22 Jan 2021

Monetary Financing of Helicopter Money and other Government Expenditure by way of Quantitative Easing

By Dr. Joseph Huber

What is it all about?

Monetary financing means funding of government expenditure by central-bank money, whether directly from central bank to government, or indirectly, in that the central bank purchases government bonds on the open market. In the after­math of the 2008/12 crisis it was especially Adair Turner, last chairman of the UK Financial Services Authority, who relaunched the idea of direct monetary financing under the heading of overt money finance to pay for crisis-induced extra government spending.[1]

The central-bank money thus issued for government spending was soon dubbed helicopter money, a catchy metaphor dating back to Milton Friedman in 1969: pouring banknotes on people from a helicopter, remindful of manna from heaven. To Friedman, helicopter money meant an illusionary blessing, because it would simply raise price levels, not productivity and wealth.[2] Others, among them Ben Bernanke, chairman of the US Federal Reserve during the 2008/12 crisis, thought the advisability of helicopter money depended on the rate of capacity utilisation.[3] In a severe recession or crisis, government extra spending to prop up the economy has been a policy tool for decades, even if not overtly funded by the central bank. The covid pandemic has now revived the debate on helicopter money.[4]

Another term given to the approach was Quantitative Easing for People (QE4P)[5], as distinct from QE just for finance since 2008/09. The expressions helicopter money and QE4P will primarily be associated with a Keynesian demand-side approach, similar to the idea of a citizen’s dividend per capita. In March 20, the US government was pondering the idea of a 1,000 dollar ’emergency income’ to each citizen. Positive Money Europe, too, has called for a 1,000 euro helicopter gratuity per capita.[6] Such plans might be seen as a door opener for a general basic income.[7]

Various crisis programs, though, also include supply-side elements such as investment in infrastructure, sector-targeted programs, tax breaks for companies, credit assistance, business and loan subsidies. A broader term encompassing this is QE for the real economy.

QE for the real economy has now become a reality, as governments are spending large amounts of extra money to counteract the economic shocks of the Covid-19 crisis. Helicopter money in the broader sense of an extra government allocation to firms and households can be taken as a generic term that covers all this.

Monetary financing is more common than it seems

Monetary financing has been a taboo up to now. Nevertheless, it has always existed in different ways and on different scales.[8] In the days of precious metal currencies it went without saying that the first use of the major part of newly minted coins immediately served government expenditure. With the spread of paper money since the decades around 1700, the newly set up central banks printed their notes for government expenditure in the first place. Also the issue of treasury notes was an established practice in many European countries from the early 18th century until around WWI. In the United States, government-issued money has a long tradition since the early 18th century, first in the form of colonial bills, later on US Treasury notes since the Civil War in the 1860s (Greenbacks). The US Treasury could still issue notes today if the government would so decide. Not least the US New Deal to fight the Great Depression of the 1930s and other such government programs in Canada and Europe were funded by monetary financing in one way or another.

Apart from times of war and crisis, however, and beginning in the later course of the 19th century, the central banks underwent a role change. They turned from ‘bank of the state’ to ‘bank of the banks’, primarily or even exclusively supplying the banks with notes and central-bank account balances. The role change was advanced and accomplished particularly under the influence of neoliberalism in banking and finance prior to and after WWII. Only since then has monetary financing assumed the character of a taboo.

A core doctrine of neoliberalism, which became ultraliberalism since around 1980, can be described as follows: Restrict or prohibit money creation by the government as well as money creation by the central bank for the government. Money shall primarily be created by the private banking sector. The role of the central banks is to refinance the banks, not financing government expenditure which must be funded by taxes and sovereign debt. This was the road map for establishing the privileged and now all-dominant bankmoney regime. Today, bankmoney counts for 90–95% of the general money supply and its pro-active creation by the banks determines the entire money system. The central banks just re-act to the facts the banks have created beforehand, even more markedly in crisis mode than in normal operation.

Contrary to what is claimed, ‘money printing’ continued to be practiced more extensively than ever. In place of the treasuries it was the banking sector to make reckless use of the ‘printing press’ in the form of creating bankmoney on account. This primarily served the process of global financialisation since the 1970/80s, including the non GDP-contributing business lines of finance that were growing in startling disproportion to GDP. Sovereign debt became an important profitable investment opportunity for banks, investment trusts, wealth funds and insurers. Nor did the central banks stop financing the government. For doing so, treasuries and central banks act in paso doble, the treasuries issuing bonds, the central banks buying up chunks of the bonds on the open market from banks and other financial institutions. De jure, this is forbidden, de facto it has always been done, albeit to varying degrees depending on the country.

After long decades of monetary overshoot and excessive leveraging of credit and over-indebtedness, this kind of monetary and financial system has now definitely maneuvered itself into a dead end. A better balanced and functionally more sensible role assignment needs to be developed regarding the sovereign control of the currency and money creation (including seigniorage), and the division of powers between monetary competences, budgetary-fiscal responsibilities and financial-market functions.

Monetary and financial meaning of helicopter money

Currently discussed approaches to helicopter money are about transferring newly created reserves (central-bank deposit money) into a government’s central-bank transaction account, in parallel and in addition to the commercial banks’ ongoing creation of deposit money. (Many state bodies run accounts both with commercial banks and the central bank). Conventional QE proceeds within the framework of the bankmoney regime in which central-bank money (the stock of reserves) is kept within the interbank circuit. This is why it is largely ineffective in real-economic terms. Helicopter money, by contrast, immediately feeds into real-economic supply and demand. It is an instrument of economic policy.

It is often assumed that helicopter money is given from the central bank (1) directly to the treasury (2) free of interest and (2) without redemption of the principal. These assumptions do not normally apply. According to current law, most central banks are prohibited from directly giving or lending money to the treasuries. Two exceptions are the central banks’ annual profit disbursed to the treasuries, and limited amounts of ways-and-means advances (bridging loans) in a number of countries.

In most cases, helicopter money still involves the paso doble procedure of QE policies. As a first step, the treasuries sell new bonds to a privileged national consortium of banks. The bonds are interest-bearing and redeemable. The banks pay the equivalent in reserves into the treasury’s transaction account at the central bank. To do so, banks may have to borrow additional reserves on the interbank money market and from the central bank. The reserves paid to the treasury do not remain there for long, but immediately flow back into the interbank circuit through government spending.

As a second step, the central bank sooner or later purchases those government bonds, or some part of them, on the open market. If non-banks were the holders of the bonds, the non-banks receive bankmoney, that is, a deposit entry into their current bank account, while the central-bank money, the reserves paid by the central bank for the purchase, flow into the banks’ central-bank account. If banks were the holders of the bonds, the banks are paid in reserves anyway. The asset swap of government bonds into reserves (in the case of banks) or into bank deposit money (in the case of non-monetary financial institutions) represents a monetisation of the bonds, an expansion of M0 and M1. Whatever the central bank does with the purchased bonds afterwards, formally these bonds remain debts of the government, with the central bank as the final creditor, and the reserves in interbank circulation as credit-and-debt-tied central-bank money.

This could be seen as something close to sovereign money, were it not for the detour via the banking system and institutional investors, and the government’s dependence on them. This is costly for the taxpayer and profitable for the banks and bond funds. Moreover, the arrangement includes the ‘formality’ of interest and redemption. The bonds remain a claim of the central bank on the treasury, or, respectively, a liability of the treasury to the central bank. Interest paid by the treasury to the central bank returns with the central bank profit transferred to the treasury. An asset-and-debt position the bonds remain nonetheless. The level of interest is currently very low. Japanese and a number of European sovereign bonds even trade at negative yield, that is, an interest rate at or close to zero combined with an issue price above par, or an amount repayable below par, respectively. This can certainly not be maintained in the long run.

Normally, net repayment of the principal of government debt does not happen. Keynesian and post-Keynesian economics of all shades consider redemption of sovereign debt as ‘outmoded’ and self-damaging. Instead, sovereign debt is seen as beneficial, because, as over-simplified sector balances seem to suggest, public debt results in private income and fortunes (never mind with whom the money and capital ends up).

In the single transaction, the government does indeed repay bonds at maturity. At the same time, however, new bonds of the same or a bigger volume are issued, resulting in an accumulative roll-over of public debt. As far as the central bank is concerned, the respective claims and liabilities can be ‘consolidated’ on its balance sheet, that is, the central bank’s claim on the treasury and the treasury’s liability to the central bank are prolonged each time, kind of ‘eternal’ credit and debt. So-called modern money theory advises to re-interpret credit and debt between central bank and government accordingly and not to be shy about making use of it. In Keynes, a similar construction was called zero-coupon perpetual consol. Spain has now made such a consol proposal for the financing of Eurobonds. Apparently every dominant regime creates the ideology that suits it, even if in this case it involves a worrisome confusion of the meaning and functionality of money, credit and debt.

Among other ‘iron laws’ of economics presently suspended is the view of interest as the central price for the proper allocation of funds. Without adequate interest an economy is supposed to derail, becoming inefficient and unproductive. In contrast to this the situation today is characterised by the continued oversupply of money and capital together with ensuing interest rates around the zero lower bound and truly majestic mountains of debt. Meanwhile, governments and many other actors can only keep on accumulating debt on the condition of very low interest, or minus-interest. To common sense and sound economic reasoning this looks like an exercise in surreal finances.

It is true, however, regarding the special case of government debt on a central bank’s balance sheet, that it is not particularly sensible when (1) the government pays interest to the central bank (2) just to get it back through the annual transfer of central-bank profit to the government. In the relationship between a state’s treasury and central bank, interest rates are close to meaningless, indicating that sovereign money in a genuine form is free of interest. Regarding the roll-over of the principal of government debt to the central bank, the situation is just as weird. What is the point of endlessly ‘consolidating’ claims a state has on itself and debts it has to itself? (given the central bank is the national monetary authority).

Regarding the overall quantity of money, net additions to it are practically always very long-term, not to say ‘forever’. Temporary reductions are rare. They may occur in a severe crisis, and amplify that crisis, for example in the present bankmoney regime when banks and other financial institutions are reluctant to lend and invest, while outstanding amounts of debt continue to be repayable. That constellation results in the deletion of corresponding amounts of bankmoney, reducing the stock of money and purchasing power, as is typical of a deflationary crisis which comes with high unemployment.

An alternative to the ‘eternal’ prolongation of government debt seems to be cancella­tion of the debt as was customary in ancient Mesopotamia (but only for tax and agricultural debts, not for commercial debts), or a so-called debt jubilee as the Jewish Torah actually provides for every fifty years.[8b] Which is easier said than done. According to the official rules of accounting, waived debt represents a loss, much like a donation. A central bank can cancel the claims it has on the government, not however a corresponding amount of liabilities, because these liabilities represent the central-bank money used by the banks and government bodies. As a result, that loss will reduce the equity of a debt-reliever, meaning that debt can be waived at most within the limits of available equity. Otherwise the debt-reliever will break equity rules or may even operate on negative equity, which means pending insolvency.

With governments and central banks the situation seems to be different, in that government insolvency does not formally exist, although public finances can certain­ly be broke. With central banks it is basically the same. They need not default in their own currency and they cannot be prevented from operating on loss carryforwards and negative equity. This has actually been done in a few cases for a limited period of time (Israel, Czechia). But negative equity does not look good. Would negative equity be reported for a longer period, this would ruin the credit rating of a respective state and the acceptance and value of its currency. Alternatively, one might try some balance sheet cosmetics by swapping the ‘claims against the treasury’ for, say, ‘equalization claims from special measures’, the latter being code for the cancellation of debts. These would then represent ‘unredeemed’ zombie assets.

It follows from the above that within the present frame of central-bank accountancy there is no way of issuing truly debt-free money, not even if there is direct monetary financing as is the case with traditional ways-and-means advances (and even these are strictly prohibited in the Eurosystem). Hence, helicopter money or QE for the real economy by monetary financing means
(a) replacing deficit spending on the basis of bank credit with deficit spending on the basis of central bank credit, without changing the mechanism of money creation, thus keeping the false identity of money and credit, or money and debt, respectively, and
(b) leaving the split-circuit system of fractional reserve banking and the monetary powers of the banks largely untouched.

From the viewpoint of sober monetary system analysis, helicop­ter money is not really a thrilling alternative to conventional deficit spending. Both approaches involve the government to incur and roll over sovereign debt, carrying on along the path that has led us to where we are, rather than changing course. The dysfunctions related to fractional reserve banking—such as the non-safety of bankmoney, the crisis-proneness of ban­k­ing and finance due to GDP-disproportionate levels of monetary and finan­cial assets and debt, banking privileges and dispro­portionate financial income at the expense of earned income—continue to exist, but are lost from sight.

To avoid misunderstanding: Monetary financing of QE for the real economy is certainly preferable to the previous policies of QE just for finance. In a crisis such as the subprime and debt crises of 2008/12 and the current covid-19 crisis, helicopter money is an effective measure to prevent worse. Over the decades, however, if done repeatedly and almost habitually on an ever-increasing scale, then – which has often and rightly been expressed that way – it’s like drug addicts trying to keep themselves afloat by an ever-increasing drug dose.

Banks are awash in redundant central-bank reserves

The monetary policy of QE – whether only for the financial economy, or also for the real economy as is now the case with the Corona-related government extra spending – is flooding the banks with unprecedented amounts of central-bank reserves. Excess reserves of American banks rose from 59 billion dollars in 2008 to 2,500 billion in 2015/16.[9] In the Eurosystem, excess liquidity was near zero until 2008, reaching a first peak in 2012 at 1,000 billion euros and a second peak in 2018/19 at 1,900 billion.[10]

Such tremendous increases are the result of the central banks’ bond purchases. When non-bank financial institutions (such as investment trusts or insurance companies) sell bonds from their holdings to the central bank, the central bank transfers the corresponding amount of reserves to the banks of those customers. The customers do not get the reserves, instead, a bankmoney entry into their current bank account (a sight or demand deposit).

With indirect and direct monetary financing, the result is basically the same. The central bank purchases newly issued government bonds, and the treasury in return gets reserves into its central-bank transaction account. When the treasury spends the reserves by making transfers to households and firms, the recipient banks of the addressees get and keep the reserves, while the final addressees, the non-bank customers, get from their banks a promise-to-pay (that’s what bankmoney represents: a liability of the bank to its customers, and a cash claim of the customers on their bank).

The QE reserves come to the banks unsolicited. In a way, the banks are free riders of QE programs, in that they receive the reserves for free. In the Eurosystem, the situation is less cosy, in that the free QE ride of the banks also looks like a burden, because the ECB charges negative interest on excess reserves. This reduces the banks’ profit margin.

At the beginning of QE after 2008, one was wondering about the consequences of the flood of reserves. A widespread expectation was imminent inflation. The actual result, however, was boosting asset inflation in shares and real estate. For consumer price inflation to happen, however, the flood of reserves would have to be spent into the real economy with increasing capacity utilisation. Else, a huge amount of additional bankmoney, fractionally based on the flood of reserves, would have to be created for the non-bank public. Both assumptions can be ruled out. Reserves cannot leave the interbank circuit to be spent into the public circuit, because the reserves cannot be converted into bankmoney, just as bankmoney cannot end up in a central-bank account.

The banks from their side, under conditions of heightened uncertainty, do not have much incentive to push lending to non-banks and investment into the real economy. Some such thing only happens when there are positive business expectations. In a stagnation or crisis, however, businesses and private customers are reluctant to borrow, except maybe for low-interest mortgages for buying a house, often as a purely financial investment.

What QE for finance actually made clear is this: The banks simply have no need for that much central-bank money. In 2008, when the interbank reserves market was broken down, the flood of reserves was useful to keep the payment system going. The markets, however, soon calmed down thanks to QE and the recapitalisation of threatened banks by governments (i.e. temporary partial or full nationalisation of banks).

Under normal business conditions, however, the system of fractional reserve banking has become so efficient, both technically and through market concentration, that banks get by with an excess reserve of only about 0.x–3% of their transaction volumes in bankmoney (depending on a bank’s size) plus a solid-cash reserve of about 1–1.5% and a minimum reserve requirement (in the euro, for example, of 1%). In quite a number of countries, minimum reserve requirements have been abolished. In the US, the formal minimum reserve require­ment is still 10% of the bankmoney minus vault cash, but the actual requirement is very low close to the vault cash, due to a number of exemptions and deductions.

If customers are willing to borrow and the banks willing to lend to whom they consider creditworthy, the banks can create as much bankmoney as they believe it serves their business. If the few reserves they need to have available should not be enough, they can easily borrow some reserves on the interbank market. Ultimately, the central bank will accommodate additional banking-sector demand for money anyway.

Combining QE for the real economy with sovereign digital currency

One may wonder why the banks should be flooded with reserves they do not really need. There is a much more sensible way to get the money out into general economic circulation, namely: making the banking reserves, restricted to the interbank circuit, available also in the public circuit among non-banks, by issuing the money in the form of central bank digital currency (CBDC) to be used by everyone. Where the central bank is the monetary authority under state law, central-bank money is sovereign money, so that central-bank issued DC equals sovereign DC.

Cash is no longer constitutive for the monetary system as a result of cashless payment practices and the systemic dominance of pro-actively created bankmoney. For this reason alone it is high time to introduce CBDC as a successor token that preserves important functional properties of cash, in particular its being central-bank issued, having the status of legal tender, used as a universal means of payment also in the public circuit, and transferred directly P2P (payer-to-payee, aka peer-to-peer), like cash going directly from hand to hand. CBDC would facilitate monetary financing of helicopter money, while being an up-to-date digital successor to central-bank notes in general use, helping restore the transmission lever and effectiveness of monetary policy as well as confidence in the monetary system.

CBDC is on the agenda anyway. The special type of money in which CBDC will be issued is not definite yet (deposit money or crypto tokens or mobile-phone tokens; accessed directly or indirectly), but issuance of CBDC is only a matter of time and of the particular design principles of implementing CBDC in coexistence with bankmoney.[12] The sooner this gets sorted out, the better, because if central banks won’t be serious about CBDC, with cash on the retreat, they risk becoming marginalised, leaving the field to private types of digital money and currencies, thus putting an end to any form of monetary sovereignty.

To prevent this, the central-bank monopoly on banknotes has to be extended to digital money denominated in the official currency unit (e.g. dollar, euro, etc). In the Eurosystem, this requires the amendment of Art.128 TFEU so as to include any type of CBDC in addition to banknotes. This does not by itself rule out private money surrogates and currencies, for example in the form of MMF shares, e-money and stablecoins. But it denies them to be denominated in the domestic currency unit and to obtain a status close to legal tender, as is the case today with the para-sovereign status of private bankmoney that enjoys dedicated central-bank support and government warranties.

According to current plans – for example by the Swedish Riksbank or the Bank of England – non-bank money users would obtain CBDC from their banks on demand by exchanging bankmoney (customer bank deposits) into CBDC, in a way analogous to exchanging bankmoney for solid cash. The banks would obtain the CBDC by selling sovereign bonds to the central bank that pays for the bonds in CBDC. [13]

Currently, given the QE flood of reserves, there is another and most obvious option: Banks ought to be able to use the redundant reserves as CBDC, or convert them into CBDC, depending on the details of the system design. If applicable regarding the technical type of the money, conventional banking reserves and CBDC ought to be given dual use, so that reserves can actually be transferred to non-bank customers, and customer CBDC lent to the banks can be used as banking reserves – much as was the case with banking reserves and cash, before bankmoney rendered cash systemically irrelevant. Either way, the QE flood of redundant reserves would usefully be absorbed, while facilitating the introduction of sovereign DC as a successor to traditional solid cash. In this particular case, the banks would not even have to bear financing costs because they got most of the reserves for free. Under normal conditions, (re)financing costs of CBDC for the banks would be the same as with cash, while the costs of handling CBDC are less than the costs of handling solid cash.

Making monetary financing possible again

Overt and direct implementation of monetary financing of helicopter money requires changes in the legal framework, for example, Art.123 (1) TFEU, or US Code Title 12, Chapter 3, Subchapter IX, § 355. These are two examples of those laws which explicitly prohibit direct monetary financing and thus essentially transfer monetary sovereignty to the banks and place the state in a one-sided financial dependence on banks and financial markets.

In the UK the law does not prevent the Bank of England from overt monetary financing. After long years of hesitation, the Covid-19 pandemic has now prompted the Bank of England to raise the ways-and-means facility for the government from 0.37 to 20 billion pounds and, if need be, to act as a primary dealer of newly issued gilts.[14]

Regarding the Eurosystem, the ECB should be enabled to follow the English example by amending 123 (1) TFEU: firstly by re-introducing a not too tight ways-and-means facility for member states (as it existed in a number of euro countries before the euro), and secondly by allowing the ECB a primary-dealer role in sovereign bonds to enable monetary financing at least in a declared state of emergency, such as severe natural catastrophes and epidemics, imminent economic collapse, or comparable conditions. This is inspired by national legislation which, under such conditions, permits the temporary suspension of budgetary debt ceilings.[15] So far, a number of courts at national and European levels have sufficiently ruled that they do not consider Art.123 TFEU to be infringed by the ECB’s QE policies.

Direct transfer of central-bank money to the treasury as genuine seigniorage

To ensure that monetary financing of helicopter money is not another variety of deficit spending, three measures have already been mentioned – introduction of CBDC, reintroduction of a government overdraft facility with the central bank, and the central bank also acting as a primary dealer of sovereign bonds in dire straits. In addition, a more far-reaching option ought to be considered, that is, the direct transfer of central-bank money to the treasury as debt-free genuine seigniorage.

On the subject of genuine seigniorage, the following should be borne in mind. Every sovereign state, or community of states, with a monetary authority and a currency of its own, is able to create the fiat money base required by its economy, and does not need to default on debt in its own currency. Of course, this is only true, for one thing, if a state defends its sovereign monetary prerogatives (control of the currency, money creation, and seigniorage), rather than leaving these to the private banking sector, and for another thing, if parliament, the governing Cabinet, treasury and central bank act on the basis of proper public law that satisfies the possibilities and limits of sound finances and sustainable economic development.

Part of this is the functional separation of the monetary state power (normally the central bank) from the budgetary and fiscal powers of the state (parliament, Cabinet, treasury). The monetary power ought to act independently and discretionary, certainly on the legal basis of well-defined tasks, goals and instruments – which is not yet sufficiently the case today.

Under such conditions, there is no reason why newly created money should not be given directly to the treasury, as a transfer of genuine seigniorage. This does not mean unleashing the ‘printing press’, simply, adding, or not adding, to the money supply according to well-defined monetary-policy criteria, giving to the state what is of the state, part of a sovereign prerogative of constitutional importance, framing basic monetary conditions for an open market economy.

Genuine seigniorage is but a blessing for the common good as long as it derives from genuinely monetary considerations on the basis of a central bank’s mandate. If at a certain time the scope of sound money creation does not meet the government’s wishes, the latter, much like today, will have to raise taxes or take up debt on the open market. Equally, not all of the money to be created would be issued as genuine seigniorage. A certain share of the new money can quite conventionally serve short-term monetary re-adjustment measures by loaning the money to banks and maybe other financial institutions, or absorbing it from them.

Even with genuine seigniorage, monetary policy continues to be shaped in reaction to the demand for money. However, creation of sovereign DC must not just one-sidedly accommodate the privileged bank-demand for central-bank reserves, but also include public demand and general economic demand for sovereign DC. Furthermore, rather than literally being driven by the demand for money, a central bank will have to assess the compatibility of the demand for money with the goal variables of its legal mandate (such as foreign exchange value, inflation, asset inflation, financial stability, economic development and employment) – and decide accordingly.

Debt-free issuance of genuine seigniorage

As explained above, under current rules of central-bank accountancy even direct monetary financing will result in credit-and-debt money, represented by a corresponding amount of public debt. But CBDC also could and ought to be created free of debt. This does in no way curtail interest-bearing and redeemable credit and debt in the many financial uses of money. At source, however, in the act of money creation, debt-free sovereign money creation does justice to the fact that money and credit are two different things fulfilling different functions.

The nature of money is not to be an interest-bearing credit-and-debt relationship, but to be an instrument for the settlement of credit-and-debt contracts, an instrument for extending loans and making investments as much as an instrument for redeeming credit, closing positions, paying for a purchase, or making donations, in fact a means of payment. A financial or other economic contract is not a universal means of payment. Of course, the transfer of a contract document – such as a trade bill, stocks and shares – can be used in lieu of money, which however does not make a credit-and-debt document money, that is, a universal means of payment represented by symbolic or informational tokens denominated in currency units.

The treatment of central-bank money and bankmoney by conventional accounting practices distorts the different notions and proper functionality of money and credit.  Money appears as a standing liability of the issuing institution, rather than from the beginning being the token that is transferred as an asset only among whomsoever. The current practice is nothing more than an inappropriate historical relic from times long gone when a banknote or a current account balance was a mere substitute for money, a surrogate used in lieu of money, representing a silver or gold claim of the customer on the bank, and a bank liability to the customer (a promise to pay on demand in silver or gold). Today, however, notes and account balances have long since become money tokens in their own right. Silver and gold are no longer in play, and coins and notes have become fiat money just like electronic or digital money. The current accounting standards, however, rather than treating money as a token and asset only, fixate the outlived practice which makes it impossible not to treat money as credit and debt.

As explained above, ‘consolidating’ sovereign money (notes, reserves, CBDC) on a central-bank balance sheet as a non interest-bearing perpetual credit claim and liability is a pseudo-solution. A zero-coupon perpetual consol, in other words, a debt-free debt position, is a most peculiar creature after all.

As an alternative, it was suggested to treat sovereign money as a special category of central-bank equity, sort of a currency area’s monetary endowment. That sounds good, but is just another pseudo-solution distorting the notion and functionality of equity.

A hint to how debt-free sovereign money can be accounted for is given by the treatment of coins. These are bought by the central bank from the treasury, and entered as an asset into the central bank’s books in return for a reserves-entry into the treasury’s transaction account. The reserves represent a standing liability on the central bank’s balance sheet, and this is still part of the outlived procedure. On the treasury’s side, however, the coins are issued free of debt, and their sale to the central bank results in a swap of assets – reserves for coins. Furthermore, the coins enter the central bank’s balance sheet ‘from outside’ as a result of a business transaction, not as a purely endogenous balance sheet entry. The coins are a monetary asset that keeps circulating as an asset, independently of the respective holder or kind of transaction.

A plan devised to generalise that principle dates back to David Ricardo in his 1824 Plan for the Establishment of a National Bank. Ricardo was the most prominent representative of the Currency School, opposing the Banking School of the time. According to his concept, the Bank of England was subdivided into an issue department, responsible for the note issue, and a banking department, concerned with the central bank’s banking operations. The separation of the note issue from the banking operations exists to the present day, although it never gained much importance because of its inconsistent implementation, notably, leaving bank deposit money untouched outside the arrangement – paving the way to the systemic dominance of bankmoney today.

The currency-theoretical approach of separating money and credit, in other words, separating the creation of money from banking and finance, can today be implemented in a modernised way by separating a money-creating currency register from the balance sheet of a central bank’s operational banking activities. The currency register would create the additions to sovereign money (solid cash as long as it exists, reserves, CBDC, the latter possibly of not just one type). The currency register isn’t a commercial trading enterprise. The register is publicly accountable and keeps books, but no balance sheet. The register would issue newly created money either into the central-bank balance sheet as a non interest-bearing but callable assignment for financial uses, or transfer the money to the treasury as genuine seigniorage free of interest and redemption.[16]

Final remark

To some readers the things discussed here are likely to be too far out of the box. But things do not have to happen all at once. More importantly: there is a perspective. For one thing, the suggested measures would make monetary financing of helicopter money an ordinary integral part of the money system. In addition, this opens up the perspective of how the present crisis-ridden bankmoney regime will eventually make way for central-bank sovereign money, whereby the central banks are no longer only ‘bank of the banks’, but also become ‘bank of the state’ again.

Originally posted on Sovereign Money


[1] Adair Turner. 2015. Between Debt and the Devil. Money, Credit and Fixing Global Finance, Princeton University Press.

[2] Milton Friedman (ed). 1969. The Optimum Quantity of Money, New York: Aldine de Gruyter, 1–68, 4.

[3] Ben Bernanke. 2016. What tools does the Fed have left? Part 3: Helicopter Money, The Brookings Institution. – Cemal Kara­kas. 2016. Helicopter money: A cure for what ails the euro area? European Parliamentary Research Service, Briefing April 2016. – Willem H. Buiter. 2014. The Simple Analytics of Helicopter Money. Why It Works – Always, Economics, Vol. 8, August 21 2014, 1–51.

[4] Willem Buiter and Sony Kapoor. 2020. To fight the COVID pandemic policymakers must move fast and break taboos, voxeu.org, 6 Apr 20.

[5] Positive Money. 2015. QE4P (Quantitative Easing for People), www.qe4people.eu. – Eric Lonergan/Stan Jourdan. 2016. Citizens’ Monetary Dividend. Upgrading the ECB’s toolkit, QE4P Policy Brief, Sep 2016.

[6] Stanislas Jourdan. 2020. Helicopter Money as a Response to the Covid-19 Recession in the Eurozone, Brussels: Positive Money Europe, March 2020.

[7] Geoff Crocker. 2020. Basic Income and Sovereign Money. The Alternative to Economic Crisis and Austerity Policy, Palgrave.

[8] Also cf. Josh Ryan-Collins / Frank van Lerven. 2018. Bringing the helicopter to ground: a historical review of fiscal-monetary coordination to support economic growth in the 20th century, Working Papers PKWP1810, Post Keynesian Economics Society (PKES).

[8b] Cf. Michael Hudson. 2018. And forgive them their debts. Lending, Foreclosure and Redemption From Bronze Age Finance to the Jubilee Year, Dresden: ISLET Verlag.

[9] Source: FRED Economic Data, Federal Reserve of St. Louis). Federal Reserve Bank of New York.

[10] Source: Bruegel Institute, Excess Liquidity and Bank Lending Risks in the Euro Area, Monetary Dialogue September 2018.

[12] Joseph Huber. 2019. Digital currency. Design principles to support a shift from bankmoney to central bank digital currency, real-world economics review, issue no. 88, 10 July, pp. 76-90. – Id. Dominant Money, part II – The upcoming rise of sovereign digital currency, SSRN-id3513411, Feb 2020.

[13] BIS. 2018. Central bank digital currencies, prep. by the BIS Committee on Payments and Market Infrastructures, Basel: Bank for International Settlements, March 2018. – Meaning, Jack / Dyson, Ben / Barker, James / Clayton, Emily. 2018. Broadening narrow money: monetary policy with a central bank digital currency, Bank of England Staff Working Paper No. 724, May 2018. – Kumhof, Michael / Noone, Clare. 2018. Central bank digital currencies – design principles and balance sheet implications, Staff Working Paper No. 725, May 2018, London: Bank of Endland – Sveriges Riksbank. The Riksbank’s E-Krona Project, Report 1 (2017), Report 2 (2018), Stockholm.

[14] www.bankofengland.co.uk/news/2020/april/hmt-and-boe-announce-temporary-extension-to-ways-and-means-facility. – Financial Times, Bank of England to directly finance UK government’s extra spending, by Chris Giles and Philip Georgiadis, April 9, 2020. – ING Bank:  https://think.ing.com/articles/ bank-of-england-and-treasury-announce-temporary-monetary-financing.

[15] The proposal of a temporary and well-specified suspension of Art.123 TFEU in a state of emergency has been made by Klaus Karwat, chair of Monetative eV, Berlin.

[16] For further details see: The case for a central-bank currency register. Accounting for sovereign money on banks’ and central banks’ balance sheets, sovereignmoney.site/central-bank-currency-register-for-accounting-for-sovereign-money.