Sovereign money – one of many alternatives to the current financial system

Aug 5, 2019 by

In the current financial system, the paradigm of “free” financial markets created an environment lacking a global supervisory authority, thereby fostering unlimited possibilities to grow for banks, free movement of capital, increased inequality as well as opportunities for private money being created ex nihilo (out of nothing). In contrast, Christian Felber proposed an alternative paradigm called ‘sovereign money’ which is based on democratic rules and a reinterpretation of money (serving as nothing more than an instrument) to promote the common good. They legitimize this not only by common sense but as already existing law. To attempt this change in narrative, the lecturer emphasized nine cornerstones and focused on three of them as the main pillars of rethinking financial systems: Commercial banks (financial support for banks has to be linked to the proposition for acting within the idea of the common good), credit (loans are being granted for real and not financial investment, they have to be approved via an ethical risk assessment) and central banks (distributing sovereign money as a combination of positive money and common good principles being defined in democratic conventions). Within the concept of positive money, the central banks only give loans to common good oriented banks. For setting the agenda, an extensive decision-making process is initiated in order to democratically decide on the most fundamental issues. As an example, for decision-making process in democratic conventions, the audience of the lecture was invited to decide on two options – of which one is the status quo – by expressing disagreement with their least favorable one.

In order to carry out a sovereign money reform, Christian Felber proposes four main ideas:

  1. All money is issued by the central bank.
  2. Banks can only grant loans, but not create money (following ethical risk assessments).
  3. Separation of monetary and financial system.
  4. The seigniorage (difference between the value of money and the cost to produce and distribute it) becomes a souvereignage (deduction of the difference between the material value of money and its given value).

As a result of this proposal, some advantages can be obtained such as less speculation, control over money supply and reduction of public debt. The latter was emphasized by the lecturer as the most important advantage compared to the current financial system.

In conclusion, we ‘took home’ three main learnings from the session. Firstly, that there exists a viable alternative for the current financial system in the form of sovereign money. Secondly, the necessity to express complex relationships in an understandable manner. However, this argument can also be criticized in the means that simple solutions are not always the best response to complex systems: There is also the need for explaining propositions or theories. Furthermore, non-trivial explanations at a simple level only cause more questions. As last impression from the lecture, we found it particularly interesting that decision-making in sovereign democracy should – according to Christian Felber – always follow “what your heart and common sense says”.

Written by: Dmitry Yakushechkin & Simon Probst

Based on the lecture “Introduction in sovereign money” held by Christian Felber during AEMS 2019.