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euro crisis, Greece, Grexit

The task of Sisyphus

The Wolfson Essay - the Greek Exit and its connection to Monetary Reform

This essay was entered for the 2012.Wolfson Prize in Economics which offered the winner £250,000 for the best proposal to resolve the Greek euro problem. It included all the technical detail contained in the book "MOVING ON" advocating an independent currency for a sovereign Scotland.


The entries were assessed by professional economists who clearly considered it an eccentricity. The winning entry observed all the usual academic conventions and revealed nothing new nor anything of value to anyone - other than the author. This was perhaps reminiscent of the prestigious Council of Economic Advisors who persuaded the SNP that sharing sterling would be a good idea for an independent Scotland…

Submission for the Wolfson Economics Prize

By: Ronald F. Morrison.

Biography: Educational background in accountancy and civil engineering. Retired company director in fields of Manufacturing, Building & Construction, Investment Banking - both in UK & overseas. Lifelong interest in Monetary Science and Banking Practice. Author of several papers on this subject and the booklet ‘There’s No Independence without Financial Independence’ (subsequently republished in MOVING ON) setting out the case for Scotland to issue its own currency following a referendum on Independence.


The 2008 banking crisis was still unresolved when the 2011 euro-zone currency disaster piled in on top of it. This combination of events has already led to a worldwide economic slowdown and now threatens a serious recession. The remedies currently circulating the public realm fail to inspire.

With this background it would seem to be ducking the issue to offer a simple technical transition programme for a member State leaving the euro-zone. The seceding State would be jumping from the frying pan into the fire and both these places are unacceptable. So this paper incorporates a somewhat deeper analysis.

It will question the validity of both Sovereign and National Debt, and describe why both are ‘systemic’ and incapable of being paid down. They can however, to a substantial extent, be written off. This would provide a clean slate for a banking regime designed to encourage enterprise and social wellbeing rather than as at present, constrain these imperatives.

By refining this objective, recognising the political hazards and plotting a practical course to its achievement, the author offers his ideal programme to provide the soundest foundation for the future growth and prosperity of the current membership.

The theoretical problem is excessive public & sovereign debt, emanating from anarchic bank credit inflation; the principal barrier to resolution is weak governments failing to call banks to democratic account.

This temerity on the part of governments is endemic throughout the strongholds of Western banking. It is exemplified in the UK by the Treasury Select Committees when interviewing prominent financial figures from the Establishment. These are typically the Chancellor, Governor of the Bank of England, Chief Secretary to the Treasury, Chairmen of Public Inquiries into banking and corporate governance and senior banking executives etc. The pattern is consistent; Members of Parliament having genuine concerns about the abuse of financial power ask questions which are expertly fielded by extremely well briefed beneficiaries of the status quo. The MPs have limited experience of a very complex banking system and they also know perfectly well that their bosses manage this theatre and therefore they are powerless and out-gunned from the outset. Their frustration is obvious, as is that of their constituents. In other legislatures the script is the same although the players have different names.

It is not in the author’s remit to suggest how this barrier is dealt with, but perhaps by acknowledging its existence and defining a clear financial alternative for the seceding State, some small benefit may be resurrected from the ashes. Should it prove successful it could perhaps find wider acceptance.

The theoretical problem of excessive and misdirected bank credit is readily dealt with by –

1. Writing off systemic debt held within the banking system (but specifically not that held by genuine bond holders)
2. Converting all chartered clearing banks to full reserve status.
3. Making banks intermediaries, i.e. the origination and issue of all new money and credit will be the exclusive prerogative of a Constitutional Monetary Authority constrained by the following -
• All new money shall be free of debt, entering circulation exclusively through the medium of the State paying directly for public asset creation by the private sector.
• The availability of labour and material resources currently under-utilised by the private sector.
• The imported content of commissioned public assets must be compatible with maintaining the International Balance of Payments.

The essay is arranged into an INTRODUCTION which expands upon how this can be achieved, followed by the PLAN, a desirable new framework for a member State seceding from the euro-zone.

Then there are several important PROVISIONS, required to defend against political wreckers and financial speculators.

With these in place the TRANSITION can commence as a sequence of processes set into an ordered timescale.

Finally there is a brief appendix with a schematic diagram by the author which illustrates the architecture of an ideal Monetary Policy.


It is not for this essay to take a view on currency unions or the pros and cons of a United States of Europe with complete political union and fiscal authority over a single currency. What it will address are the basic conditions required for any democratically accountable monetary system to function properly. It is within this context that the problems of the common currency are mapped and a practical course charted for the secession of a member State from the existing euro-zone.

Before the members embark upon any major modification to the euro-zone they should take the opportunity to review some basic issues.

Financial crises are not caused by Euros or Dollars or Drachmas. They are caused by the issue of excessive credit, flawed accounting and inept financial regulation. Failure to address this ‘elephant in the room’ means continued exponential growth of public debt - the catalyst of the present euro crisis.

Money nowadays is born, lives and dies within the banking system. Its electronic life sparks off somewhere as a bank loan and is extinguished upon repayment. In what passes as the real world it leaves an audit trail of bank statements; in the off-balance sheet world of shadow banking you will look for that in vain.

It is described as fiat money, but the reality is something else – an artifice disguised as money and called credit. Whereas the State issues fiat money as cash without debt , banks issue credit as debt. It appears convenient and not very different – until inflation is taken into account and, public services become unaffordable, savings and pensions depreciate – indeed today sovereign countries are going bankrupt. In short almost everyone, but not quite everyone, is getting poorer. There’s no shortage of money, it just doesn’t seem to reach the parts that need it.

Fiat money is a token representing the credit-worthiness of the State which issues it. It is primarily a medium of exchange and a unit of account. It is also held to be a store of value, which it is not, because it is a token and not wealth. Wealth is real - physical, social, and natural capital which may be held individually but also by States on behalf of all individuals. Fiat money may however also exist as a deferred claim to value, and that is quite different. If a saver or investor forgoes present spending for future benefit then that is legitimate within a fiat currency. Deferred spending might impact upon the money supply which should always be maintained in a state of equilibrium, and so this balance can be secured by making a bank the natural home for savings and pension funds where it can be borrowed by others for current investment.

Money is not bank credit. Money cannot be loaned unless the lender is prepared to give up possession of the sum until it is repaid. When bank credit is extended no one goes without. This much is obvious and may even appear specious, but if these definitions are loosely interpreted then the outcome upon which they are predicated is equally flawed.

The advent of fractional reserve banking progressively transformed the meaning of money as both became synonymous with bank credit. It became possible to lend credit, denominated in terms of money, without any physical money existing. Lenders could lend without forfeiting the immediate use of any money; they could lend without ownership or even a claim to ownership of real money.

Fractional reserve is the involuntary guarantee of taxpayers for other people’s debt. Systemic debt is that obligation manifested in bank loans created for private profit and unattached to any real wealth. It is bank credit loaned to governments and held within the banking system – specifically not those bonds sold on to genuine bond holders like pension funds or insurance companies etc.

Bank credit is illusory and unaccountable, which is why the balance sheet of a bank is unlike any other commercial balance sheet. What other corporate entity can create an asset from nothing and legitimise it by offsetting it with a liability to itself? No economic system can be stable with that kind of logic forming the basis of its means of exchange – and so it has proved.

That however is also why unsecuritised systemic debt could be written off without any real loss – other than a loss of future interest to a bank. Normally the bank’s shareholders would have to stand the loss of a default but the host government could readily issue a dispensation to permit the write off should it so choose. This would create a precedent which would shatter a few illusions but it would be a significant first step towards reform and be particularly relevant in the present euro-zone context. A graph indicating the volume of such systemic debt which could b written off is included in the appendices.

Is the issue and management of a fiat currency properly a function of the State or of private enterprise? A hierarchy has developed whereby financial markets now assume greater importance than the original function of money – that of facilitating and accounting for the exchange of goods and services. It has happened not because we have universally adopted fiat currencies, but because governments have abrogated their Constitutional responsibility to issue and manage their National currencies. Instead they delegated the duty, lock, stock & barrel, to corporations called fractional reserve banks. The result is a monetary system based entirely upon debt – systemic debt ultimately owed to the banking system.

Is the principle of a fiat currency – a unitary token which reflects the entire credibility of the issuing State - compatible with the concept of leveraging which is fundamental to fractional reserve banking?
Why then do we allow banks to leverage a paper token and ask Governments to act as guarantors? Government could retain its sovereignty over the currency by simply issuing it to the banks for distribution – free of debt and interest. That remains to this day how real cash money enters circulation.

Although our accounting systems are mathematically accurate and the aggregate volume of goods and services being counted are finite, the number of currency units in circulation and available to enter circulation in the form of bank credit is unlimited, constrained only by a corporate assessment of risk and profit. The figures on the graph appended extend only as far as the decade ending 2003 – before the invention of Quantitative Easing etc. Today in 2012 one can only hazard a guess the numbers and the associated inflation.

The availability of virtually unrestricted credit – manifested in particular as inter-bank lending and off-balance sheet financing - also produces a commercial anomaly – the world of options, derivative and futures trading. It is possible to ‘take positions’ of such magnitude as to influence natural market prices and patterns. Many such deals would be impossible without the leverage of bank credit, and this type of business contributes nothing to the proper function of money. There is nothing wrong with gambling or speculation, provided it is financed with one’s own money, literally ‘placed up front’ – but that is not how the demimonde of shadow banking works – it is capitalised almost entirely by the misuse of bank credit. Stable markets need ‘real’ money – the same rule which governs full reserve banking – no money from thin air. It is not the function of the State to provide social credit for anti-social adventures.

























The endogenous growth of financial markets fuelled by ephemeral bank credit has driven a lobbying wedge of self-interest deep into the political cracks. The acceptance by democracies of Wall Street ‘rating agencies’ as arbiters of their debt management ability is symbolic of the futility of this debt mountain – more accurately an upended pyramid.

Whilst both public and private debt is a domestic matter, banks also step beyond their National borders lending huge sums to foreign governments which go far beyond a ‘smoothing’ function to cover balance of trade variables. Such bonds, which constitute ‘sovereign debt’, are issued with little prospect of repayment but in the knowledge that the interest is guaranteed by the borrowing government.

By definition such debt is denominated in a foreign currency and can only be serviced or repaid by earning foreign currency from exports, remittances from Nationals abroad, or from selling off National assets or natural resources. In the case of a government defaulting on its interest payments the issuing bank is obliged to ‘take the ‘hit’ which, in the case of fractional reserve is frequently sufficient to bring down the bank and oblige the home government to either ‘bail-out’ the bank or at least refund its depositors. These loans are made for private profit and without the consent of the home government which guarantees the bank’s credit. If there is a default then this suddenly ceases to be a private business arrangement and becomes an international confrontation. This would not happen with full reserve banking in the first place, however the present imminent and embarrassing situation could in large part be avoided by the writing off process described above.

Rational behaviour would suggest that sovereign debt should be managed between sovereign governments via a transparent balance of payments formula and a related valuation of their currencies. That a private banking corporation should be permitted to make foreign loans with money it does not have but which is (even indirectly) guaranteed by its host government is therefore just as irrational as the ‘leveraging’ of a fiat currency within National borders alluded to earlier.

These anomalies are epitomised in the IMF. Here is a so called quasi-independent institution ostensibly established to facilitate the financing of trade and to smooth international financial management. It too makes loans from empty coffers using money it does not have and again no one goes without when it does so. It not only makes conditions about repayment, it requires the recipient to force through economic reforms guaranteeing an economy ‘free of government interference’ and ‘open to total and unrestricted foreign participation’. That is not for any Nation which values its independence.

Fractional reserve is an illogical system by any measure and it is no surprise that it produces illogical outcomes. It was not invented like a telephone, not deduced by a mathematician; not designed by an engineer nor discovered by a scientist – it is the petulant offspring of greed and self-interest. It stems from a privileged group (bankers) persuading another privileged group (politicians) in the 17th century, that both parties could get away with it and it matured into its modern form in 1913 when the Federal Reserve Act was passed into law. The Thatcher/Reagan legacy was the removal of the last vestiges of restraint on monetary policy and Big Bang granted a free pass to rule over the democratic process. A simple confidence trick benefiting a relatively small group has evolved into a destructive worldwide phenomenon. National governments find themselves bound to issue bonds in exchange for bank credit to finance ‘deficits’. In fact they mortgage their taxpayers in return for a means of exchange, and should they default the creditor turns off the credit tap and amidst this imposed ‘recession’ privatises the victim’s public assets and insists upon harsh austerity and unemployment.

It is perceived wisdom that all economic appraisals are ultimately evaluated in terms of money. It is affordability that conditions what government can or cannot sponsor within their national borders. Yet the primary purpose of a fiat currency is to optimise economic activity and facilitate tangible public investment – alas, all too often the opposite applies and it constrains these ambitions. This is a key dichotomy, because whilst individuals and corporations must regard money as hard to come by and to be earned by work and enterprise: the State, through its Constitution and Parliament, is charged with creating and managing the currency in order to secure this very outcome. Our currency is our means of exchange - a prime responsibility of government - not to be corrupted nor inflated for private or political gain at the point of issue.

All this is of course no Damascene revelation – it is widely understood. It persists because the system is so entrenched that to change it appears a monumental task, even more so because the groups benefitting from the status quo have acquired significant power over the political process – to the extent that democracy is now more of an illusion than an aspiration. Politicians feel impotent in the thrall of their own chartered banks.

There is no shortage of bank credit to finance the privatisation of once public monopolies as they mutate into private ones. As the situation deteriorates public inquiries are demanded into banking and corporate governance – all consistently populated by acquiescent placed people under the chairmanship of one of the City disciples - and all producing predictable outcomes.

The flawed principles of bank created credit compromise not only the money supply but extend into the high offices of State. For this reason the banks are bailed out by taxpayers; more and more money is printed in the guise of Quantitative Easing; the National Debt escalates; inflation soars; public investment dries up, and austerity is then the order of the day. It is a continuing process having but one outcome and it will be stopped only by political intervention or the total collapse of society.

So the challenge to monetary economists is not to design a suitable model - that would be a relatively logical process. A strategy of implementation must be produced and that inevitably crosses the boundaries of academia and strays unpredictably into the political labyrinth. This however becomes unavoidable when the academic is asked to unpick a political construct. Further, any meaningful treatise on Monetary Policy will require to be set into a framework of legislation, and that will unquestionably ruffle a lot of feathers in the corridors of power – in particular the powerful lobbies of the Bank of International Settlements, the IMF, Wall Street and the City of London. Nevertheless, if professional accountants and economists are to retain any credibility, or be of any practical use to society, we must collectively invent a better financial mousetrap - and present it in a transparent and understandable fashion. The pressure now upon the euro-zone may just present that opportunity. The Plan which follows is not offered in the context of a concession to an offender, but as a real solution to the current offending global banking paradigm.

The longer we put off facing up to these inconvenient truths the more our societies will deteriorate and the worse will be the eventual collapse.
Global summits searching for ‘top-down’ solutions are not cutting the mustard. A new practical ‘bottom–up’ approach is required. We can do better than simply turning back the euro-currency clock ten years. Let us not miss an opportunity unlikely to be repeated for generations

The Plan

The essential preliminary framework for transition will require -

The creation of a Constitutional provision enshrining the principle that the National Currency and Credit shall, following promulgation, be issued solely and exclusively by the State, free of initial debt, through a Constitutional Monetary Authority (CMA) which will ensure appropriate liquidity to the banking system and will assume ultimate authority over Sovereign Debt Issue & Repayment. Only under such a strong Constitutional commitment will it be possible to achieve the objectives of this Plan and establish these institutions:

• A full reserve chartered banking system to provide efficient and competitive customer account management, short term overdraft facilities and mortgages.

• A ‘retail’ banking system funded by its shareholders or members. All loans, mortgages and credit will comprise ‘real money’ drawn from the reserve base of the issuing bank subscribed by savers and investors. Banks will no longer be permitted to create their own credit and will therefore require not only to attract deposits from their customers, but also attract investors to provide funds for lending. Bank reserves will comprise multiple classes of savings, pension funds and multiple investment classes, each offering a risk related return and grade of guarantee. The function of domestic banks will be to concentrate exclusively upon retail banking. No single chartered bank will be permitted to conduct more than 15% of the Nation’s business, nor may it be effectively owned by foreign nationals.

• A Central Bank, no longer the bankers’ bank but an executive arm of the CMA will manage the transition from fractional to full reserve banking and thereafter act as banking regulator – now a more straightforward task not fully achieved within previous arrangements. The Central Bank will operate a payments clearing service for the chartered banks incorporating a registration process ensuring all lending is matched to reserves. Where needed, banks may also obtain temporary supplies of the National Credit from the Central Bank. It will also fix the base rates for interest and foreign exchange, and also monitor cross-border capital flows. The Central Bank will further be charged with managing the National Balance of Payments.

• A National Investment Bank, also an executive arm of the CMA, should be the primary conduit for its ‘new money policy’ to maximise constructive and fairly paid employment within the private sector.

• A new National Currency replacing the euro with a new (or the former) National currency unit. This need be no more than a well documented seven day wonder – as evidenced when National currencies converted to the Euro from the legacy currency circa 1999.

The conversion of the present complex banking organizations within the seceding State will entail their temporary nationalization. The State is interested only in the ‘retail’ banking operations and the payments system, so bank managers will be given adequate notice to separate these functions into a saleable entity. A fair offer will be made to shareholders following independent valuation of the assets and liabilities to be acquired. The future of the residual commercial assets and liabilities will be a matter for the shareholders. The acquired banks will be returned to the private sector at the earliest opportunity to be floated as Mutuals or Corporate Bodies.

Once this programme is finalised the dates of promulgation can be announced well in advance. The measures are to stabilize the currency, indeed the successful transition and the transparency of the future public finances should enable exchange rates to be stabilised and fixed on terms appropriate to the nation’s internal economy and sovereign debt obligations.

This conversion is likely to leave a ‘rump’ of toxic debts and outstanding obligations for which, in general, no taxpayer should be responsible. The process will doubtless involve disputes which could induce home and foreign controversy over the interpretation of how governments should guarantee the liabilities of banks operating within their States. It would be wrong to minimise the potential here for friction but all parties must compare this with the deteriorating financial crisis and the dismal alternatives. However, mutualisation (or corporate full reserve banking) will start with a clean sheet.

The Constitutional Monetary Authority (CMA) will enjoy a similar status to the Judiciary and be independent of the government of the day. Other than in times of National Emergency it may authorise additional liquidity only via the commissioning of Public Assets and Infrastructure. This restriction is introduced to ensure that any ‘new money’ entering circulation will contribute in direct ratio to physical capital formation and thus inhibit any inflation component. Thus the CMA will monitor advances of technology replacing people in the workplace and point the newly allocated resources towards more labour intensive public investment –construction and infrastructure creation and maintenance of the environment. It will consider the implications of the Balance of Trade when allocating new investment involving significant imports.

For the purposes of the model, this new currency is referred to as a ‘NEURO)’ (N€). The seceding State may decide upon a National name – perhaps a drachma and declare 1€ equals 1 drachma. The new currency will be introduced at a rate of one N€ to one € and if required will be divided into 100 smaller units.

The Central Bank which will issue the NEURO fiat currency to chartered clearing banks acting as intermediaries. All such new money will be issued free of debt and credited to the government’s seigniorage account.

As this process of internal rebuilding and replacement f National infrastructure takes hold so it becomes realistic to consider the physical nature of National Credit rather than National Debt. Corporations and individuals using these facilities could well pay user charges which would not only defray maintenance costs but provide a useful income to the State and thus supplement the taxation burden. No one can anticipate the amount of National Debt that will remain and require to be paid down, however it will be capped following secession and decisions will require to be made on the timescale to pay it down without generating inflation. These matters may now be decided upon in the light of economic conditions ‘on the ground’ rather than by abstract pressures arising in financial markets.

In short the plan prioritises the repair of the seceding State over any external influences. It restores the sovereignty of the Nation State and its Independence which in no way hampers international co-operation and trade – it simply resists the incursion of over- ambitious political forces.


Diplomatic Consultations: At the earliest opportunity contact should be made at the political level to acquaint individual EU members and any other important trading partners, with the plan. It should be presented not as radical knee-jerk reaction to secession but as a logical procedure following the irrecoverable breakdown of the previous debt system. It should be set in the context of a comprehensible alternative to civil disorder.

Time Period: A total of twelve months should be agreed to make all arrangements for the legislation required to initiate the Constitutional changes, withdrawal from the currency union and the reform of the banking system. Disengaging from the euro-zone (not necessarily euro membership) should be much less complex than joining it. Constitutional change will normally have a statutory consultation period; bank nationalisation took place in the UK almost overnight and legislators should approach this task by extracting the retail banking and clearing system from their banking organisations such that these elements are ready in good time for transition and early reprivatisation. The toxic debt - which has become known as the ‘bad bank’ elements and the trading & investment arms should be clearly identified and hived off and not permitted to affect this priority.

Failure to agree: Creditor Nations electing not to write off net systemic debt will trigger a strong fallback position i.e. the departure would still remain fully achievable by a sovereign state acting unilaterally in the context of a the residual membership and current global banking regimes. The seceding State would default on what it considered to be the amount of systemic debt represented among its liabilities. There is some degree of precedent in the Iceland experience where ordinary people simply refused to pay the debts of their bankers and set about rebuilding their financial system from scratch. The debts of all private bond holders (pension funds, insurance companies and private investors etc.) would however continue to be guaranteed by the seceding State including those written in Euros and foreign currencies. This guarantee would apply only to such debts outstanding at the commencement of negotiations as otherwise banks would be tempted to ‘unload’ or transfer such debt into qualifying categories. In areas of both public and private netted debt regarded as ‘legitimate’ or non-systemic by the seceding State, but not appropriate to the special guaranteed status above, then these debts will automatically be converted to the new independent currency unit to be introduced under the conditions of transition which follow.

Financial Security: The Central Bank will disengage from the European System of Central Banks and negotiate the reallocation of assets and liabilities. Thereafter it will keep tight control of the new currency to prevent it being speculatively traded, exploited or abused by private interests. The phrases ‘financial services’ and ‘free markets’ have been hijacked as a cover for certain rogue elements which not only bring discredit upon legitimate financial enterprise, but exploit the fragile confidence which accompanies any new currency initiative – without any regard to the economic damage incurred.

The priority of the new currency managers is the well-being of the population within the domestic economy while also ensuring the free trade of goods and responsible financial services between friendly Nations.

Speculative Pressures: The transition from a stronger to a weaker currency (certainly perceived as such in the initial stages) would, unless pre-empted, produce a run on the banks as people sought to hoard Euros to speculate or spend abroad on travel and normally imported goods & services etc. Confidence in the new currency will have to be earned and that means it may be necessary initially to limit the amounts exchangeable over a time frame. This is a device rendering the new currency initially ‘scarce’ and thus making it more highly regarded. This is an inevitable but a temporary dysfunction to be minimised by having Central Bank regulation ready should it become excessive or affect the smooth transfer to the new currency. A temporary limit may also require to be imposed for a period before transition day when the new rate of exchange and regulations come into effect. It will require a well conducted public information campaign explaining that the country has been spending other people’s money on imports and there will be no more soft loans available to continue this until the country gets back to an acceptable balance of payments. The good news will be that import substitution and a revived financial incentive for home produced goods, and a surge in public infrastructure projects, will soon achieve high employment and income levels. Physical capacity will replace affordability within the National borders. Provision to resist foreign speculation is covered under the Transition heading.

Convertibility: The Neuro will be the only legal tender in the seceding State and in order to assert sovereignty over its currency it will be convertible only through the agency of the Central Bank, which will also fix the foreign exchange rates for the N€ in relation to the National Balance of Payments. All commercial bank accounts denominated in currencies other than the N€ will require to be registered at the Central Bank.

Residents may hold unrestricted foreign currency accounts abroad; non-doms may not hold bank accounts denominated in external currencies within the seceding State; convertibility of the N€ will be restricted to legitimate trading and personal transactions. Any transaction deemed to be speculative or damaging to the integrity of the N€ will risk not being recognised.

Liquidity: The Central Bank will fix basic interest rates to encourage savers and investors to deposit money with the banks but actual rates and terms offered will be a matter for individual banks. It is recognised that private banks cannot be obliged to lend at any particular rate or to any particular customer and if insufficient liquidity is provided by banks the Central Bank will notify the CMA with a view to commission State asset creation by the private sector to be paid for directly with Central Bank cheques drawn on the Seigniorage accounts held at its credit at the retail clearing banks. There will be no requirement for domestic State borrowing from the banking system. Any foreign currency required over and above that earned and held in normal course, will be borrowed by the State against bonds serviced and repayable in that currency.

Foreign Exchange: Facilities for hedging and forward buying and selling of foreign currency will be provided by the Central Bank to the extent deemed appropriate to the actual levels of foreign trade conducted. Clearing Banks will not normally hold foreign currency accounts for residents because all forex dealing, other than through Central Bank, will be illegal. The Central Bank will hold foreign currency reserves adequate to fund its overseas commitments. Forex rates will be fixed by the Central Bank to maintain an even and transparent balance of payments. Residents may transfer capital and hold forex balances in overseas accounts but not in N€ nor as a circumvention of currency regulations.

Commercial Contracts: A new commercial law will have been enacted to protect the interests of International Contracting parties. In the case of contracts not yet commenced it will require the option of cancellation or renegotiation of the settlement currency. Where the contract is work in progress or completed pending settlement it will be honoured in the contracted currency at rates negotiated on an individual basis to a formula provided by the Central Bank. This will be designed to guarantee a fair rate of exchange appropriate to the spirit of the contract and would extend to the period of the contract or twelve months, whichever is the shorter.

Considerations of the initial exchange rate: Each seceding State will have a unique financial relationship with its trading partners which will condition its future relationship. In the case of Greece for instance one Neuro = one Euro for internal domestic business will be widely acceptable but it is clear that the new foreign exchange rate will be less favourable towards foreign imports and leave anyone holding Euros disinclined to exchange them for a unit worth less. The forex rate is of course intended to make anything imported considerably more expensive. People would try to hang on to Euros to buy anything abroad. The threat of an internal ‘black market’ in Euros is real – trading at levels different from the official Central Bank rates. These phenomena are likely to be temporary as the new legal tender takes hold and normal life resume within a few weeks. Certainly the technicalities of transition – the changing of bank accounts, credit card statements, and government payments and utility bills will act as benchmarks for all non-cash domestic transactions. Indeed for many it will be a familiar process in countries which acceded to the euro within the last decade or so.
The option of pre-applying the exchange rate immediately to domestic pricing is discarded as it will require considerable flexibility in the early stages and will impact only upon specific prices. Also it makes the transition more complicated and serves no good purpose.

Temptation to peg; Pegging the Neuro to a stronger currency may appear politically and superficially attractive. It is however not to be recommended. Argentina went through major upheaval when obliged to break its peso parity to the US dollar in 2002. Analysis of the experience illustrated that a large part of the subsequent disruption was due to trying to restructure systemic debt obligations in a conventional manner and by involving the IMF. This absorbed more attention than fixing the internal economic problems of the country and reflects what inevitably happens when the same financial interests which led to the crisis are charged with bailing it out. Pegging the currency of any sovereign developed country to that of another State is an ill considered short term alternative which simply defers the moment of truth. When compared with a currency union however it at least has the much less painful option of reversion to independence if circumstances change.
By taking the external exchange rate process out of the market place and returning it to the Central Bank much of this discomfort should be avoided.

Initial Forex rates: On Transition Day the price of a basket of commodities will be compared to those elsewhere to provide an approximate rate. However many other factors will require to be weighted in. Some imports will remain essential; others can be reduced by substitution with locally produced alternatives. Industries need to be revitalised, and as production rises to meet internal demand so also might export potential develop. Better to start with a rate knowing it to be on the low side to encourage acceptance of the new regimen - it can be fine tuned in the light of experience.
The rate of exchange governs whether the same goods & services are cheaper or more expensive abroad and flexibility is a major tool open to sovereign States taking control of their own currency. Tourism in Greece for instance accounts for almost 20% of its GDP and much could do done to increase this by creating better infrastructure and facilities – with a very low import content. Combining this with a favourable rate of exchange would be just one way back towards the overall objective of a balance of payments between sovereign States. This is engineered by the Central Bank monitoring the flow of both domestic and foreign payments, and a responsive Constitutional Monetary Authority directing debt free investment.

The Transition

Thirty days prior to Transition Day One, the Central Bank, all clearing banks and credit institutions will require to have prepared themselves for T-Day 1 – the changeover from Euro to Neuro. It will happen simultaneously with the change of legal tender and the declaration of international exchange rates. The new banking laws will also have required that within ninety days prior to Transition Day One, all existing banks would have been taken over by the State as going concerns on a pre-arranged formula, and with fair compensation. This change of ownership need not disrupt any aspects of normal retail banking.

On Transition Day One the N€ becomes the official currency of the seceding State and will be used on all non cash transactions. All balances will be automatically converted – N€1 for €1. Existing euro notes and coin in circulation will remain interchangeable with the N€ and be legal tender within the seceding State for only 30 days after promulgation of the new currency and thereafter will cease to be legal tender and be withdrawn from circulation.

All domestic contracts written for settlement in any other currency become unenforceable. The banks will have been provided with N€ notes and coins which can be exchanged at face value for a further thirty days without charge. All cash machines will have been charged with Neuros. For up to 30 days after T-Day 1 both currencies may be used, but only Neuros will be given in change. After thirty days following T-Day 1 euro coins and notes may still be exchanged for Neuros but banks will levy a charge.

A further new law requiring the registration of securities in the name of the substantive owners will have been previously enacted and will already be administratively in place - ideally as part of a more comprehensive programme of shareholder participation in improved corporate governance.

Chartered Banks will deal in foreign currencies only through the Central Bank. The substantive owners of all accounts in foreign currencies will require to be registered at the Central Bank and it will be illegal to export any Neuros other than through the Central Bank. There will be no interbank lending other than through the clearing system. It will no longer be the business of chartered banks to hold or deal in foreign securities or investments other than directly linked to their domestic lending functions.

Following the takeover of the clearing banks the first phase of conversion from the existing fractional reserve to a Full Reserve System will commence. All existing, sound private bank loans will cease to be liabilities of the bank itself and become its liabilities in the bank’s State Seigniorage Transition Account - banks become intermediaries. As old loans are repaid this liability will progressively reduce, being replaced by the new generation of ‘full reserve’ loans. The banks will have 60 days to attract new funds from investors and savers to match these. When this process is completed, the State Seigniorage Transition Account will have a nil balance and will close. Full Reserve Banking will have arrived.

A new permanent seigniorage account will open to accept tranches of the National Credit from the Central Bank. This will also be available to bridge any temporary shortfalls in reserve ratios and clearing balances etc... Its primary purpose will be the funding of State Investment when drawn upon by the State Investment Bank.

To re-assert the sovereignty and integrity of the new currency it will be necessary to hold the free convertibility of the N€ in suspension. Changes of this nature act as a magnet for international speculation and measures must therefore be put in place to minimize disruption and protect the seceding State from currency traders and stock market manipulators.

It may be noted that there is no significant cash involved in currency trading – balances move electronically. The actual money is of course legal tender only in the issuing country and when held in its own banks. A foreign hank can only make settlement by asking its counterparty – a clearing bank in the seceding State - to credit the money to its client’s account. To stop the trade in currency, banks will be instructed by the Central Bank not to transfer any Neuros abroad other than in the normal course of trade. Any transactions deemed to be potentially speculative will risk not being recognised.

Financial assets issued within the seceding State denominated in Euros will require to be endorsed by company registrars, and converted to the new currency at par. In addition, holdings of non-doms will also require to be registered with the Central Bank,

The protection of the currency is not the only thing. The value of shares held on the Stock Exchange of the seceding State and traded debt market securities might be at risk of speculation. Measures to resist this will include a ban on short selling. To render this enforceable all shares will require to be registered in the name of the substantive owner – nominee transactions will not be legally recognised.

Thereafter the Neuro proceeds from the sale of foreign held shares will be processed through the agent’s bank accounts, and may then be remitted at the official exchange rate. This restriction would last only for as long as the authorities considered the risk of substantial short selling remained.

This will be a battle for the seceding State, its outcome largely dependent upon the calibre of political leadership presiding over the reform - but that is for another day.



It is for the people and their politicians to look after their money system as assiduously as they guard their democracy, their security and their human rights. Constitutional Money as described here is the antithesis of international fractional reserve banking. For that reason it will be ridiculed and dismissed by the dominant financial establishment - a small but remarkably ruthless group which entertains no such moral scruples.

It is this group which has enriched itself through the construction of layer upon layer of financial markets and enterprises, to an extent whereby the management of money as a means of exchange has been has been overwhelmed by its use as an electronic chip in a global casino. The rules of the casino prevail over the accountability of democratic governments to their electors. The fractional reserve system initiates the debt, the rating agencies set the odds and the bond dealers of Wall Street and the City accumulate massive personal fortunes at the expense of their mesmerised victims.

It is a regime perpetuated in the economics profession by academics who indulge themselves in constructing mathematical models of the system and inserting cloned actors into their theoretical mechanisms. All too often it is the elegance of the exercise which merits publication rather than its utility as a tool of economic management. Mostly harmless it has been said, but not so, for these economists are viewed as experts by most politicians seeking advice. With few exceptions, the advice they get is set entirely within the familiar parameters of the dominant system.

Nor do you ever hear a successful banker say that the system has failed so let’s stop digging – yet these are the other advisors to government – their credibility in direct ratio to their personal financial status – the latter invariably attributable to the fractional reserve.

Finally there is inertia – the disinclination of most politicians to put a head above the parapet or pay the price of indulging in conscience.

These barriers to reform are very real, and so this endnote finishes where this essay began -

‘The theoretical problem is excessive public & sovereign debt, emanating from anarchic bank credit inflation; the principal barrier to resolution is the failure of weak governments to call their chartered banks to democratic account’.

Appendices - from "MOVING ON"







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