Monetary sovereignty is not what we think

by Davide Gionco
06.10.2024

Every time we hear about monetary sovereignty we risk immediately falling back on the term "sovereignty". We are reminded of the "king-sovereign", who with his mint mint coins with his own image. In short: a formal exercise of power, which uses the circulation of coins as a form of self-propaganda.

Coin issued by Emperor Augustus

Certainly one of the aspects linked to metallic or paper monetary sovereignty is the possibility of making propaganda through the circulation of certain images. This has happened for centuries in the past and the current European Central Bank is no exception, using banknotes to propagandize the idea of ​​a united Europe.

However, this aspect linked to monetary sovereignty has today become marginal compared to other much more important issues that we will analyze in this article.

Many people are convinced that money has a "neutral" function, as each of us collects it and spends it, without worrying too much about the rules of emission and circulation. Whether it is euros, dollars, liras or ancient thalers makes little difference. When we hear about "monetary sovereignty" we therefore think of nationalist-sovereignist-populist ideologies, which refer to national sovereignty as opposed to decisions taken by supranational political bodies. We think of leaders such as Trump, Le Pen, Salvini, Farage, Orban, etc.
The coin is seen as a symbol of national sovereignty. In this sense, being in favor of national monetary sovereignty means being nationalist, while being in favor of a single supranational currency, such as the euro, means adhering to a multinational ideological vision of the world. In both cases it is an ideological vision of money, which totally neglects the role that a currency plays in our modern economy.

In this article I will explain how in reality monetary sovereignty is not an ideological and symbolic issue, but is something very concrete, which concerns us all and which has profoundly to do with our everyday lives: our salary , the price of the goods or services we purchase, the protection of our savings, public services.

What is money

To understand what monetary sovereignty means, it is first necessary to understand what money is in human society. Not so much on an individual level, because we all know what it is for and how money works, but how it works on a collective level.

Throughout history, humanity has created many types of money with the primary purpose of facilitating the exchange of goods and services, allowing them to be spread over time.
Barter is a direct and immediate exchange, which does not require money, but most exchanges today take place indirectly, that is, I sell the goods/services I have produced, placing them on the common plate of multilateral barter. In exchange I can take what I need, taking it from the same plate. Money is the tool used to measure the value of what I put on the plate and what I want to take from the plate.
From the point of view of real value, money has no value, as the multilateral barter ends only when I have taken goods or services from the plate in exchange for those I had put in through my work.
The added value created by the tool is the facilitation of exchanges, which allows each of us to produce in a more specialized and efficient way, knowing that others do the same. In the end, overall productivity increased, because we were all able to produce with greater competence the goods and services requested by the economic community. So we are all richer.
If everyone had to produce everything they needed, production would be much less efficient and we would be poorer.

The important thing is trust in the representation of value of the money instrument we use, given that there is always the risk that someone will take goods and services from the plate without having produced as much (like thieves do). For this reason it was necessary to establish a public supervisory authority (the king or central bank) which ensures that the money held at the moment by a person actually corresponds to the value of the goods and services previously produced. If everyone made their own money this verification would not be possible.

Another collective function of money is the regulation of international economic exchanges between different nations. If within a national economic community there is trust in the exchange value of its national currency, in international exchanges the value is not guaranteed by trust, but by the quality/quantity of goods and services subject to international exchanges. If country A has a trade surplus with respect to country B, the currency of country A will be in greater demand than that of country B. Consequently there will be a natural increase in the exchange rate of A with respect to B, with the consequences of trade case. So even if country B printed more coins to buy more goods from country A for free without improving its trade balance, the currency market would quickly readjust the exchange rate.
In reality the situation is not so simple, as there are currencies accepted by all at an international level on a fiduciary basis, such as the dollar, and as there are interventions by central banks that tend to counteract the natural dynamics of exchange rates. In this article we will not deal with these aspects. Suffice it to say that for large nations with tens of millions of inhabitants the internal economy is always more important than foreign trade, so the question of exchange rates is less relevant than other issues that we are going to deal with in this article .

Brief history of money

From a historical point of view, various technical solutions have been used as means of payment which allowed the value to be maintained over time, in order to have time to complete the "multilateral barter". For example, salt was used (hence the term salary) or livestock (pecus -> pecunia). For centuries, metal coins (gold, silver, bronze or various alloys) have been used, having an intrinsic value guaranteed by the minting of the public authority.
Starting from the 18th century, paper banknotes began to spread in Europe. It was a revolution, because after many centuries it was no longer necessary to use a metallic object of intrinsic value as money, but a certified scriptural instrument that guaranteed the nominal value was sufficient. Initially the banknotes had to be guaranteed by corresponding gold reserves deposited in the chests (gold remained the true legal tender currency), but, since no one went to check how much gold was in the chests, the quantity of banknotes exceeded the quantity of reserves.
That is: the quantity of money no longer corresponded to the value of the work (production of goods and services) already carried out, but to the value of future production. This was the second great revolution, because it was understood that more money is needed if economic production grows, because the population increases, because the specialization of work increases and because new machinery is created that allows production per unit of time to increase. Increased trade requires more money.
As a result, there was less and less interest in the gold reserves in the coffers and more interested in the possibility of increasing the production and availability of goods and services: the true wealth of an economic society.

The final evolution of monetary technique ultimately led to the current electronic scriptural money, which today represents over 95% of the monetary mass in circulation. Writings on paper have become writings on computers and magnetic cards.

Brief legal history of the currency

Money was born as a "private" instrument useful for private businesses. Only later was the currency "of the sovereign" born, who guaranteed the weight and purity of the metal by placing his own effigy on the coins and forced, by force, to pay taxes in that currency. And, naturally, the sovereign did it to gain advantages, both of a fiscal nature (it is more functional to collect taxes in money than in kind), and for the possibility of imposing the reduction of the metallic title for the same nominal value. The difference earned between the perceived in-kind value and the nominal value is the famous “seigniorage”.

The use of the right to create money was necessary to regulate this share of "seigniorage". Only the king had the right to impose a nominal value lower than the intrinsic value of the metal, profiting from it, for the benefit of the people (if he governed well) or himself (if he governed badly).

When, in the Middle Ages, merchants began to have more and more money, loans at interest and usury increased. With the advent of scriptural paper money the phenomenon increased further.
Merchants engaged in lending at interest created private banks. Private banks also lent money to kings, financing wars.
The wars brought 2 advantages: 1) they put the kings indebted to the banks, increasing the political power of the banks over the king; 2) they allowed the conquest of new territories of kings who were not subject to that system, bringing them under the financial control of the banks.
When we study history and the various wars they never explain to us that wars were only fought if they were financed by banks. So it was the banks that allowed or did not allow kings to wage wars. And with whom. When the king won the war, he could annex new territory and that territory was also won over to the bank's interests.

Interest-bearing loans to states are a perpetual system of control, as the interest portion can only be repaid by taking out a new loan.
Taxation of citizens and businesses is the tool for maximizing the income of the banks, which manage to extract value from the work of the entire subject nation.

The power of the banks grew until the birth of central banks. The first was the Bank of England, founded in 1694. Subsequently the power of the central banks increased until they obtained the exclusive responsibility of the sovereign (and subsequently of the "democratic" states) for the issue of legal tender banknotes and to decide the rules of issuing and circulating money.

Central banks initially still maintained a link with institutional political power, however during the 20th century the regulation of central banks allowed a very strong development of private banks, reducing the issuance of legal tender money to the current approximately 3% of circulating money. As a result, the power of the state has greatly diminished.
Most of the money we use today, about 97%, is not legal tender, but is private bank book money originating from the issuance of new bank loans. When a bank makes a loan it writes “out of thin air” the amount of money created into Mr. Mr. That money continues to circulate from current account to current account, until it returns to Mr. X who, in the meantime, is paying the installments to repay the loan.
New loans create new money. The paid installments destroy the old money. All in a dynamic evolution.

The mechanism created by the banks of the Middle Ages and the Modern Age is maintained, given that the amount to be repaid, principal + interest, is always higher than the amount lent. In this way someone will inevitably have to take out new loans at interest, perpetuating the system. Like an addictive drug.

Today, central banks have gained the power to regulate and control the activities of private banks.
At the same time they have maintained the role of perpetuating the debt of the states, given that the legal tender currency, the paper banknotes, are always lent at interest to the states in exchange for debt securities, which states are obliged to issue new debt to repay the previous loan + interest. Exactly the same mechanism used in the private sector.

Central banks today are independent of political power, that is, they decide on regulation without taking into account the decisions of the political authority. Evidently no one guarantees us that they will do so in the interests of the people, but rather in the interests of certain financial investors.
The rules of central banks, in fact, bring advantages to some and disadvantages to others, they are never neutral. And it is a fact that the people who lead central banks have all made their careers in the world of private banking.

It is no coincidence that the few central banks that are still under political control are found in authoritarian countries (China, Russia, Venezuela, Cuba, Iran, etc.) which are "not friends" of the bloc of Western countries, in which instead the central banks they are independent from politics, acting on behalf of other interests.

The rules of central banks and our daily lives

How do central bank rules influence the real economy in which we participate every day?

1. The central bank has the power to determine the reference interest rate, which is the rate at which the central bank lends money to private banks.
   This value indirectly determines the level of interest rates that a state must pay on public debt and the level of interest rates that families and businesses must pay on loans contracted with banks.
   An increase in the amount of interest to be paid limits the ability of the state, families and businesses to make investments. An excessive increase in interest rates leads to economic recession and the destruction of jobs, with an increase in unemployment and poverty, leading at the same time, at least in the short and medium term, to an increase in profits by banks and of financial investors.
2. The central bank can decide whether or not to cooperate with the government on an economic level. It can decide to purchase unlimited government-issued debt securities by printing more money. In this way the government could issue zero-interest bonds to finance public spending, freeing itself from the yoke of interest payments. If the central bank, as the ECB does, does not cooperate for the unlimited purchase of securities (as the Japanese BOJ currently does), then the markets determine the interest rates that the state must pay on the debt, weighing on the budgets of citizens and businesses.
   Even the central bank could give the government the money it prints without asking for it to be returned. As a result, the government could maintain the same levels of public spending by reducing taxes. Or it could increase public investment without having to raise taxes.
   The central bank, independent of political power, can decide to do this or not to do it. It can cooperate with the government to promote economic development or it can not cooperate with the government, leaving it disarmed in the attempt to solve the economic and social problems resulting from the lack of public funds.
   Naturally, if the central bank favors excessive circulation of new money, which does not correspond to production levels, there is also the risk of an increase in inflation, which would erode the purchasing power of families. It is not clear why this responsibility should fall on the central bank and not on whoever was voted to govern the country.
   The fact that the central bank is independent takes away from the political government the possibility, but also the responsibility, of decisions that are very relevant for the economic policy of a country.
3. The central bank establishes the level of reserves that private banks must guarantee (today we are around 10%) to make new loans. If the level of reserves is reduced, private banks have the opportunity to make more loans, putting more book money into circulation and causing inflationary phenomena (especially in the real estate sector). If the level of reserves increases, the ability of banks to provide credit is reduced. The effect is similar to that of increasing interest rates, with the difference that there are no direct repercussions on the interest rates of loans and government bonds.
4. By combining the different rules together, the central bank can grow the private economy stimulated by credit from private banks (construction, productive investment by businesses) and grow the public economy stimulated by government spending (social spending, public infrastructure, public services) . Or vice versa, of course. In recent decades, central banks have decided to minimize the role of the state in the economy. Obviously without asking our permission.
5. Finally, the central bank must monitor the correctness of the activities of private banks. If the controls are rigorous, banks will respect the established rules. But if controls are not rigorous, or even conflict of interest, then private banks will be able to commit irregularities and even crimes, damaging businesses and families to the benefit of a few. In Italy in recent decades we have witnessed many scandals resulting from the poor supervision of the Bank of Italy.

In conclusion, the legal power currently attributed to central banks allows them to enormously influence the economic policy of a country, without however being accountable to the citizens. The most substantial part of the political decisions of a democratic state have been entrusted to a non-democratic and self-referential body, without even us being informed.

Consequently, today it is the central bank that largely determines the results of a government's economic policies, without, however, assuming responsibility for them.

Given this situation, what does it mean to have monetary sovereignty today?

Monetary sovereignty in the modern economy

Given the current powers of the central bank, a nation that had monetary sovereignty would not have much more room for maneuver than a nation without formal monetary sovereignty, such as Italy, for example, which no longer has its own national currency.
The only advantage would be that we would not have a fixed exchange rate with other countries in the currency area (Eurozone), so the sovereign currency could devalue or revalue depending on trade, as has happened for example in Europe to countries like Poland or Hungary. It would be a small thing to favor our export-oriented production system, but not so significant for the country's economy which is based mainly on the domestic market.
Therefore calling for a return to formal monetary sovereignty without reforming the legal status of the central bank would be of little use.

If the government had central bank powers it could easily find the necessary funds, creating more money out of thin air (as central banks do) and without burdening itself with interest-bearing debt, to make new investments and create jobs for the unemployed. These investments would not lead to an increase in inflation, as the former unemployed now employed would increase their spending power, increasing the sales, and therefore also the production, of goods and services in the private sector.

Likewise, the government could reduce the tax burden (and perhaps even the bureaucracy) that weighs on families and businesses, so as to leave more resources in the pockets of families and businesses for their private investments.
There would be no shortage of funds for hydrogeological rehabilitation interventions in the country or for the seismic safety of buildings. The limit would now be the availability of the workforce.

Public debt would cease to be a problem, as the state would not need to borrow to finance itself. The sale of securities would remain a simple public savings service for savers.

Naturally, a government with central bank powers should also take responsibility for its choices, taking care not to cause the inflation rate to rise too much as a result of excessive spending.

While waiting to have political forces in government with clear ideas on monetary sovereignty and capable of reforming the central bank, in reality there would already be some room for manoeuvre.
Instead of reforming the central bank, a parallel public currency could simply be created, which is not at all prohibited by the European treaties that Italy has signed. The state could use it to pay employees and suppliers and accept it for tax payments. Naturally there would be an exchange mechanism with other currencies circulating in other countries (euro, dollar, etc.).
Furthermore, today, with money mostly in electronic form, it would be simple to create a parallel currency, complete with blockchain writing to avoid counterfeiting. The Ministry of Economy could do this directly, giving each citizen or legal entity a free current account on which to write the account figures.
The current central bank would be relegated to dealing with the old money which will progressively go out of market.

All current restrictions on public accounts resulting from European treaties concern accounts in euros, not accounts in any internal parallel currency. At that point the government would have suddenly freed itself from all the artificial constraints imposed over the years by national and international bodies that were very attentive to the interests of the financial markets and very little to the interests of families and businesses.

At that point the government will only have the responsibility of managing the instrument of full monetary sovereignty in an appropriate and prudent manner, to promote the country's economy for the benefit of the population and not for restricted financial powers.

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The article Monetary sovereignty is not what we think comes from Economic Scenarios .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/la-sovranita-monetaria-non-e-quello-che-pensiamo/ on Sun, 06 Oct 2024 16:13:56 +0000.