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.)

7 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.

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