describes any movement or theory that proposes a different system of supplying money
and financing the economy than the current system.
Most monetary reformers generally advocate at least one of the following:
- A return to the gold standard (or silver standard or bimetallism).
- The issuance of "debt-free" money directly from the Treasury (rather than the sourcing of government spending via interest-bearing bonds from the central bank).
- The issuance of social credit (interest free loans) from a government-controlled and owned central bank. 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 enforcement of full reserve banking for the privately-owned banking system.
All these camps oppose the continued existence of a government-sponsored central bank to control and monitor and support the fractional-reserve-based private banking system.
Common targets for reform
Of all the aspects of monetary policy
, certain topics reoccur as targets for reform:
Fractional Reserve Banking
Fractional Reserve Banking
is the system whereby a bank is legally entitled to lend money
in circumstances where it has the simultaneous obligation to return this money to depositors/savers immediately "at call". Through this accelerated scheme of money creation, it is able to multiply the amount of loans/deposits/capital the banking system has by a factor determined by law. The resultant loan is created only because of the bank's legal right to lend out depositors' cash - even though the bank has the legal obligation to return this money to depositors immediately they ask for it. Banks exploiting the practice of fractional reserve banking
can only remain viable if depositors do not all ask for their money back at the same time. This system of banking is called "fractional reserve" because the bank is legally required to keep only a fraction
of cash in reserve
for immediate payment to all its clients/depositors. When what was perhaps an illegitimate practice by goldsmiths
(akin to embezzlement
) became enshrined in law, the total amount of the money supply
started expanding rapidly, and is still expanding exponentially today.
Some critics of fractional reserve banking (such as the Austrian Economists, Murray Rothbard and Ludwig von Mises) argue that this amounts to a kind of "fraud" perpetrated against depositors/savers as it artificially lowers real interest rates, destabilizes the money supply and contributes to volatile and wasteful business cycles (or "credit cycles"). Other critics, such as Michael Rowbotham, equate the practice with counterfeiting, where government-protected privileged private entities (the banks) are granted the legal right to create money "out of the nothing" whilst 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.
Money no longer represents any asset of value. It represents debt (or intangible obligation)
Because banks now primarily create money
(and fast-growing money "substitutes") through fractional-reserve banking
, money no longer is backed by a tangible asset - money is created whenever a new loan is approved. 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.
Governments do not supply money. Private banks do, for profit
Many people criticize the fact that governments pay interest for the use of their own money which the central bank
creates "out of nothing" (to use William Paterson
's famous phrase). 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. Either way, interest payments accumulate in a debt-based monetary system
, resulting in exponentially
bigger wealth transfers to holders of government bonds
as the economy and the money supply
Some monetary reformers criticise existing global financial institutions like the World Bank and International Monetary Fund and their policies regarding money supply, banks and debt in developing nations, in that they appear to these writers to be "forcing" a regime of extortionate or unpayable debt on weak Third World governments that do not have the capacity to pay the interest on these loans without severely affecting the wellbeing or even the viability of the local population. The attempt by weak Third World governments to service unrepayable 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.
Alternative money systems
Central Bank Independence
In an attempt to control the volatile, exponential growth of the money supply
, 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
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 intereference or direction from the central government
. This may enable the setting of interest rates
to be less susceptible to political interference and thereby assist in combating inflation
(or debasement of the currency) by allowing the central bank
to more effectively restrict the growth of M3
. 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 banks
may appear to control inflation, through periodic bank rescues and other means, they may inadvertently be forced to increase the money supply
(and thereby debase the currency) to save the banking system from bankruptcy or collapse during periodic bank runs
, thereby inducing moral hazard
in the financial system, making the system susceptible to economic bubbles
International Monetary Reform
Theorists such as Robert Mundell
(and more radical thinkers such as James Robertson
) see a role for global monetary reform as part of a system of global institutions alongside the United Nations
to provide global ecological
management and move towards world peace
, with Robert Mundell
in particular advocating the revived use of gold as a stabilising factor in the international financial system. 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.
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 Hodgson 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
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.
Examples of government issued debt-free money
Some Governments have experimented in the past with debt-free government-created money independent of a bank. The American Colonies used the "Colonial Scrip
" system prior to the Revolution
, much to the praise of Benjamin Franklin
. He believed it was the efforts of English bankers to revoke this government-issued money that caused the Revolution. 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.
In America and Britain, however, government-issued money has never been able to gain enough momentum to become an established institution because of the large degree of influence that private bankers have in governments.
Binary economics proposes that central banks issue interest-free loans to the government and for public projects or private capital. They would be administered by the banking system for the spreading of productive capacity and consuming capacity, on market principles, throughout the population.
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
, would be beneficial. These include the ideas of soft currency
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.
Banks offering small loans
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.
Return to the gold standard
A move away from credit money
towards representative money
would mean tying currency to a fixed commodity such as gold
. Digital means
are also now possible. 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.
The technocracy movement advocates energy accounting