Sovereign Money – Common Critiques

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There are a number of common objections and concerns with the proposal to switch to a sovereign money system. Here we deal with the 3 areas of objections:

  1. “It won’t work”

  2. “It’s unnecessary”

  3. “Even if it works it will be damaging”




A very common criticism or misunderstanding of Sovereign Money proposals is that they seek to prevent banks from acting as credit intermediaries. As explained in Jackson & Dyson (2013), banks would lend in a sovereign money system, but they would do so by borrowing pre-existing sovereign money (originally created by the central bank) from savers and then lending those funds to borrowers. This would be different from the current system, where banks simply credit the borrower’s account and create new money in the process. In other words, credit intermediation between borrowers and savers would be the very function of the lending side of a bank in the sovereign money system.



Definitions of maturity transformation tend to focus on the banking sector’s role in utilising short-term sources of funding to finance long-term lending. This maturity transformation will still take place in a sovereign money system. Sovereign Money proposals have bank liabilities – Investment Accounts – set at a range of maturities, from a minimum of 4 weeks (although the regulator could set a higher minimum) to a number of months or years. So banks’ loans could have maturities ranging from a few months, to a number of years. In the extreme, mortgage loans would have maturities of 25 years or more, although in practice many mortgages are refinanced earlier and the average maturity of mortgage loans is as little as 7 years. Such a business plan would see new investments and repayments on existing loans being used to fund new loans and Investment Account withdrawals.

It is important to remember that loan repayments in a Sovereign Money system would not result in the destruction of money. In the current monetary system, the deposits used to repay bank loans disappear or are ‘destroyed’ as a result of the accounting process used to repay a loan. In contrast, in a Sovereign Money system debt repayments would not result in money being destroyed. Instead, loan repayments would be made by debtors transferring Sovereign Money from their Transaction Accounts to the Investment Pool account of their bank. The bank would now have re-acquired the Sovereign Money that it originally lent on behalf of its investors. Therefore investors looking to deposit savings on a short-term basis, which may have been used to make a long-term loan, would receive their return from the repayments of the borrower.

More generally, maturity transformation can be undertaken by organisations other than banks. The peer-to-peer lending market is also developing a range of loan intermediation models involving internal intra-lender markets for loan participations, which could be adopted by banks to further enhance the flexibility of sovereign money financing. The securities markets also do maturity transformation every day. Companies issue long-term liabilities which are bought by investors, and stock and bond markets enable investors to liquidate their investments instantly by selling them to others. Banks are perhaps historically regarded as providing an essential service to borrowers whose liabilities are not marketable (i.e. they cannot be traded in financial markets), but virtually all liabilities can now be converted into marketable securities through the intermediation of banks, and that is not something that the sovereign money proposals will change.



In 1979, attempts were made principally by the US and UK authorities, to manage the economy by controlling the amount of money created by the central bank. This was a failure, because it was based on the neo-classical fallacy that central banks determine the quantity of central bank reserves and the banking sector multiply that amount into a larger amount of broad money (bank deposits), to a multiple determined by the reserve ratio.

Yet, as Keynes had recognised almost fifty years earlier, banks were able to create as much broad money as they pleased so long as they did so in step. This is because reserves are primarily used for payment settlement purposes amongst banks themselves. Only banks and building societies have access to Central Bank accounts, meaning reserves cannot leave the system. If banks create large amounts of broad money in step, then the payments between them will cancel out, the net settlements between them will remain the same, and no additional reserves will need to be injected into the system. In this system, it is a mathematical certainty that if one bank is experiencing a shortage of reserves, another bank will have a surplus. As long as the banks with the surplus are willing to lending to those experiencing a shortage, new broad money can be continuously created. Central banks (as part of the state) can’t establish control of the money supply (through restricting the supply of reserves) when it is commercial banks that create broad money through lending.

The sovereign money proposals address this problem by preventing banks from creating demand deposits, liabilities, which function as the means of payment in the modern economy. Instead, money, in the sense of the means of payment, would exist as liabilities of the central bank, and could therefore be created (or destroyed) only by the central bank. This would prevent loss of control of the money stock and provide the central bank with absolute and direct control of the aggregate of these balances.



This argument runs as follows: “A centralised committee can’t possibly make a decision as complex as how much money is needed in the economy as a whole.” This is a problem that applies to any monetary policy regime in which there is a central bank, including the existing one in which the central bank sets the base rate of interest. It is therefore not an argument against a Sovereign Money system per se, but an argument against the existence of central banks.

In practice, the Monetary Policy Committee’s decision-making process on the rate of growth of money creation would work in the same way that decisions on interest rate policy are currently made. If, in the current system, the MPC would vote to lower interest rates, then in a sovereign money system they would vote to increase the rate at which money is created. The opposite also applies: if they would vote to raise interest rates (to discourage borrowing and therefore reduce money creation by banks), then in a sovereign money system they would vote to slow the rate at which money is created. As with the decision to alter interest rates, the Committee would need to respond to feedback from the economy and adjust their decisions on monthly basis. But whereas the setting of interest rates affects the economy through a long and uncertain transmission mechanism, money creation directed through government spending leads directly to a boost in GDP and (potentially) employment. The feedback is likely to happen much faster and therefore be easier to respond to.

Secondly, the argument is also based on the assumption that banks, by assessing loan applications on a one-by-one basis, will result in an overall level of money creation that is appropriate for the economy. Yet, during the run up to the financial crisis, when excessive lending for mortgages pushed up house prices and banks assumed that house prices would continue to rise at over 10% a year, almost every individual mortgage application looked like a ‘good bet’ that should be approved. From the bank’s perspective, even if a borrower could not repay the loan, rising house prices meant that a bank would cover its costs even if it had to repossess the house. In other words, even if the loan would not be repaid and the house repossessed, the bank would most likely not suffer a loss, as the repossessed house was consistently increasing in value. So it is quite possible for decisions taken by thousands of individual loan officers to amount to an outcome that is damaging for society.

More importantly is the system dynamics of such an arrangement. When banks create additional money by lending, it can create the appearance of an economic boom (as happened before the crisis). This makes banks and potential borrowers more confident, and leads to greater lending/ borrowing, in a pro-cyclical fashion. Without anybody playing the role of ‘thermostat’ in this system, money creation will continue to accelerate until something breaks down.

In contrast, in a sovereign money system, there is a clear thermostat to balance the economy. In times when the economy is in recession or growth is slow, the MCC will be able to increase the rate of money creation to boost aggregate demand. If growth is very high and inflationary pressures are increasing, they can slow down the rate of money creation. At no point will they be able to get the perfect rate of money creation, but it would be extremely difficult for them to get it as wrong as the banks are destined to.

It is also important to clarify that in a Sovereign Money system, it is still banks – and not the central bank – that make decisions about who they will lend to and on what basis. The only decision taken by the central bank is concerning the creation of new money; whereas, all lending decisions will be taken by banks and other forms of finance companies.



In a Sovereign Money system the Monetary Policy Committee does not attempt to moderate inflation by adjusting interest rates. Instead, it adjusts the rate of money creation directly, by instructing the central bank to create money at a certain percentage growth rate. Any newly created money is transferred to government, and is then spent directly into the real economy, either through government spending or through direct transfers to citizens, or tax cuts. There is a much more direct and certain transmission mechanism between changes in monetary policy (i.e. the rate of money creation) and the impact on the real economy.

For this reason, we cannot see any reason why it would be harder to judge a central bank that controls money creation directly than one that relies on indirect and uncertain means of influencing the economy, in the form of short-term interest rates.



In a sovereign money system banks provide two essential functions, both of which can be highly profitable:

1) The payments system. Billions of pounds are transferred between accounts every single day. MasterCard, Visa and various other payment networks all run successful businesses by providing payment systems. It is unrealistic to think that banks would be unable to find a way to generate a profit given the fact that they sit at the centre of the national payments system.

2) The lending/saving function. Banks would perform this function just like any other part of the financial sector, by getting funds from savers and investing them in financial assets and loans. The rest of the financial sector is profitable. It seems unrealistic to think that banks cannot also generate a profit from providing this service. Indeed, crowd-funding and peer-to-peer lending manage to make profits by extending savings to willing borrowers.

Thus, there is no reason to think that banks in a sovereign money system wouldn’t be able to make similar profits from providing the exact same service.




Governments currently guarantee the liabilities of banks by promising bank customers that they will be reimbursed, from taxpayer funds, if the bank fails (i.e. £85,000 per person per bank). By reducing the incentives for bank customers to ‘run’ on the bank, critics may argue that Sovereign Money is unnecessary.

However deposit insurance does not make the system safer, it actually makes it riskier.

1) It removes the incentives for bank customers to take an interest in the activities of their bank.

2) It leaves banks free to take whatever risks they like without scrutiny from customers.

3) The role of monitoring is therefore left exclusively to the under-resourced regulator.

4) Bank customers, staff and shareholders benefit from the upside of bank investments, but the taxpayer takes the ultimate losses once the risk taking leads to a bank failure.

5) Deposit insurance leads to greater risk-taking by the banks (moral hazard), and therefore greater risk of failure.



This argument proposes that banks would not have taken so much risk without the safety nets provided by governments and central banks. Without these safety nets, those banks that were mismanaged would
 have been liquidated and would have made way for new market entrants with better business practices. The argument makes sense, but the policy prescription of removing deposit insurance and lender of last resort whilst keeping the current structure of banking is a dead end. If deposit insurance (the £85k on bank balances) were officially withdrawn, the first rumour of potential problems at a large bank would be enough to encourage a run on that bank. In such a situation, the government would immediately re-instate deposit insurance (in the same way that deposit insurance caps were raised or removed during the financial crisis). Likewise, central banks are unlikely to have the nerve to refuse to lend to a bank in distress, knowing that the failure of one bank could rapidly cause a breakdown in the payments system.

These problems will remain as long as the payment system consists of liabilities of commercial banks, because any bank failure threatens the payment system and therefore the entire real economy. A sovereign money system tackles this problem by separating the payments system (made up mainly of Transaction Accounts) from the risk-taking activities of banks, and allows taxpayer-funded safety nets to be removed without risking a panic in the process.



The better regulation view assumes that regulators actually have control over what banks do. This is an extremely optimistic view, for a number of reasons:

1) The banking sector has far more funds and resources at its disposal than any public body designed to regulate it. Therefore, banks would be able to mobilise substantially more resources for bypassing certain policy reforms, under the guise of financial innovation, than regulators would have in order to prevent them from doing so.

2) If regulatory policies are somewhat successful, as in 1950s and 1960s, their role can be downplayed by lobbyists and eventually removed on the grounds that such restrictions were never required to begin with.

3) The financial system is presently so complex (compared to the 1950s-1970s) that it is becoming increasingly more difficult to regulate.

4) Only regulating and not restructuring, will most likely result in a more convoluted financial system, making it even more difficult regulate.

5) Small banks cannot cope with huge amounts of regulation, in other countries this has resulted in small banks being merged with bigger banks, an unintended consequence.

6) The problems with the current monetary set-up are systemic. What is needed is systemic change, not a number of new rules that will keep the current inherently unstable system intact.

As Andy Haldane at the Bank of England has said, what is needed is greater simplicity: banks that can fail without threatening the payments system or 
calling on taxpayer funds. Our approach ensures that private risk-taking remains private, and losses cannot be socialised. That said, any measures to change regulations to direct more credit and lending to the real economy would be beneficial.




Some scrutiny from bank customers is important. We do not think that the average Investment Account holder will spend their time poring through the bank’s financial statements. However, the fact that Investment Account holders must take some risk does create the opportunity for banks to differentiate themselves − based on the types of investment opportunities they offer to the public. This is in contrast to the current situation, in which all banks offer liabilities that are underwritten by the government and therefore ‘risk-free’, and simply compete by offering the highest interest rates.

The idea that bank deposits are somehow special and must be protected from the risk of loss seems rather myopic, as it overlooks the fact that the majority of most people’s wealth is invested in financial assets (or property) that is not protected. If we believe that no bank deposit should ever lose money, why does the same argument not apply to those who invest their pensions in the stock market, or in buy-to-let property? In addition, other forms of finance such as peer-to-peer lending are showing rapid signs of growth despite not being insured by the government.

Investment Accounts in a Sovereign Money system would carry varying degrees of risk, and would not be guaranteed by the government. Investment Account holders would need to choose their respective desired level of risk at the point of opening the Investment Account. The terms of the account would explain how any losses on the underlying investments are split between the bank and Investment Account holders collectively. Losses incurred by the bank will eat into its loan loss provisions and own capital. Losses passed onto Investment Account holders will reduce the balance of their accounts.

For example, the low-risk low-return accounts may say that the bank would take the losses up to 7% of the value of their Investment Accounts (an amount that should be covered by loan loss provisions plus own capital), whilst the customers would take losses proportionately on any amount past this point. In contrast, on higher-risk accounts, which may fund more speculative activities, the terms may be that any losses are split equally between the bank and the Investment Account holders.

The noteworthy points are: a) Investment Account holders would be able to choose how much risk they want to take, and that b) in the worst case scenario, Investment Account holders may end up losing part of their investment.



The basic premise of this argument is that removing the banking sector’s ability to create money will reduce its capacity to make loans, and as a result the economy will suffer. However, this ignores several crucial issues: 1) The recycling of loan repayments coupled with savings would be sufficient to fund business and consumer lending as well as a non-inflationary level of mortgage lending. 2) There is an implicit assumption that the level of credit provided by the banking sector today is appropriate for the economy. Banks lend too much in the good times (particularly for unproductive purposes) and not enough in the aftermath of a bust. 3) The argument is based on the assumption that bank lending primarily funds the real economy. However, loans for consumption and to non-financial businesses account for as little as 16% of total bank lending. The rest of bank lending does not contribute directly to GDP. 4) Inflows of sovereign money permit the levels of private debt to shrink without a reduction in the level of money in circulation, disposable income of households would increase, and with it, spending in the real economy – boosting revenue for businesses. 5) If there were a shortage of funds across the entire banking system, particularly for lending to businesses that contribute to GDP, the central bank always has the option to create and auction newly created money to the banks, on the provision that these funds are lent into the real economy (i.e. to non-financial businesses).



Some argue that a Sovereign Money system would be inflationary or hyperinflationary. There are a number of reasons why this argument is wrong: 1) Money creation can only become inflationary if it exceeds the productive capacity of the economy (or if all the newly created money is injected into an area of the economy that has no spare capacity). Our proposals state that the central bank would have a primary mandate to keep prices stable and inflation low. If money creation feeds through into inflation, the central bank would need to slow down or cease creating new money until inflationary pressures fell. 2) Hyperinflation is typically a symptom of some underlying economic collapse, as happened in Zimbabwe and Weimar Republic Germany. When the economy collapses, tax revenues fall and desperate governments may resort to financing their spending through money creation. The lesson from episodes of hyperinflation is that strong governance, checks and balances are vitally important to if any economy is going to function properly.. Hyperinflation is not a consequence of monetary policy; it is a symptom of a state that has lost control of its tax base. Appendix I of Modernising Money covers this process in depth, looking at the case of Zimbabwe.



There are two assumptions behind this critique: 1) A shortage of credit would prompt interest rates to rise to harmful levels. 2) As savings accounts would no longer be guaranteed by the government, savers would demand much higher interest rates in order to encourage them to save.

Sections above explains how a sovereign money system will not result in a shortage of money or credit in the economy, thus there is no reason for interest rates to start rising rapidly.

The second point is disproven by the existence of peer-to-peer lenders, which work in a similar way to the lending function of banks in a sovereign money system. They take funds from savers and lend them to borrowers, rather than creating money in the process of lending. There is no government guarantee, meaning that savers must take the loss of any investments. The peer-to-peer lender provides a facility 
to distribute risk over a number of loans, so that the failure of one borrower to repay only has a small impact on a larger number of savers. Despite the fact that the larger banks benefit from a government guarantee, as of May 2014, the interest rates on a personal loan from peer-to-peer lender Zopa is currently 5.7% (for £5,000 over 3 years), beating Nationwide Building Society’s 8.9% and Lloyd’s 12.9%. This shows that there is no logical reason why interest rates would rise under a banking system where banks must raise funds from savers before making loans, without the benefit of a taxpayer-backed guarantee on their liabilities.



Many critics misunderstand Sovereign Money, and assume that Sovereign Money would equate to allowing the government to print as much money into existence as they want. However, it is important to note that politicians are not directly given control over money creation, because of the risk that political pressures could lead the government to abuse this power. Therefore, the decision over how much new money to create should be taken, as it is now, by the Monetary Policy Committee (MPC) at the central bank in line with their democratically mandated targets. Likewise, the process should be designed so that the central bank is not able to gain influence over government policy.

In practice this means that the MPC and the Bank of England should not have any say over what the new money should be used for (this is a decision to be taken solely by the government) whilst the government should have no say over how much money is created (which is a decision for the MPC). Decisions on money creation would be taken independently of government, by a newly formed Money Creation Committee (or by the existing Monetary Policy Committee). The Committee would be accountable to the Treasury Select Committee, a cross-party committee of Members of Parliament who scrutinise the actions of the Bank of England and Treasury. The Committee would no longer set interest rates, which would now be set in the market.

With these two factors in mind, the procedure for the central bank and the government cooperating to increase spending is relatively simple. First the central bank would take a decision over how much money to create and grant to the government. Once in possession of the money, the government could use it to increase spending, or lower taxes.



If the central bank decided the economy was faltering due to a shortage of money, and decided to create additional money to be allocated to government, it would be for government to decide how that money was to be spent. If instead, the central bank decided that the extra money should be lent to the banking sector, then it would be the banking sector that decided which projects to finance. Since the monetary committee does not have any decision making power to influencehow the newly money is spent, it is difficult for it to behave in a partisan manner.

When the central bank creates new money and transfers it to the government’s account, it would be for the government to decide how that money was to be spent. If the central bank feels that there is a shortage of credit in the real economy, and decides to creates money to lend to banks (in order to finance their lending to non-financial businesses) then it is the banks that decide which firms and projects to finance. Since the Monetary Committee does not have any decision making power to influence how the newly money is spent, it is difficult for it to behave in a partisan manner.

Despite this, the monetary committee should implement the safeguards that are typically used to protect against partisan behavior by any committee or body, such as having staggered terms and submitting any appointments to possible veto by a cross-party group such as the Treasury Select Committee.



This critique argues that placing the power to create money in the hands of a body at the central bank is overly centralized, amounts to central planning or relies on rule by technocrats.

Firstly, does the proposal amount to ‘central planning’? The Money Creation Committee would be responsible for just two things: a) identifying the increase in the money stock needed to promote non-inflationary growth, and b) monitoring any possibility of a shortage of credit to the real economy. They are not responsible for deciding how to spend newly created money, as this decision is given to the elected government (just as with the decision on how to spend all tax revenue). Neither are they responsible for deciding which businesses get loans or investment, as this decision remains with banks (and the savers who provide them with funds).

Secondly, is this process of money creation over-centralised? We would argue that the decision over how much money to create necessarily has to be centralised for a nation. However, the decision over how the money is spent can be as decentralised as one would wish. The most decentralised method of distribution would be to divide the newly created money equally between all citizens and allow them to spend it as they see fit. But decentralisation of the decision of how much money to create is unworkable. If the decision is decentralised by giving a range of banks (whether private or publicly owned) the power to create money, every individual bank has the incentive to create more money to maximise loan revenues. The overall result will be excessive levels of money creation. If each bank is to be given a quota for how much money to create, then this necessitates a central decision maker again. If the decision were decentralised to say, local authority governments, who were permitted to create money up until the point that it started to fuel inflation, then every local authority would have the incentive to create as much money as quickly as possible, in order to create and spend the maximum amount in advance of other local authority governments and before the combined effect led to inflation.



This is very similar to the argument above: A centralised committee can’t possibly make a decision as complex as how much money is needed in the economy as a whole.

Currently, the MPC make decisions on interest rates that have huge influence over the returns that savers make on their pensions, on how much householders pay on their mortgages, and how much businesses must pay in interest to banks. This is a blunt tool with far-reaching consequences. Indeed, the Bank of England suggests that it can take up to three years for it to start taking an effect.

On the other hand, conventional Quantitative Easing is an extremely complex technocratic process. Not only is the majority of society confused by its mechanics and how it works, but there is still a large debate as to whether it actually works.

In contrast, the creation of new money in the controlled and measured manner proposed in Sovereign Money has a much more precise and concentrated impact, and does not have the same level of ‘collateral damage’ upon the wider economy.



The concern here is that restricting the ability of banks to create money will lead to the shadow- banking sector creating close substitutes for sovereign money, thus circumventing the intention of these reforms. However, there is minimal risk of this happening, for a couple of reasons:

1) Unless there is a shortage of money, there will be no demand for money substitutes. So this argument only applies if there is a genuine shortage of money in the economy. We’ve addressed the reasons why this is unlikely above.

2) Even in a recent case of shortage of money in the economy (i.e. the years following the financial crisis) there is little evidence of ‘near monies’ rising up and taking the place of bank deposits on any economically significant scale. Any money substitutes created by the shadow banking system would be risk bearing, whereas money in Transaction Accounts would be entirely risk-free. The company or shadow bank attempting to issue near-monies would have to offer significant advantages over a standard Transaction Account in order to compensate for this risk.

However, the emergence of near-monies is actually extremely easy to prevent. For any shadow bank’s liabilities to function as near-monies, they would have to be as easy to make payments with as normal sovereign money in a Transaction Account. This would mean that it must be possible to make payments with them using the same payment networks as the banks do: BACS, CHAPS, Faster Payments and so on in the UK. Therefore any shadow bank that wishes to connect to these payment systems must be required to operate as a Transaction Account provider, and would therefore have no ability to create money. Any shadow bank that was not willing to work in this way would find the payment services it offered would be less widely accepted and therefore less useful, and not an effective substitute for sovereign money.


Currently, the Monetary Policy Committee attempts to control bank lending – and therefore the quantity of broad money in the economy – by influencing the interest rate at which banks lend to each other on the interbank market. After the reform, the MCC would have direct control over the money stock and so there would be no need for the MCC to use interest rates to affect it. This has only a superficial resemblance to the monetarist policies of the 1980s. It is important to note that one reason monetarism was disastrous, was because central banks were attempting to control the growth in bank deposits (mainly through bank lending) through restricting the monetary base.

The theory was that the quantity of money on deposit at the central bank (reserves) could be used to restrict the quantity of deposits at private banks (broad money). This policy was in part based on a money multiplier view of bank lending – that banks required deposits (or central bank reserves) before they could make loans. However, the money multiplier model is incorrect – loans in fact create deposits and reserves are required by banks only to settle payments between themselves. In short, base money is endogenous to the creation of bank deposits and is supplied by the central bank on demand. Central Banks were unable to credibly restrict the supply of reserves to any private bank once it had made loans, as to do so could have led to the bank in question being unable to make payments to other banks. This could have led to a bank run and as such would have contravened the central bank’s remit to maintain financial stability.

In addition, monetarists were mainly concerned with inflation, and saw all money creation
 as inflationary. In contrast, a sovereign money system recognizes that there are situations in which money creation actually raises demand and output rather than simply causing inflation. Monetarists also saw inflation as the main threat to the economy, and were willing to let unemployment rise in order to keep inflation under control (although this did not work). In contrast, proposals for a sovereign money system have a strong focus on how money creation can be used responsibly to boost employment and output.





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  • jamesmurraylaw

    This summary of the critiques of PM proposals really is excellent and so relevant now that Corbynomics is on the lips of every commentator.

    I can see it contains a lot of work, so well done everyone….

    It appears to cover most, or all, of the objections that have been made or may be made against the tenets of PM.

    The above page is so important that must remind PM of my suggestion in a post a few months back.

    This was that the PM website should have an easy access to the above rebuttals and links by adding them as another tab on the main menu at the top of

    Perhaps the added tab would be after OUR PROPOSALS and headed by something like:

    An alternative is to transform your FAQs tab to include the above and all the voiced, skeptical views, past and as they arise.

    In other words, make a virtue of the PM proposals being questioned by the most distinguished economists and your replies, with always a request that the interlocutors respond to your answers.

    Yet again I must emphasize the importance of clear credibility when you have arranged against you so many very wealthy and therefore very powerful agencies who would dearly like this threat to their golden egg laying geese to go away.

    • Rory Short

      The source of all our problems with money, and the end-less debates about how to fix the problems, is the disconnect between the production of money and the economic acts which justify money’s existence.

      The basic economic act is the completed voluntary exchange, between two parties, of two different items, be they goods and/or services. Basic economic acts are the nuggets of the economy, their economic worth is beyond argument.

      Basic economic acts do not involve money, it is not needed. Basic economic acts are known as bartering. However the introduction of money into the exchange process enables the exchange process to become more flexible enabling the involvement of three, or more, parties in the exchange. The exchange process thus becomes more complex and ensuring the continuation of its economic worth requires that the money system caters for differences in the status of the money used in the exchange.

      If it is newly issued money then its user becomes liable for supplying something of worth equal to the new money into the economy in order to ensure the completion of the exchange.

      If it is old money then its user has already supplied something of equivalent worth into the economy and the exchange is completed.

      Provided that the money system caters for the above distinction there is no logical reason why new money cannot be issued as new money debt to any person who needs it to make a purchase. As soon as the person sells something, a good or a service, then their new money debt could be settled, as is done currently with bank issued credit. There would need to be a money system cap on, individual new money debt, for any person to prevent free-loading and the consequent debasement of the currency, i.e inflation.

      This change to the money system would remove any need for QE for individuals,the possibility of which only arises from what are in fact defects in the current money system.

      It would also remove any worries about controlling how much money is in circulation because new money would always be available for those who need it provided that they were not trying to free-load on the money system. It would also place the issuing of new money to citizens completely outside the arena of politics.

      Ideally this change to money system would necessitate changing to a completely electronic, i.e. digital, currency. Then records could be kept of the holders of units of currency which would serve to severely curb money laundering, drug dealing, and other criminal activities involving money.

  • bankster01

    I agree with James below, many economic commentators in the main media are saying Corbyn’s ideas on “QE for the people not bankers” will result in Armageddon, to scare people and promote the Establishment view. Jeremy Warner was the latest in the Telegraph a few days ago, he should be pointed in the direction of this web page. There were plenty of comments highly rated below his piece strongly disagreeing with him which is good, and we all need to post the alternative view so the main media commentators are shown up for what they are, apologists for the Establishment. Many economists have poor training, in that they persist with the flawed multiplier theory of money and are not prepared to accept new evidence and ideas.

    • jamesmurraylaw

      Thank you bankster.

      Regretfullt, Corbyn’s guru, Richard Murphy, has a latest report that Corbyn would ‘order’ the BoE to create the levels of Sovereign Money they need.
      This a complete no-no under PM proposals.
      It would be disastrous to give that power to the Government.
      PM says politicians should have only the choice of upon what to spend the moneys created, not the amount of money available.
      This figure is a monetary decision which depends upon the medium term wider economy not short term politics.

      Somebody should point this out to Corbyn and Murphy.

      • RJ

        Totally and utterly disagree re a disaster. The decision on how much to deficit spend and how to fund this spending (bonds or BoE reserves) must rest with the elected Govt not an undemocratic appointed committee. Otherwise we end up with a Euro type situation where a unaccountable committee decide (and consequently remove economic sovereignty from the elected Govt) and the people are powerless to do anything about it.

        Only those who prefer rule by a superior elite group could support the committee proposal.

        • jamesmurraylaw

          I do admire your faith in politicians.

          However, politicians, elected or otherwise, cannot be trusted not to try to nudge the economic situation towards where they want it and for party political purposes e.g. overheating the economy towards election time.

          And that was exactly why it was lauded so much when Gordon Brown gave up the control of interest rates to the MPC in 1997.

          Before this, the Treasury set the rates and so not independently of the government. Political factors were forever clouding what should have been purely economic decisions on monetary policy.

          Brown’s Bank of England Act 1998 created the Monetary Policy Committee and its parameters.

          The government could specify its price stability target, growth and employment objectives at least annually every year, but month to month control was delegated to the MPC.

          Thus it met monthly as it and as comprised of the Governor, two Deputies and two Executive Directors but with the Chancellor appointing four other members, it was still under political control but at arms length.

          And as its decisions and minutes of its discussions were transparently published, all was kosher.

          The result? Well RJ, it was certainly a success story – producing unprecedented periods of price stability, with inflation most of the time within a percentage point of target.

          PM’s proposals are that this same non-political power would be given to the revamped MPC (now to be called the Monetary Control Committee) but this time the main power would be in adjusting the money supply by judging the amount of Sovereign Money to be created or destroyed.

          If the economy was flat an injection of more Sovereign Money would be needed, or if it was overheated some would be taken.

          No party wants to go back to the massive veering of inflation resulting from Government controlled interest rates.

          This is not an ‘elite’ set of officials – the chancellor has appointees and can sack the Governor anytime, but he had better have a bloody good reason for it – the electorate would ask a lot of awkward questions…

          And surely the measures would properly smooth out boom and bust and would we not all of us benefit from it?

          I look forward to your response.

          • RJ

            “it was certainly a success story”

            It’s been a complete disaster. Interest rates should have been increased before Lehman’s to stop an overheating property market. Instead it was kept low which is one of the reasons for very high personal debt and property price. And pressure on savers and pension funds.

            And look at the Euro in general. Can you honestly say that the setting of interest rates has been done in the best interests of all Euro countries.

            And what you are proposing is very similar to the Euro zone. How’s that going for the likes of Greece. It just shows what unaccountable bodies making key decision like this can lead to

            And this decision is massively more important than just setting interest rates. It’s key to the sovereignty of a Govt. And I just do not trust unaccountable committees that will be more in tune with the rich and corporate sector than the people. So if it’s their interest to spend big time they will approve higher Govt spending. Otherwise not regardless of the people’s good. Just look at Greece.

      • jamesmurraylaw

        I hear what you say RJ.

        However, the politicians, elected or otherwise, cannot be trusted not to try to nudge the economic situation towards where they want it for party political purposes e.g. spending more at election time.

        That is exactly why it was lauded so much that Gordon Brown gave up the control of interest rates to the MPC in 1997.

        Before this the Treasury set the rates and of course not independent of government. Political factors clouded what should have been purely economic decisions on monetary policy.

        The Bank of England Act 1998 created the Monetary Policy Committee and its responsibilities.

        The government could specify the its price stability target and growth and employment objectives at least annually every year but day to day control was delegated to the MPC except if there was an emergency.

        It met monthly and comprised of the Governor, two Deputy Governors, two of the Bank’s Executive Directors and four appointees of the Chancellor.

        All minutes of its meetings were published within.

        Result? Well RJ, it was a success story – an unprecedented period of price stability, with inflation staying most of the time within a percentage point of target.

        PM would have this same non-political control given to the revamped MPC – now to be the Monetary Control Committee – but this time of the money supply.

        It would decide if the economy was flat and needed an injection of more Sovereign Money, or whether it was overheating and needed some taken out for a while.
        The point is that every political party agrees that interest rates should be non-political and this works extremely well.
        It is a very short step to give the new MCC control over growth.
        This is not an ‘elite’ – the chancellor appoints half the committee and can sack the Governor anytime, but he had better have a bloody good reason for it as the electorate will be asking a lot of awkward questions…
        You say democratically elected reps would do things better? When history tells us that they would pull and tinker for their own benefit.

      • bankster01

        One of the problems with PMs proposals to outsiders is that they can assume it is the government will be creating money, so the proposals are misrepresented, and the inflation bogeyman will run riot. A friend who is a top economist in Australia assumed this after scanning the web site, when we need to make clear that it is the B of E creating money (or not) free from political influence, and it is an extra control lever they have each month as well as adjusting interest rates. It is disappointing that Corbyn and Murphy would “order” the B of E to create money, when their policies would be much more credible and less open to criticism if they did as Positive Money suggest.

        • jamesmurraylaw

          Bankster, I agree.
          However, despite what I say above, to a certain extent I am perversely pleased that Corbyn et al do get it wrong.

          Far left-wingery is so much anathema to me that any reason for weakening daft socialists is a win-win.
          My hope is that the LibDems take up PM proposals and make them mainstream policies.
          Can it be at all possible that George Osborne will see the PM light and begin to stick it to the private banking sector also?

          • RJ

            The Greens saw the PM light. The leader tried to explain what it was and quickly dropped it after she was roundly criticized for a joke interview on this subject.

            and Osborne knows full well that he has all the power he needs at present. He (the UK Govt) can spend without limit as and when he wants. And can either fund this spending by Govt bonds or BoE reserves. Without limit although if he goes overboard = inflation and / or currency depreciation.

          • jamesmurraylaw


            Didn’t see the Natalie Bennett interview so will try to get it.

            The fact that the Greens have cottoned onto the tenets of PM but the Leader has not got her head around it may not be important.

            You may know that it is astonishing how many MPs (and, I would warrant, Ministers) do not know where money comes from, and certainly few know the implications of double entry bookeeping – also essential fully to understand SMC.

            I disagree about Osborne. If he really could get 10 billion pounds ‘free’ money to spend that was 30-40 times more effective in the Multiplier effect.

            Here PM shows how the £10 billion of SMC would lead to 28 billion spending, up to 284 000 jobs and 5.6 billion of tax revenue, with lower personal debt.
            All of this and not one ha’porth of increase on the Deficit or the National Debt.
            This is unlike your suggestions of borrowing via Govt Bonds, reserves etc.
            No. Osborne has yet to see the light, but watch out when he does…

        • RJ

          Corbyn does not need to order the BoE to create money. Whenever the UK Govt spends TODAY the BoE AUTOMATICALLY issue BoE reserves to back this spending.

          The bank DEBIT BoE Reserves CREDIT Recipients bank account

          And it is effectively the UK Govt creating money. The BoE is a UK Govt creation and without the UK Govts 100% backing has no power whatsoever. BoE reserves would be worthless overnight if the UK Govt ceased to exist or lost their power to tax

  • landlubber

    I enjoyed reading this good exposition of PM’s proposals. Am I right in believing that PM is simply proposing the adoption of full reserve banking? So bank lending will be circumscribed by; the level of investment by shareholders, the level of customer deposits, fees and commissions and the accumulation of surplus income from its loans. If the
    UK’s international banks accept PM’s proposals would they not use their depositors
    and shareholders money and UK earnings to fund investments world-wide (if they
    appeared more profitable) than invest in the domestic economy.
    Would not a territorial restriction of banking licenses to LA areas, regions or the whole UK address the democratic deficit in the present system that does not allow the population a realistic choice of supporting their local, regional or national economy with their money? Instead they are tied to a system that funnels their earnings and savings into a cartel that can invest it anywhere it sees fit.

    The strident voices we hear proclaiming our democratic rights don’t seem to extend their concerns to that most important social invention, money. For most of the population the choice of where their money (earnings and savings) is to be invested is non-existent. The UK’s international banks could be licensed to tout for depositors or investors and invest in the UK or overseas, their ability to use the creation of national State money to subsidise their investments could at last be curtailed.

  • Sumal Raj

    In a sovereign money system how will we measure how much new money is needed or should be created in a particular time peroid?

    • jamesmurraylaw

      We do not have to.

      PM proposals are that the present present BoE independent Monetary Policy Committee, MPC, of leading banking officials would be transformed into a Money Creation Committee, MCC, which is just as independent of the Government itself.

      It would have to answer, as now, to the Public Accounts Committee who will oversee them to ensure they keep to their remit.

      The remit of the MCC will be to decide how much new money is needed to keep growth in a range, as well as keep inflation under control.

      • landlubber

        Could not the MCC decide to approve the banks use of a multiple of their deposits for loans or purchases? If so would it then be prudent to limit this facility to banks whose license requires that they cannot invest outside the UK.

        • jamesmurraylaw

          Great idea, but regretfully any efforts to stop the banks from lending when they want to, or conversely to keep on lending when they do not, has been doomed to failure.
          And this despite statute books full of rules being thrown at them.
          And it is precisely this lack of control of the banks that means they make slight rises in spending into sharp booms and slight downturns in spending into recessions.
          They are out of control because they misuse their unique power to create money, as they do every time they create a loan account.
          Fractional reserve banking is the culprit, and it has put the country into some £1.5 trillion of National Debt that causes us to pay them tens of billions every year in interest charges.

          • landlubber

            expand on my original reply to you, I suggest several adjustments to PM’s proposals (and hope they will embrace them). PM does not envisage altering the nature of the banking license an omission that leaves the international banking cartel as the recipient of most
            of the nation’s money (even if they adopt PM’s suggestion of transaction accounts at the BoE or full-reserve banking with a facility to purchase new money from the BoE) to invest where they wish irrespective of the wishes of theircustomers. This is a democratic deficit that PM does not address but the introduction of two forms of banking licence would;

            An A license would restrict a bank’s investments to the UK, a UK region or LA area up to the level of their deposits (which would be guaranteed by the FSCS). The banks’ investment accounts would not be guaranteed by the FSCS. The BoE could approve the issue of loans by any of these banks using new money that is a multiple
            of its deposits fixed by the MPC and adjusted by them as it sees fit leaving the banks to determine in which part of the UK, region, or LA areas they operate gets the investment. The State would collect interest (half of what the bank charges the borrower) on the
            outstanding principal on all the loans created with State money as it is repaid. The MPC is then relieved of deciding or negotiating how much new money each bank is entitled to, banks could chose whether or not they wished to avail themselves of the additional
            new money on offer;

            A B license would allow international banking plc’s to seek investment from individuals or organizations in the UK and abroad and invest their funds where they like, they would not be allowed to access new money; that would only be offered to domestically restricted banks.

            Adoption of these proposal would allow local, regional or national
            populations and organizations the choice of supporting their own economies if they wish (which addresses the democratic deficit in the present system and PM’s proposals) instead of being forced into supporting the international plc banks investment portfolio.

    • Graham Hodgson

      The Bank of England would extend its model of the economy to include money stocks and payment volumes and run various scenarios as they do at present when testing their interest rate options. As an example of the kind of data that might be suitable, over recent years the volume of payments in the real economy, which is a measure of productive economic activity, increases at an average of around 3.6% per year or of the order of £4 billion per quarter, whilst sight deposits (which would equate to Transactions Accounts) are growing at 4.7% per year, £1.2 billion per quarter. Depending on the interactions of other factors in the model, and feedback from the actual economy (including inflation), it might turn out to be a suitable rule of thumb that every additional £4 billion in transactions requires £1.2 billion in new money.

  • Roger Clipsham

    I’m no economist , but you seem to be suggesting consumer bank deposits should no longer be guaranteed, If i’ve read it right. That sounds like a recipe for a run on the banks?

    • Graham Hodgson

      Consumer bank deposits, referred to as Transactions Accounts, would be held at the central bank, not the commercial banks. The commercial banks would only handle account administration and payments processing on behalf of the customers.

  • penny g

    Thanks Dora and Frank – this is really helpful. When my colleague Roo and I went to see our MP, Andrew Smith, re reforming the monetary system, his immediate response was ‘I can’t see how it couldn’t be fixed by regulation’. Any chance of creating it in more user-friendly formats, e.g. a series of PM style short videos?

  • keithfromashford

    Bankers don’t understand their product, debt.

    “What is wrong with lending more money into the Chinese stock market?” Chinese banker before last month

    “What is wrong with lending more money into real estate?” Chinese banker last year

    “What is wrong with lending more money to Greece?” European banker pre-2010

    “What is wrong with a NINA (no income no asset) mortgage?” US banker pre-2008

    “What is wrong with lending more money into real estate?” US banker pre-2008

    “What is wrong with lending more money into real estate?” Irish banker pre-2008

    “What is wrong with lending more money into real estate?” Spanish banker pre-2008

    “What is wrong with lending more money into real estate?” Japanese banker pre-1989

    “What is wrong with lending more money into real estate?” UK banker pre-1989

    “What is wrong with lending more money into the US stock market?” US banker pre-1929

    Positive money please, these bankers are idiots.

    • keithfromashford

      We thought Japanese bankers were the stupidest in the world when they created the mother of all real estate bubbles that burst in 1989.

      Japan has not recovered since.

      But Wall Street was determined to outdo them in the stupidity stakes using derivatives and complex financial instruments to magnify up the losses from a housing boom. The bubble burst in 2008 and the global economy hasn’t recovered since.

      James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.

      Losses from sub-prime – less than $300 billion
      With derivative amplification – over $6 trillion

      “It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” (pg
      404, “All the Presidents Bankers”, Nomi Prins)

      Japan only managed to cripple its own economy through crazy lending into real estate, Wall Street crippled the global economy.

      Perhaps Chinese bankers are now looking to steal Wall Street’s crown?

      The competition is fierce with European bank lending into Greece as another contender.

      A merit award for Spanish and Irish bankers who have destroyed their nations finances with unconditional state bailouts after reckless lending into real estate.

      • keithfromashford

        More idiot bankers:

        Icelandic bankers
        Cypriot bankers

        “Only lending to people who can pay you back?
        Are you sure?
        No one told me” a typical banker

        Payday loans, sub-prime, student loans, sub-prime auto loans ……….

      • keithfromashford

        More idiot bankers:

        Icelandic bankers
        Cypriot bankers

        “Only lending to people who can pay you back?
        Are you sure?
        No one told me” a typical banker

        Payday loans, sub-prime, student loans, sub-prime auto loans …………

  • keithfromashford

    Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.

    After the crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.

    When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were

    The end result 2008.

    With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.

    Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy.
    The broad brush effect has blown bubbles everywhere.

  • keithfromashford

    Banks, the banking industry and the monetary system have become a joke.

    Banks have become strange hybrid (private/state) institutions where the profits remain in private hands and the losses are socialised.

    They need “too big to fail” status because they know they can’t stand on their own two feet in the marketplace and need the crutch of a Government backstop.

    It is the nation’s responsibility to recapitalise its banks when bankers have run them into the ground.

    The nation has to borrow money from banks and pay interest on those loans.

    Banks can only create money from new debt and the world is drowning in debt.

    The Central Banks can print money by the trillion to bail out banks whose balance sheets have been wrecked by banker’s incompetent trading.

    They can never contribute a single penny to help the nation’s population.

    This is madness.

  • khan

    one of the best solution for bank money creation is 100% required reserve system, where central bank obliges banks to keep 100% required reserve of all demand and time deposits.
    the second solution to control banks money creation is to verify all bank lending that where these money goes? means only allow banks to provide and lend money to the real sector.
    the current issue for best explanation see the link below

    • RJ

      So I assume this situation would be for one bank based on 100% funding as follows

      Bank loans 200
      BoE reserves 200
      Bank Account on call 100
      Bank LT deposits 100
      Owing to BoE 200

      Where would these reserves initially come from? Would it be an initial loan from the BoE. I think this would work,. Banks in total could not loan more money than reserves. So the BoE / treasury could control total loans by controlling the reserves (an asset) in circulation. Either by

      Loans to banks
      Government spending
      Bond issues (drains reserves)
      Repaid reserves

      For me this is a lot easier to understand than the PM solution. And will stop banks recycling reserves and increasing bank credit. Unlike PMs solution.

    • jamesmurraylaw

      The book you kindly proffer in your link is an exposition of finance from the Islamic tradition.

      Most in this country we are too far along the road to think in such terms.

      (With respect, many Islamic friends of mine whose first language is not English use the free app ‘Grammarly’ to ensure their posts are not obscured by their direct translation from their native language.)

  • landlubber

    My reservations about PM’s proposals are;

    1) The democratic deficit of the present system is not addressed. Those who promote the adoption of Western civil liberties emphasise the protection of freedom of choice in worship,
    communication, association, representation and management of one’s personal
    income but there is no choice for people who wish to support their own local, regional
    or national economy allowed for in either the present system or PM’s.

    2) Surely the money creation allowed the banks could be better controlled without resorting to a completely bureaucratic solution for instance by limiting the MPC to restricting the bank’s money creation to a multiple of the banks deposits as it deemed appropriate (that multiple could be 1) and limit this facility to banks whose license restricts their loans and investments to the UK. The State would collect interest (half of what the bank charges the borrower) on the outstanding principal on all the loans created with State money, as it is repaid.

    • jamesmurraylaw


      1. I must admit that you have me foxed with tis objection.

      Surely the democratic element is in the absolutely power the elected Government – the Treasury – retains to spend the money they raise form taxes, borrowings and Sovereign Money creation on whatever they feel is necessary.

      The AMOUNT of Sovereign Money created by the BoE will be decided by the MCC – a committee of senior bankers and appointees of the Government.
      As now with the MPC answerable to a select committee of elected back benchers but instead of a remit to keep inflation within a set range, they will be under a remit to keep the money supply with the range needed to ensure there is no slack in the economy (i.e. heading towards recession) or not enough (the same but heading towards inflation)
      2. That just sounds like a tax on banks’ lending and so another way to raise money.
      It does not seem to have influence on the money supply which is the purpose of the exercise.

      • landlubber

        Those who promote the adoption of Western civil liberties emphasise the protection of freedom of choice in worship, communication, association, representation and management of one’s personal income. PM does not envisage altering the nature of the banking license an omission that leaves the international banking cartel as the recipient of most of the nation’s money. The introduction of various territorial licenses would allow people and organisations the choice (at present denied them) of supporting their own local,regional or national economies. For instance the population of the UK, Scotland or say Bradford – and their supporters- could under a territorial licensing system be assured that their individual, LA and private sector bank accounts would be wholly used to promote the UK, Scottish or Bradford economy; if there was too great a demand for investment then if it appeared profitable other lenders (including the international banks) could partitipate if there was too little and bank money reserves increased they could be used to buy government debt. The point of the excercise would be to institutionalise in the banking system a territorial choice as to where individuals and organisations put their money. At present the choice is one that the communist system offered people at an election. You can vote for any 5 of the 5 candidates, they are all paid -up party members. To have the ability to choose territorial licenses have to be introduced. If individuals and organisations are not interested in supporting their own locale, region or country there will be no demand;

        An A license would restrict a bank’s investments to the UK, a UK region or LA area up to the level of their deposits (which would be guaranteed by the FSCS). The banks’ investment accounts would not be guaranteed by the FSCS. The BoE could approve new money creation that is a multiple
        of its deposits fixed by the MPC and adjusted by them as they see fit (they could put it at 1) leaving the banks to determine in which part of the UK, region, or LA areas they operate gets the investment. The State would collect interest (half of what the bank charges the borrower) on the
        outstanding principal on all the loans created with State money as it is repaid and the principle besides (since the new money is borrowed – created – State money that the State allows the bank to bring into existence. The MPC is then relieved of deciding or negotiating how much new money each bank is to get, banks could chose whether or not they wished to avail
        themselves of it. Bank lending would be restricted to the level of their deposits and shareholders stake unless the MPC authorised them (all of those restricted to investing in the UK) to create a multiple of their deposits to serve an expanding economy. The interest charges would be fixed by the bank which would be mindful of its need to attract depositors as well as investors. Competition would determine rates not government dictat. The BoE’s MPC would monitor and advise the governor on the appropriate use of the money creation multiple.

        A B license would allow international banking plc’s to seek investments and deposits from individuals or organizations in the UK and abroad and invest their funds where they like, they would not be allowed to access new money;
        that would only be offered to domestically restricted banks.

        Adoption of these proposal would allow local, regional or national
        populations and organizations the choice of supporting their own economies if they wish (which addresses the democratic deficit in the present system and PM’s proposals) instead of being forced into supporting the
        international plc banks investment portfolio.

        • landlubber

          Line 10 para 2 …………’and the principle besides (since the new money is borrowed – created – State
          money that the State allows the bank to bring into existence’. Should read ‘and the principle besides in the case of new State money that is borrowed – created – State money that the MPC allows the bank to bring into existence.

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