inc Explanatory Note 12

(12) Sovereign Money

Some 24 national campaigns argue that taking the power to create money out of the hands of banks would end the instability and boom-and-bust cycles that are caused when banks create too much money in a short period of time.  In this way, banks could be allowed to fail without bailouts from taxpayers.  It would also ensure that, rather than being lent into existence as currently happens and frequently for speculative rather than productive purposes, newly created money is spent into the real economy, thus reducing the overall public debt burden.

Only one campaign has official endorsement — Iceland — on which one reviewhas commented:  “Under the proposed sovereign money system, the Central Bank of Iceland would increase the money supply in proportion to growth and consistent with the mandated inflation target.  Direct control of the money supply would remove the need for traditional policy instruments designed to manipulate commercial banks’ incentive to create money, such as policy interest rates and regulatory lending limits.  The government would then put the money into circulation via sovereign bond purchases, and/or fiscal measures. To avoid conflicts of interest leading to the oversupply of money, decisions over allocation would be made by a committee independent of the government.”  For Constitutionalists, however, whatever system of money management is opted for, by government or independent thereof, it is crucial that the overall process remain at all times subject to public oversight thereby ensuring that money is deployed as a social good in the interest of the many rather than, as at present, of the few.