According to the rising demand of sustainable economic models, based on the increasing awareness that our planet cannot withhold the current pressure of the continuous economic growth, this essay raises the question whether our current monetary system creates a growth imperative and if sovereign money is an alternative to overcome this growth imperative. The essay gives an introduction into the function of the two-tier, fractional reserve banking system and reflects the consequences of the “money creation privilege” of modern private banks. Moreover, it is discussed if and how this system creates a growth imperative in our economic system.
Therefore, the neutrality theory of money is criticized as well as the common idea that interest creates growth. Furthermore, the pro-cyclical behavior of private banks and the lack of control of central banks is
discussed as a possible reason for growth imperative. Still as a result there is no systemic necessity to growth based on the monetary system. The monetary system is not a driving condition of the economic growth, but it lays the necessary basis for growth. The essay concludes that it is questionable that the growth imperative can be avoided with sovereign money, especially because the causality goes from economic growth to money creation and not vice versa.
Table of Contents
1 INTRODUCTION
2 THE MONETARY SYSTEM
2.1 HOW THE MONETARY SYSTEM DOES NOT WORK
2.2 HISTORY OF MONETARY SYSTEM
2.2.1 THE MONEY CREATING PROCESS
2.2.2 CENTRAL BANKS
2.3 FINANCIAL SYSTEM TODAY
3 MONEY AND GROWTH
3.1 MONEY CREATION AND GROWTH
3.2 IS THERE A GROWTH IMPERATIVE?
4 SOVEREIGN MONEY
4.1 THE BASIC IDEA OF SOVEREIGN MONEY
4.2 CONCLUSION: CAN SOVEREIGN MONEY DECREASE THE GROWTH IMPERATIVE?
5 QUOTES
Objectives and Topics
This essay explores whether the current monetary system acts as a driver for a structural growth imperative and investigates whether "sovereign money" offers a viable alternative to foster a post-growth economic model.
- The function of the two-tier, fractional reserve banking system.
- The relationship between money creation, debt, and economic growth.
- Critical analysis of the growth imperative within existing monetary frameworks.
- Evaluation of "sovereign money" as a policy tool for monetary reform.
- The interaction between private bank money creation and macroeconomic stability.
Excerpt from the book
2.1 How the monetary system does not work
Critics of the present monetary system already see a fundamental problem in the absence of a profound understanding of the monetary system in society as well as in science. Therefore, the starting point of this essay is to explain the commonly used multiplier model in order to analyze its problems and to transfer them into the larger context of today’s monetary system. The role of banks in the monetary system is often explained as follows (Huber 2010: S.44f).
A private bank receives a certain amount of reserves R from a central bank. Customers can lend money from the bank or save it on their accounts. In order to stay liquid and be able to pay out their customers if they want to get money, the private banks always need to hold a minimum reserve MR of their issued loans L in the amount of x percent of R. The Banks don’t need to hold the money due to nearly equal inflows and outflows but relatively stable stocks. So, the amount of money a bank can lend is: L=R(1-MR) R=Reserve; MR=Minimum Reserves; L=Loans. This continues iteratively, until the credit multiplier gradually reduced by L is zero. Finally, the sum of all credits is: L=R/MR. Let’s assume R is 1000 and x=10%. So, the bank can hand out loans in the amount of 10000: 10000/0.1 = 10000. If x would be only 0,02 the amount would be 50000.
Summary of Chapters
1 INTRODUCTION: This chapter highlights the tension between continuous economic growth and planetary boundaries, introducing the goal of investigating whether the current monetary system hinders a transition to a post-growth society.
2 THE MONETARY SYSTEM: This chapter analyzes the mechanisms of modern banking, including the history of the money creation process and the structural function of central banks and private financial institutions.
3 MONEY AND GROWTH: This section examines the theoretical link between money creation and economic growth, critically questioning whether a growth imperative is inherent in our current monetary structure.
4 SOVEREIGN MONEY: This chapter explores the concept of sovereign money as a potential reform, evaluating its ability to reduce the systemic growth imperative and increase stability.
5 QUOTES: This chapter provides a comprehensive list of literature and sources used to support the arguments presented throughout the work.
Keywords
Sovereign Money, Monetary System, Growth Imperative, Fractional Reserve Banking, Central Banks, Money Creation, Post-Growth, Economic Stability, Financial Crisis, Degrowth, Sustainability, Macroeconomics, Debt, Banking Reform, Currency
Frequently Asked Questions
What is the fundamental premise of this paper?
The paper investigates whether the existing monetary system is a primary driver of the structural growth imperative and if reforming it could facilitate a post-growth economic system.
Which thematic fields are central to the study?
The study centers on the mechanics of money creation, the role of central versus private banks, the concept of a growth imperative, and the policy proposal of sovereign money.
What is the primary research objective?
The objective is to determine if current monetary structures, specifically private bank money creation, necessitate continuous economic growth and if sovereign money can effectively decouple this relationship.
Which scientific methodology is applied?
The work utilizes a theoretical analysis, evaluating existing economic models (such as the multiplier model) and juxtaposing them with post-Keynesian and degrowth critiques of monetary policy.
What specific topics are covered in the main section?
The main sections cover the history and mechanics of the two-tier banking system, the theoretical link between interest and growth, and the operational proposal for a sovereign money regime.
Which keywords define this work?
Key terms include Sovereign Money, Growth Imperative, Fractional Reserve Banking, Money Creation, and Financial Stability.
How does the author define the "money creation privilege" of banks?
The author refers to the ability of private banks to create money through lending as a systemic privilege, which plays a central role in the cycles of credit and potential economic instability.
What conclusion does the author draw regarding the sovereign money proposal?
The author concludes that while sovereign money might increase systemic stability, it remains questionable whether it alone can fully remove the growth imperative, as causality often flows from economic growth to money creation rather than the reverse.
- Citar trabajo
- Tim Mauch (Autor), 2019, The monetary system and sovereign money, Múnich, GRIN Verlag, https://www.grin.com/document/471291
