Monetary reform
Encyclopedia
Monetary reform describes any movement or theory that proposes a different system of supplying money
and financing the economy from the current system.
Monetary reformers may advocate any of the following, among other proposals:
, certain topics reoccur as targets for reform:
describes systems in which banks lend
money
while at the same time guaranteeing that depositors (whose money it is lending) will be able to make withdrawals on demand. A fraction of deposits is retained at the bank as reserves
to cover normal withdrawals made by depositors. Because the bank extends a loan with money from depositors, while at the same time guaranteeing the deposits already held by the bank, this system has the effect of increasing the economy's money supply
. When a bank makes a new loan, the funds will - generally speaking - be deposited in a bank again, where the same funds will be lent out again, increasing the money supply
again. However, if the fraction of deposits that the bank withholds as reserves is greater than zero, each successive new loan will be slightly smaller than the previous loan, and the growth in the money supply will slow with each successive loan.
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 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 run
s. Countries have also implemented legal reserve requirements 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 (such as members of the Austrian school
) argue that the practice inherently amounts to a kind of "fraud
" perpetrated against depositors/savers as it, in their view, artificially lowers real interest rates, destabilizes the money supply
and contributes to volatile and wasteful business cycles (or "credit cycle
s"). Other critics, such as Michael Rowbotham
, equate the practice with counterfeiting, where government-protected privileged private entities (the bank
s) are granted the legal right to create money "out of the nothing" while also being granted the right to charge interest on their creation. Michael Rowbotham argues that this concentrates wealth in the banking sector (which has a "cannibalizing" effect on the rest of the economy), causes the rest of the populace to slowly sink into debt slavery, creates volatile hyperinflation
in the housing market and deflation in the consumer goods market, squeezes real wages, destroys farming and agriculture
and de-industrializes heavily indebted economies.
, resultant money is no longer backed by a tangible asset. Money does not represent anything other than the debt of another; the only "tangible" aspect of the system is the borrower’s promise to pay back the interest and principal on the loan. Debt
and the ability of borrowers to service that debt then becomes the underlying currency.
creates "out of nothing". This leaves the state of a nation's economy susceptible to the interests of private bankers who create the money solely for the purpose of creating ongoing profits for their employees and shareholders, without any other binding social or legal obligations to the broader community (or future generations) that are normally expected from government
entities. Either private individuals or corporations borrow to fund themselves and their businesses, or government "borrows" money from the central bank
to fund deficit spending.
and International Monetary Fund
and their policies regarding money supply
, bank
s 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.
, 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 rate
s 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
. 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 can promote positive economic or social change. Although central bank
s 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 run
s, thereby inducing moral hazard
in the financial system, making the system susceptible to economic bubble
s.
(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. Henry Liu of the Asia Times Online
argues that monetary reform is an important part of a move towards post-autistic economics
.
While some mainstream economists 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 on the left-wing of the subject and those associated with the anti-globalization movement
.
, 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. (For an in depth critique see Gary North's Gertrude Coogan’s Bluff,
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 and died out in the post-World War II
era.
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.
" 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. Abraham Lincoln
used interest-free money created by the government to help the Union win the American Civil War
. He called these 'Greenbacks' "the greatest blessing the people of this republic ever had."
The islands of Guernsey
and Jersey
in the Channel Islands
create their own money, the Guernsey pound
and Jersey pound
, to supplement the British Pound and the Scottish pound.
, 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 scrip
s 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.
on simple interest, not compound interest
, can make a difference to small-scale business people trying to make a start without collateral
. The Grameen Bank
instituted this technique and remains popular and influential.
towards a hard currency
or asset-backed currency does not necessarily mean using commodity money such as gold
, silver
or both
in daily transactions. The vast majority of the gold supposedly in reserve is held by the Federal Reserve as collateral for the national debt. The currency could be tied to the good faith and credit of the United States Government, which already issues bonds on the open market, which in turn could be redeemable in gold or silver. 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. Some monetary reformers believe that in a genuine free market
, where government did not impose a monopoly currency on the populace, a gold standard
or silver standard
monetary system would arise spontaneously out of the free market
because of their unique properties: their extraordinary malleability, their strong resistance to forgery
, their character as stable and impervious to decay, and their inherently limited supply.
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given 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, occasionally in the past,...
and financing the economy from the current system.
Monetary reformers may advocate any of the following, among other proposals:
- A return to the gold standardGold standardThe gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
(or silver standardSilver standardThe silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver specie standard was widespread from the fall of the Byzantine Empire until the 19th century...
or bimetallismBimetallismIn economics, bimetallism is a monetary standard in which the value of the monetary unit is defined as equivalent both to a certain quantity of gold and to a certain quantity of silver; such a system establishes a fixed rate of exchange between the two metals...
).
- The issuance of interest-free creditCredit (finance)Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
from a government-controlled and fully owned central bankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
. These interest free but repayable loans would be used for public infrastructure and productive private investment. This proposal seeks to overcome the charge that debt-free money would cause inflation.
- The issuance of social creditSocial CreditSocial Credit is an economic philosophy developed by C. H. Douglas , a British engineer, who wrote a book by that name in 1924. Social Credit is described by Douglas as "the policy of a philosophy"; he called his philosophy "practical Christianity"...
- "debt-free" money issued directly from the TreasuryTreasuryA treasury is either*A government department related to finance and taxation.*A place where currency or precious items is/are kept....
- rather than the sourcing of fresh money from a central bankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
in the form of interest-bearing bonds. These direct cash payments would be made to "replenish" or compensate the populace for the net losses some monetary reformers believe the populace suffers in a fractional reserve-basedFractional-reserve bankingFractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
monetary systemDebt-based monetary systemCriticisms of fractional-reserve banking have been put forward from a variety of perspectives. Critics have included mainstream economists such as Irving Fisher, Frank Knight and Milton Friedman. Within the economics profession today, most criticisms are from non-mainstream economic theories such...
.
- The enforcement of full reserve banking for the privately owned banking system.
Common targets for reform
Of all the aspects of monetary policyMonetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
, certain topics reoccur as targets for reform:
Fractional Reserve Banking
Fractional-reserve bankingFractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
describes systems in which banks lend
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given 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, occasionally in the past,...
while at the same time guaranteeing that depositors (whose money it is lending) will be able to make withdrawals on demand. A fraction of deposits is retained at the bank as reserves
Bank reserves
Bank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...
to cover normal withdrawals made by depositors. Because the bank extends a loan with money from depositors, while at the same time guaranteeing the deposits already held by the bank, this system has the effect of increasing the economy's money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
. When a bank makes a new loan, the funds will - generally speaking - be deposited in a bank again, where the same funds will be lent out again, increasing the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
again. However, if the fraction of deposits that the bank withholds as reserves is greater than zero, each successive new loan will be slightly smaller than the previous loan, and the growth in the money supply will slow with each successive loan.
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
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
and the crash of 1929. These reforms included the creation of deposit insurance
Deposit insurance
Explicit deposit insurance 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...
(such as the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
) to mitigate against the danger of bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
s. Countries have also implemented legal reserve requirements 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 (such as members of the Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
) argue that the practice inherently amounts to a kind of "fraud
Embezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
" perpetrated against depositors/savers as it, in their view, artificially lowers real interest rates, destabilizes the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
and contributes to volatile and wasteful business cycles (or "credit cycle
Credit cycle
The credit cycle is the expansion and contraction of access to credit over the course of the business cycle. Some economists, including Barry Eichengreen, Hyman Minsky, and other Post-Keynesian economists, and some members of the Austrian school, regard credit cycles as the fundamental process...
s"). Other critics, such as Michael Rowbotham
Michael Rowbotham
Michael Rowbotham is a political and economic writer and commentator based in the UK who is best known for his two books The Grip of Death and Goodbye America...
, equate the practice with counterfeiting, where government-protected privileged private entities (the bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s) are granted the legal right to create money "out of the nothing" while also being granted the right to charge interest on their creation. Michael Rowbotham argues that this concentrates wealth in the banking sector (which has a "cannibalizing" effect on the rest of the economy), causes the rest of the populace to slowly sink into debt slavery, creates volatile hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
in the housing market and deflation in the consumer goods market, squeezes real wages, destroys farming and agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
and de-industrializes heavily indebted economies.
Fiat money
Banks create new money as loans through fractional-reserve bankingFractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
, resultant money is no longer backed by a tangible asset. Money does not represent anything other than the debt of another; the only "tangible" aspect of the system is the borrower’s promise to pay back the interest and principal on the loan. Debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
and the ability of borrowers to service that debt then becomes the underlying currency.
Money creation by the central bank
Many people criticise the fact that governments pay interest for the use of their own money which the central bankCentral bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
creates "out of nothing". This leaves the state of a nation's economy susceptible to the interests of private bankers who create the money solely for the purpose of creating ongoing profits for their employees and shareholders, without any other binding social or legal obligations to the broader community (or future generations) that are normally expected from government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
entities. Either private individuals or corporations borrow to fund themselves and their businesses, or government "borrows" money from the central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
to fund deficit spending.
International organizations and developing nations
Some monetary reformers criticise existing global financial institutions like the World BankWorld Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
and International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and their policies regarding money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
, bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s and debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
in developing nations, in that they appear to these writers to be "forcing" a regime of extortionate or unpayable debt on weak Third World
Third World
The term Third World arose during the Cold War to define countries that remained non-aligned with either capitalism and NATO , or communism and the Soviet Union...
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
Third World
The term Third World arose during the Cold War to define countries that remained non-aligned with either capitalism and NATO , or communism and the Soviet Union...
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.
Central Bank Independence
In an attempt to control the volatile, exponential growth of the money supplyMoney supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
, some countries have created a currency board
Currency board
A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target....
, or granted independence to their central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
. The Reserve Bank of New Zealand
Reserve Bank of New Zealand
The Reserve Bank of New Zealand is the central bank of New Zealand and is constituted under the Reserve Bank of New Zealand Act 1989. The Governor of the Reserve Bank is responsible for New Zealand's currency and operating monetary policy. The Bank's current Governor is Dr. Alan Bollard...
, the Reserve Bank of Australia
Reserve Bank of Australia
The Reserve Bank of Australia came into being on 14 January 1960 as Australia's central bank and banknote issuing authority, when the Reserve Bank Act 1959 removed the central banking functions from the Commonwealth Bank to it....
, the Federal Reserve, and the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
are examples where the central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
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
Central government
A central government also known as a national government, union government and in federal states, the federal government, is the government at the level of the nation-state. The structure of central governments varies from institution to institution...
. This may enable the setting of interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s to be less susceptible to political interference and thereby assist in combating inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
(or debasement of the currency) by allowing the central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
to more effectively restrict the growth of M3
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
. 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 can promote positive economic or social change. Although central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s may appear to control inflation, through periodic bank rescues and other means, they may inadvertently be forced to increase the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
(and thereby debase the currency) to save the banking system from bankruptcy or collapse during periodic bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
s, thereby inducing moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
in the financial system, making the system susceptible to economic bubble
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
s.
International Monetary Reform
Theorists such as Robert MundellRobert Mundell
Robert Mundell, CC is a Nobel Prize-winning Canadian economist. Currently, Mundell is a professor of economics at Columbia University and the Chinese University of Hong Kong....
(and more radical thinkers such as James Robertson
James Robertson (activist)
James Robertson , a British-born political and economic thinker and activist, became an independent writer and speaker in 1974 after an early career as a British civil servant....
) see a role for global monetary reform as part of a system of global institutions alongside the United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
to provide global ecological management and move towards world peace
World peace
World Peace is an ideal of freedom, peace, and happiness among and within all nations and/or people. World peace is an idea of planetary non-violence by which nations willingly cooperate, either voluntarily or by virtue of a system of governance that prevents warfare. The term is sometimes used to...
, with Robert Mundell
Robert Mundell
Robert Mundell, CC is a Nobel Prize-winning Canadian economist. Currently, Mundell is a professor of economics at Columbia University and the Chinese University of Hong Kong....
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 Online
Asia Times Online is a bilingual English‒Chinese, Internet-based newspaper covering geopolitics, politics, economics and business "from an Asian perspective"...
argues that monetary reform is an important part of a move towards post-autistic economics
Post-autistic economics
The movement for Post-Autistic Economics was born through the work of Sorbonne economist Bernard Guerrien. The movement is best seen as a forum of different groups critical of the current mainstream: from behavioral and heterodox to feminist, green economics and econo-physics...
.
While some mainstream economists favour monetary reforms to reduce inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
and currency risk
Currency risk
Currency risk or exchange rate risk is a form of financial risk that arises from the potential change in the exchange rate of one currency in relation to another...
and to increase efficiency
Efficiency (economics)
In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another if it can provide more goods and services for society without using more resources...
in the allocation of financial capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
, the idea of all-encompassing reform for green or peace objectives is typically espoused by those on the left-wing of the subject and those associated with the anti-globalization movement
Anti-globalization movement
The anti-globalization movement, or counter-globalisation movement, is critical of the globalization of corporate capitalism. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist movement, anti-corporate globalization movement, or...
.
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 RowbothamMichael Rowbotham
Michael Rowbotham is a political and economic writer and commentator based in the UK who is best known for his two books The Grip of Death and Goodbye America...
, Stephen Zarlenga and Ellen Brown
Ellen Brown
Ellen Hodgson Brown is an American lawyer and author who since 2008 has become a well-known monetary reformer, mostly because of her book The Web of Debt. She has also written several books about alternative medicine.- The Web of Debt :...
, support the restriction or banning of fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
(characterizing it as an illegitimate banking practice akin to embezzlement
Embezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
) and advocate the replacement of fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
with government-issued debt-free fiat currency issued directly from the Treasury
Treasury
A treasury is either*A government department related to finance and taxation.*A place where currency or precious items is/are kept....
rather than from the quasi-government Federal Reserve. (For an in depth critique see Gary North's Gertrude Coogan’s Bluff,
Alternatively, some monetary reformers such as those in the Social Credit
Social Credit
Social Credit is an economic philosophy developed by C. H. Douglas , a British engineer, who wrote a book by that name in 1924. Social Credit is described by Douglas as "the policy of a philosophy"; he called his philosophy "practical Christianity"...
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
Social Credit
Social Credit is an economic philosophy developed by C. H. Douglas , a British engineer, who wrote a book by that name in 1924. Social Credit is described by Douglas as "the policy of a philosophy"; he called his philosophy "practical Christianity"...
movement flourished briefly in the early 20th century, but then became marginalized and died out in the post-World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
era.
Both these groups (those who advocate the replacement of fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
with debt-free government-issued fiat, and those who support the issuance of repayable interest-free credit from a government-owned central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
) 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
Consumerism
Consumerism is a social and economic order that is based on the systematic creation and fostering of a desire to purchase goods and services in ever greater amounts. The term is often associated with criticisms of consumption starting with Thorstein Veblen...
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 ScripColonial Scrip
Early American currency went through several stages of development in the colonial and post-Revolutionary history of the United States. Because few coins were minted in the thirteen colonies that became the United States in 1776, foreign coins like the Spanish dollar were widely circulated....
" system prior to the Revolution
American Revolution
The American Revolution was the political upheaval during the last half of the 18th century in which thirteen colonies in North America joined together to break free from the British Empire, combining to become the United States of America...
, much to the praise of Benjamin Franklin
Benjamin Franklin
Dr. Benjamin Franklin was one of the Founding Fathers of the United States. A noted polymath, Franklin was a leading author, printer, political theorist, politician, postmaster, scientist, musician, inventor, satirist, civic activist, statesman, and diplomat...
. He believed it was the efforts of English bankers to revoke this government-issued money that caused the Revolution. Abraham Lincoln
Abraham Lincoln
Abraham Lincoln was the 16th President of the United States, serving from March 1861 until his assassination in April 1865. He successfully led his country through a great constitutional, military and moral crisis – the American Civil War – preserving the Union, while ending slavery, and...
used interest-free money created by the government to help the Union win the American Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
. He called these 'Greenbacks' "the greatest blessing the people of this republic ever had."
The islands of Guernsey
Guernsey
Guernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet...
and Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
in the Channel Islands
Channel Islands
The Channel Islands are an archipelago of British Crown Dependencies in the English Channel, off the French coast of Normandy. They include two separate bailiwicks: the Bailiwick of Guernsey and the Bailiwick of Jersey...
create their own money, the Guernsey pound
Guernsey pound
The pound is the currency of Guernsey. Since 1921, Guernsey has been in currency union with the United Kingdom and the Guernsey pound is not a separate currency but is a local issue of banknotes and coins denominated in pound sterling, in a similar way to the banknotes issued in Scotland and...
and Jersey pound
Jersey pound
The pound is the currency of Jersey. Jersey is in currency union with the United Kingdom, and the Jersey pound is not a separate currency but is an issue of banknotes and coins by the States of Jersey denominated in pound sterling, in a similar way to the banknotes issued in Scotland and Northern...
, to supplement the British Pound and the Scottish pound.
Local barter, local currency
Some go further and suggest that wholesale reform of money and currency, based on ideas from green economics or Natural CapitalismNatural capitalism
Natural Capitalism: Creating the Next Industrial Revolution is a 1999 book 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 Business Review summary....
, would be beneficial. These include the ideas of soft currency, barter and the local service economy
Service economy
Service economy can refer to one or both of two recent economic developments. One is the increased importance of the service sector in industrialized economies. Services account for a higher percentage of US GDP than 20 years ago...
.
Local currency
Local currency
In economics, a local currency, in its common usage, is a currency not backed by a national government , and intended to trade only in a small area. As a tool of fiscal localism, local moneys can raise awareness of the state of the local economy, especially among those who may be unfamiliar or...
systems can operate within small communities, outside of government systems, and use specially printed notes or tokens called scrip
Scrip
Scrip is an American term for any substitute for currency which is not legal tender and is often a form of credit. Scrips were created as company payment of employees and also as a means of payment in times where regular money is unavailable, such as remote coal towns, military bases, ships on long...
s for exchange. Barter takes this further by swapping goods and services directly; a compromise being the Local Exchange Trading Systems
Local Exchange Trading Systems
Local exchange trading systems , also known as LETSystems, are locally initiated, democratically organised, not-for-profit community enterprises that provide a community information service and record transactions of members exchanging goods and services by using the currency of locally created...
(LETS) scheme: a formalised system of Community-based economics
Community-based economics
Community-based economics or community economics is an economic system that encourages local substitution. It is most similar the lifeways of those practicing voluntary simplicity, including traditional Mennonite, Amish, and modern eco-village communities...
that records members’ mutual credit
Mutual credit
Mutual credit is a type of alternative currency in which the currency used in a transaction can be created at the time of the transaction. LETS are mutual credit systems.Typically this involves keeping track of each individual's credit or debit balance...
in a central location.
Micro credit
Banks offering small loansMicrofinance
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....
on simple interest, not compound interest
Compound interest
Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding...
, can make a difference to small-scale business people trying to make a start without collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
. The Grameen Bank
Grameen Bank
The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...
instituted this technique and remains popular and influential.
Return to the gold standard
A move away from fiat moneyFiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
towards a hard currency
Hard currency
Hard currency , in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value...
or asset-backed currency does not necessarily mean using commodity money such as gold
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, silver
Silver standard
The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver specie standard was widespread from the fall of the Byzantine Empire until the 19th century...
or both
Bimetallism
In economics, bimetallism is a monetary standard in which the value of the monetary unit is defined as equivalent both to a certain quantity of gold and to a certain quantity of silver; such a system establishes a fixed rate of exchange between the two metals...
in daily transactions. The vast majority of the gold supposedly in reserve is held by the Federal Reserve as collateral for the national debt. The currency could be tied to the good faith and credit of the United States Government, which already issues bonds on the open market, which in turn could be redeemable in gold or silver. Digital means
Electronic money
Electronic money is money or scrip that is only exchanged electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems...
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
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
allows renewed decentralisation and competition in this area, eroding the central government
Central government
A central government also known as a national government, union government and in federal states, the federal government, is the government at the level of the nation-state. The structure of central governments varies from institution to institution...
's and bankers' old monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
control of the means of exchange. Some monetary reformers believe that in a genuine free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
, where government did not impose a monopoly currency on the populace, a gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
or silver standard
Silver standard
The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver specie standard was widespread from the fall of the Byzantine Empire until the 19th century...
monetary system would arise spontaneously out of the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
because of their unique properties: their extraordinary malleability, their strong resistance to forgery
Forgery
Forgery is the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. Copies, studio replicas, and reproductions are not considered forgeries, though they may later become forgeries through knowing and willful misrepresentations. Forging money or...
, their character as stable and impervious to decay, and their inherently limited supply.
See also
- Criticism of debtCriticism of debtThis article is about criticism of, and arguments against debt.There are many arguments against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Usually these refer to conditions under which debt should not be used as a solution, e.g. to fund...
- Criticism of fractional-reserve banking
- Criticism of the Federal ReserveCriticism of the Federal ReserveThe Federal Reserve System, known colloquially as "the Fed", has faced various criticisms since its conception in 1913. The system was created as a third attempt at central banking in the United States...
- Full reserve banking
- Social CreditSocial CreditSocial Credit is an economic philosophy developed by C. H. Douglas , a British engineer, who wrote a book by that name in 1924. Social Credit is described by Douglas as "the policy of a philosophy"; he called his philosophy "practical Christianity"...
- Seignorage
- List of monetary reformers
External links
- American Monetary Institute
- Prosperity UK A monthly journal on Money Reform which campaigns for publicly created debt-free money
- Committee on Monetary and Economic Reform
- The Money Reform Party, U.K.
- Forum for Stable Currencies, House of Lords
- The Mystery of Banking, Murray RothbardMurray RothbardMurray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...
- The Ethics of Money Production, Jörg Guido Hülsmann (2008), Ludwig von Mises Institute
- Transforming Money
- Free Banking FAQ
- Greening the Dollar
- UK Monetary Reform & Proposals for Full-Reserve Banking
- Full Reserve Banking