Most people think that money is created by the state or the central bank. But central banks only issue the cash we use, which is about 10% of the total money supply. Only a fraction of money has its origin in the state, namely notes and coins. By contrast, around 90% of the money supply is created as loans by commercial banks, which earn money from them. In order to bring the power of money creation back under democratic state control, money reformers discuss three core ideas: 100% Money (also known as the Chicago-Plan or Full Reserve Banking), Positive Money and Modern Monetary Theory (MMT).

1. Economist Irving Fisher’s 100% Money proposal – also known as the Chicago Plan after the group of 1930s Chicago economists that proposed it – envisages a 100% reserve requirement of money at the central bank for each commercial bank issuing loans. In this connection, one speaks of
Full Reserve Banking.

2.The Positive Money proposal, put forward principally by Joseph Huber and James Robertson, would equate bank credit money with cash: bank credit should also be exclusively created by the central bank. In order to avoid the danger of inflationary financial policies driven by political interests, the management of the money supply should have constitutional status and be controlled by an independent monetary body that has equal status with the legislative, executive and judicial branches of the state.

3.The promoters of Modern Monetary Theory (MMT) pursue similar goals, however they would prefer to strengthen the position of the state rather than the central bank. According to the MMT proposal, states are in a legitimate position to take on potentially unlimited debt to fulfil their obligations and can produce an expansion of the money supply at any time. The state can also take on unlimited new debts in order to meet the interest repayments.

What these various concepts have in common is they aim to empower state management of the economy through money creation. Private money creation by commercial banks is automatically less controllable. Through this process, the banks act pro-cyclically and cause (asset price) inflation and speculative bubbles on the finance markets, which in turn lead to real economic shocks. Apart from this, private commercial banks get the profits from credit creation, which should go to the state.

(based on Philipp Degens (2013): Alternative Geldkonzepte, MPIfG Discussion Paper 1/13, (in German) with permission of the author)