expense. At least not from retail banking. Banking is not intrinsically dishonest.”

    Well think again. Our currency is not the least bit stable. Its an elephant balancing on its trunk. And our banks are not conducting honest business or they would not need a central bank to stop them from having periodic banking collapses. The fact is you aren’t thinking at all Terje. You’ve never been willing to think when it comes to this subject.

  18. My question is, it’s obvious that private banking around the world is focused on profiteering (as all private businesses are), and central banks essentially facilitate the private banking communities to gain those profits. So shouldnt central banks act as regulators to the industry and not as a quasi partner?

    This to me seems to be a catch 22, if the central bank doesnt assist private banks in profiteering than banks fail and the economy may fail. If they do than they are essentially making it more expensive and less affordable for families in Australia to live. (i.e. working longer hours and both partners now needing to work to get by)

    This to me screams out that the system currently in place is juvenile, and would be ridiculous to continue. We have some very inteligent people with a great deal of experience and knowledge who could design a far better system which would stabilize an economy while keeping the quality and standard of life to acceptable levels.

    I would like to see a panel set up of the greastest minds in the country, and see what they are able to come up with in terms of a new banking system. If only Julia would put as much effort into restructuring the banking system as she has the Carbon tax………….

  19. @JohnE

    “We have some very inteligent people with a great deal of experience and knowledge who could design a far better system which would stabilize an economy while keeping the quality and standard of life to acceptable levels.

    I would like to see a panel set up of the greastest minds in the country, and see what they are able to come up with in terms of a new banking system.”

    No designed system will work, even if we get the greatest minds. We distribute milk, bread, and butter cheaply without a designed system. No-one person designs the chain of production from the cow to our kitchen, and indeed it’s likely that no-one knows how that process works (what one person designed agriculture, automotive engineering, oil refining, mining, logistics, management etc that’s required to put a $2 bottle of milk on our shelves).

    I suggest you read “I, Pencil” ( ) for an understanding of a more practical solution to this issue.

  20. Clinton I read I, Pencil, and I can understand your enthusiasm for the principle of organic development, however, the current monetary system has been designed. In fact, the organic development of the monetary system was interupted, when the central banking system, notably the Bank of England, was established. This system was a designed system, and it was specifically designed for the purpose of profit.

    In the case you put forward with the pencil, I put it to you that the concept of the pencil grew organically, however the production, development, distribution and price of the pencil are all very carefully designed processes with obtaining the greatest profit in mind.

    A pencil is a product and is defined by its usefullness in society, i.e. supply and demand dictate its price. This is the same as money, however it should not be. Money is not a product, it is simply a reflection of value of an individuals labour. This is the organic development of money through history. For example, One person may be a fisherman and another a baker, the baker doesnt eat seafood so how is the fisherman able to trade with the baker for bread. Simple, he uses an item which is of value to everyone to a proportion which represents his value relative to the demand in the community for his labour (in this case, his ability to catch fish).

    All kinds of systems have been used throughout history i.e. pigs, shells, sticks of wood etc. Banking has turned what is simply the reflection of our labour into a product and charge us to trade it. And to make things worse they have the ability to make money from interest on money already leant, this is called fractional lending.

    Without ranting on too much, The current banking system has been designed and is run for maximum profit. This means that there are a few men at the top of the chain who are making ridiculously large sums of money at our demise. I will leave you with a quote by the Rothchild brothers from Lodon, sent in a leeter to associates in New York in 1863.

    “The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

    The Rothchilds are at the centre of designing the current banking system. They have designed it to be in thier interest and not ours. This is why I suggest a panel to design a system that benefits the population not the few.

  21. Sorry, I don’t quite understand your argument about why we should choose a designed banking system over an organic one?

    All you’ve seemed to do is point out one designed system (our current system) which is bad for most people. How this is an argument for another different designed system over an organic one I don’t quite understand.

  22. Let me change my wording Clinton. Not a designed system but a designed transition back to the organic monetary system that would have been inplace, had the profiteers not changed it into a privatised system in the first place.

    If you would like a designed monetary systems as an example, look into Icelands Banking system before it was privatised in the early 2000’s. It only took 6 years to send the country broke, and they now owe over 110,000 thousand pounds per man women and child in Iceland. They had a designed social banking system which developed no national debt, and created one of the most safe and prosporous banking systems in the world. When they moved to a similar privatised system like ours, human greed took over and a few at the top got rich at the expense of everyone else. Now the people of Iceland get to pay for the mansions and BMW’s of the banking elite, just like us.

    LUCKY THEM!!!!!!!!!!!

  23. If you still cant conceptualise my point Clinton, There is no escape from a designed system because the whole economic structure of society is drastically different to the previous organically developed system. The best option we have now is to find a way of sustaining a controlled monetary system which is not debt based, somewhat of a similar system to that of Iceland pre privatisation as in my last post would be an example.

    I dont think there is anyone in the world at the moment who would suggest that the global economy, which is derived from our monetary systems is anything but chaotic. If we continue on the path of a debt based system, we will always be at the mercy of bank controlled inflation and deflation, and therefore in a system where decisions are made to protect currency and not society.

    If money doesnt make the world a better place for all, then what is the point of having it???????

    I believe the only people who would argue for this system are those who benifit from it.

    A panel of experts, I believe, could deliver a more manageable system that may not make many billionaires, but would minimise poverty and bridge the gap between the haves and the have nots.

  24. What really happened:

    They printed too much money.

    “What analysts and authors commonly miss is the reason the banking sector could expand so rapidly. Indeed, as we shall see, the incentive structure of the Icelandic economy was manipulated through government guarantees, artificially low interest rates, and monetary spigots opened wide, allowing liquidity to be flushed through the economy. In addition, Iceland’s homeowners were offered tantalizingly low interest rates through the “Housing Financing Fund” (HFF), a state agency that enjoyed explicit government guarantees on its debt, resulting in reduced interest charges for homeowners. Interestingly, while the Fund’s merely implicitly guaranteed American counterparts — Freddie Mac and Fannie Mae — have been the center of much controversy, the HFF has remained relatively unscathed.”

  25. My concern about the fraud of fractional reserve banking is not so much the money multiplier the “money out of thin air” it is the charging of interest upon this part of the loan principle instead of the actual amount of assett used meaning a deposit in most cases, given that the created out of thin air part of the loan principle is cancelled out as the loan is repaid it is the charge of interest on the total and not just the amount at risk to the bank.
    The ten percent or so risked and used to create the extra nine tenths in created credit therefore attracts interest as if it were money provided by the bank this usually results in three times the principle amount in interest or profit to the bank including the bank fees charged upon this loan.
    It is this earning of interest upon money that did not exist except for the term of the loan that I see as the crime upon the people and the greatest restriction upon endeavour, if the bank was to be a low profit government bank that used fractional reserve banking yet only applied the interest to the fraction of such reserve banking (the deposit base) this would be a more honest money system.
    Fractional reserve banking that treated a failed loan that was not due to any fault of any of the parties and therefore writes off the portion of created credit for that specific loan now unable to perform would be a victory for equity relieving the people from forclosure and confiscation of property, examples here are fire, drought, and flood.
    This idea is based upon the assumption that the borrower brought the reason for the creation of credit to the bank and the bank agreed it was a good reason at the time, if the purpose for the loan failed then so should the amount created for it.
    As the 1937 Royal Commission into banking after the great depression found ” that a bank can create a loan and not require the repayment thereof” one can see that profits made upon this fraud of FRB can also be used by banks to favour certain customers with “connections” the basis of monopoly explaining the the “one percent” perhaps.

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