Where Does the Pound in Your Pocket Come From?
An Introduction to Monetary Sovereignty
Have you ever wondered about the origin of the money in your wallet? That crisp £20 note or the balance in your bank app didn’t start with taxes or gold mining. It began with the government pressing a few keys on a computer. This is the essence of monetary sovereignty — understanding how money is created and managed in a nation that issues its own currency.
The Origin of Money: Government Creation
In a sovereign nation like the UK, which issues its own currency — the pound sterling — money originates from the government. The Treasury, working with the Bank of England, creates pounds simply by crediting bank accounts.
When the government spends — on roads, hospitals, or green energy — it injects new money into the economy. No borrowing from taxpayers or printing presses is required; it’s done digitally.
This is very different from household finances. You or I must earn or borrow money before we can spend. The government, by contrast, spends first, creating the pounds that eventually reach our pockets through wages, benefits, or contracts.
Key Principles of Monetary Sovereignty
- Spending Creates Money, Taxation Deletes It: The government creates new pounds when it spends and deletes them when taxes are paid. There is no central “money pot” that must be filled before spending occurs. Borrowing through gilt sales is a monetary operation, not a funding requirement.
- Sovereign Currency Power: The UK cannot “run out” of pounds. Public deficits are not signs of irresponsibility — they are simply the pounds the private sector holds after taxation. Bonds help manage interest rates and savings, not government solvency.
- The Real Role of Taxation: Taxes don’t pay for government spending. They serve to control inflation, influence behaviour, and sustain demand for the pound. By removing money from circulation, they help prevent the economy from overheating.
- The Real Limit: Capacity, Not Cash: The true constraint on spending is real capacity — the workers, materials, and energy available to produce goods and services. Inflation occurs only when total spending exceeds that capacity. Shortages in energy, imports, or production can also cause inflation even when spending remains stable.
- Private Bank Money Creation: Commercial banks create money when they issue loans, adding deposits to the banking system. That money is destroyed when loans are repaid. Monetary sovereignty means managing both public and private money creation in the public interest.
Why It Matters
Understanding monetary sovereignty allows us to have honest debates about government priorities. It doesn’t tell us what to spend on or how big government should be — only that affordability is never the issue. The real questions are about capacity, efficiency, and purpose.
The pound in your pocket is a public tool — created by the state to serve the people who use it.
Learn More
Monetary Sovereignty falls under the the latest thinking in fiscal and financial policy. It has the same framework as Modern Monetary Theory (MMT). The term "Theory" as in the Theory of Gravity isn’t a guess — it simply describes how things have been found to work. In science a theory has been tested and fits all current tests, if it is not yet proven it is an 'hypothesis'. Monetary Sovereignty is fundamental to MMT: a nation must have the power to create and control its own currency.
To find out more, just click below or visit our blog page for articles and explanations.
Contact your MP
If what you are reading makes sense, yet goes against everything politicians and the media are telling you, why not contact your MP and point them in the direction of truth and honesty?
Write to them!Monetary Sovereignty:
Rethinking Debt, Deficits, and Money Creation
What is Monetary Sovereignty?
Monetary Sovereignty shows that a government like the UK, which controls its own currency (the pound), isn’t bound by traditional budget constraints. It can create money to fund public priorities—think green jobs, NHS upgrades—without needing to tax or borrow first. The real limits are resources (workers, materials) and inflation, not debt figures. Monetary Sovereignty also reframes how deficits, government “debt,” and bank lending shape the economy.
What’s Government “Debt”?
When the UK spends more than it collects in taxes—say, a £50 billion deficit—it typically issues bonds (gilts) to “cover” the gap. Investors (banks, pension funds, foreign entities) buy these, lending pounds back. This builds the national “debt,” now around £2.7 trillion, or 100% of GDP. But here’s the twist: this debt is optional (and if there were no government debt there would be no pounds in circulation). The government can create pounds directly via the Bank of England (BoE) without selling bonds. That “debt” is just a record of money created and left in the economy as savings—not a bill it must repay like a household.
There’s a further twist. To buy a bond, you already need pounds. Look at any £10 note: it says “I promise to pay the bearer on demand the sum of ten pounds” and is issued by the Bank of England. That note is itself a government promise to pay — just like a gilt. When you buy a bond with pounds, you’re merely swapping one government promise for another. The only difference is that the bond pays interest. In other words, gilts are simply interest-bearing pounds.
Deficits and Money Supply
A deficit isn’t a problem—it’s a boost. Spending £50 billion on infrastructure without taxing it back adds £50 billion to the money supply: cash in workers’ pockets, firms’ accounts. Traditionally, bonds soak up some of this (investors trade pounds for gilts), but without bonds, it stays out there. That’s fine if the economy has slack—unemployed workers (1.5 million today) or idle factories can absorb it. The catch? Too much money with too few goods sparks inflation.
Banks Create Money Too
Private banks also expand the money supply. When they issue loans—around £1 trillion yearly in the UK—they create new pounds as deposits. Borrow £10,000 for a car, and £10,000 appears in the seller’s account, no one’s savings drained. This amplifies the money supply beyond government deficits. If lending runs hot (say, during a boom), it can overheat the economy, pushing prices up. This is why interest rates are currently used as the primary method of controlling inflation.
Why Debt’s Optional
No Bonds Needed:
The government could skip gilts, create £50 billion for wind farms, and pay directly. Taxes later pull cash back if inflation rises—no increase in government 'debt'..
Real Examples:
Post-WWII, the UK rebuilt its economy by creating money for infrastructure and creating the NHS, ignoring deficit fears, and with no detrimental effect on the economy. Quite the reverse.
Following the 2008-2009 financial crisis, the Bank of England launched quantitative easing (QE), injecting £200 billion into the stock market to stimulate lending and growth.
During the Covid-19 pandemic, the BoE expanded QE by £450 billion, matching government debt issuance to fund furlough and support schemes.
In 2022, after Liz Truss’s mini-budget caused market turmoil, the BoE intervened with £65 billion in emergency bond purchases to stabilize pension funds and prevent collapse.
Japan’s “debt” exceeds 250% of GDP, yet it issues yen freely with low inflation.
Monetary Sovereignty argues the UK could do the same for a Green New Deal—renewables, jobs, and sustainability—without austerity.
Historical Hangover:
Bonds date to gold standard days when money was tied to metal. Now, they’re a choice to manage cash flow or calm markets—not a necessity.
Managing Inflation:
Beyond Interest Rates
The BoE uses interest rates (4% today, 22nd September 2025) to control bank lending. Higher rates make loans pricier, so fewer people borrow, shrinking the money supply and cooling inflation. But this hammers savers and mortgage holders, and it’s blunt—hitting everyone, not just excess. Monetary Sovereignty says we can manage without bonds and rethink rates. Here’s how:
Tax as a Tap:
Raise taxes to drain money supply when deficits or bank loans overfill the tank. If £50 billion in green spending plus £20 billion in new loans pushes inflation from 2% to 4%, a temporary 2% VAT hike pulls £30 billion back. Targeted (e.g., luxury goods) or broad, it’s flexible.
Loan Limits:
Cap bank lending directly. Set quotas—say, £800 billion yearly—or tighten rules (e.g., higher capital reserves). Less lending, less money created, no rate hikes needed.
Resource Watch:
Spend when resources are idle (5% unemployment? Go for it). Pause or tax when bottlenecks (like steel shortages) signal inflation risks.
What It Looks Like
Picture 2026:
No bonds issued. The government creates £100 billion for net zero—jobs bloom, money supply grows. Banks lend £20 billion more. Inflation ticks to 3%. A £40 billion tax tweak (VAT up 1%) plus a £900 billion lending cap stabilize it. No debt piles up, no rate pain—just balance via taxes and rules.
Why It Matters
Deficits fund progress—£100 billion could cut emissions or fix schools. “Debt” isn’t a burden; it’s optional savings we can bypass. Banks’ loan power shapes money supply too, but we don’t need rates alone to tame it. Monetary Sovereignty frees us to spend on what matters, using taxes and smart limits—not debt fears or blunt rate hikes—to keep inflation in check.
Want More?
Read "The Deficit Myth" by Stephanie Kelton or connect with an Monetary Sovereignty advocate. This isn’t about party lines—it’s about what’s possible when we rethink money, debt, and how it’s managed.
Key Take Aways
"Deficits fund progress"
""Post-WWII, the UK rebuilt its economy by creating money for infrastructure and creating the NHS"
""Taxes don’t pay for government spending—they control inflation"
""Government spending creates money"
""Monetary Sovereignty — the modern understanding of how national spending, taxation, and inflation really work."
The Policy Impact of recognising Monetary Sovereignty in the UK
Monetary Sovereignty starts from a simple point: the UK government as a sovereign issuer of sterling, cannot run out of pounds. It issues its own currency, and therefore its spending is not limited by tax revenues or borrowing in the same way as a household or business. The real limit is inflation, not affordability.
1. Fiscal Freedom
If Monetary Sovereignty were recognised, UK fiscal policy would shift from focusing on “balancing the books” to managing inflation and making sure real resources — workers, skills, and materials — are used efficiently. The conversation would move from “can we afford it?” to “do we have the resources to do it?”
2. Bond Markets
Government bonds (gilts) would no longer be treated as necessary to fund spending. Instead, they would be optional — offered mainly to provide investors with a safe place to store wealth. The idea of “borrowing to fund spending” would end.
3. The Bank of England
The Bank of England would coordinate openly with the Treasury. Its role would focus on managing financial stability and payments, while fiscal policy — spending and taxation — would take the lead role in controlling demand and inflation.
4. A Job Guarantee
One option with Monetary Sovereignty might be a Job Guarantee: ensuring that anyone who wants work can find it at a basic living wage. This would stabilise both employment and wages, acting as a buffer against recessions and inflation. However, with the rapid development in AI, humanoid robots and self driving vehicles, this might in the future need to be implemented as a Universal Basic Income, replacing pension and benefits, removing the administration of those schemes, and ensuring that rapidly changing technology does not unfairly impact the working class. Monetary Sovereignty would allow such choices to be made, as they became necessary.
5. Public Investment
Adopting Monetary Sovereignty would make it easier to fund long-term investment in housing, healthcare, green energy, and infrastructure. Instead of worrying about “raising the money,” the question would become whether the UK has the capacity to deliver those projects without creating inflation.
6. Markets and Inflation
Markets would adjust to the new reality: bond vigilantes would lose influence, because the government does not need to borrow from them. Inflation would be the main test of policy. If inflation rose, the government could respond with taxes, regulation, or targeted credit controls, rather than austerity.
The Takeaway
Introducing Monetary Sovereignty in the UK would not be reckless. It would mean recognising how the monetary system already works, and using that knowledge to invest in people, communities, and the future. The limit is not money — it is the real resources available and how wisely they are used.
About Us
The Advisory Initiative on Monetary Sovereignty is a body established in 2025 to educate politicians the media and the public on the true workings of money, and to help remove the misunderstandings that the current belief that you must tax in order to spend tend to cause.