Money System Theory

The Present Money System
Functioning, Dysfunctions and Future Perspectives

The mechanism of deposit creation by banks, based on a fractional reserve of sovereign currency, was already well known to the participants in the debate between the Currency and the Banking Schools almost 200 years ago. The theory of bank credit money was then developed from the 1890s. And yet many academics and banking practitioners still want nothing to do with it.  
Here is a paper that provides an up to date outline of the workings of the money and banking system - how money is created, how it circulates in the payment system, how it is temporarily de- and re-activated, and how it is finally deleted. 
This then helps clarify why a number of orthodox money and banking theories are obsolete today or were misleading from the beginning - which however also applies to a number of heterodox ideas about money.
The picture is rounded off by a summary of the dysfunctions of split-circuit reserve banking and a brief outlook on the perspective of a single-circuit sovereign money system. 

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This article has been published in the real-world economics review RWER, issue no. 80, 26 June 2017, 63-84, under the heading > Split-circuit reserve banking. Download from RWER  



Michael Kumhof

Michael Kumhof

Michael Kumhof and Zoltan Jakab explain why
Banks are not intermediaries of loanable funds - facts, theory and evidence, Bank of England Staff Working Paper No.761, Oct 2018.

Prof R. Werner

Prof R. Werner

While many orthodox scholars still struggle to catch up with advanced money system theory, other scholars at the frontline of new developments, however, are overshooting the mark. One example is a typology by R. Werner. He distinguishes three models or theories of banking: the loanable funds model, the theory of reserve circulation, and credit creation out of nothing. Here is the article by Richard Werner on > Can banks individually create money out of nothing? The theories and the empirical evidence of how banks create money.

I could not prevent from making a few
> Critical Remarks on R. Werner's Typology of Three Banking Theories - including an explanation why bankmoney is separate, but not independent from central-bank money > read.
> as a PDF

Another criticism has been made by Michael Schemmann, professor of accountancy
> Critique of Werner's Article on Bank Credit Creation



Monetary Puzzlement
Why central banks perform worse than they could

Central banks are nowadays portrayed as the most mighty and powerful institutions, controlling the banking industry and exerting tremendous influence on financial markets and the economy beyond. Central banks themselves are keen to leave no doubt about their being in control of the situation. In actual fact, the decisive monetary power is with the banks. Here is an article that tries to sketch out what central banks actually can do and what they cannot.  
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Circuitism - its monetary theory and model of circulation

Circuitism is a French-Italian offspring of Marxism, Keynesianism and Postkeynesianism from the 1960–2000. The name is derived from a specific model of the monetary circuit. Circuitism represents one of the most advanced theories of money, while at the same it time reproduces some typical shortcomings of monetary teachings of Keynesian descent. The Circuitist model of circulation (banks crediting firms, firms paying workers, workers buying the firms' output, which enables the firms to pay back to the banks) reflects financial banking capitalism of old. It neglects the realities of a sphere of non-GDP financial circulation, has an incomplete view of chartalism, and reveals a lack of understanding for the dysfunctions of fractional reserve banking. Thus, behind its criticism of 'the power of banks', it nonetheless reproduces another real bills doctrine in the tradition of the Banking School rather than opening up the horizon towards an up-to-date sovereign currency system.   
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Currency and Banking Teachings

Currency versus banking teachings represent a frame of reference of lasting relevance to modern money systems.
The expression New Currency Theory (NCT) makes reference to the historical Currency School of the first half of the 19th century. It was opposed by the Banking School of the time.
Most economists seem to have forgotten about this controversy. At the same time, most monetary reform initiatives today in fact stand for new currency teachings...
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Neo-Austrians between Gold Standard, 100% Reserve, and Free Banking

The Neo-Austrian School and New Currency Theory share a similar criticism of fractional reserve banking. Strangely enough, Neo-Austrians blame the problem on government and central banks rather than the banking industry.
The Neo-Austrian idea of money and banking reform then is free banking, i.e. a system without legal-tender laws and central banks, on the basis of a return to a 100% gold reserve. This appears to be quixotic, but is a revelation to others.

Here are > Notes on the occasion of reading Huerta de Soto, a main proponent of the Neo-Austrian School.
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On Modern Money Theory

See menu>>  Money Theory/Modern Money and Sovereign Currency


The video obove On the Functioning of Fractional Reserve Banking was registered at the 12th American Monetary Institute's Annual Reform Conference, Chicago, Oct 2016

Seigniorage: The banks' privilege of creating the bankmoney on which they operate costs the taxpayer a lot of extra money - foregone to the public purse to the benefit of the banking industry  

Researchers from the New Economics Foundation (NEF), London, and the Copenhagen Business School (CBS) have developed a new approach to determine the banks' extra profits from primary credit and bankmoney creation. In an empirical case study including the UK, Denmark, Switzerland and Iceland they also have specified the numbers: up to three quarters of banks' profits. About time to do away with that neo-feudal privilege …   

Executive summary >     
NEF and CBS full report >  
CBS academic version openarchive >  
CBS academic version directly >