Sovereign Money

The term "sovereign money" denotes the portion of a currency issued by a central bank or national monetary authority which is not made up of debt.

"Cash" is another term often used to describe sovereign money. However, a sovereign currency can be made up in part of scriptural money issued by a central bank or monetary authority in addition to banknotes and coinage.

According to estimations, sovereign money currently makes up just 20 percent of currency reserves. 80 percent of the “money” held in reserves is private bank money - debt owed by banks to their customers and by borrowers to banks.

Retail banks create ever more private bank money in the process of providing loans. Because banks only hold a small part of the money which they owe to depositors, they make up the bulk of the loans with scriptural money.

The money which bank customers have in their bank accounts really amounts to nothing more than an “IOU” from the bank to the customer. If more than a small portion of depositors wanted to withdraw their deposits at the same time, the bank would be unable to provide enough sovereign money to repay depositors.

Those pushing for an economy based on a sovereign currency want to forbid the spontaneous creation of private bank money and only allow the use of money which is produced and controlled by the central bank (the Swiss National Bank in Switzerland).

If a sovereign currency were adopted, private merchant banks and universal banks (like UBS, Credit Suisse, ZKB, PostFinance and Raiffeisen) would no longer be allowed to create scriptural money. Banks would need enough sovereign money to cover all deposits.

Similar concepts, such as Irving Fisher’s “100% money model”, have been presented since the 1930s. The so-called “Chicago plan” aimed to replace the dominant fractional reserve system with a sovereign currency. Banks would only be able to lend money which was fully covered by their sovereign currency reserves.

In the German-speaking world, the “Vollgeld” concept has been further developed by economist and social scientist Prof. Joseph Huber. Huber has criticized central banks’ lack of control over the amounts of new money created and believed that a reform based on sovereign money could create a more stable financial system.

More on this topic:
Alternative currencies explained
Cryptocurrencies compared

Expert Benjamin Manz
Benjamin Manz is CEO of and an independent expert on banking and finance.
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