The term sovereign money is used to refer to three different kinds of money systems. This means the term must be explained if it’s going to be used.
What is a sovereign entity?
The word sovereign comes from super and reign, meaning to rule over, and generally refers to formal government. We can expand the definition to include a defined community’s authority and right to govern itself. For example, a group of businesses, such as the Swiss WIR, can decide to govern themselves with regard to the creation and use of money. Remember, govern itself can mean different things and who gets to create new money will override any other governing power.
In all uses of sovereign for a money system, the role of government is essential. All uses have two characteristics in common: government authorizes the money, and government guarantees the money. But they differ in who has the critical money-creation power. Here are the three uses of the term.
Sovereign money means national money
- Government authorizes the money, making it legal tender; and,
- Government guarantees the money with the full faith, credit and wealth of the nation.
Modern Money Theorists (MMT) use the term sovereign money to refer to US money. In the US system today, private bankers create the money. Government only provides the authority that makes this money national legal tender, and government provides the guarantee. MMT is using sovereign to mean national. If you’re a reader of MMT texts, please note: while the texts acknowledge private banks create money, they refer to the money as issued by government.18 This conflates authority with creation, and confuses money creation and governance.
This use of sovereign for a privately created money is an unfortunate addition to the confusion around money systems. Yes, a nation or state can choose any money system, make the money national money, and call their money, sovereign money. But, if the state is not creating the money, then it is neither ruling, nor sovereign.
Sovereign money means any kind created by government
- Government authorizes the money, making it legal tender; and,
- Government guarantees the money with the full faith, credit and wealth of the nation: and,
- Government creates new money – by any method
The Colonies in pre-Revolutionary America were hotbeds of money system experimentation. Many of the colonies experimented with creating, authorizing and guaranteeing their own money with the full faith, credit and common wealth of their Colony. For example, in 1690 Massachusetts issued Bills of Credit, that were a promise made by the government to accept these bills for all money due to Massachusetts. They spent these bills into circulation. These notes were sovereign money, in that they were authorized by government and legal tender; they were backed only by the full faith, credit and common wealth of the colony; they could not be converted into anything else (as with a gold-backed currency); and, they were created by the Colony’s legislative assembly.
The Colony of Pennsylvania in the 1720s created a sovereign money they loaned into circulation against the assets of borrowers. This was debt-credit money created and authorized by government as legal tender. It was backed by the full faith and credit of the colony and whatever the borrowers put up as collateral. This money was so successful, an admiring Benjamin Franklin wrote a pamphlet titled, A Modest Inquiry into the Nature and Necessity of Paper Currency (1729).19
By the 21st century there were only a few nations retaining a sovereign right to create their own money supply. One was Libya under dictator Muammar Gaddafi, who used Libya’s 140 tons of gold to back the Libyan dinar. In 2011, the Libyan economy had a Gross Domestic Product (GDP) of roughly $75 billion and 140 tons of sovereign gold with a street value of about $8.5 billion. Remember every unit of money circulates, used to facilitate many exchanges in an economy. A money supply equal to roughly 10 percent of all economic activity was close to a 100% IOU-commodity-backed money system. Gaddafi planned to use this gold as a reserve for a fractional gold-reserve money for Africa – a Pan-African currency.20 This threatened the global private money-creator powers.
Western powers began an intervention to depose Gaddafi in March 2011. Steady bombing through May shifted power to the rebels, who that month established a central bank with the financial assistance of Western global bankers. This bank was established five months before Gaddafi was killed and his regime fell in October 2011. The power to create new money was turned over to the global private banking sector. This was called, “bringing Libya in line with international banking standards.” 21
Yes, Gaddafi was a crazy guy who did some terrible things. While Gaddafi’s failings might fill a book, he also did some wonderful things for his people using the sovereign power of the state to create money for good (as well as for self-enrichment). He spent billions into circulation to create one of the world’s largest water systems that brought water from the mountains to the population centers – a water system which NATO deliberately disrupted with bombing, a war crime.22 He spent money into circulation to keep the price of staples low, and to absorb the cost of education and health care for all citizens. He created and put money into circulation by giving every newly married couple about $50,000 to set up house, introducing stability into family life. His good deeds do not excuse the lack of freedoms, corruption and poverty under his rule. However, they are an example of how sovereign money can be spent into circulation to benefit a nation.
China is one of the only remaining nation states retaining government power to create some new money. But, as required by the global banking powers, it also adopted a fractional reserve system, and it made room for semi-private Chinese banks with money creation powers and the international banking cartels and their money creation privileges.
Today China is using its money creation power for a global transportation infrastructure initiative, promising over $1 trillion in infrastructure and spanning more than 60 countries. Called, One belt, One Road, The New York Times reports, “China is literally and figuratively forging ties, creating new markets for the country’s construction companies and exporting its model of state-led development in a quest to create deep economic connections and strong diplomatic relationships.” 23
Sovereign means 100% sovereign equity money
- Government authorizes the money, making it legal tender; and,
- Government backs the money with the full faith, credit and common wealth of the nation: and,
- Government creates new money by giving, spending, lending, or investing, and money cannot be used by anyone else to leverage additional money creation. This money is not anyone’s debt or credit, it is an asset – part of the shared equity of the common wealth; and,
- Government is of, by and for the people. Decisions are made democratically, with fully available information, consideration and accountability.
Just as happens with today’s national money systems, this sovereign money commits a defined group of people – such as a nation
- to maintain the value of its money with the strength of its common wealth.
In a 100% sovereign equity money system, the seignorage goes to the common wealth, instead of to private bankers. In a 100% sovereign equity money system, the commons guarantees the risk and receives the benefits of money creation.
This money system is called sovereign money by many reformers, including the American Monetary Institute, Vollgeld Initiative in Switzerland, PositiveMoney.org in UK, and OnsGeld in the Netherlands. The term sovereign money is logical because the sovereign government is the one creating the money as opposed to private bankers creating the money. In any system, whoever gets to create the money, rules. So sovereign money most accurately refers to a money system in which the ruler-government is the same as the ruler- money-creator. But remember, that is not always how people use the term.
Some want to describe money created of, by and for the people as a social credit or common credit, “Credit is not debt it is a ‘positive’ annotation of value being transferred between two parties to recognize contributions made to society or through the market or as a basic right of income.” 24 The problem with this construct is this positive credit still incurs an obligation; the whole of society is issuing these credits guaranteed by our common wealth. To define a credit as something positive, without acknowledging that in our universe, there is a negative for every positive, seems an unnecessary twisting of useful words. This use of the word credit may be an effort to fit this kind of money into the standard balance sheet mindset. But it adds confusion. Rather than trying to define a credit that has no debit side, it is clearer to consider this money as equity – part of the net worth of the commons.
Historical 100% sovereign equity money
At a national level, there are no true and fully sovereign money systems today. However, the US issued this kind of sovereign money on two significant occasions – to win the revolutionary war and the civil war. Without the power to create money, our revolutionary government could not have survived over the six years of war it took to achieve independence. The Union would not have won the Civil War without the power to create sovereign money. Some US sovereign dollar bills remain in circulation to this day, though in the past 100 years they have only represented a minuscule portion of the money in circulation. Private banking interests sabotaged the creation and issuance of this sovereign money – the Continentals in the revolutionary war and the Greenbacks in the civil war. In collusion with foreign governments, they counterfeited the money, causing hyperinflation and devaluation. Although our government acted responsibly in issuing manageable amounts of new money, the counterfeiters successfully blamed the government for the devaluation of the currency, setting up bad government – good banker propaganda that persists to this day.
100% Sovereign equity money in existence?
Today, to my knowledge, there are no 100% sovereign equity money systems in use, though there are growing advocacy movements worldwide. Switzerland held a national referendum in June 2018 Iceland and Great Britain discussed the possibility in their Parliaments. Great Britain has a very active and talent-rich advocacy group, PositiveMoney.org. South Africa has a sovereign money movement. The American Monetary Institute (AMI) has been gathering people and providing an education about a sovereign money system since 1996. Collaborating with the American Monetary Institute, Ohio Representative Dennis Kucinich (in Congress 1997–2019 introduced the NEED Act in 2011, which would establish a 100% sovereign equity money system in the US.25
In May 2018, the International Movement for Monetary Reform (IMMR) gathered representatives of sixteen national monetary reform groups from around the world. The conversation has begun. As someone commented on the AMI forum, it’s like a popcorn popper, slowly increasing in volume and frequency.
The naming dilemma
So what do we call it? It is cumbersome to call this last kind of money 100% sovereign equity money. But, if we don’t give it this long name, it will be confused with the other two definitions of sovereign money. Some want to call it pure, real, or true money. But too many people have named too many kinds of money systems, pure and real. Here are some other options for naming this kind of money:
- Our money, because it belongs to the whole community, instead of private bankers.
- Common wealth money because it belongs to, and is guaranteed by the common wealth, and increases the wealth of the commons.
- Commonwealth money because it belongs to our democratic republic.
- Public money because it belongs to the public instead of to private bankers.
- Positive money because it represents equity.
- Just money because it is equity and because it gives no one special privilege.
- The people’s money , because it belongs to the people, instead of private financial corporations.
- Equity money because it is not created by debt-credit.
And for using this system for our nation:
- US money because it belongs to us, the citizens of our nation, instead of the global bankers.
For defining a kind of money system, I’m going to go with commonwealth money. It is the republic, the WE, the people, who own and create money in this system. And, the two words joined also convey that it is the common wealth that guarantees the money.
A commonwealth money system
The decision to choose a commonwealth money system, the creation of money, and its entry into the economy are decided by a democratically elected government. Decisions are transparent, broadly participatory, and deciders are accountable.
The token is some means of representing a unit. In the US today, what we call a dollar is an IOU from the Federal Reserve consortium of private bankers. The top of our money reads, Federal Reserve Note. Were we to change to commonwealth money, we could still call a money unit a dollar. A cash bill could read, US Dollar. There would be no difference in the recording of exchanges using this unit. But, it would be a US dollar money unit, a part of, and representing the common wealth. A dollar would not represent anyone’s debt; it would be equity.
Authority vested in government authenticates commonwealth money; it makes it legal tender by law. It is a government job to police counterfeiting.
Commonwealth money is backed and guaranteed by the common wealth of a nation or state; the full faith, credit and assets of the nation stand behind commonwealth money.
A nation’s common wealth supports the promise of continuing future value for the money. With a healthy commons people innovate, produce and sustain a prosperous economy. The common wealth includes natural resources such as breathable air, potable water, arable land, and minerals. The common wealth includes community safety, the quality of the transportation and communication networks, the availability of educated and healthy, capable employees. The common wealth is reflected in the general health and well-being of the citizens: What percentage have quality food, air, water and health care? Do the citizens enjoy a balanced life style of work, play and rest? Do educational opportunities abound? Are there plenty of healthy green spaces that support biodiversity, recreation and beautiful vistas? Is the Justice system robust and equitable? These all matter, because the evidence says when people are healthy and rested and have a daily opportunity to see natural beauty, they do their best and most innovative work and thinking.
The better a nation’s people work and think, the more likely they will be to solve problems in a timely way and move forward constructively into the future. A nation with commonwealth money has a strong currency when its common wealth is great.
Measure & Store of Value
Commonwealth money is defined as 100% equity money. It cannot be used by anyone as a reserve to create new money by lending – as happens in a fractional reserve money creation system. Because there is no need to continuously increase the supply of money to pay interest on debt that creates it, there is no systemic need to continuously inflate the supply beyond that required by increases in population, productivity and a fudge factor for entrepreneurship and natural disasters. This means the money can be a fixed value measure and maintain a truly stable value. A stable value makes money a better store of value over time.
Creation & Destruction
Commonwealth money is created by a government, in a transparent, representative, democratic and participatory republic. It is introduced into the economy by giving, spending, lending, or investing. Destruction would depend on how the government creates new money. See the options in Chapter 3.21.
Ultimately, who rules?
A democratically elected and accountable government rules. In the first two uses of the term sovereign money, if you have private bankers, a despot, or dictator such as Muammar Gaddafi creating sovereign money, you have the advantages of sovereign money and the disadvantages and loss of freedoms that come with the rule of a privileged few. If, as in commonwealth money, you have an effective and functioning democracy, then the power to create money belongs to the nation as a whole; one can have the benefits of sovereign money and the benefits of a free society.
Because the power to create new money conveys the power to control a nation, any kind of sovereign ruler’s power is supported by the privilege of creating money. So a dictator with the power to create the second definition of sovereign money will be difficult to dislodge. A government of, by and for the people with the power to create money will make it hard for special interests to take over control of the nation.
Sovereign power – the power to rule – requires the power to create new money.