The Modern Monetary System: Summary

If this chapter has given the student a basic understanding of the nature of a modern monetary system, then it has done its job. By way of review, here are some of the basic points.

• Modern money is a token, not a commodity with a value in non-monetary use. This is not to say that our money has no value. On the contrary: the value of money is what it will buy -- and as modern money will buy a range of goods gold coins could not have bought, it is, in a sense, far more valuable.
• Modern money is a mixture of fiduciary money (obligations of banks) and fiat money issued by government or quasi-government organizations.
• Fiduciary money is a service produced by banks, so-called "banks of issue." These banks create money at some multiple of the reserves they have available to pay claims.
• Complex as this system is, it is hard to imagine an alternative system that would clearly be more stable, workable, and cheap to administer than a well-administered fiduciary money system.
• In our system, money creation is controlled and managed by the central banks, such as the Federal Reserve System. The Central Banks control the creation of money by regulating bank reserves and controlling the amount of reserves available.
• The quantity theory of money teaches us that it is important that the quantity of money be controlled and not increase too fast. Even if the quantity theory is not exactly true, there is no question that the great hyperinflations have been the consequences of uncontrolled increases in the quantity of token money.

In conclusion, the monetary system, complex or simple as it may be, is an essential part of any modern economic system. Without a functioning monetary system, modern production literally collapses. This key component of the market system deserves the time and study required to understand it thoroughly.

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