Joseph Huber votes for a sovereign money reform
Sovereign money instead of commercial bank money: On 12 November, Joseph Huber, Professor for economic and environmental sociology at the Martin Luther University of Halle-Wittenberg, pleaded for a sovereign money system. His talk was part of the CFS Lecture series on the Order of Money hosted by Thomas Mayer, CFS Senior Fellow.
Huber explained that the existing money system (the reserve system) allowed banks to create deposit money, theoretically in unlimited amounts. The resulting money supply was several times higher than the reserves that banks were obliged to hold with the central bank. For example, a bank needs only around three percent coverage with the central bank to credit 100 currency units to a bank account. Due to increasing non-cash transactions central banks had virtually lost the control over money supply, Huber said.
Huber criticized that the reserve system was unstable and amplified crises because of regularly overshooting credit and deposit creation: There was a constant creation of money without real economic production of a comparable size. According to Huber, the true monetary cause of the present financial crisis was this excess money. He explained that the money supply M1 – currency in circulation and demand deposits of individuals or companies with banks – increased by 189 percent between 1999 and 2008 whereas the nominal gross domestic product only grew by 51 percent. As a consequence, inflation and asset inflation rose as well as indebtedness, also by states. Moreover, Huber warned that money in bank accounts, which is to a great extent uncovered, was unsafe because it could simply disappear in case of a banking crisis.
Therefore, Huber recommended that the state should regain the money monopoly in order to better control the money supply. He suggested a transition from commercial bank money to sovereign money. In contrast to commercial bank money, sovereign money is valid unlimitedly and stable and can only be issued by the central bank. Accounts from bank customers should be converted into money accounts that are kept off the banks’ balance sheets to separate the banks’ money from their customers’ money. As a result, the money of bank customers will be safe again. Huber explained that the state currency sovereignty would be regained by this reform, the creation of deposit money would be no longer possible and thus no overshooting money supply could arise. A further advantage would be, according to Huber, that the government would get all profits from money supply growth – the so-called seignorage – and could use it to finance part of its state budget because only the state has full sovereignty to create money.