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A monetary system is a system where a government manages money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint, central bank and .
Choice of monetary system affects inflation rates, trade balances, and exchange rates. Throughout history, countries have used various approaches, including commodity money like gold, representative money backed by precious metals, and modern fiat money backed by government authority.
A 20th-century variation was bimetallism, also called the "double standard", under which both gold and silver were legal tender.Velde, Francois R., "Following the Yellow Brick Road: How the United States Adopted the Gold Standard". Economic Perspectives, 4th Quarter, 2002. Available at SSRN: http://ssrn.com/abstract=377760 or
The central bank does not directly fix the amount of currency in circulation. Money creation is primarily accomplished via lending by . Borrowers who receive the money created by new lending in turn affect the stock of money, as paying off debts removes money circulating.
Although commercial banks create circulating money via lending, they cannot do so freely without limit. Commercial banks were required to maintain an on-hand reserve of funds equaling a portion of their total deposits banks (Large banks in the United States, for example, had a 10% reserve requirement until eliminated in 2020.) Central banks set interest rates on funds available for commercial banks to borrow short-term from the central bank to meet their reserve requirement. This limits the amount of money the commercial banks are willing to lend, and thus create, as it affects the profitability of lending in a competitive market.
In times of economic distress, central banks can act as a borrower to prompt the creation of new money as well; during quantitative easing they will buy and mortgage-backed securities.
Under the stamp scrip system proposed by Silvio Gesell, every bill of paper money had a set of 52 printed boxes (4 x 13), and a stamp worth 0.1% of the bill's face value would have to be purchased and stamped onto the bill's boxes each week in order to keep the money valid as legal tender. A central bank would issue the demurrage currency. Since the supply of money would gradually deplete due to demurrage, the central bank would be responsible for monitoring the money supply and printing to replace all the money that disappears due to demurrage. The money printing could create just enough inflation to cancel out the natural deflation of demurrage, thus achieving an inflation target of 0%.
Under a fiat monetary system, inflation effectively works as a hidden tax. Under a demurrage monetary system, currency would have demurrage fees instead of inflation, which would be a more explicit and easier to measure tax on money. In Gesell's proposed system, the individual owners of Freigeld would pay the demurrage fee for the stamps to the government, thus reducing the amount of other taxes that a government would have to collect.
If individuals do not want to pay the demurrage fees, they could deposit their money into a bank. The bank would become responsible for paying for the stamp fees, and the money would retain its full value from the depositor's perspective. Bank would thus be incentivized to loan the money in order to pass the holding expense onto others and avoid paying for the stamps, which would guarantee that plenty of money would be available for lending in the economy. Gesell believed that banks would loan until their interest rates eventually fall to zero. Banks would collect only a small risk premium and an administration fee, without any need to adjust for inflation or deflation.
In some cases, demurrage currencies have been employed as Notgeld, intended to keep the circular flow of income running throughout the economy during recessions and times of war, due to their faster circulation velocities.
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