Increasing Productivity with an Efficient Financial System

Kevin Cox
4 min readMar 4, 2024

The world’s financial system is inefficient and reduces productivity as a country becomes richer. Productivity drops because the financial industry funnels wealth to the already wealthy, who keep money in financial and existing assets rather than reinvest them in new productive assets. It gives them relative wealth and power while reducing the wealth and income of the rest of the population. The situation becomes critical once the increase in wealth of the top 10% is 90% of the total wealth increase, as is the situation in Australia today.

Three of the financial industry responsibilities are to transfer money between parties, create and destroy money as needed for the government, and to protect the money held by depositors.

Computers and communications should reduce the cost of all three responsibilities; the evidence is that all these costs are increasing even as technology progresses. The largest cost increase is the unnecessary creation of new money for the government, which licenses banks to perform this task. The government can quickly correct this problem and reduce unnecessary money creation with a small change to existing banking regulations.

Banks Create Unnecessary Money

It is unnecessary to create new money to transfer old assets. Non-bank Credit Unions and Mutual Funds did it for years. They rarely do it today because governments changed the rules to make new loans more profitable to banks than old money loans. This forced savers to seek financial investments and for Credit Unions to become Banks. The rule changes have held back investment in productive assets and transferred wealth from most of the population to the wealthiest. Today, the wealthiest 10% of the population increases their wealth every six months by as much as the total wealth of the poorest 10%.

The Reserve Bank can address this problem by requiring Bank Loans to purchase existing assets with existing money. A new rule will leave Bank profits the same, but the profit on any given loan will only occur on the amount of existing money at risk. The rule is that X% of the interest paid comes off the capital owed. The Reserve Bank sets the value of X for different asset types. For existing loans, this is likely to be 80% for home loans. This only applies to loans to transfer ownership of existing assets. The Reserve Bank does not need to set the interest rate but lets the market decide, and the rule only applies to new money to transfer old assets.

This will ensure banks do not have the perverse incentive to lend money on a sure bet. These loans are left to savers in less position to evaluate new assets. Banks will be encouraged to invest in enterprises that produce new assets and increase productivity. They will do what they are designed to do. Invest money to increase productivity.

Today the icons of the “free markets” namely stock markets trade more existing stocks in less than ten days than the total of new stocks in a year. The value of new houses constructed in any year is less than 10% of the houses exchanging hands.

In both cases, existing money could be used to exchange existing assets and new money used for new assets.

Benefits of Using New Money for New Assets

If we invest new money in new assets and use existing money to transfer ownership of assets, the productivity of our financial system will improve. We will produce the same value of goods and services with less money, stabilising the economy’s productivity and preventing it from dropping as the country becomes richer. Governments and the Reserve Bank can aim for zero inflation, as regulating capital markets with a finer control instrument is more effective than changing the government interest rate. This enables capital markets to function as true markets rather than our distorted markets of regulated interest rates and inflating asset prices with the harm and cost it brings.

An additional benefit is to make housing affordable by eliminating the high cost to home buyers who need to pay for the new money to purchase an existing home. It will increase productivity, as less money is required to produce the same value of goods and services. As a result, everyone should benefit from increased productivity created by money moving rapidly to achieve the same goals.

Governments changed the rules on Banking in the 1980s without fully understanding the consequences. Today, the government can change the rules to make Australia a fairer, more financially equal, richer and more productive society.

Today technology allows us to model a financial system where people use old money to transfer existing assets and Banks use new money to lend to create new assets.

The government can call for volunteers to experiment with a new system financed through Community Banks or existing Credit Unions to prove the idea without imposing it on the population. The volunteers would be people who own their homes outright, have mortgages, have savings or are new buyers and sellers. The proof of savers getting higher returns and buyers paying less would be obvious within two months of operation, and the government can encourage communities to adopt the approach voluntarily.

The changes are to bank regulations that will reduce the cost of interest payments to purchase a house while leaving the price the same and at the same time giving savers higher returns on their bank savings.

The Big Four Banks' profits will drop as they make fewer loans because of the competition from credit unions and community banks. Credit Unions and Community Banks will outcompete the Banks for loans with existing money as the profits stay with the depositor and borrower owners.

The government has a clear choice. Continue with the rules and regulations introduced in 1980 or return to a system where savings are used to finance the transfer of existing assets and new money is used to invest in new assets.



Kevin Cox

Kevin works on empowering individuals within local communities to rid the economy of unearned income.