Introduction to and Summary of
Creating New Money. A Monetary Reform for the Information Age

Today’s monetary and banking system is, in essence, still based on the 500 year old fractional reserve system suited to metal money.  It still has to catch up with the new payment practices and the accelerating circulation of non-cash money based on modern information and telecommunication technology.

It is now opaque, inherently un­safe and unstable, almost impossible to control, and too expensive. It is increasingly perceived as part of an unaccountable system of money and finance that needs reform at every level - local, national and international.  New initiatives and proposals are in the air. The New Economics Foundation has been prominent in developing and promoting LETS (local exchange trading systems), time money and other alternative or parallel currencies, microcredit, community banking, credit unions, and other new approaches to local community finance (Mayo et al 1998).

The reform we discuss in this report is different from those.  It is not directly linked to them, but is a wider issue. It is a reform of the mainstream monetary and banking system. It reflects the values of a democratic civil society and the need for economic and financial stability.  It is in tune with the Information Age. 

It is basically simple. It is in two parts.
1)  Central banks should create the amount of new non-cash money (as well as cash) they decide is needed to increase the money supply, by crediting it to their governments as public revenue. Governments should then put it into circulation by spending it. 
2)  It should become infeasible and be made illegal for anyone else to create new money denominated in an official currency. Commercial banks will thus be excluded from creating new credit as they do now, and be limited to credit-broking as financial intermediaries.   

We refer to this as ”seigniorage reform”.  While adapting to the new conditions of the Information Age, it will also restore the prerogative of the state to issue legal tender, and to capture as public revenue the seigniorage income that arises from issuing it.  Originally, seigniorage arose from the minting and issuing of coins by monarchs and local rulers.  Extending it to the creation of all official money will correct the anomaly  that has grown up over the years, resulting today in 95% of new money being issued, not by governments as cash (coins and banknotes), but by commercial banks printing credit entries into the bank accounts of their customers in the form of interest-bearing loans. This costs the public large sums of money in seigniorage revenue foregone. ... It gives the commercial banks a hidden subsidy in the shape of special, supernormal profits.

Chapter 2 outlines the arrangements that seigniorage reform will introduce for creating new non-cash money and putting it into circulation.  It will be a two-stage process.  First, central banks will issue the new money as public revenue by entering it into the current accounts they hold for their governments. [1]  Second, governments will spend it into circulation. 

[1] Current accounts contain sight deposits (or demand deposits or overnight deposits) in which non-cash money is immediately available as a means of payment.  In that respect they differ from savings (or time deposit) accounts, sometimes known simply as deposit accounts.  The current accounts held by central banks for commercial banks are known as operational accounts. 

It will be for central banks to decide at regular intervals how much new money to issue.  They will make their decisions in accordance with monetary policy objectives that have previously been laid down and published, and they will be accountable for their performance. But they will have a high degree of independence from government, giving governments no power to intervene in decisions about how much new money to create.  Scaremongers will raise the spectre of inflation.  But we show that, among other benefits, seigniorage reform can be expected to provide more effective safeguards against the risk of inflation than exist today, when commercial banks print almost all the new money.

There are many ways in which governments will be able to spend the new money into circulation.  We discuss some of these, e.g. paying off the National Debt, or reducing taxation.  But we conclude that, in principle, what governments do with this revenue should - as with other public revenue - be a matter which the government of the day should decide in accordance with its priorities.  Whatever decisions governments take in this respect, seigniorage reform will have a very beneficial effect on public finance.

Chapter 3 explains how commercial banks will be prevented from printing new money.  Four comparatively straightforward changes will be needed, as follows.    
• Sight deposits denominated in the official currency will be recognised as legal tender, along with cash.
• The total amount of non-cash money existing in all current accounts (including those of bank customers, banks, and government), together with the total amount of cash in everyone’s possession, will be recognised as constituting the total stock of official money or legal tender immediately available for spending.
• Customers’ current accounts will be taken off the banks’ balance sheets, and the banks’ will manage them separately from their own money (which is not what they do today).  As a result, a clear distinction will be introduced between means-of-payment money in current accounts (”plain money”) [2], and store-of-value money (”capital”) in savings accounts. In practice this will mean that, except when a central bank is creating new money as public revenue, payments into current accounts will always have to be matched by payments out of other current accounts, or paid in as cash.

[2] We use the term ”plain money” to refer to official money (legal tender), both cash and non-cash in current accounts.  After seigniorage reform ”the stock of plain money” will more plainly define the money supply than any term now in use. ]
•  Finally, if any person or organisation other than a central bank fails to observe that distinction and prints new non-cash legal tender into a current account, they will be guilty of counterfeiting or forgery - just as they would be if they manufactured unauthorised banknotes or coins.

 Until now, bankers, monetary officials of government, mainstream monetary academics, and even most monetary reformers, have accepted what everyone knows to have become fiction. The truth now is that bank sight deposits and banknotes - which in the UK still say ”I promise to pay..” - signify more than merely an entitlement to money.  They actually are  money. 

So, for example, the reserve system for controlling the creation of new non-cash money by banks has to be seen as a throwback to a time when money was a physical substance, gold or silver, and not primarily - as now - information held in bank accounts and transmitted directly from one bank account to another.  As goldsmiths and bankers increasingly lent greater amounts of credit than the money they possessed themselves and than had been deposited with them for safekeeping, it was recognised as prudent - and then became obligatory - to limit the total amount of credit they gave to a specified multiple of the gold and silver they held in reserve.  That gold and silver, and subsequently the other immediately liquid assets which took their place, became known as a ”fractional reserve” - because it was a specified fraction of the total value of the credit a bank could give. The system of banking management and control based on it became known as ”fractional reserve banking”.  

As Chapter 3 describes, proposals for monetary reform have often advocated 100% banking (in place of fractional reserve banking) as a way to prevent banks creating new money.  Failure to get those proposals adopted has been at least partly due to the difficulty of implementing them, reflecting as they did an out-of-date understanding of the changed nature of money and the process of creating it.  The plain money proposal will achieve the same aim as 100% banking would have done, but in a simpler way - easier to understand and implement, and more fully reflecting the nature of money in the Information Age.

Finally in Chapter 3 - and later in greater depth in the Appendix - we discuss the clarification of monetary statistics, monetary definitions and monetary terminology which seigniorage reform will prompt, and which is desirable for its own sake.  With the blurring of the distinction between means-of-payment money and store-of-value money - i.e. between the functions of sight deposits and savings deposits - that has taken place in recent decades, the definitions on which monetary understanding and policy-making are based have become correspondingly muddled.  For example, it is not at all clear what is now meant by the ”money supply”.  The different definitions of money - M0, M1, etc, up to M4 - are abracadabra to most people. One sometimes feels that, if a banking priesthood had deliberately designed monetary statistics and terminology to conceal from citizens and politicians of democratic countries how the money system now works and how it could be made to work for the common good, they would have been hard put to improve on what exists today!

Having shown in Chapter 2 that the impact of seigniorage reform on public finance - taxation, public borrowing and public spending - will be highly beneficial, in Chapter 4 we discuss some of the wider advantages claimed for it.

Among possible advantages are:
• greater equity and social justice
reducing inflationary as well as asset-inflationary tendencies in the economy
• creating greater economic stability by reducing the peaks and troughs of business cycles
• improving the safety and stability of domestic banking institutions
• removing distortions caused by channelling 95% of new money into the investment and spending priorities of banks and their customers
• reducing monetary pressures and constraints arising from the creation of new money by commercial banks as interest-bearing debt, that encourage environmentally unsustainable development, and
• a monetary and banking system that is transparent and open to public and political understanding of how it works. 

Chapter 5 deals with various suggested objections to the proposal for seigniorage reform.  Some - e.g. that it will mean nationalising the banks and putting a tax on money - can be briskly dismissed as obvious misconceptions, and - as explained in Chapters 2 and 4 - seigniorage reform is likely to reduce, not increase, tendencies to inflation.

Examination of the possible impact of seigniorage reform on banking services and banking profitability shows that any negative effects on the services banks can offer, or on their ability to compete in domestic markets, will be outweighed by the benefits of the reform. Study of the suggestion that it will be possible to evade or bypass the prohibition on the creation of new official money by anyone except the central bank shows that risks of evasion by conventional banks will be limited and can be minimised; and suggests that the risks of monetary controls being bypassed by a growing use of parallel currencies, or by the development of electronic currencies and internet banking, will actually be smaller after seigniorage reform than they would have been without it.

Finally, there is the suggested objection that the citizens, businesses, banks and economy of a country or currency area that initiates seigniorage reform might be at a disadvantage in international financial affairs.  Again, examination shows that the advantages of reform are likely to outweigh any disadvantages in that respect.  Moreover, it is possible that seigniorage reform will help to strengthen international monetary and financial stability, and provide a model which could be relevant to the further development of the international monetary system for a globalised economy.

Chapter 6 assesses the prospects for seigniorage reform, and discusses what should be done to promote it.  As always, the minority who will lose by it will strongly resist it, whereas the majority who will benefit from it will tend to be more lukewarm in their support.  Who will be its opponents, and who its beneficiaries and supporters?  What trigger issues and events may help to spread wider understanding of it and support for it?  Which countries could take the lead in pioneering it?  And why may it be possible to achieve it now, when similar attempts have been successfully resisted for the past two centuries? Our answers to these questions are realistic but optimistic.

Support will be needed from people in the following groups:
- politicians and public officials, not necessarily connected with banking and financial affairs;
- the banking industry itself, the central banks, and other national and international monetary and banking institutions;
- the mainstream community of economic and financial policy-makers, policy-analysts, policy-debaters and policy-commentators;
- the community of respected monetary academics, monetary historians and other specialist monetary and banking experts;
- the wider community of individuals, NGOs and pressure groups, who are committed to the support of proposals for greater economic efficiency which involve a fairer sharing of resources, but who may as yet be unfamiliar with the relevance of monetary reform; and
- the community of already committed supporters of monetary reform. 

We hope this report will attract the attention of monetary and banking experts and policy makers. But it is often difficult for people pursuing a professional career in a particular walk of life to take a positive interest in proposals for its reform until there is widespread recognition that they should. We suggest, therefore, that bodies like the New Economics Foundation should give high priority to spreading awareness of the case for seigniorage reform among politicians and public officials, and potentially interested individuals, NGOs and pressure groups.  They, together with existing supporters of monetary reform, can then help to create a climate of informed opinion that will make it easier - indeed more compelling - for the experts to give seigniorage reform the serious attention it demands.


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James Robertson

James Robertson

Joseph Huber

Joseph Huber