As sovereign money reform has been gaining attention, more scholars from various schools of thought have felt called upon to comment on it - mainstream commentators, Neoaustrians, demand-side Keynesians, and others. This provides an opportunity for clearing up misrepresentations of sovereign money.
Here is a review of typical points of criticism from a variety of scholars
> Sovereign Money in Critical Context
Responding to criticism of monetary reform from a variety of economic viewpoints
A similar paper has been prepared by Positive Money
> Sovereign Money - Common Critiques
The Cambridge Journal of Economics, the leading organ of academic Postkeynesianism, has prepared an issue on 'Cranks and Brave Heretics: Rethinking money and banking after the Great Financial Crisis', including under this umbrella supporters of sovereign money reform. The formulation is taken from Keynes who himself, however, owed quite a few things to some of the 'cranks' of his time, particularly S.Gesell and C.H.Douglas.
G. Fontana and M. Sawyer consider sovereign money reformers to be > More Cranks than Brave Heretics.
B. Dyson, G. Hodgson and F. van Lerven of Positive Money have taken the trouble to respond to the paradigmatic biases of the critics > A response to Critiques of 'Full Reserve Banking' or 'Sovereign Money' Proposals
According to a model by van Suntum/Neugebauer, a transition from bankmoney to sovereign money (= Vollgeld) would 'distort the natural rate of interest'
> Vollgeld, Public Debt, and the Natural Rate of Interest.
As is often the case, the authors start from incorrect assumptions about sovereign money. In addition, they make use of a questionable natural-rate equilibrium theorem of interest > Side notes to van Suntum/Neugebauer.
Economic Thought (4.2: 1-19, 2015) has published a paper on
> Proposals for Full-Reserve Banking, by Patrizio Lainà, University of Helsinki.
In the same issue, Charles A. E. Goodhart, London School of Economics, and Meinhard A. Jensen, University of Copenhagen, were given the opportunity to write a critical
> Commentary on Patrizio Lainà's Proposals … Currency School versus Banking School: An Ongoing Confrontation.
My main comment on the two papers:
The good news is that the unfolding debate on the problems of the present bankmoney regime and monetary reform is now being framed in updated terms of the Currency School versus Banking School controversy. The bad news is that most of the Goodhart/Jensen criticism addresses the wrong target, i.e. reserve banking in various variants, while missing its proper target which would have been sovereign money beyond reserve banking.
Lainà does his bit in this misdirected debate in that he has subsumed a number of quite different approaches all under the heading of full-reserve banking. The approaches he discusses are
- a traditional commodity standard, based on gold or a basket of commodities
- the Chicago plan, i.e. 100%-reserve banking
- Narrow banking
- Limited purpose banking
- Deposited currency
- Sovereign money.
In this list, only the Chicago plan represents full-reserve banking strictly speaking.
Narrow banking is close to it, but watered down, in that full coverage of deposits by central-bank money (reserves) can be replaced with asset backing of deposits.
Limited purpose banking (special-purpose separate banking) is not by itself a monetary concept and can only be seen as a related approach when combined with a 100%-reserve.
Deposited currency is an inconsistent conglomerate category, mixing up primary bank credit and secondary nonbank loans, and a special approach to making the transition from bankmoney to sovereign money by granting everybody access to a central-bank account.
Considering a traditional commodity standard as a full-reserve approach is misleading. Silver, gold or other commodities primarily serve as an instrument of monetary policy, aimed at limiting the quantity of money. In the modern bankmoney regime, however, respective commodities would not function as reserves (non-cash central-bank money) in the split-circuit reserve system as it is made up of public circulation on the basis of bankmoney (demand deposits), and interbank circulation on the fractional basis of central-bank reserves.
Equally, but for other reasons, sovereign money does not belong in this list. Sovereign money, such as pursued by the contemporary monetary reform movement, is about a single-circuit money system beyond reserve banking, no matter whether on a fractional or 100% reserve base. In a sovereign-money system there is no longer a central-bank money base M0 and monetary banking aggregates M1–M4, but just one integrated stock of money M under control of the central bank. The latter, as the monetary authority of a nation-state, or community of nation-states, would be the only monetary power in the system.
In a true sovereign money system beyond split-circuit reserve banking, banks cannot create asset and liability entries 'out of nothing'. Money in such a system is always a liquid asset, never a liability on a bank and central-bank balance sheet. Payment involves divesting of sovereign money in a bank or customer money account here, and its adding into another such account, actually in tune with civil law requirements regarding credit and debt (which is violated by the split-circuit bankmoney regime, in that customers receive a claim on money rather than the money itself).
In consequence, in a sovereign money system, banks cannot do what Goodhart/Jensen think they could continue doing, that is, creating overnight liabilities to customers, instead of a real transfer of liquid sovereign money from a bank's money account into a customer's money account, or the reverse. In a sovereign money system, there is segregation of funds. Banks and customers all have their own money account. One of the basic principles of a sovereign-money system is separation of money and credit, and this involves separation of a bank's money and its customers' money.
Goodhart/Jensen's criticism clearly has a point regarding 100%-reserve banking, such as the historical Chicago plan or Fisher's 100%-money. These approaches still represent a reserve system and include split circuits (bankmoney in the public circuit, and a base of central-bank reserves in the interbank circuit). In a full-reserve system, banks would indeed still be able to pro-actively create deposits in the public circuit, which then have to be covered by reserves several weeks after the fact. Thus, even a 100%-reserve would not exactly be 100% and would not prevent banks from creating additional money, even if the banks' ability to do so would be more restricted than is the case today. (More on this
> here and > there).
Sovereign money, by contrast, even if this aims at the same or similar goals as the monetary reformers of the 1930s, represents an entirely different system under aspects of banking operations, accountancy and monetary policy. Regarding the latter, by the way, most present-day supporters of sovereign money prefer discretionary policies, i.e. flexibly re-adaptive policies over mechanically rule-bound stipulations. This being the case, allegations of money shortage in a sovereign-money system, or volatile or excessive interest rates, are in fact as much taken 'out of thin air' as today's bankmoney.