Few people ever stop to think – how does an Australian Dollar get started in the first place?

If pushed, most people could say that Australian dollars come from the mint or the Reserve Bank ‘printing press.’ But coins and notes are only part of the story. In reality, almost all Australian dollars are created digitally, not physically.

The Reserve Bank of Australia (RBA) is the only institution that can create new base money – the notes, coins, and electronic reserves that sit in the banking system. When the RBA buys government bonds, lends to banks, or makes payments on behalf of the government (such as paying an NDIS support worker), it creates new Australian Dollars. And it does so using nothing more than keystrokes. Former Governor of the RBA, Phillip Lowe, referred to this as the “magic of central banking” and literally said that the RBA could create money “out of thin air.” (See here for more about this).

Making money out of thin air does not sound very hard and economists like things to sound complicated. So, the process is described more formally as vertical money creation. This is becausethe money begins at the ‘top’ of the economy – the Commonwealth Government – and flows down to the rest of us.

Commercial banks are the only other ‘player’ in the Australian economy that can create money, But they do so in a different way. When you take out a home loan, the bank doesn’t lend you someone else’s savings; it creates new deposit money and puts it in your account. This is called horizontal money creation, because it happens between banks and customers within the private sector. However, the banks can only create Australian Dollars because the Commonwealth Government – through the RBA – makes and guarantees the currency system itself. And only banks that are authorised by the Commonwealth can create money like this.

So, The Commonwealth Government creates Australian Dollars.

The most obvious implication of this is that the Commonwealth Government doesn’t need to “find” dollars before it spends. Australian Dollars begin their life when the government spends them into existence by doing things like paying NDIS support workers, local area coordinators or public servants.

(Taxes then delete some of those dollars from circulation, helping manage inflation and the economy’s balance. See here for more details on this part of the process).

Government funding simply CANNOT be funded by taxpayers paying taxes. The dollars used to pay tax need to be created before anyone can use them to pay tax. Taxpayers simply cannot be the creator of an Australian Dollar. If this sounds hard to believe, just think about the word ‘counterfeiting’ (and the 14 years imprisonment if someone other than the Government is caught trying to ‘create’ their own dollars).