The 2008 global financial crisis laid the foundation for monetary reform initiatives because mainstream theories could not easily explain the policies adopted by central banks and global governments after the crisis, as well as their consequences. For example, inflation barely rose under quantitative easing policies despite the astronomical increase in the money supply, contrary to mainstream theoretical explanations. Accordingly, recent monetary reform proposals have generally focused on reforming the currency issuance method.
These include modern monetary theory (MMT), strategic quantitative easing (also known as “quantitative easing for all”), and sovereign money theory. MMT claims that a nation can guarantee jobs by utilizing its ability to issue money to support active fiscal spending. By contrast, strategic quantitative easing argues that central banks can issue money to temporarily pay people or finance public projects when needed. Sovereign money theory argues that, as in pre-modern times, governments can issue money directly as basic income paid to citizens or for other public purposes.
This study deals with sovereign money theory (i.e., the notion that money can be issued to pay basic income). When money is issued, profit (seigniorage) is generated from the difference between the money’s face value and the cost of issuing it, and this profit is used as a source of basic income. However, to issue sovereign money, the financial system must first be reformed.
This report conducts a preliminary study on reforming the financial system to align it with the issuance of sovereign money and investigates its impact on the financial system. To understand sovereign money’s impacts on the financial system, it is necessary to first review sovereign money theory in general. For this purpose, this study first examined problems in the current monetary system based on the credit-creation of commercial banks. Specifically, the following issues in the current monetary system were discussed. It is impossible to provide a continuous money supply needed for economic growth; most seigniorage goes to commercial banks rather than the government; and it gives rise to social and environmental issues, including moral hazard in the financial system. Sovereign money can serve as a solution to these problems.
Next, the report reviewed the operating system of sovereign money. Introducing sovereign money will result in changes in financial conditions. First, under a sovereign money system, commercial banks stop creating credit and customer accounts are divided into transaction accounts and investment accounts. The transaction accounts invest in safe assets, while the investment accounts invest in risky assets according to the customer’s instructions. A “Monetary Management Committee” (MMC), a new body with powers equal to those of the executive, legislative, and judicial branches of government, makes decisions about the creation of sovereign money. The MMC’s sole function is to supply the money needed for continuous economic growth and a stable level of inflation.
Next, the report reviewed the various impacts of transitioning to a sovereign money system. The key point here is the full-reserve banking system, which was reviewed in considerable detail because it has become the focus of debates on sovereign money. This report found that concerns about potential issues in the transition to full-reserve banking were exaggerated. Regarding the political and economic implications for financial system reform, sovereign money theory is not particularly radical in the context of academic history. Sovereign money theory proposes only limiting banks’ ability to create money, making it relatively moderate compared to bank nationalization theory, which calls for a reform of the distribution of money.
Finally, the report offered policy recommendations. A number of obstacles must be overcome to transition to a sovereign money system. Specifically, reforming the current system and introducing a new one would generate friction among many conflicting parties, requiring a painstaking process to coordinate these conflicting interests. The transition to a sovereign money system can thus be described as a long-term undertaking and must be implemented gradually.
However, if a policy decision to issue sovereign money is made, then financial reforms such as introducing full-reserve banking and opening personal accounts at the central bank must be performed beforehand. Gyeonggi Province is currently promoting basic income as one of its policies. For the province to expand basic income, it must conduct further studies on the issuance of sovereign money and propose policy measures to the central government based on this research. A sovereign money system can also be partially implemented within the current system, and sovereign money can be used to finance basic income and the like. For example, Article 75 of the Bank of Korea Act states that the Bank may directly subscribe to government bond issues, and Article 76 states that the Bank may directly subscribe to bonds whose redemption in full and interest payments are guaranteed by the government. Article 76 also stipulates that interest rates and other terms of the subscription shall be determined by the Monetary Policy Committee. This can be utilized to issue sovereign money without changing the current system.