What does the RBA say About Where Dollars Come From?

Explainer: What Governor Lowe said about the Reserve Bank of Australia and the “Magic” of Central Banking.

The RBA has happily announced to the public the truth of what this website is saying. Here is how the former Governor of the RBA, Phillip Lowe, explained money creationto Senator Rex Patrick on May 28 2020 (source: Hansard):

Senator Patrick: In terms of the government making money available for things like the JobKeeper program, that’s a separate activity to what the Reserve Bank is doing. You’re trying to provide liquidity to the financial system. The source of your money to do that is what?

Dr Lowe: The source of the Reserve Bank’s money—this is the beauty of central banking: central banks are unique entities in that they can create money. When we want to buy a government bond from a pension fund, the way we pay for that is credit—if you buy it from a bank—at the bank’s account at the Reserve Bank. We are the one entity in the country that can create money just out of nothing. That’s why it’s incredibly important that the governance around that process is very strong, and that, as I said in response to Senator Whish-Wilson’s question, the separation of monetary and fiscal policy is kept. We have seen, where that has not been maintained, that it can be abused—creating money out of thin air and financing government expenditure without checks and balances.

Senator Patrick: It sounds like a great job, if you don’t mind me saying!

Dr Lowe : The governance of it is incredibly important. It’s mainly about interest rates, but the central banks are the only entities that can create money out of thin air. We take that responsibility incredibly seriously, and it’s not to be abused.

It is worth repeating Dr Lowe’s main point:

“Central banks are unique entities in that they can create money… We are the one entity in the country that can create money just out of nothing.”

Remember, the RBA is wholly owned by the Commonwealth and is governed by a specific Act of Parliament. It is therefore part of our system of government. Occasionally, you will hear people say that the RBA is independent of Government. That just means that there are no politicians on it’s board. It is more accurate to say that the RBA is independent within Government.