02 May 2019

Design options of sovereign money – a full overview

The goal of a sovereign money reform is to place the money creation into the hands of a public institution that serves the public interest. However, there are still many different design options how to implement this, i.e. what instruments should be used to steer the money supply or if the payment system should be run by the state or private payment providers. To bring more clarity to the discussion, this article provides an overview of the wide variety of design options for a sovereign money system.

Among the member organizations of the International Movement for Monetary Reform regarding some of the design options there is consensus on best solutions but in other cases opinions vary quite a lot. Obviously though, often it can’t be generalized what is best, as that depends on a country’s specific circumstances and institutions. What’s reasonable for Germany might not be reasonable for South Africa or Canada.

The primary focus on this article though, is to provide an overview of all the options on the table and not so much a thorough discussion of the various pros and cons of the various options. Nevertheless, some basic arguments and considerations are provided together with a description of the status quo and alternative reform proposals if applicable. The design options for the transition from the current to a sovereign money system have been left out due to considerable complexity of this topic – this might be a good topic for another article though.

Part 1: Design of the Monetary Authority

1. How is the institutional setup of the monetary authority and its relation to the government?

Now: There exist no monetary authorities yet but what comes closest are the existing central banks. Their setup is very different from country to country. Sometimes it is a (partly) privately owned institution (Switzerland, US Fed), sometimes it is fully public (Germany). Usually it is relatively independent from the government and not bound to follow its orders.

Discussion: It is a very questionable relic that some central banks are still privately owned and shows the current heavy linkage between central banks and the financial sector. That should be ended. Often there is already relative independence from politics and most money reformers agree that this should be kept in place.

Sovereign money proposal: The monetary authority should be an independent state authority serving the public interest (like the judiciary) and bound by law and statutes. (Of course there is still great room for discussion what this exactly means and how to ensure accountability to the people.)

Different proposal by some Keynesians or Modern Money Theory Proponents: The function of currency creation should be part of the finance ministry so there is no need for an independent monetary authority. (This would make some things obviously easier and allow better coordination of money creation and government spending but entails the risk of power abuse and a dangerous concentration of power.)

2. What goals should be part of the official mission of the monetary authority?

Now: Differs, the ECB has the single target of consumer price stability whereas the US Fed supplements this with the goal of economic growth.

Discussion: One single goal makes things obviously easier but including multiple goals might create a better balance. The monetary authority also only has limited power to achieve some goals and it can be argued that some goals should rather be in the hands of a separate institution of the government. Lastly, the exact wording and definition of a goal is crucial and often there are multiple similar objectives.

Sovereign money design options (multiple are possible):

  1. Consumer price stability (There is agreement that consumer price stability should be the primary goal of the monetary authority but it is debatable if this should be supplemented by other goals.)
  2. Financial stability, asset price stability or preventing asset bubbles (Asset price increases were generally badly neglected during the last financial crisis and there should be an institution that keeps an eye on preventing asset bubbles and ensuring financial stability. But maybe this should rather be put into the hands of the financial supervision institution to limit entanglement and moral hazard. Also, asset prices depend on multiple factors and maybe the focus should rather be on preventing bubbles than ensuring price stability in terms of the level of asset prices.)
  3. Economic capacity utilization and preservation, economic growth or full employment (These are many different terms for the similar and reasonable objective of providing enough money for releasing the full potential of the economy. The goal of economic growth can be criticized for not taking into account the ecological limits of our planet. Economic capacity utilization and preservation might therefore be a better goal. Full employment is usually taken as a sign or indicator for economic capacity utilization but it can also be questioned if traditional full employment is really desirable given that the 4th industrial revolution might make more and more jobs superfluous and we might soon need to shift to basic income and purposeful doing anyway.)
  4. Stable value of the currency in terms of foreign exchange rate

3. Who’s in charge of bank oversight and financial regulation?

Now: In the Euro-area this is also in the hands of the ECB, in other countries it is often a separate state agency.

Sovereign money proposal: There should be a separate financial supervision agency, focussed on risk transparency and investor protection (It is highly problematic to combine central banking and supervision/regulation of banks in one institution and should be separated to prevent entanglement with private interests and moral hazard.)

4. What are the monetary authority’s instruments to bring new money into circulation?

Now: Usually there is a whole variety of instruments, i.e. at the ECB: Deciding about the level of the minimum reserve ratio, setting the interest rate on various credits facilities to banks and on their reserve deposits, open market operations (including the infamous Quantitative Easing program), defining eligible securities. (The current toolkit is mostly very indirect and ineffective though, causes numerous externalities, creates moral hazard and potential for power abuse and gives way too much power to one institution.)

Sovereign money design options (multiple possible):

  1. New money is handed as seigniorage income to the government for spending, i.e. for infrastructure investments, welfare allowances, tax cuts. The monetary authority would decide about the amount of money creation but not about where it is spend, whereas the government can’t decide about the money creation. (Most sovereign money reformers propose this as the primary instrument to inject new money into the economy as it is fair and should be quite effective to stimulate the economy.)
  2. An equal income from money creation is handed to all citizens directly from the monetary authority, i.e. every month there is a variable amount wired to all citizens. (This instrument would have the advantage of probably having a quicker effect on the economy and there is barely any possibility of power abuse.)
  3. Credit to banks (This could supplement other instruments to make sure there is sufficient credit supply in the economy. However, it would again create entanglement with banks and moral hazard / risk of abuse of power etc.)
  4. Open market operations (This could supplement a) for quick “fine-tuning” of the money supply.)

Part 2: The financial system

5. Are other institutions allowed to create money?

Now: Usually there is a law that defines physical cash as the official currency and gives the monopoly of creating it to the state/central bank. However, private banks are tolerated to create their own private bank money denominated in the official currency and even get backed by government guarantees such as deposit insurance. Usually, the government even prefers this private bank money over its own official currency (cash) for payments of fees or taxes due to its convenience but against the logic of the law.

Discussion: Not allowing private banks to create the official currency lies at the core of a sovereign money reform. However, the differentiation between money (“money is what money does”) and the official currency (defined by law) is crucial and it is debatable if there can still be private forms of money besides the official state currency.

Sovereign money design options:

  1. No, issuance of the official currency and all forms of money (physical and digital cash) is a state monopoly. Anything that functions like money and substitutes the state currency is forbidden. (This is the rather rigid version to prevent private actors to regain any privilege of money creation. Critics wonder in how far this could be implemented and really forbidden and where to draw the line/how to define money)
  2. Yes and no, issuance of the official state currency and general unit of value (physical and digital cash) is a state monopoly. But everybody is allowed to create alternative forms of money or liquid stores of value like local currencies or cryptocurrencies. These though are exempt from state support, have an exchange rate to the official currency and the government would only accept the official currency for tax payments and for handling its expenditures. (This might be a well balanced middle-way allowing for private innovation and freedom but ensuring a well-functioning and crisis-proof payment system.)

Different proposal: “Digital Cash” or “central bank digital currency” (CBDC): Private citizens get access to accounts at the central bank and therefore to a digital form of cash / sovereign money that is totally safe from bank failures. This only exists as an additional option besides private bank money as it is now though. (This could be seen as a first step to sovereign money.)

6. Who performs credit intermediation?

Now: Private and public banks are creating credit and there are all kinds of other forms of credit intermediation through P2P lending, crowdfunding or in some sense also shadow banks.

Sovereign money proposal: Banks lose their special privilege of money creation and become real credit intermediaries. However, anyone could provide this function including public and private credit institutions, funds, P2P lenders. (It is not the task of the monetary authority to do credit intermediation, this is a common misunderstanding.)

7. Does physical cash still exist?

Now: Yes, but in dwindling proportions and there are efforts to phase it out or to abolish it. if successful, this would give even more power to banks and their bank money and also raises great privacy concerns.

Sovereign money proposal: Physical cash should definitely stay in existence and be supplemented by other digital forms of sovereign money.

8. What gives value to the currency? Is it backed by anything?

Now: Currencies are not backed by gold or any commodity, rather their value is derived from the productive capacity of the economy as measured in GDP (the value of produced goods and services) in combination with their legal status as official currency.

Sovereign money proposal: No proposed changes.

Alternative Neo-Austrian proposal: There should be a return to the gold-standard. (This would link the money supply to the random change of the supply of gold and thereby put the money supply into an inflexible corset, risking deflation and economic depression when gold is scarce.)

Part 3: Technicalities

9. How is the target of consumer price stability defined?

Now: The ECB defines consumer price stability as 1,8% inflation of consumer prices.

Sovereign money design options:

  1. No changes (This could firstly counteract as a security buffer against deflation and could secondly come to function like a “money tax” as a positive inflation target allows more money creation/seigniorage for the public and would therefore redistribute money from top to bottom.)
  2. Consumer price stability = 0% inflation (Arguably total price stability would be a worthwhile goal and can be reached more easily within a sovereign money system but an accidental drop below zero would be harmful which is why a small positive rate might be better.)

10. Is there interest on sovereign money accounts?

Now: Current accounts usually receive no or very low interest, whereas longer-termed deposits receive interest.

Discussion: In a sovereign money system, citizens have the choice to keep their money either in cash-alike and totally safe digital sovereign money accounts or to hand their money to longer-termed savings accounts at lending institutions to be used for credit. The savings accounts naturally receive interest as compensation for reduced liquidity and risk but what about sovereign money accounts?

Sovereign money design options:

  1. There is no interest on sovereign money accounts (This is usually the preferred option and coherent as those accounts are like cash and cash also receives no interest. Also this would still give an incentive to put money on a savings accounts to earn interest.)
  2. There is positive interest on sovereign money accounts

Different Proposal by the so-called“Gesellians”: Negative Interest on sovereign money accounts, also known as “demurrage”. (This would redistribute income to the public and prevent money hoarding. However, it could undermine trust in the sovereign money accounts and create evasion costs or a shift to alternative forms of money. However, imposing such a negative interest might theoretically be an interesting tool for monetary policy in times of crisis to stimulate consumption or investment.)

11. Who runs the payment system?

Now: The central bank typically provides the account and payment system for central bank reserves. In the euro-area this is the so called TARGET2-system, provided by the ECB. Then banks build their own online-banking and payment interface for the end users deposit money on top of this.

Sovereign money design options:

  1. Similar to now, the monetary authority provides the background payment system with an open interface which can integrate private payment systems for online-banking or other services by private financial intermediaries. (This would possibly allow for better privacy, competition and innovation.)
  2. The monetary authority runs the whole payment system including the handling of sovereign money accounts. (For example, every citizen gets a sovereign money account that could be linked with the tax or social security number and ideally there is a well-functioning and free payment system for everyone.)

12. What technology is used for the electronic payment system?

Now: Account based

Sovereign money design options:

  1. Same as now account based
  2. Distributed ledger technology/Blockchain (Depending on the exact design of the software, theoretically this could allow for better privacy and decentralization.)

13. How is sovereign money accounted for in the monetary authority?

Now: Cash (which is sovereign money) is accounted as a liability of the central bank, as if it could be redeemed into anything else than cash. (This is due to the history of money where it was often redeemable to precious metals like gold.)

Sovereign money design options:

  1. Same as now, as a debt/liability in the balance sheet of the monetary authority. (This would require less legal changes.)
  2. Separate from balance sheet in a ledger of the monetary authority. (This is certainly the preferred and more coherent option by sovereign money reformers. Money is then clearly not a debt but an asset that is not at the same time a debt of anyone. However, accounting is not reality but just a form of protocol and theoretically whatever the accounting system, sovereign money could achieve the same goals.)

13 thoughts on “Design options of sovereign money – a full overview”

  1. “The goal of a sovereign money reform is to place the money creation into the hands of a public institution that serves the public interest.”

    The above quote reflects a fundamental error in the definition of sovereign money. It would actually be more in the public interest if it read as follows: “The goal of a sovereign money reform is to place the money creation into the hands of the public.”

    This is already happening in any monetary system which allows the use of credit cards because every time a credit card is used to make a purchase of goods or non-financial services new money is issued to make the purchase. And this new money is not inflationary provided that the credit card debt is paid off as soon as possible and it is usually done within 30 days.

    If this was the ONLY WAY in which new money was allowed to be issued there would be no need for any institution to control the money supply it would naturally control itself according to consumer demand and banks could return to their proper role which is to link depositors with borrowers.

  2. The use of credit cards to make a purchase of “goods and non-financial services”, covers only a part of transactional activity. If you were to buy a house, for example, you would not get a mortgage this way. The “Full Overview” above indicates that this Reform is going to be a long drawn affair, given the diversity of the views at the conceptual stage itself, the inherent difficulties of implementation of a project of this nature and the realization that, even with rigorous planning, it is going to be a leap in the dark. Let us agree, we need a Reform in order to curb the power of the Banks to create money; they used it irresponsibly, many times in the past, inflicting severe damage on people and nations. This happened when either Regulations were paltry or those responsible for their oversight did not do their job or authorities embraced the myth of self-regulation. While we continue to work on the Reform, we ought to focus in (1) Identifying areas where regulations of the financial sector need to be strengthened, loopholes plugged and (2) getting banks to divest from high-risk or speculative activities (these will have to be to identified e.g. bankrolling M&A, brokerage, etc). The objectives of the Reform would be well served, while the work on the ultimate objective goes on.

  3. It’s important to state the definition and functions of a “monetary authority” and how those are the same or different from a central bank. Currently in nearly all systems using private commercial bank created debt-credit money, the central bank is NOT determining how much new money to create; it is a much more distributed and haphazard functioning of the entire commercial banking sector. In the US, the Fed admits that the individual banks create the money supply acting independently, and the central bank follows in their wake, roughly 3 months behind, doing their best with inadequate tools to “influence” and sustain the choices that the bankers made.

    Under a new sovereign money (using Huber’s definition, not MMT’s), establishing an agency that makes a recommendation for how much new money can be created to keep the value steady, is a NEW function that is NOT part of any central bank’s current portfolio. In the US, the Fed is mandated to ‘do their best’ to ‘influence’ the amount of money and to keep inflation at a ‘stable’ 2 percent; they are mandated to aim to keep unemployment in the 3-4 percent range; and to “ensure the safety and soundness of the nation’s banking and financial system; and, in the last decade, to protect the credit rights of consumers. They also provide other services – basic banking for the US government, and general system clearing. The latter are banking not money creation services and a ‘central bank’ that is simply a national bank can take on that role, and be supervised under Treasury.

    Once the power to create money is removed from the commercial banking sector and returned to the public, there are 2 basic functions to that process: 1) decide how much to create; and, 2) enter the new money into the economy. A new steady-value money agency can be established by law to aggregate the recommendations of the professional agencies that already track CPI and other data, AND, aggregate the recommendations of the citizens. (We will get the best decision with the broadest, informed, diverse participation). Weighting can be determined by experiment. The ONLY role of this agency can be coming up with the recommendation for how much new money.

    In the US, our Congress has the power of the purse, and our Constitution gives the power to coin money to Congress. So, while an agency can make the recommendation, and to prevent conflicts of interest, Congress can set high bars for overriding their recommendation, the power to decide on an amount and to distribute this new money resides with the Congress. When Congress accepts the recommendation, the amount of new money is entered on the books as income and an asset, just as happens when coins are created.

    All the other functions of the current central bank can be moved into the treasury or not. But, it is helpful to keep the current functions and future functions of a central bank distinct from this new function of determining how much new money will keep the value steady.

  4. It seems to me that central banks are a kind of fire-wall between government and the banking sector that has the money power and as such we don’t need them, national treasuries can issue the money without a bank. Under SMR gov issues all the money for public purpose and banks would be mere intermediaries, independent businesses offering financial services to people and not allowed to create money. But I like allowing local currencies, even for local governments to issue, so that, for instance, if a town wanted to issue demurrage money as Wörgl, Austria did with great success during the depression being able to accomplish 2.5 million in public projects with only 6000 invested, they could do so. In fact considering a short time factor we need to mitigate climate damage we may need that kind of performance. Under SMR a nation could, by allowing local experimentation, become its own monetary laboratory. And I think the economic damage being done by the current system in part the centralization of nearly everything, population, energy & food production, media ownership etc., which needs be reversed putting people back in touch with nature and where their food comes from. We can reduce emissions this way, hopefully reversing or slowing extinction rate, supply the money needed for work in building local economies, eliminate shipping and commuting as much as possible. Travel in efficient systems mostly for pleasure and learning.

  5. My compliments for this overview, I have 2 comments:
    At point 5 sub 2 about alternative money systems.
    I think that the creation of an alternative currency must be limited to a maximum (for example 1% of the money supply), thus avoiding instability of the official currency.
    At point 9 under 2 about price stability.
    I think the goal should be no inflation, 0%. Is a little bit of deflation really bad sometimes? normally you buy a product or service when you need it. Example computers have become much cheaper. Did we really wait for a possible fall in prices? no, moreover, many products are more or less directly needed such as food, clothing and so on.
    The conscious pursuit of inflation of close to 2% is in fact a kind of tax on the possession of money and that is undesirable in this form, in particular for the small savers.

    1. The article and this comment are very helpful. The article, being an overview, does not really address how centralization – necessary in the same way as agreement about law is necessary – can at the same time allow community /local / individual understanding of their own need. Adding to point 5.2 so that working with local issues is in tune with central is spot on.

  6. The problem with the banks is that they have two kinds of business. As centers for the accounting and saving and lending of private money, they fulfill a need that cannot be changed, nor should it be.

    But as business investors and finance supporters of capitalist organizations, insurance, shares purchase and sales, investment public and private companies, including the ability to buy and sell debt, they introduce a part of stock-exchange activity which should be entirely controlled by an independent source and one that neither the public nor the government have any right to control. A separate source of funding control is needed from which private investors should be isolated. This is aimed to ensure that if and when its unstable nature becomes felt, (and the system is unstable as evidenced by the 2018 financial crisis) the results will not spread outside the local stock-exchanges.

  7. Thank you for your article.

    I certainly agree that the present banking system should loose the ability to create money. While you have mentioned the possibility of new money being added into the economy by dividends to citizens and money added by government spending is great thing, I am certainly not happy about your intentions of adding credit to the banks.

    You also have no solutions on how to manage inflation and how to solve our massive current debt problems existing now, all questions that need to be answered. I believe the article I have written below answers all the relevant questions that need to be asked on Monetary Reform.
    Please read below.

    Can we really establish true monetary reform using the vehicle of Social Credit?

    To realistically prove that Social Credit is this vehicle to establish true monetary reform, I need to get you up to speed very quickly with this very short summary. To understand Social Credit, we need to first understand why affordability is always an issue. When this is fully understood we can then show you the tools needed to effectively treat this cause.

    Social Credit is an economic tool that has the potential to enhance and stabalise the economy of any given nation. It was devised and created by the late C.H.Douglas in the 1930’s (Not to be confused with China’s Big Brother surveillance systems deliberately called ‘the social credit system’ in an attempt to hijack the true meaning of Social Credit, to confuse and impede research on this very important subject)

    In a nut shell, Social Credit is about affordability. It is a mechanism to provide sustained affordability to all of its citizens by increasing and maintaining the purchasing power of its people to buy the necessities of life with out the cost of impossible debt and inflation.

    The main reason we have such massive affordable issues in just about every nation of the world is this reason: Unsustainable Debt. Affordability will always be an issue until we finally understand the real reason for this outcome which we call the Inherent Gap.

    The Inherent gap in reality is the lack of purchasing power the population has to buy the goods and services it produces. The total costs of all businesses and wages combined in any economy never balances out. Meaning all the wages combined are insufficient to cover the total costs required to pay for them.

    This actually makes sense when you think about it. The income the population receives in wages is never enough to cover the costs incurred in supplying these goods. The wage factor is only just part of the cost structure involved in supplying these goods, there are far more costs involved. Since the majority of the populations’ income comes from this there will always be a shortage of money. The total cost in supplying goods and services to the nation far exceeds the wages it receives.

    This is only part of the problem; this gap is also greatly increased by the fact that our money supply is created as debt and to a smaller but growing extent to lost wages from jobs being replaced by automation and new technologies. (See notes 1&2 at end of article below)

    As a result all nations around the world need to increase its money supply; it will usually get this from the commercial banks as debt through fractional reserve banking. The nature of lending this way means the country will never be able to pay it back. There will always be a growing need for new money to service these debts which include compound interest.

    The current mechanism of creating money as it stands now is flawed as 97% of the money supply is borrowed into existence. This puts us in a bad situation as all this money must be paid back plus interest. As you can see this is an impossible thing to do, as the original debt can only be paid back with more debt. A constant supply of money is thus required for any economy to function. Any reduction in this money supply will cause a recession and almost certainly a wide world depression if no action is taken to release new money into the economy.

    The Solution
    The solution to this would be to simply make the purchasing power of the market, of the final consumers, equal to the aggregate total price of all goods and services available on the market. Theoretically, all goods and services would be able to then be purchased by all consumers, transferring all the real production that exists to all the real consumers that need them. This can be done in a number of ways.

    A/New money creation
    New money should no longer be created by the present banking system (past economic events through out history show that this organisation can no longer be trusted. Confidence in this organisation is pretty close to zero)

    It is vitally important that the creation of new money is created by a responsible organisation that works for the good of the nation it presents. Safe guards and balances are a must to ensure it is kept in check. A system such as Social Credit could be used to responsibly create new money. It could be implemented by any government.

    The request to create new money will be first sought and petitioned by the government and if accepted created by the Peoples Bank or Social Credit office that has the sole exclusive right to create new money. Under the strict guide lines of Social Credit policies the creation of debt free money must first be approved and accepted for the good of the nation by this authority or it will be denied. The present banking system will no longer be able to create money; their role will continue in an intermediate capacity only, (which the world’s populations falsely believe they do now) they will be paid for their services rendered.

    B/ Fill the Inherent gap.
    The government could spend debt free money into the economy through the policies of Social Credit to help reduce the shortage of money in the economy. A more direct approach would be to issue a debt free Dividend paid out to all citicens of the population. In order to implement this, two things must be known: the total purchasing power of all individual consumers and the total price value of all goods and services available to final consumers. The total price value minus the total purchasing power would equal the surplus of goods and services being offered that need to be transferred that aren’t being transferred, the difference in those two sums is called the Price Gap. Only then can the Dividend be used wisely (Read note 1 below at end of article)

    C/ Control inflation, increase purchasing power
    In order to prevent inflation, while still eliminating the price gap, a second thing may be done by using the Price Compensation Rebate. Reduce the amount paid in dividends to each individual citizen by same amount, say, half, and then apply that to the remaining gap in the economy, not increasing the money supply, but in reducing aggregate price of goods sold by rebating businesses to drop them. (Meaning the price of goods is reduced by rebating businesses their costs to lower their prices; the existing purchasing power of money will automatically increase because of this.)

    Businesses would agree to reduce their price of goods for sale by a set percentage with the guarantee from the government that it would pay them back that same amount in newly created debt free money as a Price Rebate. Any business that did not agree to this would lose competition due to higher prices; and in the end, the same result is achieved anyway, with people being able to consume that which is actually there to consume, and the benefits of competition preserved without the negative side effects. I should mention here that the price rebate will automatically increase the purchasing power of wages already received without increasing the money supply, being a win, win for every one, inflation, deflation, wages and prices controlled all in one go.

    D/Removal of excessive debt
    It is recognised throughout the world that there is excessive debt. Almost every government and its population are burdened with impossible debt that is not manageable. To ensure the world economies function correctly and smoothly, it is necessary to remove this excessive debt. This cycle of debt can be easily cancelled and removed in the interest of all nations. A Debt Jubilee as such could be implemented as and when needed to remove impossible debt.

    This is a summary of what Social Credit is as I understand it. I have tried to simplify the explanation of Social Credit so that it is hopefully more understandable to those wanting to explore its merits without loosing too much detail required. It is my hope that this short explanation of Social Credit could be used to both deliver a better understanding of why we need to reform our monetary system and also the requirements needed to deliver a far better system.

    I should also add that a system such as this could be essential in delivering a vehicle for returning our basis to environmental solutions instead of environmental destruction caused by greed and debt. Environmental Sustainability can only happen when debt is no longer forcing our hand to do the opposite. Long life products could be the new way to go to stop the waste. No longer do we need to create unnecessary waste to ensure wages are paid. (See notes below, the need to compensate lost wages from automation, new technologies and long life products)

    Long term survival of the human race and our environment and all it contains must be protected. The economies of the world really need to look into this.

    Regards,
    Andrew Webb
    8/6/2019

    See Notes Below

    1The inherent gap
    The inherent gap in the purchasing power of the population was first recognised by Douglas in the 1930’s. He found that the wages paid were always less than the total costs of goods and services produced. He published his observations and conclusions in an article in the magazine The English Review, where he suggested: “That we are living under a system of accountancy which renders the delivery of the nation’s goods and services to itself a technical impossibility.” To prove this fact he later formalized this observation in his A+B theorem.

    To fix this problem Douglas came up with a provision to eliminate this gap.
    To balance the costs of production and the ability of the nation’s ability buy these goods. He come up with this solution by using the Compensated Price Mechanism to remove the risk of inflation and also a provision to increase the money supply as required by using The National Dividends. The Compensated Price Mechanism was essentially money credited to the producers and retailers of the nation to compensate their loss to produce and sell goods at a certain price. This was a major move as it guaranteed that inflation could be controlled using this method. The National Dividend is new money credited to the nation paid out to its citizens when the money supply dropped to a certain level. It guaranteed that the economy always had enough money to maintain commerce with out the need to indebt the nation with impossible debt.
    Douglas noticed that the weekly total cost of goods produced was greater than the sums paid to individuals for wages, salaries and dividends. This seemed to contradict the theory of classic Ricardian economics,. Troubled by the seeming difference between the way money flowed and the objectives of industry (“delivery of goods and services”, in his opinion), Douglas decided to apply engineering methods to the economic system. Douglas collected data from more than a hundred large British businesses and found that in nearly every case, except that of companies becoming bankrupt, the sums paid out in salaries, wages and dividends were always less than the total costs of goods and services produced each week: consumers did not have enough income to buy back what they had made. He published his observations and conclusions in an article in the magazine The English Review, where he suggested: “That we are living under a system of accountancy which renders the delivery of the nation’s goods and services to itself a technical impossibility.” He later formalized this observation in his A+B theorem. Douglas proposed to eliminate this difference between total prices and total incomes by augmenting consumers’ purchasing power through a National Dividend and a Compensated Price Mechanism.

    2/ The need to compensate lost wages from automation, new technologies
    and long life products.
    There is a growing gap in consumer purchasing power. The people need to have guaranteed minimum income that is above the standard wage accepted today. As more and more jobs are increasingly being replaced by machines and other technology advances and even long life products, the need to compensate real wages lost is essential. The solution to this is the National Dividend distributed to its citizens, created debt free; it can be used to compensate wages lost. Additional new money from the National Dividend gathers more importance.

    It must be understood that all technical advances in manufacturing and production has lead to a greatly reduced no of workers required. This should be a benefit to all mankind and should be recognised as a nationally owned heritage to every one. The opposite is true and people in general are thrown out on the scrap heap with the unemployed. The shockingly low benefits provided guarantee a poverty that is almost impossible for a family to live on. Social Credit is the solution to the world’s problems. It is the only monetary reform I Know that recognizes the growing gap in consumer purchasing power. CH Douglas certainly knew what he was talking about.

  8. On question 1
    Opinion: there should be a rule-based monetary policies system, where the rules are stipulated in the laws.
    Rationale: a rule-based monetary policies system can provide accountability, while systems with central bank independence cannot.

    On question 2
    Opinion: the goals should be the following two, (1) fostering economic transactions, and (2) fostering long-term wealth equality.
    Rationale: fostering economic transactions is the essential purpose of money, and fostering long-term wealth equality helps prevent one great weakness of the current systems, namely the current systems enable arbitrary wealth inequality.

    On question 4
    Opinion: citizens should receive newly issued money available with the restriction that these money should go to (perhaps crowdfunding-like) investments. There should be a feedback mechanism that can link investment results and citizens’ behaviors.
    Rationale: a democratic arrangement like this helps avoid arbitrary wealth inequality, and with the investment-only restriction it has a better chance to track real economic activities.

    On question 8
    Opinion: money should be backed by basic consumer goods and basic industrial goods.
    Rationale: such arrangement would help meet the need of greater guidance on how to allocate newly created money in terms of quantity and direction. The need is stemmed from the use of a rule-based monetary policies system and a democratic money creation mechanism.

  9. NEW: A Critique of Design Options of Sovereign Money – a Full Overview
    http://paulgrignon.netfirms.com/MoneyasDebt/MAD2016/Grignon-Critique-Zeddies-Sovereign-Money-Overview.pdf

    Sovereign money reformers fail to examine what happens to money during its time in circulation, up to 30 years. Thus they fail to understand that the primary cause of negative outcomes is the multiple concurrent principal debts of the same money that accumulates over that time, an inevitable result of having one monopolistic form of money that is lent, earned and re-lent multiple times concurrently. Sovereign money reform as proposed by exclusionists can only exacerbate this problem because the fundamental principle of a SINGLE FORM OF MONEY MADE VALUABLE BY ITS OWN SCARCITY IS THE ROOT OF THE PROBLEM.

    http://paulgrignon.netfirms.com/MoneyasDebt/MAD2016/Grignon-Critique-Zeddies-Sovereign-Money-Overview.pdf

    1. Hi Paul,

      Not sure I understand what you are saying here. Sovereign money reformers out there want the scarcity of money reformed so that there is no scarcity in our money supply. They want money created debt free spent into the economy by the government and also by issuing debt free money to the population by issuing dividends when required. There are two real critical reasons why there is a shortage of money. Most people know the first one, the second not to many see below.

      1/ 97% of all our money supply is created as debt. As this money is created as debt it must be paid back with interest costs thereby reducing the money supply. To maintain the correct ratio of money needed for an economy to function it must constantly increase this supply of money needed by borrowing more money. If the banks hold back on this supply we will have recessions or worse, depressions. There must be a constant supply of new money into the economy or it will dry out.

      2/ The main reason why there is such a shortage of money is this one, very few people know or even understand this reason. It is called the Inherent Gap. Affordability will always be an issue until we finally understand the real reason for this outcome. The Inherent gap in reality is the lack of purchasing power the population has to buy the goods and services it produces. The total costs of all businesses and wages combined in any economy never balances out. Meaning all the wages combined are insufficient to cover the total costs required to pay for them.

      This actually makes sense when you think about it. The income the population receives in wages is never enough to cover the costs incurred in supplying these goods. The wage factor is only just part of the cost structure involved in supplying these goods, there are far more costs involved. Since the majority of the populations’ income comes from this there will always be a shortage of money. The total cost in supplying goods and services to the nation far exceeds the wages it receives. This is only part of the problem; this gap is also greatly increased by the fact that our money supply is created as debt and to a smaller but growing extent to lost wages from jobs being replaced by automation and new technologies. As a result all nations around the world need to increase its money supply; it will usually get this from the commercial banks as debt through fractional reserve banking. The nature of lending this way means the country will never be able to pay it back. There will always be a growing need for new money to service these debts which include compound interest.

      The Solution
      The solution to this would be to simply make the purchasing power of the market, of the final consumers, equal to the aggregate total price of all goods and services available on the market. Theoretically, all goods and services would be able to then be purchased by all consumers, transferring all the real production that exists to all the real consumers that need them. This can be done in a number of ways. It is vitally important that the creation of new money is created by a responsible organisation that works for the good of the nation it presents. Safe guards and balances are a must to ensure it is kept in check. A system such as Social Credit could be used to responsibly create new money. It could be implemented by any government.

      Fill the Inherent gap.
      The government could spend debt free money into the economy to help reduce the shortage of money in the economy. A more direct approach would be to issue a debt free Dividend paid out to all citizens of the population. In order to implement this, two things must be known: the total purchasing power of all individual consumers and the total price value of all goods and services available to final consumers. The total price value minus the total purchasing power would equal the surplus of goods and services being offered that need to be transferred that aren’t being transferred, the difference in those two sums is called the Price Gap. Only then can the Dividend be used wisely

      Control inflation, increase purchasing power
      In order to prevent inflation, while still eliminating the price gap, a second thing may be done by using the Price Compensation Rebate. Reduce the amount paid in dividends to each individual citizen by same amount, say, half, and then apply that to the remaining gap in the economy, not increasing the money supply, but in reducing aggregate price of goods sold by rebating businesses to drop them. (Meaning the price of goods is reduced by rebating businesses their costs to lower their prices; the existing purchasing power of money will automatically increase because of this.)
      Businesses would agree to reduce their price of goods for sale by a set percentage with the guarantee from the government that it would pay them back that same amount in newly created debt free money as a Price Rebate. Any business that did not agree to this would lose competition due to higher prices; and in the end, the same result is achieved anyway, with people being able to consume that which is actually there to consume, and the benefits of competition preserved without the negative side effects. I should mention here that the price rebate will automatically increase the purchasing power of wages already received without increasing the money supply, being a win, win for every one, inflation, deflation, wages and prices controlled all in one go.

      Removal of excessive debt
      It is recognised throughout the world that there is excessive debt. Almost every government and its population are burdened with impossible debt that is not manageable. To ensure the world economies function correctly and smoothly, it is necessary to remove this excessive debt. This cycle of debt can be easily cancelled and removed in the interest of all nations. A Debt Jubilee as such could be implemented as and when needed to remove impossible debt.

      Environmental Reasons
      I should also add that a system such as this could be essential in delivering a vehicle for returning our basis to environmental solutions instead of environmental destruction caused by greed and debt. Environmental Sustainability can only happen when debt is no longer forcing our hand to do the opposite. Long life products could be the new way to go to stop the waste. No longer do we need to create unnecessary waste to ensure wages are paid. Long term survival of the human race and our environment and all it contains must be protected. The economies of the world really need to look into this.

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