Will the New Banking Proposals in Iceland Save it from Economic Instability?


Iceland stands like a sentinel at the gates of the Arctic and astride the Mid-Atlantic rift. Part of Scandinavia but also the last stone hop to North America it is a place which breeds peculiarity. With a population of under 330,000, less than the population of Wichita, Kansas, this peculiarity is compounded. Throw in month long winter nights and communal hot spring spas and one can understand why the tiny country produces such weird (and often interesting) furniture, music, and economic ideas.

Attached Ash Navabi at the Mises Institute examines one of Iceland’s most recent idea exports, sovereign money.

(From Mises.ca)

What the Icelandic report suggests as a solution to this problem is a system it calls “sovereign money”. According to the report, the sovereign money system will require commercial banks to keep 100% reserves, and so ending the private practice of fractional reserve lending.

However, the central bank remains and retains the right to create money out of thin air based on its whims and fancy. The central bank also can just create money without simultaneously giving out a loan. So if the government needs $1 billion, instead of the current system where they have to raise the money by selling $1 billion in bonds, the central bank will literally just grant them the money without needing anything in return.

The report says that this system will have several benefits, but for the purpose of brevity I will focus on one claim: that sovereign money will result in greater economic stability.

Will a Central Bank-Controlled a 100% Reserve System Prevent Economic Instability?

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