Martin Wolf FT supports Sovereign Money in discussion of KPMG report to Icelandic Prime Minister September 5, 2016

What’s the problem?

Right now most of the money in our economies is created by banks. Banks create up to 97% of money, in the form of the numbers in your bank account, when they make loans. This means that they effectively decide a) how much money there is in the economy, and b) where that money goes. The control of the creation of money, in the hands of banks, has created many problems.

Martin Wolf challenges the Governor of Icelandic Bank “This system of banks creating money is an unspeakable mess”

The FT’ s chief economics commentator Martin Wolf …challenged the Governor of Icelandic Bank by saying that since the financial system is the monetary system, it’s impossible to separate these two issues. In addition, he emphasized very eloquently that the current system was not stable at all. “It is very hard to say that financial system has done its job of intermediating for real economy” he said. “This system is an unspeakable mess and it’s going to go on being an unspeakable mess.”

“You want your money to be the one thing that is completely safe when everything else goes to hell”, said Wolf, but the design of the banking means that it’s impossible for banks to provide this safety. It requires government support – guarantees from the central bank and the Treasury – to keep the system safe, but these guarantees are “a gigantic source of moral hazard”.

“There is a very very powerful set of reasons for believing that the status quo is intolerable” he concluded, before emphasizing the merits of sovereign money:

  • Reclaim seigniorage (the proceeds of creating money) for the public benefit
  • Create a more stable financial system
  • Limit the ability of banks to ‘extract rent’ (i.e. extract wealth from the economy rather than generating it)
  • Stop pushing up house price bubbles
  • Have a much stronger impact on stimulating the economy than current measures like QE.

First steps could be digital cash and helicopter money

Wolf thinks there are possibly two key measures that could be undertaken in the short run. First, he said something like ‘helicopter money’ whereby central banks would distribute money directly to citizens was quite likely to happen. Second, central banks could issue their own digital currencies to provide a safe version of electronic money to citizens, alongside with existing banking deposits. Wolf however warned that a key issue was the independence of central banks, which needs to be preserved under a sovereign money system. But after all, the independence of central banks was thought as being impossible in the past, so there is no reason we cannot modernise those institutional arrangements with a sovereign money system.

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