Positive Money Research Paper

1050 Words 4 Pages
Positive Money’s sovereign money proposal: Could it work?

Under the sovereign money proposal proposed by the forward thinking group positive money, the power to create money would be taken away from the banks and given to the central banks. Banks would therefore serve two purposes; a transaction function with which people stored money until they needed to spend and this money would be secure, the other a lending and savings function with the banks acting as a middleman between savers and borrowers. But could this system effectively work if brought into to somewhere like the UK and what would be the advantages and disadvantages of bringing in such a system.

In the current system in the UK the vast majority of money (97% of it (1) ) in circulation
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Within the current system as stated earlier on 97% (1) of money is in bank deposits which are effectively liabilities of the bank of the bank and are very dependent on how well the banks are doing and how their affairs lie. We have seen the most recent crisis that banks have failed often due to poor investment decisions which led to deposits within banks frozen, the banks then had to be saved so that their customers could avoid losing their money. It shows how the banks were more inclined to take risks in the knowledge that government intervention would be on hand in order to save them, this meant that economy was dependent upon banks who were willing to take risks in the knowledge they would be save, this is not a sustainable environment. This problem would be overcome under the sovereign payments system, investments and lending of banks would become entirely separate to deposits in banks in transaction accounts meaning that their money would exist in the central rather than a liability for the commercial banks. So if banks were to fail due to risky or poor investments then the transaction accounts balances could be easily transferred to another healthier bank as it was stored at the central bank and not lost in poor investments. This would be a huge advantage of switching to the sovereign money system as it would overcome a huge problem that …show more content…
Currently in the Uk when there has been a financial crisis like the one of 2010, banks have been unwilling to lend money and there has been a lack of credit due to the perceived risk of default by consumers, which leads to further economic difficulty due to the lack of credit and therefore consumption. Sovereign money could provide an answer to this problem as the central bank would be in charge of creating money it could create money in these times in order to try and counter act the crisis. Money creation could be altered easily during the cycle in order to soften the extremes of the cycle; reducing money creation in the booms and increasing money in the busts and recessions. This would help lead to a more balanced economic

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