3.6  What would a sovereign money system look like?

/67/ If today's fractional reserve system cannot be said to be sovereign, what then would a sovereign money system look like? With regard to its constitution, an advanced modern sovereign-currency system would fully be based upon the three components of the monetary prerogative as laid down above. The entire money supply would be created and issued by an independent state body.[1] In the US this might be an independent currency board under the roof of the treasury. In Europe the most obvious candidates are the national central banks or the ECB, respectively, in the case that the euro survives its present debacle. This would then be a fourth branch of government, the monetary state power, complementing the legislative, executive and judicial powers. It would finally do what today's central banks are supposed to but are unable to, because under fractional reserve banking they have lost control.

Central banks, as guardians of their nations' monetary sovereignty, should no longer be seen as the special commercial banks as which they once began, but as the monetary state authority they have increasingly become – the monetary state power, institutionally separate but democratically involved and held responsible, comparable to the judiciary in that it acts according to the law and its specific legal mandate, but on that basis independent in pursuing its monetary policies. The limitations it has to observe will have to be specified under various aspects:
growth potential of the economy at full capacity
- stability of domestic levels of consumer prices, interest rates, external exchange value of the currency, balance of payments
- stability of asset prices and ratio of financial assets to nominal and real GDP
- fiscal rules regarding government budgets, maybe even including a government expenditure-to-GDP target.

The division of powers between central bank and parliament/cabinet would maintain the separation of monetary and fiscal policy. The central bank decides how much money will be appropriate in the short and long term, and how the money is put into or withdrawn from circulation. /68/ The central bank should leave the bigger, long-term additions to the stock of money as genuine seigniorage to the government. Parliament and cabinet in turn have no right to demand money from the central bank or to interfere in monetary policy. Seigniorage would clearly be much higher than today, allowing the funding of about 1–6% of total public expenditure depending on growth and the size of government expenditure. If, in addition to seigniorage, direct central-bank credit to the government or direct buying of sovereign bonds were allowed, the central bank is not obliged to lend the money demanded. It is free to grant loans if this is economically justified and does not violate legal limits. The central bank as much as the treasury would be duty bound, under threat of penalty, to make sure that what they are doing keeps within the limits set by law. As long as the monetary power on the one hand and treasury, cabinet and parliament on the other act by the rules, this will not infringe the separation of monetary and fiscal policy.

At the same time, the two-tier functional division between central bank and banks would include the separation of money creation from banking. The central bank's task is to create the national money supply, to keep control of its quantity and to manage foreign reserves. The banks, ceteris paribus, would do largely the same as they do now, except creating primary credit, i.e. create by their own fiat and discretion the money supply on which they operate. The sovereign privilege of being able to spend money without having previously taken it in will be reserved for the central banks. Commercial banks will be in a position comparable to that of anyone else. They can spend, lend or invest to the degree they take up money from customers and companies, the interbank market and, if need be, the central bank. Banks would be what they are supposed to but aren't today: intermediaries between savers and borrowers, between upstream and downstream investors. It is part of their task to finance investment, but they should not to be investors themselves, at least not to a large extent.

Bank money would not exist anymore, just sovereign currency on account, on mobile storage media and on hand. This too would involve debiting and crediting in the mere booking sense of transferring existing money. Would it still involve primary loaning and thus interest-bearing debt money? That depends. If additions to the money supply are lent from the central bank to banks, /69/ just as reserves are lent today, this would be interest-bearing sovereign debt money. To a degree this may persist as an instrument of short-term monetary policy. If, by contrast, long-term additions to the money supply (in accordance with well-defined monetary and fiscal policies) were transferred to the public purse in order to be spent into circulation through government expenditure, this would not be a loan but simply debt-free sovereign currency.

Debtlessness of sovereign money can be mirrored in central banks' balance sheet in that banknotes and digital money are in future accounted for in a way analogous to how treasury coin is accounted for today. There are some variants of how this can be done, as much as there are variants of accounting for new money in a conventional way.

Conventional bookkeeping may insist on treating debt-free sovereign money formally like a 'credit', even though free of interest and without specified maturity. It would thus be entered as, say, permacredit to the treasury and as a liability of the central bank. Scarcely anyone would worry much. For practical and statistical reasons those 'liabilities' would be subdivided, similar to the case today, into 'coin in circulation', 'notes in circulation', 'digital currency in circulation'. It might nonetheless be more appropriate to enter debt-free permacredit in a central-bank balance sheet not as a liability but as part of a nation's monetary equity, say as a national monetary endowment which the money-issuing authority can write out to the state coffers.

In a certain sense, though, even debt-free money is embedded in a context of econo­mic obligations. This does not involve a banking debt but a social duty as expressed in modern principles or values such as work, performance, achievement and merit. Without human effort, labour, technical efficacy and the regenerative forces of nature there is no economic product to sell and buy, and no purposes in which to invest and build up capital. Money would have no function and be worthless. Debt-free sovereign money may not be a promise to repay, but it is a promise to be productive, and a promise to keep control of the money supply so that there is neither too much nor too little money around in correspondence with actual levels of productivity.


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[1] The components of a sovereign currency system listed here, and additional specifications, are shared by a growing number of monetary reform approaches. Cf. footnote 41, p31.