1 Sep 2013

More ideas for direct ECB payments to Eurozone citizens

I've been thinking more about how the European Central Bank should get freshly created debt free money into the Eurozone economy. Following my post last week, I'm increasingly convinced that the best way to get money directly from a Central Bank into the economy might well be to short-circuit politicians completely, and directly credit the bank accounts of citizens.

Suppose that, in its wisdom, the European Central Bank decides that the Eurozone needs another €1 trillion to get the economy moving. Given that the total Eurozone population is 333 million, this works out at €3000 per man, woman and child. Under the current arrangement, the European Central Bank's main options for getting more money into the economy involves adjusting the interest rate at which it provides funds to the banking system. But this is clearly not an efficient way of controlling the money supply - nobody can oblige commecial banks to make loans. And when they do make loans, this is just increasing the amount of debt in the system.

Injecting money directly into the economy debt free by adding money to the bank accounts of European citizens would be far more efficient, and would allow the money supply to be increased without increasing debt levels.

But what would be the best way to do this? Should the ECB transfer money to the conventional bank accounts that citizens have with their local banks? While this is possible, it seems to me that there may be an even better option.

My suggestion is that the ECB should itself open accounts for every Eurozone citizen. Literally, this could simply involve creating the equivalent of an enormous Excel spreadsheet, with one entry per citizen.  Initially, all those accounts would have an entry of €0.00. But, if the ECB decides to increase the money supply, it would simply add the appropriate sum (be it €10, €100, €1000 or whatever) to the account.  It would be as simple as pressing a key on a computer. (Yes, that is all that is needed to create money!).

How would people spend this money? Well, I would suggest that they would be able to link their conventional bank account to the ECB account, much as you can link a bank account to a Paypal account. This would mean that you could then transfer the money on the ECB account to your conventional account, at which point you could then use it as you would use money normally.

Note that the ECB account could only be positive. There would be no way for a citizen to become overdrawn on their ECB account because they simply would not have the option of transferring more money than there was credit on the account.

One other interesting possibility is that citizens would also be able to transfer money from their conventional bank account to the ECB account. Why would they do this? Well, the ECB would not be paying interest on the sums held on their accounts. On the other hand, any money that was held by the ECB would be absolutely safe. There would be no way that you could lose the money, irrespective of what happens to the rest of the banking system.

This idea is actually very close to the notion of "transaction accounts" that the Positive Money group has been proposing in the UK. Their idea is that the "current accounts" in the banking system should effectively be accounts held with the Bank of England. As with the current proposal, those accounts would be guaranteed by the Central Bank but would not get any interest. If someone wanted to get interest, they would need to transfer their money from the transaction account to an investment account, which would have an associated level of risk.

Both Positive Money's proposal and my own have the major advantage that it would no longer be necessary for governments and central banks to guarantee money deposited with commercial banks. This would remove the massive hidden subsidy that has been artificially propping up the commercial banking industry at tax payers expense, and has encouraged reckless behaviour by bankers.

In Positive Money's proposals, your money would be safe while it was in the transaction account (effectively with the Bank of England). Withe the current proposal, the European Central Bank would actually have a safe account for each citizen - a place where it would be easy to transfer money for safe-keeping. But at the same time, it would also provide an easy way for the ECB to be able to directly increase the amount of money in the system.

I would propose that the ECB would only have the ability to put money into these ECB run accounts. While you could in principle tax people by withdrawing money from their accounts, I think this would be a bad idea. For a start, if you were to apply a €100 tax to all citizens by reducing the ECB account balances by €100, what would happen to an account that did not have €100 in it? As I have already said, I strongly believe that such accounts should only be positive.  No, I think that if the ECB wanted to reduce the amount of money in the system, the best way would be to apply a very small FTT to the roughly €1.6 quadrillion of transactions that occur in the Eurozone each year. That way, there would be no way of causing people to go into debt. If you can't afford the 0.05% fee for transferring money from A to B, don't make the transfer.

Finally, why do I think that directly crediting citizens is better than providing money to governments? Well, one reason is that if the ECB wanted to inject €1 trillion into the economy and did it by transferring the sums to the 17 Eurozone governments, it would be much harder to be sure that the money really did get into the economy. Providing money to governments does have the risk that money could end up being used for corrupt practises. Who knows what proportion of money provided directly to the Italian government would end up with the Mafia? Directly crediting the accounts of individual citizens would completely avoid this sort of risk.

Any comments?


  1. Hi Simon,
    completely agree with you, my proposal is also to have the ECB set up an account for each citizen, and send him money-no-debt not all at once, but each month, enough to soak up the backlog of interests + the effect of new interests on commercial loans + kick the economy a bit. That way, the huge cloud of debt that you so rightly described last time will over time disappear or at least be reduced to a manageable size.
    At the same time, the ECB should do the same and send money-no-debt to governments, to soak up the public debts over time, and nothing else.

    And then, the governments should live within the means of their tax income.

    I can invite you again to read my book, it has a lot of this stuff inside...
    I'll have a conference on these things later this month, in Luxembourg




  2. Hi Jean-Claude,

    I'm glad that we agree. Do you know of anyone else who has proposed that the ECB sets up accounts for each citizen to allow money to be injected directly into the economy? It would be interesting to know the history of this idea.

    I think you are right that the best thing would be for the ECB to provide both direct money to citizens and direct money to governments (again proportional to the population size). They would just have to decide what the ratio between the two should be. For example, 50% for citizens, 50% for governments would be one simple option.

    But whatever they do, it would be even more efficient if the ECB imposed FTT was used to soak up any excess (and restribute from the speculators to the real economy). I really can't see what arguments could be raised to oppose such a strategy.

    Will check out your book (despite the price!)



  3. Good Morning Simon,

    I think the Indian government is in the process of getting everyone an account, may be useable over mobile phone. They do it precisely in order to bypass the politicians and bureaucracy. Also, the Brazilians have a scheme going, with free cash if you send your kids to school. As far a amounts are concerned, the cash for governments has to pay for the interest on the current debt, + say 5 % of the principal per yeare. That way, after 20 years, the whole nightmare is gone.

    For the citizens, it has to avoid inflation, but pay for the savings that we do, + sufficient growth to keep us busy. So anywhere between 5 or 10% of GDP?

    I'll do some calculations.

    wish you a sunny day, and if you ever get to Luxembourg ...


  4. Thanks for the info on India and Brazil. It's true that it really costs very little to set up a web-based system. For example, the Cyclos software allows such a system to be set up very easily already, although the ECB might need to do a bit more to scale up to 333 million users (!). But really, no big deal...

  5. Hi Simon,
    is this proposal meant to happen post monetary reform or even before it? You would have to change accounting standards in banking to simply credit accounts without any debt contract. Or ECB would have to buy something from the people in order to credit their account. So I suppose this is a post reform measure.

    Of course once the money creation is taken away from banks there has to be some kind of authority that will create the money instead. But the question is: would you like to create money in a centralized form or would you rather prefer a decentralized money creation model. I would prefer states and even regions to create money according their preferences of development and their growth potential and willingness to growth. Preferably there would be centralized state currencies and also complementary currencies. Both of them can be created on decentralized level.

    I don't see a problem with politicians. The money authority will be a fourth state power firmly established in the constitution and the number one criterion would be to have a 0% monetary inflation. Imagine people buying stuff for the same prices for decades. And suddenly a politician comes along who would want to misuse the money power. If it is even possible without changing the constitution. But lets suppose he would create inflation. You could imagine the uproar it would cause in the society. People would realize immediately that this is an outright robbery. Once the money power is in the open under public scrutiny and not disguised like it is today, it would be very unwise and hard to misuse it.


  6. Hi Marek,

    Indeed, a zero percent inflation system is indeed perfectly feasible.

    Furthermore, I'm all in favour of creating a range of alternative currencies - including alternative National, Regional and Local ones (see my Neuro proposal for example). The critical point is that none of these should be created as interest bearing debt - otherwise we are back with the same problems that we have with Euros, pounds and dollars.

    Of course, even if we do create lots of alternative debt-free money systems in parallel, this doesn't get round the fact that the total Eurozone debt is currently standing at €24.5 trillion - 2.5 times Eurozone M3. So unless the banks are happy to be paid off with pizza vouchers (or Neuros, or Sol Violettes) , this mountain will never disappear unless the ECB does what it has to - namely, inject enough euros into the system to allow debt to be repaid.

  7. Hi Simon,

    well that is the problem - this monetary system is a power tool. The debt was never meant to be repaid in the first place. With rather small changes in the accounting our problems could be fixed. And sure without injecting debt free money the debt cannot be repaid. Although I would argue that under so-called "Odious debt" we - the people should simply refuse the payment of large sums of the debt.

    Regarding the ECB - I would be very careful to incorporate central banks into any reform solution. Central banks are secretive power houses that guard the legalized theft that is our modern banking system. After reading Werner´s Princes of the Yen, I only have my previous negative ideas about central banks reinforced.

    I live in Slovakia and after 2008 I can tell that more people are starting to realize that something is very wrong. But there is a campaign of so called libertarians and the Austrian school to misinform people and lead them into false believe about returning to gold standard or competing currencies. They say that fractional reserve banking is a fraud, however, their explanation of money multiplier is misleading. Do you also feel these tendencies?


  8. I agree that it would solve the problem if the people said no to paying back "Odious debt". The problem is that any government that refused to pay off its debts would be vulnerable to legal attacks by defenders of the financial system. That's why, in addition to paying debt-free money to citizens, I would really like to see the ECB providing funds to allow governments to directly pay off debt at source - causing the "money" and the debt to disappear in a puff of smoke. That way, the banks could not mount a challenge - they would have to cancel the debt, but would not have more money as a result - and hence no risk of inflation.

    But, of course, all this depends on completely changing the mode of function of the ECB. In particular, it is unlikely to happen with the ex-European Director of Goldman Sachs at the helm.

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