Monetary reform

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This is a low level revision of an automatic translation of the original page in Catalan. I apologize for any errors it may contain. 

Imagine a village where there is the need to build a road, a school, a hospital ... something.

Imagine that in this village there is a significant percentage of people without work and who want to work.

Imagine that a construction company has no contracts and therefore has his future jeopardized, and that it cannot keep their employees, let alone hire new ones.

Imagine that the city council, the regional government and state government are aware of the need to build the road, school or hospital, of the problem of people without work and of the problem of the construction company, and want to do everything in their hands so that the work is done, workers have a job and the company can continue to run.

What is missing so that everything gets settled? What mysterious ingredient is needed so that people have employment, companies survive and the work gets done?

I ask the reader to read the following options and choose the answer that he thinks is correct:
  1. Need for a work
  2. People who want to work
  3. Companies that can take on the project
  4. Determination by the government
  5. Money
money_80861aIf, as I hope, the reader has chosen "money", I think he must be a little surprised and probably wondering how it can be that there is no money. Perhaps money is like energy (the ability to perform work) without which nothing works, and that money, like energy can't be created or destroyed, and therefore, if there is no money, there's nothing to do?

But this can not be right! We all know that money, at least, is created. Someone (the Bank of Spain? The European Central Bank?) prints banknotes and mints coins. So, why not create more money and let the work begin, the company hire the workers and the unemployed have jobs?

The conventional answer is that printing money when we need it devalues ​​the value of money and generates inflation. But in fact, notes and coins are just a (increasingly smaller) part of the money (1). The remaining money is created by a mechanism called fractional reserve banking system (2). This video explains how it works:

The monetary reform movement wants to give back to the state the exclusive right to create money. One of its most prominent proponents, James Robertson, suggests a simple mechanism to accomplish this that essentially involves two parts (3):
  1. Central banks should create the amount of new non-cash money (as well as cash) they decide is needed to increase the money supply, by crediting it to their governments as public revenue. Governments should then put it into circulation by spending it.
  2. It should become infeasible and be made illegal for anyone else to create new money denominated in an official currency. Commercial banks will thus be excluded from creating new credit as they do now, and be limited to credit-broking as financial intermediaries.
The monetary reformers are careful to emphasize that central banks should apply strict criteria to decide how much money must be created, and should maintain the objective of controlling inflation. This avoids the criticism and the danger that the creation of money by a public entity generates inflation. The objective of monetary reform is not that governments have at their disposal a printer or mint they can use whenever money is needed. The goal is to avoid the creation of money by a mechanism that also implies the creation of debt and therefore forces governments to get into debt to get funding.

How should governments spend the money? This is a different issue that has nothing to do directly with the proposal for monetary reform. However, it is interesting to know some basic proposals. The reader is free to choose his own.
  1. Governments should spend money on projects and in the manner they deem most appropriate. The difference would be that they would have more money so they should not pay interest.
  2. Governments should use the new money to pay off the debt. This would save interest payments and stabilize public accounts.
  3. The money created by central banks should be distributed among all citizens as a national dividend or citizen’s income (Stéphane Laborde (4) presents a particular proposal for monetary reform in this regard).
In the United Kingdom (5) and the United States (6) bills have presented to implement some kind of monetary reforms. What are our leaders and political parties waiting to discuss monetary reform?

  1. Money supply. Wikipedia, recuperat el 26 de febrer de 2012.
  2. Fractional reserve banking. Wikipedia, recuperat el 26 de febrer 2012.
    Modern Money Mechanics. Federal Reseve Bank of Chicago, 1961-1992.
  3. Huber & Robertson. Creating new money, 2011.
  4. Stéphane Laborde. Théorie relative de la monnaie, 2011
  5. Manuel Llamas. Reino Unido debate restaurar la reserva 100% en los depósitos bancarios. Libertad Digital Economía, 16 de setembre de 2010.
  6. Stephen Zarlenga. From the US: Representative Dennis Kucinich Introduces Monetary Reform Bill. Positive money, 26 de gener de 2011.
    Congressman Dennis Kucinich (D,Ohio, 10th District). National Emergency Employment Defense (NEED) Act of 2011, HR 2990.

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