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The economics of decentralized money and banking

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  • Robert Wutscher

Abstract

The notion that the rate of interest is the price of money, a variable that equilibrates money demand and money supply, appears to have emerged as a direct translation of supply and demand as it operates on the goods market into the world of finance. This paper argues that the rate of interest should not be seen as an equilibrating mechanism of this sort, nor should it be treated as a natural tool for regulation of price levels; rather, it is the mechanism that, only under a properly designed decentralized monetary and banking system, however, maintains real capital equilibrium, regulating money flows between the real and the financial sectors. This process is negated by the centralized use of short-term interest rates as policy tools. It shows how, in a well-designed decentralized free banking system, bank credit extension would be counter-cyclical to the liquidity fluctuations of the public.

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  • Robert Wutscher, 2024. "The economics of decentralized money and banking," SN Business & Economics, Springer, vol. 4(11), pages 1-25, November.
    • Handle: RePEc:spr:snbeco:v:4:y:2024:i:11:d:10.1007_s43546-023-00493-6
    DOI: 10.1007/s43546-023-00493-6
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    References listed on IDEAS

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    1. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," European Economic Review, Elsevier, vol. 44(4-6), pages 713-718, May.
    2. repec:ejw:journl:v:2:y:2005:i:2:p:279-324 is not listed on IDEAS
    3. Michael Bordo & Andrew Filardo, 2005. "Deflation in a historical perspective," BIS Working Papers 186, Bank for International Settlements.
    4. Beckworth, David, 2007. "The postbellum deflation and its lessons for today," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 195-214, August.
    5. Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it? [‘The macroeconomics of low inflation’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 20(44), pages 800-844.
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    Cited by:

    1. Robert Wutscher, 2025. "The Economics of ‘Spontaneous’ Plan Coordinated Growth under the Decentralised Money and Banking Alternative," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 17(3), pages 1-17, March.

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    Keywords

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    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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