MONETARY REFORM
A BETTER MONETARY SYSTEM FOR ICELAND
A REPORT BY FROSTI SIGURJONSSON
COMMISSIONED BY THE PRIME MINISTER OF ICELAND
Monetary Reform - A better monetary system for Iceland Edition 1.0 March 2015 Reykjavik - ICELAND
©
2015 Frosti Sigurjónsson
6
Contents
1
Overview and summary ............................................................. 10
1.1 Abstract ......................................................................................................... 10 1.2 The need for monetary reform ............................................................ 10 1.3 Alternatives to the fractional reserve system ............................... 14 1.4 Recommendations .................................................................................... 17
2
Monetary problems in Iceland .................................................... 18
3
The money creation mechanism ................................................. 20
3.1 How commercial banks create money ............................................. 20 3.2 How the Central Bank of Iceland creates money ......................... 24 3.3 The Central Bank's role .......................................................................... 25 3.4 The incentive for creating money ...................................................... 27 3.5 Can the CBI restrain money creation? .............................................. 29 3.6 Do banks simply lend existing money? ............................................ 33
4
The expanding money supply ..................................................... 38
4.1 Measures of money .................................................................................. 38 4.2 Deposits increased by 19-fold in 14 years ..................................... 39 4.3 2001 changes in monetary policy ...................................................... 40 4.4 The money supply and inflation ......................................................... 42 4.5 What enabled expansion of money in the 2000s ......................... 48
5
Fractional reserve issues ............................................................ 56
5.1 Deposit Insurance ..................................................................................... 56 5.2 Lending for speculation vs economic growth ............................... 59 5.3 Commercial banks control the money supply .............................. 61
6
Alternatives to fractional reserve ............................................... 63
6.1 The Chicago Plan revisited .................................................................... 63 6.2 Narrow banking ......................................................................................... 64 6.3 Limited Purpose Banking ...................................................................... 67
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