CBJLF_-_Stabilizing_Euro_Sovereign_Money

Central Bank Journal of Law and Finance, No. 1/2016 69
Stabilizing the Euro through Sovereign Money?
Max Danzmann*
Abstract
Above all, the abolishment of private bank moneycreation is a matter of distributive justice.
Why should banks earn interest with self-created money? However, there are other
important matters such as the design of the sovereign money system within the European
Monetary Union (EMU) and the sovereign money system’s effect on financial stability.
Potentially, a sovereign monetary reform could stabilize the Euro. In the following, these
matters shall be analysed taking into account the state sovereignty of the members of the
EMU, the competitive relationship between the sovereign money system and the private
(bank) money systems as well as the independency of the European Central Bank (ECB).
Keywords
sovereign money, money creation, financial stability
JEL Classification:
E4
** Ph. D. in economics, finance lawyer in an international law firm in Frankfurt, Germany.
The author thanks Dr. Joseph Huber, Dr. Timm Gudehus, Dr. Wolfgang Freitag and Thomas Betz for
their input.

70 Central Bank Journal of Law and Finance, No. 1/2016
1. BASIC PRINCIPLES OF SOVEREIGN MONETARY REFORM
Sovereign money means money as legal tender which was created solely by the state
(sovereign) accounts unlike private bank money as a mere money surrogate which only
qualifies as a claim of the bank customer against the bank for payment of central bank
money. The sovereign money system’s main difference from the current private bankmoney
system is that, not only on the primary money market among the central bank and the banks,
but also on the secondary money market among banks and non-banks, solely money created
by the central bank is the permitted payment instrument and no longer privately created
bank money. Hence, money may generally not be created privately and must be created by
either the central bank or the parliament resolving fiscal policy together with the public
authorities administering household and public finances (the fiscus) as sovereign money.
1.1. Abolishment of Private Bank Money Creation
Currently, the most part of the money supply is privately created by banks through granting
sight deposits on current accounts. Through sovereign monetary reform, sight deposits on
current accounts with banks will be transformed to central bank money on sovereign money
accounts and will be, thereby, upgraded as legal tender. This implies that new sight deposits
on current accounts (which then qualify as sovereign money accounts) must not be created by
banks any longer1.
Upon a sovereign monetary reform, deposits on and payments from sovereign money current
accounts require either a debiting of another sovereign money current account or a cash
deposit or are made through sovereign money creation. Therefore, sovereign money current
accounts of bank customers have to be separated from bank’s balance sheets and will be
directly assigned to the bank customer’s legal estate. The bank then only holds the sovereign
money deposits and administers the sovereign money current account as trustee for the bank
customer as beneficiary. This systematic reform changes the equity and liability side of the
banks’ balance sheets: Banks cannot create the money required for granting loans, but have
to finance the loans by way of debt or equity (e.g. (long-term) savings deposits or term
deposits)2.
1
Cf. J. Huber, Vollgeld. Beschäftigung, Grundsicherung und weniger Staatsquote durch eine
modernisierte Geldordnung, 1998, p. 259 et sqq.
2
Cf. J. Huber/J. Robertson, Geldschöpfung in öffentlicher Hand, 2008, p. 25 et sqq.

Max Danzmann
1.2. Money Creation by the Fiscus and the Central Bank
There are two alternatives through which sovereign money can be created which can also be
combined. Sovereign money is either brought into the monetary system by the fiscus or
directly by the central bank.
If newly created sovereign money is brought into the monetary system by the fiscus
(Alternative 1), the central bank credits a certain amount to the fiscus’ current account with
the central bank first. In the following, the deposits on the fiscus’ central bank account will be
introduced to the rest of the monetary system (in a democratic, legitimized order) by the
fiscus through withdrawals and direct debit orders as public expenditure. Through this,
money creation has a direct impact on economic demand (e.g. to be applied for a Keynesian
policy) and not – as currently – only depending on the credit supply and credit demand3.
Alternatively, the central bank could also control the sovereign money supply without the
fiscus’ assistance (Alternative 2). Under this alternative, the central bankcreates sovereign
money either temporarily by extending loans to the fiscus, banks or other economic actors or
permanently through open market transactions, such as by way of real estate, sovereign bond
or private bond purchases. Such money creation may also be utilized for the purpose of the
final deposition of financially destabilizing losses4. However, open market transactions of the
central bank can have heavy competition distorting and redistribution effects to which
central bank policy might not have sufficient democratic legitimacy.
2. SOVEREIGN MONEY IN THE EMU
The EMU as a sovereign monetary system could be operated either centrally, on EU or
Eurozone level, or locally, on member state level. Depending on the design of such system,
this will have different implications for the member states’ sovereignty.
2.1. Central Operation: Foundation of the European Financial Union?
If the sovereign monetary system is centrally operated by the European System of Central
Banks (ESCB) and sovereign money is brought into the monetary system through national or
EU fiscal policy (Alternative 1), it is questionable whether the individual member states of
3
Cf. J. Huber, Monetäre Modernisierung. Zur Zukunft der Geldordnung: Vollgeld und Monetative,
2012, p. 126 et sqq.
4
Cf. M. Danzmann, Final Deposition of Losses through the European Central Bank's Balance Sheet as
a Financial Stability Policy Tool, Central Bank Journal of Law and Finance, 2/2015, p. 4 et sqq.

the EMU could maintain their fiscal sovereignty. For any member state, the answer to this
question depends on the relation of public spending through sovereign money creation and
its overall public budget since, in a central operation scenario, a pre-determined issuance
amount would be assigned to each fiscus and no fiscus would have the right to issue
sovereign money on its own. If, what is currently not intended, such central assignments of
sovereign money creation cover for a major part of the public budget, the consequence is a
factual foundation of the European Fiscal Union and the loss of the individual member state’s
sovereignty.
Furthermore, whether a member state loses its sovereignty depends on the fiscal redistribu-
tion effects of sovereign money creation among member states. These redistribution effects
depend on the criteria for allocation of the sovereign money creation among member states.
The state’s share in the aggregate population of the EU, GDP-share, ECB capital share or a
mix of these factors could, among other things, serve as such criteria. Moreover, it would be
of significant relevance for the member states’ fiscal sovereignty whether, besides the
amounts of sovereign money creation, also a specific purpose is regulated towards which the
created money has to be applied.
In contrast, if sovereign money is issued by national central banks or the ECB (Alternative
2), it will depend on the specific design of the issuing channels for sovereign money whether
they require the Fiscal or Financial Stability Union or the member states can keep their
sovereignty. For a temporary, credit issuance of sovereign money, comparable to today’s
refinancing operations of the ESCB with credit institutions (Alternative 2a), a Fiscal Union
would not necessarily be required. Despite the fact that the main parameters of the central
banks’ refinancing operations are centrally controlled, a Fiscal or Financial Union could be
required due to redistribution effects, if the location of the sovereign money creation is not
determined by bank demand (with reallocations through national central bank’s emergency
liquidity assistance), but is rather centrally controlled by the ESCB through inflexible quotas
for each of the national central banks.
However, a Fiscal or Financial Union will in any case be required if the ESCB issues sovereign
money temporarily (through the acquisition of debt) or permanently (through the final
deposition of financially destabilizing losses, social expenditures, equity contribution to
private corporations or long term infrastructure investments) (Alternative 2b). This can
lead to significant redistribution effects not only among economies but also among certain
economic sectors and competitors. Due to the tremendous economic power the ECB has, the
ECB would need a strong mandate which could not be assigned towards the ECB without
binding the ECB to parliamentary decisions considering requirements of the democratic
principle.

Max Danzmann
2.2. Decentralized Operation: Currency Split
A decentralized operation of the sovereign money system in the EMU5 could lead to a split of
the currency union, contrary to the basic principle which the ECB applies to all of its financial
stability policy measures (i.e. safeguarding the currency union). The members which
undertake a full sovereign monetary reform by themselves would have to leave the Eurozone.
Only by themselves, could they, if at all, introduce sovereign money as a parallel currency
which is prohibited under the current currency regime in the EMU pursuant to Art. 3 para. 4
TEU6 and Art. 128 para. 1 TFEU7.
Alternatively, a sovereign monetary reform might potentially as well be made by all Euro
members with the monetary operation and control of the sovereign money system in the
discretion of each of the national fiscuses and central banks. However, such sovereign
monetary reform could, if at all, work if the issued sovereign money Euros could be
distinguished by the member state that issues any specific sovereign money Euro. Otherwise,
each member state could issue sovereign money Euros anonymously, independently, without
the other member states’ control and at the other member states’ cost. In contrast, if the
sovereign money Euros were to be distinguished by the issuing member state, their value
would diverge due to which the currency union would factually be abolished. Due to this, the
TARGET2-system would have to be shut down since TARGET2 as a single currency transfer
system must treat every Euro technically equally. Such separate systems could only work
together through the implementation of national sub-systems of TARGET2 which would be
brought together by TARGET2. Despite this, such separate systems would provide the
national fiscuses only with seigniorage in their national Euros even though their current
public debt would still be denominated in old Euros.
3. FINANCIAL STABILITY THROUGH SOVEREIGN MONEY?
Notwithstanding its specific form and kind, a sovereign monetary reform in the EMU should
imply positive effects on the stability of the European financial system.
5
Cf. J. Huber, Monetary Reform in the Eurosystem, 2012, p. 7 et sqq.
6
The Treaty on European Union.
7
The Treaty on the Functioning of the European Union.

3.1. Fiscal Stability
If new sovereign money is constantly issued by the fiscus (Alternative 1), fiscal stability
improves through the constant seigniorage raised by the issuing fiscus. In addition, the
transition from debt money to asset money (following from central bank balance sheet
changes, in case of a sovereign monetary reform) will result in tremendous profits of the
central bank which might eventually be transferred to the fiscus and decrease public debt. In
order to avoid a transition related liquidity overflow, central banks should transfer the
described transition profits to their fiscuses only gradually, as soon as and to the extent the
banks repay their transitions asset money loans to the central banks, which central banks
have granted the banks for the purpose of exchanging their debt money with asset money. On
the other hand, liquidity gaps in the monetary system should also be avoided by gradually
transferring the banks' repayment amounts to the fiscus rather than transferring the
transition profit as a whole upon final repayment of such loans8.
Such transition profits (which are transferred by the national central banks to their own
fiscuses) should fiscally stabilize in the short and medium term, even though the amount of
the profit transfers would be determined by the national central bank’s share in the ECB
capital and not its actual fiscal stability needs.
By way of financing public expenditures (e.g. following the application of a Keynesian
economic policy), the profits which are made through the transition to a sovereign money
system and the seigniorage could not only be used for lowering public debt, but also for
stabilizing the real economy. Depending on the development of EMU member states’ fiscal
policies, it seems possible that the main interdependency between fiscal policy and financial
stability policy disappears through stabilizing public debt and public bonds9.
3.2. Stabilizing Financial Institutions
A sovereign monetary reform leads to a situation in which money on sovereign money
current accounts will be extracted from the private bank’s balance sheets, assets and
insolvency estate and thereby made bank money bank insolvency resistant. Bank customers
would have no incentive for a bank run in insolvency or illiquidity scenarios of their banks.
Furthermore, it should be expected that the financial system develops less over-liquidity
bubbles due to the fact that banks may no longer create the money themselves for loans they
8
Cf. T. Gudehus, Neue Geldordnung, 2016, p. 11.
9
Cf. M. Danzmann, Das Verhältnis von Geldpolitik, Fiskalpolitik und Finanzstabilitätspolitik, 2015, p.
232 et sqq.

Max Danzmann
extend, but rather have to fully refinance such loans with debt or equity themselves.
Currently, the overshooting private bank money creation often leads to price bubbles
especially in real estate markets, since the self-created liquidity by banks is often used for
financial speculation on the basis of debt and credit.
Normally, banks increase their credit issuance pro-cyclically during asset price booms
whereby the quality of bank financed assets in relation to their prices deteriorates and debt
levels rise over the cycle. Since the banks have to refinance the loans they grant in a sovereign
money system, the pro-cyclicality of banks’ credit issuance and the volatility of the money
supply should decrease. On the downside, the economic development might become less
dynamic due to such restrictions. On the other hand, financial instabilities and financial
crises become less likely.
Moreover, sovereign money should even have further stabilizing effects as money issuance is
made by the fiscus and no longer mainly on interest bearing credit, but rather throughpublic
expenditures which do not imply any economic growth pressure or compulsion caused by
credit interest, like in a private bank money system10. Under a bank money creation regime,
every loan debtor has to earn the difference between the amount it owes and the actual loan
amount in order to pay its interest liability. Despite this, interest with its capital allocation
steering function is not eliminated by a sovereign money reform at all. The sovereign money
reform only removes one interest element in the course of financing real economy.
3.3. Monetary Stability
In a sovereign money system, the central bank has the ability to control and steer the money
supply directly (or indirectly with the fiscus' assistance). Particularly, the central bank can
determine how much money is to be issued (by the fiscus) in a given timeframe. By way of
such a money supply control, inflation rates can be controlled more directly than through
base interest rates. Currently, most central banks aim at controlling price levels by way of
increasing (decreasing) bank loan costs through base interest rates, thereby reducing
(increasing) demand for bank credit and private bank money creation.
Vice versa, base interest rates are reduced in order to stimulate the granting of bank loans
and private bank money creation. However, the central bank does currently not have the
ability to force and effect an increase of the secondary money market money supply (i.e.
private bank money creation) through decreasing base interest rates, if banks do not extend
loans due to balance sheet adjustments or recession concerns (as currently experienced in the
10
Cf. J. Kremer, Vollgeld, 2014, p. 2.

EMU). To such extent, the sovereign money system outclasses the private bank money
system as a consequence of the abolishment of the separation of the primary and secondary
money market. In contrast to base interest rate instruments, the central banks (and the
fiscus) can effectively control the money supply for non-banks in a sovereign money system.
Considering such effective money supply control options, it should be quite controversial of
such money supply control should be rule based and/or be discretionary or whether the
central bank should remain inactive in a sovereign money system. A point in favor of an
inactive monetary policy, which maintains money supply levels even in times of weak
economic activity, is that bank loan interests decrease in such times as a consequence of a
decreasing bank loan demand which then, on the other hand, stimulates the bank credit
demand. Since the money supply is exposed to a continuously changing environment, it can
be useful to adjust the money supply in a rule-based manner (e.g. proportionally to the GDP
growth rate). But it is also possible to manage business and trade cycles with an active and
discretionary monetary policy and to fight a recessive development with public expenses on
the basis of an extension of the sovereign money supply.
One of the main reasons for a stable development of the sovereign money supply is to
stabilize the exchange rates. Due to the debt-free nature of its monetary base and the
aforementioned stabilizing effects of sovereign money, an increasing demand of sovereign
money abroad might be expected which would result in a stability premium in the form of a
currency appreciation and an improvement of exchange rates.
4. FINANCIAL INSTABILITY THROUGH SOVEREIGN MONEY?
A sovereign monetary reform within the EMU might come at the cost of financial stability
risks following from potential inflexibilities of money supply control and due to fact that it
might be undermined by foreign exchange transactions, parallel currencies or private money.
4.1. Central Money Supply Control
The transition from an endogenous to an exogenous money supply causes financial stability
risks. Generally, banks reduce their credit supply at times of a weakening economy and
decreasing asset prices, whereby private bank money supply is lowered. This endogenous
money supply with a decentralised and flexible accommodation of the overall amount of
money in the financial system to a variable demand is the greatest strength of the current
monetary system11. In case of a conversion to a sovereign monetary system, the private bank
11
Cf. T. Gudehus, Dynamische Märkte, 2nd edition, 2015, p. 420.

Max Danzmann
money creation can no longer function as buffer in the overall money supply, if short term
expenses could be financed by private bank money. An endogenous monetary is
advantageous, if an economy is in need of quick growth12.
Economic actors have to face a relatively inflexible money supply in a sovereign monetary
system, since the money supply can only be adjusted centrally by the central bank and the
fiscus. The central creation of sovereign money leads to a very direct control of the economy
by the state. In addition, an inflexible money supply tends to be financially better for savers
and depositors, since they can dispose over liquidity, which is a limited resource during
economic upswing. Banks have to compete then for saving deposits, triggering an increase of
interest premium on savings. The risk and liquidity premiums, as integral parts of interest,
should rise. All this could lead to redistribution effects in favour of savers and lenders.
Important reasons for a sovereign monetary reform are considerations of distributive justice
and redistributive effects. For instance, an increase of the private money supply favours, first
of all, the banks as first users of the new private bank money according to the Cantillon-
effect. Furthermore, financial products which are leveraged with private bank money tend to
redistribute more towards financial incomes than work incomes. It is generally difficult to
justify the bank's ability to earn interest with money they create themselves. However, it
should be noted that this ability does not come for free. Banks bear – notwithstanding public
bail-outs – credit risks through their balance sheets and have to hold minimum levels of
(expensive) equity and liquidity as required by banking regulation authorities. Besides this, a
sovereign monetary reform is not the only way to circumvent the redistributive effects
described before. For instance, the bank money creation could effectively be restricted by
minimum reserve requirements and financial advantages could be skimmed throughtaxation
of bank money creation. Further, it should be noted that during times of decreasing bank
profits due to low interest rate levels caused by the application of the central banks'
quantitative easing policies, the abolishment of private bank money creation could cause
bank insolvencies and further financial stability risks.
4.2. Foreign Trade and Foreign Exchange Trade
Monetary stability also depends on the behaviour of foreign actors. As an example, the money
supply control itself is also in a sovereign money system not sufficient in order to ensure
stable price levels due to the phenomenon of imported inflation. Despite money supply
12
Cf. T. Betz, Geldschöpfung, Vollgeld und Geldumlaufsicherung, 2014, ZfSÖ 180/181, p. 38 (43).

control, increases in foreign price levels influence domestic inflation rates through price
increases in relation to imported goods.
Moreover, central banks are generally obliged during times of free movement of capital to
convert foreign currency income, resulting from foreign trade surpluses in the current
account balances, into their domestic currency. The central banks receive foreign currencies
in exchange which could either be held as reserves or be invested in foreign economies. Such
foreign trade surpluses are often completely invested in the economies where they were made
due to which the trade surplus is compensated in the current account balance by a capital
outflow in the same amount. If this is, however, not the case, the amount which has not been
invested abroad has to be deducted from the amount, which the relevant central bank would
have intended for the creation of sovereign money otherwise. In other words, the surplus in
foreign currency reserves limits the sovereign money issuance and reduces the state's
seigniorage.
In contrast, the central bank and the fiscus can increase their seigniorage if there is a great
demand for their sovereign money currency abroad. However, this might cause monetary
instability issues, if there is hoarding of sovereign money abroad and a great portion of such
hoarded sovereign money suddenly comes back into the domestic economy within a short
period of time. Such risk would for instance realise if the status of the sovereign money
currency Euro, as an international reserve currency, would be (partially) revised due to an
adverse development of European economies. The described capital flows could hardly be
avoided in the Eurozone due to the statutory worldwide freedom of capital movement in EU
law.
4.3. Parallel Currency
For the time being, a sovereign monetary system, if introduced, would have to compete with
private money systems. As most banks operate in different currencies and are refinanced
with more than one central bank nowadays, banks are incentivised to shift their business
activities to private bank money systems, if they lose their ability to create money under a
sovereign monetary order. However, such circumvention requires that bank customers
actually demand bank services in another currency. Especially, if banks are willing to pass
financial advantages resulting from private bank money creation (partially) on to its
customers (e.g. by lowering interest margins), the bank customers would also have incentives
to shift (even) their (domestic) transactions to foreign currency.
Especially, during a shortage of the domestic sovereign money currency resulting from a
central bank policy aiming at an increase of the exchange rates of the domestic currency or a

Max Danzmann
decrease of domestic price levels without further public expenses, domestic economic actors
are incentivised to obtain financings through a private bank money system. For example, a
German corporation could get a US dollar loan from a US bank in the USA, which will be
utilised on a current account with such a US bank. A parallel foreign currency would then
ensure an expansion of the (private bank) money supply endogenously to the extent the
domestic sovereign money system (exogenously controlled by the central bank) is not
sufficiently flexible and cannot be adjusted to an increased money demand in the short-term.
A foreign currency could even become a parallel currency if foreign capital providers not only
(as has already been the case for a long period of time) exchange their foreign currency into
the domestic (sovereign money) currency (thereby causing exchange rate adjustments) in
order to furnish the domestic actors in need of capital with the domestic (sovereign money)
currency, but rather the domestic economic actors use foreign (private bank money) currency
for payments from a foreign bank account to another foreign bank account, even for their
domestic transactions. Through foreign bank accounts in a private bank money system, there
would be domestic demand for foreign private bank money creation by an economy with a
sovereign money system. Nowadays, a lot of corporations have foreign bank accounts. Due to
this, two German corporations could settle payments for instance in US dollar through US
dollar bank accounts in the USA. Online banking and worldwide freedom of capital
movement allow for a cross-border private bank money system even today.
If domestic actors from the sovereign money economy use the foreign parallel currency
frequently, banks will then earn more interest for their lending and profit for their services
abroad, which could well result in a shift of bank businesses activity and an exodus of
domestic and international banks from the sovereign money economy. In addition, it can be
expected that the external value of the foreign private bank money currency, which is
frequently used as parallel currency, rises. The foreign central bank can fight against
unfavourable exchange rate rises by expanding the monetary base and the money supply.
However, the (partial) assumption of payment system and financing functions from the
sovereign money system by the private money system might undermine the private bank
money system's central bank's ability to effectively influence the economy and control the
money supply. On the other side, the sovereign money system's central bank could only
restrict the use of a parallel currency and capital flight only by way of capital controls and a
prohibition of foreign exchange13. Furthermore, the ECB, for example, would currently have
13
Cf. T. Gudehus, Neue Geldordnung, 2016, p. 45.

no right under EU law to request minimum reserves abroad or to stop (derivative)
transactions with its (sovereign money) currency.
Despite this, the usage of a parallel currency implies significant exchange rate risks for the
actors of the sovereign money economy to the extent that not only payments but also the
underlying agreements and transactions are made in such foreign parallel currency. Such
usage could further be problematic due to the fact that corporations stemming from the
sovereign money economy will still have to use the sovereign money currency for their
balance sheets, even though they do their transactions in a foreign currency and, therefore,
bear exchange rate risks. Whether or not the described financial risks resulting from a
parallel currency in fact materialize, this depends on the domestic and foreign economic
actors' trust in the sovereign money currency and system. The competitive relationship
among the sovereign money system and foreign private bank money systems could also be
decided in favour of the sovereign money system in the long run provided that the advantages
of a sovereign monetary system outweigh the risks it imposes on financial stability.
4.4. Private Money
A sovereign money system does not only compete with parallel foreign private bank money
systems, but also with parallel private (corporation) money systems. For the purpose of this
article, private money shall be defined as money which is issued by a private corporation that
is, at least until the issuance of private money, not a bank (private money issuer) and which
gives the holder of such private money a claim against the private money issuer for a specific
payment or other performance. The fungibility and transferability of such claim is required so
that its holder can use such claim for the purpose of payment towards its own creditor and
such claim can fulfil money functions. In order to ensure such fungibility, the private money
issuer must have a certain level of creditworthiness and the issuer needs to consent to the
transferability of its debt which is essentially embodied by such private money. Generally,
only big corporations cater for a sufficient creditworthiness to trigger demand for their
private money and so that their private money can be used and transferred by its holders in
their transactions without having to seek the issuer's consent.
As one alternative of private money, private money issuers issue their private money in
consideration of payment of financial funds as deposits which would generally be sovereign
money in a sovereign money system (Alternative 1). Such deposits could be used or
invested by the private money issuer profitably. By way of accepting deposits, the private
money issuer would functionally become a bank and legally become a regulated credit
institution. Such acceptance could cause financial stability risks due to the maturity

Max Danzmann
transformation undertaken by the private money issuer provided that the private money
issuer on-lends or invests the deposits for a longer term compared to the term in which its
own indebtedness is due and payable towards the private money holder. However, it is likely
that the private money issuer has to pay comparably high interest rates for such deposits,
since the depositors and holders could always choose to deposit their money with a regular
bank instead. The competitive relationship between private money under this alternative and
a sovereign money system should structurally not be problematic, since such private money
is reconnected with the sovereign money system, as long as private money issuers have to
obtain funds on the markets when and if they have to repay the deposits to the private money
holders upon withdrawal of their deposits. In contrast to a bank money system, the private
money issuers do not have the ability, under this alternative, to generate interest profits on
the basis of self-created bank money by way of granting a loan through its own creditworthi-
ness and without having to refinance its money issuance at all.
As another alternative, private money could also be issued by its issuer on the basis of a loan
towards another economic actor (Alternative 2). In this scenario, the issuer grants and
transfers its private money to another actor, without a preceding performance by the private
money receiving holder, merely on the basis of such holder's performance commitment. The
holder has to pay to the private money issuer interest for such private money (as it
constitutes a loan and credit). As a consequence of the fact that such private money is based
on credit, it qualifies as credit money comparable to private bank money. Since issuing such
private money constitutes a lending business, it requires a banking license. However, it might
be useful to restrict or prohibit such private money issuance to protect the sovereign money
system against competition within the own monetary system, if the private money system
undermines the sovereign money system or poses other financial stability risks.
There are additional forms of private money, such as private money that is not based on the
issuer's commitment to repay (sovereign) money, but rather on the holder's claim against the
issuer for another performance equal or similar to a voucher or coupon issued by shops.
These forms could also be based on preceding deposits or payments by the holder in
consideration of such private money (Alternative 3) or based on a credit of the private
money issuer towards the holder without any upfront payment by the holder (Alternative
4). Alternative 3 constitutes an advance payment from the private money holder to the issuer
whereas private money in accordance with Alternative 4 represents security in relation to a
claim for future performance. However, these alternatives should not pose any risks for
financial stability and the stability of the sovereign money system, since the demand for such

private money should be limited due to their illiquidity, their little fungibility and their
specific performance restrictions.
If the private money term is defined more broadly, it could also capture other private money
systems such as the Bitcoin-system. The Bitcoin-system is structured with an ex ante limited
money supply and Bitcoins, as fiat-money, embody nothing but a claim for payment of other
Bitcoins as replacement of the Bitcoins returned. The parameters of the distribution of such
private money are usually determined by its originator. Money systems such as the Bitcoin-
system do not constitute a credit money system since its money issuance is not based on (an
interest bearing) credit. It is possible that such private money systems are value stable due to
their pre-determined and limited money supply and the private money they issue is fungible
due to their embeddedness in high-tech systems. Up to now, such private money systems still
do not pose any risks to the stability of a sovereign money system considering their size and
their distribution so far. If this situation were to change and such systems were to jeopardise
monetary or financial stability, states could consider restrictions of such private money
systems as a matter and consequence of their monetary, fiscal and financial sovereignty.
4.5. Final Deposition Instruments
A sovereign monetary reform does not eliminate the central bank's ability to finally deposit
financially destabilizing losses in its balance sheet on the basis of – despite currency
devaluation – its unlimited money creation capacity and its unlimited capacity to absorb
losses14. In a sovereign money system, the fiscus and/or the central bank purchases
financially destabilizing assets with sovereign money. The Outright Monetary Transactions,
the Extended Asset Purchase Programme or Quantitative Easing of the ECB could (factually)
be implemented in the same manner in a sovereign money system as currently done by the
ECB in today's credit money system.
However, the final deposition tool based on the eligibility of inferior assets for monetary
policy refinancing can no longer be applied by the central bank as a financial stability policy
tool since there will be no credit refinancing of banks with the central banks upon the
abolishment of the private bank money system, unless the sovereign money system uses the
issuing channel described under Alternative 2a above. Due to this, the central bank can no
longer act as lender of last resort as in today's credit money system. This also implies that no
members states of the ESCB can implement Emergency Liquidity Assistance operations to
14
Cf. M. Danzmann, Final Deposition of Losses through the European Central Bank's Balance Sheet
as a Financial Stability Policy Tool, Central Bank Journal of Law and Finance, 2/2015, p. 2 et sqq.

Max Danzmann
stabilize its domestic banks and provide them with liquidity any longer. Nevertheless, the loss
of such final deposition tool could be compensated by means of an extension of the other
main final deposition tool of purchases of financial destabilizing assets.
5. SOVEREIGN MONEY AND CENTRAL BANK INDEPENDENCY
A sovereign monetary reform has major implications for the interaction of monetary and
fiscal policy and, therefore, consequences for the central bank's independence from fiscal
policy and the parliament. It depends on the specific design of the sovereign money system, if
it implies a monetary or a fiscal policy dominance.
If the central bank has the sole competence to issue sovereign money and to introduce it to
the business cycle directly by way of its own demand or indirectly by way of lending of
sovereign money loans towards banks, the central bank's sovereign monetary policy
dominates the fiscal policy or does at least implement its sovereign monetary policy
independently. Considering requirements of democratic principles, it could be quite
problematic (especially in the EMU due to the member states' fiscal sovereignty) if an
independent central bank makes decisions on the application of public expenses which
actually fiscal policy is competent and responsible for.
Vice versa, fiscal policy would dominate monetary policy if the central bank would require a
resolution of the parliament as the main fiscal policy actor for each and every emission of
sovereign money as well as the reduction of the sovereign money supply. If the sovereign
monetary system would be designed like this, the central bank would factually become a sub-
department of the fiscal administration and the parliament and lose its independence. All
public expenditures as well as all budget cutbacks would have direct implications for the
money supply. Furthermore, it must be expected that, especially in economies with a long
history of fiscal instabilities, the money supply will be increased rather than reduced since the
central bank cannot reduce the money supply on its own and fiscal policy as the competent
authority will, empirically and from experience, most likely not be willing to do so. A
dependency and subordination of the central bank towards fiscal policy will be difficult
particularly in unstable parliamentary scenarios in which, for example, no resolutions for
monetary policy measures can be made due to lacking majorities.
In order to reduce fiscal policy dominance, certain measures and modifications could be
implemented whereby the central bank gets tools to incentivize the fiscus for an increase of
the money supply by way of public expenditures or a reduction of the money supply by way of

withholding of sovereign money (financed by budget surpluses or public debt). The central
bank could be furnished with competences and powers to enable the central bank to decide
independently. The sovereign money system could be structured in such a way that the
central bank and fiscal policy can only control it together.
For example, the fiscus' sovereign money issuance could be limited in a way that sovereign
money may only be retrieved by the fiscus for a pre-determined period of time and/or for
pre-determined amounts. Furthermore, the central bank could also be furnished with a
legislative initiative right in relation to fiscal policy matters in order to balance the fiscal
policy's co-determination rights in monetary policy through the implementation of a right in
the opposite direction (especially in case the minister of finance or secretary of the treasury
blocks the central bank's policy measures). Following such a legislative initiative by the
central bank, the parliament decides on the sovereign money creation and thereby
determines the sovereign money supply. However, the central bank may generally not make
further conditions for parliamentary decisions bearing in mind democratic principle
requirements.
For the interaction of central bank and fiscal policy, it must be noted that there are usually
several fiscuses within a state or a currency area. In Germany, the federal state, the federal
states and the municipalities administer (among other sub-divisions) their own budgets.
Sovereign money issuing rights could be assigned to each of the relevant fiscuses and each of
them could be provided with current accounts held by the central bank in the name of the
relevant fiscuses. The central bank could thereby act as a moderator of such fiscuses.
However, it has to be expected that the interactions and dependencies among monetary and
fiscal policy will be aggravated following a sovereign monetary reform. The central bank's
moderation tasks will even be more complex on EMU level where not only the member states
themselves have fiscuses, but also the member states' sub-divisions each have their own
fiscus.
6. STABILITY OF THE SOVEREIGN MONEY EURO
A sovereign monetary reform overcomes the current credit money system. Therefore it
requires not only a fundamental economic policy decision, but also, within the EMU, a
deeper integration of the member states' financial policies, as a consequence of aggravating
interdependencies between monetary and fiscal policy, especially when considering that the
Euro as a uniform currency can probably only be set up in a monetarily stable manner, if it is
controlled and steered centrally.

Max Danzmann
Although transition profits resulting from a sovereign monetary reform should have fiscally
stabilizing effects in the medium term, a sovereign monetary reform is only likely to succeed
if it sufficiently ensures monetary stability and the financial stability of its financial
institutions. Otherwise, foreign credit money or private money systems could jeopardise the
sovereign money system's stability. In any case, only questions on the legitimacy of the bank's
interest profits, which are based on self-created private bank money, will not ensure the
sovereign monetary reform's success in the long run.

REFERENCES
1. Betz, T., “Geldschöpfung, Vollgeld und Geldumlaufsicherung”, 2014, ZfSÖ 180/181, p. 38
(43).
2. Danzmann, M., “Das Verhältnis von Geldpolitik”,FiskalpolitikundFinanzstabilitätspolitik,
2015, p. 232 et sqq.
3. Danzmann, M., “Final Deposition of Losses through the European Central Bank's Balance
Sheet as a Financial Stability Policy Tool”, Central Bank Journal of Law and Finance,
2/2015, p. 2 et sqq.
4. Gudehus, T., “Neue Geldordnung”, 2016, p. 11, 45.
5. Gudehus, T., “Dynamische Märkte”, 2015, 2nd edition, p. 420.
6. Huber, J., “Monetäre Modernisierung. Zur Zukunft der Geldordnung: Vollgeld und
Monetative”, 2012, p. 126 et sqq.
7. Huber, J., “Monetary Reform in the Eurosystem”, 2013, p. 7 et sqq.
8. Huber, J., “Vollgeld. Beschäftigung, Grundsicherung und weniger Staatsquote durch eine
modernisierte Geldordnung”, 1998, p. 259 et sqq.
9. Huber, J.; Robertson, J., “Geldschöpfung in öffentlicher Hand”, 2008, p. 25 et sqq.
10. Kremer, J., “Vollgeld”, 2014, p. 2.

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