http://www.telegraph.co.uk/finance/economics/...d-looks-at-e...
Iceland's government is considering a revolutionary monetary proposal --
removing the power of commercial banks to create money and handing it to the
central bank.
The proposal, which would be a turnaround in the history of modern
finance, was part of a report written by a lawmaker from the ruling centrist
Progress Party, Frosti Sigurjonsson, entitled "A Better Monetary System
for Iceland."
"The findings will be an important contribution to the upcoming
discussion, here and elsewhere, on money creation and monetary policy,"
Prime Minister Sigmundur David Gunnlaugsson said.
The report, commissioned by the premier, is aimed at putting an end to a
monetary system in place through a slew of financial crises, including the
latest one in 2008.
According to a study by four central bankers, the country has had
"over 20 instances of financial crises of different types" since
1875, with "six serious multiple financial crisis episodes occurring
every 15 years on average."
Mr Sigurjonsson said the problem each time arose from ballooning credit
during a strong economic cycle.
He argued that the central bank was unable to contain the credit boom,
allowing inflation to rise and sparking exaggerated risk-taking and
speculation, the threat of bank collapse, and costly state interventions.
In Iceland, as in other modern market economies, the central bank controls
the creation of banknotes and coins but not the creation of all money, which
occurs as soon as a commercial bank offers a line of credit.
The central bank can only try to influence the money supply with its
monetary policy tools.
Under the so-called Sovereign Money proposal, the country's central bank
would become the only creator of money.
"Crucially, the power to create money is kept separate from the power
to decide how that new money is used," Mr Sigurjonsson wrote in the
proposal.
"As with the state budget, the parliament will debate the
government's proposal for allocation of new money," he wrote.
Banks would continue to manage accounts and payments, and would serve as
intermediaries between savers and lenders.
Mr Sigurjonsson, a businessman and economist, was one of the masterminds
behind Iceland's household debt relief programme launched in May 2014 and
aimed at helping the many Icelanders whose finances were strangled by
inflation-indexed mortgages signed before the 2008 financial crisis.
The small Nordic country was hit hard as the crash of US investment bank
Lehman Brothers caused the collapse of its three largest banks.
Iceland then became the first western European nation in 25 years to
appeal to the International Monetary Fund to save its battered economy.
Its GDP fell by 5.1 percent in 2009 and 3.1 percent in 2010 before it started
rising again.
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