Abstract
Modern monetary system are complex social constructs. Monetary aggregates—which serve as medium exchange and as a store of value—are all denominated in a unit of account (e.g. the euro), and are classified according to their liquidity: that is, the speed with which they can be converted into cash. But what is the role of private banks in money creation and destruction? How does interbank clearing work, and why are Central Bank necessary to maintain the stability of the payment system? What are the main implications of 21st century monetary contestations (such as cryptocurrencies and local complementary currencies) for sustainability? These are some the main questions adressed in this chapter.
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Notes
- 1.
Since a balance sheet, by definition, is balanced, the following equality is always verified: Assets = Liabilities + Net Worth. Net Wealth (NW) is a residual variable appearing on the liabilities side and allowing to preserve the accounting balance.
- 2.
The latest data are available on the website of the European Central Bank’s statistical warehouse: https://sdw.ecb.europa.eu/.
- 3.
This was not always the case. For example, the British Bank Charter Act of 1844, heavily influenced by David Ricardo, limited the issuance of money by banks to their gold holdings. This system, which caused many banking crises (in 1846, 1857 and 1866) was regularly suspended until the First World War. For a more detailed discussion, see Makoto Itoh and Costas Lapavitsas (1999, pp. 4–24), Political Economy of Money and Finance.
- 4.
In the collective imagination, bank reserves include the coins and notes that depositors entrust to banks. While this is correct nowadays the proportion of coins and banknotes in bank assets is very low: in January 2020, European banks held 35,000 billion in assets, of which cash only accounted for 1230 billion (European Central Bank). The underlying reason is that holding cash induces an opportunity cost, given that cash does not earn interest. Banks therefore prefer to hold their assets in the form of loan portfolios (because their borrowers pay interest on these loans). Note that today, the volume of cash in circulation is largely insufficient to cover the volume of bank transactions. In the euro area, in 2019, cash (coins and banknotes) amounted to €1.2 trillion—only a fraction of the bank deposits in circulation (about €15 trillion). Note also that it is very difficult for a bank to obtain coins and notes from its depositors. Hardly anyone deposits cash at the bank these days. When we use an ATM, it is usually to withdraw cash. And less and less people tend to do so.
- 5.
One can easily understand why the basis rate charged by the Central Bank in return for reserve issues is so often commented on and analyzed in the financial press. For example, banks will pass on an increase in this rate to their borrowers, which will decrease the demand for credit, the creation of new bank deposits, and ultimately how much spending (and income) there is in the economy.
- 6.
This observation only applies to the case of a floating currency (such as the euro or the US dollar); in contrast, in the case of a fixed exchange rate regime, a foreign currency (such as the US dollar in a currency board regime, such as the one in force in Hong Kong) or a precious metal (such as gold in the case of the Bretton Woods system) stands at the top of the payments hierarchy, and limit the Central Bank’s ability to issue limitless liabilities.
- 7.
We follow standard practice by writing Bitcoin with a capital letter, when referring to the system and with a small letter when referring to the pseudo-monetary unit (like the euro, the dollar…).
- 8.
See this video: https://www.youtube.com/watch?v=wJcNuwFyzfg.
- 9.
Website of the Transition Towns Network: https://transitionnetwork.org/about-the-movement/what-is-transition. The movement gained traction in France when it appeared in the documentary film Demain directed by Cyril Dion and Mélanie Laurent, released in 2015.
- 10.
Rob Hopkins is the author of several books on transition cities and runs a blog on transition initiatives: https://www.robhopkins.net.
- 11.
The details of this local resilience plan can be downloaded at this link: https://www.mairie-ungersheim.fr/app/download/11588869999/Transition+Ungersheim+Ed+2015.pdf?t=1490703591.
- 12.
La Nef is a financial cooperative offering savings and loan solutions geared towards projects with a social, ecological and/or cultural purposes. Created in 1988, it is approved and supervised by the French prudential supervisory board, the Autorité de Contrôle Prudentiel et de Résolution (ACPR) as a Specialized Credit Institution.
References
Allais, M. (1999). La crise mondiale d’aujourd’hui: pour de profondes réformes des institutions financières et monétaires. Clément Juglar.
Fare, M. (2016). Rethinking money—Transforming territories, making society. Charles Léopold Mayer.
Goldstein, J. (2020). Money—The true story of a made-up thing. Atlantic Books.
Schumacher, E. F. (1973). Small is beautiful: A study of economics as if people mattered. Perennial Library.
Itoh, M., Lapavitsas, C. (1999). Political Economy of Money and Finance (p. 301). UK: Palgrave Macmillan.
Peacock, M. (2013). Introducing Money (p. 224). UK: Routledge.
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Didier, R., Lagoarde-Segot, T. (2023). Exploring Monetary Systems. In: Lagoarde-Segot, T. (eds) Ecological Money and Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-14232-1_4
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DOI: https://doi.org/10.1007/978-3-031-14232-1_4
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