For the past three years IMF economists Michael Kumhof (Kumhof left the IMF in 2015 to work for the Bank of England) and Jaromir Benes have been circulating a proposal to end the ability of banks to create money.

As Kumhof explains in the November 2013 video below, the perception that governments issue our money is totally false. In the current global economic system, only about 3% of money (mainly coinage) is created by government. The other 97% is created by private banks (out of thin air) when they generate new loans. (See How Private Banks Create Money).

For various reasons, which Kumhof explains in the video, he and Benes believe that unlimited and unregulated private money creation by banks is responsible for the current economic crisis. And that full recovery is only possible if the privilege of creating and controlling the money supply is restored as a government function.

In addition to assuming sovereign control over the money supply, Kumhof believes national governments should also require banks to hold 100 percent reserves for the loans they initiate. This effectively terminates their ability to create money out of nothing. This, in turn, massively reduces their political power.

Ironically, the proposal put forward by Kumhof and Benes isn’t new. Entitled the Chicago Plan, it was first put forward by University of Chicago professors Henry Simons and Irving Fisher during the Great Depression.

The History of Private vs Sovereign Money

During the Q&A at the end, Kumhof briefly discusses previous experiments with government-issued sovereign money, which have mainly occurred in the US. Sovereign money funded the original 13 colonies, the American War of Independence and the Civil War.

In their paper The Chicago Plan Revisited, he and Benes trace the history of sovereign money back to the ancient Greeks and Romans. During the Middle Ages and Renaissance, all currencies were publicly controlled (by kings and the Pope) until 1666, when Charles II transferred control of money creation to private banks with the English Free Coinage Act.

The slides, which are difficult to see in the video, are available here