The Monetary Reform Debate as the Continuation of the Long-Standing Currency vs Banking School Debate and the Identification of Its Long-Overdue Resolution

Aim. Since the 2008 crisis, an increasing number of economists and commentators have been calling for fundamental reform of our monetary system and financial architecture. In particular, banks have been heavily criticised, and policy proposals include the demand to abolish banking. Such calls for monetary reform are not new. in 19th  century England, a policy debate among economists and policy-makers fell into two main camps, the so-called Currency and the Banking Schools. The former argues for centralisation of money issuance, the latter for decentralised money creation. Theses and methods. We show that present debates on reforming the monetary system, including introducing central bank digital currencies and a drastic shrinkage (if not elimination) of commercial banking, continue this familiar dichotomy, of which the protagonists seem unaware. in addition to pointing out that present-day debates about monetary reform merely restate the centuries-old positions of the Currency and Banking School protagonists, we argue that it is high time to resolve the dichotomy between the two schools. We do this by presenting and explaining an empirically successful compromise between the extreme positions of the two schools of thought that achieves the goals of both. Results. It consists of the successful decentralised banking structure of countries such as Germany, whose banks are mostly not-for-profit enterprises in public and/or local hands that lend mainly for productive business investment, while a central bank exists that can avoid crises by monitoring aggregate bank lending for non-GDP (asset) transactions. Conclusion. We believe this constitutes an important contribution to the present debate about the potential reform of national and international financial architectures.

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