Sovereign Money

Discussion

A. Renner et al. :

"In establishing a global economy where biophysical resources can hope to be distributed sustainably and equitably, there must, essentially, exist some form of democratic control over new money issuance methods. As discussed cogently by Huber (2017) and Huber and Robertson (2000), for example, ideas of “sovereign money” should be carefully considered as legitimizing alternatives to the modern money system. Sovereign money involves, first, declaring in law that all demand deposits are legal tender and that the current accounts of bank customers be taken off the balance sheets of banks—commercial banks must manage the current accounts of customers separately from their own money. Of course, under a sovereign money paradigm, it would still be possible for commercial banks to make loans by utilizing their own vault money or assets, independent from demand deposit accounts. Second, sovereign money involves the reorganization of central banks or treasuries or the establishment of a completely new organization, such that organization is given the exclusive right to create new money. The idea of the latter aspect is that said newly organized entity puts new money into circulation by spending it through bureaucratic administrative channels. Alternatively, following Huber and Robertson’s (2000) expansion on possible ways of introducing new money into circulation: (1) the newly organized entity puts money into a current account, which it manages for its government, (2) the government spends new money to further public interests, expenditures such as education and the redemption of national bonds or tax-reduction, and (3) the government is enabled to make interest-free loans to local governments for development purposes. The most pressing, fundamental point to emphasize is the need to enhance each citizen’s entitlement, such that the people share both the benefits and the costs of money issuance, an act that ultimately results in communal liability.

Such ideas on money sovereignty are simple enough, yet they appear to improve on the original ideas laid down in Fisher’s (1936) 100% Money in two respects. First, Fisher regarded cash as “actual physical money”, which was supposed to play the traditional role of gold. Under the current situation of incessant, large-scale money creation and annihilation by commercial banks, Fisher’s conceptualization of money seems narrow. Second, through changes in the prime interest rate, the bank reserve system was assumed in Fisher’s work to be an effective tool of controlling the money supply. It is now well known that such changes do not work to regulate the money supply.

Perhaps, the most challenging issue to be resolved before ideas related to “sovereign money” can possibly be realized is how to ascertain the actual money supply’s legitimacy and fairness. Consider how, whenever a niche for expansion of bureaucratic power emerges within a political institution, that niche tends towards a rapid occupation by newly created bureaucratic activities. Hayek (1990), one of the most trenchant supporters of free banking policy, heavily criticized the unnecessary expansion of public expenditure through government money creation. He identified government monopoly as the source of unnecessary inflation. The experience of reconstruction following the Great Tohoku-Kanto Earthquake in Japan illustrates some of the difficulties involved. Among reconstruction efforts, in total, the Board of Audit of Japan identified as inappropriate 326 out of 1401 “reconstruction projects”, totaling ¥1.3 trillion. More than 12% of the reconstruction fund was ultimately spent on projects having nothing to do with great earthquake damages (Mayumi 2020). Such a situation is common following the injection of a large quantity of general liquidity and, in this way, discussion on the distribution of newly created sovereign money can be understood as crucial. How to achieve a subtle balance between the production of goods and services on the one hand and virtual wealth, in Soddy’s sense, on the other, without disrupting the general price, is a moot point. This holds not only for those goods and services that constitute gross domestic product accounts, normally considered by economists such as Hayek, but also for other items such as land-related assets and financial assets."

(https://link.springer.com/article/10.1007/s10018-021-00309-7)