The Case for Sovereign Money
In the process of coming to terms with the financial crisis since 2008, the easily visible causes were examined first, for example, perverse incentives as well as questionable practices of risk management and accounting. Thereafter, some structural aspects came to the fore, such as deregulation, insufficient capital buffers and missing firewalls. In the meantime, increasing attention is being paid to the money system which in fact is the foundation of it all. The present system of fractional reserve banking is the root cause of many financial problems. The final answer to unstable finances and unsafe bankmoney (deposits) is very likely to be sovereign money.
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What is Sovereign Money?
Why it must be put on the agenda and what a sovereign
money system would look like
Sovereign money is legal tender issued by a monetary authority, in most cases by a nation-state's independent central bank, or the ECB. The counterpart to sovereign money is commercial bankmoney, i.e. demand deposits on current bank account. Bankmoney is created whenever a bank grants a loan, or overdraft, or buys stocks and bonds or real estate from nonbanks, and pays for this by crediting the customers' or sellers' accounts. These credits need to be backed by sovereign central-bank money, but just to a very small percentage of 1.5% in the UK, 2.5% in the eurozone, and less than 8.5% in the US...
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• Sovereign Money. An Introduction, by Ben Dyson, Graham Hodgson and Frank van Lerven, Positive Money, London.
• Miguel A. Fernández Ordónez - Governor of the Bank of Spain and member of the ECB's Governing Council from 2006 to 2012 - gave a remarkable speech on > El Futuro de la Banca: Dinero Seguro y Desregulación del Sistema Financiero, in which he speaks out in favour of sovereign money reform.
• Explaining Monetary Reform - Presenting the American Monetary Act, brochure by Stephen Zarlenga, American Monetary Institute.
• Stephen Zarlenga on > The Need for Monetary Reform, American Monetary Institute.
• Andy Anderson & Ron Morrison on introducing a sovereign currency, the Scotmerk, in Scotland > Moving On.
• Richard C Cook > Monetary Reform and How a National Monetary System Should Work, Global Research, 11 May 2007.
How to account for sovereign money
Bookkeeping is hardly a favourite pastime. Money and banking, however, are in fact about nothing else than accountancy and balancing of accounts. As monetary reform has been gaining attention, ever more experts raise the question of how to account for sovereign money on the balance sheets of central banks and banks.
The first and actually not so good idea was to continue the practice of entering money into the books as a liability of the money creator. A better idea then was to treat sovereign money like coin, that is, as a liquid asset only which adds to the equity rather than to liabilities. But the coin or equity approach still has its little drawbacks – which can be overcome by an extension of the equity approach as suggested in this new paper on >
Previous approaches, particularly regarding the coin or equity approach, include the following:
• Thomas Mayer of the Swiss Vollgeld-Initiative has identified > Seven ways of how sovereign money can be brought into circulation
• Similarly > Accounting for Sovereign Money. Why State-Issued Money is Not 'Debt' by Ben Dyson and Graham Hodgson of Positive Money.
• For all who like to put monetary matters straight in terms of T-accounts, Andrew Jackson has described > The transition process from bank money to central-bank sovereign money in balance sheets.
• Uli Kortsch (The Monetary Trust Initiative) and Jamie Walton (American Monetary Institute) on > Public Money Accounting Principles in the US.
Modelling sovereign money
A number of modellings – based on different approaches such as DSGE, system dynamics and stock-flow-analysis – came up with basically convergent findings. Sovereign money would not only be safe, but also bring about significantly more financial and economic stability, non-volatile normal interest rates, low inflation, financial assets and debt not growing in disproportion to GDP, and a higher level of output and employment:
Yamaguchi, Kaoru 2014: Money and Macroeconomic Dynamics. An Accounting System Dynamics Approach, Awaji Island: Muratopia Institute/Japan Futures Research Center.
Yamaguchi, Kaoru and Yamaguchi, Yokei 2016: The Heads and Tails of Money Creation and its System Design Failures, shows the dynamics of the present bankmoney regime and those of an alternative public money system.
Benes, Jaromir / Kumhof, Michael 2012: The Chicago Plan Revisited, IMF Working Paper WP/12/202. A revised draft dates from February 12, 2013.
Lainà, Patrizio. 2015. Money Creation under Full-Reserve Banking: A Stock-Flow Consistent Model, Levy Economics Institute Working Papers, No. 851, Oct 2015.
van Egmont, Klaas / de Vries, Bert. 2015. Dynamics of a sustainable financial-economic system, Sustainable Finance Lab Utrecht University, Working Paper, March 2015.
Original Sources on sovereign money
Introduction and summary of
• Creating New Money. A Monetary Reform for the Information Age by James Robertson and Joseph Huber, New Economics Foundation London, 2000.
• Here is how James Robertson introduced the subject in his > Alternative Mansion House Speech, London, June 2000.
• Here is how Joseph Huber presented the subject in a paper given at the Forum for Stable Currencies, House of Lords, June 2001 > Seigniorage Reform and Plain Money.
• Another document on this > Plain Money. A Proposal for Supplying the Nations with the Necessary Means in a Modern Monetary System.
'Managing an economy's money is among the most important tasks of the government'.
Free exchange, The Economist, Dec 3rd 2016
"It is incumbent on central banks to prevent the growth of dangerous bubbles".
Dean Baker, Centre for Economic and Policy Research, Washington