Monetary reform

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Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system.

Contents

Monetary reformers may advocate any of the following, among other proposals:

Common targets for reform

Of all the aspects of monetary policy, certain topics reoccur as targets for reform:

Reserve requirements

Banks typically make loans to customers by crediting new demand deposits to the account of the customer. This practice, which is known as fractional reserve banking, permits the total supply of credit to exceed the liquid legal reserves of the bank. The amount of this excess is expressed as the "reserve ratio" and is limited by government regulators not to exceed a level which they deem adequate to ensure the ability of banks to meet their payment obligations. Under this system, which is currently practiced throughout the world, the money supply varies with the quantity of legal reserves and the amount of credit issuance by banks.[ citation needed ]

Several major historical examples of financial regulatory reform occurred in the 20th century relating to fractional-reserve banking, made in response to the Great Depression and the many bank runs following the crash of 1929. These reforms included the creation of deposit insurance (such as the Federal Deposit Insurance Corporation) to mitigate against the danger of bank runs. [12] Countries have also implemented legal reserve requirements which impose minimum reserve requirements on banks. [13] Mainstream economists believe [12] that these monetary reforms have made sudden disruptions in the banking system less frequent.

However, some critics of fractional reserve banking[ who? ] argue that the practice inherently artificially lowers real interest rates and leads to business cycles propagated by excessive capital investment and subsequent contraction. [14] A small number of critics, such as Michael Rowbotham, equate the practice to counterfeiting, because banks are granted the legal right to issue new loans while charging interest on the money thus created. Rowbotham argues that this concentrates wealth in the banking sector with various pernicious effects. [11]

Money creation by the central bank

Some critics{who}} discuss the fact that governments pay interest for the use of money which the central bank creates "out of nothing". [15] These critics claim that this system causes economic activity to depend on the actions of privately owned banks, which are motivated by self-interest rather than by any explicit social purpose or obligation.

International organizations and developing nations

Some monetary reformers{who}} criticise existing global financial institutions such as the World Bank, International Monetary Fund, Bank of International Settlements and their policies regarding money supply, banks and debt in developing nations, in that they appear to these writers to be "forcing" a regime of extortionate or unpayable debt on weak Third World governments that do not have the capacity to pay the interest on these loans without severely affecting the well-being or even the viability of the local population. The attempt by weak Third World governments to service external debt with the sale of valuable hard and soft commodities on world markets is seen by some to be destructive of local cultures, destroying local communities and their environment. [8] [11] [16]

Arguments for reform

Among the arguments for a transition to full-reserve banking or sovereign money are as follows:

Arguments against reform

Among the arguments for keeping the current system of money creation based on the credit theory of money or fractional reserve banking are as follows:

Alternative money systems

Government Control vs Central Bank independence

To regulate credit creation, some countries have created a currency board, or granted independence to their central bank. The Reserve Bank of New Zealand, the Reserve Bank of Australia, the Federal Reserve, and the Bank of England are examples where the central bank is explicitly given the power to set interest rates and conduct monetary policy independent of any direct political interference or direction from the central government. This may enable the setting of interest rates to be less susceptible to political interference and thereby assist in combating inflation (or debasement of the currency) by allowing the central bank to more effectively restrict the growth of M3. [34]

However, given that these policies do not address the more fundamental issues inherent in fractional reserve banking, many suggest that only more radical monetary reform such as government directly taking over central banks such as the China or Swiss models can promote positive economic or social change. Although central banks may appear to control inflation, through periodic bank rescues and other means, they may inadvertently be forced to increase the money supply (and thereby debase the currency) to save the banking system from bankruptcy or collapse during periodic bank runs, thereby inducing moral hazard in the financial system, making the system susceptible to economic bubbles. [35]

International monetary reform

Theorists such as Robert Mundell (and more radical thinkers such as James Robertson) see a role for global monetary reform as part of a system of global institutions alongside the United Nations to provide global ecological management and move towards world peace, with Robert Mundell in particular advocating the revived use of gold as a stabilising factor in the international financial system. [36] [37] Henry Liu of the Asia Times Online argues that monetary reform is an important part of a move towards post-autistic economics. [38]

While some mainstream economists[ who? ] favour monetary reforms to reduce inflation and currency risk and to increase efficiency in the allocation of financial capital, the idea of all-encompassing reform for green or peace objectives is typically espoused by those[ who? ] on the left-wing of the subject and those associated with the anti-globalization movement.[ citation needed ]

Social credit and the provision of debt-free money directly from government

Still other radical reform proposals emphasise monetary, tax and capital budget reform which empowers government to direct the economy toward sustainable solutions which are not possible if government spending can only be financed with more government debt from the private banking system. In particular, a number of monetary reformers, such as Michael Rowbotham, Stephen Zarlenga and Ellen Brown, support the restriction or banning of fractional-reserve banking (characterizing it as an illegitimate banking practice akin to embezzlement) and advocate the replacement of fractional-reserve banking with government-issued debt-free fiat currency issued directly from the Treasury rather than from the quasi-government Federal Reserve.[ citation needed ] Austrian commentator Gary North has sharply criticized these views in his writings. [39]

Alternatively, some monetary reformers such as those in the social credit movement, support the issuance of repayable interest-free credit from a government-owned central bank to fund infrastructure and sustainable social projects. This social credit movement flourished briefly in the early 20th century, but then became marginalized. In Canada, it was an important political movement that ruled Alberta through nine legislatures between 1935 and 1971, and also won many seats in Québec. It died out in the 1980s.

Both these groups (those who advocate the replacement of fractional-reserve banking with debt-free government-issued fiat, and those who support the issuance of repayable interest-free credit from a government-owned central bank) see the provision of interest-free money as a way of freeing the working populace from the bonds of "debt slavery" and facilitating a transformation of the economy away from environmentally damaging consumerism and towards sustainable economic policies and environment-friendly business practices.[ citation needed ]

Examples of government issued debt-free money

Some governments have experimented in the past with debt-free government-created money independent of a bank. The American Colonies used the "Colonial Scrip" system prior to the Revolution, much to the praise of Benjamin Franklin. He believed it was the efforts of English bankers to revoke this government-issued money that caused the Revolution. [40] [ unreliable source? ]

Abraham Lincoln used interest-free money created by the government to help the Union win the American Civil War. He is sometimes quoted (probably apocryphally) calling these 'Greenbacks' "the greatest blessing the people of this republic ever had." [41]

Local barter, local currency

Some[ who? ] go further and suggest that wholesale reform of money and currency, based on ideas from green economics or Natural Capitalism, would be beneficial. These include the ideas of soft currency, barter and the local service economy.

Local currency systems can operate within small communities, outside of government systems, and use specially printed notes or tokens called scrips for exchange. Barter takes this further by swapping goods and services directly; a compromise being the Local Exchange Trading Systems (LETS) scheme: a formalised system of community-based economics that records members' mutual credit in a central location.

Commodity money

Some proponents of monetary reform[ who? ] desire a move away from fiat money towards a hard currency or asset-backed currency, which is often argued to be an antidote to inflation. This may involve using commodity money such as money backed by the gold, silver or both, commodities which supporters argue possess unique properties: their extraordinary malleability, their strong resistance to forgery, their character as stable and impervious to decay, and their inherently limited supply. [42] [ non-primary source needed ]

Digital means are also now possible to allow trading in hard currencies such as gold, and some believe a new free market will emerge in money production and distribution, as the internet allows renewed decentralisation and competition in this area, eroding the central government's and bankers' old monopoly control of the means of exchange. [43] [44]

Free banking

Some monetary reformers[ who? ] favour permitting competing banks to issue private banknotes whilst also eliminating the central bank's role as lender of last resort. In the absence of these factors, they believe a gold standard or silver standard would arise spontaneously out of the free market.[ citation needed ]

See also

Related Research Articles

Central bank Government body that manages currency and monetary policy

A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a state or formal monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Most central banks also have supervisory and regulatory powers to ensure the stability of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior by member banks.

Monetary policy of the United States

Monetary policy concerns the actions of a central bank or other regulatory authorities that determine the size and rate of growth of the money supply. For example, in the United States, the Federal Reserve is in charge of monetary policy, and implements it primarily by performing operations that influence short-term interest rates.

Money supply Total value of money available in an economy at a specific point in time

In macroeconomics, the money supply refers to the total volume of money held by the public at a particular point in time in an economy. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits. The central bank of each country may use a definition of what constitutes money for its purposes.

Fractional-reserve banking

Fractional-reserve banking, the most common form of banking practiced by commercial banks worldwide, involves banks accepting deposits from customers and making loans to borrowers while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities. Bank reserves are held as cash in the bank or as balances in the bank's account at a central bank. The country's central bank determines the minimum amount that banks must hold in liquid assets, called the "reserve requirement" or "reserve ratio". Banks usually hold more than this minimum amount, keeping excess reserves.

Full-reserve banking is a system of banking where banks do not lend demand deposits and instead, only lend from time deposits. It differs from fractional-reserve banking, in which banks may lend funds on deposit, while fully reserved banks would be required to keep the full amount of each depositor's funds in cash, ready for immediate withdrawal on demand.

Monetary base

In economics, the monetary base in a country is the total amount of bank notes and coins. This includes:

An open market operation (OMO) is an activity by a central bank to give liquidity in its currency to a bank or a group of banks. The central bank can either buy or sell government bonds in the open market or, in what is now mostly the preferred solution, enter into a repo or secured lending transaction with a commercial bank: the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral.

Money creation

Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, most of the money supply is in the form of bank deposits. Central banks monitor the amount of money in the economy by measuring the so-called monetary aggregates.

The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit due to artificially low interest rates set by a central bank or fractional reserve banks. The Austrian business cycle theory originated in the work of Austrian School economists Ludwig von Mises and Friedrich Hayek. Hayek won the Nobel Prize in economics in 1974 in part for his work on this theory.

Modern Monetary Theory also known as neo-chartalism, a macroeconomic theory

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. MMT is opposed to mainstream understanding of macroeconomic theory, and has been criticized by many mainstream economists.

Henry Calvert Simons

Henry Calvert Simons was an American economist at the University of Chicago. A protégé of Frank Knight, his antitrust and monetarist models influenced the Chicago school of economics. He was a founding author of the Chicago plan for monetary reform that found broad support in the years following the 1930s Depression, which would have abolished the fractional-reserve banking system, which Simons viewed to be inherently unstable. This would have prevented unsecured bank credit from circulating as a "money substitute" in the financial system, and it would be replaced with money created by the government or central bank that would not be subject to bank runs.

Quantitative easing Monetary policy tool

Quantitative easing (QE) is a monetary policy whereby a central bank purchases at scale government bonds or other financial assets in order to inject money into the economy to expand economic activity. Quantitative easing is considered to be an "unconventional" form of monetary policy, which is usually used when inflation is very low or negative, and when standard monetary policy instruments have become ineffective. The term "quantitative easing" was coined by German economist Richard Werner in 1995 in the context of the Japanese crisis.

Money Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.

Credit theory of money Economic theory concerning the relationship between credit and money.

Credit theories of money, also called debt theories of money, are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt), at least in eras where money is not backed by a commodity such as gold. Two common strands of thought within these theories are the idea that money originated as a unit of account for debt, and the position that money creation involves the simultaneous creation of debt. Some proponents of credit theories of money argue that money is best understood as debt even in systems often understood as using commodity money. Others hold that money equates to credit only in a system based on fiat money, where they argue that all forms of money including cash can be considered as forms of credit money.

Stephen A. Zarlenga was a researcher and author in the field of monetary theory, trader in stock and financial markets, and advocate of monetary reform.

The Chicago plan was a collection of banking reforms suggested by University of Chicago economists in the wake of the Great Depression. The proposal envisaged the separation of the monetary and credit functions of the banking system, under a scheme that is often referred to as "narrow banking" or "full-reserve banking system".

This article is about the history of monetary policy in the United States. Monetary policy is associated with interest rates and availability of credit.

The National Emergency Employment Defense Act, aka the NEED Act, is a failed monetary reform proposal submitted by Congressman Dennis Kucinich in 2011, in the United States. The bill has failed to gain any co-supporters and was not introduced to the floor of the house.

The Swiss sovereign money initiative of June 2018, also known as Vollgeld, was a citizens' (popular) initiative in Switzerland intended to give the Swiss National Bank the sole authority to create money.

References

  1. Sound Money Archived 23 April 2009 at the Wayback Machine , Lew Rockwell
  2. Our Money Madness, Lew Rockwell
  3. The Case for a Gold Dollar, Murray Rothbard
  4. What has Government done to our money?, Murray Rothbard
  5. The Case for a 100% Gold Dollar, Murray Rothbard
  6. Free Banking and the Free Bankers, Jörg Guido Hülsmann, Quarterly Journal of Austrian Economics (Vol. 9, No. 1)
  7. "Sovereign Money" . Retrieved 13 September 2018.
  8. 1 2 Brown, Ellen H. (2007). Web of Debt. Baton Rouge, Louisiana: Third Millennium Press. ISBN   978-0-9795608-0-4 . Retrieved 15 December 2007.
  9. "Stephen A. Zarlenga, The Lost Science of Money AMI (2002)". Archived from the original on 28 August 2018. Retrieved 22 September 2008.
  10. As an example of such groups, see Douglas Social Credit and the Social Credit School of Studies
  11. 1 2 3 Rowbotham, Michael (1998). The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics. Jon Carpenter Publishing. ISBN   978-1-897766-40-8.
  12. 1 2 Mankiw, N. Gregory (2002). Macroeconomics (5th ed.). New York: Worth Publishers. p.  489. ISBN   0-7167-5237-9.
  13. Mankiw, N. Gregory (2002). Macroeconomics (5th ed.). New York: Worth Publishers. p.  487. ISBN   0-7167-5237-9.
  14. Murray Rothbard, The Mystery of Banking
  15. For an example of the public criticism of the current monetary system, see the speech of the Earl of Caithness in the British House of Lords on 5 March 1997 [ "The Economy - Wednesday 5 March 1997 - UK Parliament". Hansard. 5 March 1997. Retrieved 20 April 2021.][ non-primary source needed ]
  16. As an example of groups critical of the World Bank, see the Whirled Bank website.
  17. 1 2 Werner, Richard A. (2016). "A Lost Century in Economics: Three Theories of Banking and the Conclusive Evidence". International Review of Financial Analysis. 46 (July): 361–79. doi: 10.1016/j.irfa.2015.08.014 .
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  20. 1 2 3 4 5 Di Muzio, Tim; Robbins, Richard H. (2017). An Anthropology of Money: A Critical Introduction. Routledge. ISBN   978-1-138-64600-1.
  21. 1 2 3 Jackson, A. and Dyson, B. (2012). Modernising Money: Why our Monetary System is Broken and how it can be Fixed. London: Positive Money.
  22. Data sources: CIA. "The World Factbook". Central Intelligence Agency. Retrieved 6 September 2018.. Desjardins, Jeff. "All of the World's Money and Markets in One Visualization". The Money Project. Retrieved 6 September 2018.
  23. 1 2 Brown, Ellen Hodgson (2012). Web of Debt: The Shocking Truth about Our Money System and How We Can Break Free. Third Millennium Press. ISBN   978-0983330851.
  24. 1 2 3 Eisenstein, Charles (2011). Sacred Economics: Money, Gift, and Society in the Age of Transition. North Atlantic Books. ISBN   978-1-58394-397-7.
  25. Bezemer, Dirk, and Michael Hudson (2016) "Finance Is Not the Economy: Reviving the Conceptual Distinction." Journal of Economic Issues , vol. 50 (3), pp. 745–768.
  26. 1 2 Korten, David C. (2010). Agenda for a New Economy: From Phantom Wealth to Real Wealth . Berrett-Koehler Publishers.
  27. Mellor, Mary (2010). The Future of Money: From Financial Crisis to Public Resource. London.
  28. 1 2 3 Thomas Jordan, "How money is created by the central bank and the banking system", Swiss National Bank, 16 January 2018
  29. 1 2 3 4 5 6 Schneider-Ammann, Johann N.; Thurnherr, Walter (2016). Botschaft zur Volksinitiative "Für krisensicheres Geld: Geldschöpfung allein durch die Nationalbank! (Vollgeld-Initiative)" (PDF). Schweizerischer Bundesrat.
  30. Birchler, Urs (1 November 2017). Vollgeld-Leitfaden (PDF). Institut für Banking und Finance, Universität Zürich. Retrieved 11 September 2018.
  31. Fontana, Giuseppe; Sawyer, Malcolm (2016). "Full Reserve Banking: More 'Cranks' than 'Brave Heretics'". Cambridge Journal of Economics. 40 (5): 1333–1350. doi:10.1093/cje/bew016. Alt URL See also Dyson, Ben; Hodgson, Graham; van Lerven, Frank (2016). "A Response to Critiques of 'Full Reserve Banking'". Cambridge Journal of Economics. 40 (5): 1351–1361. doi:10.1093/cje/bew036. and Fontana, Giuseppe; Hodgson, Graham (2017). "A Rejoinder to 'A Response to Critiques of "Full Reserve Banking"" (PDF). Cambridge Journal of Economics. 41 (6): 1741–1748. doi:10.1093/cje/bex058.
  32. Margeirsson, Olafur (2014). Financial Instability and Foreign Direct Investment (PDF). Doctoral dissertation, University of Exeter. pp. 251–264.
  33. Dittmer, Kristofer (2015). "100 percent reserve banking: A critical review of green perspectives". Ecological Economics. 109: 9–16. doi:10.1016/j.ecolecon.2014.11.006.
  34. Manipulating the Interest Rate: a Recipe for Disaster, by Thorsten Polliet, December 2007
  35. Moral Hazard Effects of Central Bank Intervention Archived 24 March 2008 at the Wayback Machine , by Nouriel Roubini
  36. Uses and Abuses of Gresham's Law, by Robert Mundell
  37. The Role of Money, James Robertson
  38. The Road to Hyperinflation Archived 29 June 2012 at archive.today , Henry C.K. Liu
  39. Gertrude Coogan's Bluff, Greenback Populism as Conservative Economics
  40. America Created its Own Money in 1750, by Congressman Charles G. Binderup
  41. Carr, William R. (2 December 2000). "Lincoln, Money, Greenback, JFK, Kennedy, Edmund D. Taylor and C". Heritech.com Index Page. Retrieved 20 April 2021.
  42. Theory of Money and Credit, Ludwig von Mises 1953
  43. Not Losing Your Head Archived 16 April 2009 at the Wayback Machine , Speech by Lew Rockwell
  44. Free Market Money System by F.A. Hayek

Further reading