The "Sovereign Money System". Necessary Reform or Dangerous Panacea?

Through credit allocation banks can create money "out of nothing". The movement for "sovereign money" (Vollgeld) considers this fact as the main cause of inflationary dynamics, business cycles, speculation, public debt and financial crises. Hence, only the central bank should have the right and the power to create money. It would bring it in circulation as a "gift" to the government. Private households and enterprises would deposit their money at banks. The latter are not allowed to lend this electronic sovereign money out. An evaluation of this idea yields the following results: First, it is in principle not possible to steer inflation or the business cycle through changing the quantity of money. Second, sovereign money cannot dampen financial speculation. Third, such a monetary system would strongly impair credit allocation to the real economy. Fourth, it would also dampen effective demand in the total economy over the long run. Fifth, this system would enlarge the – already great – power of central banks in a way which can hardly be reconciled with democratic principles.