Sovereign Money – Common Critiques

Home » Our Proposals » Sovereign Money –…

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.





Stay in touch

  • James Murray

    A great page – and it should be thrust to the top of the website.

No Announcement posts

back to top