Modern Sovereign Money—Part II: A Synthesis of the Chicago Plan, Sovereign Money, and the Modern Money Theory

In the first part of this series, I demonstrated that the current fractional reserve banking system produces a fundamental conflict of interest between private banks and society. The aim of this second part is to describe three radical solutions to this interest conflict. The Chicago Plan and the Sovereign Money approach propose to prohibit private banks to create money by abolishing fractional reserve banking. The Modern Money Theory on the other hand tries to challenge the current economic systems as a whole based on chartalist ideas. All three approaches have serious deficits. However, they are complementing each other well. The Modern Money Theory solves the main problem of the Chicago Plan and the Sovereign Money proposal, whereas the latter two solve the major issues of the former. I will outline a synthesis of those three theories in order to overcome the interest conflict between the private banks and society.


Introduction
The collapse of the global financial markets in 2008 and the following recession has given us a unique opportunity to think about the efficiency of our current economic system. As I have shown in the first part of this series [1], a careful analysis of the system-related causes of the crisis reveals a fundamental conflict between the private banks and society. Private banks (non-government owned banks) can increase their profits by creating more and more money through borrowers default. Bank runs again have a very negative impact on society. If the private banks are bailed out, then the taxpayers have to pay for the risk-seeking behavior of bankers. Or if the government lets the private banks fail, then a sudden credit crunch could lead to a serious recession in the real economy.
Two theories explain how the private banks create money. The money multiplier model emphasizes that private banks have to wait until customers deposit their money in order to use those deposits to make loans. The money supply is controlled by the central bank through reserve requirements. However, private banks can circumvent those regulations entirely through securitization. The second theory is the endogenous money theory, which claims that private banks do not need to wait for customers to deposit their money. The accounting rules of double-entry bookkeeping allow the banks to create loans (as an asset) by counter-balancing it with fictitious deposits in the name of the borrowers (as a liability). Here, the money supply is endogenously determined by the demand for credit and is not anymore under the direct control of the central bank. The endogenous money theory is clearly a much more accurate description of reality.
However, for a policy discussion, it is important to keep both models in mind. A proposal with would only prohibit private money creation as described in the endogenous money theory would not solve the problem, because private banks could still take excessive risks in the money multiplier model through securitization. Any real solution to the problem would have to either close the loopholes or prohibit also private money creation as described in the money multiplier model.
As I have shown in the first part [1], conventional reforms of the banking system are very unlikely going to solve the interest conflict between private banks and society, because the private banks would always find ways to evade regulations. Therefore, it becomes reasonable to consider some unconventional (and more radical) options. Instead of allowing the private banks to create money through fractional reserve banking, it could be argued that the ability to create money should be a state monopoly (cf. [2], pp. 358-359). If a normal citizen tried to create (counterfeits) money, he/she would go to prison. Why then do we allow private banks to create over 97% of our money out of thin air ( [3], p. 369)?
One argument could be that we give private banks this extraordinary privilege to create money, because they fulfil an important function in the economy. However, the too-big-to-fail banks are not fulfilling their functions for the economy.
They do not transfer the money from the depositors to the businesses who want to invest, because it is much more profitable for them to speculate with the depositors' money ( [4], p. 6). And they have strong incentives to create bubbles, because a bubble fuels the demand of debts, which again allows a higher leverage of private banks. Investors are more willing to finance their investment with debt, if prices (e.g. the value of a house) compared to the costs of borrowing the money increases faster, because they could always sell their investment with profits. Of course, this logic only works until the bubble bursts. Therefore the private banks neither support real economic growth (cf. [4], p. 7) nor price stability (cf. [2], p. 361; [5], p. 4). But if the current banking system is not fulfilling their core functions for the economy, why should we accept the risks they are creating for the whole society?
In the following, I will discuss the Chicago Plan, the Sovereign Money approach, and the Modern Money Theory. And finally, I will propose a synthesis of these three approaches, which would indeed much better solve major problems of our current economic system: growth, employment, and price stability.

Chicago Plan
The  [16], p. 417) showed-using an accounting system dynamics approachthat a full reserve banking system would allow the elimination of government debt without "triggering recession, unemployment and inflation." And finally, the Chicago Plan would not diminish the useful core functions of private banks as for example "providing a state-of-the-art payments system, facilitating the efficient allocation of capital to its most productive uses, and facilitating intertemporal smoothing by households and firms" ( [14], p. 7).  [10] or b) equity + treasury credit [14] or c) equity [9] government bonds, short-term and mortgage loans are cancelled against treasury credit [14] Central Bank/Treasury --provision of treasury credit -

Sovereign Money
The origin of the idea of Sovereign Money can be seen in the economic works of  [24], p. 14)-but it tries to achieve this aim in different ways. The first difference is that no break-up of commercial banks into money banks and credit investment trusts is demanded. The second point is the insight that money in our information age is much more than just cash (e.g. credit cards), and therefore the Chicago Plan with the requirement for money banks to hold 100 percent reserves in cash seems to be outdated ( [22], p. 4, 23).
Since money is today mainly information stored in bank accounts, it is much easier to prevent private banks to use their customers' deposits for creating loans by changing accounting rules (cf. [23], p. 26). The first step is to declare the electronic money in the customers' deposits (most of it was created by the private banks) to be legal tender ( [22], p. 23f). In a second step the private banks would be required to make a clear distinction between safe transaction accounts with instant access for the customers and investment accounts "where the customer consciously requests their funds to be placed at risk and invested" (  Jackson and Dyson claim that their Positive Money proposal would provide the following benefits ( [7], p. 20f). It would in the long run reduce the level of debt in the economy. And since saving and lending are disconnected, it would be possible to let banks fail without the need of deposit insurance or taxpayer-funded bailouts ( [23], p. 177f, 256). Furthermore, they claim that the control over the money supply could be simplified, because the MCC could directly create or destroy money and would not need to manipulate the interest rate as it is currently the case ( [22], p. 15; [23], p. 208, 274). And the independency of the MCC would guarantee the elimination of asset price bubbles and the limitation of monetary sources of inflation ( [23], p. 25), and therefore also the regulatory burden could be reduced ( [24], p. 16). Additionally, the state would earn a large profit from creating new money, which could be used to stimulate economic growth ( [24], p. 12). Furthermore, a single country could implement this new system without the need to coordinate with the rest of the world ( [24], p. 17). And finally the monetary and financial institutions will not change dramatically. "Almost all the everyday routines of the banking and financial markets will continue as if nothing had happened" ( [22] However, my biggest concern about the Positive Money proposal is that it does not achieve its goal to guarantee the government's control over the money supply. Yes, the sovereign money approach rules out money creation by the private banks as it was described by the endogenous money theory. But similar to  downplay this problem by arguing that such a "process is unsustainable in the long term." I agree, it is. In the moment the process becomes unsustainable and borrowers default, the bubble will burst with consequences for the real economy.
It would not destroy money, but we can expect that the private bank's customers, who lost their "wealth" in the Investment Accounts will adjust their behavior and cut consumption. This problem becomes more serious, because Jackson and

Modern Money Theory
The  Randall Wray ([27], p. 76f) argued that this could be achieved with a government job opportunity program or an employer of last resort (ELR) program. The ELR is a government program that offers everybody, who is ready, willing and able to work, a job at a fixed wage ( [26], p. 82; [27], p. 124). By doing so the government sets the price for unskilled labor, which is an important commodity for the private sector, and therefore anchors the value of its currency ( [27], p. 94, 131; [30], p. 175). "[T]he value of the currency is determined by what one must do to obtain it, and with ELR in place, it is clear exactly what that is: the value of the currency is equal to one hour of ELR work at the going ELR wage" ( [26], p. 82). In addition, the ELR fulfills the principle of functional finance, because government spending would float counter cyclically. In times of high unemployment the ELR will increase government spending automatically, whereas in times of full employment the ELR will reduce government spending and inflationary pressures ( [26], p. 83; [27], p. 94; [32], p. 15). However, the ELR would allow the firing of workers, if they would not fulfill the required performance standards ( [27], p. 125). As a result, we can expect the ELR to be better than unemployment, because "it would prevent deterioration of labor skills, would maintain income at a base level" ( [32], p. 15), and "should lower recruiting and hiring costs as employers would have an employed pool of workers demonstrating readiness and willingness to work" ( [29], p. 46f). Workers, who are unwilling or unable to work, would still have to rely on the social safety net ( [27], p. 125).
Finally, the advocates of the MMT claim that their proposal would be compatible to a free market ideology, because government interventions could be reduced. Neither would there be a need for a minimum wage law, nor would the interest rate need to be adjusted frequently. And since the ELR reacts automatically to the private sector's demand of labor, it is actually the private sector that decides the size of the government's deficit ( [27], p. 182).
The critics of the MMT have mainly focused on two topics. The first is related to concerns about the applicability of the ELR program in real economies. Critics question whether the government can find sufficient desirable work for all the unemployed workers ( [27], p. 181) or believe that it would lead to inflation, since those "unproductive" workers in the ELR would earn wages and consume goods, although they do not increase the production of those goods ( [29], p. 47). Wray ([27], p. 182) counters the former point by referring to the endless job opportunities in the not-for-profit, volunteer organizations as a way to find desirable work. And the counter-argument to the latter point is that the ELR as well as any other service job does not produce any goods. Should we therefore get rid of all service jobs? According to Tymoigne and Wray ([29], p. 48) this argument is a red herring.
The second concern of the critics is far more serious. More mainstream post Keynesians have pointed out that the role of private banks in creating money is not covered well in MMT ( [33] [34], p. 19). This is an important issue, since the MMT emphasizes the view that the government has a monopoly to create money, which however is not the case in reality. It is even more confusing that the MMT makes this argument in the context of post Keynesianism, which believes in its core in the endogenous money theory [35].  tive Money Proposal. They actually complement each other well. I will try to describe here a synthesis of the three approaches, which I will call the Modern Sovereign Money synthesis (see Table 3).

Synthesis
First of all, considering that we are living in an information age, I agree with the Sovereign Money theorists that it is much easier to change accounting rules than printing a large amount of cash in order to introduce a 100%-reserve requirement. I would follow here largely the Positive Money proposal of Jackson and Dyson (see Table 2). Central banks would keep the databases (customer funds, investment pool, etc.), whereas the private banks would hold the Transaction   My second concern about Jackson's and Dyson's Positive Money proposal is that they would like to give the private banks the permission to use time deposits The usual argument against public banks is that they are inefficient compared to the private banks. Well, I would immediately ask how efficiency is measured.
Of course, the proposed public banks would be much less efficient in making a profit. This should not be a surprise, since it would not be their aim to make profit. On the other hand, I am quite sure that those public banks would be much more efficient in supporting the creation of jobs and with this the sustainable growth of the economy than private banks [39]. banking system between the private banks and society as a whole would disappear. As a result this alternative financial system would much more efficiently contribute to economic growth and the reduction of unemployment than the current system. It would much better fulfil the aim of price stability than the current system. Furthermore, the money available for speculation would dry up immediately when private banks would lose the ability to create money. And the establishment of such an alternative financial system would not require international cooperation, because it would make the national public banking sector largely independent from other financial markets.

Conclusions
The focus of the first part of this series [1] was on an analysis of the private banks' current ability to create money. I have shown that independent of the theory, which explains this money creation process (money multiplier theory vs. the post Keynesian endogenous money theory), issuing of money by private banks leads to a fundamental conflict between the risk-seeking bankers and the risk-averse society. Private banks can increase their profits by extending the money supply through loans. The society on the other hand has an interest to limit the money creation by the private banks, because the excessive issuing of (private) bank money increases the probability of bursting bubbles and bank runs with tremendous negative consequences for the real economy and the taxpayers. Furthermore, I argued that the conventional proposals to reduce the risks of financial crises would fail, because they did not address the cause of the issue: the fundamental conflict between private banks and the society.
In this second part, I analyzed the more radical proposals, which actually tried to solve this fundamental conflict. Both the Chicago Plan as well as the Sovereign Money approach claim that they would achieve this by abolishing fraction-