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What Is Monetary Reform?

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  • Written By: Helen Akers
  • Edited By: Jessica Seminara
  • Last Modified Date: 07 November 2016
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    2003-2016
    Conjecture Corporation
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Monetary reform refers to any school of thought that proposes a change in the way the money supply is created. It can also include how the money supply is controlled and who has the authority to influence it. Some monetary reform theories call for improvements or changes in the way the current system distributes money.

One of the oldest monetary reform theories is the gold standard. This theory calls for a central bank to back up or secure all of the economy's circulating money with gold. The gold standard prevents economic collapse by ensuring that all debts and liabilities are able to be fulfilled in the event of massive withdrawals against assets.

When a customer deposits funds with a bank in an asset account, such as a savings plan, those funds are used by the bank to make loans to other customers. The bank counts on the fact that only a certain percentage of those asset funds will be withdrawn at certain times. It also uses the funds it receives from credit and loan repayments to circulate money back to customers who make withdrawals against their asset accounts.

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If for some reason too many withdrawals would be made against those asset accounts, the banks would need to turn to some source of funding to fulfill their obligations. One of the reforms that were put into place following the Great Depression in the United States was the creation of Federal Deposit Insurance. The insurance was implemented as part of a monetary reform that placed control over the money supply into the hands of the government and its central bank. Mainly designed to prevent mass consumer panic and bank runs on deposit accounts, it also ensured that the government was able to funnel money back into the economy if banks failed.

Some monetary reform theories call for government ownership and control of a central bank, while others wish for it to remain independent. When a federal government controls a central reserve bank, it has the ability to simply print the money that it needs. In addition to influencing the money supply by issuing bonds or securities, the government can increase the amount of money in the system by funneling additional funds through commercial banks. Some theorists call for the money to be lent to commercial banks interest-free, while some think those funds should come directly from the government itself.

Another monetary reform theory centers around the idea of full reserve banking. The idea behind full reserve banking is that lending institutions are not able to lend out deposited funds. When a customer deposits funds in a checking or savings account, those amounts are kept and secured. Under a full reserve banking system, those funds must be held in cash.

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