Monetary reform

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Template:Short description Template:Pp-semi-sock Template:Use dmy dates Template:Public finance Monetary reform refers to proposals to change a country's monetary system, including how money is created, regulated, and distributed. Such reforms seek to address perceived problems with current monetary schemes, like financial instability, wealth inequality, or inflation. Monetary reform movements grow during economic crises, proposing alternatives to prevailing systems.

Reforms range widely from a return to commodity-backed currencies like the gold standard to more radical changes like full reserve banking or government-issued debt-free money. Some reforms seek technical adjustments to existing systems, while others propose to fundamentally restructure money's economic functions.

Historical context

Monetary reform movements gain prominence during periods of economic instability.<ref>Template:Cite book</ref><ref>Template:Cite book</ref> The Great Depression sparked reform proposals including the Chicago plan.<ref name=":0" /> Similarly, the 2008 financial crisis renewed interest in alternatives like sovereign money systems,<ref name=":1" /> while the COVID-19 pandemic further increased debates about monetary system design.<ref>Template:Cite book</ref>

Monetary system evolution's major transitions included from the gold standard to the Bretton Woods system to current fiat money.<ref>Template:Cite book</ref> Each transition has generated debate about the optimal monetary arrangement for economic stability and growth.<ref>Template:Cite book</ref><ref>Template:Cite book</ref>

Types of monetary reform

Gold standard

Template:Main The gold standard linked currency values to gold reserves. Under this monetary system, paper money was convertible to fixed amounts of gold, anchoring currency values. The classical gold standard functioned internationally from the 1870s to World War I, with a modified version under the Bretton Woods system.<ref>Template:Cite book</ref>

Proponents' arguments include that currencies backed by gold had more stability than fiat money.<ref>Template:Cite book</ref> They argue required gold reserves limited financing expenditures through money creation.<ref>Template:Cite book</ref> Austrian school economists have advocated returning to gold-backed currencies to prevent inflation.<ref>Template:Cite book</ref>

Critics' arguments center on monetary policy constraints during economic downturns. Mainstream economists note the gold standard may have prolonged the Great Depression by preventing money supply expansion to fight deflation. Countries that abandoned the gold standard earlier in the Great Depression recovered more quickly.<ref>Template:Cite book</ref>

Full reserve banking

Template:Main Full reserve banking proposals would require banks to hold 100% reserves for customer deposits, eliminating fractional-reserve banking currently used worldwide.<ref>Template:Cite book</ref> In a full reserve system, banks would operate as intermediaries not creators of credit.<ref>Template:Cite book</ref>

Theoretical foundation: The Chicago plan, designed by University of Chicago economists,<ref name=":0">Template:Cite book</ref> spurred academic attention. The plan would separate monetary and credit functions, transferring money creation to government control.<ref>Template:Cite book</ref>

Proponents' arguments include the elimination of bank runs, as banks would have reserves to meet all withdrawals.<ref>Template:Cite book</ref> They argue it would reduce systemic risk<ref>Template:Cite book</ref> and provide governments greater control over the money supply.<ref>Template:Cite book</ref>

Critics' arguments focus on potential economic disruption and reduced credit access. They suggest full reserve banking could drive borrowers to the shadow banking system.<ref>Template:Cite book</ref> Mainstream economists express concern about reduced capital allocation efficiency, as well as transition costs and potential unintended consequences.<ref>Template:Cite book</ref>

Sovereign money

Template:Main Sovereign money systems propose transferring money creation from commercial banks to government institutions like central banks. Under the current system, commercial banks create money through loans;<ref>Template:Cite book</ref> sovereign money would make money creation a government monopoly.<ref>Template:Cite book</ref>

Theoretical basis: Proponents argue money creation should be a public function rather than a private one. They propose that government created money could be spent into circulation for public purposes instead of private bank profit.<ref>Template:Cite book</ref>

Policy examples: Switzerland held the 2018 Swiss sovereign-money initiative,<ref>Template:Cite book</ref> which did not pass. Iceland considered a similar proposal following the 2008–2011 Icelandic financial crisis.<ref name=":1">Template:Cite book</ref> These real-world applications provide insight into political and implementation challenges.

Economic analysis: Supporters argue sovereign money could provide better control over they money supply and reduce debt burden.<ref>Template:Cite book</ref> Critics claim asset bubbles may still be possible.<ref>Template:Cite book</ref> The Swiss National Bank opposed the initiative claiming lack of expertise and resources.<ref>Template:Cite book</ref>

Social credit

Template:Main Social credit theory, developed by C. H. Douglas starting in the 1920s, proposes that governments issue money directly to citizens as a social dividend.<ref>Template:Cite book</ref> This would supplement wages and fill the deficit of purchasing power to a "just" price of goods and services.<ref>Template:Cite book</ref> Maurice Reckitt said the community would issue its own credit, enabling goods to be sold below cost.<ref>Template:Cite book</ref>

The Social Credit Party of Canada gained power in Alberta in 1935,<ref>Template:Cite book</ref> governing for decades.<ref>Template:Cite book</ref> Mainstream economists did not accept social credit, claiming it was inflationary.<ref>Template:Cite book</ref>

Related proposals advocate for the government issuing interest-free money for infrastructure. Proponents seek to prevent inflation by withdrawing the credit from circulation as the loan is repaid.<ref>Template:Cite book</ref> Historical examples of government-issued interest-free money include American Revolution continentals<ref>Template:Cite book</ref> and American Civil War greenbacks.<ref>Template:Cite book</ref>

Alternative currency systems

Demurrage currency

Template:Main Demurrage currency is designed to lose value over time, encouraging circulation not hoarding.<ref>Template:Cite book</ref> Economist Silvio Gesell sought to boost velocity, requiring periodic stamps to keep the money valid.<ref>Template:Cite book</ref>

Historical examples include the Wära in Germany. It had led to modest economic prosperity before it was forbidden by the finance ministry.<ref>Template:Cite book</ref>

Despite their success, most demurrage currencies were banned by central banks for violating national monopolies on currency.<ref>Template:Cite book</ref> Contemporary versions include complementary currency<ref>Template:Cite book</ref> and negative interest rate proposals.<ref>Template:Cite book</ref>

Local currencies

Template:Main Local currencies and local exchange trading system (LETS) create community-based alternatives to national currencies.<ref>Template:Cite book</ref> These systems aim to improve the economy in local communities and can include features like demurrage.<ref>Template:Cite book</ref> Examples include Ithaca Hours in New York and time banks.<ref>Template:Cite book</ref>

Free banking

Template:MainFree banking proposals would allow private bank issued currencies, eliminating central bank restrictions on money creation.<ref>Template:Cite book</ref> Proponents argue competition creates pressure for stable currencies,<ref>Template:Cite book</ref> while critics raise coordination problems.<ref>Template:Cite book</ref>

Contemporary catalysts for reform

COVID and monetary policy

The COVID-19 pandemic prompted unprecedented monetary policy responses, including massive quantitative easing (QE) programs by major central banks.<ref>Template:Cite news</ref> Rising inflation in 2022 led most central banks to switch to quantitative tightening.<ref>Template:Cite book</ref>

The inflation surge reignited debates about:

Arguments for reform

Financial stability concerns

Monetary reform advocates often cite financial instability to justify systemic change.<ref>Template:Cite book</ref> They argue fractional reserve creates a mismatch between liquid deposits and illiquid loans.<ref>Template:Cite book</ref> This can lead to bank runs and government interventions during crises.<ref>Template:Cite book</ref>

Procyclical bank lending expands credit during booms, contributing to asset bubbles, followed by a drop in credit during busts, amplifying economic downturns.<ref>Template:Cite book</ref> The money supply is created by bank lending, and central banks have limited ability to stop booms with higher capital requirements.<ref>Template:Cite journal</ref>

Debt sustainability issues

Since most money is created through commercial bank lending,<ref>Template:Cite book</ref> the total debt in the economy exceeds the money supply,<ref>Template:Cite book</ref> challenging aggregate debt repayment.<ref>Template:Cite book</ref> Foreign currency risk has led to mounting debt for developing countries and handing over national assets.<ref name="Werner2016">Template:Cite journal</ref>Template:Rp

This suggests constant economic growth is necessary,<ref>Template:Cite book</ref> with unsustainable resource consumption and environmental degradation.<ref>Template:Cite book</ref> Labor-saving technologies are generally used to increase income and consumption not reduce hours of work.<ref>Template:Cite book</ref>

Wealth distribution effects

Monetary reform advocates argue money creation through lending benefits those with access to credit.<ref>Template:Cite book</ref> while costing those holding cash.<ref>Template:Cite book</ref> Asset price inflation benefits owners while growing inequality.<ref>Template:Cite book</ref> Quantitative easing benefits asset holders, while those without benefit only if investment or consumption increases employment.<ref>Template:Cite book</ref>

Critics claim the privilege to create currency and charge interest enable banks to thrive at everyone else's expense.<ref>Template:Cite book</ref> Wright Patman objected to governments paying interest for money created "out of nothing",<ref>Template:Cite book</ref> making economic activity dependent on private bank self-interest.<ref>Template:Cite book</ref>

Arguments against reform

Economic disruption risks

Economists defending current systems claim transitioning to an untested financial system could create extreme uncertainty.<ref name="Jordan2018">Thomas Jordan, "How money is created by the central bank and the banking system", Swiss National Bank, 16 January 2018</ref> They say the current system allows consumers to afford the necessities of modern life. Financial instability is a risk for countries attempting unilateral reforms.<ref name="Bundesrat">Template:Cite book</ref>Template:Rp

The finance sector would be weakened because its profit is reduced.<ref name="Bundesrat" />Template:Rp Critics claim a sovereign money system would stimulate shadow banking and alternative means of payment.<ref>Template:Cite journal Alt URL See also Template:Cite journal and Template:Cite journal</ref>

In the traditional banking system, the central bank controls the interest rate 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.<ref>Template:Cite journal</ref>

Monetary policy effectiveness

Status quo advocates contend reforms would impair central bank ability to maintain price stability.<ref name="Bundesrat" />Template:Rp Separating money creation from lending would lead to a lack of experience estimating monetary expansion effects on prices.<ref name="Bundesrat" />Template:Rp

Critics doubt whether the central bank's tools for money supply are sufficient. The central bank may have to provide credit to commercial banks and accept the accompanying risk.<ref name="Birchler">Template:Cite book</ref>Template:Rp

Political economy concerns

Critics claim direct distribution of newly created money risks high inflation if significant financing needs generate political pressure. They argue that central bank independence helps prevent inflation.<ref name="Bundesrat" />Template:Rp

They worry about restrictions on economic freedom.<ref name="Bundesrat" />Template:Rp

International perspectives

Developing country experiences

Michael Hudson criticized the World Bank and International Monetary Fund for reinforcing debt dependency.<ref>Template:Cite book</ref>

Developing countries' external debt can harm local culture and the environment.<ref>Template:Cite book</ref> Countries have experimented with alternative monetary rules, often related to external debt and balance of payments.<ref>Template:Cite book</ref> These experiences can provide case studies for understanding monetary reform.<ref>Template:Cite book</ref>

Countries such as Ecuador and Zimbabwe used currency substitution,<ref>Template:Cite book</ref> while others have used currency boards with loss of flexibility.<ref>Template:Cite book</ref>

Global monetary reform proposals

Proposed reforms to the international monetary system include expansion of special drawing rights.<ref>Template:Cite book</ref> Proposals seek to address imbalances due to US dollar centrality.<ref>Template:Cite book</ref> Robert Mundell proposed reforming the international monetary system with a world currency.<ref>Template:Cite book</ref> James Robertson called for international financial system reform with green economics.<ref>Template:Cite book</ref>

The Economic and Monetary Union of the European Union was a significant innovation in international monetary reform,<ref>Template:Cite book</ref> demonstrating the possibilities and challenges in economic policy coordination across member states.<ref>Template:Cite book</ref>

Contemporary developments

Central Bank Digital Currencies (CBDCs)

CBDCs represent a significant contemporary development in monetary reform.<ref>Template:Cite web</ref> The emergence of central bank digital currency (CBDC) has created new possibilities for monetary reform.<ref>Template:Cite book</ref> CBDCs could enhance monetary policy effectiveness and allow more control over distribution.<ref>Template:Cite book</ref>

134 countries with 98% of world GDP are evaluating a national digital currency.<ref>Template:Cite book</ref> The Bahamas, Jamaica, and Nigeria have launched CBDCs.<ref>Template:Cite web</ref> CBDCs could provide government-issued digital currency directly to the public.<ref>Template:Cite book</ref>

The design choices for CBDCs vary significantly, including decisions about privacy, programmability, offline functionality, and intermediation models.<ref>Template:Cite book</ref><ref>Template:Cite book</ref> These choices have profound implications for monetary policy effectiveness, financial stability, and individual privacy.<ref>Template:Cite book</ref>

Post-crisis reform efforts

Following the 2008 financial crisis, reforms such as Basel III, increased capital requirements for banks.<ref>Template:Cite book</ref> While some economists argue they have reduced systemic risk,<ref>Template:Cite book</ref> others call for more fundamental reform to address structural problems.<ref>Template:Cite book</ref>

See also

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Notes

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References

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Further reading

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