By Denis Hay
Description
Learn how money is created in Australia, why most money is digital, and how both government spending and bank lending create new money.
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Introduction: How the System Really Works
Most people are taught to think of money as something printed by the Mint and constrained by tax revenue. Yet this picture is outdated for a modern digital economy. Today, almost all Australian dollars exist only as numbers on a screen.
Understanding how money is created in Australia helps explain why public services get cut, why banks hold so much power, and why governments claim they cannot afford what citizens need. The truth is simple. Australia creates money every day without printing cash. Most of it never exists as physical notes. This system shapes everything from public budgets to mortgages, and it affects everyone whether we realise it or not.
The Problem: Why Australians Feel Stuck
1. Misunderstanding how modern money works
One of the most significant barriers to better policy is confusion about how money comes into existence. Many people believe the government must raise taxes or borrow before it can spend. Others think banks shuffle deposits around. Neither is correct.
The process of bank money creation means banks create new digital dollars every time they approve a loan. They do not lend out savings. They issue new purchasing power. At the same time, the federal government issues new money every time it spends. It does not “use up” tax money. It credits bank accounts through the Reserve Bank system.
This confusion allows harmful narratives to take hold. If people believe money is scarce, they accept cuts to services, slow wage growth, and privatisation.
Internal link: Australia’s Dollar Sovereignty.
2. The cost of misunderstanding
Misunderstanding how money is created in Australia leads to fear-driven politics. Surpluses are seen as responsible. Deficits are seen as dangerous. Yet a surplus removes cash from the economy at the very moment households struggle to pay rent, mortgages, or power bills.
When the government runs a deficit, it adds new digital money to the private sector. When it runs a surplus, it subtracts money from the private sector. The Reserve Bank itself explains that government payments are settled by marking up accounts at the RBA, not by moving physical cash.
Source: Reserve Bank of Australia
The result is clear. Australians are told the government cannot afford public housing, dental care, world-class education, or national infrastructure. Yet, new money is created every day for financial markets and private bank lending.
The Impact: What Australians Are Experiencing
3. Everyday life is shaped by digital money
The shift to digital money in Australia has been massive. Around 97 per cent of all Australian dollars exist only as electronic entries. Cash makes up only a tiny fraction of the money supply. This means that almost all the money used for groceries, rent, mortgages, bills, and wages is created by keystrokes.
Here is how this plays out:
- When you take out a mortgage, your bank creates the money for the home price.
- When the government pays age pensions, Medicare rebates, or infrastructure contractors, the RBA marks up accounts.
- When austerity budgets are applied, digital money flows out of the economy, leaving households short.
Internal link: Where Does the Money Go.
4. Who benefits from confusion
The winners in the current system are those who profit from the public’s misunderstanding of money. Banks gain power when people believe they can only lend what they hold. In reality, banks generate new money through loan approvals, meaning private profit determines much of the national money supply.
At the same time, politicians justify cuts by telling voters the government must tighten its belt. When a government with monetary sovereignty talks about running out of money, it spreads a myth that keeps public expectations low. Surpluses pull digital cash out of the economy, increasing the need for private debt. Confusion ensures the status quo continues.
The Solution: What Must Be Done
5. Understanding monetary sovereignty
Australia is one of the few nations with full monetary sovereignty. It issues its own free-floating currency and controls its central bank and payment system. When the government spends, the RBA adds numbers to the recipient’s account. This is the heart of how money is created in Australia.
Monetary sovereignty means:
- The government cannot run out of its own currency.
- The real limit is the availability of workers, equipment, land, skills, and energy.
- Deficits are normal and essential for private sector prosperity.
- Public investments can be funded without raising taxes first.
Internal link: Dollar Sovereignty Explained.
6. Policy solutions and demands
To build a fairer economic system, Australia needs to modernise its understanding of money and use digital creation for public purposes. Key policy steps include:
- Introduce monetary literacy programs in schools and adult education.
- Fund essential services through direct public money issuance.
- End the false idea that taxes fund federal spending.
- Use deficits to support jobs, health, housing, education, and climate action.
- Create a national public payments system that prioritises local needs.
- Reduce dependence on private debt by funding public infrastructure directly.
- Ensure government budgets reflect real resources, not artificial limits.
A better Australia becomes possible once we accept that money is created digitally and can serve a public purpose.
Frequently Asked Questions
Q1: What percentage of Australian money is physical?
Only around three per cent is physical cash. The rest are digital credit entries within the banking system.
Q2: Does the government need tax revenue before it can spend?
No. The government spends first by creating new digital dollars. Taxes later remove money from the economy to manage inflation.
Q3: How does bank money creation work?
Banks create new money when they issue loans. They do not lend out deposits. This is central to how money is created in Australia.
Final Thoughts: Why This Knowledge Matters
Understanding how money is created in Australia empowers citizens. We no longer need to accept claims that Australia cannot afford world-class schools, housing, healthcare, or environmental protection. The limit is not money.
The limit is political will. When we recognise digital money as the real system, we can demand investment in people, not cuts that push families into hardship. Australia can build a better future once we reject myths and insist that public money serves a public purpose.
What Is Your Experience?
What is your experience with understanding how money is created in Australia, and has it challenged what you were taught about budgets and debt?
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Find more writing on political reform and Australia’s dollar sovereignty at Social Justice Australia.
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Engaging Question
How does understanding how money is created in Australia change the way you think about what our government can fund?
References
Reserve Bank of Australia: Payments System Overview.
Australian Bureau of Statistics: Money and Banking Statistics.
Bank of International Settlements: Money Creation in the Modern Economy.
This article was originally published on Social Justice Australia
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I realise Michael, this interesting article goes well beyond the part I’m commenting on. But whenever the term sovereign currency is used, I tend to interpret it as code for less restrained public expenditure and advocacy of Modern Monetary Theory.
The notion of MMT, a sovereign currency, “our government can never run out of money”, demonstrates an incomplete analysis or understanding of MMT.
It is not a panacea for limitations of public expenditure, and in some ways it requires a more disciplined approach to expenditure than our current system .
We have now outsourced inflationary control to the Reserve Bank.
Monetary policy is the main means of controlling inflation and the burden fall disproportionately, particularly on first home buyers.
Using interest rates is a blunt instrument, and there are always long lags in assessing its success.
On the other hand, MMT puts the government front and centre in responsibility for controlling aggregate demand (ie inflation) via its spending program.
So in the current circumstances, with inflation running far higher (almost double the target of 2%-3%), MMT requires an increase in taxation, or reduction in expenditure to reduce demand.
In other words, during our current inflationary periods, MMT requires action contrary to a spending increase and contrary to the political will demonstrated by successive governments
One (though there are plenty) of my major misgivings about MMT is that governments of all persuasions have shown no inclination to respond to inflationary pressures by reducing expenditure , “the independent Reserve Bank is responsible ”
Later, if I get around to it, I might comment on options to reduce aggregate demand (ie inflation) that don’t simply rely on the blunt instrument interest rates.
But… MMT/sovereign currency offers no solution to expenditure constraints during the current economic cycle.
I see a cashless society replaced by a online digital society as being another step in government control. Sadly, older people will never come to grips with such a system, nor will many younger ones.
The real issue here, is what is any country worth? What are it’s resources, worker force, scientific/industrial achievements and ability to contribute to society?
A monetary/trading system without some solid physical backing is a disaster waiting to happen.
I have to ask, how does one live on a tablet full of credits? Give me a couple of gold coins any day.
When we get back to the supremacy of spirituality and the essential love for ourselves and each other and the transcendence of worldly goods and chattels as a measure of success,we are already in a long, hard road of disappointments.
Latter day materialism is killing our collective spirit, aided and abetted by governments captured by neoliberal economics.
It sticks out like the dog’s proverbials.
Herein endeth the sermon.
A Commentator
Thank you for your thoughtful comment. I agree that having a sovereign currency does not mean unlimited spending. The real limit is always inflation, not money itself, and responsible policy has to work within our productive capacity.
Where MMT is helpful is in reminding us that the federal government is not financially constrained in the way households are. It can always purchase what is available for sale in Australian dollars. The real discipline comes from matching spending to the resources we have, not from pretending the government can run out of dollars.
You are right that interest rates are a blunt tool. They put the entire burden of inflation control on mortgage holders, renters, and small businesses. A more balanced approach would let fiscal policy play a greater role, using targeted measures rather than relying almost entirely on the RBA.
During inflationary periods, the question is not simply whether to spend more or less, but whether spending is directed to areas that expand capacity, ease bottlenecks, and make life more affordable for people.
I appreciate your contribution. It is an important discussion for Australia to have, especially when households are carrying the heaviest load.
Thanks for your comment, Jon. I understand the concerns about digital systems, especially when many people still rely on cash. My worry is not the digital part itself, but whether it remains a public tool or becomes something that increases government and corporate control.
Australia is already mostly digital. The important thing is to make sure people always have genuine choice and privacy, including the ability to use cash if they want to. A cashless society would absolutely disadvantage older Australians and anyone without reliable technology.
As for physical backing, Australia left the gold standard decades ago. Today the real value of a country comes from exactly what you mentioned: its workers, its natural resources, its scientific achievements, and its productive capacity. Gold does not determine our ability to build homes, train nurses, or generate clean energy.
The key issue is keeping our monetary system democratic, safe, and designed around public purpose. Cash should remain available, but digital money can also serve people well as long as it is not turned into a tool for surveillance or restriction.
Thank you Harry, your comment captures something many people feel but struggle to put into words. Neoliberalism has pushed us into a way of living where worth is measured by possessions and profit rather than connection, wellbeing, or the common good. It really has been a cancer on our society and our environment.
When a country forgets the value of people and community, everything becomes transactional. We end up with governments that serve markets instead of citizens, and a culture that leaves many feeling isolated or inadequate.
You are right that a shift in values is essential. A society built on care, dignity, and shared purpose is far stronger than one built on materialism and competition. Rebuilding that sense of collective spirit is part of the political and cultural work Australia needs to take seriously.
Your contribution adds an important perspective to the discussion.
Banks create new money when they issue loans. They do not lend out deposits. This is central to how money is created in Australia.
This is mentioned several times in the article but what I fail to comprehend is that if I secure a housing loan from a bank they are able to fund me without calling on the deposits they hold.
That sound like voodoo economics to me.
Thanks Dennis. My original comment referred to Michael. I thought he posted it, my mistake, apologies.
I think the key point is that in the current cycle of inflation, MMT would have a contractionary fiscal policy.
Either by reducing spending or increasing taxes.
Regardless of whether we adopt alternative priorities, MMT does not provide any new sources to support public expenditure during this phase of the economiccycle.
As I’ve noted previously, to broaden the load of suppressing aggregate demand (ie inflation) I would like the Reserve Bank to have some ability to set the GST above the current minimum.
This even seems consistent with the neutrality of MMT on whether contractionary fiscal policy is a combination of tax increases or spending reduction.
It’s simple, Terry. Most of the “money” circulating in our economy is just numbers in computers.
Terry, this video from “Yanis Varoufakis” might help.
It seems to support what Denis has been saying for some time.
The video title is Every nation is in debt, so who’s the lender?
https://www.youtube.com/watch?v=x4mg0sp2nyo
The video is AI generated, with this explanation.
Disclaimer: This is a fan-made channel and is not affiliated with Yanis Varoufakis or any political party, organization, or institution he is associated with. The videos are inspired by Varoufakis’s public statements, ideas, and analyses for educational and informational purposes only. A synthesized voice is used and does not belong to Yanis Varoufakis. Visual lip-syncing and dubbed narration are included solely to enhance clarity, create a cinematic experience, and make the content more engaging. Our aim is to present Varoufakis’s economic and geopolitical perspectives in a way that is accessible and understandable for a wider audience. We also strive to make his ideas available to viewers who are deaf or hard of hearing by providing accurate transcriptions in most of our videos. This channel shares his insights with respect for his work, without any intent to mislead or impersonate him.
This seems to be a trend now, so the usual warning applies — question everything.
Terry, I should have added, the video deals in some detail with the matter you raised.
Steve
Thanks for that, I have been a fan of Yanis Varoufakis for some time.
Hi Terry, thanks for raising that. It does feel counterintuitive at first, because most of us were taught that banks take deposits from one customer and lend them to another. That is the old textbook model, not the system we operate under today.
When a bank approves your mortgage, the money is not taken from someone else’s account. The bank simply creates a deposit in your name and records an asset, the loan, on its books. Your new money is matched by your new debt. This is how bank money creation works day to day.
The key part is that banks do not wait until they have enough deposits before lending. The deposits largely appear after the loan.
If you are interested, the Bank of England and the Bank for International Settlements both explain this clearly in their public papers. I referenced them in the article if you would like to take another look.
You are right to question it. Most of us did when we first came across it.
A Commentator
Thank you for the follow up and clarification. You raise an important point about the inflationary cycle and the need for tools that do not put the entire burden on interest rate rises. I agree that relying on the Reserve Bank alone has real consequences for mortgage holders, renters, and small businesses.
It is true that in an inflationary period MMT does not claim that spending can simply increase without regard to capacity. MMT’s contribution is in helping us understand that inflation control can be shared more fairly and targeted more precisely than the current blunt approach.
Where there may be a slight difference in perspective is that “contractionary” does not always mean reducing services or support. Capacity can be expanded as well as demand reduced. Investments that fix bottlenecks, energy costs, supply chains, skills shortages, and housing pressures can ease inflation rather than fuel it.
I appreciate your point about tax settings. The key question becomes not only whether taxes rise, but which taxes, upon whom, and for what social purpose. These are choices, not inevitabilities, and it is healthy that we discuss them openly.
Thank you again for engaging in good faith.
Denis, would it be fair to say that MMT involves a hands-on approach to the economy, rather than letting “the market” or “economic forces” have the biggest say?
Thanks Steve, I think that is a good way to put it. MMT recognises that a government with its own sovereign currency is not just a spectator in the economy. It already plays a central role through spending, taxation, and regulation, whether we acknowledge it or not.
The idea that “the market” can run things on its own has been the core of neoliberal thinking, and we can see the results in areas like housing, energy, health, and education. A hands-on approach simply means using the tools we already have with clear public purpose, rather than pretending that outcomes are accidental or unavoidable.
MMT does not remove the role of markets. It just accepts that when markets fail to deliver basic needs, government has a responsibility to step in rather than hope problems fix themselves.
If I may summarise again Denis, under MMT the economy serves the people, while under the status quo the people serve the economy.
Thanks Steve, yes, that captures the difference well. An economy should be a tool that improves lives, not something people sacrifice their wellbeing to maintain. The goal is a system that serves the public, not the other way around.