Monetary reform is any movement or theory that proposes a system of supplying

money 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 primary functions which distinguish money ar ...

and financing the economy that is different from the current system. Monetary reformers may advocate any of the following, among other proposals: * A return to the

gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from th ...

(or silver standard or bimetallism). * Abolition of central bank support of the banking system during periods of crisis and/or the enforcement of full reserve banking for the privately owned banking system to remove the possibility of bank runs, possibly combined with sovereign money issued and controlled by the government or a

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...

under the direction of the government. There is an associated debate within

Austrian School The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian scho ...

whether free banking or full reserve banking should be advocated but regardless

economists such as Murray Rothbard support ending central bank bail outs (" ending the Fed"). * The issuance of interest-free credit by a government-controlled and fully owned

. Such interest-free but repayable loans could be used for public infrastructure and productive private investment. This proposal seeks to avoid debt-free money causing inflation. * The issuance of social credit – "debt-free" or "pure" money issued directly from the Treasury – rather than the sourcing of fresh money from a

in the form of interest-bearing bonds. These direct cash payments would be made to "replenish" or compensate people for the net losses some monetary reformers believe they suffer in a fractional reserve-based monetary system.

Common targets for reform

Of all the aspects of

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...

, 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 Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserv ...

, 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. 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 The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

and the many bank runs following the crash of 1929. These reforms included the creation of

deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of ...

(such as the

Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...

) to mitigate against the danger of bank runs. Countries have also implemented legal

reserve requirements Reserve requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the centra ...

which impose minimum reserve requirements on banks. Mainstream economists believe that these monetary reforms have made sudden disruptions in the banking system less frequent. However, some critics of fractional reserve banking argue that the practice inherently artificially lowers real interest rates and leads to business cycles propagated by excessive capital investment and subsequent contraction. 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.

Money creation by the central bank

Some critics discuss the fact that governments pay interest for the use of money which the

creates "out of nothing". 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 criticise existing global financial institutions such as the

World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...

, Bank of International Settlements and their policies regarding

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

s and

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

in developing nations, in that they appear to these writers to be "forcing" a regime of extortionate or unpayable debt on weak

Third World The term "Third World" arose during the Cold War to define countries that remained non-aligned with either NATO or the Warsaw Pact. The United States, Canada, Japan, South Korea, Western European nations and their allies represented the " First ...

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

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.

Arguments for reform

Among the arguments for a transition to full-reserve banking or sovereign money are as follows: * Money are created when a loan is made and this money disappear when the loan is paid down. The central banks cannot control the

when private banks are creating credit money. Credit money can be converted to reserve money in various ways so that there is no practical limit to the amount of credit money that can be created by private banks.Benes, Jaromir and Michael Kumhof (2012). "The Chicago Plan Revisited". IMF Working Paper, no. 202. This increases the risk of economic crises,

unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refe ...

, and bank bailouts or bank runs. * Less than 6% of the money in circulation in the world is coins and bank notes, the rest originates from bank credit, carrying interest. This interest allows banks to earn rents from the mere fact that money exist. Reformers do not think it fair that the whole society is paying rents to the banks just for having money to circulate.Jackson, A. and Dyson, B. (2012). ''Modernising Money: Why our Monetary System is Broken and how it can be Fixed.'' London: Positive Money. * The total amount of public and private debt in the world is now between two and three times the amount of

broad money In economics, broad money is a measure of the amount of money, or money supply, in a national economy including both highly liquid "narrow money" and less liquid forms. The European Central Bank, the OECD and the Bank of England all have their own ...

in circulation. This is a result of the accumulated compound interest of credit money. This counterintuitive fact makes it virtually impossible to repay all debt. The mathematical consequence is that somebody will have to go bankrupt even if they have done nothing wrong. It seems unfair that somebody will become destitute as a consequence of the money system rather than because of their own reckless behavior. * It is not only individual persons and businesses that go bankrupt as a consequence of the fact that there is more debt than money in circulation. Many states have gone bankrupt and some states have done so many times. The debt problem is particularly severe for

developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...

that have debt in foreign currencies. The

and the

have been promoting loans to resource-rich developing countries for the expressed purpose of promoting economic growth in these countries, yet these loans were denominated in foreign currencies and most of the money were used for paying transnational entrepreneurs without ever entering the local economy. These countries have been forced to sell off national assets in order to service the debt. Also a number of countries in the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...

are affected when a large part of the money circulating in the country originates from banks in other member countries. The spiraling, unpayable national debt has led to social chaos and even war in some cases. * A major part of all new credit money that is created is spent on changing the ownership of existing assets rather than creating new assets. This process inflates the prices of assets, including real estate, factories, land, and intellectual rights. This makes living unnecessarily costly for everybody. It contributes to growing inequality and it makes the economy unstable because of the creation of asset bubbles. * The exponentially increasing debt in society can only be serviced as long as the rate of economic growth exceeds the interest rate. This creates an imperative for perpetual growth in production and consumption. This leads to overconsumption and overexploitation of resources. The technological progress in labor-saving technologies has not given us more leisure as we expected, because of the necessary growth in consumption. * The unpayable debt leads to bankruptcies of homeowners and foreclosure of their homes. This allows banks to replace their virtual assets in the form of money created 'out of thin air' with physical assets in the form of

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

. In 1968, a court in Minnesota decided that this practice was unconstitutional because the process by which the bank had created money from nothing was fraudulent (see First National Bank of Montgomery v. Daly).

Arguments against reform

Among the arguments for keeping the current system of money creation based on the

credit theory of 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 ...

are as follows: * Switching to an untested banking system that differs from that of other countries would lead to a situation of extreme uncertainty. Thomas Jordan
"How money is created by the central bank and the banking system"
Swiss National Bank, 16 January 2018 * A reform would make it difficult for the

to implement a

that secures price stability. * The creation of money free of debt would make it difficult for the central bank to later reduce the

. * The

would quite likely be subjected to political pressures for producing more money for whatever purpose is high on the political agenda. Giving in to such pressures would lead to

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

. * The finance sector would be weakened because its profit is reduced. * A reform would not offer complete protection against financial crises abroad. * A reform would lead to an unhealthy concentration of power at the central bank. Critics doubt that the central bank can determine the required money supply better than the private banks can. * The central bank may have to provide credit to commercial banks and accept the accompanying risk. * A sovereign money system would stimulate the creation of

shadow banking The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations. Examples of NBFIs include hedge funds, i ...

and alternative means of payment. * In the traditional banking system, the central bank controls the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

while the money supply is determined by the market. In a sovereign money system, the central bank controls the money supply while the market controls the interest rate. In the traditional system, the need for investments determines the amount of credit that is issued. In a sovereign money system, the amount of saving determines the investments. This change of influences will generate a new and different system with its own dynamics and possible instabilities. The interest rate may fluctuate as well as the liquidity. It is not certain that the market will find an equilibrium where the liquidity is sufficient for the needs of the real economy and full employment.

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

. The

Reserve Bank of New Zealand The Reserve Bank of New Zealand (RBNZ, mi, Te Pūtea Matua) is the central bank of New Zealand. It was established in 1934 and is constituted under the Reserve Bank of New Zealand Act 1989. The governor of the Reserve Bank is responsible for ...

, the Reserve Bank of Australia, the

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...

, and the Bank of England are examples where the

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 A central government is the government that is a controlling power over a unitary state. Another distinct but sovereign political entity is a federal government, which may have distinct powers at various levels of government, authorized or del ...

. This may enable the setting of interest rates to be less susceptible to political interference and thereby assist in combating

(or debasement of the currency) by allowing the

to more effectively restrict the growth of M3. 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

s may appear to control inflation, through periodic bank rescues and other means, they may inadvertently be forced to increase the

(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 bubble An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...

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 The United Nations (UN) is an intergovernmental organization whose stated purposes are to maintain international peace and security, develop friendly relations among nations, achieve international cooperation, and be a centre for harmoni ...

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. Henry Liu of the ''

Asia Times Online ''Asia Times'' (), formerly known as ''Asia Times Online'', is a Hong Kong-based English language news media publishing group, covering politics, economics, business and culture from an Asian perspective. ''Asia Times'' publishes in English ...

'' argues that monetary reform is an important part of a move towards post-autistic economics. While some mainstream economists favour monetary reforms to reduce

and currency risk and to increase efficiency in the allocation of

financial capital Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provi ...

, the idea of all-encompassing reform for green or peace objectives is typically espoused by those on the

left-wing Left-wing politics describes the range of political ideologies that support and seek to achieve social equality and egalitarianism, often in opposition to social hierarchy. Left-wing politics typically involve a concern for those in soci ...

of the subject and those associated with the

anti-globalization movement The anti-globalization movement or counter-globalization movement, is a social movement critical of economic globalization. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist m ...

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. Austrian commentator Gary North has sharply criticized these views in his writings. 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

) 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.

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 In political science, a revolution (Latin: ''revolutio'', "a turn around") is a fundamental and relatively sudden change in political power and political organization which occurs when the population revolts against the government, typically due ...

, much to the praise of

Benjamin Franklin Benjamin Franklin ( April 17, 1790) was an American polymath who was active as a writer, scientist, inventor, statesman, diplomat, printer, publisher, and political philosopher. Encyclopædia Britannica, Wood, 2021 Among the leading int ...

. He believed it was the efforts of English bankers to revoke this government-issued money that caused the Revolution.

Abraham Lincoln Abraham Lincoln ( ; February 12, 1809 – April 15, 1865) was an American lawyer, politician, and statesman who served as the 16th president of the United States from 1861 until his assassination in 1865. Lincoln led the nation throu ...

used interest-free money created by the government to help the Union win the

American Civil War The American Civil War (April 12, 1861 – May 26, 1865; also known by Names of the American Civil War, other names) was a civil war in the United States. It was fought between the Union (American Civil War), Union ("the North") and t ...

. He is sometimes quoted (probably apocryphally) calling these ' Greenbacks' "the greatest blessing the people of this republic ever had."

Local barter, local currency

Some go further and suggest that wholesale reform of money and currency, based on ideas from green economics or

Natural Capitalism ''Natural Capitalism: Creating the Next Industrial Revolution'' is a 1999 book on environmental economics co-authored by Paul Hawken, Amory Lovins and Hunter Lovins. It has been translated into a dozen languages and was the subject of a Harvard ...

, 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 desire a move away from fiat money towards a hard currency or asset-backed currency, which is often argued to be an antidote to

. This may involve using commodity money such as money backed by the

gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile ...

silver Silver is a chemical element with the symbol Ag (from the Latin ', derived from the Proto-Indo-European ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, white, lustrous transition metal, it exhibits the highest electrical ...

both Both may refer to: Common English word * ''both'', a determiner or indefinite pronoun denoting two of something * ''both... and'', a correlative conjunction People * Both (surname) Music * The Both, an American musical duo consisting of Ai ...

, 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. 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 The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, p ...

allows renewed decentralisation and competition in this area, eroding the

's and bankers' old

monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...

control of the means of exchange.''Free Market Money System''
by F.A. Hayek

Free banking

Some monetary reformers 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 In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...

References

External links

{{DEFAULTSORT:Monetary Reform Monetary economics Metallism Public finance