Vollgeld and the sovereign money initiative

On Sunday, the Swiss voted down in a referendum a proposal known as sovereign money or Vollgeld/Monnaie Pleine). This proposed to do away with ‘fractional banking’ and make the central bank the sole authority for creating money. In the modern banking system, notes and coins — currency — (along with some special reserves) are created by the central bank.  But this ‘monetary base’ only represents a small part of the total money supply in an economy. Instead, the majority of money is created by commercial banks when they lend to consumers and businesses. When banks make loans to households, companies and other financial institutions, they create money deposits (because these loans then appear as deposits for the borrowers in the bank.

But the amount that banks have to keep as reserves to meet these depositors’ demands for cash and as a buffer against any collapse in the value of the assets offered by the borrowers against their loans asset write-downs is very small in comparison to their assets, a fraction. That’s because the risk of failure or non-repayment is low and the regular demand for cash is low.  In practice, banks keep about 5% of liabilities as fractional reserves.

The Swiss sovereign money initiative proposed that all deposits have to be kept as reserves (with the central bank). So the commercial banks’ ability to ‘create’ money through loans would disappear and, effectively, the central bank would be in sole charge of money supply.

Why do this?  The argument is that commercial banks are inefficient in lending and cause regular financial crises. They tend to lend more for financial speculation rather than for productive investment and this leads to financial crashes.  If the central banks hold all the country’s cash, they can control the lending and make sure it is for productive purposes.  And the central banks could directly boost demand in the economy by expanding the money supply without the inefficient intermediary of the commercial banking system.

The sovereign money idea is not new but has been revived because the global financial crash and the Long Depression that has followed.  It was previously mooted in the Great Depression of the 1930s.  Chicago University ‘Debt depression’ economist Irving Fisher put it forward then.  More recently, some economists at the IMF resurrected the idea in a recent working paper, “The Chicago Plan Revisited” ( IMF Working Paper WP/12/202).  IMF Working Paper WP/12/202.   Several top Keynesian economists also have supported vigorously the idea – including Martin Wolf at the Financial Times and Steve Keen, the post-Keynesian economist. 

Naturally, the monetary authorities are opposed to the idea because of the fear that governments could remove the ‘independence’ of the central bank and start to use the country’s cash deposits now at the central bank for their own purposes and also to expand the money supply without any productive assets backing – thus leading to runaway inflation.

The other question is whether putting all the money supply in the hands of the central bank would stop future financial crashes.  The credit crunch and global financial crash of 2007-8 did not originate in commercial banking but in investment banks like Bear Stearns and Lehmans.  These banks held no customer deposits or made loans to households but were engaged in speculative capital like ‘exotic derivatives’.  With ‘sovereign’ banking, such speculation would continue and even increase in the commercial banking system.

I have dealt with the banking scheme before in a previous post.  As I argued then, sovereign money would only work if the banks were brought into public ownership and made part of an overall funding and investment plan.  But if that happened, there would be no need for it.

Behind these schemes is a belief that all that is wrong with capitalism is a bad monetary system and reckless bankers.  Also there is the Keynesian belief that government controlled money expansion can avoid crises and slumps by boosting ‘effective demand’.  It is ironic that Keynes himself with the experience of the Great Depression in the 1930s came to the conclusion that monetary stimulus was inadequate to get economies out of slumps and eventually opted for fiscal stimulus.

The reality of the capitalist system is that only if profitability is sufficient will investment increase and lead to more jobs and then incomes and consumption.  Artificial money creation by fiat from the government does not get round this – as the experience of ‘quantitative easing’ has already shown.

The outcome of a sovereign money scheme to bypass the banking system will not be a sustained economic recovery, but either a new bout of financial asset speculation or inflation, or both.  It is not the banking system that has to be bypassed but the capitalist system of production for profit that has to be replaced by planned investment under common ownership.  Indeed, if the banking system is circumvented, the capitalist system of production will be thrown into greater confusion.


10 Responses to “Vollgeld and the sovereign money initiative”

  1. Nadim Mahjoub Says:

    Hi Michael

    Here are my suggestion on the paper about China.

    Correct the following sentence

    : Lin found this index well explained the economic growth… this was a flawed development strategy is responsible for …

    As Tyler Cowen recently put it, a leading neoclassical economist of the 1950s and 1960s …

    P. 4, John Ross … There is no reference. Who is he?

    Ross considers that this how John Maynard Keynes

    P. 6 You should have briefly explained what the ‘law of value’ is.

    The neoclassical prescription for economies that, like China (and the Soviet Union), had

    P. 7: the quote from Anwar Shaikh is not complete, “Thus …”

    You should the same font and the same style throughout

    P. 9 consistency: use only one ‘points’ or ‘pts’

    Regards Nadim Mahjoub نديم المحجوب Arabic Tutor at LSE and International House London E-mail: nadimmahjoub@gmail.com Skype: nadim_london http://middleeastpanorama.blogspot.co.uk/


  2. Mike Ballard Says:

    Very useful critique of MMT. Thank-you, Comrade.

  3. Tony of CA Says:

    Why can’t people just realize the utter insanity of the for profit system? It simple not sustainable.

  4. Roberto Says:

    Dear Mike Ballar,

    In my opinion, there was not critic of MMT in this blog.
    MMT and Sovereign Money are orthogonal concepts.

    Best regards.

  5. Alex Says:

    I realy don‘t understand the Marxist argument against helicopter money (printing money and sending it to each and every citizen). Crisis of profitability get cured according to Marx by a destruction of capital. If just enough capital values get destroyed, new production of capital will be profitable again.

    Why can‘t the destruction of capital values be realized through destruction of money-capital instead of real capital? If the central bank could create 5% inflation (that is a rate of return of -5% in real terms, destroying 5% of money-capital each year), investments with a rate of return above -5% in real terms, would be more „profitable“ than hoarding money. Hoarding 100€ leaves 95€ in real terms after one year, investing with a real return of -2% leaves 98€.

    Why is hoarding money a very important part in Marx‘ conception of capitalism, if making costless hoarding impossible, wouldn’t have no effect?

    • ucanbpolitical Says:

      This is what the Chinese government did in 2016. It droned money into the economy through additional credit. However, this has come at the expense of adding to the already high debt burden.

      • Alex Says:

        “However, this has come at the expense of adding to the already high debt burden.”
        Yes but they owe this debt to themselves, this is not a real problem, in any case, monetary policy could be done without any debt whatsoever.

        By the way, I think in the case of China, even Michael Roberts would agree that “printing money” works. It’s only in capitalist society where the majority of corporations is in private hands, that he thinks money “printing” leads to stagflation.

        My question is, what is the theoretical justification for this belief. Since the rate of profit can and is falling, why can’t it go into negative territory? Why can capitalists coordinate their reaction to “money printing” by raising prices without raising productivity (stagflation) if they can’t coordinate their behavior in the case of technical innovation, which also leads to a fall in the profit rate?
        If capitalist could switch from competition to coordination so easily, why is there a falling rate of profit in the first place? In that case, wouldn’t it be better for capitalists to never allow for any kind of technological progress (higher organic composition of capital), since the less labour they hire, the less exploitation, the less profit?

        Isn’t this the basic contradiction of capitalism? Capitalists -because of competition- have to be efficient, keep costs down, so they always try to produce with less workers, on the other hand they need workers to exploit, because that’s where profits come from. They can’t live with them, can’t live without them. This is not just a conflict, but a real contradiction at the heart of capitalism. That’s why the basic tendency of capitalism is always to reach a final utopia where there is production with no labour input at all, but the moment this point is reached, capitalist will realize that their profits have also vanished.

        Now, if capitalist could just abolish competition, they could successfully prohibit any technological progress and keep the profit rate always at a maximum. We would forever stay in a economy with a very low organic composition of capital.

        Michael Roberts seems to be saying capitalist can’t do that, but the moment somebody “prints” some money, suddenly they can.

  6. Alex Says:

    The last sentence should end:
    „…would have no effect?“

  7. Frank Nilsson Says:

    Bad research Michael!
    The problem with todays banking system is not inefficiency. It is the fact that private banks can make money out of nothing and then make a profit out of it. That is in fact a very essentiell part of the capitalist system.

    Abe Lincoln tried the idea with great success when printing the greenback dollars, and it did not lead to inflaton. On the contrary it enabled him to invest in railways and telegraph and to win the war.
    The Confederate States borrowed from the banks and were totally broke and in debt when the war was over.

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