Monetary sovereignty

Monetary sovereignty is the power of the state to exercise exclusive legal control over its currency and monetary policy. This includes the authority to designate a country's legal tender, control the money supply, set interest rates, and regulate financial institutions.[1] Monetary sovereignty is crucial for national sovereignty, economic independence, and policy autonomy.[2]

The degree of monetary sovereignty ranges widely from countries with high control over monetary systems to those who voluntarily gave up aspects to supranational organizations or adopted a foreign currency.

Definitions

Monetary sovereignty has several key powers:

Legal tender authority: the exclusive authority to designate which forms of payment are legally acceptable for settling debts in a nation.[3][4] This includes determining the official currency.

Issuance and retirement: the exclusive authority to control legal tender issuance and retirement.[5]

Monetary policy independence: The ability to set interest rates and determine bank reserve requirements without external interference.[6] This power includes responding to economic conditions with expansionary or contractionary measures.[7]

Exchange rate management: The authority to set exchange rate policies, whether fixed or floating,[8] and intervene in foreign exchange markets.[9]

Financial system regulation: The power to regulate banks and other financial institutions, including acting as a lender of last resort, setting capital requirements, and supervising financial markets.[10]

History

Monetary sovereignty has evolved significantly through history.[11] The concept of monetary sovereignty predates political sovereignty by thousands of years, with proclamations by ancient rulers or priesthoods on the authority to create money. Sovereignty and the nation state developed in the 16th century Western Europe.[12]

Monetary sovereignty powers were reasons for the founding of central banks, starting with Sweden's in 1668.[13] The gold standard constrained monetary policy for countries maintaining gold convertibility.[14] After the Bretton Woods system collapsed in 1971, many nations adopted floating exchange rates and regained monetary policy control.[15]

Contemporary examples

High monetary sovereignty

Nations such as the United States, Japan, and the United Kingdom have high monetary sovereignty. They have autonomous central banks that can respond to economic conditions without external constraints and independently set monetary policy.[16]

Shared monetary sovereignty

The European Union represents voluntary monetary sovereignty sharing. 20 member nations adopted the euro[17] and transferred substantial powers to the European Central Bank.[18] These countries have some fiscal sovereignty but gave up the ability to independently adjust the money supply, set interest rates, or devalue the currency.[19]

Limited monetary sovereignty

Currency boards or dollarization significantly limit monetary sovereignty. Argentina's Convertibility plan had pegged the peso to the dollar.[20] Ecuador and El Salvador adopted the US dollar.[21]

Challenges to monetary sovereignty

Globalization and capital flows

International capital mobility can constrain monetary sovereignty.[22] Capital flows across borders can reduce monetary policy effectiveness.[23]

Digital currencies and cryptocurrencies

Digital currencies, including central bank digital currencies (CBDCs)[24] and private cryptocurrencies, challenge monetary sovereignty.[25] These technologies could allow currency competition and cross-border payments bypassing traditional monetary controls.[26]

International monetary cooperation

The International Monetary Fund can impose conditions limiting monetary sovereignty.[27] Monetary policy often requires international cooperation.[28]

Sovereign money creation

Money can be created by both central banks and commercial banks.[29] Central banks create base money through open market operations, lending to commercial banks, and other mechanisms.[30] Commercial banks create money through fractional reserve banking when they extend loans.[31] Most money is created by commercial banks through loans. Reserve aggregates do not constrain bank lending or deposit creation.[32]

Organizations like Positive Money advocate for central banks exclusively managing money creation. This would replace using interest rates to influence commercial bank money creation.[33] Sovereign money reform proponents argue for money creation that benefits the general public not private banks.[34] They say commercial banks can create money for profit while the public bears financial instability risk.[35] Proponents argue for democratic oversight over money creation,[36] for public purposes like education, healthcare, or basic income.[37]

Critics question the feasibility of a transition to a sovereign money system.[38] They argue sovereign money would not prevent asset bubbles financed by existing surplus funds in money markets.[39]

The 2018 Swiss sovereign-money initiative was a popular reform attempt but did not succeed.[40] After the 2008–2011 Icelandic financial crisis, the prime minister commissioned a study of banking system reforms by Frosti Sigurjónsson,[41] who proposed sovereign money reform.[42]

See also

References

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  2. ^ Patrício Ferreira Lima, Karina (2022-09-01). "Sovereign Solvency as Monetary Power". Journal of International Economic Law. 25 (3): 424–446. doi:10.1093/jiel/jgac029. ISSN 1369-3034.
  3. ^ Nzaou-Kongo, Aubin (2020). "International Law and Monetary Sovereignty: The Current Problems of the International Trusteeship of the Cfa Franc and the Crisis of Sovereign Equality". African Review of Law and Critical Thinking. 1 (1): 30. doi:10.6084/m9.figshare.12808835.v3. Retrieved 5 December 2020.
  4. ^ Bogomolov, Oleg T. (2016-07-27). Market Forces in Planned Economies: Proceedings of a Conference held by the International Economic Association in Moscow, USSR. Springer. ISBN 978-1-349-11559-4.
  5. ^ "The Legal Aspect of Money" by F.A. Mann, 5th edition, Oxford, 1992, pp. 460-78
  6. ^ Bordo, Michael D.; Wynne, Mark A. (2016-04-01). The Federal Reserve's Role in the Global Economy: A Historical Perspective. Cambridge University Press. ISBN 978-1-316-56530-8.
  7. ^ Armijo, L. (1999-01-13). Financial Globalization and Democracy in Emerging Markets. Springer. ISBN 978-0-333-99489-4.
  8. ^ Bhandari, Jagdeep S. (1987). Exchange Rate Management Under Uncertainty. MIT Press. ISBN 978-0-262-52122-2.
  9. ^ Pilbeam, Keith (1991-06-18). Exchange Rate Management: Theory and Evidence: The UK Experience. Springer. ISBN 978-1-349-11744-4.
  10. ^ Robert, Holzmann; Fernando, Restoy (2022-10-07). Central Banks and Supervisory Architecture in Europe: Lessons from Crises in the 21st Century. Edward Elgar Publishing. ISBN 978-1-80220-889-4.
  11. ^ Zimmermann, Claus D. (2013-11-07). A Contemporary Concept of Monetary Sovereignty. OUP Oxford. ISBN 978-0-19-150205-7.
  12. ^ Cottier, Thomas; Lastra, Rosa M.; Tietje, Christian; Satragno, Lucía (2014-08-29). The Rule of Law in Monetary Affairs: World Trade Forum. Cambridge University Press. ISBN 978-1-316-06169-5.
  13. ^ Yağcı, Mustafa (2020-09-03). The Political Economy of Central Banking in Emerging Economies. Routledge. ISBN 978-1-000-16477-0.
  14. ^ Parker, Randall; Whaples, Robert (2013-02-11). Routledge Handbook of Major Events in Economic History. Routledge. ISBN 978-1-135-08079-2.
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  17. ^ Sweeney, Simon (2023-12-22). European Union in the Global Context. Taylor & Francis. ISBN 978-1-315-29435-3.
  18. ^ Cohen, Benjamin J. (2000). The Geography of Money. Cornell University Press. pp. 47ff. ISBN 978-0801485138.
  19. ^ Schmidt, Vivien A. (2002-08-15). The Futures of European Capitalism. OUP Oxford. ISBN 978-0-19-153108-8.
  20. ^ Franko, Patrice (2018-09-07). The Puzzle of Latin American Economic Development. Bloomsbury Publishing PLC. ISBN 978-1-4422-1218-3.
  21. ^ Ozsoz, Emre; Rengifo, Erick W. (2016-05-24). Understanding Dollarization: Causes and Impact of Partial Dollarization on Developing and Emerging Markets. Walter de Gruyter GmbH & Co KG. ISBN 978-3-11-043403-3.
  22. ^ Reinert, Kenneth A.; Rajan, Ramkishen; Glass, Amy Joycelyn; Davis, Lewis S. (2010-08-02). The Princeton Encyclopedia of the World Economy. (Two volume set). Princeton University Press. ISBN 978-1-4008-3040-4.
  23. ^ Sergi, Bruno S.; Tiwari, Aviral Kumar; Nasreen, Samia (2024-07-22). Modeling Economic Growth in Contemporary India. Emerald Group Publishing. ISBN 978-1-80382-751-3.
  24. ^ Strong, Carolyn; Martin, Brett; Chrysochou, Polymeros (2024-09-03). Advances in Blockchain Research and Cryptocurrency Behaviour. Walter de Gruyter GmbH & Co KG. ISBN 978-3-11-098183-4.
  25. ^ Haynes, Andrew; Yeoh, Peter (2020-04-28). Cryptocurrencies and Cryptoassets: Regulatory and Legal Issues. Taylor & Francis. ISBN 978-1-000-06404-9.
  26. ^ Dombret, Andreas; Kenadjian, Patrick S. (2023-03-06). Data, Digitalization, Decentialized Finance and Central Bank Digital Currencies: The Future of Banking and Money. Walter de Gruyter GmbH & Co KG. ISBN 978-3-11-100323-8.
  27. ^ Bohoslavsky, Juan Pablo; Cernic, Jernej Letnar (2014-12-01). Making Sovereign Financing and Human Rights Work. Bloomsbury Publishing. ISBN 978-1-78225-393-8.
  28. ^ Wijnholds, Onno de Beaufort (2020-07-23). The Money Masters: The Progress and Power of Central Banks. Springer Nature. ISBN 978-3-030-40041-5.
  29. ^ Schneider, Erich (2013-11-05). Money Income and Employment. Routledge. ISBN 978-1-136-50647-5.
  30. ^ Focardi, Sergio M. (2018-03-19). Money: What It Is, How It’s Created, Who Gets It, and Why It Matters. Routledge. ISBN 978-1-315-39104-5.
  31. ^ Cleaver, Tony (2003-09-02). Understanding the World Economy. Routledge. ISBN 978-1-134-54323-6.
  32. ^ Rangeley, Max (2024-09-12). The Age of Debt Bubbles: An Analysis of Debt Crises, Asset Bubbles and Monetary Policy. Springer Nature. ISBN 978-3-031-66473-1.
  33. ^ Pettifor, Ann (2017-02-21). The Production of Money: How to Break the Power of Bankers. Verso Books. ISBN 978-1-78663-136-7.
  34. ^ Felber, Christian (2017-10-25). Money - The New Rules of the Game. Springer. ISBN 978-3-319-67352-3.
  35. ^ Felber, Christian (2017-10-25). Money - The New Rules of the Game. Springer. ISBN 978-3-319-67352-3.
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  37. ^ Smith, Fraser Murison (2020-08-27). A Planetary Economy. Springer Nature. ISBN 978-3-030-49296-0.
  38. ^ Stellinga, Bart; Hoog, Josta de; Riel, Arthur van; Vries, Casper de (2021-06-03). Money and Debt: The Public Role of Banks. Springer Nature. ISBN 978-3-030-70250-2.
  39. ^ Weber, Beat (2018-05-17). Democratizing Money?: Debating Legitimacy in Monetary Reform Proposals. Cambridge University Press. ISBN 978-1-108-17392-6.
  40. ^ Breuer, Marten (2019-07-17). Principled Resistance to ECtHR Judgments - A New Paradigm?. Springer. ISBN 978-3-662-58986-1.
  41. ^ Nageswaran, V. Anantha; Natarajan, Gulzar (2019-04-25). The Rise of Finance: Causes, Consequences and Cures. Cambridge University Press. ISBN 978-1-108-63325-3.
  42. ^ Moosa, Imad A. (2016-10-14). Contemporary Issues In The Post-crisis Regulatory Landscape. World Scientific. ISBN 978-981-310-953-7.
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