The document discusses the case for transitioning from a fractional reserve banking system to a sovereign money system. It argues that the current system of private bank money creation leads to excessive credit creation and money supply growth, fueling financial crises and instability. Under a sovereign money system, the central bank would have sole authority to create money, eliminating private bank credit money in the form of demand deposits. This would allow for better control of money supply, inflation, and credit bubbles. It would also generate seigniorage revenue for the government on an ongoing basis and allow for an initial one-time reduction of public debt.
Prof. Joseph Huber:Creating a Stable Monetary System. The Case for Sovereign Money Conference
1. Creating a Stable Monetary System.
The Case for Sovereign Money
Conference The Future of Money
University of Economics and Business
Athens, 24 Jan 2013
Prof Dr Joseph Huber
Chair of
Economic Sociology, Em
Martin Luther University
Halle an der Saale
2. Financial Crises Abound
Current banking and debt crises are no single events, but latest links in
a continued chain.
From 1970 to 2007 many crises happened on migratory hot spots around
the world, intensifiying in number and gravity:
145 banking crises
208 currency crises
72 sovereign debt crises
______________________________________________
425 systemic financial crises
in addition now also including the subprime crisis, the US-EU banking
crisis, and the PIIGS sovereign debt crisis. Further such mess upcoming.
Sources: Laeven/Valencia 2008, Reinhart/Rogoff 2009, Lietaer et al 2012 49–52. Bundeszentrale
für Politische Bildung: http://www.bpb.de/wissen/DP0D1P. Kennedy 2011, 96.
3. The misjudged factor – the monetary system
Among the many factors held responsible, one is poorly understood and
has so far been misjudged – the monetary system.
The monetary system as it stands today is a system of unrestrained
credit creation by the banks on a fractional basis of central-bank
reserves, called fractional reserve banking.
The financial causes of the crises have a common monetary cause:
excessive credit creation within the system of fractional reserve banking.
The financial system is plagued by malfunctions. It is the
monetary system that is at the root of the problems.
Unrestrained credit creation within the system of fractional reserve
banking inevitably feeds speculative bubbles, asset and consumer price
inflation, financial-investment income at the expense of earned income,
and results in over-indebtedness, particularly of governments and the
banks themselves, with ensuing crises and loss of money and assets alike.
4. Money Governs Finance, Finance Governs the Economy
o l→
o ntr
C
y of
a rc h Real Economy
H ier Financial
→
System
Monetary
System
←H
ierar
ch y
of R
e s tr i
ction
s←
5. Uno-Actu-Identity of Credit Creation and Money Creation
(demand deposits) by ledger entry
2
Bank Balance Sheet
Customer
Assets Liabilities Debit
Credit
10.000 10.000 - 10.000
+ 10.000
Claim on Liability Interest-bearing Credit as
liquid
customer towards debt to the bank bank
money
from credit customer
(means of payment)
creation
= claim on cash
Banks create credit (non-cash money) when they
- make out loans and overdrafts
6. Fractional Reserve Banking
i.e. Multiple Credit Creation
on a Fractional Basis of Reserves
In order to create 100 units of demand deposits, the banking sector needs
fractional 'coverage' in central-bank money of about 2,5% - composed of
• 1,4% cash (coin and banknotes) for the ATMs
• 0,1% liquid reserves for settlement of daily clearings
• 1,0% obligatory minimum reserve (of no use at all)
Put as banks' money multiplier: Bank money, i.e. demand deposits created
by the banking sector = 900 times liquid reserves
= 73 times cash
Today's money supply M1 (currency in circulation) consists of
80–95 % bank money on current account (demand deposits)
5–20 % sovereign money (state money in the form of coin, banknotes,
and liquid central-bank reserves) – though not even this put
into circulation by sovereign supply initiative, but by banking
demand pull for fractionally re-financing themselves).
7. M1 Bank Money (demand deposits) vs Cash
Data: Swiss National Bank, Historical Time Series, No.1, Feb 2007, 1.3, 2.3
8. Cashless transactions by (1) clearing of customer accounts
and (2) settlement of bank accounts in reserves
Customer A 20 k
Customer B 30 k
15 k Customer O
Customer C 25 k
30 k Customer P
30 k Customer Q
Bank X itself 15 k
10 k Bank Y itself
90 k
85 k
Clearing
Bank ∆ =5k Bank
X Y
Settlement in inter-
bank credit/debit or
central bank reserves
9. Short-Term Restrictions to Credit Creation out of Thin Air
1) Market volume = preparedness to go into debt = potential of
demand for securities and credit (loans)
2) Expansion/Contraction of credit in step throughout the
banking sector, domestic and international (thus ensuring
near-balance of in- and outflows within the system)
3) Size of banks. For large banks it is much easier to extend their
balance sheet than for smaller banks
4) Obligatory minimum reserves
5) Capital adequacy according to Basel rules (assets-to-equity-ratio
or loan-to-equity-ratio)
6) Liquidity rules (liquid and near-liquid assets must be equal to or
bigger than overnight liabilities)
after H.Seiffert, Geldschöpfung, Nauen 2012, 78-97.
In the longer term there are no restrictions. By crediting/debiting,
buying/selling, paying out/taking in relative simultaneously, banks
mutually create all of the required assets and equity they need.
10. Split Circulation of Money
1. Interbank 2. Customer
circulation circulation (nonbank)
of of
reserves (on account) bank money (on account)
Central Bank Banks Customers
Cash Cash - private Haushalte
Issue Exchange
Monetary and - companies, organis.
Financial Institutions - public households
3. Cash (coin, notes) as a residual sub-quantity of the money in circulation,
exchanged out of account, or back onto account .
11. Banks' money creation is out of control, the money supply
wildly overshooting.
M1/GDP (Marshallian 'K') European Monetary Union
Increase 1995–2010
Data: http://epp.eurostat.ec.europa.eu/portal/page/portal/national_accounts/data/database
12. Banks' money creation is out of control, the money supply
wildly overshooting.
Marshallian 'K' Germany (M1/GDP) 1950–2010
Data: http://www.bundesbank.de/statistik/statistik_wirtschaftsdaten_tabellen.php#wirtschaftsentwicklung
13. The Monetary Cause of Financial Causes
of the current crises:
Overshooting Money Supply from Fractional Reserve Banking,
i.e. Multiple Credit Creation on a Fractional Basis of Reserves
European Monetary Union 1995–2008
M1 189 % ∆~6/8 ~3/4
GDP nominal (price-inflated) 51 % ∆~1/8
GDP real (price-deflated) 23 % ~1/8
United States increase last ten years
M2 (broad liquid money) 80 % ∆~ 2/5
GDP nominal (price-inflated) 45 % ∆~ 2/5
GDP real (price-deflated) 16 % ~ 1/5
Sources: www.federalreserve.gov/releases/h6/hist; www.bundesbank.de/statistik/zeitreihen; Data: http://
epp.eurostat.ec.europa.eu/portal/page/portal/national_accounts/data/database: Bundesbank, Monthly
Bulletins, tables II.2.
14. Excessive Credit Creation, i.e. money-printing by the banks,
results in Inflation and Asset Inflation.
There are two main channels through which an expansion of banks' balance sheets,
i.e. expansion of the money supply, contributes to credit bubbles, financial asset
bubbles, and over-indebtedness of actors involved, including market 'exuberance'
and asset price inflation.
- bank credit (additional creation of money) for direct leverage of financial-market
investment in stocks, real estate, derivates, foreign exchange, private equity (e.g.
hostile leveraged buy-outs most of which are credit-funded)
- bank credit (additional creation of money) for funding public debt, i.e.
buying sovereign bonds by paying with newly created demand deposits.
The volume of sovereign bonds and bills is nothing but just another bubble, in
fact the biggest bubble of all.
15.
16. Expansion of
bank money
FAZ 10.5.11, 9
as leverage for
paper investment
in financial assets
Taken from The Economist
18. Accumulation of sovereign debt in industrially advanced countries
Japan 1950-2009 (Bln Yen)
USA 1940-2010 (Bln US-Dollar)
19. Government Debt = Interest-Bearing Assets (Gov Bonds & Bills)
Who profits from government debt, as long as governments are
able to pay?
Banks 50 – 60 %
Funds and Insurance Companies
(in UK and elsewhere also pension funds) 30 – 35 %
Private Households
(Italy, Japan more than elsewhere) 7 – 16 %
Ownership of Public Debt in Europe
12%
Banks domestic and foreign
Funds, Insurance
33% 55%
Private Households
Source: ECB, Monthly Bulletins, Table 6.2.1
20. Shift in Income Distribution – to the Benefit of Financial Income
at the Expense of Earned Income
Any current income (taxes, labour, interest and payback of pricipal)
has to be paid out of current proceeds from GDP – or additional
debt.
If interest-bearing monetary and financial assets grow dispropor-
tionately higher than GDP, this will lead to a disproportionately
growing share of income from financial investment, or interest
respectively, and correspondingly involve a declining share of
earned income.
22. Increase of Financial Income to the Detriment of Earned Income
Economist 21 Jan 2012, 47
23. The Case for Monetary Reform.
Transition from banks' money surrogate (demand deposits) to
plain sovereign currency
The financial causes of the crises have a common monetary
cause: excessive credit = money creation. Financial markets cannot
work properly on the basis of a malfunctioning monetary system.
For sorting out banking and financial markets, one has to come to
grips with the money system.
Measures of banking and financial reform can hardly be successful
unless based upon a reform of the underlying money system.
→ see again figure
24. Money Governs Finance, Finance Governs the Economy
o l→
o ntr
C
y of
a rc h Real Economy
H ier Financial
→
System
Monetary
System
←H
ierar
ch y
of R
e s tr i
ction
s←
25. The Case for Monetary Reform – Goals
→ Obtaining full control of the money supply (M-to-GDP ratio)
→ Control of inflation and asset inflation (asset/debt-to-GDP ratios)
Hence,
→ reintroduce plain sovereign currency in order to
→ reestablish the monetary prerogative as a sovereign right of
constitutional importance, comparable to the state monopolies
on legislation, public administration, jurisdiction, taxation, and
the use of force)
26. The Case for Monetary Reform.
Transition from banks' money surrogate (demand deposits) to
plain sovereign currency
Sovereign money = chartal or state money.
E.g., coin (issued by the treasury) and banknotes (issued by the
central bank) are sovereign money.
Demand deposits are private bank money.
A money reform today does with digital money on account the same
that was done with private banknotes in the 19th century, when
private banknotes were phased out in favour of the state or central-
bank monopoly on banknotes such as it exists today.
27. Key Components of a Sovereign Money Reform
1. Restoring monetary sovereignty, and sovereign money respectively:
ensuring the full state prerogative of
→ determining the currency of the realm (unit of account)
→ creating the currency (= money in circulation = legal tender),
including coin, banknotes, as well as digital currency (e-money)
on account and on mobile storage media
→ obtaining full seigniorage from the issuance of money.
2. Independent Monetary Authority: Conferring responsibility for the
entire stock of money to an independent monetary authority (in
Europe the central banks, the ECB resp., under public law)
3. No more bank money: Putting an end to the creation of bank money
(demand deposits) which is credited into current accounts on a
basis of fractional reserves
4. Full seigniorage to the benefit of the public purse
by spending new money into circulation through public expenditure
(genuine seigniorage), or by loaning it to banks (interest-borne
seigniorage).
28. Main Measures to be Taken for a Transition to Plain Sovereign Money
Extension of the monopoly on coins and banknotes to
money on account and on mobile devices. From a set date on,
the central bank has the exclusive right to create and put into
circulation the entire stock of money (currency, legal tender).
Amendment of Art.128 TFEU, Art.16 ECB/ESCB Statutes.
Taking customers' current accounts off the banks' balance sheet,
thus putting an end to banks' ability to create demand deposits.
This is no nationalisation of banks and credit. Banks continue to be free
market enterprises. The reform is just about renationalising the money.
Overnight liabilities to customers are redeclared to be liabilities to
the central bank, getting out of the books to the extent that outstanding
old customer loans are repaid and the money passed on to the
central bank – where it is formally extinguished and replaced with
newly issued plain money.
29. Main Measures to be Taken for a Transition to Plain Sovereign Currency
Revision of Art. 123 (1) TFEU (Prohibition for ECB/NCBks to directly
contribute to funding government budgets). Central Banks shall be
- not just lender of last resort for the banks, but also for the state
- not just re-active issuer of least reserves in re-financing the banks,
but pro-active issuer of first instance, in fact the sole issuer of money
- acting not just as the bank of banks, but again as the bank of the state.
Central banks will thus be upgraded in formal status, becoming de facto
what they are already supposed to be de jure, i.e. an independent
monetary state authority (in a sense analogous to the judiciary) with
full control of the money supply – a function they now cannot fulfill
because under fractional reserve banking the banks have largely
usurped the state prerogatives of money creation and seigniorage.
31. Advantages of Plain Sovereign Money
A transition from bank money to sovereign money
involves a minimum of institutional change . It leaves most
structures intact and banking practices unchanged.
It keeps the advantages of the present system, such as e.g.
• sufficient and flexible money supply (only a partial reality today)
• affordability of credit
• maturity transformation
• easy money transfer (payment systems) both domestically
and internationally
• full convertibility of the currency
In addition it comes with five more important advantages
32. Advantages of Plain Sovereign Money
1. Money-on-account cannot disappear and is thus safe. In a banking crisis,
the payment system is no longer at stake. In so far, government and society
aren't susceptible to banking blackmail any more.
2. Money supply under effective control. No more inflationary bank-money
supply. Monetary inflation close to zero possible.
3. No more procyclical overshooting, or undershooting, of money supply.
More steady flow of money and capital. Business and financial cycles more
moderate. No more additional 'money fuel' for speculative leverage.
4. Full regular seigniorage to the benefit of the public purse (annualy about
1–4 % of total public households, depending on country and growth).
Banks' margin extra profit and privileges from credit creation abolished.
5. One-off transition seigniorage. Allows for a 50–100 % redemption of
public debt within two to four years (dependending on country).
33. Regular Annual Seigniorage as an Addition to the Stock of Money
Billion SFr BIP M1 Seigniorage approx. Total public ∆ M1 as a % of
Billion € (memo) ∆ M1 at expenditur total public
∆ BIP 1-2-3 % e expenditure
Greece 215 96 1.0 – 1.9 – 2.9 108 1.0 – 1.8 – 2.7 %
EU-17 9.347 4.786 48 – 96 – 144 4.652 1.0 – 2.1 – 3.1 %
Germany 2.477 1.383 14 – 28 – 42 1.164 1.2 – 2.4 – 3.6 %
Austria 301 141 1.4 – 2.8 – 4.2 153 1.0 – 1.8 – 2.7 %
Switzerl. 568 463 4.6 – 9.3 – 13.9 189,2 2.4 – 4.9 – 7.4 %
Figures available for 2011. Quellen: European Central Bank, Monthly Bulletin, Tables 2.3.1+2 (www.ecb.int). -
Deutsche Bundesbank, Monatsberichte, Tabellen II.1+2 (www.bundesbank.de). - Österreichische Nationalbank,
Statistik und Meldeservice, http://www. oenb.at/de/stat_melders/statistik_und_melderservice.jsp - Schweizerische
Nationalbank, Statistische Monatshefte, Tab. A2, B2. - http://www.bankofgreece.gr/Pages/en/Statistics/monetary/
nxi.aspx
34. One-off Transition Seigniorage EU-17, Gr, D, A, CH
Billion € A1 A2 A3 A B
Billion SFr Customer Interbank Reserves M Stocks Total A/B
Demand Demand Bks with to be Public Debt
Deposits Deposits CentralBk replaced
2009 EU17 3.744 312 369 4.425 7.120 62 %
Ger 1.014 129 112 1.255 1.767 71 %
A 111 22 35 168 191 88 %
CH 336 116 45 497 209 238 %
2010 EU17 3.912 359 317 4.588 7.796 59 %
Ger 1.109 135 146 1.390 2.056 68 %
A 112 19 39 170 206 83 %
CH 386 123 38 547 209 262 %
2011 Gree 75 ~8 ~12* 95 280 34 %
EU17 3.943 390 637* 4.970 8.219 61 %
Ger 1.170 115 121 1.406 2.088 67 %
* Untypical effect through QE. Sources: Europäische Zentralbank, Monthly Bulletins, Tab. 2.3.2 (SightDepos), 2.5.1 (Interbk Deposits), 6.2.1
(Public Debt). - Deutsche Bundesbank, Monatsberichte, Tab. II.2+3 (Sichteinl), IV.3 (Interbk-Sichteinl), III.2 (Reserven EU+D), IX.1
(Staatsschulden). – Österreichische Nationalbank, Statistiken, Daten & Analysen, Tab. 1.1.2 (Reserven), 7.24.1 (Staatsschuld), 3.3.1–3
(Zwischenbankforderungen) - AK Österreich, Wirtschafts- und Sozialstatistisches Taschenbuch 2011, Tab. Geschäftsstruktur der inländischen
Kreditinstitute (Zwischenbank-forderungen). - Schweizerische Nationalbank, Statistische Monatshefte, Tab. A1.17, A2, B2. - SNB, Die Banken in
der Schweiz 2010, Tab. 18 Passiven. - Statistik Schweiz/Bundesamt für Statistik, http://www. bfs.admin. ch/bfs/portal/de/ index. Eidgenössische
Finanzverwaltung, Finanzstatistik der Schweiz 2010, 3. - Eurostat Statistical Books, Government Finance Statistics, 2012
35. Advantages of Plain Sovereign Money
Under given circumstances there is no smooth way out of the present
banking and sovereign debt crisis of the old-industrial world.
Under prevailing conditions, overcoming the crisis unavoidably includes
- creditor write-downs (haircuts) to an important extent
- inflation and/or negative interest (real interest rate below inflation rate)
- austerity regimes (strangling the economies, increasing unemployment
and impoverishment ).
A transition to plain sovereign money, by contrast, would actually make for
a smooth ending of the banking and debt crisis – neither requiring austerity
regimes, nor inflation or negative interest, nor creditor haircuts.
It is difficult to understand why those in charge do not embrace this
opportunity.
36. Creating a Fair and Stable Monetary System.
The Case for Sovereign Money
Conference The Future of Money
University of Economics and Business
Athens, 24 Jan 2013
Prof Dr Joseph Huber
Chair of
Economic Sociology, Em
Martin Luther University
Halle an der Saale
37. Euro Sovereign Debt Crisis. What should have been done (1)
Keep to the law: No Bail-out (Art.125 TFEU)
Value adjustment of sovereign debt (in fact debt haircut) by markets.
Accept insolvency of affected states.
Systemically relevant creditor banks (some of the 90 out of 8.300
banks in the EU) which were possibly threatened by bankruptcy
could have been stabilised through bail-in and government partici-
pation in banks' equity (= partial nationalisation). Insolvent govern-
ments could have obtained necessary means from other euro
member countries (≠ bail-out).
In the federal structure of the U.S. there are no bail-outs. Insolvent
States or municipalities cannot claim 'solidarity' from outside. External
help, though, may come from stimulus plans and recuperation aid.
38. Euro Sovereign Debt Crisis. What should have been done (2)
Insolvent debtors face a difficult period of time anyway. Imposed
austerity to the single-side befenit of creditors causes sharply shrinking
economies and purchasing power, increasing unemployment and
impoverishment, and is certainly the worst option of all.
A sovereign debt crisis is not to be equated with a currency crisis.
Possible insolvency of some nation-states would not have resulted
in a an existential crisis of the euro. Public insolvencies in the U.S.
never aroused concern about the U.S. dollar.
Probably transitional devaluation of the euro of about 20–35 % for
about one to three years. Not too tremendous a problem. The 'euro
crisis' is a pressure pretext to be bailed out.
39. Leaving the euro. An option worth considering?
Pro
Return to former national currency would result in a low valuation (devaluation
respectively) of the new national currency. This creates a strong advantage of
international cost competitiveness.
If the return to a national currency is combined with an imposed reduction, or
even cancellation of all claims and debts in euro, this would result in a relief
of total national debt, i.e. getting things straight for a new beginning
… though, of course, at the expense of domestic and foreign creditors, which
is where trouble comes in …
40. Leaving the euro. An option worth considering?
Contra
If not combined with reduction or cancellation of national debt, a return to
the national currency would actually worsen the burden of foreign debt.
If combined with imposed debt relief, this causes massive damage to/problems
for domestic creditors and investors. Lack of financial resources. Credit
drought and investment restraint. As a result, shrinking economy in spite of debt
relief, and maybe political unrest.
Long-winded legal disputes over contract violations.
Massive flight from the new currency. Another drain on foreign reserves.
Due to lack of foreign reserves imports would stay below what is required.
Remaining imports would trigger (imported) inflation.
Equally, internationally active firms would face difficulty in meeting their
obligations. Thus many firms threatened in their existence.
Incoming foreign direct investment would be low, or fail to materialise at all.
Foreign credit would be obtained under unfavourable conditions only, and
come with exchange-rate risk and new dependency on foreign creditors.
All things considered … leaving does not really look like a good bargain.
41. Creating a Stable Monetary System.
The Case for Sovereign Money
Conference The Future of Money
University of Economics and Business
Athens, 24 Jan 2013
Prof Dr Joseph Huber
Chair of
Economic Sociology, Em
Martin Luther University
Halle an der Saale
