MONETARY 
         REFORM 
          
         A BETTER MONETARY SYSTEM FOR ICELAND 
          
          
          
                                        
          
          
          
          
         A REPORT BY FROSTI SIGURJONSSON 
         COMMISSIONED BY THE PRIME MINISTER OF ICELAND 
                       
          
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
           Monetary Reform - A better monetary system for Iceland 
           Edition 1.0 March 2015 
           Reykjavik - ICELAND 
           ©2015 Frosti Sigurjónsson 
            
                        
                       Contents 
                        
                       1     Overview and summary ............................................................. 10 
                       1.1      Abstract ......................................................................................................... 10 
                       1.2      The need for monetary reform ............................................................ 10 
                       1.3      Alternatives to the fractional reserve system ............................... 14 
                       1.4      Recommendations .................................................................................... 17 
                       2     Monetary problems in Iceland .................................................... 18 
                       3     The money creation mechanism ................................................. 20 
                       3.1      How commercial banks create money ............................................. 20 
                       3.2      How the Central Bank of Iceland creates money ......................... 24 
                       3.3      The Central Bank's role .......................................................................... 25 
                       3.4      The incentive for creating money ...................................................... 27 
                       3.5      Can the CBI restrain money creation? .............................................. 29 
                       3.6      Do banks simply lend existing money? ............................................ 33 
                       4     The expanding money supply ..................................................... 38 
                       4.1      Measures of money .................................................................................. 38 
                       4.2      Deposits increased by 19-fold in 14 years ..................................... 39 
                       4.3      2001 changes in monetary policy ...................................................... 40 
                       4.4      The money supply and inflation ......................................................... 42 
                       4.5      What enabled expansion of money in the 2000s ......................... 48 
                       5     Fractional reserve issues ............................................................ 56 
                       5.1      Deposit Insurance ..................................................................................... 56 
                       5.2      Lending for speculation vs economic growth ............................... 59 
                       5.3      Commercial banks control the money supply .............................. 61 
                       6     Alternatives to fractional reserve ............................................... 63 
                       6.1      The Chicago Plan revisited .................................................................... 63 
                       6.2      Narrow banking ......................................................................................... 64 
                       6.3      Limited Purpose Banking ...................................................................... 67 
                                                                6 
                        
                       7     The Sovereign Money Proposal .................................................. 69 
                       7.1      Key advantages of a Sovereign Money System ............................. 69 
                       7.2      The Sovereign Money System in detail ............................................ 71 
                       7.3      Payments, loans and maturity transformation ............................. 76 
                       8     Creating Sovereign Money ......................................................... 78 
                       8.1      Separating the creation and allocation of money ........................ 78 
                       8.2      The Money Creation Committee ......................................................... 78 
                       8.3      Deciding how much money to create ............................................... 78 
                       8.4      Introducing new money into the economy .................................... 79 
                       8.5      Removing money from circulation .................................................... 80 
                       8.6      Accounting for Sovereign Money ....................................................... 81 
                       9     The transition to sovereign money ............................................. 83 
                       9.1      Account conversions................................................................................ 83 
                       9.2      Availability of bank credit following the switchover ................. 85 
                       9.3      Impacts of a Sovereign Money System ............................................. 85 
                       9.4      Impacts in an international context .................................................. 88 
                       9.5      Scepticism about Sovereign Money ................................................... 89 
                       Bibliography ...................................................................................... 94 
                       10    Samantekt á íslensku ............................................................... 102 
                       10.1     Formáli eftir Adair Turner lávarð .................................................... 102 
                       10.2     Inngangur ................................................................................................... 102 
                       10.3     Úrdráttur .................................................................................................... 103 
                       10.4     Valkostir við brotaforðakerfið ........................................................... 107 
                       10.5     Þjóðpeningakerfi ..................................................................................... 108 
                       10.6     Niðurstöður ............................................................................................... 113 
                                                             
                                                                7