What would a sovereign money system look like?
From a New Currency Theory point of view, a sovereign nation-state ought to have monetary sovereignty, in addition and in analogy to comparable prerogatives of constitutional importance such as the exclusive powers of legislation, executive government and administration, jurisdiction, or the monopoly of force, and the monopoly of taxation. If today's fractional reserve system cannot be said to be sovereign, what then would a sovereign money system look like?
An advanced modern sovereign-currency system would be based upon the three components of a state's monetary prerogative:
1. Determining a country's standard currency unit, i.e. the monetary units of account.
2. Issuing the currency, i.e. the entire money supply (cash and in account), the stock of lawful means of payment, denominated in that standard unit.
3. Taking in to the benefit of the public purse the seigniorage which accrues from creating additions to the stock of money; be this genuine seigniorage resulting from spending new money into circulation, or interest-borne seigniorage resulting from loaning money into circulation.
In state theories of money from around 1900, as for example by G. Fr. Knapp or A. Mitchell-Innes, the monetary prerogative just refers to (1), i.e. determining the national unit of account. According to those theories, state agencies are not necessarily expected to issue the means of payment. The state can (and does) establish a means of payment created by others, i.e. the banks, by accepting it for incoming payments and using it for outgoing payments. Seigniorage wasn't even an issue. This legitimizes the split or mixed money arrangement we have today, where coin originates from the treasury, banknotes from the central bank, and demand deposits (digital money on account, representing 80-97 per cent of the money supply) from the banks.
That 'fractional' state theory of money has today been re-adopted by Modern Money Theory. This is in contradiction with the currency school of the 1830-40s as well as with the chartal and constitutional new currency approach pursued in this place. A state's full and unimpaired monetary prerogative clearly includes all of the three components listed above - as was the case in most of the 2,600 years since coin and, far later, paper currencies came into existence.
In amodern sovereign-currency system the entire money supply would be created and issued by an independent state body. In the US this might be an independent Currency Commission under the roof of the Treasury (assumed this wouldn't collide with the necessary independence of that body). In Europe the most obvious candidates are the independent national central banks or - in the case that the euro survives its present debacle - the ECB, respectively. This would then be a fourth branch of government, the monetary state power, complementing the legislative, executive and judicial powers. It would finally do what today's central banks are supposed to but are unable to, because under fractional reserve banking they have lost control.
The lion's share of seigniorage today is foregone to the public purse. It is the banking sector that enjoys the privileges related to the prerogative of extending primary credit and deposits. The banks' privilege of having their debt to customers declared official money is actually an amazing achievement. State coffers have to make do with a remaining relatively small interest-borne seigniorage accruing from making out residually needed central-bank credit to banks and managing a nation's foreign reserves.
Central banks, as guardians of their nations' monetary sovereignty, should no longer be seen as the special commercial banks as which they once began, but as the monetary state authority they have increasingly become – the monetary state power, institutionally separate but democratically involved and held responsible, comparable to the judiciary in that it acts according to the law and its specific legal mandate, but on that basis independent in pursuing its monetary policies. The limitations it has to observe will have to be specified under various aspects:
- growth potential of the economy at full capacity
- stability of domestic levels of consumer prices, interest rates, external exchange value of the currency, balance of payments
- stability of asset prices and ratio of financial assets to nominal and real GDP
- fiscal rules regarding government budgets, maybe even including a government expenditure-to-GDP target.
The division of powers between central bank and parliament/cabinet would maintain the separation of monetary and fiscal policy. The central bank decides how much money will be appropriate in the short and long term, and how the money is put into or withdrawn from circulation. The central bank should leave the bigger, long-term additions to the stock of money as genuine seigniorage to the government. Parliament and cabinet in turn have no right to demand money from the central bank or to interfere in monetary policy. Seigniorage would clearly be much higher than today, allowing the funding of about 1–6% of total public expenditure depending on growth and the size of government spending.
If, in addition to seigniorage, direct central-bank credit to the government or direct buying of sovereign bonds were allowed, the central bank is not obliged to lend the money demanded. It is free to grant loans if this is economically justified and does not violate legal limits. The central bank as much as the treasury would be duty bound, under threat of penalty, to make sure that what they are doing keeps within the framework and limits set by law. As long as the monetary power on the one hand and treasury, cabinet and parliament on the other act by the rules, this will not infringe the separation of monetary and fiscal policy.
At the same time, the two-tier functional division between central bank and banks would include the separation of money creation from banking. The central bank's task is to create the national money supply, to keep control of its quantity and to manage foreign reserves. The banks, ceteris paribus, would do largely the same as they do now, except creating primary credit, i.e. create by their own fiat and discretion the money supply on which they operate. The sovereign privilege of being able to spend money without having previously taken it in will be reserved for the central banks. Commercial banks will be in a position comparable to that of anyone else. They can spend, lend or invest to the degree they take up money from customers and companies, the interbank market and, if need be, the central bank. Banks would be what they are supposed to but aren't today: intermediaries between savers and borrowers, between upstream and downstream investors. It is part of their task to finance investment, but they should not to be investors themselves, at least not to a large extent.
Bank money would not exist anymore, just sovereign currency on account, on mobile storage media and on hand. This too would involve debiting and crediting in the mere booking sense of transferring existing money. Would it still involve primary loaning and thus interest-bearing debt money? That depends. If additions to the money supply are lent from the central bank to banks, just as reserves are lent today, this would be interest-bearing sovereign debt money. To a degree this may persist as an instrument of short-term monetary policy. If, by contrast, long-term additions to the money supply (in accordance with well-defined monetary and fiscal policies) were transferred to the public purse in order to be spent into circulation through government expenditure, this would not be a loan but simply debt-free sovereign currency.
Debtlessness of sovereign money ought to be mirrored in central banks' balance sheets. Banknotes and digital money on account can in future be accounted for in a way analogous to how treasury coin is accounted for today. There are some variants of how this can be done. These include that money issued through genuine seigniorage is closed out of the central bank's balance sheet, but of course kept on record in statistics.
Conventional bookkeeping may insist on treating debt-free sovereign money formally like a 'credit', even though free of interest and without specified maturity. It would thus be entered as, say, permacredit to the treasury and as a liability of the central bank. Even though this isn't fully appropriate, scarcely anyone would worry much. For practical and statistical reasons those 'liabilities' would be subdivided, similar to the case today, into 'coin in circulation', 'notes in circulation', 'digital currency in circulation'. It might nonetheless be a bit more appropriate to enter debt-free permacredit in a central-bank balance sheet not as a liability but as part of a nation's monetary equity, say as a national monetary endowment which the money-issuing authority can write out to the state coffers.
In a certain sense, though, even debt-free money is embedded in a context of economic obligations. This does not involve a banking debt but a social duty as expressed in modern principles or values such as work, performance, achievement and merit. Without human effort, labour, technical efficacy and the regenerative forces of nature there is no economic product to sell and buy, and no purposes in which to invest and build up capital. Money would have no function and be worthless. Debt-free sovereign money may not be a promise to repay, but it is a promise to be productive, and a promise to keep control of the quantity of money so that there is neither too much nor too little money around in correspondence with actual levels of productivity.