What are Economists Saying About Iceland’s Sovereign Money Proposal?

A study recently commissioned by the Icelandic prime minister, Sigmundur Gunnlaugsson, and written by Frosti Sigurjonsson, displays an accurate analysis of how banks create money and endorses Sovereign Money proposals. But what are people saying about the report? Of course there are criticisms of the report and some of the usual misunderstandings, but most people think it’s a proposal that merits serious consideration:

Iceland’s Prime Minister Gunnlaugsson said:

“The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy.”

Economists at RBS released a note stating:

“The key idea is a new Sovereign Monetary System, where only the central bank is responsible for money creation. The idea makes sense…Separating the creation of money and allocation of money powers could safeguard against excessive credit creation, and reduce incentives for commercial banks to create more credit to make private gains…Iceland’s proposal is worth exploring.”

Lord Adair Turner, Former Chairman of the FSA, writes:

“It proposes a radical structural solution to the problems we face. The feasibility and merits of that specific solution need to be debated. But whatever the precise policies pursued, they must be grounded in the philosophy which this report proposes – that money creation is too important to be left to bankers alone.”

The Financial Times writes:

“Having decided against scrapping its currency, the government in Reykjavik now mulls a complete ban on its banks creating krona when they issue new loans…In recent years Scandinavian central bankers have shown the same dauntless appetite for exploration that once saw Nordic ships fan out across the globe. In this spirit Reykjavik should give sovereign money a shot. Nations far bigger and meaner than Iceland have struggled to come to grips with financial excess through conventional means. As well as showing other countries a potential way forward, by bringing the axe down on fractional reserve banking the Icelanders might just regain some control over their economic destiny.”

The Economist writes:

“Under the proposed sovereign money system, the Central Bank of Iceland would increase the money supply in proportion to growth and consistent with the mandated inflation target. Direct control of the money supply would remove the need for traditional policy instruments designed to manipulate commercial banks’ incentive to create money, such as policy interest rates and regulatory lending limits. The government would then put the money into circulation via sovereign bond purchases, and/or fiscal measures. To avoid conflicts of interests leading to the oversupply of money, decisions over allocation would be made by a committee independent of the government… If successful, Iceland’s experience could serve as an important case study for global monetary reform.”

For The FT Alphaville, Matthew Klein:

“Sigurjonsson’s plan for Iceland is an intriguing beginning that hopefully will lead to more debate about the future of the financial system. If implemented, it would dramatically improve the ability of central bankers to stabilise nominal spending without distorting the composition of economic activity.”

The Telegraph states:

“Iceland’s government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance…The key idea is a new Sovereign Monetary System, where only the central bank is responsible for money creation. The idea makes sense…Separating the creation of money and allocation of money powers could safeguard against excessive credit creation, and reduce incentives for commercial banks to create more credit to make private gains…Iceland’s proposal is worth exploring.”

Edward Hadas of Reuters wrote:

“Radical bank reform is mostly endorsed by academics, commentators and crackpots. So it is certainly worth taking note when a senior person in a real government calls for a top-to-bottom makeover of banks and the monetary system…Still, the Sigurjonsson plan is a plausible blueprint for better banking and Iceland is a good place to start. The population may be embittered enough to try something new and the established global powers of banking would probably tolerate an experiment in this miniature economy.”

Frosti Sigurjonsson, the MP who wrote the report stated:

“Iceland, being a sovereign state with an independent currency, is free to abandon the present unstable fractional reserves system and implement a better monetary system. Such an initiative must however rest on further study of the alternatives and a widespread consensus on the urgency for reform.”

Positive Money is really thrilled that the Prime Minister of Iceland is considering these proposals. And we are asking people to sign and share a petition, calling on the next Prime Minister in the UK to do the same.

Please sign our petition to tell the future Prime Minister of the UK that money creation should only be used in the public interest. And if you’ve signed it already, share it your friends on Facebook and Twitter. And/or send them an email – here’s a simple text you can copy:

I’ve signed this petition to prevent banks from creating money. I think you’ll find it interesting – have a look and consider to sign the petition too! http://bsd.wpengine.com/petition