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Endogenous Theories on Monetary Reform


Many of the old and the wise-men discussed in Part 4 and Part 5 of this series, have influenced and reminded contemporary scholars about the dangers that are inherent in the private banking system.

Well-known scholars thus far have understood that the private banking system is the root cause of the perpetuating debt and unsustainable growth that many countries have been experiencing.

These problems have forced many leaders to propose solutions to the current monetary system.

This movement is known as Monetary Reform, and within the movement there are quite a few different camps. These include;

Fiat Debt-Free Money Reformers (FDF)

Modern Money Theorists (MMT)

Endogenous Theories on Monetary Reform

Islamic Banking Advocates (IBA)

Social Credit Reformers (SCR)

Land Reformers (LR)

Hard Money Reformers (HM)

Competing Currency Reformers (CCR)

While the previous article deals with the exogenous theory for monetary reform, this article elaborates on the proposals of Post Keynesians, who deal with the endogenous theories for monetary reform.


Endogenous Theories on Monetary Reform

Several prominent Post Keynesian academics such as Physicist William Hummel have proposed several endogenous theories to reform the monetary system.

Hummel’s proposal calls for the implementation of a Full Reserve Banking Model, similar in nature to the proposal by economist Stephen Zarlenga.

However, there are notable differences and these will be analyzed further below.

Full-Reserve Banking (FRB)

There several endogenous theories on monetary reform, one of them is the full reserve banking model.

Under a full reserve banking model, each bank has to hold reserves equal to all of its transaction deposits.

Note, that holding all transaction deposits is not the same as a 100% reserve requirement on banks, since investment accounts such as time deposits and savings deposits (which earn interest rates) can still be loaned out.


Transaction deposits are a type of deposit account that have full liquidity. This means that they can be demanded at any time, and must be held in reserve by the bank at all times.

Time deposits are a type of savings account held at a bank, which help earn interest for the depositor. In this scenario, for a depositor wishing to withdraw their money, they must give their bank ample notice ahead of time, before they can withdraw their money.

Savings deposits are similar to time deposits except that they typically produce lower rates of interest. Another difference between the two, is that savings deposits can be withdrawn by the depositor at any time (unlike time deposits), but this may involve transaction fees.

Under the current fractional reserve banking system, a bank acquires new reserves whenever it receives new deposits. However, under a full reserve banking system, these reserves would not create new deposits since they cannot be loaned out in the first place.

Under a full reserve system, banks would only be able to increase their lending power, once they acquire additional reserves.

Banks are currently able to acquire extra reserves by;

  1. Borrowing from the Federal Reserve (Central Bank)
  2. Borrowing from other banks, otherwise known as Inter-bank lending
  3. Selling assets in the open market, otherwise known as engaging in open market transactions

Under a full reserve banking system, the strategies used by banks would have to change in order to acquire extra reserves. The implications of a full reserve banking model on bank lending power is addressed below.


Under a full reserve banking system:

1.) Banks would not wish to borrow from the Fed (or central banks in general) because they would charge higher interest rates on their loans. This option would only be used in emergencies such as bank runs.
2.) Banks borrowing from other banks would not increase the amount of total loans in the economy. Rather, they would only be increasing the amount of loans the borrowing bank can make, while simultaneously causing a reduction in the amount of loans the lending bank can make.
3.) Banks could increase their reserves through open market operations through a sell-off in their assets (not including government bonds).

Hummel argues that the methods outlined above cannot efficiently increase the lending power of a bank.

It would be beneficial for a bank when the central bank engages in open market operations (OMO) with their portfolios.



Open market operations are a form of monetary policy engaged by the central bank, in order to buy government bonds and securities held by commercial banks.

These operations are beneficial for commercial banks since they are able to generate more reserves with the excess liquidity. This excess liquidity allows them to lend more money out to the public.

Open market operations also work in reverse, by enabling the central bank to sell their bonds and securities back to commercial banks in recessionary times.

A full reserve banking system would lead to a significant reduction in bank runs, since commercial banks would have the reserves to satisfy their depositors withdrawals.

However, transitioning from a fractional reserve banking system to full reserve system poses unique challenges to the current status quo.

Hummel describes one of these challenges in his article titled: A Plan for Monetary Reform, where he writes,

Suppose there were 10 units of reserves and 100 units of deposits. The Fed would have to inject 90 units of reserves into the banking system to equal the 100 units of transaction deposits. It would do so by purchasing 90 units of Treasury securities in the open market. However that would also increase transaction deposits by 90 units, and result in 190 units of deposits against 100 units of reserves. Additional purchases by the Fed would increase the reserve ratio further but it would never reach the full 100 percent target that way. However those who sold the Treasury securities to the Fed would not leave the proceeds in their transaction deposits where they earn no interest. Instead they would seek investments to earn a return. Regardless of where they invested the proceeds, however, the excess 90 units of transaction deposits would remain in the banking system until used to buy savings and/or time deposits in banks.

The challenge presented here, is that there is no current mechanism for banks to achieve a 100% reserve ratio since the extra 90 units would remain as transaction deposits rather than time/saving deposits.

As a solution to this problem, Hummel advocates for the creation of a single national depository, that would facilitate the transition from the current fractional system to a full reserve system.

This depository would serve to hold all of the transaction deposits of commercial banks,  removing banks from their role as deposit taking institutions.

In addition, it would neither lend, nor borrow, nor produce interest, on the money held in depositor’s accounts.

Hummel acknowledges the implications of his national depository institution on commercial banks in a full reserve system, where he writes;

Banks could no longer create or accept transaction deposits. However they could continue to offer savings and time deposits, which would be insured by the FDIC up to specific limits. The deposits would be credited to the customers’ respective bank accounts, and the funds would be credited to the banks’ respective accounts in the Depository. Banks would be required to offer payment services against their customers’ respective transaction accounts in the Depository. They would also be required to issue cash against a depositor’s savings account and accept cash as credit to his savings account. In addition to serving the entire private sector, the National Depository would serve the U.S. government, and offer accounts to foreign banks and governments that need to transact in U.S. dollars. All of the Treasury’s funds would be held in its account at the Depository where it would deposit its receipts from Federal taxes and the sale of its securities. Likewise all of government spending would be paid out of the Treasury’s account at the Depository.

Hummel’s proposal for a national depository would relegate banks to play a role as a third party, acting as the middle-man between the depositor and the national depository.

Hummel’s full reserve model has received criticism from various schools of economic thought.

Post Keynesian economist Steve Keen argues that the Full Reserve Banking system does not address the root cause affecting the financial crisis, since it only addresses the creation of money without determining what the money is being utilized for.

Keen asserts his position in his article titled The Debtwatch Manifesto; where he writes,

Technically, [Full Reserve Banking] would work. I won’t go into great detail on them here, other than to note my reservation about them, which is that I don’t see the banking system’s capacity to create money as the causa causans of crises, so much as the uses to which that money is put… The problem comes when that money is created instead for Ponzi Finance reasons, and inflates asset prices rather than enabling the creation of new assets.

In contrast to the Full Reserve Banking model, Keen follows circuitism, an economic theory which strives to analyze how money is created as debt in the economy.



The circuitist model focuses on the horizontal transactions within the economy, and states that money is created endogenously within the private banking sector rather than the public (government) sector.

This model is illustrated below.



Circuitist’s argue that it is currently impossible to pay off the combination of sovereign and private debt that countries have fallen into since it has become unsustainable.

Sovereign debt has become a significant problem for many western democracies, most importantly in Europe.

The problem facing Canada, as indicated in Article 1 of this series, is that the compounded interest charges have exponentially increased Canada’s national debt.

In fact, Keen establishes several models  illustrating the mathematical impossibility of repaying sovereign and private debt.

His models is based upon the financial instability hypothesis proposed by pioneer economist Hyman Minsky. Minsky’s original hypothesis asserted that there are several mechanisms pushing the private sector into accumulating more debt.

Minsky identifies these mechanisms as the three types of economic units in society; Hedge units, Speculative units, and Ponzi units.

Minsky elaborated on these types of economic units in his paper titled: The Financial Instability Hypothesis, where he wrote,

Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on “income account” on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to “roll over” their liabilities: (e.g. issue new debt to meet commitments on maturing debt).For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations.

Minsky argued that the total accumulation of debt by these 3 economic units will continue up until a point in time when the debt will no longer be sustainable by the economy.

Many economists have referred to this point in time as the “Minsky moment“.

Mark Carney publicly spoke out on the impending financial catastrophe when he acknowledged in a speech that “The Minsky Moment has arrived.”

Having been a pupil of Minsky, Keen has proposed his solution to the Minsky moment.

He argues that the government should undertake the following actions;

  1. Implementation of a Debt Jubilee
  2. Nationalization of the banking sector
  3. Creation of Jubilee Shares
  4. Adoption of the PILL Proposal


1.) Debt Jubilee

Keen’s proposal for a debt jubilee involves in the write-off of all private sector debt within the economy.

All too often, the current narrative in the global economy today has been governments facilitating in bailouts to creditors (commercial banks) at the behest of tax payer money, in order to keep the financial system afloat.

Naturally, this “piece meal” solution tends to favor the creditor who would simply maintain the debt rather than help the debtors directly.


For this reason, Keen proposes in a debt jubilee since it would serve to grant money to the debtor in order to facilitate their repayment of the debt, rather than bailing out the creditor who would just maintain the debt.

Keen elaborates on his proposal in his article titled: The Debtwatch Manifesto where he writes,

A modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.

2.) Nationalization of the banking sector

Since the government has deferred the power of money creation entirely into the hands of private banks, Keen’s solution first involves nationalizing the banks, so that the government could fund the debt jubilee process.

However, simply eliminating the level of debt would not address the root cause of the private banking system.

Keen argues that the banks are the root cause since they encourage the risky speculative behavior that has led to the Minsky moment in the first place.

One aspect of this speculative behavior involves the buying and selling of company shares on the open market.

Keen’s solution to this problem is in the adoption of Jubilee shares, that would eliminate the incentives to speculate on share prices.

3.) Jubilee Shares

Jubilee shares act like normal shares except also having an expiry date.

Keen suggests that if these shares are resold more than two times in the secondary market, then they should be given a 50 year expiry date.

The purpose of this expiry date would be to discourage borrowers from taking loans to buy shares in order to profit off of the appreciation of share prices.

Keen’s proposal on Jubilee shares also ties in with his proposal to reduce the lending power of banks for mortgages.

4.) Property Income Limited Leverage (PILL)

Keen proposes a limit in the amount banks can lend for mortgage financing in order to prevent another sub-prime mortgage crisis.

This proposal would establish the maximum limit on a loan that can be granted in order to purchase a property, based on the valuation of the property itself.

Keen provides a clear example of his proposal where he writes,

I instead propose basing the maximum debt that can be used to purchase a property on the income (actual or imputed) of the property itself. Lenders would only be able to lend up to a fixed multiple of the income-earning capacity of the property being purchased—regardless of the income of the borrower. A useful multiple would be 10, so that if a property rented for $30,000 p.a. [per annum], the maximum amount of money that could be borrowed to purchase it would be $300,000.

Keen advocates on the PILL proposal because he believes it will reduce the chance of another housing bubble occurring in the economy.

Keen’s proposals for monetary reform has generated criticism, particularly against a debt jubilee, because it leads to the following problems;

  1. Moral hazard
  2. Inflation
  3. Government control over money creation
1. Moral Hazard

Critics have spoken out against a debt jubilee because they argue that individuals should be responsible for the debt they accumulate.

They state that financially reckless individuals should not be absolved from their debts because this promotes and encourages reckless behavior, thus creating a moral hazard for the economy.

Moral hazard is a concept that states people will take risks if they have an incentive to do so. The idea centers on the belief that people might ignore the moral implications of their choices and instead, do what benefits them the most.

Interestingly, many of the criticisms lobbed against a debt jubilee have been made by the very banks that received bailouts for their own reckless behavior.

Keen counter-argues his critics, arguing that the debt jubilee would apply to everyone, whether they were, or were not in debt.

This is because he believes that it is not the fault or responsibility of the person for sinking into debt, but rather on the banks since they have incentivized, and encouraged risky speculative behavior.

2. Inflation

Critics also argue that the debt jubilee will cause inflation, and will lead to a significant reduction in the purchasing power of the people.

Keen responds to this by arguing that the jubilee will not be inflationary at all, since the newly created money will mainly be used in order to pay off old debts. And as old debts are repaid, the money supply will shrink, with the net increase in the system having a marginal effect on the economy.

3. Government control over money creation

Critics also disagree with Keen on his proposal because it would involve government intervention in the economy. They argue that Keen’s proposals would strengthen government control over money creation.

The criticisms against his proposals reflect different schools of economic thought.

Austrian economists oppose his proposal on the grounds that the government could very easily manipulate the money supply for their own political gain.

Keen rebuts, arguing that the monetary system is better off under the control of the government, than in the hands of private banks since it has an obligation to the people; whereas banks possess no moral obligation to the public, and thus are more likely to abuse their power to create money.

Keen’s argument has relevance to Canada’s case since private banks have locked the government into a perpetual cycle of debt with predatory compound interest rates.

There are many other proposals that call for monetary reform, and they also focus on changing the nature of the monetary system from the ground up.

The financial crisis that has rippled through western democracies has not had as significant an impact on the Islamic banks as of yet, which has led some to investigate in it’s success.

Islamic banking is analyzed in greater detail in Pt 12.


Part 1 – The Overview of Canada’s Current Financial Position

Part 2 – How the Monetary System Works

Part 3 – The History of the Bank of Canada

Part 4 – The Dangers of Usury in the Banking System

Part 5 – The Dangers of Usury in the Banking System Pt 2

Part 6 – The Loss of Canadian Sovereignty

Part 7 – The Decline of Canada’s Economic Environment

Part 8 – The Movement for Monetary Reform

Part 9 – A Review of the Fiat Money System

Part 10 – The Fundamentals of Modern Money Theory

Part 12 – Principles of the Islamic Banking System

Part 13 – A Review of the Social Credit Money System

Part 14 – Henry George and the Land Reform Movement

Part 15 – A Review of the Austrian School of Economics and the Gold Standard

Part 16 – Currency Competition and Alternative Money Systems

Part 17 – The Shadow Banking System

Part 18 – Economic Recovery at the End of the Road


Comments (4)

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