A public
monetary system

Two kinds of euros

In daily use, every euro appears identical. In accounting terms, however, different kinds exist. Cash is a liability of the central bank. The balance in an ordinary bank account is a liability of a commercial bank to its customer. Most money used by households and businesses consists of these commercial-bank deposits.

A bank balance is accepted as equivalent to cash because banks participate in the payment system, are supervised and must allow balances to be converted at face value. Deposit guarantees and central-bank support reinforce this equivalence. A private bank liability therefore functions as money throughout society.

A loan creates a deposit

When a bank grants a €300,000 mortgage, it normally does not first take that exact amount from a vault or another customer’s savings account. It simultaneously records a claim on the borrower and a new bank deposit. The deposit can immediately be used to buy the house. The amount of deposit money has increased.

This does not mean a bank can create wealth without constraints. It needs capital, must settle payments to other banks and bears credit and liquidity risks. The crucial point remains that the act of lending itself creates new, generally accepted means of payment.

Repayment destroys the created money

Repayment reverses the process: the borrower’s deposit and the bank’s claim both decline. The money created with the loan disappears from circulation. Interest is a payment to the bank and an income stream to the financial sector. To the extent that banks spend this income again, it returns to the non-financial economy.

The deeper dependency remains: if all bank loans were repaid in a pure credit-money model, almost all deposit money created through those loans would disappear. Money and debt are structurally connected.

Credit determines money’s first destination

New money does not enter circulation through a democratic budget, but wherever banks expect sufficient return and security. A large share therefore flows into mortgages, property and other assets with marketable collateral. Property lending can form a self-reinforcing loop: more credit expands purchasing power, higher prices increase collateral values, and higher collateral values enable larger loans.

Why the system becomes complex and fragile

Because private bank liabilities serve as society’s money, a bank cannot fail like an ordinary business. An uncontrolled failure can affect deposits, payments and credit simultaneously. Banks are therefore surrounded by deposit insurance, capital and liquidity rules, emergency support, resolution regimes and central banks acting as lenders of last resort.

Money creation driven by sentiment

In optimistic times, risks are judged to be low, lending expands and the amount of deposit money grows. When sentiment reverses, banks grant fewer new loans while existing loans continue to be repaid. Money growth then stops or the money supply contracts precisely when households and businesses need liquidity. The system amplifies the economic cycle.

Money as a social agreement

Money is ultimately a socially recognised unit of account and payment agreement. The community can legally determine what counts as a euro, who may issue new euros and when money is added or withdrawn. New money does not have to originate as interest-bearing bank debt.

Under the proposed system, only a public Monetary Authority (MA) may create generally accepted means of payment. Private money creation and money-like substitutes are prohibited. Ordinary claims, bonds and credit agreements remain possible, but may not present themselves as instantly redeemable, nominally guaranteed payment money.

Mandate and democratic division of responsibilities

The MA has one primary monetary objective: to keep the value of money as stable as possible. It does not choose political projects. It determines how much money the economy can absorb without general inflation or unnecessary deflation. Democracy then decides how that monetary space is used.

How new money enters circulation

When the MA concludes that the money supply can grow, it makes new money available to the democratic budget without an interest burden. Parliament may spend it on healthcare, pensions, education, housing, infrastructure, energy or other chosen purposes. It enters circulation through wages, suppliers and public services and can afterwards be used for every normal transaction.

Removing money from circulation

A credible public monetary system must also be able to remove money when total demand structurally exceeds productive capacity. This may be done through taxes whose proceeds are cancelled, temporary monetary levies, lower net public expenditure or public savings instruments. The MA determines the required correction; democracy chooses how the burden is distributed.

Banks become credit intermediaries

Banks continue to exist, but may only lend money they have actually obtained: equity, fixed-term investment accounts, bonds or repayments on earlier loans. A new loan transfers existing public money and does not change the money supply.

Bankruptcy does not change the money supply

If an investor makes €100,000 available to a business through a bank, that business spends it on machinery, staff and suppliers. If the business later fails, the money still exists in the recipients’ accounts. What becomes worthless is the private claim. The quantity of money does not change.

Interest is also paid from the existing money supply. The lender receives a return when the investment succeeds and bears the loss when it fails. There is no monetary need to shift that loss onto citizens who did not participate. Deposit guarantees and public compensation for voluntarily accepted credit risks disappear.

Transparency and responsibility

Under the current system, it is barely visible that a bank balance is a private institution’s debt. Stability depends on supervision, reserves, guarantees and emergency facilities. Under the MA system, a euro in a payment account is public money. Anyone providing funds for credit owns an investment with explicit risk. Bank accounting no longer determines how much money society possesses.

Less boom and bust

In the current system, optimism can immediately become more credit and more money, reinforcing rising property and asset prices. In the MA system, every loan must be funded from existing money. Greater demand for credit does not automatically expand the money supply. Investors must consciously make money and risk available, limiting leverage and making risk more visible.

The first use of newly created money

In the current system, private credit assessors have substantial influence over where new money first appears. Those with existing wealth and collateral can obtain new purchasing power more easily. Under the MA system, the first use becomes an explicit democratic choice. Society can direct new money to public services and productive capacity.

Finance returns to being a service industry

Without the ability to issue cheap money-like liabilities, financial leverage becomes more expensive and more limited. Banks must persuade investors to bear real risk. This is likely to produce smaller balance sheets, fewer layered constructions and less trading that is profitable only because of cheaply created credit.

Converting existing deposits

On a transition date, ordinary payment deposits are converted one-for-one into public MA money. Citizens retain their full nominal balance, but it no longer appears as risk-bearing bank debt in the monetary system. Existing loans remain contractually valid. Temporary transition financing can decline as old loans are repaid. New loans may only be made from funds that have actually been obtained.

Phasing out guarantees

Deposit insurance can disappear once payment balances consist entirely of public money. Investment accounts carry no guarantee. Participants must be clearly informed in advance that loss is possible. Compensation afterwards would recreate the very mixture the reform is intended to end.

Independence and democratic oversight

The MA may not independently finance political preferences. Conversely, parliament may not order unlimited money creation. The MA therefore determines the available monetary space under a clear mandate using public data; democracy allocates it. Auditors, courts and parliament oversee the process, while appointments are made for fixed, staggered terms.

What the proposal does not promise

A public monetary system does not abolish scarcity, human error or political conflict. Bad investments, wars, commodity shocks, failed harvests and technological disruption remain possible. The benefit is more specific: these events need not automatically threaten society’s payment money and payment system. The link between credit sentiment, money creation, collateral prices and public rescues is broken.