Abstract for: The Heads and Tails of Money Creation and its System Design Failures -- Toward the Alternative System Design
Concerning the creation of money under the current fractional reserve banking system of debt money, two theories have confusingly coexisted among economics profession for more than a century; the one that regards banks as intermediaries of deposits, and the other as credit creators out of nothing. They are based on two different ways of understanding banking processes of money creation, and called here flow and stock approaches of SD modeling, respectively. The purpose of this paper is threefold. First, these two approaches are shown to be identical as if they are head and tail of the coin, bringing century-long confusions to an end. Secondly, using the model of stock approach, the current monetary system is shown to be unstable in the sense that it causes booms and busts and leads to recent failures of QE policy. In other words, the debt money system is demonstrated to entail system design failures. Thirdly, the alternative monetary system preventing monetary instabilities is fully explored. It is the monetary reform of the Chicago Plan proposed in 1930s after the Great Depression in 1929. The alternative system is shown to attain monetary stability. As its by-product, debt liquidation of government is shown to be attained concurrently.