Traditional economics believes that money is neutral. This means that the choices and preferences people make and have are not affected by the existence of money. According to this view it should not matter whether we use money or engage in barter trade.
If this hypothesis would be true, there would be no point in pursuing monetary reform. The truth is, however, that the so-called neutrality of money is nothing but a myth.
What is monetary reform not?
Before we continue, we need to make clear what we are not discussing:
Though both of the above could be useful in certain circumstances, they are essentially cosmetic operations. Neither does alter the fundamental structure of the financial system.
True monetary reform deals with the question: who issues money? However, we cannot grasp this issue without considering what money actually is.
What is money?
Economic textbooks usually define money by the functions money has:
- medium of exchange
- unit of account
- storage of value
It is important to know the functions of money, but it does not really answer what money is. A better approach to define money is given by Bernard Lietaer and Jacqui Dunne:
Money is whatever the government decides to accept in the payment of tax liabilities (p.27).
This definition has important consequences. If the government decides that people should pay their taxes with tea leaves, tea farmers will become a powerful group in society. Or if the government demands payment with shells, people living on the coast will become powerful.
Government can, in this context, either be national or local government, as long as the are able to impose tax liabilities upon their citizens.
However, Dunne and Lietaer do provide a second, alternative definition of money:
An agreement, within a community, to use something standardized as a medium of exchange (p. 57).
This second type of money, is referred to as common tender as opposed to legal tender.
What is the problem with the current monetary system?
In modern society the government allows people to pay their taxes with credit created by commercial banks. Hence these exert a great deal of economic power, as banks are able to decide to whom they lend money. The problem here is that the interests commercial banks do not necessarily coincide with public interests.
In fact, as pointed out by Richard Werner e,a,, commercial banks tend to extend credit to those purposes which generate the most profit for the banks. And often this means that bank prefer to finance speculators rather than to increasing production by (small) businesses.
From a republican perspective this great economic power of the banks is highly problematic. It allows private interests to undermine the public good. Hence without monetary reform we cannot have a true republican society.
How could monetary reform solve this?
Since the government can establish anything as currency, it could issue its own money and require people to pay their tax liabilities with it. This would shift the power to create and allocate money back to the state. Though this system is far from perfect, however, it is to be prefered to vesting this power into the state rather than to private banks.
In addition to national currency issued by the government, complementary and local currencies such as LETS should be endorsed. Such currencies will not only strengthen local communities but also serve a counter-force to the concentration of monetary power in the (central) government.
Lietaer, Bernard and Jacqui Dunne. Rethinking Money. How new currencies turn scarcity into prosperity. Berrett-Koehler Publishers, San Fransisco, 2013.
Ryan-Collins, Josh, Tony Greenham, Richard Werner and Andrew Jackson, Where does Money come from? A guide to the UK banking system, New Economics Foundation, London 2015.