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Monetary reform approaches are often related to changes in the system of seigneurage, i.e. monopolies on the right to issue money.

Reforming the system: abolishing seigneurage


Seigneurage is the privilege of commercial banks to create money. It is a privilege that should be abolished.

1. Herman Daly

"Daly broached an area of social wealth that is rarely explored -- the private privilege of issuing money, called seigniorage. Historically, this was the king's prerogative that was later passed to the commercial banking sector. Some 95 percent of the US's money supply exists in the form of demand deposits and loans made by banks. Under our system of fractional reserve banking, which allows banks to retain only a small fraction of money on hand as a reserve against money lent out, banks are able to reap enormous private profits through their seignorage privileges. Why not gradually raise the reserve requirement to 100 percent, asked Daly, and reap some public gain from the ability to create money? Daly conceded he might be regarded as a "monetary crank" in making this proposal, but cited some illustrious economists of the 1920s who agreed with him. (Note: James Robertson, a progressive-minded economist in Great Britain, has also proposed reforms along these same lines. See his speech, "The Alternative Mansion House Speech," by James Robertson of the New Economics Foundation, London, and his report, with Joseph Huber, "Creating New Money.")

2. Reforming the Seigneurage, James robertson


"The necessary reform is simple - but our minds should not be repelled by its simplicity! There are two sides to it.

(1) Central banks should create the amount of new non-cash money (as well as cash) they decide is needed to increase the money supply. They should credit it to their governments as public revenue. Governments should then put it into circulation as public spending. In deciding how much new money to create, central banks should operate with a high degree of independence from their governments - as the Monetary Policy Committee of the Bank of England now does.

(2) It should be made illegal for anyone else to create new money denominated in the official currency. Commercial banks will then be excluded from money creation. They will be limited to credit-broking as other financial intermediaries are - borrowing, but no longer creating, the money they need to lend.

This reform will restore "seigniorage", in a form adapted to the conditions of the Information Age. That is to say, it will restore the prerogative of the state to issue money, and to capture as public revenue the income that arises from issuing it, in an age when most money has become information. Originally, seigniorage was the revenue enjoyed by monarchs and local rulers from minting coins. It reflected the fact that the coins were worth more than the costs of producing them. As, over several centuries, the physical characteristics of money have changed from metal to paper to electronic bits and bytes, and as banking practices have developed, the relative importance of that original source of seigniorage has gradually dwindled. Now that almost all money takes the form of electronic entries in computerised bank accounts, extending the traditional principle of seigniorage to non-cash money will correct the anomaly that has grown up over the years.

The arguments for this monetary reform are not limited to the contribution it will make to public revenue, considerable though that will be. As the report explains, it will have beneficial social and environmental effects. It will be very beneficial for the economy as a whole. For example, it will tend to bring about lower interest rates and lower inflation; and it will tend to create greater economic stability, by enabling the central bank to smooth out the peaks and troughs of business cycles more effectively than it can do today. It will also help to clarify monetary statistics, monetary definitions and monetary terminology. This is a crucial point. The distinction between means-of-payment money and store-of-value money - between the functions of sight deposits and savings deposits - has become blurred in recent decades. The result is that the concepts and definitions on which monetary understanding and policy-making are based are now even more obscure than they were before. It is not at all clear what is now included in the "money supply". The different definitions of money - M0, M1, etc, up to M4 - are abracadabra to most people. One might imagine that a monetary priesthood had deliberately set out to conceal from citizens and politicians of democratic countries how the money system works, and how it could be made to work better for the common good. The proposed reform will mean that the whole stock of national currency circulating in the economy will have been issued by the central bank. It will include all the non-cash money in everyone's current accounts, together with the cash which everyone holds. It will be easy to calculate how much of it there is. It will no longer be necessary to juggle with M0, M1, M2, M3, M3 extended, M4, and so on. There will simply be the one amount of plain money M. Everyone - and that includes politicians, officials, bankers and monetary experts, as well as a growing number of citizens, bank customers and taxpayers - will be able to understand better than today how the system works. As befits the citizens of a democracy, we will be better able to evaluate and discuss the monetary and financial policies and policy options which are presented to us. This reform will mark an essential further step towards what, at the Mansion House last year, Chancellor Gordon Brown called "transparency in policy-making, involving an open system of decision-making in both monetary and fiscal policy".

3. More Information

The Creating new Money report is at

A shorter review, at

A summary here, at

FAQ ON DEBT FFEE money, at

And check these many interesting monetary reform links, at

Books and Reports:

Creating New Money is available for £7.95 from The New Economics Foundation, 3 Jonathan Street, London, SE11 5NH. Tel: 0207 820 6300.

PROSPERITY: Freedom from Debt Slavery is a 4-page monthly journal which campaigns for publicly-created debt-free money. PROSPERITY is edited and published by Alistair McConnachie and a 12-issue subscription is available for £15 payable to PROSPERITY at 268 Bath Street, Glasgow, Scotland, UK, G2 4JR. Tel: 0141 332 2214; Fax: 0141 353 6900, [email protected]

The Grip of Death: A study of modern money, debt slavery and destructive economics by Michael Rowbotham, [Jon Carpenter Publishing, 1998] and Goodbye America! Globalisation, debt and the dollar empire by Michael Rowbotham, [Jon Carpenter Publishing, 2000] both available from PROSPERITY.