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Why don’t most mainstream experts recognise the relevance of monetary reform?

September 30, 2014

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Professor Joseph Huber writes:

In preparation for the 10th Annual Monetary Reform Conference in Chicago next week, organised by the American Monetary Institute, I have extensively revised the paper Sovereign Money in Critical Context: responding to criticism of monetary reform from a variety of economic viewpoints.

A few points made in Huber’s consideration of mainstream economists’ failure to recognise the relevance of monetary reform

joseph huber (2)You may certainly not want to re-read the entire paper here: www.sovereignmoney.eu/sovereign-money-in-critical-context
or via www.sovereignmoney.eu/papers-and-manuscripts/, but you might be interested in the new passages at the beginning of the paper on why many mainstream economists do not recognise the relevance of monetary reform or why economists of Keynesian origin for the most part think they have no problem with the present banking regime. This is followed by rounding up key components of New Currency Theory.

Why do most mainstream experts not recognise the relevance of monetary reform? By mainstream economics I mean American textbook standard economics.

By these standards, money does not appear to be particularly important. Making money is seen as the major motive driving the economy. The function of money in exchanging the output on markets is to mediate and facilitate exchange. Beyond this, however, money is considered to be of little importance.

If one believes in this doctrine of neutrality of money, dysfunctions of the money system are not recognised as a subject of concern, despite all financial crises and mainstream economists find it difficult to see why monetary reform might be of relevance. Economic textbooks may well have 600–1,000 pages, but the passages on the monetary system usually count 10–20 pages―which is a smaller percentage even than those given to the fractional reserve base in the present banking system.

The confusion of token fiat money and bank credit is a core element of banking doctrine

Commentators overlook the fact that money creation and money lending/spending are two different functions, but carried out in one act in the present credit-money or debt-money system. Wrongly identifying credit and money leads critics to deny that in a modern money system the money supply in circulation can be debt-free.

As long as economists stick to the identification of money with credit, their support for monetary reform is likely to be lukewarm at best.  

Some schools of Keynesian descent reinterprete the monetary system. One put forward by Modern Money Theory (MMT), is problematic and misleading.

Online information: Modern Money Theory: A Reply to Critics: MMT, also known as neochartalism, is an economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e., fiat money. According to modern monetary theory, “governments with the power to issue their own currency are always solvent, and can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints”.

Huber comments: “If public debt and public expenditure equal sovereign-money creation, and if a sovereign government allegedly can create as much of it as it deems decent, then it seems to follow that a sovereign government is always solvent and need not default. Deficit spending and sovereign debt thus appear to be monetarily and financially irrelevant and economically only beneficial, while monetary reform, again, appears to be irrelevant and unnecessary”.

Though postkeynesianism and its offshoots describe the contemporary monetary system in an accurate way under operational aspects, they apparently consider the system to be functional rather than dysfunctional. In other words, they do not attribute financial instability and crises to the monetary system of fractional reserve banking. Accordingly, they see no reason to think about monetary reform.

hyman minskyOne distinguished financial economist who did see the need for reform was Hyman Minsky. He presented the financial instability hypothesis, that credit and debt bubbles not only feed from secondary on-lending of existing money, but before this from primary bank credit evermore adding to overshooting money supply. Accordingly, at one time he thought about a special arrangement of separate banking, namely the separation of money and payment services from the lending and investment business of banks, in order to restrict the power of banks to create primary credit (bank money).

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