Financial Innovations and Monetary Reform: How to Get Out of the Debt Trap 3031241886, 9783031241888 Written by two leading experts on multinational accounting and

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Financial Innovations and Monetary Reform: How to Get Out of the Debt Trap
 3031241886, 9783031241888

Table of contents :
Foreword by Jacques de Larosière
Foreword by Raphaël Douady
Introduction: Monetary Representation and Economic Reality
About the Authors
1 Short History of Money from Antiquity to the Twenty-First Century
1.1 The Origins
1.2 Caesar and Augustus: Legal and Financial Reforms
1.3 The Last Turn to Modern Money: The U.S. Default on Gold in 1971
2 The Evolution Toward Modern Money and the Path Toward Digital
2.1 Money and Accounting Are Closely Linked
2.1.1 Financial Statements: Defining the Real World and the Financial Universe
2.1.2 The Real World and the Financial World
2.1.3 The Basis for the Expression of Today’s Money
2.1.4 Stock Markets Influence Financial Statements; Monetary Transmission
2.1.5 One Global Language, Accounting
2.2 The Uniqueness of the Transcription of Exchanges
2.2.1 The Principle of the Double Part
2.2.2 The Principle of the Annual Exercise: Integrate the Time Factor
2.3 Accounting for Liabilities
2.3.1 Accounting for Financial Instruments at “Fair Value” (Addressed by IFRS 9)
2.3.2 A New Vision of Accounting in a New World
2.3.3 The Shortcomings of Accounting
2.3.4 Lessons Learned from the Uncertainties of Reading the Books
3 The Current Model, the Role of Central Banks
3.1 The Interaction Between the Real World and the Financial World
3.2 The Traditional Role of Central Banks
3.3 The Issue of Profits and Taxation
3.4 The New Positioning of Central Banks
3.5 Central Bank Accounting and Data
3.6 Functions and Tools of Central Banks
3.7 The New Crisis
3.8 The Transmission of Monetary Policies to the Non-Financial World
3.9 Rates and Volumes Are the Key Tools of Central Banks’ Monetary Policies
3.10 Risk Borne by Central Banks
3.11 The Relationship Between the Real World and the Financial Universe from the Point of View of Transaction Monitoring by the Central Bank
3.12 Disconnections Between the Real World and the Financial World and Leaks in the Information System
3.13 Reducing the Scope of Central Bank Action
3.14 The Monetary Aspects of Distribution
4 The Monetary World and Its Analytical Tools
4.1 Exchanges Are the Source of Monetary Instruments
4.2 Update on the Coherence of Currency Spaces and Its Consequences
4.3 The Transformation of the Monetary World
4.4 The Monetary Unit
4.5 Distinctions of the Medium, the Standard and the Blockchain
4.6 The Stamping and the Standard
4.7 The Right to Issue a Standard
4.8 The New Approach of the Bank for International Settlements (BIS)
4.9 Conceptual Discussion for an Expanded Monetary Approach
4.10 The Necessary Development of the Observation of the Single Financial Space
4.11 M5 and M6: Derivatives and Separation Between Instruments
4.12 The Landscape of Exchanges Through M5, M6
4.13 Analytical Objectives of Exchange Rate Observation
4.14 The Classification of Instruments
4.15 Exchangeability Between Instruments
4.16 The New Paradigm
4.17 The Power of Seigniorage and Its Challenges Today
4.18 A Formula Test: STD (Serval, Tranié, Douady)
5 The Monetary System, the Issues
5.1 What Does the Word “System” Mean When It Comes to Money?
5.2 Description of the Existing System
5.3 System Foundations—Independence and Sovereignty
5.4 Central Banks at the Base of the System
5.5 The American Federal Reserve Bank’s Objectives
5.6 The Central Bank of the European Union “ECB”
5.7 The People’s Bank of China (PBoC or PBC)
5.8 What Does Central Bank Independence Mean?
5.9 International Monetary Institutions
5.9.1 The International Monetary Fund (IMF)
5.9.2 The World Trade Organization (WTO)
5.9.3 The Bank for International Settlements (BIS)
5.9.4 The Main Institutions Involved in Transnational Lending
5.9.5 The World Bank Group (WBG)
5.9.6 Regional Development Banks
5.9.7 Issues to Be Discussed for the Implementation of a Renewed Monetary System
5.9.8 Financial Market Infrastructures (MFIs)
5.9.9 The G20 Distinguishes Three Categories of Infrastructure
5.9.10 Attempts to Propose Alternative Solutions to Risk Concentration
5.9.11 An Extended Stabilization System from the CCPs (Central Clearing Counterparty) Could Be Considered
5.9.12 Topics Not Yet Adequately Addressed by Monetary or State Institutions
5.9.13 International Coordination, from G7 to G20
5.9.14 The Current Situation
5.9.15 The Financial Stability Board (FSB): The Necessary “Strange Animal”
5.9.16 Toward a New World
5.9.17 Intermediate Synthesis
6 The Monetary Reform, Its Stakes and Its Modalities
6.1 The Standard as the Central Issue of a Renewed International Monetary System
6.1.1 Why Would a Clear Separation Between the Unit and the Support Be a Positive Step Forward?
6.1.2 How to Protect the Inviolability of the Standard?
6.1.3 What Exchange Rate Parity with Other Currencies Should Be Adopted?
6.2 The Objectives of Monetary Reform Within the Framework of an International Treaty
6.3 What International Conference? Leadership Requirements, Participants and Transition Process
6.4 The Rise of the FSB
6.5 The G20 as a Political Leader for International Coordination
6.6 Technical Skills: BIS and IMF
6.7 The Role of Central Banks Needs to Be Redefined
6.8 The Place of Companies in the New Monetary Framework
6.9 OECD Governance
7 The Reduction of Public Debt, the Heart of a Monetary Reform
7.1 Possible Ways to Reduce Debt
7.1.1 The First Path: Provoke the Reduction of the Value of the Instruments by the Rise of the Rates
7.1.2 A Second Path to Debt Reduction: Organized Debt Clearance
7.1.3 The Third Way: Converting Debt into Equity
7.2 Implementation of a Public Debt Reorganization Scheme
7.2.1 Debt Reduction Process in the Western World
7.2.2 Feasibility of the Exchange Project for Western Countries
7.2.3 Reminder of Some Basic Data
7.2.4 Principle of the Transformation of Public Debt into Investment Securities
7.2.5 A Major Entrepreneurial Project at the Heart of a New Economic Paradigm
7.2.6 A Dynamic Process to Build
7.2.7 The Transformation Process
7.3 A—The General Dimension of the Project
7.4 B—The Debt Transformation Process for the Eurozone
7.4.1 Creation of a Hive-Off Fund Called Transformation Fund or “TF”
7.4.2 The Exchange of Acquired and Subscribed Shares for Debt
7.4.3 Neutralization of Public Debt by Allocation of Securities Representing Investments
7.4.4 Joint Commentary on the Taxation, Trading Process and Legal Status of Trading Rights in Projects
7.4.5 The Specificity of the Exchange Scheme
7.4.6 An Unavoidable Transformation
7.5 C—The Process for the US Dollar Zone
7.5.1 A Realistic Global Objective
7.5.2 The 60% Cap
7.6 D—Countries that Do Not Have Monetary Autonomy (So-Called Peripheral Countries) and Asian Countries that Together Form a Fast-Developing Zone
7.7 E—Project Availability, Side Effects and Common Currency Issues
7.8 F—Common Success Factors, Coordination and International Aspects: Moving Toward a Multilateral Monetary World
7.8.1 The Conditions and Challenges of a Successful Transformation Plan
7.8.2 The Deployment of the Device and its Requirements: No Speculation
7.9 Conclusion
Appendix A: The HTDA Project to Track Exchanges in a New Digital Monetary Universe
Appendix B: Glossary
Appendix C: List of Central Monetary Institutions

Citation preview

Future of Business and Finance

Jean-François Serval Jean-Pascal Tranié

Financial Innovations and Monetary Reform How to Get Out of the Debt Trap

Future of Business and Finance

The Future of Business and Finance book series features professional works aimed at defining, analyzing, and charting the future trends in these fields. The focus is mainly on strategic directions, technological advances, challenges and solutions which may affect the way we do business tomorrow, including the future of sustainability and governance practices. Mainly written by practitioners, consultants and academic thinkers, the books are intended to spark and inform further discussions and developments.

Jean-François Serval · Jean-Pascal Tranié

Financial Innovations and Monetary Reform How to Get Out of the Debt Trap

Jean-François Serval Groupe Audit - Serval & Associes Neuilly sur Seine, France

Jean-Pascal Tranié Aloe Private Equity Paris, France

ISSN 2662-2467 ISSN 2662-2475 (electronic) Future of Business and Finance ISBN 978-3-031-24188-8 ISBN 978-3-031-24189-5 (eBook) © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

From the authors, an admiring and friendly thanks to Mr. Denis Bachelot, economic journalist, the ruthless proofreader of this work. It is idea by idea, line by line, with great logical rigor, that he contributed to the coherence and clarity of our reflection on money to better bring it to the attention of the reader and allow this book to exist.

Foreword by Jacques de Larosière

It certainly takes a great deal of intellectual audacity to tackle the issue of international debt with the firm intention of finding a solution to this challenge that is mortgaging the world’s economic future, after decades of fiscal laxity. And Jean-François Serval and Jean-Pascal Tranié are not lacking in audacity with the publication of this new book, which puts forward concrete proposals to meet the challenges of debt. In their first book “La Monnaie virtuelle qui nous fait vivre”,1 the authors had already demonstrated their particularly detailed knowledge of the mechanisms of the monetary economy. This 2010 text, with its premonitory title, analyzes the financial crisis that marked the end of the 2000s, known as the “subprime” crisis, with regard to the mutations in financial innovation that have allowed for the almost unlimited creation of “monetarized” financial instruments, sources of “virtual” money, since there is no counterpart in the creation of real wealth. This observation of a new monetary space, outside the radar of central banks, led the authors to formulate one of the key ideas of their book, an idea that we shared at the time: the definition of new tools for analyzing monetary flows, called M5 and M6, which encompass the entire space in which economic agents operate and thus make it possible to grasp, in the most complete way possible, the reality of the financial assets that are used for exchanges and the values that underlie them. In a second book, published in English, “The Monetary System: Analysis and New Approaches to Regulation,”2 Jean-François Serval and Jean-Pascal Tranié set out the framework for regulation that is better adapted to the stability needs of the financial world, thanks to the statistical possibilities offered by the data captured by the expanded monetary space represented by M5 and M6. A better perceived reality and a better controlled reality. This third volume aims to build a new stage in this edifice: the outline of a global reform of the international monetary system—a reform that proposes the establishment of a renovated monetary universe based on the current institutions


Serval J.-F., Tranié J.-P., La Monnaie virtuelle qui nous fait vivre, 2010, Eyrolles. Serval J.-F., Tranié J.-P., The Monetary System: Analysis and New Approaches to Regulation, 2014, John Wiley & Sons Inc. 2



Foreword by Jacques de Larosière

that organize international financial life and advocates the creation of a new standard, in a world where monetary issuance has been freed from all restrictive constraints since the abandonment of the gold standard in 1971. But more than that, this book puts forward a resolutely innovative approach, the central idea of which consists in transforming sterile financial masses that no longer have any economic reality because they no longer bear interest into wealth creation. To facilitate the return to the real economy, they propose that a significant part of public debt be converted into equity capital in the world of business and goods production, with the aim of finding new profitable investment projects. The idea is audacious, as we have said, and the authors endeavor to demonstrate its technical feasibility. The demonstration is convincing and appears relevant to “getting out of the debt trap,” while accompanying, through the mass of investments mobilized, the great technological transformation underway in the world economy. The challenge we face is first and foremost one of production, which is the only way to provide a concrete response to the question of debt through the creation of new wealth. In this approach, money must remain as neutral as possible with respect to exchanges and therefore not interfere with the supply and demand mechanism, which must play its full role. This objective depends first and foremost on the actions of central banks, the authors emphasize. The latter must regain their role as guardians of the monetary system, whereas over the last few decades the evolution of the financial economy has created money beyond all limits. Finally, we are convinced that this investment and production approach accompanies a movement that is already well underway, that of setting up vast national and international investment programs in major infrastructure and research projects in innovative sectors. China was the first to set an example with its new Silk Roads projects, the basis for a Chinese network of the world economy. Now, the United States and Europe are also embarking on major projects involving trillions of dollars or euros, although market forces will have to provide adequate returns on the savings available! The developed world is becoming aware that only the creation of wealth—the increase in production, therefore—can overcome the crushing obstacle of debt. “Monetary Reform” presents an operational framework for achieving this ambition, which must be a priority for the international community. This common objective requires a commitment by nations to a policy of reducing their public deficits, which must pave the way for an international agreement laying the foundations for budgetary discipline among states, an indispensable prerequisite for international monetary reform. Jacques de Larosière Former Managing Director of the IMF, Former Governor of the Banque de France

Foreword by Raphaël Douady

When, on a rainy day in 1715, the Scotsman John Law proposed to the Regent Philip II of Orleans, who ruled France, one of the greatest powers in the world, if not the greatest, whose reserves were at a low ebb after many costly wars started by his uncle Louis XIV “The Great,” to create the first banknotes that were not necessarily backed by a more “hard” asset, such as gold, the Regent and his advisors were at first very reluctant. But they still had a choice: that or chaos. Law’s proposal was finally accepted in 1718. Law did not know that he was setting up a system that would determine the way the economy would function for centuries. Of course, like any visionary, he was convinced that his system was by far the best and that it would solve (almost) all the world’s economic problems and bring universal prosperity. We know the rest of the story but not the end because the story never ends. The system collapsed in just a few years. The experiment was repeated with the “assignats” during the French Revolution in 1790, with similar failure, although in this case a perverse game of the British, who massively printed false currency notes, played a significant role in the failure of the system. John Law’s idea was in fact quite simple: since the state was the only entity capable of ensuring the security of production and trade relations of the country’s economic actors, it could rely on this capacity to issue “guarantees” that could be used by them for their exchanges. Today, indeed, any housewife who is close to her money will tell you that a piece of watermarked paper with a number on it and the signature of a central banker is the safest asset in the world. But what is money today? A simple record in an electronic file: the most secure and the most fragile thing at the same time. Secure because it is copied many times to the cloud and therefore “recoverable” if lost, and fragile because any hacker who can penetrate a securely encrypted system could change its value. More importantly, what rules drive the creation of such a virtual currency? At the individual level, we all know that when we spend $100 to buy something, our bank account decreases by that amount and the merchant’s account increases by the same amount. But at a higher level, what does it mean when a Central Bank “prints” money: it is no longer physically printed, only a number that appears in a secure file is changed. According to what rules? With what limits? What are the consequences? Following the logical approach, what happens when a country ix


Foreword by Raphaël Douady

issues a debt? Certainly not the same thing, whether it is a country of five million inhabitants handling its often important international exchanges in a currency other than its own, or the United States whose currency is also that of others! We often hear words like “this mountain of debt will have to be paid back by our grandchildren,” or that this or that expense, or worse, a bank bailout, is financed by “taxpayers’ money.” What is the reality of these “payments”? This money does not come out of anyone’s pocket. In their first two books, La Monnaie virtuelle qui nous fait vivre and Le Système monétaire, J.-F. Serval and J.-P. Tranié, described the incredible revolution that money has undergone and is still undergoing, to the point of calling into question its fundamental meaning and its use by all layers of the economic system. Their third book deals with the current disequilibrium, after more than ten years of quantitative easing, and proposes avenues to resolve it. These “avenues” are anything but conventional. Going back to the very definition of money, thanks to their immense experience in accounting, supervision and management of large institutions and government entities, and therefore never disconnected from reality, they show how, little by little, we can gradually reduce the unsustainable pile of debt that is burdening the economic system. It is obvious that this book was not written by economists, but by people who know how things work “on the ground.” They not only study the flows of money and goods and their valuation, but also observe who pays what for what service, why this or that person makes this or that decision, borrows or lends, enters into derivative contracts and so on. What are the costs, benefits and risks for them? Including the rationalization of taxes… They consider nations as economic agents, confronted with their constraints and needs, and with all their refinancing possibilities. Then, they start to dream a little: suppose that we live in a wonderful world with fully cooperative nations, wanting the best for themselves and for the world at large (amazingly, the two are aligned!) What would be the best strategy to adopt? To erase all debts that can be erased, to abandon the dollar king for an international currency that would be backed by real assets spread throughout the world, etc. Of course, an impossible alignment of fiscal policies between countries would be necessary for a logical approach if we want them to be neutral on monetary actions. Then, the bell rings and they have to wake up. So, let’s see what we can do that most resembles the dream they just had. Perhaps we should first clarify what can be clarified: it is easy to do because within the same economic group, i.e., companies linked by financial control, debit and credit claims compensate each other. This is what accounting professionals call “consolidation.” The next step is a global cleaning of the “debt loops” between firms, in order to reduce the general level of leverage in the economy, the main source of financial instability, as Hayman Minsky rightly observed more than half a century ago… This reminds us of the famous anecdote: a rich tourist arrives at a small hotel in a beautiful village, a little slice of paradise on the shores of the Mediterranean (for the sake of political correctness, I’ll omit the actual countries that were named for the tourist and the village when I first heard it). The tourist wants to visit the hotel rooms to see if they are suitable for his family. The owner welcomes him and calls a maid

Foreword by Raphaël Douady


to accompany the potential guest, but asks the tourist to pay a deposit of e100, which he will return if he decides not to stay. The tourist has no problem with this and gives the owner a bill for e100 and goes up the stairs with the cleaning lady. Immediately, the hotel calls the restaurant, to whom he owed 100 e. The restaurant calls the wine merchant, to whom he also owes e100. The wine merchant calls his mistress, to whom he had promised a gift of e100. The mistress rushes to the hotel to pay for the room she used with her other lover. When the tourist returns after visiting all the rooms, he gets his deposit back and doesn’t know that he has just settled all the debts of the village. This colorful story illustrates the original role of central banks in the banking system with “quantitative easing”: to provide the liquidity necessary for the system to function without fail after the 2008 disaster. With a little foresight, one could have foreseen the drift of the system: governments, banks and other businesses taking advantage of easy money and near-zero (if not negative) interest rates, instead of limiting the use to clearing and stimulating the most active part of the digital revolution. However, for many political and social reasons (which we will not discuss here, whether good or bad), debt has accumulated in all areas of the economy. Sovereign debt, of course, but not only: students, households, real estate (yes, again!), SMEs, pensions (whose liabilities are increasing as life expectancy increases), insurance and reinsurance companies (which are facing more and more frequent catastrophic events due to global warming), etc. At the same time, thanks to the digital revolution, unicorns are hatching every day, while the “GAFAMs” continue to grow, despite their gigantic size. So, money and “rich tourists” are always there to help. The once “emerging” countries, now “emerging,” are creating new cohorts of consumers, while becoming tough competitors for producers in the developed countries. Having a global understanding of this world context, taking into account the particular legal, social and cultural context of each region of the world (especially in Japan and other Asian countries), Serval and Tranié follow the path traced by Einstein. They observe, as in the Mediterranean village, that for humans, flows have as much importance as value. In Einstein’s theory of relativity, we cannot know the speed of movement of the Earth, the Sun or the Milky Way, our galaxy. We cannot conclude on a hierarchy of the relative motion of one with respect to the other. We can observe that the Earth does not have a strict linear motion, because of the Coriolis force. But it would be much more complicated to say whether the Sun moves in a straight or curved line in the Milky Way, and we cannot say whether Andromeda is moving toward us, or whether we are moving toward Andromeda. Both are correct, it is just a matter of reference. Daring to draw a parallel with debts, this “compensation” operation is only a change in the position of the ocean floor, i.e., a change in values that does not affect the surface of the water, the money flows. This could explain, at least in part, the very low interest rates by a simple artificial inflation of capital values without changing the flows. If capital values were reduced to “normal” levels, interest rates would naturally return to their historical average, in order to align the remuneration of resources, labor and capital.


Foreword by Raphaël Douady

Like the best science fiction novels, this book describes a world that does not yet exist, but that will be very difficult to avoid. It is not a matter of being smart or not, of wanting peace or war, of globalizing or closing in on ourselves, this future is inescapable and will be imposed on the governments of the world. It is very likely that several “crises” (in quotes, because what we call “crisis” has yet to be precisely defined) will occur in order for our politicians and governments, our leaders and our people, our regulators and our legislators, to accept the inescapable reality. But unless we are particularly pessimistic about the future of our world, we now know that it will be the only reasonable path for the global economy to follow. Raphaël Douady Member of the Centre d’Économie de la Sorbonne Université Paris 1 Panthéon-Sorbonne Paris, France Academic Director of the Laboratory of Excellence on Financial Regulation (Labex Refi), Former Frey Chair Stony Brook University Stony Brook, USA


Many wonderful professionals have accompanied us during the five years of this book’s adventure. Of course, most of them were faithful friends or became friends during this long and hard work to which they generously contributed. Our friend Patrice Durand, whose experience at the head of large state-owned and private companies, after having held responsibilities at the French Treasury, was a precious help. He accompanied our proposals for the treatment of public debt, given his experience as a major banker. He has helped us a great deal by the relevance of his comments and his constant concern for pragmatism in his vision of economic policy. A big thank you and a friendly thought to Dominique Foult, who read our work through a communicator’s eye, with the will to transmit the ideas to the largest number of people in order to enlighten the debates necessary to a monetary reform. Throughout our work, Governor Jacques de Larosière has been a precious and benevolent help in identifying the central points of the monetary edifice and in indicating to us what he considered essential to respect in the deployment of a reform process. Thus, Jacques de Larosière reminded us that no reform could be envisaged if it included a monetary abandonment, which would constitute a nonrepayment to creditors of a debt already issued. It is this requirement that formed the conceptual backbone of the project. Beyond his thoughts on the international financial system, of which he is one of the world’s most recognized specialists, his intellectual support has served as a guide for the authors, helping us to move forward with confidence in the construction of our reflection. Some very great specialists in their respective fields also helped us by reading our projects, commenting on them and also spending hours exchanging with us. This is the case of renowned mathematicians: Raphaël Douady, Research Professor at the Sorbonne and Gilles Godefroy from the Centre National de Recherche Scientifique, for all that concerns the mathematical approach, risk and portfolio valuations and, also, for what could be a digital currency and how to protect the nominal unit attached to it. It is also the case of Ricardo Pérez-Marco, another great mathematician. He is the one who gave us a better understanding of the virtual world of cryptocurrencies and made us participate in the Forum he organized on this topic, in November 2016, at the Institut Henri Poincaré, the famous French Research Center in mathematics. xiii



Daniel Gabrielli, former head of the Banque de France, participated in the elaboration of this book by analyzing his proposals closely, criticizing them if necessary and validating the key ideas. He helped us to develop the principle of a progressive introduction of the new digital monetary architecture that we propose. Michel Perez, a researcher at New York University and the U.S. representative of Labex, a research center, helped us a great deal with his extensive experience with banks and his work on ethics and conventional American dispositives. Claude Rubinowicz has made a valuable contribution through the regular exchanges we have had with him and his careful reading of the manuscript. His action has been essential in the process of modernization of the Paris market, with the implementation of the concept of a competitive market, without which a financial center cannot function on a global scale. His support has been a decisive element in our work. Jean-Fred Warlin, a great historian and author specializing in the eighteenth century and its hidden administrative workings, has allowed us to verify certain historical references. He is the specialist who knows where the invention of future markets comes from. We must thank Mr. Alain Papiasse, one of BNP’s senior managers, for giving us access to the bank’s future market specialists and especially to Mr. David Alphandari, the head of FOREX. He explained to us, who are neither traders nor specialists in market governance and regulation, how clients are exposed to foreign exchange risks and how they can protect themselves against them, how they could react to possible changes in the environment and how central banks anticipate risks to their balance sheets. This book would not have been possible without the indispensable help of Florence Sirel, a former IMF official and leading academic concerned about the future of young candidates for one of America’s most prestigious educational institutions. She helped ask the right questions and contributed to the development of our proposed solutions for moving toward realistic monetary reform. Affectionate thoughts also to the youngest contributor, Léa Serval, a future mathematician involved and ranked in this field in national competitions for teenagers who, with a paper on Aristotle’s analysis in “the Republic,” helped us to better understand the difference between the real world and its representation. Warm thanks to Anna Schwarz, the very faithful and efficient co-author of the texts and their presentation, who accompanied the long work of preparing this book and supported the energy of its contributors. Philippe Jurgensen, a senior civil servant, a great connoisseur of money and development problems and a recognized author in these fields, has contributed with his remarks to the improvement of the diagnoses of the monetary economy. Finally, I would like to thank all those who have not been mentioned because of their position or their discretion, or both, and who have contributed to the reflection and the construction of the future by their always useful criticism. They will recognize themselves.

Introduction: Monetary Representation and Economic Reality

After years of successive financial crises and low economic growth, and before the coronavirus crisis and the Ukrainian conflict, we had once again entered a period of economic rebounds in most countries of the world without knowing what event could upset the natural economic cycle. However, the engine of this uncertain recovery, which ended in 2018, was fueled by the use of dopants based on currency imbalances and interest rate cuts. The price to be paid for this recovery is a global debt that consists of claims expressed in nominal value of issue but also, after exchanges, at the book value of their redemption. This is an enormous debt that is difficult to manage, given the diversity of both its holders and its debtors. These debts, whose total is constantly growing, cannot be repaid at their nominal value, as the corresponding original production no longer exists, and the taxpayers and pensioners, its creditors without compensation, will have to make do with it. In the long run, the real situation will impose itself on them, whereas the GDP to be redistributed has not varied in the Western countries at the same rate as the debt. The enormity of the latter, which now stands at nearly $300 trillion, and its hidden nature create both a high risk of collapse and a false image of socioeconomic reality. The truncated representation of economic reality generated by the almost unlimited availability of liquidity to economic agents does not change the fact that production is stagnating and that there is a crisis in recorded debt in Western countries. This distortion further aggravates distrust of the monetary system and generates, through a mechanical adjustment, volatility in the values of financial instruments. These phenomena have the effect of reducing the risktaking by entrepreneurs and investment in venture capital, the two engines of the market economy. Combined with changes in world demographics and the resulting balance of economic power in favor of Asia, tariff or monetary policies that would like to regain lost influence in certain Western countries without a real economic basis are doomed to failure. The object of economic production considered in its exchanges expressed in nominal value with its claims and debts is conventionally a zero-sum game whose transposition into the accounting books is only a representation that differs from reality. The excessive level of debt represents a mass of liquidity devoid of any productive efficiency. This overabundance of liquidity in the real economy fuels the fall xv


Introduction: Monetary Representation and Economic Reality

in interest rates on the financial markets; a fall encouraged by the monetary authorities to reduce the cost of servicing their debt. Excessive liquidity is detrimental to the proper functioning of economies, and the primary issue is no longer that of financial resources, but rather that of the use of these resources for profitable investments. The primary disease of our international economic system stems from a still possible break in the past pattern of U.S. dollar dominance after World War II. It has been further exacerbated by the absence of rapid inflation that would mop up the nominal debts expressed in that currency. The volumes traded in tangible goods by the main economic actors led to a divergence, but also an independence, between the monetary volumes traded and the link with the currency in which they were traded. The debt drift was encouraged by consumption artificially boosted by low interest rates and an abundance of credit in the form of increasingly specific financial instruments disconnected from the reality of the underlying asset. The state guarantees given to the monetary system that monetary deposits will be repaid in all circumstances and that systemic companies will be kept afloat in all circumstances have accentuated this uncontrolled release of debt—a movement amplified by the ongoing revolution in the means of payment which accelerates the rotation of money. After World War II, the massive debts generated by the conflict, followed by those of the Korean War, were wiped out by inflation and soaring consumption in Western countries. These debts could easily be replaced by new debts issued at the same pace as the allocation of “real” production, which was undergoing a new transformation in favor of tangible and intangible investments in a period of economic reconstruction and the development of mass consumption in Western countries. The disappearance of debt partly explains the post-war rebound of defeated and destroyed countries such as Japan and Germany, which became the world’s largest exporters of manufactured goods, along with China, while the victors did not do as well economically. Today, with growing public debt and stagnant or declining demographics in the most developed countries, the international political space and economic power relations, as well as individual needs, have radically changed and our model of economic development must be rethought. The increase in productivity due to the digital age and the economies of scale linked to the consolidation of trade areas within economic zones have created new economic challenges and opportunities. In the face of an overabundance of liquidity, in a multipolar economic system, including Asia, Europe, North America, South America, India and Africa, there is little chance that liquidity will be channeled, even in a risk-free environment, toward productive investments. Confidence in the future, which is the foundation of any monetary system, is being called into question. The unconstrained monetary facility proves to be poisonous, both for the issuer and for the user, who can decide at any time to detach himself from the vagaries of the money market if real exchanges can be carried out directly through marketplaces that reconstitute, de facto, a barter system.

Introduction: Monetary Representation and Economic Reality


The current economic system is not sustainable. It can only create a succession of catastrophes if each of its members wants to apply its own individual rules. No one will share the cake of assets that do not exist for lack of counterparts committed to real production or to financial assets expressed at face value. The debt continues to grow at a faster rate than GDP. This debt, under these conditions, will not be repaid and the solvency of the participants in the trade of financial instruments, whether issuers or holders, will be called into question, with the inevitable prospect of an economic crisis that will begin with a halt in trade, as soon as doubts arise as to the value of the instruments that are necessary for their repayment. In the pages of this book, which has its roots in two previous works, Virtual Money and The Monetary System - A New Analysis - and New Approaches to Regulation, we will try to explain, starting from the historical origins of money, the current monetary organization and the revolution in digital space, what has changed in the old way in which demand responded to supply and settled the transaction by payment in a limited space, which is now widely disappeared. We want to convince the reader that a reform of the monetary system is urgently needed and to outline, as a logical consequence, the paths to follow in order to overcome the obstacles, such as the excessive level of debts, and to build a new democratically decided multilateral system with sustainable redistributive effects. Why do we think this is possible? Because the monetary system is only a set organized by the accounting books, a simple attempt to represent the real world. New, more efficient lenses will change this representation without negatively affecting the reality of production. The links between the different spaces of exchange must be apprehended and we will try to explain what these links can be. In this new landscape that we want to highlight, after recalling where we come from and where we are, we will propose not only to “revolutionize” the system with a new standard, but also to give back to the central banks their initial mission, that of controlling the monetary system, which has been lost by the drift of the debt, which takes away all free will from governments. The latter, obliged to issue more and more money, are driving down interest rates by excess liquidity, whose low level is incompatible with a liberal economy. Each economic agent must be guided only by the profitability of his projects in the short, medium and long term, and must calculate it in relation to the cost of capital and risk. The best actor is the bearer of the risk, that is, the entrepreneur himself, and not an interest rate forced by the bad practice of public deficits and the resulting levels of indebtedness. The burden of government debt is reaching new heights as the world is tipping into a scenario never before seen in modern economic history, a scenario in which the most catastrophic projections can be given free rein. Cumulative public debts, already at very high levels before the coronavirus crisis, now represent an estimated 100 trillion dollars or 115% of world GDP! The figures are staggering and the question that every lucid citizen must ask is whether the international financial system can sustain such a drift in public finances. Let us be realistic, the volume of the sums at stake is such that it is time


Introduction: Monetary Representation and Economic Reality

to admit that these debts, even though they are placed under the control of organizations responsible for protecting savers, cannot be repaid. Can we escape the fatal consequences of this tsunami of liquidity that is trying to save our economies in danger, when the remedy may kill the patient? Neither taxation, nor the substantial reduction of public spending, nor the inflation that accompanied the enrichment of the post-war generation, represents a credible prospect for repaying the debts already issued and to come. We are not naïve and we are well aware that the great world powers are engaged in a fierce competition for the economic domination of the world, and the monetary question is indeed at the heart of this power issue. However, unless we imagine that the temptation of destructive chaos will prevail (a hypothesis that unfortunately cannot be totally ruled out), we believe that reason, subject to the constraint of the principle of reality, must lead the dominant players in the economy to find compromises if each of them wishes, selfishly, to preserve its prosperity, its security and its continuity. We have to admit that the sudden attack of Russia on its neighbor Ukraine surprised and challenged us, even though we had already made our point. How can we talk about international negotiations to pacify the world through better coordination of the major players when the cannon is once again firing on the old continent that was so badly damaged in the previous century? Is the hardening of the confrontation between the blocs a decisive obstacle to a new consensual world economic order? It is certainly not easy to answer this question in a world of rapid change that is redistributing the cards of power. But, in the logic of the analysis that we are developing throughout this book, we are anxious to distinguish economic reality from its financial and accounting representation. Does the exclusion of Russia from the international trading system represent a major destabilizing factor for the international monetary order, and thus, ultimately, for the world economy? At the risk of being surprising, our answer to this question is no, given the basic economic realities of production and trade. Russian GDP amounted to $1,485 billion in 2020, equivalent to the GDP of Spain, compared with a world GDP of $87,568 billion for the same year. Russia’s foreign trade is very small with a level of 785 billion in 2021, half of which is made up of hydrocarbon and gas sales. The Russian economy does not have the size to destabilize the world economy in the sphere of real trade, and the ruble, by the same token, lacking economic depth, cannot weigh on the monetary scene. In terms of the real economy, which involves billable deliveries, the issue of substitution of energy sources and rare metals extracted from Russia’s soil is manageable in the medium term. This can be achieved through investment, the development of known reserves, increased transport capacity, diversification of resources, innovations in battery components and, finally, through savings in consumption and improved energy efficiency. On the financial level, the one that allows the functioning of the exchange economy, the exclusion of the Russian Federation from the international clearing system Swift, which is used by commercial banks to settle debts in foreign currencies, or from the ISDA (International swap and derivatives association), this

Introduction: Monetary Representation and Economic Reality


will not prevent bartering from developing, as it did in the days of the Soviet Union, in businesses that by their very nature are the responsibility of authorities or companies linked to the state. It is also worth noting that sales of hydrocarbons and gas have not really been excluded from international clearing systems. However, Russia’s share of international trade will not allow it to create a global financial market, unlike China. On the other hand, the Russian Federation will once again be affected by its history of repeated defaults or simply by its reputation as an unpredictable player that rating agencies always consider when it comes to giving a value to a financial instrument or pricing a hedging instrument. Barter or not on commodities, it doesn’t matter what you call it, the reality is there; the return to an archaic method of clearing exchanges leads to more commissions for financial intermediaries who have to cover more risks as to the outcome of the transaction. In terms of money and trade, both the buyer and the seller lose, as does the world as a whole. In the longer term, it seems logical, from a perspective of negotiated conciliation, to organize a new monetary structure that includes, without exclusivity, all trade participants of a certain level, including Russia. Russia should then be able to develop its payment system within the framework of international negotiations and, at the same time, the reconstruction of the Ukraine should be undertaken. The construction of Europe may be an example in this process of setting up a new monetary order, with the model of a union built on the rubble of war, with the idea that a pacified order should first be based on a process of bringing economic coherence. China has become the central player in international trade, and the Ukrainian crisis will only encourage its desire for a new international monetary order. It is unlikely, however, that the Middle Kingdom has the will to destroy the current greenback-based order. China still needs the United States as a major customer, so its ruin cannot be its objective, and Russia does not have the power to build a new monetary order against the dollar. However, in the face of Western sanctions, it seems clear that Chinese and Russian initiatives to create an alternative crossborder interbank payment system to the Swift system, with the CIPS system for China and the SPFS for Russia, can only be amplified and brought closer together in the current climate of tension. The current political dynamics can only accelerate the fundamental historic movement toward an increasingly multipolar world. The obvious reluctance of economically influential countries, such as India or the Gulf monarchies, to align themselves with Western sanctions against Russia, clearly shows the growing complexity of the current world, where power can no longer be simply unipolar. The risks of direct war between the great powers cannot be totally ruled out, as recent events have shown, but, more than ever, the confrontation of ambitions is probably being played out first and foremost on the terrain of economic domination, with currency as the decisive weapon. Exchange rate parity is becoming the barometer of the power of nations. China regularly refers to the need to take into account this multipolar reality of the international monetary system, which in a way crowns its new role on the international scene. As early as March 2009, in


Introduction: Monetary Representation and Economic Reality

the context of the subprime crisis, the governor of the People’s Bank of China at the time, Mr. Zhou Xiaochan, spoke in the BIS magazine of the need to create a currency. The Chinese leader proposed the SDR (IMF Special Drawing Rights) as a reference currency, which would then be used more widely. The Chinese leader proposed the SDR (IMF Special Drawing Rights) as a reference currency, whose use would then be extended. But, as we analyze below (see p. 196), the SDR system is too limited in its use and has not obtained the support of the financial world to be able to claim this dual role of exchange rate function and standard. In our approach, an entire review of the monetary system must be carried out with a view to coordinating a multipolar system, capable of guaranteeing its own stability and durability. We do not hesitate to say that the geopolitical crisis we are going through makes our proposal for a reform of the international monetary system even more urgent. In the financial sphere, the war and the increased risks it entails will accentuate inflationary tensions. The observation of physical shortages, in a phase of transition of the sources of supply, amplifies price drifts, at the risk of triggering a structural inflation mechanism that will end up impacting wages in a context of shortage of qualified labor. To avoid an uncontrolled rise in interest rates that would plunge the world into a crisis of instability, governments and their monetary authorities will logically pursue their generous policy of monetary creation and, as a result, increase the weight of international debt. Moreover, the geopolitical situation will mechanically increase the world’s public debts simply because of the obligation of nations to rearm (see the 2022–2023 budget of the United States and Germany). Unfortunately, the current destruction, already estimated at 500 billion dollars for Ukraine, will also mobilize vast investment needs. Finally, the resources lost as a result of the current conflict, in gas and hydrocarbons as well as in food, will have to be compensated for by innovations, and therefore investments, which will easily fit into the mechanism we are putting forward of transforming debt into productive investments. It seems to us that the time has come when the main nations of the world economy will have no other choice, apart from chaos, than to undertake a negotiation process aimed first of all at breaking the fatal chain that always results from a war, with the organization of an international conference charged with defining the rules of a new world order. This is a new monetary situation in a world divided and threatened by the common danger represented by the exorbitant weight of debt. Europe can be a central player in this new international configuration. This is an ambitious and mobilizing project for a Europe that is struggling to find its place in the concert of great nations. Brussels’ initiative to respond to the Chinese Silk Roads offensive through the “Global Gateway” project, which aims to mobilize 300 billion euros in a development aid plan, is only a first step given the magnitude of the financial stakes. However, competition and confrontation should not exclude consultation and, why not, cooperation? Its status as a second-tier power should give Europe, between the two giants, the role of a reasonable mediator, peaceful

Introduction: Monetary Representation and Economic Reality


by necessity. Although Europe does not have the political leadership to dictate its law on the international scene, it is nonetheless useful to remember that it is the second largest trading power, with a surplus of its trade in goods of 220 billion euros in 2021, to be compared, for the same year, with a surplus of 535 billion dollars for China, and a U.S. deficit of 976 billion dollars. Europe can make its voice heard, if it wants to, while its two major competitors are clashing in a rivalry that is increasingly dangerous for the planet. Half a century after the abandonment of the Bretton Woods agreements, which established the dollar standard, the need for an international monetary conference in a multipolar world is imperative, as contemporary economic realities inexorably redefine a new geography of national power.


1 Short History of Money from Antiquity to the Twenty-First Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 The Origins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Caesar and Augustus: Legal and Financial Reforms . . . . . . . . . . . . . 1.3 The Last Turn to Modern Money: The U.S. Default on Gold in 1971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Evolution Toward Modern Money and the Path Toward Digital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Money and Accounting Are Closely Linked . . . . . . . . . . . . . . . . . . . . 2.1.1 Financial Statements: Defining the Real World and the Financial Universe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 The Real World and the Financial World . . . . . . . . . . . . . . . 2.1.3 The Basis for the Expression of Today’s Money . . . . . . . . 2.1.4 Stock Markets Influence Financial Statements; Monetary Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.5 One Global Language, Accounting . . . . . . . . . . . . . . . . . . . . . 2.2 The Uniqueness of the Transcription of Exchanges . . . . . . . . . . . . . . 2.2.1 The Principle of the Double Part . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 The Principle of the Annual Exercise: Integrate the Time Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Accounting for Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Accounting for Financial Instruments at “Fair Value” (Addressed by IFRS 9) . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 A New Vision of Accounting in a New World . . . . . . . . . . 2.3.3 The Shortcomings of Accounting . . . . . . . . . . . . . . . . . . . . . . 2.3.4 Lessons Learned from the Uncertainties of Reading the Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Current Model, the Role of Central Banks . . . . . . . . . . . . . . . . . . . . . . 3.1 The Interaction Between the Real World and the Financial World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Traditional Role of Central Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Issue of Profits and Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 8 17 17 17 18 20 22 22 23 23 25 25 26 27 28 31 33 33 34 36 xxiii



3.4 3.5 3.6 3.7 3.8

The New Positioning of Central Banks . . . . . . . . . . . . . . . . . . . . . . . . . Central Bank Accounting and Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Functions and Tools of Central Banks . . . . . . . . . . . . . . . . . . . . . . . . . . The New Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Transmission of Monetary Policies to the Non-Financial World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rates and Volumes Are the Key Tools of Central Banks’ Monetary Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Borne by Central Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Relationship Between the Real World and the Financial Universe from the Point of View of Transaction Monitoring by the Central Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disconnections Between the Real World and the Financial World and Leaks in the Information System . . . . . . . . . . . . . . . . . . . . Reducing the Scope of Central Bank Action . . . . . . . . . . . . . . . . . . . . The Monetary Aspects of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . .

37 39 41 41

4 The Monetary World and Its Analytical Tools . . . . . . . . . . . . . . . . . . . . . . . 4.1 Exchanges Are the Source of Monetary Instruments . . . . . . . . . . . . 4.2 Update on the Coherence of Currency Spaces and Its Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The Transformation of the Monetary World . . . . . . . . . . . . . . . . . . . . . 4.4 The Monetary Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Distinctions of the Medium, the Standard and the Blockchain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 The Stamping and the Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 The Right to Issue a Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 The New Approach of the Bank for International Settlements (BIS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 Conceptual Discussion for an Expanded Monetary Approach . . . . 4.10 The Necessary Development of the Observation of the Single Financial Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11 M5 and M6: Derivatives and Separation Between Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12 The Landscape of Exchanges Through M5, M6 . . . . . . . . . . . . . . . . . 4.13 Analytical Objectives of Exchange Rate Observation . . . . . . . . . . . . 4.14 The Classification of Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.15 Exchangeability Between Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 4.16 The New Paradigm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.17 The Power of Seigniorage and Its Challenges Today . . . . . . . . . . . . 4.18 A Formula Test: STD (Serval, Tranié, Douady) . . . . . . . . . . . . . . . . .

51 52

5 The Monetary System, the Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 What Does the Word “System” Mean When It Comes to Money? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Description of the Existing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


3.9 3.10 3.11

3.12 3.13 3.14

42 42 43

43 46 46 48

53 54 54 56 57 58 60 60 64 65 67 69 69 70 71 71 74

77 78


5.3 5.4 5.5 5.6 5.7 5.8 5.9


System Foundations—Independence and Sovereignty . . . . . . . . . . . Central Banks at the Base of the System . . . . . . . . . . . . . . . . . . . . . . . . The American Federal Reserve Bank’s Objectives . . . . . . . . . . . . . . . The Central Bank of the European Union “ECB” . . . . . . . . . . . . . . . The People’s Bank of China (PBoC or PBC) . . . . . . . . . . . . . . . . . . . What Does Central Bank Independence Mean? . . . . . . . . . . . . . . . . . International Monetary Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.1 The International Monetary Fund (IMF) . . . . . . . . . . . . . . . . 5.9.2 The World Trade Organization (WTO) . . . . . . . . . . . . . . . . . 5.9.3 The Bank for International Settlements (BIS) . . . . . . . . . . . 5.9.4 The Main Institutions Involved in Transnational Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.5 The World Bank Group (WBG) . . . . . . . . . . . . . . . . . . . . . . . . 5.9.6 Regional Development Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.7 Issues to Be Discussed for the Implementation of a Renewed Monetary System . . . . . . . . . . . . . . . . . . . . . . . . 5.9.8 Financial Market Infrastructures (MFIs) . . . . . . . . . . . . . . . . 5.9.9 The G20 Distinguishes Three Categories of Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.10 Attempts to Propose Alternative Solutions to Risk Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.11 An Extended Stabilization System from the CCPs (Central Clearing Counterparty) Could Be Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.12 Topics Not Yet Adequately Addressed by Monetary or State Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.13 International Coordination, from G7 to G20 . . . . . . . . . . . . 5.9.14 The Current Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.15 The Financial Stability Board (FSB): The Necessary “Strange Animal” . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.16 Toward a New World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9.17 Intermediate Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 The Monetary Reform, Its Stakes and Its Modalities . . . . . . . . . . . . . . . . 6.1 The Standard as the Central Issue of a Renewed International Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 Why Would a Clear Separation Between the Unit and the Support Be a Positive Step Forward? . . . . . . . . . . . 6.1.2 How to Protect the Inviolability of the Standard? . . . . . . . 6.1.3 What Exchange Rate Parity with Other Currencies Should Be Adopted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 The Objectives of Monetary Reform Within the Framework of an International Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 What International Conference? Leadership Requirements, Participants and Transition Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79 80 80 81 82 82 83 83 87 88 89 90 90 91 93 93 96

97 97 101 102 108 112 114 117 117 119 120 120 121 122



6.4 6.5 6.6 6.7 6.8 6.9

The Rise of the FSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The G20 as a Political Leader for International Coordination . . . . Technical Skills: BIS and IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Role of Central Banks Needs to Be Redefined . . . . . . . . . . . . . . The Place of Companies in the New Monetary Framework . . . . . . OECD Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

122 123 124 124 125 126

7 The Reduction of Public Debt, the Heart of a Monetary Reform . . . . . 7.1 Possible Ways to Reduce Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 The First Path: Provoke the Reduction of the Value of the Instruments by the Rise of the Rates . . . . . . . . . . . . . 7.1.2 A Second Path to Debt Reduction: Organized Debt Clearance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.3 The Third Way: Converting Debt into Equity . . . . . . . . . . . 7.2 Implementation of a Public Debt Reorganization Scheme . . . . . . . 7.2.1 Debt Reduction Process in the Western World . . . . . . . . . . 7.2.2 Feasibility of the Exchange Project for Western Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 Reminder of Some Basic Data . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.4 Principle of the Transformation of Public Debt into Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.5 A Major Entrepreneurial Project at the Heart of a New Economic Paradigm . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.6 A Dynamic Process to Build . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.7 The Transformation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 A—The General Dimension of the Project . . . . . . . . . . . . . . . . . . . . . . 7.4 B—The Debt Transformation Process for the Eurozone . . . . . . . . . 7.4.1 Creation of a Hive-Off Fund Called Transformation Fund or “TF” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.2 The Exchange of Acquired and Subscribed Shares for Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.3 Neutralization of Public Debt by Allocation of Securities Representing Investments . . . . . . . . . . . . . . . . . 7.4.4 Joint Commentary on the Taxation, Trading Process and Legal Status of Trading Rights in Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.5 The Specificity of the Exchange Scheme . . . . . . . . . . . . . . . 7.4.6 An Unavoidable Transformation . . . . . . . . . . . . . . . . . . . . . . . . 7.5 C—The Process for the US Dollar Zone . . . . . . . . . . . . . . . . . . . . . . . . 7.5.1 A Realistic Global Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.2 The 60% Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 D—Countries that Do Not Have Monetary Autonomy (So-Called Peripheral Countries) and Asian Countries that Together Form a Fast-Developing Zone . . . . . . . . . . . . . . . . . . . .

129 129 130 131 132 133 133 135 135 137 138 139 140 141 142 143 145 146

147 148 149 149 151 152



7.7 7.8



E—Project Availability, Side Effects and Common Currency Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F—Common Success Factors, Coordination and International Aspects: Moving Toward a Multilateral Monetary World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8.1 The Conditions and Challenges of a Successful Transformation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8.2 The Deployment of the Device and its Requirements: No Speculation . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


155 156 157 157

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

About the Authors

Jean-François Serval is the founding president of Groupe Audit Serval, a firm that performs financial statement certification on three continents: Europe, the United States and Asia, and also Former president and founder of the Constantin Group. Jean-Pascal Tranié a former student of the École Polytechnique and the ENA, is the head of an international investment fund. He has held a position as president of a subsidiary in a large communications group.



Short History of Money from Antiquity to the Twenty-First Century


The Origins

Many economics textbooks have explained the slow transformation from a subsistence economy to a barter economy, thus limited by the comparability of the objects or services exchanged. Although an improvement over the subsistence economy, the barter economy remains cumbersome and inefficient, as it requires the simultaneous acceptance of a transaction by both parties with physical delivery. The barter economy eventually gave way to a financial economy that was made possible by the issuance of money, a potentially universal intermediate means of payment, conducive to labor specialization and economic development.1 The Greek civilization and the emerging monetary system that resulted from it led international trade for centuries (from the fifth to the first century BC). During this period of antiquity, the countries surrounding the Mediterranean became a world of commercial and industrial competition with the Greeks, the Phoenicians in the west and the Medes on the southeastern border as the players. The Greek civilization that was adopted by the Macedonian invaders also counted in monetary units. It is interesting to note that Alexander the Great’s mentor, Aristotle (384 BC–322 BC), was able to describe money and its qualities as a store of value apart from any physical contingency in his book Politics. The Greeks were familiar with book balances and paper money when they issued notes allowing credit between their Mediterranean trading posts. Alexander’s armies were largely undefeated in their conquest of the eastern world. From Asia to India, from the Middle East to Egypt, money, i.e., currency, the reserve function of money attached to it, allowed the accumulation of the wealth necessary to manufacture armaments, pay troops

1 We know from museum objects that the measurement of money appeared on Mesopotamian clay tablets at the same time as writing (2900 BC) and monetary expressions can be read in the Code of Hammurabi dating from about 1650 BC.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,




Short History of Money from Antiquity to the Twenty-First Century

and organize measurable processes of sharing within the army. The standardization of exchanges through the use of money with a unit of account across the Empire allowed for more efficient management of the Empire and probably expanded international trade. The Roman successors simply adopted the Greek monetary system with new metallic coins. The coinage soon came to be seen as having symbolic value.2 Metallic money is attractive; it is the representation of wealth because of its ease of counting and its ability to be accumulated and transported. The latter is almost unlimited as Plato already noted. The costs of storing and maintaining money are also very low compared to the physical goods or animals it represents, which require storage capacity or care and feeding for their subsistence. Money also represents a commitment: the promise that it is eventually exchangeable and allows a good to be measured intrinsically or against another good. While metallic currencies, especially those made of gold, can have intrinsic value, paper money is nothing more than a contract. It requires trust, and the basis of that trust is a simple piece of paper, the bill, which requires the existence of a link serving as a reference between exchangeable assets, through a number. Where the applicable law includes such a link, it is referred to as fiat money. The possibility of this is the reason why many economists, especially those of central banks, continue to return to the idea of a currency based on precious metal and more specifically on gold. In ancient times, the idea of having a single unit of currency did not exist, even though gold seemed to be a good basis because of its universality as a source of value for everyone, regardless of the language used and the unit chosen. Often sanctified by the stamping on pieces of metal of a goddess or sovereign or dominant animals such as the lion, the earliest known Western coins have always been representative not only of wealth, but also of power. When stamped with a specific and regal value, the coins represented by a known and verifiable measurable weight a store of value. The reserve of value, as today, that of energy, has a fabulous character for the man who sends him back as all that he does not control, to the enigma of the time which imposes itself to him and which he cannot defy. From a sociological point of view, we can see the durability of this symbolic link by the survival through the centuries of still common monetary terms, in particular those associated with measurement and pricing. Take for example the “talent,” the Greek unit of measurement representing a unit of volume roughly equivalent to 1/100th of a cubic foot. It is often confused with a monetary unit, which it is not. The silver “cycle” was used under the Persian king Archimedes who used it in the fifth century BC; it corresponded at that time to 180 grains of barley representing 11 grams of silver. It became the “Shekel” for the Hebrews. The word “coin” comes from the temple of Juno Moneta on Capitoline Hill in ancient Rome, where coins were minted and treasure stored in the time of Augustus. The Roman influence on coinage is also evident in other languages: for example, “denier,” a French word for a unit of currency used in the Middle Ages


Ferguson N., The Ascent of Money: A Financial History of the World, 2009, Penguin Books.

1.2 Caesar and Augustus: Legal and Financial Reforms


before the “franc,” and “dinero,” the Spanish name for currency, both come from the Roman denarius, a division of the Roman coin “sestertius.” In addition to naming the different types of money, past leaders who helped reform the financial and monetary systems have often been given an image by historians that has contributed to their eternal fame. But did they deserve this honor, and if so, for what? From the beginning of our history, we can discover the links between money and society. Solon (640–about 558 BC) was both a lawman and a statesman, elected “archon” in the political system of the Greek cities. Despite maintaining social distinctions based on birth or military ability, he is considered the inventor of our democracy along with Aristotle and Plato. But more importantly for our purposes, Solon is also the one who, when he was elected (594–593 BC), canceled public and private debts. His goal in canceling debts was to free many peasants whose lands could have been seized, and themselves put into slavery, for failure to repay. This decision was made with pragmatism and compassion; imprisoning large numbers of peasants would have reduced the number of individuals available for military service or to participate in the newly reformed democratic institutions. It is interesting to note that Solon’s monetary reforms also included a reform of the units of measurement and the calendar. Almost a century later, in 454 BC, the League of Delos, a collection of Greek city-states, was forced to use both Athens’ units of measurement and its currency. Solon’s main achievement was also to reform the political institution by appointing independent judges, those who would determine the “census” and the amount of money that determines citizenship linked to the right to vote.


Caesar and Augustus: Legal and Financial Reforms

Of all the monetary developments of the Romans, the system established by the Emperor Augustus (63 BC–14 AD) deserves special comment. Indeed, it is the first known monetary unification on a territory covering all the countries surrounding the Mediterranean. This occurred during the first century AD, a time when Rome was rapidly expanding to rule almost the entire then known world of the West. The reforms of Constantine (272–337 AD) renewed those of Augustus and his successors and established a new bimetallic monetary system based on gold and silver that more or less survived until the end of the Eastern Roman Empire in 1453 AD, when Constantinople, the surviving center of the weakened Eastern Roman Empire, was conquered by the Turks. In the western part of Europe, a competitor to the Byzantine Empire had already developed a new political entity with the Carolingian kings starting with Charlemagne (birth date around 747 AD; death in 814 AD). Among his many achievements, the emperor also created a new monetary system, with an effort to unify the monetary unit and rationalize the media. What is the common context of these reforms? They coincide with military victories and territorial expansion and are based on the ability of a country to



Short History of Money from Antiquity to the Twenty-First Century

have reserves of precious metals for the minting of the currency in which these reserves had to be obligatorily transformed. They also often coincide with the end of the system they replaced, either by simple substitution or by the creation of new coins in sufficient quantity to meet the needs of the expansion of trade. Confidence in debts was, as today, ensured by a repressive legal system against debtors and forgers. Finally, conquering powers have historically seized the gold reserves of conquered nations and imposed tribute and taxes on them, thus ensuring their ability to maintain their metallic monetary practices. Monetary reforms and the disappearance of war and other debts, paid off by the conquered nation, often led to further economic expansion at the expense of the conquered population. All the monetary reforms that followed after the civil wars and that marked the time of Caesar and his successors at the head of the Empire each represented a particular stage in the evolution of Roman history. The civil wars of the second century (AD) led to the establishment of a centralized price control that unilaterally changed the value of the monetary unit, as if the Empire could substitute its regulatory force for the liberalism of trade. The Emperor Diocletian (244–311 AD) had retired to Split3 after conducting a reform administrative and financial on a large scale with the issuance of new silver coins. This was done partly to compensate for the lack of gold reserves spent on wars and also to pay soldiers’ salaries and the purchase of luxury goods imported from the east of the Empire. But the centralized administrative organization that might have been acceptable in the eastern part of the Empire was not so for the west because of a more communal sociological substratum due to successive invasions and different water needs. This shows the geographical and cultural limits of any reform, even if it is adapted and distributed geographically. The western part of the Empire where Roman power originated disappeared politically in 476 AD, when the Emperor Augustus was deposed by the Goth Odoacer. It should be remembered, however, that Rome, the imperial city, was not defended, the budgetary resources being allocated to the defense of Ravenna, which had become the capital of the Western Empire since the final separation of the Empire into two parts in 395 AD. Even before the fall of the western part of the Empire, Emperor Constantine (272–337 AD) had led a monetary reform by creating a new currency (“solidus” in Latin or “nomisma” in Greek) that divided a 325 gram pound into 72 solidus (the sub “gold”) of 4.5 grams of 23 carats. The relevance of this new unit of measurement of value was such that its weight remained unchanged until the middle of the eleventh century, both in the West and in the East. After the Byzantine Empire suffered a series of military defeats, the solidus was devalued and a new unit of only 7 carats was issued. This is the currency known as the “hyperpere” which became commonplace for international contracts in medieval trade. As the U.S. dollar is now an international currency, the hyperpere was not only the Byzantine currency, it was also recognized and accepted throughout much of the known


Croatia today.

1.2 Caesar and Augustus: Legal and Financial Reforms


world at the time. What is even more interesting is that the standard monetary unit of the hyperpere was too large for the usual daily needs of the public and the local currency with silver and bronze coins still faced problems of value variation as it happens in any bimetallic system. The most disturbing thing is that in the Byzantine system when determining the price of certain goods, bread for example, the quantity is adapted to the unit and not the other way around. One paid with a “follis,” the bronze money, (288 follis for a nomisma) and one obtained a variable weight of bread according to the price. The currency was the axis of the system and not the price, thus showing its fundamental role. Closer to the modern era, the fundamental revolutionary and napoleonic reforms led to the germinal franc (1795), which remained a stable currency until 1914.4 These reforms were the result of the political and financial bankruptcy of the French monarchy and were preceded by the collapse of the first modern banking system, which had been conceded in 1716 to John Law’s bank,5 “La Banque Royale,” to finance investments in the colonies, including Louisiana. John Law accepted a charter to be the issuer of money and invented the concept of monetary easing by pushing the acceptance of bank bills as preferable to metallic money. The germinal franc was adopted by many European countries. This excessive stability led to slower and later industrial development in France than in the United Kingdom, which financed its wars with debts that were reduced over time by inflation. Borrowing in germinal francs was like borrowing in Swiss francs today, easy and cheap but with a huge exchange risk that explains the current resurgence of gold. Some reforms that seemed technically successful at the outset led to total disaster from a political point of view. This was the case with the reforms developed by Dr. H. Schacht,6 who replaced the decaying Reichsmark with a new currency, the Rentenmark, to successfully end a hyperinflationary environment. He brought about a monetary and economic recovery that was, to some extent, credited to the Nazi party. Dr. Schacht also contributed to the success of the new currency by rallying some of the country’s most powerful industrialists behind him. The “new order” followed a prolonged disorder in the democratic political context of the Allied-imposed Weimar Republic following World War I. This disorder and especially the subsequent restoration of the situation helped to facilitate the election of Hitler when the American financial crisis of 1929 hit Germany in 1931. Understanding this historical sequence helps us to understand the importance of monetary stability as a measure of the liberating power of money at the disposal


The germinal franc was created in April 1795 (year III and germinal 7th year XI). It was defined by 4.5 g of silver and 0.29024 g of gold. On March 27, 1803, an international agreement in which 27 countries participated defined its value as 32.25 g of gold per hundred francs. 5 Rault A., Le système, 2015, Albin Michel. 6 It is interesting to read Schacht’s testimony when he was interviewed by Dr. Oberfelden in Spandau prison in 1946 about his role with Hitler, whom he said he had never met. Also of interest is the economic environment after the Treaty of Versailles and the loan received by Germany from the USA; Golderson N. L., Les entretiens de Nuremberg, 2005, Flammarion.



Short History of Money from Antiquity to the Twenty-First Century

of the population and industrialists. Without a minimum stability of money, the population can easily fall into despair and violence, because it can no longer evaluate the resources it needs to support itself. Disorder sets both in people’s minds and in the reality of the exchange of goods and services. Monetary power, whether centralized and owned by the sovereign or decentralized, has the capacity to grant credit and has characterized the functioning of market economies throughout the centuries, from the Lombard merchants of the Middle Ages to the industrialists of Western Europe in the nineteenth century. It was only in the nineteenth century—inspired by the British example, with the creation of the Bank of England in 1694, and also by the precedent of Holland, where the first European Central Bank was created in 1609—that the European states generalized the creation of central banks, characterized by the regalian guarantee that they provide for the exchange of monetary instruments. Europe was simply following a process already known in the East since the first century BC and even more so in the seventh century AD, in Tang Dynasty China, where state-guaranteed banknotes were issued as a different instrument from those issued by private individuals. The bills issued by individuals were more or less only promissory bills to settle a transaction. With the scarcity of metal coins in the seventeenth century, paper bills became more important than they had been in the past (see the Massachusetts Bay Colony in 1690). What differentiated these public issues of paper money from one another was the quality of the issuer or the authority it represented, the ability to levy taxes and eventually to redeem the issued bills redeemable with the taxes levied. The explosion in the distribution of credit and liquidity foreshadowed a coming crisis, a phenomenon that has been historically analyzed by many authors. Referring to the ancient Greek civilization, a summit not only for philosophical ideas but also for trade across the Mediterranean in the fourth century BC, the Russian writer of the last century Michael Rostovtzeff wrote: “The systematization and regulation of trade benefited greatly from the development of the profession of money-handler, who became a banker as he became more professional. Banks regularly engaged in monetary operations involving a wide variety of credits. So, why did we instead see an economic crisis descend on Greece, a crisis caused by the country’s political evolution?”. The interaction between civilization, trade, the rise of philosophical ideas and democracy, and the development of the means of exchange is a constant in the history of societies. Prosperity due to a better efficiency of the means of production and competitive advantages as described by Adam Smith and the satisfaction due to the possibility of acquiring goods not available locally are all linked to the existence of money. Money to regulate trade is a component of economic efficiency. Today, money is itself impacted by new technologies that improve its own productivity in circulation and exchange. But since the development of money, countless authors have warned against its perverse effects and the decline of civilization also occurs through monetary issues. The ancient Greek crisis described by Rostovtzeff bears striking similarities to the current financial crisis. Greek civilization was extending its influence over

1.2 Caesar and Augustus: Legal and Financial Reforms


Fig. 1.1 A brief history of money market supports

the Middle East under the political domination of the Persians until the Battle of Salamis in 480 BC. At that time, Greece was not a unified political entity but a collection of independent cities with a common culture among which Athens had a leading role. However, the dominance of the Athenian currency, the “drachma,” was to decline irreversibly due to the combined effect of increasing debt and a decline in the economic power and military superiority of Athens. Exhausted by the “civil wars” between the cities and the foreign wars against the Medes and the Phoenicians, the Greek domination in the trade, the culture and the money weakened little by little. The military, political and commercial superiority of Rome was imposed after the defeat of Athens and its allies in the second century BC7 and the destruction of Phoenician Carthage in 146 BC The natural geographical space extended by the “Pax Romana” to large territories across the “Mare Nostrum” allowed for the development of trade and therefore productivity gains through the specialization of populations. The Empire benefited enormously from Sicilian wheat as well as from North African and Egyptian imports, but at the same time it became dependent on them (Fig. 1.1).


Archimedes was killed by a Roman soldier because he did not respond to a warning.



Short History of Money from Antiquity to the Twenty-First Century

In summary, the concepts of monetary units to measure claims and debts go back at least twenty-six centuries and the process of appraisal to define individual wealth, based on monetary valuation, has remained the same.8


The Last Turn to Modern Money: The U.S. Default on Gold in 1971

In August 1971, U.S. President Richard Nixon decided that the dollar was no longer exchangeable for gold. After years of war (Korean War, Vietnam War and the general Cold War effort) and inflation, the link to gold was no longer viable. The U.S. gold reserves could not match the volume of nominal currency in circulation at the official exchange rate. Not cutting the link would have forced the United States to deliver all of its gold reserves to foreign dollar holders, with no beneficial effect for the United States. The price of gold on the open market was already potentially higher than the official parity and selling it at the official price would have been a breach of fiduciary duty to the American public. Selling at a much higher price in order to clear the excess dollars would also have been a breach of contractual obligations to U.S. dollar holders. Nixon and his advisers had no choice but to demonetize gold. They did so by terminating the Bretton Woods agreement. This decision could be considered a major defeat for the United States, but it must be seen from other angles. It allowed the so-called Cold War effort to continue until the final defeat of the Soviet Union in 1989 with the fall of the Iron Curtain. The event was not only symbolic, but also brought about a major change in the world. The fall of the Iron Curtain also represented the victory of market economies over centralized pricing economies. Seventeen years of almost universal growth followed in the Western world. Due to monetary developments and the Bretton Woods Agreement of 1944, the M1 component of the money supply, which consists of coins, bills and/or deposits, is the basic aggregate for a central bank to track the money supply. These components of M1 are easy to express as shown with a number, the nominal value. M1 is the basis of the multiplier, according to which the currency will generate turnover in the economy and multiply as the credits granted are repaid. The Federal Reserve Bank of St. Louis tracks M1. The graph above shows that the old correlation between the money issued and the multiplier, which was caused by the fact that the money issued and circulating is used several times, thus feeding each actor in a transaction, no longer works properly because of


In the Middle East, there are clay tablets (in the National Gallery Museum in New York) with some accounting formats that do not yet include the meaning of the language surrounding the numbers. They date back to the same period as the beginning of writing, about 6000 years ago. Modern formats as they are known in the Western world date back to the time when banking developed with the Lombards, the Italian merchants who traveled throughout Europe in the Middle Ages.

1.3 The Last Turn to Modern Money: The U.S. Default on Gold in 1971


disintermediation, which allows economic agents to exchange directly with each other or through markets without necessarily going through a bank account. Over time, paper and metallic currencies have almost disappeared within M1. Modern money is different from what it was from antiquity until the twentieth century. The fracture came with the French and American revolutions, which founded the concept of an unlimited property right granted to all citizens to oppose the oppression of the sovereign resulting from the fact that the sovereign king is the ultimate owner of everything within his territorial jurisdiction. This “revolution” of minds and laws, even if it was not fully accomplished in practice until the twenty-first century, has definitively differentiated modern societies from the old ones we have been talking about, because they have abandoned, at least in principle, the segregation between categories of citizens by status, blood, inheritance or wealth. The contractual freedom of individuals to engage in legitimate economic purposes was also a revolution that we tend to forget because we are born with these principles and take them for granted. The segmentation of society by status and role was in fact no longer fully operational. Legal equality, driven in particular by the ideals of the French Revolution, even if it often remains an abstract principle, is nonetheless, de facto, a fundamental component of market competition. This new social contract changed the world. The concept of property and that derived from its possible transfer meant the possibility of exchanging almost anything but also required the need for a measure that money allows. The exchanges allowed, without knowing it, the emergence of new types of money that were not necessarily guaranteed by the sovereign. After the wars that afflicted Europe in the twentieth century and the end of the Cold War between East and West, the need for centralization required by the armament effort diminished. At the same time, free economic trade and the competition that goes with it were accepted by all the remaining powers as an effective political and economic model that was to be imposed on the world. The globalization of trade has been accompanied by a financial creativity that has modified the traditional nature of money. We will see later that money has expanded not only technically speaking because of its reality based on an essentially immaterial medium, but also from a legal point of view: the payment of a transaction is no longer limited to a cash payment with a check or a bill of exchange or even a bank transfer. The capacity of an economic actor to generate money has existed since the invention of money. One way of looking at monetary emission is to perceive it as the social capacity of producers to emit new money when they generate claims and these claims, once sold, mechanically become a monetary instrument by their negotiable nature. This claim can be considered, as long as it is not extinguished, as equivalent to a free issue, as in the case of the issuance of bills or lines of credit by the central bank when the statutes or regulations authorize it. As we analyzed in detail in our previous book, the speed of turnover will determine the growth of the volumes of money in circulation (when trade grows) or their contraction (when it slows down) simply because of their accounting. The depreciation of value or its increase will result from the need to adapt over time, the flows, supply and demand to the quantities of both real goods and money. When there is no longer an equivalence between the creation of wealth and the circulation of money, the default constituted by the non-repayment of a booked debt will be the result of the need to adapt the flows, supply and demand to the quantities of both real goods and money.

The shortage or excess of money can also be generalized when the central bank allows prices to change in monetary units or when it decides to change the exchange rate with monetary units. The shortage or excess of monetary volume



Short History of Money from Antiquity to the Twenty-First Century

can also be general when the central bank allows prices expressed in currency units to vary freely or when it decides on a variation in exchange rates with foreign currency units (we will return to the link between currency units and the standard in Chapter 6). Finally, money today is affected by a new technological environment that improves its own productivity in terms of flows, convertibility, transparency and security. Things to Remember

Lessons from History What can we learn from history from a monetary point of view? Money is linked to the human societies that invented the principle of property and all the institutions necessary to enforce this principle through laws and judges. In modern societies, property rights are enshrined in constitutions where they are protected against the arbitrariness of the sovereign.9 Property rights are not only established as such, but are often absolute, meaning that the holder is responsible for the property he owns. Not only is the right of ownership established as such, but it is often absolute, which means that its holder is responsible for the goods placed in his hand for the income but also for the damage he may cause. Thus, there is no property that does not belong to anyone, called by jurists “property of the freehold.” Once such a legal system is viable, the measurement of commitments becomes an inescapable issue. Measurement is about the performance of commitments, i.e., their pricing and a timetable for the obligations attached to them. This is based on the observation that reforms of schedules and weights and measures have often been carried out at the same time as reforms of political and financial institutions. For any society, the processes of implementing sound monetary policy have always involved the intervention of a ruler under whose aegis such operational reforms and their daily monitoring could take place. Money is a common good of society, a good that carries social objectives and feelings. For example, when it is mismanaged by central banks with lax monetary or fiscal policies compared to the necessary liquidity needs. Money can also be the cause of social unrest when it provokes a feeling of injustice. This will be the case when its distribution is not fluid and no longer feeds households in a balanced and sufficient manner. This will also be the case when fraud is widespread and when the monetary unit is manipulated. Money also raises the question of collective responsibility as opposed to individual responsibility. It was a mistake, for example, to punish Prussian Germany for the damages of World War I. The war damages were never


Constitution of the United States.

1.3 The Last Turn to Modern Money: The U.S. Default on Gold in 1971


really paid by Germany but used by the propaganda of the Nazi government to challenge the Treaty of Versailles as unjust. The political challenge was based on the fact that German citizens never felt (and probably were not individually) responsible for the war, while they were asked to pay the consequences collectively. The Allies after World War II learned from World War I and did not repeat the same mistake by destroying the German currency through an unrealistic system of sanctions that deprived them of the means to run their industry. On the contrary, under the aegis of the United States, they implemented the Marshall Plan to rebuild the destroyed economies, including that of the Germans. More importantly, they decided, under pressure from the French judge at the Nuremberg war crimes tribunal,10 to follow the criminals as individuals and not the German people as a whole. Money is bivalent. It is a collective good, but it is used individually and collectively. This link between individuals and society is the central subject of this book in that it is the basis for the reflection, and the recommendations that follow, of an extended currency whose only vocation is to develop production and thus the GDP available for redistribution through its effect on the real economy. Therefore, its quantity is not important in itself and must be variable, upwards or downwards, according to the needs expressed in terms of liberating value in relation to posted prices. This is the opposite of the old model where quantity was constrained by dogma. The distinction between the real economy and the financial economy that we are insisting on has always been known, but despite its obviousness, no one before Nicolas Oresme (Abbey of Lisieux, France 1325-1382) had been able to explain where the boundaries between the two spheres lay. With the exception of religion, everything that was negotiable at that time was tangible, especially money, which was essentially metallic. The subject has never been concluded and the question of the interactions between the real economy and the financial economy is, more than ever, open. The New World on the Model of the Current currency Today’s money issue profile. The following graph aims to show that modern money, when it is not simply issued by central banks in the form of coins and banknotes, results from an exchanged production when it is not immediately and totally compensated by a total or only partial payment. The resulting difference creates a balance which is a reserve of value and therefore money. It will appear on balance sheets and profit and loss accounts. We will see that this pattern is the simple result of accounting rules, in particular the double-entry rule, which requires


The trial organized by the treaty of August 1945 between the allies lasted from November 1945 to October 1946. The French judge was Henri Donnedieu de Vabres.



Short History of Money from Antiquity to the Twenty-First Century

Fig. 1.2 Modern money-issuing process

that a transaction has a single defined price accepted by both the buyer and the seller, each of whom will record it in their respective books for the same inverse amount with a counterparty: the purchase of one being the sale of the other, and the resulting receivable of one, the debt of the other (Fig. 1.2). It can be seen from the graph above that money creation is linked to production, to balances payable, including with any other financial instrument, and to money issued without consideration. It is also linked to the money of the central bank and to the bills or bonds resulting from the public deficit. The latter components of money, being generally accepted, allow all economic agents to finance their production and distribution cycles with the balances they hold. This is why balances, whatever they may be, are already, in substance, money that is waiting to be released on the terms of the contract, whether implied or written and set by terms and conditions or by law. This is the first link between the economy and available money. The word “available” also refers to a concept of volume where scarcity would hold back the economy. In 1971, the failure of the United States to guarantee the dollar’s link to gold freed up money and allowed the volume of money available to be

1.3 The Last Turn to Modern Money: The U.S. Default on Gold in 1971

adjusted after at least two millennia of concern about the availability of precious metals both to define the unit of currency and to maintain the volume of money and credit appropriate to the needs of trade. Central banks were no longer obliged to exchange their currency of issue for anything other than new fixed-rate instruments. Treasuries with budget deficits became the issuers of money, while independent central banks were only charged with fighting inflation by managing interest rates—a model that prevailed after the fall of the centralized systems that had prevailed since the Roman Emperor Diocletian, with maximum price lists, or, on the contrary, with U.S. President Roosevelt who tried to fight deflation with minimum prices and budget deficits. With the crisis of 2008, central banks avoided the collapse of the financial system and invented the concept of unconventional policies to provide liquidity to financial institutions with QE (Quantitative Easing) and to fight against the slowdown in the rotation of money flows and the consequences on the facial values exchanged, i.e., an overall monetary contraction. The opening of the monetary spaces of the financial markets and financial innovations has allowed the emergence of new forms of fiduciary money. The reference price of the unit had disappeared. Free-floating nominal face values became the new basis. This transformation was a natural process triggered by necessity when metallic money began to fade, but it developed in an extraordinary way after President Nixon’s decision. The paradox is that while efficiency in production requires constant adjustments of the most diverse kinds that only a market economy allows, it also requires monitoring to make these adjustments sustainable for societies. To achieve this oversight at the international level and to allow for the most efficient allocation of financial resources around the world, there must also be a central mechanism to regulate what needs to be addressed and another mechanism to enforce the measures adopted. The more the universe is deregulated, the more the central banks have the same need to determine the amount of appropriate monetary masses to make available to the economy during the periods required by the cycles that govern each agent and its activity... The transformation of the monetary framework associated with the abandonment of gold was carried out outside any international framework limiting the issuance of new currencies and allowing for risk management. As soon as the disappearance of the Bretton Woods framework was noted, it was suggested that the members of the G20 should meet to establish a new benchmarking system. Since the English Revolution, public budgets and accounts have been governed solely by parliaments, but monetary management has become independent in theory, with international coordination created between independent central banks. The decentralization of the issue of money that resulted from the abandonment of gold as a reserve allowed, by freeing them from all constraints, the growth of posted exchanges but also of budget deficits and of the masses of claims to be used, all of which




Short History of Money from Antiquity to the Twenty-First Century

became at the same time masses of a monetary nature. On the other hand, it was not accompanied by—in the absence of reform, and as would have been necessary—detailed monitoring of the flows released to manage the risk of collective abuse and to support the development of sensible regulation. This regulation needed a basis for the unit of currency and a detailed analysis of the types of instruments used to satisfy exchanges, as well as a clear distinction between real transactions and financial transactions to replace the distinction between the currencies of central banks, banking institutions and other economic agents. As we have already analyzed in our previous book, these phenomena developed at a time when the means of telecommunication were changing and their medium was becoming almost totally digital. This transformation had an important impact. General de Gaulle’s statement that gold was the best reserve instrument because it belonged to no one, which was true, became irrelevant. He was probably advised by Louis Armand and Jacques Rueff,11 who raised the question of what reserves should be made up of and who should be empowered to set their value or what kind of mechanism could be adopted to set that value. Specifically, they wanted to know whether it should be an extrinsic system, the market as with gold, or an intrinsic system. The intervention of a human being in the operating mode being inevitable. In order to address the subject of monetary reform, we will first examine how the recording of exchanges in the economy works today, knowing that the accounting regulations that define its representation are now largely international and the principles, such as the one already mentioned of the double entry, universal. By accepting the abandonment of the gold standard, the world was changing its paradigm and instituting, without saying so, a new rule of calibration, the one that the markets were to set by the price of exchanges expressed in the different currencies in use; the new system was not, however, likely to convince all the important members of the international community, and the latter was supposed to meet in order to set a new framework of calibration and a new monetary system. This meeting, with this purpose, never took place or resulted in a draft. The system has been based solely on the reality of the double-entry rule, which is imposed on trade and requires agreement between the parties. Thus, economic agents today find themselves in a system where they only exist financially when they are recognized as individuals or as companies and their transactions are recorded in the accounts.


They published a report known as the “Armand Rueff Report” which based General de Gaulle’s economic policy and reforms on a balanced budget and a new currency upon his return to power in 1958.

1.3 The Last Turn to Modern Money: The U.S. Default on Gold in 1971

Of course, compared to the old system, we have made a huge breakthrough in the way observations are processed and forecasts are made. The reality of all transactions can also be tracked and forecasting models can be built. Gold was unique in its formula and weight. The essentially information-based financial system can show observers an unlimited number of combinations and these can be used as the basis for assumptions about the behavior of the players. As already mentioned, the independence of the financial world from past exchange realities can then be better analyzed. The traditional opposition between macro- and microeconomics disappears, to be replaced by the idea that we have different lenses to analyze different sizes, but that we accept that individual interactions are the model that allows us to detail realities and adapt aggregates to the analysis sought.



The Evolution Toward Modern Money and the Path Toward Digital


Money and Accounting Are Closely Linked

Exchanges are recognized by recording them in files, usually books called “accounting journals.” When the receivables and payables resulting from these exchanges appear on the financial statements, they are transformed by the fact that they become a balance in the books and thus are endowed with legal protection allowing them to be recovered or the obligation to pay them. These claims and their counterparts, debts, become “money” if they are exchangeable. Moreover, because a unit is nominally associated with a number in accounting, and because the number called “nominal” is inherently universal (receivables and payables are expressed in units that become “money”), the accounting standards used to define what is a receivable and what is a payable can strongly influence how we view “money.”


Financial Statements: Defining the Real World and the Financial Universe

In an organized society such as the one in which we live, it is important, in order to know the economic world around us and with which we interact, that statistics classify financial transactions according to their economic nature and the resulting claims according to their legal nature and the rights associated with them. Long after World War II, most of the centers responsible for collecting and processing statistical data adopted more or less the same classification scheme. All economic agents, except individuals, who are called “households” in statistical language, used these models for classifying economic agents and transactions made for the preparation of financial statements that are used to recognize the ownership of assets and the liabilities owed or potentially owed (e.g., pensions).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,



2 The Evolution Toward Modern Money and the Path Toward Digital

From the point of view of monetary language, the world of accounting is separated into two parts: on the one hand, that of those who keep their own accounting records by legal obligation or simply for tax purposes, and on the other hand, that of those who deal with the former, i.e., private individuals whose every economic act leaves an accounting trace. The first category mirrors the second and relies on accountants to draw up financial statements. In the world of auditing, a final category deserves special attention that which has the sovereign power to issue instruments without consideration and to change the unit in which they are expressed. In the United States, for example, this category includes the central government and the Federal Reserve Bank, which was established in 1913. With the industrial revolution, companies played the role of monetary creator through the explosion of trade and the resulting credit between economic agents, individuals or companies. However, the financial abuses of the monarchies, especially the French, led, during the nineteenth century, to the establishment of an additional monetary level in the control of public spending with the creation of independent central banks and with the aim of controlling monetary issuance and currency stability in relation to the gold standard. This system, despite the violent crises it went through, particularly during the wars, held up until 1971 with the abandonment of the gold standard. The removal of the limit linked to the standard has freed up money creation by central banks, which have become over the decades, partly in spite of themselves, the key player in money circulation, liquidity and inflation control in a context of drifting monetary deficits and the purchase of government debt that they generate. The principled prohibition on central banks lending to the Treasury has been shattered since the 2008 crisis and the monetization of public debt. The COVID-19 crisis has amplified this phenomenon beyond all limits.


The Real World and the Financial World

In the previous works, we distinguished transactions carried out on material, immaterial, financial or non-material rights and their stamping with a price generating a claim on one of the parties and a corresponding debt, i.e., a potential monetary instrument when it is negotiable and conforms to other monetary characteristics (accessible, stable in value). Derived from this approach, the universe we observe consists of two spaces, one transactional and the other financial, both linked by a distinct information system. The change in the way transactions are carried out and the volume of data now available allows multiple participants to know everything about the real world (what was exchanged, between which parties, when, where, how the object was transferred, how it was delivered, thus allowing for the attribution of responsibility for the operations carried out). Data can also be stored with a temporal chronology with no value limits. This was not the case before. At the same time, payment methods with cash or clearing are simply governed by law or, more often, by the regulations of the market platforms.

2.1 Money and Accounting Are Closely Linked


In this comprehensive understanding of the economic world from a monetary point of view, balances are recorded when transactions take place and the potential monetary instruments, i.e., the associated claims, become such at their nominal value. These are elements of the financial universe. We can then distinguish more clearly between the real world of trade in goods and services and the world of financial balances that can begin to circulate when one is released from a debt resulting from an exchange or resale of financial instruments that is identical to a monetary exchange. The two universes are linked, the nature of their link being the most complicated subject to understand. This vision is not really new in principle. Aristotle (380 BC) takes the same approach in his Politics when he distinguishes between natural wealth—resulting from work—and chrematistics, the monetary unit1 . The first category of assets belongs to the real world while the second comes from the exchange of chrematistics. Aristotle notes that physical realities have limits, whereas there is no limit to the accumulation of charismatics. Moreover, as the financial world has grown without limit, the question of the link between the two spaces is increasingly crucial. For example, in 2008, when the financial crisis broke out, the immediate question was whether, how and how fast it would affect the real world. The remedies to be prescribed and implemented depended on the analysis made and the answer given to this question of the link between speed and effectivity. The answer given, in our opinion ill-defined as explained in our previous work, was different according to the specialists. The strategic choice of regulatory bodies, led by the G20 and the Financial Stability Board (FSB), has been to disconnect as much as possible the two worlds, that of reality and that of finance, in order to avoid a contagion phenomenon in the event of a drop in values. This has resulted, in particular, in a search to reduce the mass of shadow banking and the addition of prudential ratios in each of the two worlds to act as a shock absorber in the event of a sudden encounter between the two worlds. The pandemic of 2020, which has greatly slowed down economies, has benefited from the lessons of 2008 by engaging the budgetary capacities of states more than ever, but has also made the question of debts, the essential theme of our developments, more sensitive than ever, by shedding light on the distinction between reality and representation in the field of money that underlies modern economies. Any questioning of the ability to collect debt calls into question the confidence in the social pact on which our societies are based, and its constantly rising level is an obstacle to a reform of the monetary system (Fig. 2.1).


Aristotle, La Politique, translation by J. Barthélemy-Saint-Hilaire, 3rd ed. by Librairie Philosophique de Ladrange.


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Fig. 2.1 Real world and the financial world


The Basis for the Expression of Today’s Money

Financial statements determine economic data. They allow for the analysis of trade. Precious metals now represent only a marginal fraction of global monetary instruments, valued at less than $1 trillion against an annual global GDP of $88 trillion (World Bank, 2019). As a result, precious metals are no longer used as a benchmark for monetary valuation. Nominal values struck on the face of coins, printed on bills issued by central banks and listed on private instruments (such as personal checks) are now associated with accounting standards. Accounting, bank statements and corporate current account statements are, at the scale of exchange economies, the only remaining observable image of monetary expression. Individuals and firms can only understand their ability to trade through their books, which indicate the nominal value corresponding to the “price” of a transaction. Ledgers show these exchanges and their prices and show the balances that result from deposits, loans and withdrawals that determine the owner’s ability to collect or withdraw money. Other major mechanical consequences result from the generalization of the accounting rules: any change in the value of the object of a transaction already

2.1 Money and Accounting Are Closely Linked


recorded representing a receivable, a debt or other assets will generate uncertainty as to the balance and net worth of a company’s assets that its “balance sheet” is supposed to represent. In theory, if the financial instrument is recorded in accordance with the guidelines of the fair value standard (IFRS no. 9) in the income statement, it will generate a profit or loss depending on whether it is an increase or decrease in value. A decline, even if not recognized, will trigger in the analyst’s mind the idea that the indebted entity may not be able to repay its debts if earnings are not sufficient to cover the loss, even if not yet realized. Therefore, any change in value should logically generate an equivalent potential gain or loss on the balance sheet. Almost all monetary flows are now processed through electronic exchanges that are evidenced by accounting entries characterizing the ownership rights to the asset or the commitment to pay a debt of each individual or company. Even if individuals do not have books or records that they are not obliged to keep, they are increasingly concerned by electronic exchanges and the statements that are given to them (bank statements, card statements, automatic transfers and deductions, etc.). Accounting has become the universal language of money and exchange. It is transnational. It must not be falsified, it must be recognizable and financial statements must be comparable. Any serious doubt about the quality of bank statements or financial statements would trigger an immediate reaction from the economic agents involved and have a devastating effect on transactions. If doubt of soundness of the financial system, rumors can develop unchecked in the financial markets from which our economies are refinanced. Rational economic agents must refrain from spreading rumors in the markets. The freezing of transactions, the risk of recession or the regression that would follow would be a threat to our societies. This is a major challenge for modern economies. The analysis of financial statements determines, with or without the help of rating agencies, the rating assigned to public or private issuers. It is the only way to assess their economic and financial situation. On the other hand, the analysis of central banks’ balance sheets provides a view of only one area, that of the national currency in relation to the banking system, as well as its link with the public accounts and the country’s external position. This last analysis is of little meaning if it is not complemented by data from the financial markets and from companies; it does not allow for an appreciation of the economic realities concerning resources and production. When money is in excess due to lack of use, it must be stabilized with special devices to limit its volatility. Financial instruments comprising all kinds of balances expressed in monetary units as they circulate are now monetary in nature: they are liquid and exchangeable ad infinitum. By their very nature, these instruments issued by globalized companies compete with central bank issues. Understanding the markets where they are traded is as necessary as understanding public issues and the traditional definition of money supply: M1, M2 and M3. It is only when these instruments, which have become a new currency, are governed by international standardization that their volatility can be controlled in order to best discipline the functioning of the markets, and that their emancipation


2 The Evolution Toward Modern Money and the Path Toward Digital

from the overabundance of liquidity will be possible. This is the purpose of the definition we provided in our previous books.


Stock Markets Influence Financial Statements; Monetary Transmission

In physics, numeration is the most efficient way to represent reality, but it does not represent reality itself. In economics, exchanges, whether legal or real or both, are reality. The entries, which are represented by both the balance sheet and the profit and loss account by the ledgers that record all the entries and allow them to be established, reflect either real exchanges or exchanges of resulting instruments. They give a picture of the real world. The way in which this picture of the realities of exchange is interpreted by its reader is an important subject that determines the behavior of economic agents.


One Global Language, Accounting

The conversion of exchanges into figures is a prerequisite for understanding the distinction to be made between the tangible world of exchanges and the financial world of exchanges that we call the financial universe. It requires the use of a language called accounting. The first thing to understand about accounting is how an exchange gives rise to a financial instrument that then becomes a potential monetary right when it is transferable by sale or other means. The media for recording transactions are known as books of account, whether they are digital or paper-based. The books of account must record any transaction that has taken place between a company, an administration or a non-profit organization, between them or with a natural person acting as an individual. In addition to individuals (i.e., citizens) acting as such who are exempt from this legal requirement, each of these entities must comply with commercial codes to keep books and records according to a uniform scheme, the “accounting standards.” The keeping of books and records is not only a necessity to represent the financial world, but has become a legal requirement for any corporation (commercial or otherwise) or organization in the twentieth century. Tax collection, evidence for business purposes and sometimes publication for third parties are the usual reasons for the dissemination of this obligation. Any natural person who is a trader, legal entity or government entity must also record in the books of account any transaction affecting his economic activity and assets. These transactions must be recorded chronologically and expressed in the currency unit in force in the jurisdiction where the person or entity is located (dollar, euro, yen, pound sterling, renminbi, etc.). The entrepreneur, individual or legal entity, must take an inventory at least once every 12 months to help prove the existence and value of the business assets. He must draw up a financial statement by centralizing the journals of accounts, called “financial statements,” which include the income statement and

2.2 The Uniqueness of the Transcription of Exchanges


the balance sheet, at the end of the fiscal year, which itself has a defined duration, thus allowing to associate a result to a period of time. The quality of bookkeeping and the resulting financial statements are the key to the degree of trust that is itself a foundation of economic life. The framework for an accounting system consists of three parts: a periodicity for locating data, a unit for measuring transactions and a system for ensuring consistency and uniformity related to the need to compare financial statements in order to judge the economic performance of the entity preparing the financial statements. Property law is the foundation of accounting for “accounting” for transfers of rights from one person to another. Without a property right to define the principles and a judicial system to ensure its implementation, i.e., its protection, accounting would not exist. Indeed, no inventory of assets could be made of an uncertain asset, not guaranteed by a legal framework. What operations are covered by accounting? Without limitation, these are the operations of purchases, sales, rentals, cash flow and contractual commitments other than those already mentioned (rentals, investments, etc.). Accounting therefore becomes a matter of law to ensure the integrity of the exchanges and the data that account for them, and the eventual recourse to the courts, when disputes inevitably arise, guarantees it. These disputes will require prerequisites and evidence of what happened for the plaintiff. The regulations and laws must organize the way in which the evidence can be brought to the attention of judges. From a management requirement, accounting has become also a matter of tax regulation as tax levies increased to meet the growing needs of governments after World War I. Over time, accounting standards were set, not by governments (in wartime and just after the war) but by independent authoritative bodies. After the war, this task was entrusted to the FASB (Federal Accounting Standard Board, in the USA) and to the IASB (International Accounting Standard for Europe and other countries), all of which were approved for reasons of sovereignty by the monetary, fiscal and/or judicial authorities. There is also a general rule, often repeated by standard setters and based on the need to localize errors and combat fraud that any transaction involving a transfer of ownership must be accounted for. In order to meet the essential accounting requirements and to provide a general language and some basic rules, accounting practitioners and standard setters have established what are called generally accepted accounting standards.


The Uniqueness of the Transcription of Exchanges


The Principle of the Double Part

There is a universally recognized and already mentioned principle which, as such, is law. It is the principle of the double part. In the Western world, it is considered to have been invented by Luca Pacioli, a priest in the service of Lombard bankers in the fifteenth century. He wrote a book called La Summa on how to keep books of account when it became necessary for bankers to keep track


2 The Evolution Toward Modern Money and the Path Toward Digital

of transactions with summaries of what they had lent and what was still owed. Lombard bankers financed international trade in the fifteenth century in Western Europe. They needed to know against which correspondents they had credit or debit balances, i.e., “they owe me” or “I owe them” certain amounts in this or that currency. This principle is simple and logical; it results from the transfer of ownership when an asset is traded. For an asset acquired that appears on the asset side of the balance sheet, there is a corresponding liability for the price paid, which appears either as a reduction of cash or as a credit to liabilities. By definition, the price being the same for the seller and the buyer, the amounts debited and credited are equal for the same transaction. By convention, it was decided that debits would appear in the left-hand column of the ledgers and credits in the right-hand column. It will soon become apparent that some debits represent assets, such as machinery or a building. Others represent a legal link to the original party of the transaction but can also be transferred to a third party as debts or receivables. With respect to the original party or third parties, debtors or creditors, it may be decided that the balances will offset as current accounts. In other cases, depending on the applicable law, set-off may be permitted or prohibited, which would have consequences for the liquidation regimes of claims and debts that may be attached to rights and obligations under different schedules. The impact of this accounting technique is of paramount importance on the balance sheet structures and prudential ratios of banks. The right to collect receivables and sell the existing underlying asset is different in different countries. In addition, the sales pattern changes in practice due to the nature of the goods and ancillary services sold (telephones and subscriptions to services with communication media). This makes it difficult to compare the financial statements according to the applicable real estate and commercial law, using the same accounting standards (IFRS for sales recognition). It should be noted that a business enterprise can change the nature of its assets and liabilities through exchanges (e.g., selling its receivables) and can develop offsets in other ways. In addition, the basis for an offset may change over time. When a debtor is in trouble, a balance between the debts and credits of that troubled company is allowed. The debt remains due, while the credits are added up in the legal proceedings. This process can be affected in a long-lasting insolvency situation such as Chapter 11 bankruptcy, in which payments to creditors are suspended while a reorganization plan is submitted to the bankruptcy court. We will find this technical problem, hidden or not, in the market valuations that played a major role in the financial crisis of 2008. The double-entry system has other qualities that were not evident when it first came into use in the fifteenth century but which now form the basis of any verification process and reinforce the view that the values recorded should not be changed. If an error is made in recording unbalanced transactions, the sum appearing on the debit and credit sides of the balance sheet and income statement will not be equal. As a result, at least one of the specific accounts to which the entry in the accounting book has been copied has an erroneous balance, and the balance of accounts

2.3 Accounting for Liabilities


will appear unbalanced, allowing the search for the error or fraud. When the bank’s accounts are substantiated by reconciliation (arithmetic explanation of differences) with independently and separately maintained bank statements, any unexplained discrepancy indicates an error or fraud in a counterparty account. The determination of this diagnosis is due to the fact that the legal reality is unique and paramount. Any issue of money must be recorded from the central bank, but also in the banking system and consequently in the whole economic system of the companies with which the individuals will deal. From this starting point, the issue of the appropriate medium to ensure that a single record is the original arises: this is true for a bank bill, and it is true for any credit note and any entry in an accounting book. New technologies, such as blockchain, which guarantees this uniqueness, can change the efficiency of money flows. We see here that physics is indeed at the heart of the financial system. For now, physics makes the chronology of transactions inviolable, and if a transaction, which occurred once, appears twice on a ledger (the ledger of a blockchain, for example), one is too many and the anomaly can be located and qualified to be corrected and its cause eventually sanctioned. We see that the rule of the double part—a reality shared between two parties—is a form of blockchain that worked before the digital era. It should be noted that the property of “the double part” is found in the exploitation of the blockchain in the digital world, whose presentation in its space is only a version of it in a unique and continuous space.


The Principle of the Annual Exercise: Integrate the Time Factor

Financial statements must relate to a period of time. In order to measure financial performance, financial statements must relate to a defined period of time. The parallelism between income and expenses in the income statement applies only in the context of accrual accounting, where expenses and income are recognized on an accrual basis, i.e., when the transaction is concluded. Any revenue must correspond to the accrued expenses or income necessary to make the revenue final (this principle is in addition to the accrual principle). This principle raises difficulties when a contract does not have a straight-line performance period and when it straddles a book closing date (this will often be the case in the construction industry where cycles often exceed 12 months).


Accounting for Liabilities

The books must be kept in a monetary unit fixed by law: in the United States, it is the dollar; in the European Union, the euro (for 19 countries in the Eurozone out of the 27 members of the European Union).


2 The Evolution Toward Modern Money and the Path Toward Digital

Debts can be issued, i.e., given concrete form by a legal title, thus becoming financial instruments. If not, they may or may not be determined or valued. When debts are negotiable, this means that they can be transferred between various parties. They can be more or less precisely determined, or not, as to their amount due and their beneficiaries, which is the case of the pension reserves that are at the heart of our subject. They may be accounted for when their amount is determined or appear as an off-balance sheet commitment when they are not yet accounted for. When they are issued, they must be considered as part of the money supply, as we shall see later in defining M5 (see Chapter 3). For their part, standard setters, overconfident in their ability to evaluate commitments using mathematical models or market benchmarks when they exist, are pushing companies to improve their financial ratios, to dispose of their pension liabilities by outsourcing them to specialized legal structures such as public or private pension funds. Due to the combination of the transfer of ownership laws and the double-entry rule, the entries are similar for the transferor and the transferee. As a result, the “price” of the transaction must be recorded at the nominal value at which it was concluded. This value, which is linked to a real legal transaction (the transfer of ownership), is referred to as the “historical value.” Historical value means that balance sheet items are recorded at their original cost, the price to be paid (also known as “historical accounting”). Historical accounting is different from inflation accounting. Inflation accounting recognizes that the value of acquired fixed assets has changed due to inflation, which increases the value of the assets when expressed from their original value in the correlative disbursement. Argentina adopted such a system for fixed assets when it experienced a period of hyperinflation, but based on regulated indices that make the financial data difficult to understand for the uninitiated because they do not consider market values.


Accounting for Financial Instruments at “Fair Value” (Addressed by IFRS 9)

In contrast to the historical value method, there is also the “fair market value” (FMV) adjustment method, which consists of recognizing an impairment loss at each balance sheet date if the historical value is higher than the balance sheet date. Over the years, the practical ease of distinguishing between long-lived and liquid assets in their valuations has diminished with the mechanisms for transforming long-lived assets into marketable financial instruments. With IFRS No. 9, which introduces a system of continuous valuation of financial instrument portfolios, the gains and losses recognized by fair value measurement may not appear in the income statement in the absence of realization and appear only as a change in equity, depending on the purpose of the investment concerned.

2.3 Accounting for Liabilities



A New Vision of Accounting in a New World

Accounting is simply a language for representing the legal commitments that govern relations between economic agents and, more importantly, for reflecting the financial position of the participants in the exchange with the counterparty. There are two types of participants: individuals and companies. This is why standards are needed to ensure the homogeneity of the representation and the reality of the transactions. Without defining how a transaction should be displayed, the capabilities to build representations of reality by digitizing a value could not be exploited. The addition of numbers to identify the different legal natures and characteristics of the goods exchanged would miss its target, which is to mean something to humans as well as to production or storage robots. The level of aggregation of classical accounting is challenged in the modern world when the characteristics of a transaction can be multiplied in many combinations as to the assets or services exchanged between the parties to the transactions. Conventional accounting, with aggregates that erase the detail of the paperwork, can no longer compete with digital approaches without limits of detail and attachments, let alone reconciliations with third parties and markets. The detailed analysis of all transactions should prevail over classical accounting based on group accounts; the “general ledger” should remain only a simplifying view of reality for specific users and therefore be differentiated according to the objectives of the different readers. This is why standard setters have established rules that designate the users of the financial statements (usually the shareholders). A number of stakeholders are thus forgotten (such as employees, tax authorities and the ecological environment) and require corrections that the processing capabilities did not allow when the accounting standard-setting bodies were set up in the twentieth century. Therefore, safety and efficiency will be increased when a transaction is known about the object (all the characteristics attached to it can be traced as to nature, image, weight, size, quality of colors, use of price and purpose, without any limit). Aggregation will be governed solely by purpose and may allow tracking of margins made by each participant. Overall, the subject of time and chronology where conventional accounting fails in valuation (e.g., for long-term commitments such as pension benefits) can be addressed through the reality of flows and create an identified link to the real world. It is worth recalling the public and public interest expectations that accounting must meet. The latter should be governed by standards that are as homogeneous as possible in order to allow comparisons of performance with alternative investments over time. This comparative approach will help to ensure the reliability and transparency of transactions. The public will also expect independent safeguards and their expectations will be met (preferably through the opinion of an independent auditor) and, if necessary, that sanctions will be imposed in the event of a violation of the reporting rules by the courts or by specialized authoritative institutions, such as the SEC in the United States or other government agencies.


2 The Evolution Toward Modern Money and the Path Toward Digital

Accounting books and records are not only usable by the business, for which they were designed. The data they record is indeed universal; it builds the monetary base (M5, M6) and determines the financial results of the exchanges. In so doing, depending on the economic philosophy adopted by the system, they can be used by other stakeholders. The durability of accounting standards is also linked to the need for comparison over time. Without time-bound accounting, any analysis of performance over time would be compromised by the repetitive changes in concepts that can be triggered either by financial innovations or by the excessive creativity of standard setters who want to justify their existence. Comptable principles are old and, because they have proven themselves, durable.


The Shortcomings of Accounting

In Einstein’s language, accounting would be a methodology for constructing a representation of exchanges over time. What it lacks, once it gets off the books and onto the summary accounts, are two key pieces of information that accounting does not naturally consider. The first is the due date on which a receivable or payable resulting from an exchange must be paid. This information is supposed to be known as part of the exchange contract, but it will disappear when it is aggregated into an account to collect information by instrument (commercial paper, etc.), debtor or creditor. This information was more or less explicit in classical accounting by the rule that balance sheet items should be classified in order of liquidity, from the least liquid (fixed assets, issued capital) to the most liquid (cash and receivables immediately payable or repayable on demand). In any case, the concept of liquidity has disappeared from the financial statements and can only be provided by the details of the accounts or explanatory notes to the financial statements that explain commitments and maturities. The second piece of information missing from the financial statements is the credit status of the counterparty, which will only appear in two categories: current, i.e., regularly honored, or default, when the due date has not been met. To address the shortcomings discussed above, fair market value determination (IFRS 9) and risk-weighted asset valuation are now required by banking supervision. Of course, it should also be noted that, while the 12-month cycle is appropriate for agricultural activities, longer production cycles cannot be properly represented, especially those that require heavy capital requirements. They require analytical systems so that results can be quantified at each close. The implementation of accounting principles that allow performance to be measured and compared requires continuous monitoring of margins and liquidity risks adapted to the cycles. Consequently, the way in which adjustments to financial values are accounted for at their “fair value” principle, when it affects the income statement, will have to be reconsidered. The legal principles whose relevance has changed little or not at all over the last two millennia must once again become the basis of the accounting standard-setting system and clearly distinguish between

2.3 Accounting for Liabilities


what is a commitment and what is a liability or risk. The way in which movement records are visualized and used must be rethought. Value adjustments by reference to market values (GMF) should be reserved, in our view, for instruments whose nominal value is not determined, such as the amount of pensions for example. The application of the fair value principle is problematic insofar as the parties have the choice of implementing the valuation method at the GMF, thereby calling into question the double-entry principle, which consists of considering that a claim/debt is for an equal amount for the buyer and the seller. This situation entrenches an imbalance between the parties in the settlement of the rules and, moreover, renders the representation of exchanges at the macroeconomic level illegible, in its consideration of monetary exchanges by M5 and M6, which only admit balanced entries and the construction of the aggregates that can be derived from them. Recall that in our first book we defined a new monetary space encompassing all financial instruments, especially those representing claims and debts held by firms, which we called M5. To these can be added the non-counterparty elements of debtors and creditors that constitute the theoretical amount of equity. The addition of the latter with M5 represents M6. These new concepts are an essential element in our vision of monetary reform and we will develop them throughout our discussion. This artificial distortion of the legal reality of exchanges affects the vision of financial equilibrium and leads to a distorted perception of a transaction which, by its very nature, can have only one price. The principle of the intangibility of entries is flouted by the method, even though two or more owners of a similar asset may have a different estimate of it. In any event, in the event of a dispute or liquidation, only the value fixed at the time of the exchange contract will serve as the basis for the settlement of the transaction. Of course, the static approach of closing the books on a historical basis if used for financial statement comparison is not intended to represent the reality of the duration of industrial and commercial cycles. The new information processing capabilities can track the history of transactions and the resulting receivables without unilaterally changing the accounting representation of the exchanges, as fair value does. IFRS 9 is a very serious mistake that can only be justified by the insufficient training of standard setters and the dogma that the common rule can change the physical rule. Analysts need financial statements with fixed starting values in order to comment on the events of the accounting period and to be able to explain variations and compare them with external values. The question of value is very much related to the turnover of money, but also to the turnover of any asset, and the observer, the analyst, can use different valuation criteria. Fair Market Value (FMV) is an external approach to be used only by professionals, accountants or analysts, for comparison purposes and without interference from reality. FMV is an accounting concept by which the valuation of a good or service is done by reference to a market price established between independent parties. Only governments with a democratic mandate should be allowed to change a price, by law and without interference with private contracts. At the macroeconomic level, it is up to statistical bodies, not corporate accountants, to specify the information needed to


2 The Evolution Toward Modern Money and the Path Toward Digital

estimate the elements that make up M5, i.e., the creditworthiness of the debtors, the value of the exchange currency and the maturity dates. The issue of accounting for retirement benefits is also specific to the issue of time and presents the same uncertainty in measurement. It need not be explained that in modern societies, employment contracts with a known salary for past services are associated with long-term pension benefits, either of a defined amount or based on guaranteed contributions by the employer. With a working career starting at age 25 and ending between 62 and 67, this leads to a 40-year working life for a citizen, while the average life expectancy after retirement is 20 years and more in some countries such as Japan and France. This period of retirement must be financed by a redistribution of GDP, which represents about 50% of the gross annual remuneration paid by private or public employers. This phenomenon was anticipated in the post-war decades because of the rise in demographics, the growth of the working population and the decrease in the number of retirees (given the limited number of births that marked the war periods). In general, we see today, in most countries, a reverse trend, with a low birth rate and a rapid increase in life expectancy (over 82 years) in the highly developed nations. Thus, in order to provide a faithful representation of the financial reality, the standard setters have decided that companies’ liabilities should be recognized in their financial statements (IAS no. 19) in order to better reflect the reality of their long-term financial situation. But in doing so, standard setters did not, and could not, solve the challenge of providing the most relevant representation of financial statements for users of the accounts. The valuation of time and long-term instruments such as pension liabilities is not within the current competence of companies and depends on another management approach, in order to bring operators closer to the result of their actions, which includes tax effects. With this in mind, various accounting solutions have been developed to bring the company’s players closer to the information they need to improve their performance. These solutions are based on two distinct systems. The first consists of providing information on which the actor can act (sales and purchases) and which contributes directly to the income statement. The second is to separate out those elements over which the participants have little or no control because they are imposed on them; this is, for the most part, the case of pensions, the terms of which are linked to changes in the economy. The majority of the solution adopted to deal with the time factor has been to isolate pension liabilities and their costs from the balance sheet by backing them with assets and transferring them to legal entities. To deal with the time factor, the solution that has mostly been adopted is to isolate pension liabilities and their costs from the balance sheet by backing them up with assets and transferring them to separate legal entities, such as pension funds (the 401(k) in the United States or the French Plan d’Epargne Retraite (PER), for example). Another family of mechanisms consists of transferring this type of commitment to a system under the responsibility of the state (American social security).

2.3 Accounting for Liabilities


Expanding the use of these devices would improve the clarity of the picture given by M5 and restore a fundamental economic reality that, over time, the share of GDP that will be distributed to retirees will depend on the GDP eventually generated by economic activity; the gap between distribution and GDP can only be monetary debt.


Lessons Learned from the Uncertainties of Reading the Books

We have now arrived at the crossroads of social realities, those of the real economic world and the representation of what interacts in monetary terms: the real world, the financial world, time and risks with their interest rate issues. This question of the representation of financial reality is important because the quality of the identification and the estimation of the value of the commitments make it possible to assess their scope and, above all, to develop forecasts. Without the starting point provided by the financial statements and the income statement, it is not possible to establish, for example in the case of pensions, whether the commitments or needs acquired by the employee during his or her working life can be met during the following years of inactivity. The reality of the commitment cannot be denied, and governments assume it when they withdraw a guaranteed minimum from the private pension system and place it under their guarantee, with a social protection system which exists in countries as diverse as the United States, Germany, France and Japan. But it should be noted that in France, the potential debt does not appear on the balance sheets of private companies or the public sector, but in the public budget. The Public Accounting Standard Board, the international accounting standard-setting body, is pushing for the valuation of pension benefits to be recorded directly on the government’s balance sheet. In spite of the confusion resulting from the action of standard setters in favor of valuing assets and liabilities at market prices (FMV), this must be rethought with the idea that the uncertainty of the future over a long period of time must be estimated separately from the accounting books, which, in the accounting vocabulary, must lead to a differentiation between liabilities (which are certain in their amount) and provisions (which are estimated). Otherwise, the latitude given to accountants in the application of the standard insidiously creates a flexible rule that generates uncertainty and makes it possible to escape the control of the supervisory bodies responsible for ensuring the relevance and conformity of the accounts. This was indeed the case until very recently, with a situation of negative interest rates that operates outside of economic reason, especially in the case of very long-term commitments such as pensions. Furthermore, for the sake of clarity in the reading of the accounts, which is not favored by fair value, it should be noted that accounting practice also allows some of the debts recorded, even if they are still uncertain because they have not been contracted for, to be backed by productive investments appearing on the assets side of the balance sheet. In this case, the result is a possible balance between assets


2 The Evolution Toward Modern Money and the Path Toward Digital

and liabilities, allowing these items to be removed from the balance sheet of the companies and placed in external structures, such as “hive-offs.” In this case, the financial statements are immunized by the effect of changes in value, if these are not parallel between assets and liabilities. This removal of items eliminates the distortions that resulted from the GMF. From a microeconomic point of view, only the amounts that are actually redistributed, which are capped by the reality of GDP, can be taken into account. What is certain to be distributed over a large number of future years does not change the real redistribution, which is based, in the present time, on what individuals feel is necessary for their well-being, which may or may not ensure social peace. The disconnection of time was envisaged at the time when France, under the aegis of the Conseil National de la Résistance (CNR), decided to set up a pension system based on redistribution linked to GDP and salaries, rather than on the capitalization whose accounts could no longer be kept after the par value of the pension savings was wiped out after the war by the continuous devaluations of the currency and a significant contraction of the par value of the currency and, consequently, of the investments made in fixed-income instruments.


The Current Model, the Role of Central Banks

To understand monetary policy, one needs to make a logical comparison between the details of transactions and their aggregation and classification into homogeneous aggregates. The first issues to be addressed are how to represent individual transactions and how to capture information about them.


The Interaction Between the Real World and the Financial World

Due to accounting rules, and more specifically the double counting rule, any transaction appears as a balance until it is offset by a payment. The number and value of transactions through the balances they generate determine a money supply in the balance sheets. The payment of balances by debtors mechanically reduces the money supply. Consequently, the speed of both transactions and their payment is one of the determining factors of the entire monetary operation that M5 and M6 make possible. A period of no transactions, or reduced transactions, can trigger a monetary contraction when settled balances, to the extent of amounts due as they mature, are balanced by payment. The only money that will remain alive at the end of the cycle, since it has no counterpart other than the central bank’s balance sheet, will be the latter’s fiduciary money, which, by its very nature, is neither redeemable nor exchangeable for a real asset. This example explains the interaction between the money supply on which the central bank must intervene if GDP, which is only the result of trade, contracts. This money is called “central bank money” to distinguish it from “digital money,” which is self-proclaimed in its operation by private issuers. The two key factors of exchange, and their value determined by supply and demand, as well as the speed of monetary circulation, need to be analyzed instrument by instrument, maturity by maturity and risk by risk in order

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,



3 The Current Model, the Role of Central Banks

to determine the value of monetary exchanges and the speed with which they are made.


The Traditional Role of Central Banks

The central bank not only issues money, but also officially retains the privilege of seigniorage, a levy on value that pays for its exchange and guarantee service. It also monitors the exchange rate and inflation. A central bank is supposed to fight inflation in order to keep the bargaining power of its currency unit stable, but also to ensure the liquidity of the economy by providing the necessary quantity of money at appropriate interest rates. As long as the banking system was almost the only channel for financing the economy, the central bank had direct control over monetary policy because of its control over liquid instruments (M1, M2) and the volume of loans distributed; what happened after issuance with money flows was therefore not a concern for the central bank. The 1929 crisis occurred when central banks allowed prices and value to adjust. They did adjust, but with terrible and contagious consequences for citizens, including deflation in commodity prices, declining output and soaring unemployment. All the economists of the time put their intellectual energy into understanding the effect of the monetary contraction that occurred and they and their followers developed theories about the appropriate measures which should have been taken to combat the consequences. From Keynes to Bernanke, the remedies adopted have been money issues and a downward trend in monetary rates. This diagnosis explains the QE (quantitative easing) policies implemented by central banks in recent years. The prevailing thinking is that if a monetary contraction is observed on the markets with price falls, and therefore with an effect on balance sheets, it should be countered by issuing new currencies to compensate for the negative effects on solvency in the face of debts owed in nominal value. No attention was paid to the money-issuing process at the time of the 1929 crisis, when the system lacked the types of financial instruments developed since then to refinance and make liquid balances, which were only developed in the following decades. It was only the war that finally got the economic machine moving again. With the combined increase in industrial production and inflation, the ratio between the value of the assets employed and the debt mechanically decreased, thus improving the stability of the system. However, in the absence of urgency and the enthusiasm that accompanied the return to peace, the analysis of “what was money” never developed because the subject disappeared with a new standard currency serving everyone (the dollar), the disappearance of public debts and endogenous economic growth driven by reconstruction needs and consumer expectations. The prevailing monetary philosophy (if you can call it that) was to combat speculation by laws prohibiting commercial banks from investing in equities over the long term, in order to prevent the central bank, the ultimate guarantor of the solvency of the monetary system, from being forced to carry out bailout operations.

3.2 The Traditional Role of Central Banks


In the last decade, financial instruments of all kinds have been developed, accompanied by a new logic aimed at reducing the risks of value collapse, by intervening directly on liquidity and interest rates. Based on the experience of the 1929 crisis, it was decided to provide banks, through the market, with an unlimited quantity of liquidity at the lowest possible rates, even negative ones, in order to maintain the monetary circulation of all financial instruments. However, this so-called QE policy, which has been widely practiced since the financial crisis of 2007–2008, is not a miracle solution. The remedies of the easy money policy, limited to nonconventional measures such as “helicopter money,” which consists of giving out as much money as necessary at zero or negative rates to stimulate investment, do not address the causes of structural imbalances in the real economy. It is a band-aid, not a therapy. The development of regulatory restrictions, such as the “bumpers” of prudential ratios, which are very specific in their basis and affect a wide range of entities (banks, insurance companies, investment funds), leads to money flows to other, more risky markets. Since a centralized economy is likely to fail in the long run, independent economic actors always shy away from anything that might restrict the free flow of money. For example, the value of digital companies can be explained by the ongoing revolution brought about by this new industry, the structural development of which is accelerating on the basis of high PERs (price earning ratios) (e.g., 47.57 for Amazon). This is a revolution in retail distribution, definitively transferring the turnover from a store to home delivery, or even Apple (27.6 P/E), since digital equipment is to be acquired by almost all citizens and is to be perpetually renewed. Market valuation is necessary, and attempts to regulate values by fixed prices have all failed (Diocletian’s Edict fixing the prices of basic goods and services). Is the price of shares in the digital industry, which often exceeds a coefficient of 25, abnormal? We give an explanatory answer because there is no dogmatic answer to such a question. Trying to find one is irrelevant, since society is a community that decides the value of an asset according to circumstantial, subjective and evolving criteria. In this case, it is the very positive market outlook for the coming years. It is not fixity that we should strive for, but flexibility through competition. It is the freedom of movement on the roads, as long as they are monitored to avoid obstacles and ensure safety, that is the goal toward which development must be aimed. The digital revolution is a great step forward for humanity, but it also requires heavy financial investments for digital transformation (infrastructure and education) as well as for monitoring and regulation. Having a global and detailed vision of the monetary flows will allow for a better public understanding of economic phenomena and their magnitude. Consequently, this understanding will bring more confidence through the transparency of the evaluations observed. Market players equipped with the necessary mathematical tools will act mechanically and their action will avoid the erratic movements that automatically trigger situations of instability where the risk becomes dangerous.



3 The Current Model, the Role of Central Banks

The Issue of Profits and Taxation

A new trade landscape has developed, posing new problems through the shift in trade-related value added. In this new context, the tax collection system, which many believed should remain unchanged, has proven to be inadequate due to the shift in the location of added value in the value chain, on the one hand, through digitization, and on the other hand, through the valorization of data, which the digital currency has brought about, whereas previously it was anonymous. Diocletian’s “Edict of the Maximum” meant that merchants were not allowed to market their goods at a higher price than the one set, and that they could not significantly increase them according to transportation costs—a major issue in the age of the cart or boat and reduced preservation processes. Since World War II, international companies have been regularly accused of shifting profits to avoid taxes. The historical reality is that taxes were, and still are, lower in some countries than in others due to different social structures and demographics of services offered to citizens. Education itself allows for different productivity and leads to unequal capabilities in innovation and the use of sophisticated equipment. Much of this innovation and sophistication has moved eastward from the United States, whose economic power has dominated the past century. Ultimately, the military costs of defending a declining American supremacy increased economic imbalances, while companies globalized and expanded where consumers are most numerous. Today, the Organization for Economic Cooperation and Development (OECD) is in charge of the issue of global corporate taxation. The U.S. Treasury Secretary Yenet Yellen’s March 2021 tax reform bill would unify the effective tax rate for very large companies (those with consolidated sales of more than $750 million annually and gross margins of 10% or more) to impose a minimum tax rate on their revenues (see Chapter 7). At the G7 level, the major nations agreed on a minimum tax rate of 15%. In the end, the WTO, faced with so many competing national tax laws, did not achieve its original objectives of competitive balance. Policies to manage the economy through taxation can only work in a closed world and only serve to displace problems, not solve them. Unfortunately, history has shown, from the time of Diocletian to the era of communism, that these measures are ineffective and do not contribute to general prosperity, for the simple reason that a market economy is more efficient than a centralized economy where the decision-maker, far from the consumer, is deprived of the possibility of optimizing his choices with regard to the allocation of his resources and of setting prices. These dirigiste policies are nothing more than a refusal to tackle the structural weaknesses of an economy, and the tax weapon they use can quickly undermine the neutrality of financial flows and the best economic efficiency of exchanges that respond to the needs of each individual. Nevertheless, the new U.S. administration has proposed to raise the corporate income tax again to a ceiling of 28% (which does not include the taxes levied by each of the states, which vary from 0 to 9%). The WTO cannot fully realize its mission of removing non-tariff barriers in the old industrial world as well as in the new digital world. Ultimately, the number of

3.4 The New Positioning of Central Banks


potential consumers with the same level of education will be the determinant of the economies of scale, the quality of products and services, and the innovation that competition brings. This is especially true in a digital economy where no tangible component costs need to be added to the cost of designing a product. Given the right organization and cultural proximity, size will prevail and, ultimately, any attempt to artificially alter the economical balances will lead to the failure of the economic free market by means of taxation. On the contrary, the circulation of money, considered as a whole, will be directed toward where it will have the best profitability and, in particular, where, including the taxation of resources, it is the cheapest and its profitability the most gratifying; this will trigger a splitting up of the economic system, where the winner will automatically be the largest entity. This is the opposite of the objective of equal treatment between actors, intended to ensure the best conditions for full competition favorable to the emergence of new actors. Always, subject to the level of education, the human society capable of spreading its research costs over the largest number of inhabitants will have the highest standard of living and the most powerful companies in terms of size. The globalization of taxation, strictly limited to very large companies, is a new approach which, if it can adapt to the changes in economic models, can mark the possibility of a desire for international coherence capable of improving competition but also of opening up the prospect of international negotiations such as monetary negotiations, of which it would constitute an important pillar.


The New Positioning of Central Banks

From a functional point of view, central banks are distinguished from commercial companies only by the activity and the constitutive monopoly of issuing coins and secured instruments in the form of banknotes. We have seen above that the monopoly that central banks acquired in the nineteenth century (when they were separated from governments) and their development in the twentieth century with scriptural money has more or less disappeared with the extraordinary expansion of exchanges, especially those that are directly cleared within payment platforms, which for the purposes of supervision fall into the category of “infrastructures.” The only specificity of central banks from an operational point of view is that they remain responsible for the supply of money and banknotes that are necessary for the economy. Central banks are the last resort for some of the financial markets and for the banking system. They are the only organizations authorized to issue monetary instruments without counterparty. This central bank money today represents marginal volumes compared to the volumes of financial instruments generated by economic exchanges (M5). The central bank and the banking system it oversees still have a view of customer transactions through their knowledge of the data in the account statements they receive, which summarize the details of transactions. But financial and physical marketplaces have largely replaced the traditional banking monopoly on credit


3 The Current Model, the Role of Central Banks

and deposits, thus reducing the central bank’s ability to intervene. The marketplaces are now at the center of monetary circulation and could at any time issue their own money, provided they obtain the necessary legal authorizations (banking licenses): a prospect that we had already envisaged in our previous works.1 In addition, if not within the central bank, the new deployment of a single identification system for economic agents (LEI for companies and IBAN for individuals—See Chapter4) on a general basis could allow for the replacement of the central bank’s global monitoring system, which operates through nominative accounts opened in commercial banks and clearinghouses. A new regulated system that would include the currently dispersed transaction monitoring would be necessary to better exploit data access for its social and economic purposes. Traditionally, central banks have not intervened in the private exchanges that drive financial markets, other than money markets. This was true until the Japanese central bank, since the financial crisis of 2007–2008, has been buying private or public stocks and bonds on the market. Thus, within the framework of their new field of action, central banks increase or reduce liquidity and interest rates through so-called unconventional policies that act on rates and liquidity through their interventions on the market. Within this unconventional framework, they can also open lines of credit to commercial banks or governments (when their statutes do not prohibit it) or issue money in the form of lines not backed by other financial instruments already issues. Unfortunately, through their excessive use linked to the excesses of indebtedness, these tools available to central banks—interest rates and liquidity—have lost their effectiveness in improving the speed of trade and encouraging productive investment. The overabundance of liquidity has deregulated the classic market mechanisms. Generally speaking, when buying shares or other financial securities and reselling them, central banks pursue “unconventional policies” compared to the former conception of the transactions allowed to central banks, which were limited to purely monetary operations and possibly to the subscription of public debt securities when they were issued. They have freed themselves from this constraint and now buy all types of instruments, including bonds and equities, whether on the primary market (the one on which they are issued) or the secondary market (the one on which they are sold). When central banks buy only real-world instruments already issued by other entities, they maintain the link between the real world of trade and the financial world. The traditional constraint, which was intended to guarantee the independence of the central bank from the budgetary difficulties of governments, no longer corresponds to the realities of central bank action. The extension of the quality of government bonds eligible as collateral for loans, functioning as a prudential buffer for central banks, allows the latter to contribute to the refinancing of the governments whose debt they buy up to fixed ceilings.


Serval J.-F., Tranié J.-P., La Monnaie virtuelle qui nous fait vivre, 2010, Eyrolles; The Monetary System: Analysis and New Approaches to Regulation, 2014, John Wiley & Sons Inc.

3.5 Central Bank Accounting and Data


The modification of bank capital requirements is a similar strategy that encourages banks to buy government-issued securities, which are less capital intensive. It allows governments to increase their monetary issuance, which is mechanically reflected in the increase in the balance sheet totals of central banks due to the latter’s purchases, either on issue or on the secondary market. For example, the banks of the ECB system own 53% of the debt securities held for monetary policy purposes, including 26% of French public debt. However, these ways of refinancing loans to the economy do not lead to the same result in the accounting books, even if they do not change the fundamental economic equilibrium. One route is through commercial banks and the other directly through the central bank’s balance sheet, in a system of monetary circulation in which all actors participate in the same accounting debt process, outside of any productive reality.2 This mechanism, which perpetuates a virtual monetary system, because it is essentially an accounting system, disturbs the interest rates that should determine the performance of the market economy, whereas the realities of the production economy and the needs that arise from it are intangible data that no system has been able to replace in a general way over the long term. The stimulus packages made compulsory by the health crisis are the manifestation of the demands of the real economy, suffocated by the lack of activity and its consequences in terms of monetary contraction.


Central Bank Accounting and Data

From an accounting point of view, the central bank keeps records of all its transactions and prepares regular financial statements.3 When buying or selling instruments, it will follow the same accounting rules as the private sector as a whole with respect to accounting at historical prices. However, due to the volumes and constitutional guarantees, the fair value rule for the valuation of portfolios at the closing of accounts does not really apply to it. Public issues will remain at cost or par value, for example—a critically important and much disputed rule with major potential consequences due to the rise of flexible monetary policies by central banks. Not surprisingly, we find that the dollar accounts for about 75% of total central bank balance sheets (Table 3.1). Under pressure from market conditions, central banks buy government debt securities, violating the normal rules of a market that should prohibit them from refinancing budget deficits4 by buying them back to control rates. In doing so, they expose their balance sheet to the risk of a change in value. The risk carried by their balance sheet is driving central banks to buy gold because its value, largely intrinsic, is recognized as a real hedge against risk, and it fluctuates independently of prevailing interest rates. Unlike other financial instruments, gold is always valued


See Note No. 209, Banque de France, published on March 25, 2021. Official Register | Banque de France ( 4 See Banque de France Note 209, cited above, on the growth of central bank volumes. 3


3 The Current Model, the Role of Central Banks

Table 3.1 Balance sheet totals of the main central banks (source statistics of the 4 main central banks) (in trillion U.S. dollars) 2008



Sept.-Nov. 2021

Bank of Japan





BOC (China) (1)














9.47 (Nov. 17)






Sources Central banks and Yardeni Research Inc; U.S.$3.7 trillion in foreign exchange reserves, including the estimated value of the People’s Bank of China’s reserves

as a real asset necessary for economic exchange and as a counterpart to the virtual world of money, which exists only by convention. On June 28, 2015, Mr. Hyun Song Shin, Economic Adviser and Director of Research at the Bank for International Settlements (BIS), presented a report as part of the opening remarks at the 85th Annual General Meeting of the international institution. The report provides an overview of the results of central banks’ instrument purchase policies. With charts representing flows through 2014, the report includes a review of dollar-denominated trade among banks as a representation of transactions. The dollar accounts for 45% of the total, the euro for 15% and the yen for 10% of global transactions. The balance sheet totals of central banks can be compared to a world GDP of U.S.$95 trillion for 2021.5 The U.S. GDP, expected for 2021, is U.S.$23 trillion, the EU’s is e19 trillion6 and China’s is $17 trillion. Looking at the table above, we notice that the balance sheet of the Federal Reserve System (FED), between 2008 and 2021, has grown much more (9 times) than that of the other central banks whose balance sheet has grown by less than 4 times. Note that the balance sheet of the Peoples’ Bank of China (BOC) had completely stopped growing before the pandemic. Moreover, one can see the link between interest rates and debt, with the growth of the latter causing rates on the best instruments or those best protected by the quality of the currency of expression, to fall due to an excess of offers seeking short-term jobs. 18.3% of U.S. public debt is held by the FED and 64% by nonresidents.7 As for the ECB, it had set a ceiling for the repurchase of public debt securities, i.e., 33%, and an allocation key for the quotas among its members. Unfortunately, official central bank statistics do not provide sufficient detail on their books. What is considered “government” is generally defined, but this definition is not universal in that it varies by state (e.g., social security in the United


Resource from the International Monetary Fund (IMF). Resource from Eurostat. 7 Source Société Générale 6

3.7 The New Crisis


States) and, of course, does not include everything that is used as money by private balance sheets (M5). Knowledge of money turnover in financial markets does exist. However, the share of assets held by non-residents is not always provided. What is generally known is the share of government debt held by non-residents. This share is very large for the United States because of the role of the dollar (48%), for the United Kingdom (28%) and for the ECB (31%), and it is almost zero for Japan,8 but the details of this circulation cannot be consolidated in the absence of a homogeneous definition of the concept of public debt. This knowledge is important because stability is at stake when refinancing is international and the financial instruments that contribute to it can circulate from one jurisdiction to another for reasons of political stability of the issuing country, combined with the change in monetary policy conducted through interest rates directed by the central bank as much as by natural markets guided by risk anticipation. Apart from these key elements, the current statistical system has been improved by better knowledge of the market after the crisis, but is still incomplete. It lacks a better understanding of what is not going through the banking channel for clearing payments. It is estimated that the missing share is between $15 trillion and $22 trillion, which represents between 6.3% and 10.5% of the payments volume.


Functions and Tools of Central Banks

In essence, the central bank is responsible for the proper circulation of money throughout the economy in order to ensure trade and a better allocation of resources to the economy over time. This interpretation by the European Union is quite broad. It means that the transmission between the real world and the financial world should be as efficient as possible. The classical functional qualities of money are acceptance, measurement function, payment function and store of value function.


The New Crisis

The graphs above show the evolution of the balance sheets of the major central banks, whose totals have grown from $7,000 billion in 2008 to $30,000 billion in 2021, a quadrupling in thirteen years, while global GDP as determined by the World Bank has only increased by 50% (from $60,443 billion to probably $90,000 billion in 2021). The growth of central banks’ balance sheet totals, which after a period of stabilization is expected to grow again, leads to uncertainty and the risk of default

8 The case of Japan is different, with public debt owned by private individuals through the postal system (a financial institution). The holding of the UK public debt is partly carried out by “offshore” companies that may correspond to tax evasion and money laundering movements that hold, in fact, a part of the British public debt.


3 The Current Model, the Role of Central Banks

because of the disconnection of the reality of exchanges from the monetary and universal reality of exchanges expressed by a value in the accounts. Exchanges are guided by supply and demand at a certain price, while the monetary picture affecting the resulting balance will vary according to other criteria. To a large extent, the growth of the economy has been caused by the need to set low policy rates to combat the slow turnover of certain instruments in relation to the growth of trade. Growth was accelerated by internet platforms and debts on which debtors could not afford to pay interest at an appropriate rate to cover the risk of default. The result was an overvaluation of the figures by the prices of debt and equity instruments, which were too high. In the context of a monetary policy with zero or negative interest rates, the split between short- and long-term financial markets is unsustainable, as excess liquidity leads to negative short-term interest rates that make the banker’s task of transforming short-term deposits and liabilities into long-term ones artificial. It is the very essence of the banking profession that is called into question.


The Transmission of Monetary Policies to the Non-Financial World

Without calling into question the distinction between the financial and nonfinancial worlds as defined by national accounting, let’s examine this key issue. When Western central banks and governments were trying to cope with the consequences of the 2008 financial crisis, and were trying to revive struggling economies after financial institutions had been rescued from default by central banks with unlimited open windows and public treasuries with structural budget deficits, the transmission of monetary policies to the real economy remained the key issue.


Rates and Volumes Are the Key Tools of Central Banks’ Monetary Policies

As far as interest rates are concerned, the early Roman imperial period was already aware of the issues and interest rates that drove economic agents to borrow. Pliny the Younger, a great financial administrator, while governor of Bithynia and Pontus, 9 wrote to the Emperor Trajan (Book X, Epistles 55): At the present time I fear that the money reserves will remain idle, for an opportunity to purchase land seldom or never presents itself, and it is impossible to find people to borrow from the State, especially at a rate of 12% per month for what they can borrow from individuals. Consider, therefore, Sir, whether you think the rate of interest should be lowered to attract qualified borrowers in this way, and


Roman province located on the Sea of Marmara on the northern coast of present-day Turkey.

3.11 The Relationship Between the Real World and the Financial Universe …


if they do not borrow, that the reserves should be divided among the Decurions so that they give to the State in exchange for good debt. The answer he received from Trajan was the following (Book X, Epistles 56): My dear Pliny, I see no other solution than to reduce the interest rate to facilitate the lending of public money. You will organize this measure taking into account the number of borrowers, but to make indebtedness compulsory against the will of the citizen may be useless and does not correspond to the justice that prevails in our Empire. Rates and volume are the two most important variables. These two factors combine because a change in rates will affect values and liquidity, especially when money is circulating. These variables generate risk both on the real economy and on its financial representation.


Risk Borne by Central Banks

What Caruana and Song were already raising in 2015, in their commentaries on balance sheet growth with huge accumulations of debt instruments at low rates, is more particularly important today with increased amounts. This is because longterm financial instruments concentrate the risk in the event of a rise in interest rates. It is as if the risk were too great to mention, or as if it did not exist. Indeed, in theory, this risk does not require depreciation because, by definition, the central bank’s money is redeemed at par, as long as the issuing government exists. This is, however, the only report that raises the problem of the necessary money supply and, consequently, its excess in the international world of the currency market, where a central banker can become a trader in his own money. The risk of a rise in interest rates is, however, well known and indisputable. The newspapers, since the COVID-19 crisis, have only begun to talk about it.10


The Relationship Between the Real World and the Financial Universe from the Point of View of Transaction Monitoring by the Central Bank

National budgets reflect not only the balance between spending and tax collection, but also the health of the economy as measured by trade volumes. This is particularly true of the consumption-based value-added or sales tax (VAT). Direct intervention in national debt to make QE work poses a major problem in currency areas where several treasuries operate simultaneously. This is the case in the Eurozone. Because of deregulation and globalization, money, as it is now defined as broad money, can flow through the monetary ocean as water would through the sea. A


See our articles in Figarovox of July 21, 2020 and Les Echos of August 7, 2020.


3 The Current Model, the Role of Central Banks

real tangible asset can be transformed into a financial instrument that becomes convertible into another financial instrument or directly exchanged for another tangible asset. This process allows for greater efficiency in the allocation of assets in both the financial system and the real world. This securitization process mechanically increases the money supply and the efficiency of resource allocation. The mechanism of transformation of a real asset into a financial instrument is observed in the space we define as M5 and M6. This mechanism, in itself virtuous, can prove dangerous because of the contagion of price instability in the event of a financial crisis. This fear of instability largely explains the stress test constraints that the regulator has imposed on the banking system since the 2008 crisis. The factors of monetary transmission between the monetary spaces specific to each country or zone are expressed simply because of the universal nature of money, i.e., time and the interest rate that expresses it as assessed in relation to risk by economic agents or computers that, moreover, operate in contexts of supply and demand expressed in volume over time. The simple equations that see the world as flat no longer work. Economic output and the velocity of assets, including money, are no longer the only factors in the system to be determined and thus modeled. Classical monetary economists have been driven out of the world they were trying to understand. Demand and supply are no longer the only factors to be discussed. Humans have been forgotten but still have to determine why the price of a Van Gogh painting is worth so much. Curiously, the number of financial instruments and structured finance packages has grown as the assets to be refinanced have become more differentiated. Expectations and time pricing are beyond reason and are as difficult to integrate as the criterion of the beauty of an asset. This lack of visibility in the assessment of the value of trade explains why central bank economists, in their simulations of the impact of monetary policy scenarios, limit themselves to the observation of statistics collected retrospectively. Nor can they apprehend the market value of a product when the services linked to the use of the product largely outweigh the cost price of its material manufacture. Similarly, control over the development and intellectual property of software included in technological products is the key to a value chain whose constituent elements can be determined by an infinite number of combinations. Thus, the monetary circulation that results from exchanges is difficult for central banks to grasp, in terms of both their value and the associated risks. In the same vein, the fundamental bases of societies, such as the existence of consumers, the level of education or even safety in the street, also determine the medium- and long-term development of economies, and not the excesses of QE intended to compensate for the failures of exchanges by massive injections of liquidity. If the fundamental causes of trade are not addressed, the economic patient will suffer from multiple ailments that can lead to the most violent crises. Without being able to reform itself, the failing system that artificially survives by means of quantitative easing and negative interest rates spends energy through friction and inevitably loses its efficiency.

3.11 The Relationship Between the Real World and the Financial Universe …


We have already discussed the link between monetary injections and their effects on the evolution of GDP. We have noted that, detached from the exchange of the assets that gave rise to them, the value represented by financial instruments could be determined by criteria other than the simple mechanical relationship between supply and demand for the underlying asset; the transaction is carried out by the market, without any link to the source of the issuance of these derivative instruments. This independence between the underlying asset and the market value does, however, have a certain limit, namely the maturity date on which the debt that gave rise to the instrument must be repaid at its nominal value. The stability of the exchange system can thus be assessed by understanding the gap between the nominal values of issuance and the actual values of debt redemptions. The interplay between the real economy and the financial world can be described by a graph showing the risk generated by this gap. It is certain that the accounting standard setter failed to meet the requirement of neutrality of information when he promoted the use of fair value in the books. The question then becomes how to assess the limits of the difference between the nominal value and the negotiated price of the instrument required by the freedom of the markets, in the absence of a truly realized transaction. So what needs to be done to ensure the necessary stability of prices and liquidity? In addition to the necessary interventions of the central bank to ensure liquidity, the first response envisaged in Europe by the monetary authorities is to improve the depth of the markets for financial instruments by standardizing and unifying them (Fig. 3.1).

Fig. 3.1 Size of the financial markets by instrument: The money iceberg



3 The Current Model, the Role of Central Banks

Disconnections Between the Real World and the Financial World and Leaks in the Information System

As explained above, direct barter between individuals does not appear and is not decipherable because of the absence of any accounting obligations for the parties to the exchange. After having almost disappeared, barter is coming back with social networks and informal markets, especially since the individual is not subject to any accounting obligations. The elusive nature of barter between individuals in terms of financial information creates a problem because it escapes any observation or tax collection. As a result, this barter is growing. If not all payments are reportable, what should be the boundaries between informal and regulated trade? This is an open question with respect to public protection and tax collection. Bartering also expands when barriers to trade arise, such as economic sanctions by some states against others.


Reducing the Scope of Central Bank Action

The chart above shows how markets perceive the change in the commercial bank model at a time when interest rates are low and clearing is largely outside the traditional banking system, while regulation is increasing the cost of banking infrastructure both in terms of prudential requirements and in terms of digital expenditures and direct controls. Digital trade statistics show its strong growth. According to the United Nations Conference on Trade and Development (UNCTAD), global e-commerce sales jumped to $26.7 trillion in 2019, a 4% increase over 2018. This figure includes business-to-business (B2B) and business-to-consumer (B2C) sales and is equivalent to 30% of global GDP that year. Overall, the report notes the dramatic rise of e-commerce in the context of movement restrictions caused by COVID-19, thus increasing the share of online retail sales from 16 to 19% of total retail sales in 2020. According to UNCTAD, online retail sales have increased significantly in several countries, with South Korea showing the highest share with 25.9% in 2020, up from 20.8% the previous year. For e-retail (B2C), the amount of global sales amounted to nearly 3 trillion in 2018, to 4.89 trillion in 2021, with a forecast of 5,425 trillion in 2022 and nearly 6 trillion in 2023.11 This ongoing digital revolution is profoundly changing the role of central banks in monetary circulation, a phenomenon that can only be amplified by the shift from specialized means of payment such as payment or credit cards to the telephone and by the use of alternative currencies such as cryptocurrencies, whose functions will have to be regulated by the regulator.


Source: Statista 2021.

3.13 Reducing the Scope of Central Bank Action


Economies of scale, coming from the “long series” factor derived from robotization, appear once again as a determinant of concentration and of the oligopolistic economic structure in the digital industry and are also pushing for the outsourcing of resources of payment outside the banking sector. The same is true for the development of digital money, which is more efficient than traditional payment methods. The new distribution channels and logistics are looked at with envy by Google (Alphabet) and Tencent (the Chinese giant) or social networks (Facebook), because they control the data needed to approach consumers but not the logistics when the exchanges involve physical goods. In contrast to traditional distribution, “brands,” in order to keep control of their transactions and the data they generate outside of the exchange of products in stores, are trying to escape, with their own digital means, from the ever-growing control of market platforms. Recall that in 2020, Alibaba generated $ 74 billion in sales during Black Friday and Amazon, in 2019, generated for the same event, 108.5 billion in sales (up 44% on 2018) with 2 63 billion visits. The key players in digital commerce are of capital importance because they become a main distribution channel and can share economies of scale with producers and central players in the payment system and thus in the monetary system, in competition with the banks. The figures for digital commerce for the key players who control the delivery of physical goods speak for themselves. Example

Sales and other data (taken from market publications and subject to exchange rate fluctuations). Turnover: —Alibaba, 2021: US$571 billion versus $4.5 billion in 2015; —Amazon, 2021: US$315 billion versus $61 billion in 2015; —Microsoft, 2021: US$168 billion versus US$93.58 billion in 2015; —Tencent Holding, 2019: US$54 billion versus US$6.5 billion in 2016. Number of online customers (Source: Statista): —Amazon: 200 million active accounts as of 3/31/2021; —Alibaba: 890 million active accounts on the same date. It should be noted, however, that the business model of the latter two operators is different, so their figures are not comparable. Benefits: 2021 net earnings (from U.S. dollar publications and subject to foreign exchange ratios): —Alibaba: $22.9 billion; —Amazon: $21.33 billion; —Apple: $57.4 billion; —Microsoft: $61.3 billion; —Tencent: $35.2 billion.


3 The Current Model, the Role of Central Banks

Market capitalization: Market capitalization of data-holding companies (October 2021 based on market releases and subject to exchange rates): —Alibaba: U.S.$657 billion; —Alphabet (Google): U.S.$1,539 billion; —Amazon:U.S.$1,711 billion; —Facebook: U.S.$870 billion; —Tencent: U.S.$774 billion. Note that Tencent is listed in Hong Kong dollars (HK$) and the comparison with a dollar asset is specious because wages and cost of living in Asia are different from the United States (NY is not similar to Mississippi and HK shareholders may not be similar to NYSE or NASDAQ shareholders), and the size of the digital economy is different.


The Monetary Aspects of Distribution

As the qualification of money has expanded to include all receivables that can be accepted (M5 and M6), the operation of the money system has changed with the combination of data knowledge and control of physical logistics. The resulting balances from transactions are more than ever potential currency, with purchases increasingly paid directly from a phone. At this point, Alibaba and Amazon, with different concepts (Amazon directly operates its purchases and sells while Alibaba rents retail spaces), are also payment places. At any time, they can substitute themselves for central banks or commercial banks, without having a banking license. They can grant credit lines, and they may decide not to collect balances, i.e., to issue de facto new money, or finally, because of their purchasing power, to impose their conditions on suppliers. This trend will not slow down and, as a result, central bank regulation will have less and less impact on flows, as it will never affect the logistical capabilities of digital players who, with Google and Tencent, not only have control over what they trade and what they manage, but also over the consumer, whom they know through his or her most personal characteristics. The neutrality of central banks with respect to economic actors is no longer applicable and the monetary power, which results from the combination of the power of those who control logistics such as Amazon and Alibaba and the knowledge of consumers with orders and payments, provides Google and Tencent with a new privilege of seigniorage that no one had thought of before. The incumbents can sell data, such as knowledge of who buys what, where and for how much. The use of digital money for clearing balances and its greater efficiency for transfers also reduces the role of central banks and their scope of action. The latter cannot interfere with individual consumer behavior, whereas platforms can direct the choices of the economic agent and thus take control of both the flows

3.14 The Monetary Aspects of Distribution


and the stored reserves of value that escape central banks. Monetary regulation, whoever is responsible for it, becomes almost irrelevant. The shift toward the markets of the concepts and uses of money traditionally devolved to central banks has restricted the reality of the central bank to a reduced number of domains, namely: the definition and stabilization of monetary units and interest rate policies. The consequence of the digitalization of trade has been to eliminate the intermediation role of central banks. Participants in production and consumption can operate directly and issue most of the money used (see M5-M6). The confidence of actors in the outcome of exchange operations must be based on new attributions of responsibility between all the actors in the money flow cycles, in the face of the upheavals that are taking place in the world of exchanges. This extension of the monetary field, to the detriment of the traditional role of banks, has cracked the unified horizontal system that existed between currencies to create new spaces where digital money can develop vertically from sellers to consumers. A new revolution is underway; part of the sovereign power to issue money has shifted from central banks to producers who have access to marketplaces and transaction data. In addition, without giving our opinion on trade-oriented marketplaces, they are superior in their potential efficiency for distributing credit on accounts already opened. They concentrate information on transactions and the holder’s credit profile and can therefore allocate margins between suppliers, logistics, and the cost and resources of financing if they are not bypassed by direct financing from suppliers. How long will governments self-risk such seigniorage power?


The Monetary World and Its Analytical Tools

We begin this chapter with an enigma posed by Albert Einstein1 : I still believe in an abstract model of reality showing things as they exist and not just through the possibility that they exist. [But] in any case, any attempt to deduce logically from simple basic experiments fundamental concepts and laws for mechanics, is bound to fail.

To understand monetary policy, a logical comparison must be made between the details of transactions and their grouping and classification into homogeneous aggregates. The first issue to address is how to represent individual transactions and how to capture information about them. In a previous book,2 we described the process by which we slowly moved from anonymous metallic money to the extensive use of fiat money first, and finally to bookkeeping entries, or scriptural money, reducing the share of the former two categories to almost nothing compared to the massive use of the latter. The process of evolution toward a cashless monetary system is even more impressive given the deregulation of the postwar period and the general deregulation following the election of U.S. President Ronald Reagan in 1980 and the expansion of the “financialization” of the world economy, with the transformation of balances into negotiable financial instruments. In our previous books, we have tried to explain the organized process by which direct refinancing of the economy has rendered obsolete the legal financial mechanism constituted by the monopoly of bank credit distribution.

1 Einstein A., Comment je vois le monde, translated from the German by Maurice Solovine and Regis Hanrion, champs sciences, Flammarion 2009. Excerpt from “Études scientifiques,” p. 171. 2 Serval J.-F., Tranié J.-P., La Monnaie virtuelle qui nous fait vivre, 2010, Eyrolles.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,



4 The Monetary World and Its Analytical Tools

We have seen that the deregulation policies promoted since Milton Friedman3 and the election of President Reagan have allowed the issuance of new means of paying a claim resulting from exchanges, thereby creating a process of unlimited issuance of new money, which is manifested essentially through the use of commercial paper. What has changed a great deal in recent years is the ability to collect and calculate data with almost no limits, apart from the protection of personal data set by laws and pure human capacity. The M5-M6 space allows us to see all the transactions carried out by economic actors, whether individuals or companies. The central question then becomes the analysis and exploitation of these masses of data to model a monetary policy that is as efficient as possible, given the multiplicity and diversity of territories and economic zones throughout the world.


Exchanges Are the Source of Monetary Instruments

What are exchanges? An exchange is a transfer of a good or service that takes place between two or more parties. It is limited to saleable assets or services. By virtue of their nature and by law, some goods and services cannot be provided or transferred. We exclude them of our scope. These are, for example, inalienable assets such as certain symbolic sovereign assets (the White House, the Château de Versailles, etc.) or illegal services and trades (people, drugs, etc.). Usually, their actors do not make these transactions accountable when they are concluded, even if they are settled with already issued and anonymous money (in this respect, we suggest, moreover, that the monetary tool, which has become essentially digital in these cases of fraudulent transactions, be simply erased by the central bank). All exchanges that are not barter trigger an equilibrium for the price fixed between the seller and the buyer. This balance remains open until it is offset by another exchange (e.g., cash) which, in essence, will be monetary in nature. If there is no continuous renewal of exchanges, M5 and M6, as indicators of the money supply, contract and at the same time reveal a collapse in activity. The above developments have been necessary to understand that a single unified category of money or a traditional classification between currency and bills, book money and other credits, will not suffice to understand the factors that determine money flows, how fast and where they are accumulated, displayed, traded and


Milton Friedman (1912–2006) was an economist and statistician who taught at the University of Chicago for over three decades. A proponent of a free-floating currency, he was against the concept of central banking and influenced Reagan’s monetary policy (see the forewords to the 1984 federal budget—in essence, lower taxes will create wealth and rebalance the budget). Even today, the FED’s quantitative easing is the result of its theories that private money is more efficient than public money.

4.2 Update on the Coherence of Currency Spaces and Its Consequences


cleared. However, the subject of monetary expression and physical or virtual consistency has never been addressed until now. This topic, in our approach, clearly falls within the space of real exchanges represented by money that constitutes our definition of M5.


Update on the Coherence of Currency Spaces and Its Consequences

Today’s money is not only an exchangeable financial instrument involving the combination of a claim and a monetary unit, it is also a medium, usually digital, with a number to facilitate counting and secure transport by verifying that the number of units is equal on departure and arrival. Different types of money can be distinguished according to their origin. First of all, money issued by central banks or other authorities, without any exchange in return for this issue, then, debts which are another kind of money that originate in a trade or a commercial service. The existence of a debtor “creates” the “money.” Finally, we find a third category that appears only in the books and not in the contracts. This is the category that arises from the difference in value of the instruments already issued in the first two categories, simply by changing their price in relation to the original nominal value. This creation of money, as already explained above, is based on books and registers and on the reality of financial exchanges, not on what are called real exchanges of goods and services. We have also studied the consequences of the new independence between physical exchanges and prices recorded on balance sheets and posted prices. We have also explored, in a previous work, the fact that by increasing the values displayed on the books to the level of those displayed by real exchanges on regulated exchanges and by being accounted for in financial statements using IFRS or GAAP accounting standards, these instruments create new borrowing capacity on the balance sheet by making it possible to secure new creditors and thus new lenders to the economy. This is the process of subprime securitization and the valuation of any transferable security that we described earlier. Mobilization of assets also generates a sense of comfort for the holder, such as increased spending potential and new borrowing capacity in proportion to the increase in net equity if values rise. In doing so, the holder can accelerate trading until a limit is reached, set by regulation or by a breach of trust. The question is, of course, what enters the real economy and what happens to the interaction between the values of money already recorded on balance sheets, money flows and output. A rise in prices will automatically have an impact on economic equilibrium and the optimal allocation of resources. With today’s monetary realities, we see that knowledge of the volume of money available, unit prices and the speed of circulation of money is of paramount importance.



4 The Monetary World and Its Analytical Tools

The Transformation of the Monetary World

We knew the speed of rotation, but in the past, debates and studies have focused a lot on the question of the multiplier effect and the time it took for the money, once lent, to come back and be redeposited in the bank. The question was how effective Keynesian policies were and how long it took for them to take effect on a sluggish economy. Of course, as we saw in the previous book, these topics are reminiscent of a discussion of iron versus steel weapons. The disintermediation of banks and direct access to financial markets, the unlimited number of different financial instruments, globalization and the tools for trading and displaying them have revolutionized the understanding of monetary issues. The changes are known and the regulations are trying to understand and control what has happened and developed. It strives to know how financial markets work and to regulate them to make them safer for participants and more stable for the economy. But free markets and the diversification of financial techniques have made the return of money, after its issuance to banks, increasingly complex and improbable in the face of increased alternative capacities for use in other places of exchange, which are, in particular, the financial markets. All these financial issues and the flows they generate are now part of M5. The financial markets, enlarged by disintermediation, have become increasingly autonomous from the central bank. This revolution has taken place in the last forty years. Its consequences are still poorly assessed, apart from the fact that with the multiple and deep data recorded on exchanges (Big data), most companies have discovered that the processing of this data, now massively digitized, will have an impact on all their operations; the way of producing but also globally the way of addressing all the potential buyers and all the actors of the productive process. These new financial instruments, made neutral and independent of their original supports by the financial markets, pose new challenges to humanity to ensure the most homogeneous competitive field possible.


The Monetary Unit

The financial instrument and the unit that accompanies it, so that they become exchangeable and thus money, have been the subject of endless debate. There is, however, very little conclusive literature on the current digital ball and its impact. The monetary unit today, no longer needs to be tangible or to refer to a physical measure. The mathematics necessary to satisfy the exigency of measurement of the currency and its instruments have no limits. The algorithms govern with the computers to operate them. This assertion, if true, is purely theoretical despite a few non-compliant attempts to create digital currencies like Bitcoin or Libra, despite a few other real deployments underway made for consumers by distribution platforms like Amazon or Google. The reason cryptocurrencies are not currencies is simple. Except for Libra

4.4 The Monetary Unit


or Diem, which do not yet exist, they are not tied to value stabilization mechanisms, which should be attached to them, and their volatility is high. When these cryptocurrencies have a stabilization mechanism, such as Diem, which must be built on a basket of currencies composed in fixed proportions, there remains the unknown of the long-term credibility of the balance sheet of the primary issuer, in this case Google, and its legitimacy to issue. Without this guarantee, distribution networks cannot hold these currencies other than marginally without risking loss of value during the clearing process. Mediumterm investors cannot accumulate such payment instruments to adjust cycles with liquid money because of the risk involved, and long-term investors simply cannot. This is also the reason why the U.S. dollar became the leading currency in international trade after World War II, when the United States dominated international trade with a 50 percent share of the trade volume. Today, the dollar accounts for 85–90% of foreign exchange and interbank claims. Nevertheless, a detailed analysis of trade will reveal differences in usage depending on the medium of the transaction. Commodities and natural resources are trades where the dollar may be used in more than 95 percent of contractual or manufactured goods transactions, while manufacturers and buyers may tend to use their own currency to immunize themselves from exchange rate risk against the currency in which they incur their costs and that of the final consumers who determine their margins. The use of the dollar will then either be minimal in one area, or more limited simply because of the declining relative size of the United States in world trade, in terms of population and ultimately in terms of GDP. It should only be noted that if, contractually, for international trade, the currency of expression is chosen by the parties at the time of the settlement of a balance by the banking system and, in the case of the dollar, payment by clearing must be made, as a legal requirement, through the Federal Bank of New York. The same obligation exists for the clearing of euros with the European Central Bank and most central banks have adopted the same mechanism. However, it only covers the real exchange rate. When the dollar balance has changed ownership, as it can with disintermediation outside the federal system or commodity futures markets, there is a risk that the resulting dollar issuance outside the regulated federal system will be beyond the reach of the United States and that international financial trade will change the currency used. The transmission belt of the dollar’s risk remains on the market exposures that are accumulated in the balance sheets of economic agents. These unknown masses are such that no stabilization intervention could be carried out without consultation between the major operators in the event of speculative attacks against the greenback on very deep foreign exchange markets (FOREX) and attacks on commodity markets, which are very diversified in terms of the products traded. When the parity of the dollar against other currencies is more sensitive to the political environment and military tensions in the world than to the economic situation and trade balances, how do markets determine the appropriate parity? What is the appropriate parity and could it be defined within broad currency areas? There are no answers yet to these fundamental questions.



4 The Monetary World and Its Analytical Tools

Distinctions of the Medium, the Standard and the Blockchain

Money, and the standard attached to measure it, needs two elements to come to life. The first is a debtor without whom it cannot become an enforceable right. This may be a natural person, a corporation, a charitable institution or a government entity, with or without a financial purpose. Evidence is also required (see above about accounting) and a possible transfer order which will be of a contractual nature in order to allow the holder of the balance to transfer its value from one account to the other. Once cleared, the reciprocal balances disappear, but the entries that generated the balance remain in the account books. The concept of uniqueness of the electronic language brought by the blockchain is a breakthrough in the intangible world of money. With the chronology that forms it by the links between blocks, it is superior to any other information system on monetary movements by the chronological security that it brings. A currency can be associated with a system of measurement whose basis is physical units (measurement of a precious metal or any exchangeable good), a definition, a substantial weight or volume, or it can be strictly scriptural and even a cryptogram whose value is determined by the limitation of its use to a given number of units (the Bitcoin). When it is not displayed by an accounting entry, money cannot come to life. As we have explained, most money results from unsettled transactions (exchanges). The question of the authenticity of money is not only a question of the value of money, but also a question of the quality of the money itself. The question of the authenticity of the underlying transaction and the resulting claim is essential. When talking about money in the digital age, we inevitably talk about the “blockchain.” But what is a blockchain? Thanks to telecommunications, information can be transmitted to any computer anywhere in the world. All the computers with an identification key can see what the others have as data classified in a chronological order. Therefore, the resulting image can be organized like a book that shows all the extraneous data and thus ensures that a transaction is only displayed once. The medium is then the book, or the electronic database, where any non-conforming information is marked. In a sense, this is the modern way of transcribing the double-entry principle, according to which a transaction appears twice in the books of each party to the transaction, as a buyer and as a seller and for equal amounts. Any discrepancy in the digital currency chain system is immediately identifiable as an anomaly by the participants, who all have continuous access to the same information, which they can all use as a check of the custodian. As a system, it is a way to improve transfers and security, but the basic principle of dual-party control remains the same. Subject to the quality of the encryption, the guarantee of a third party on the uniqueness of the information is no longer necessary. This uniqueness is shared and guaranteed by all the participants in the blockchain. Thus, the authenticity of the first posting is guaranteed by its chronology. The risk of an attack against centralized information does not exist. If a computer’s memory burns down, the

4.6 The Stamping and the Standard


system is resilient because it has been copied several times. If someone is able to break into the system, the counterfeit transactions can be located and eliminated and the timeline restored. The blockchain works like any other security device. Its cost will depend on the electricity used by the computers, the cost of the telecommunication networks, the cost of the computer power and, of course, the amortization of its development cost. It should also be noted that the cost of using blockchain will vary and will depend on the diffusion of its use. Today’s technology seems to make the cost negligible. But in fact, private blockchains, if they are reliable and cover a reduced number of users who are easier to protect because they are better known, will remain less expensive than public blockchains whose unit cost of use increases with the number of units (blocks whose continuity has to be verified with a cost of energy to do so that much greater). Private blockchains must, moreover, selfregulate by creating their own rules of protection beyond the applicable rules of general law. Nevertheless, the question of how to express the amount of the monetary issue with an entry in an accounting book is always present, as for any transaction. The answer to this question is essential when it comes to monitoring and regulating a monetary system that is measured in units of a standard. These units are the basis for the valuation of the transaction.


The Stamping and the Standard

When a number is attached to the medium as a result of a transaction, the subject of the standard arises. Is it a durable tool to measure the exchange relationship? The monetary standard is a stable store of value. Is it protected against counterfeiting like a metal atom by definition would be by its weight such as the weight of gold for a dollar, a British sovereign, a French coin (the Napoleon is, e.g., defined by its weight of 6.08044 g of gold)? Since August 1971, gold is no longer a standard, the reference currency on which it was based, essentially the dollar, is now guaranteed by the exclusivity of issuance held by the issuing central banks and its consequent management of scarcity, even if it is quite relative. Is the greenback, which has become a standard, still sufficiently universal to be used in large markets? Yes, it is, in fact, a universal monetary unit. More than any other currency, the U.S. dollar is a universal monetary standard because of the sovereign power that backs it, to give confidence in the protection of its backing and its measurement, which gives it a role as a standard. Implicitly, even though the U.S. currency has lost its metallic definition (its weight in gold), it retains its ubiquity as a unit because of the scope of its regulation. It establishes that its self-authorization of use is within its national jurisdiction through its centralized monetary system. The U.S. justice system sanctions any fraud concerning the use of the dollar. The dollar unit we are talking about is mostly used outside the scope of American sovereignty when it comes to real trade. According to the WTO, only 15 percent


4 The Monetary World and Its Analytical Tools

of international trade in dollars is with U.S. residents, which means that 85 percent of trade is outside the scope of U.S. sovereignty when it comes to dollar claims on banks, 85 percent of which are also denominated in dollars. Therefore, it is the dominant currency unit in use today. Can the dollar, as a standard, itself be regulated by a new measurement tool that would have, above the currently freewheeling greenback, the role of international standard? Who should then have the right to set the exchange ratio, and by what process? Certainly, this monetary unit, as a possible standard, can be universal if it is organized in such a way as to give confidence to the actors, as we shall see later in Chapter 7. This is a political and military subject, since it presupposes that the laws in force can be applied beyond national borders; it is indeed a question of a global balance of power. In the context of a digitalized world, this unit of measurement should logically be digital; it requires protection against copying by a third party with regalian powers, a control of its variation in value and a control of its link with a support such as a debt with a nominal value. Of course, since it is not protected by a molecular formula like a metal, the unit will need to be mathematically protected like a cryptogram with a mechanism by which the volumes used will be under control.4


The Right to Issue a Standard

Cryptocurrencies, such as bitcoin, have replaced the definition by metal weight with digital computing power. This solution has the particularity of making the issue more or less universal. Anyone with a computer can receive units through data transfers. The transfer facilitated in this way is equivalent to the transfer of money and must also be protected. Contrary to what many claim, the fact that the power of issuance is fixed does not settle the question of the appropriate volume of issuance, which must also be regulated. The question of the legitimacy of the multinational institution that should have the power to regulate monetary issuance is a political issue. The question of the adequacy between the necessary monetary volume and the issuance is completely open. In addition to the issue of units and standards, there are new monetary aggregates for an expanded concept of money. The current approach is to track money through the most liquid financial instruments, the central bank’s money and related derivatives (M1 and M2, sometimes M3). What the banking systems distribute in the form of loans should be analyzed together with direct market refinancing, which now constitutes the most important part of refinancing. The traditional monetary aggregate approach to the balance sheets of financial institutions is now irrelevant and requires a more granular analysis as financial instruments and guarantees diversify and expand. Unbalanced national budgets


The HTDA system works according to the same concept of tamper-proof chronology on which the double part and the blockchain are based (see Appendix 1).

4.7 The Right to Issue a Standard


and free markets disconnected from tangible trade, without any international regulation (regulations are still national to this day and sanctions can only be governed by national jurisdictions), make the monitoring of flows displayed by M5 and M6 the only relevant approach. They give a view of the risk of contagion through the flows of a variation in their value; for example, in the event of default by the debtor and systemic sales of the collateral. The accountant, in his formal world, cannot keep track of totally different kinds of collateral, and the execution process can only fail by trying to give values to add up in a single balance sheet. Profits and losses of such diverse origins would force him to lie that his science of standards is as relevant to the public as to market analysts. This is only true for comparable transactions performed in a similar manner within a currency area by industrial and service firms that do not perform monetary functions as is the case today because of the public’s digital access to producers and payment platforms. As mentioned above, we advocate a monetary monitoring system based on detailed observation that, extended to all data, blurs the boundaries between entities that are legally classified as financial, legally constituted (banks and payment and market infrastructures) and those that are not. The presentation in this M5 and M6 monetary space of the flow of financial instruments, such as claims and certain assets without counterparties (shares or equity), would allow for a more detailed classification of the flows between entities, and between legal entities and individuals. In this new context, the traditional monetary aggregates (M1, M2, M3) will disappear as such, replaced by an infinite number of combinations of multiple information carried by the transactions recorded in the M5 and M6 space, depending on the purpose of the analyses sought. For example, it will be possible to observe the speed of transactions by category of assets and liabilities in real time, without which the analysis of observed values is not possible. Moreover, knowledge of the details of transactions and their purpose will make it possible to legislate the use of data and their accessibility according to the beneficiary. Thus, as with surveillance camera images, accessibility could be reserved for restricted use, regulated by an institutional authority. The value adjustments now permitted by accounting standards to “fair market value” make little sense when one considers, for example, that the IFRS 9 rule does not apply to government issues taken at par, the original issue value. By adopting this standard, accounting bodies have accepted that governments can issue money without limits, secured by a fixed valuation, which is the opposite of a sensible process and represents a kind of corruption of thought and violation of the truth of finance by abolishing free market mechanisms. It is preferable to have a system that tracks nominal values fairly, allowing for a separate assessment of macroeconomic risk on a consistent basis. As we have already said and repeated, the nominal is a predetermined reality between stakeholders to which legally sanctioned rights are attached. The nominal is the manifestation of an exchange that defines the value of a transaction on the day it takes place.



4 The Monetary World and Its Analytical Tools

The New Approach of the Bank for International Settlements (BIS)

The newest development regarding aggregates would imply the BIS’ acceptance of the idea that a global approach to liquidity should now be considered. Jaime Caruana, BIS director general, cited BIS research director Hyun Song Shin’s personal approach to global liquidity in his opening remarks at the 2015 Annual General Meeting and presented a report in which dollar claims between banks appear as aggregates. A belated realization of the asset risks arising from massive debt buybacks, compared to previous approaches that denied the rate and solvency risks of governments or private issuers. It is clear that the contemporary monetary system has removed the barriers to the transmission of interest rate and solvency risks. In his speech, Mr. Caruana presents a relevant analysis of the risk transmission process, which partly corresponds to our analysis of the money supply by M5. The BIS has also de facto eliminated M2-M3 (claims that are not quickly due) by including all types of claims and by classifying them, in particular, according to the currencies in which they are issued, with the dollar and the euro accounting for 90% of inter-country transactions. In making this analysis, Caruana, rightly, also introduces the value factor that we know to be more or less volatile. For us, monetary units are only concepts of measurement, because no unit as such is linked, since the non-convertibility of the dollar, to immediately negotiable tangible assets. Only central banks can meet the requirements of monetary policy by providing liquidity to the markets where they are traded to ensure market continuity. Five years ago now, on June 28, 2015, Caruana warned that low rates on long-term instruments generate high value risk due to the volumes involved, which would intervene if rates rose. As noted earlier, Caruana writes that “BIS research has found evidence that volatility during periods of inflated growth tends to undermine future potential productivity.”5


Conceptual Discussion for an Expanded Monetary Approach

In response to the failure of macroeconomic deregulation and accounting standards during the economic crisis of 2007–2008, new microeconomic regulation for monetary financial institutions (MFIs) has been developed. Without a general framework, it may not be more effective than its predecessor because the playing field no longer has clear boundaries. In the context of this reform, we are witnessing the disappearance of the financial and accounting boundaries that financiers


See the Bank for International Settlements document no. 66, quoted above, where Mr. Jaime Caruana explains why the balance sheet of central banks is important.

4.9 Conceptual Discussion for an Expanded Monetary Approach


have been calling for all economic agents integrated into the global financial system (MFIs) and all types of transactions performed, recorded according to the same standards (IFRS). Refinancing of the economy is now done through the financial markets rather than through banks, depending on the size of the borrower as well as the type of collateral involved (e.g., refinancing the acquisition of real estate). The result is a monetary policy that is increasingly disrupted by additional government measures either to increase liquidity and the volume or to reduce the cost. This choice depends not only on the objectives set by governments with respect to social issues such as housing and payment systems, but also on the need to refinance the public deficit. Monetary policy is also affected by the need to keep some troubled systemic banks afloat by providing them with low-cost liquidity (rates and volumes). We see the same concerns about tax issues, as these must also be addressed if the ultimate goal is to have a level playing field that distributes the tax burden evenly. The tax situation is not only made uncertain and inefficient by advances in the way trade is conducted, but also by measures taken that cannot be suddenly dismantled. Indeed, various budgetary systems have been set up and used to refinance budget deficits by using the sovereign privilege of raising or exempting taxes as a guarantee. These exemptions may concern both offshore funds and the absence of withholding tax on most public issues. It can also include the protection of pension plans and other long-term accumulation of money for retirement. This type of regulation is in fact a mean of long-term refinancing of public debt, creating a kind of centralized economy that is far removed from what we call a market economy. Although we talk a lot about the market economy and we have probably come a long way from where we were 70 years ago, governments have at the same time created obstacles to its natural functioning, which would result, in order to be most effective, from a relevant and fair control. These economic and fiscal policies are made unavoidable by the existence of different comparative advantages according to political, social and geographical environments. This brings us back to the issue we discussed earlier, that is, the changing weight and nature of economic exchange in the world since the Second World War. In raising this issue as we do, we are aware that the ultimate consequences of globalization are to foster economies of scale and to provide more efficient means of trade and production. Globalization achieves this by giving each of the economic agents in a particular category access to a wider range of resources and more direct access to a supplier. It also generates greater competition, which in turn generally favors the largest players or, in the case of new products, the most innovative. If globalization is more efficient, it of course destroys those who do not have the size to benefit from economies of scale, who do not have adequate natural resources, or who do not have the logistical infrastructure or access to a large consumer population center. Moreover, globalization favors actors who are able to optimize economic linkages at the expense of those who do not benefit from the combination of competitive advantages in their sector.


4 The Monetary World and Its Analytical Tools

We believe that the first way to approach the issue of exchange is to advocate for the greatest possible transparency of our monetary world, and to put aside political and ideological motives that are of no use to the average citizen. We see the world as a global monetary system that determines the social relations between individuals. It has always been said that reforms without wars can only happen with prosperity, and since we still do not have a tool to plan or model reforms from a mathematical point of view, it is not worth trying to dismantle our worn out system without a prepared replacement. The problem that arises is whether it is possible to define a new monetary universe that encompasses the entire space where economic agents currently operate and, by observing the playing field, to ensure that individual transactions do not generate collective risks. This expanded playing field, which we propose to call M5 and M6, should sensibly take into account most of the financial assets used for trading, and develop a monitoring of these and the underlying assets. M5 would apply to the total cash and liabilities of firms, and M6 to the total assets of those firms. The difference between the two aggregates corresponds to assets and liabilities without counterparts (fixed assets, physical currency, equity balances). These definitions should also identify the economic status of the holders and their counterparties, which will reflect the current realities that in a modern economy the bookkeeping function is not limited to banks. Banks and other financial institutions, in our approach, no longer have the monopoly of money creation and financial trade. A return to metallic money, or even to fiat money, is no longer an option. For survival purposes, central banks want to control the framework in which they were set up. They would thus tend to regain control of the monetary instruments of exchange that had escaped them, as would any institution. The consequence would be to limit the money supply and its free use by centralizing its management. The result is certain: there would be stagnation linked to insufficiencies in the nature, quantity and distribution of the instruments used for exchange, and consequently a weakening of activity. Creativity to find the instruments necessary to regulate exchange would be reduced. This is a fundamental question, but answering it is obviously more complex. Analysis of the initial consequences of a free money supply, i.e., one that is created by the simple activity of economic agents, faces at least three technical obstacles. The first is the ability to collect a wide variety of information, since information related to instruments issued by all kinds of unregulated firms and financial institutions may or may not have been disclosed to the public and civil authorities and may not appear in the annual accounts. The second is territorial control, i.e., the issuance of money with a dollar counterpart in countries classified as tax havens. Finally, the third obstacle is the treatment of the assets, which aims to bring them together in a single legal and accounting package in order to weight the risks and thus be able to value them, instrument by instrument. This financial

4.9 Conceptual Discussion for an Expanded Monetary Approach


securitization technique separates the real activity from the monetary issue, which becomes a virtuality.6 The potential conversion of assets and liabilities from one category to another (i.e., illiquid, financial assets) is necessary to define the elements of M5. The whole group of assets and liabilities, whether they are dischargeable (debts and receivables) or equity (shares), must define the overall space to be used for trading. We call it M5 and M6. Recall that aggregates are a simplified approach that assumes that the spaces they define are sufficiently homogeneous to represent the flows and their components at a level of precision that makes sense to the observer. From the observation, one can extrapolate the changes and draw conclusions. Aggregate analysis is not as good as detailed analysis, but the two types of analysis should converge in their conclusions. Recall also that, we are questioning the system of national accounts designed with Keynes in past environments that distinguish between financial institutions and other economic agents. The digitization of money and the resulting flows make this distinction an illusion. All agents contribute to monetary issues. We believe that this erroneous distinction explains why monetary policies, as organized, have failed or, at least, have had no positive effect. This is why we see the financial world as a kind of onion with different layers of interacting financial instrument categories. An onion, with its irregular and uneven shape, is not a perfectly round ball; it is M5 and its sister ball (M6, M5), both of which come from real transactions translated into numbers because they are expressed in monetary units. The interaction between the layers results from the fact that the transactions are individual, with no predetermined aggregation as to compensation, and that they are carried out at any level of the firms. It is the approach conceptualized in our previous M5 and M6 books that allows the two worlds, that of reality and that of its representation, to be brought together. Accounting is at the heart of this issue! Corporate balance sheets and profit and loss accounts are the right level of data collection because they allow, as standardized today, the sorting of assets and liabilities and the measurement of activity by the amount of revenue recorded. This then allows for the measurement of turnover rates when they are related to third party customer or supplier sales. It is then possible to determine the monetary space, M5, M6, defined as “any asset that has a counterparty and therefore has either the nature of a debt receivable or that of a capital.” It includes any liquid asset or liability (each of which determines a ratio with income and fixed assets and liabilities). Assets that are currently considered liquid (e.g., currency) corresponding to M1 would be excluded as minimal, but in aggregate, they cannot be claimed from the central bank without a currency conversion process. The ratio between the two aggregates of liquid and fixed assets and liabilities will indicate liquidity, which is of course a key factor in the stability of values. It is indeed the


The real space is that which gives rise to claims at the exchange price. The financial space is that which results from the resale of derivatives of the first category.


4 The Monetary World and Its Analytical Tools

world of M5 and M6, that is to say, the world of the representation of activity and its monetary expression, which allows us to see the real and thus to analyze it. The creation of a value bubble will occur when the flows, which the underlying assets and liabilities generate, no longer equal in the portfolios the values at which the instruments to finance them have been paid. The prediction of a “breakdown risk” will also become possible by observing a slowdown in the velocity ratio. In an adapted consolidation of the financial statements, it will also be possible to determine intercompany financing by separating receivables and revenues, depending on whether they are from households or other companies subject to the applicable legislation. With accounting consolidation, which would cancel out receivables and payables within the same package, the nominal value of the instrument exchanged remains the fair measure of the risks actually borne. The visibility of the balances resulting from the transactions allows a measure of the leverage of the debt and the associated risks. Moreover, the totals that we define as M6 (M5 plus equity) allow us to measure the reality of the money supply as it exists in each country or monetary zone. M5 and M6 correspond to a break with the classical aggregates because the significance of the previous models is already limited and central banks and other institutions are obliged to supplement their aggregates with data and studies from national accounting systems. The inventory approach to assets and liabilities cannot be evaluated without exchanges (the velocity of money, which like the rotation of a star or an object determines gravity). The transformation of asset and liability categories into legally defined categories must remain a visible phenomenon that must not be hidden from observation. Off-balance sheet liabilities that do not appear in accounting transactions as they manifest themselves in M5 are, in our project, taken into account with our approach by a subset aggregate of the M5 space that we call M5. In this new universe of the monetary space, M6 retroacts by making the net situations (assets minus liabilities with counterpart) appear. It is important to note that nothing in this draft analysis undermines the sovereign power of nations, and since none of them can remain outside the monetary system of convertible currencies (with the exception of China as long as it sets restrictive conditions for its full convertibility), no obstacle can be placed in its way. It can also allow a debate that is currently slowed down by the variety of situations.


The Necessary Development of the Observation of the Single Financial Space

In the financial world, the IBAN and LEI allow companies to identify the originators of transactions, individuals or companies, in the single space that is M5 and M6. Therefore, these transactions can be aggregated from multiple angles, whether the supporting instrument is cash or any other instrument. Sorting can also be done by type of financial instrument, by individuals or by companies, and

4.11 M5 and M6: Derivatives and Separation Between Instruments


by types of transactions and their amounts. The sorting criteria are limited only by the information attached to the transactions. It is important to use the resources that the unique M5 and M6 space allows to gather and analyze. This approach allows us to observe how money is created by the exchange of goods and services, or destroyed by changes in value, and how monetary instruments can vary in volume through their payment and how the speed of exchange, and the exchange itself, are affected both by these movements and by the mood of economic agents and prevailing interest rates. Later in the book, we will consider ways to reduce debt amounts, but we can note that a set-off, as a simple payment, is a mechanism for reducing balances. The sale of an asset to pay off a debt has the same effect of reducing the debt, and thus the total recorded in M5. From a static point of view, the transactions are all balanced and the transactions on the balance sheets are balanced. Everything looks good in the best of all possible worlds. Then, thinking more deeply, we realize that if this were the case, there would be no risk of crisis and we would not write anything on this subject. Asset prices and liquidity, i.e., the ability to sell within a given time frame, make the previous statement either false or uncertain. For better or for worse, numbers are not realities, even if they are presented in standardized financial statements. A picture of the trade in financial instruments, their speeds and natures, is necessary for any monetary policy aimed at maintaining stable trade. Central bank monetary aggregates cannot provide this information. Analyses such as stress tests (on the decline in value, the variation in interest rates) attempt to compensate for this weakness of a static approach. This suggests two considerations: When two, three, or an unlimited number of participants are linked to a market where each is both a creditor of one and a debtor of the other, a wiping out of all debts and claims of similar amounts has no influence on economic reality. The realization of a payment that reduces a balance requires the existence of stable and liquid financial instruments, without which trade can only come to a halt. The data provided by M5 allow us to assess the degree of monetary liquidity necessary for the system to function. Second, the unwinding of debts and claims with participants of a complementary industrial or commercial nature, such as a producer and a supermarket, is not a problem if a collateralized monetary instrument, which can serve as an intermediary, is available to do so. The mechanism of the rise of the soufflé that exchanges have allowed when asset prices have risen is a frequently observed reality (Fig. 4.1).


M5 and M6: Derivatives and Separation Between Instruments

By themselves, M5 and M6 do not describe monetary flows but are the representation of the transactions revealed by the exchanges, which in turn make it possible to identify and analyze monetary flows. We have seen that M5 is composed of monetary elements, such as balances that are claims corresponding to invoices,


4 The Monetary World and Its Analytical Tools

Fig. 4.1 Within the monetary structure

that can be recorded as negotiable instruments on regulated markets. But all of them are legally defined in terms of their ownership and the responsibility that their holding entails for their safekeeping, especially when it is a financial institution authorized by the regulators to receive securities. These securities, which are financial instruments, carry with them the laws that govern them as set out in monetary codes and market regulations. The governance of marketplaces and trading rules provide definitions of what markets are and the intermediaries that operate the instruments object of the operations. This makes it possible, along with the identification of the actors, to decipher what makes up M5 and M6. Collection and settlement, consequences of defaults and speed of transactions will be the indicators to be observed along with the derivatives and guarantees attached to the items circulating in this space. Reserves and accruals for future events such as pension benefits and dependency costs will also be included in the analyses to allow for the time factor. The time factor is the space between the actual flow and the cash flow. Therefore, these elements need to be precisely identified and addressed because they will come into play in the event of a default of the debtor or the value and link the assets or claims to the financial derivatives. Only M5 and M6 allow an appreciation of all these interrelationships.

4.12 The Landscape of Exchanges Through M5, M6


We also considered that any claim, whether governed by law or not (they are all governed by the legal concept of ownership), was contractual in nature. The existence of a claim always corresponds to an equivalent debt for another holder and of a monetary nature, as opposed to an immediate barter where the exchange of goods offsets the transaction. Nevertheless, in order to discuss how money should be operated and its issuance regulated (if regulation is necessary), we need to look more deeply into what exchanges are today from a monetary point of view.


The Landscape of Exchanges Through M5, M6

With our M5, M6 lens, the balance sheets can be consolidated to be seen as a single space. If they were all consolidated, their balances would disappear for accounting purposes. This rule applies with two exceptions: when the nominal values have been unilaterally modified by the holder due to the accounting standard of fair value, or an impairment test; or when the instrument has been traded at a value different from its issue value. In these two cases, the balances recorded in the accounts become non-reciprocal, and the consolidation of the balance sheets no longer mechanically cancels out the balances that are nevertheless symmetrical and should disappear by confusion between their creditor and debtor, who are now one and the same. The gap that appears is a measure of the exposure to the variation in prevailing interest rates in the entire monetary edifice. The debt legally owed in the monetary system by the holder is a nominal value that necessarily constitutes a ceiling on what he will pay. The difference determined by the comparison between the nominal value and the book value appearing in the financial statements mechanically becomes the floor beyond which the value cannot fall. The balance sheets of enterprises are the counterpart of transactions between themselves and with households. However, since households are not subject to accounting requirements (keeping books and records when not required for tax purposes), they do not appear as such in M5, but exist as counterparts of the enterprises from which they source and work. It is also useful to remember that our goal of observing ongoing exchanges should include the ability to change not the actual legal facts of the exchanges, but rather to change the space–time view of what the financial world is. The law or case law is what it is (when it exists), the instruments are also legally defined, as are the figures collected on transactions from statistical agencies’ databases. All of these elements have an effect on monetary liquidity and must each be analyzed in order to assess the speed of circulation of money and the risks of contagion of a default. Finally, financial statement data can be analyzed according to different parameters depending on the angle of observation, which may be that of accounting standards (a concept that determines exclusive or shared control of a firm), or that of jurisdictional competence that will sanction the application of applicable exchange rules (customs duties, quotas, standards, etc.) or determined by the dependence between actors. These last approaches, which consider infinite angles


4 The Monetary World and Its Analytical Tools

of analysis, have no standardized and official statistical basis, even though it is easy to understand that certain criteria can guide the analyses. Some countries are linked economically through trade with companies operating under their control. This is the case, for example, of Japan, whose companies use neighboring countries to manufacture through subsidiaries. Germany can be seen in the same way with certain Eastern European countries. Of course, monetary policies will not work and will not be transmitted in the same way if the performance factors change, with shortages appearing over time in one country (labor shortages in Japan) and significant availability in others (in debt instruments). The traditional analysis by country used in many official reports no longer makes sense today if we consider that the free exchange rate regime prevails in the world, excluding China, and that the derivatives markets provide the necessary collateral arbitrage at a cost that appears in the rates charged. This observation alone justifies the need for our M5 and M6 approach. By relying on firms’ accounting records and trade details where possible, M5 and M6 go beyond the limits of central banks’ analysis and the consistent monitoring they attempt to do of the risk of default on asset values. The difference between the nominal values of debt and the corresponding traded value, as well as the difference between M5 and M6 (equity and fixed assets), will enhance the risk and timing analysis. In this approach, there are three focal points of factors: the applicable law, the time frame (such as the time you have an appointment posted in your calendar— this can be the time of issuance, the time of exchange and the due date) and finally the exchange locations (Fig. 4.2).

Fig. 4.2 Observation of exchanges in the financial world

4.14 The Classification of Instruments


Because we now have a global view with M5 of the elements that will satisfy any type of exchange as a payment, we can now approach what can be analyzed.


Analytical Objectives of Exchange Rate Observation

We will discuss the types of exchanges we see through the lens of M5. The objective is to know the velocity for each real exchange and the price of the financial exchanges that balance the real exchanges. The speed can only be measured by considering a delay and a volume of exchange, and with the detailed analysis of M5, we have the necessary elements to measure it. In a complex economy that allows for permanent adaptations, instruments must be diversified but always exchangeable between them. This need for exchangeability is mandatory to avoid imbalances in specific refinancing instruments, either to realize excess liquidity that would otherwise be useless at best, or to deal with the risk of liquidity drying up. It is also necessary to monitor bad initiatives by the U.S. Congress, such as those that led to the subprime crisis linked to financing to insolvent individuals. The refinancing of these real estate assets transferred risk to the economy as a whole through interventions to support both threatened tenants and homeowners as well as institutions that failed due to falling collateral values.


The Classification of Instruments

To achieve these analytical objectives, we need to differentiate and classify by legal type the instruments traded to be exchanged. The statistics available today, developed with certain central banks (the Federal Bank of St. Louis or the ECB), while relevant, have reduced certain categories of financial instruments and certain markets to the point of being of little use for the analysis of their flows. Among other things, they lack observations on the currencies used and the holders when they are transnational.7 The categories to be used for a more operational classification are as follows: – Securities representing rights in equity; – Scriptural money; – Non-marketable financial instruments (“FIs”), i.e., not transferable or claimable by anyone other than the issuer on the maturity date. Included in this category are instruments that can be accepted as collateral for loans; – The tradable financial instrument with subcategories including traded and nontraded, listed and unlisted and listed on regulated markets or only on OTC (unregulated) markets.


See Sing’s report to the BIS General Meeting presenting the amounts of international dollar/euro claims limited to those between banks.


4 The Monetary World and Its Analytical Tools

In summary, the legal status of the instruments to which the entitlements are attached will be the first level of classification, the status of the markets where they can potentially be traded the second level of classification, and the underlying collateral attached the third level. By using such classifications, regulators and judges will be able to determine consistent rules and guidance for their jurisprudence. With greater visibility, confidence in the instruments will be better established and international convergence made possible with respect to legal status, including the collateral that is attached to the instrument and the process that applies to it in the event of default, negotiation and reporting and safekeeping rules. The underlying collateral behind the instrument may itself be rated according to what it is based on (e.g., real estate or bills). The protection of private property (the ownership or proceeds from the sale of the asset serving as collateral) will be ensured by transferring the pledge to the holder of the instrument for enforcement of the claim on the defaulting issuer. The sovereign undertaking, in essence, has a different nature from private engagement and is no longer based on precious metals like gold or silver (or an alloy of the two like electrum). Public commitment is now based on the fact that the sovereign power has the power to levy taxes: the state concerned can decide (within limits set by the constitution and the interpretations of the Supreme Courts) to levy taxes and to change laws to satisfy a financial commitment. Being collective, this capacity, at least in the short term, may appear better to the markets than a right to collect pledged and therefore seizable assets whose value may be affected by difficulties threatening a particular sector of the economy (the value of real estate may be inconsistent if no transaction is possible). The advantage of a sovereign guarantee is that it is not dependent on a specific asset and is general. This partly explains why sovereign issues can have negative interest rates because they are guaranteed by a direct claim on everyone’s cash flow capacity, at least in the context of a powerful and healthy state. The mutualization among its citizens of the commitment has value; on the other hand, a national financial default can deny a state access to international financial markets, where there is assured liquidity to date.


Exchangeability Between Instruments

To decipher the meaning of the volume of trade and velocity of an instrument in the financial space, in addition to identifying financial markets, we also need to know who the market participants are and have a description of how transfers are legally conducted, and how and when they are reported. Observing exchangeability can then allow the determination of dynamic ratios to anticipate the evolution or contraction of subspaces by instrument in volume and price.

4.17 The Power of Seigniorage and Its Challenges Today



The New Paradigm

The present system of exchange manifests its existence by the recording of transactions entirely carried out between them by economic agents, with at least a nominal value and according to a chronological order, the date and time of their occurrence in space–time. These unsettled transactions, i.e., claims, appear as points and disappear totally or partially when they are combined with another total or partial inverse operation: their payment. The monetary space as a chain never ends when it is, at its source, the uncounterparty money issued by the central bank. The traditional aggregates, including those of M5 and M6, are just grouped together for the sake of simplicity under legal definitions that attribute ownership of assets and debts to economic agents and allow us to observe their behavior over time. What is important in this new vision is: – That the registration system must not accept any break in the continuity of the exchange chain; – That the recognition of the nominal value of the assets exchanged constitutes an underlying commitment that characterizes the instrument, with its origin and risk.


The Power of Seigniorage and Its Challenges Today

Through observation, we get a glimpse of the direct seigniorage power that generated by the issuance of money by the central bank, the production and trade effect, essentially purchases and sales (the real source of money today), the multiplying effect and the price effect on financial instruments already issued. The seigniorage derives from the power to issue money and to set the exchange rate of money. It is essentially the power to change the unit and to govern interest rates. The power to issue has thus become a modern power of seigniorage. It directs the fiscal and monetary policy of a nation. Due to the disintermediation of economic finance and regulation limiting access to financial markets, the seigniorage rights of nations, once reserved for mints, have been dispersed in the modern world among the large financial institutions and marketplaces that provide the necessary conduit for instrument flows. Because of their transnational nature, marketplaces are challenging the national powers of central banks by having the power to alter the price of these instruments, including unilaterally changing the implicit rates of loans and borrowings that are mechanically linked. When it corresponds to an organizational service or a guarantee, any deviation in the price initially set between independent parties would not be a problem if the resulting “profit” corresponds to a cost. But, beyond the costs of operating the market, any levy represents, in a way, a new right of seigniorage but, instead of being part of a national system, it would be private,


4 The Monetary World and Its Analytical Tools

and for the benefit or at the expense of the final participants. The risks of overcosting market infrastructures in relation to their efficiency become a subject of attention insofar as the volume of monetary flows has increased out of proportion to the rise in GDP. We have seen examples of the excesses of the financial sphere, with the Libor scandal (interest rate fixed by agreement), but also with the issues of remuneration of asset management and rating consultants by the agencies. The whole concept of the unified and extended monetary space that constitutes M5 and M6 requires an identification connection with the economic agents that operate it. The company identification system known as the Global Legal Entity Identifier (GLEI) fills a gap in the statistical system originally organized by country. M5’s statistical approach makes it possible to highlight the link between the real world, whose actors are the companies, and the financial world, whose evolution is monitored by the central banks, and to grasp all its components: meaning, nature, distance, risk, etc. The classic example of an analysis on this subject is that of a car manufacturer that finances its distribution network in several countries. Contrary to what would be shown by general national statistics or monetary statistics by country, the company has no monetary or financial risk exposure to its subsidiary because it has an inventory corresponding to the open credit balances that the intercompany sales have created. Its risk is commercial in nature and therefore not financial or contagious. This risk, which is intrinsic to the group formed by this transnational enterprise backed by its real assets, is of a substantially different nature from that which the monetary expression, resulting from exchange rates, imposes on the system. For this reason, the implementation of GLEI should consider defining and linking companies, wherever they are located, to the group on which they depend economically, on the one hand, through the volume of its trade and, on the other hand, financially, through the ownership of its capital, a complex issue that accountants must address when preparing or auditing a “consolidation” of the financial statements of “controlled” entities. It should be clear to all that an information system based on a global infrastructure should be designed to integrate accounting standards and make them compatible with what big data allows, adding the identification of the beneficial owners of the entities, their location and any legal ties. The GLEI system allows for this analysis, but the accountant’s assessment remains prevalent and there is a risk of divergence between the formal reality of the accounts and the financial risk. The moment of the actual transaction from an electronic and legal point of view should also be defined and its date attached to any entry. Today, while some large companies can analyze their exposure to currency fluctuations and commodity prices, there is no real way to regulate globally what current movements between currencies can trigger or what a crisis outside the zone would generate directly by spreading. Within the framework of M5 processing, the data derived from the details of the transactions carried out by the market players, which is protected by business secrecy, would be used in an anonymous form. Thanks to coherent data classified

4.17 The Power of Seigniorage and Its Challenges Today


chronologically with their counterparties, which allows the identification of all the exchange processes, the M5 space allows the apprehension of secure information on the blockchain mode, with the ability to trace the entire chain of purchases and sales from the original transaction of the product or service. Detailed with an unlimited number of possible aggregations, the data would provide the relevant industries and the public with information on macroeconomic exposure and price formation. For example, it would reveal how pension benefits accrued and recorded in financial statements are used and how they contribute to the financing of the productive economy and the refinancing of government deficits, and the effect of tax incentives where savings income is exempt. Without these tax exemption schemes, the value of public debt in many countries would collapse because of the lack of sufficient buyers. It is thus clear that by processing M5, the interrelationships between accounting, savings and employment become more legible and forecasting models easier to develop. This information, detected globally by the central authorities, would prove useful to democratic institutions in determining the QE policies or interest rate actions to be taken to prevent and deal with risks. The distinction made by proponents of Modern Monetary Theory (MMT) between the vertical analysis of how money flows from the central bank to consumers and back to the banks and the horizontal analysis between private entities and individuals, disappears. It disappears because the two merge in the M5 space and the dynamic observation shows the original nominal value of all transactions, compared to the transaction values of debts. It also shows the destination of flows by type of transaction, sale, or exchange. Fractal approaches and quantum mechanics, i.e., all the statistical tools, without interfering with the observed elements, will make it possible to explain what could be done to apprehend the problem of the price of objects and services that are the determinants of transactions.8 According to the French Civil Code, a sale is made when the parties agree on the thing and the price. Defining the relevance of a price in a market economy is to resolve a central issue that would make it possible to bring transparency to international monetary negotiations, where the first debate is: what is the right stable exchange rate that has determined, for each individual transaction, the price paid by the buyer to the supplier? Observation and, above all, digital mass processing capabilities make it possible to let the markets answer this question without the temptation to interfere with the freedom of the markets.


In a discussion of this nature, the following names should be remembered: John Bell, Niels Bohr, Bose, Louis de Broglie, Clinton Joseph Davisson, Paul Dirac, Wladimir Fock, Enrico Fermi, Hugh Everett, Pascual Jordan, Hans Peter Kramers, Chandrashekhra Vankata Raman, Willis Lamb, Lev Landau, John Von Neimann, John Wheeler, Wolfgang Pauli, Max Planck Robert Andrews Millikan, Max Von Laue, Pinewood Derby, Henry Moseley, Stephen Moseley, Richard Feynman, Werner Heisenberg, David Hilbert, Heike Kamerlingh Onnes, Robert Retherford, Erwin Schrödinger, Wilhem Wien, Herman Weyl, Eugène Wigner, Peter Zeeman, Zellinger. Serge Haroche, Steven Weinberg, Sheldom Glashow, Abdus Salam.


4 The Monetary World and Its Analytical Tools

The following formula was published in our previous book.9 It can give an idea of how balance sheets through the M5 approach, using the fair market value of transactions as well as the autonomy of the financial world and its instruments, can reveal a systematic risk of instability through too great a divergence between nominal and market values. A valuable indicator for economic policymakers.


A Formula Test: STD (Serval, Tranié, Douady)

The valuation of the monetary unit is at the heart of the question at a time when central banks have not been able to monitor it, in the absence of a universal standard. With the increase in new money flows10 with financial trading and clearing platforms, financial markets will be wiped off the face of the earth if no global international rules are agreed on to determine and guarantee the value resulting from their measurement with a standard. Nevertheless, the rules will have to take into account the realities of flows and the valuation of financial instruments to adapt where necessary to the achievement of M5 and the overall national and international objectives of prosperity and wealth sharing between people and generations. We are in the world of financial statements largely expressed in a dominant currency unit, the dollar. In the financial environment lies the risk of counterparty default. By trying to formalize what has been developed before, we arrive at the following collapse risk formula: E = (Value − Price) × (S × M5) where E is the Explosion Index and S is the velocity over a period (Revenue/ M5) taken as the deviation from an optimal target subsequently determined by the classification of M5 instrument categories. Where Value is the face value of the instrument and Price is the amount recorded, if different when the instrument was acquired or traded. The acceleration/deceleration of transactions S’ is determined by the following equation: 

S = k × (V − P)× where (S) is a response function to the price/value spread and k is an elasticity coefficient. Generally, (S) is positive between the acceptable limits for each asset class in terms of trading speed. The value itself reacts to liquidity, depending on supply and demand. V is an entity that moves quickly as a function of tran-P is only revalued at each transaction on the particular asset. Therefore, we can write:     V −P =h× S


Serval J.-F., Tranié J.-P., The Monetary System: Analysis and New Approaches to Regula- tion, 2014, John Wiley & Sons Inc, p. 208. 10 Serval J.-F., Tranié J.-P., La Monnaie virtuelle qui nous fait vivre, 2010, Eyrolles.

4.18 A Formula Test: STD (Serval, Tranié, Douady)


These two coupled equations create a common dynamic of transaction speed and value/price spread, the stability of which can be measured by the burst index E. The meaning of these equations is that trade occurs within certain boundaries. The differential value minus the price encompasses them all and implies a minimum volume of monetary financial instruments. We understand this notion of a bubble, which we experienced in 2008 with the subprime crisis and the collapse of real estate values in the United States. The “Serval, Tranié, Douady” (STD) equation consists of measuring the risk carried by the deformation of balance sheets that include all financial instruments, particularly those linked to real estate, at their financial value. The quantitative independence between the processes of determining prices in the real economy and the processes of determining the exchange prices of financial instruments mechanically creates a spread. However, this “spread” has a limit. For trade to continue, a certain volume of money is needed. Below this volume, the economy dries up. Beyond that, the economy is flooded. For the reader’s understanding, we should add that the differential between traded prices and nominal value in our model functions as a spark plug. It is a spatial representation of a financial reality that does not change the other representation of the reality of trade at nominal value, it represents another image that may itself affect market participants. Once set in motion, the acceleration process identified by our team is difficult to stop and our STD formula, in this context, must make it possible to trigger alerts that activate, in particular, the market interrupters that allow the competent authorities to find the appropriate responses. We need mathematicians to create a solution to automatically explore the correlations that can exist in the infinite mass of data and to develop, without limit, models of interactions of these correlations between different spaces.


The Monetary System, the Issues


What Does the Word “System” Mean When It Comes to Money?

We have seen what money is and what markets are. Now we need to know how they combine to form a system. The system is defined by the relationships by which citizens and governments or their central banks organize the monetary compensation of their exchanges. They do this with the help of a unified measurement tool that aims to regulate the acceptance of money as a means of payment and the exchange ratio of the currency. Since the emergence of the modern notion of nationhood in the eighteenth century, national currency has become an attribute associated with sovereignty, as had previously been the collection of taxes, military expenditure, and the financing and budgeting of regalian needs. For these reasons, national monetary systems are accompanied by international treaties for external trade. This was the case in ancient times and is still true today through agreements between central banks allowing for the exchange of liquidity. After the collapse of the Western Roman Empire (476 AD) there were periods, as in the Middle Ages, when the word “system” referred to a type of organization that could not be called a structured national system. At that time, monetary exchange was based only on competition in the quality of the medium that monarchs tried to regulate within their territorial sovereignty, and money was still part of the barter system as if it had not yet completely disappeared. This allowed the various economies to operate within their borders, but also to import the goods and commodities they lacked, in return for exporting (or at least not using) limited amounts of precious metals like gold. Until the nineteenth century, with the enormous growth of industrialization and trade, monetary systems were mainly national and developed within large colonial empires, such as the Portuguese, Spanish, French and English. These were able to be mostly

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,



5 The Monetary System, the Issues

self-sufficient in raw materials, including precious metals, as well as in energyproducing products such as wood, coal and oil. As usual, even though these times have disappeared, we are still living with the remaining assets of the previous system. This system ended with the dismantling of the colonial empires in the twentieth century. The end of these colonial empires also changed the situation in that the need for an international monetary system became more imperative, while the military and commercial supremacy of the United States after the Second World War established the reign of the American currency. European economic integration, on the other hand, led naturally to the creation of a single currency, the euro, which in turn contributed to the development of trade and financial markets. The industrialization of China and the trade deficit of the United States, combined with the concentration of uses and monetary reserves among only three major currencies, the dollar, the euro and the Chinese renminbi, have changed the environment in which the Bretton Woods agreements were concluded in July 1944. In this multipolar system marked by strong imbalances in trade and income, it is urgent to establish new criteria for the functioning of a system whose contradictions, driven by the logic of bloc power, threaten the balance of the world. There is no widely shared diagnosis of the economic and social environment that would make it possible today to initiate a negotiation aimed at macroeconomic trade and payment mechanisms that respond to the new needs, and that would make it possible to replace the post-Bretton Woods mechanisms or to frame those created sui generis by practice to complement them. The old market adjustment theories that the market adjusts values and flows no longer work, if they ever did. The point of return is in fact mobile and only stabilized by the weight of debts that must meet monetary assets to satisfy their payment. If the value of the dollar falls, the holders of monetary instruments, which are essentially denominated in dollars, lose their bargaining power. Beyond a certain threshold, it is better for these holders, if they can, to acquire assets than to seek payment for their claims in dollars. If they do, they can improve supplier productivity to improve the profitability of their value chain.


Description of the Existing System

The functioning of the current monetary system is based on the distinction between international and national monetary systems, a distinction that goes back at least to ancient Greece. In The Republic,1 Plato considers the difference between the national currency used between free citizens and the international (foreign) currencies that the city dealt with by changing coins, melting them down or using them in international trade. Plato thus evoked an early form of currency control


Plato around 423-424 BC–348 BC. Author of “The Dialogue of the Republic”.

5.3 System Foundations—Independence and Sovereignty


system. The currency at that time already had all the attributes of money that we have known until the twentieth century. This Platonic vision of a global reality between the economy and the currency is partially consistent with our M5 approach. It allows us to look at a set of elements created by a transaction to see what comes under internal and external exchange, and an evaluation of collective wealth, based on incoming and outgoing flows and the monetary needs that accompany them. From the Bretton Woods agreement of July 1944 until the unilateral withdrawal of the U.S. dollar in 1971, the monetary world was almost entirely based on the convertibility of the dollar at a fixed rate to gold. We are now living under a kind of informal system with the 1976 Jamaica agreements, where the participating countries2 agreed to let exchange rates float. Since the time of Milton Freidman and the fall of the Iron Curtain in 1990, the market economy with free trade has become a commonly accepted idea. Europe was, and still is, in a trade surplus situation, while the United States remains in a trade deficit. The idea was that the Chinese currency was undervalued and that if it were allowed to fluctuate freely (which it has not been to this day), it would adjust and relieve the U.S. trade deficit. The participants did not understand that China, while retaining its communist political organization, had adopted the competitive system of the market economy. This is a policy choice that has allowed China to enjoy the extraordinary success we see today, while maintaining full control over its currency and diplomatic efforts to float its currency according to its own interests.


System Foundations—Independence and Sovereignty

The Bretton Woods monetary structure was based on national central banks overseeing a fixed exchange rate system. Central banks are part of this system. The system was based on a set of rules where exchange rates were always fixed with a reference to gold and monitored. The liquidity of payments was assured between countries with international loans and swaps, when necessary. This world no longer exists, although all the international institutions that were created by the Bretton Woods agreement of 1944 have survived. However, the role of these institutions, like that of the BIS created earlier after World War I, has changed and gold has lost its function as a benchmark, although it is once again favored by investors, due to the decline of U.S. monetary supremacy, rising debts, international tensions and an inflationary crisis in the United States. In addition to the Bretton Woods institutions, there was already the Bank of International Settlements (BIS), which, starting with the management of war damage payments from the first world conflict, became a coordination center for regulation. In the wave of deregulation and global competition, the World Trade Organization, created later, was dedicated to facilitating free and fair trade between nations. Only one of the institutions can


The United States, Great Britain, France, Germany, Italy, Japan.


5 The Monetary System, the Issues

be described as monetary and international because of its original purpose: the International Monetary Fund (IMF).


Central Banks at the Base of the System

The privilege of sovereignty resulting from the power of monarchies is linked to the need to organize monetary issues and to monitor them. Even the United States, which rejected monarchy and therefore did not create a central bank, decided to do so in 1914. All countries have a central bank even when they are integrated into a zonal system such as the euro zone or the dollar zone. The issuing privilege of central banks and reserves are transferred from these banks to a zonal central bank, for example the Federal Reserve or the European Central Bank. By law, these banks have their own assigned objectives and display with their monetary unit the sign of their sovereignty and independence.


The American Federal Reserve Bank’s Objectives

“The Federal Reserve is working to promote a strong U.S. economy”.3 Congress expects the U.S. Federal Reserve (Fed) to conduct monetary policy with three specific goals in mind: maximum sustainable employment, stable prices and moderate long-term interest rates appropriate to inflation and risk. These objectives are sometimes referred to as the Fed’s “mandate”. Maximum sustainable employment is the highest level of employment that the economy can maintain while keeping inflation stable. Prices are considered stable when consumers and businesses do not have to worry about prices going up or down when budgeting or borrowing or lending for long periods of time. When prices are stable, long-term interest rates remain at moderate levels. The objectives of price stability and moderate long-term interest rates go hand in hand and are linked to the available volumes of goods and services and their monetary counterparts. The Fed seeks to fulfill its monetary policy mandate by influencing interest rates and overall financial conditions. For example, by keeping policy interest rates low, the Fed makes housing prices more affordable for consumers and also makes it less expensive for developers to build and rent. It should be noted that, left to the committees that govern it and deprived of an active target since the inflation it was supposed to fight has disappeared due to competition, the Fed’s policy goals have become uncertain (inflation, price stability, unemployment, foreign trade). The prevailing uncertainty is not only driving down the dollar, but also generating asset inflation linked to the excess liquidity generated by budget deficits. The purchase of assets, whether real estate or personal property, is therefore becoming the only


American Constitution.

5.6 The Central Bank of the European Union “ECB”


protection against currency risk, especially since there is increased doubt about the conditions for repayment of the federal debt, which is estimated at $28,000 billion at the end of 2022, i.e., slightly more than the GDP of the United States and one third of world GDP. The warnings and critical opinions of central bankers become their only instruments of action. They are neither a strategy nor a remedy for their limitations. This situation reveals a lack of control over the facts and demonstrates, once again, that an institution cannot reform itself. Only institutions that profess doubt and respect for the limits of what they can explain are capable of improving their functioning in the field of the visible.


The Central Bank of the European Union “ECB”

The objectives assigned by the Central Bank of the European Union are explained as follows on its website:4 “The primary objective of the ECB is to maintain the price stability of the Eurosystem (19 countries of the European Union that have adopted the euro as their currency) and of the single monetary policy for which it is responsible”. This is provided for in Article 127(1) of the Treaty on the Functioning of the European Union. Without prejudice to the objective of price stability, the Eurosystem shall also support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union. These objectives include “full employment” and “balanced economic growth”. The Treaty establishes a clear hierarchy of objectives for the Eurosystem. It places primary importance on price stability. The Treaty clearly states that ensuring price stability is the most important contribution that monetary policy can make to the achievement of a favorable economic environment and a high level of employment. These Treaty provisions reflect the broad consensus that the benefits of price stability are considerable. Maintaining stable prices on a sustainable basis is an essential precondition for increasing economic welfare and the growth potential of an economy. The natural role of monetary policy in the economy is to maintain price stability. Monetary policy can only influence real activity in the short term. But in the end, it can only influence the price level in the economy. Monetary Union, beyond the single currency, has set itself the objective of unifying financial instruments and markets throughout the European Union. However, no more than the Fed, the ECB, prior to the arrival of Mrs. Christine Lagarde at its head, had acted to modernize the support of its monetary standard in the face of the arrival of cryptomonetary currencies, as the Chinese Central Bank has done with the e-renminbi. The question of the e-euro is now being asked.




5 The Monetary System, the Issues

The People’s Bank of China (PBoC or PBC)

The bank was established on December 1, 1948, which by merging the entire banking system became monolithic with the headquarters in Beijing. All banks, previously private, were part of it. It became a central bank in 1982. In 1995, The People’s Bank of China became independent. It was separated into 5 specialized commercial banks: Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), Construction Banks of China (CBOC), Agricultural Bank (ABC) and Bank of Communication (Bocom). Four more banks were added in 1994 with global objectives, the Agricultural Development Bank, the Import and Export Bank, and the China Development Bank (CDB). In 2018, was established a supervisory body, the China Commission for Banking and Insurance Regulation (CCRBA). With 9 regional banks, 2 functional offices and 18 functional departments similar to any central and supervisory body combined, the BOC has 303 municipal sub-branches and 1,809 county sub-branches. The system operates within a legal framework to ensure the proper formulation and implementation of state monetary policies, establish and perfect a macro control system through the central bank. The central bank issues renminbi, regulates the interbank lending and interbank bond market, manages the foreign exchange market and records transactions. Within the system are entities that act as agencies or training centers for the bank’s executives, and perform the functions of communication, statistical monitoring, anti-fraud, banknote minting and printing, software clearing centers and currency exchanges, and microfinance. The bank is under the authority of the Council of State, which appoints the governor who heads a seven-member board. The total consolidated balance sheet, as of September 2021, is $5.9 trillion, compared to the Fed’s $8.4 trillion, the ECB’s $9.7 trillion and the Bank of Japan’s $6.6 trillion.


What Does Central Bank Independence Mean?

Independence from government means greater dependence on the environment. Central banks are constitutionally independent of governments in order to protect the monetary edifice from fiscal drift. This means, first, that their management is independent of governments and that monetary policies are not dictated by them. It also means, in general, that borrowing from central banks is prohibited or limited so that the budget remains subject to the approval of parliamentary institutions. To complement the sovereign right to issue money and to oversee the exchange rate and unit value in the direct spirit of the French and American revolutions and the successors of the English Revolution, which restricted the king’s right to set the budget and the resulting taxes without prior parliamentary approval, it was necessary to maintain the independence of central banks from the sovereign. In general, the heads of central banks are irrevocable and a board free to organize monetary

5.9 International Monetary Institutions


policies with committees is formed. The board is accountable to parliament after the fact. The question that needs to be answered is whether this is an appropriate setting for both the objectives and the horizon of economic policies. When the clock is broken, it will not work without repair, independence or not. Long-term goals such as education and infrastructure do not appear in the discussion, just as societal choices and philosophy are absent from artificial intelligence (AI). Leadership is always a necessity to assign goals in a human society. The problem is that central bank objectives, such as full employment and monetary stability, can be at odds with interest rate fluctuations and money issuance volumes. The classic example is monetary policies of interest rates and QE. While the U.S. government wants to keep interest rates low to encourage full employment, the central bank’s committees and the bank as a whole base their decisions on an assessment of the economic situation, in order to justify their independence. But they then become dependent on facts and long-term strategies that are difficult to anticipate. In addition to the regulation necessary for the harmonization required for monetary fluidity and security, central banks can be the necessary body for a democracy, just as all parliamentary systems have two chambers with different time horizons and initiation processes to reconcile different purposes.


International Monetary Institutions


The International Monetary Fund (IMF)

The International Monetary Fund (IMF), established in 1944 following the Bretton Woods agreement, with 188 member countries operating as the “IMF Group,” has since pursued broad objectives and an organization designed to make its board more inclusive of emerging economies. Today, the IMF has 190 member countries and is governed by a Board of Governors, a 24-member Executive Board, and an Executive Board consisting of a Managing Director, four Deputy Managing Directors and various committees. The United States holds 17.4% of the quotas. Its objectives are: • to promote international cooperation through a permanent institution; • to facilitate the expansion and balanced growth of international trade and thereby contribute to the promotion and maintenance of a high level of employment and real income, and to the development of the productive resources of the members as the main object of economic policy; • to promote trade stability in order to maintain orderly exchange rate arrangements among members and avoid competitive depreciation of the exchanges; • to assist in the establishment of multilateral payment systems for current transactions among members and the elimination of exchange restrictions that impede the growth of world trade;


5 The Monetary System, the Issues

• to give members confidence by making the Fund’s general resources available to them over time, with adequate safeguards, thus giving them the opportunity to correct their balance of payments imbalances without resorting to measures destructive of national or international prosperity. The IMF’s main raison d’être (as defined in paragraph 3 above) and the ultimate goal assigned to it was to avoid a repetition of the vicious circle of competitive devaluation. But behind its goals was the reality that the gold reserves of the United States and the IMF were insufficient, and the balance of power that allowed the IMF to exist has changed and, indeed, continues to change. After decades of wars (Korea and then Vietnam), implicit conflicts such as the Cold War, and inflation, these gold reserves, at current exchange rates, were no longer adequate either for the nominal value of the currency in circulation, if it was due, or for the expansion of world trade and financial development. This is why the international community decided to create a new international reserve asset under the aegis of the IMF, the Special Drawing Rights (SDRs).5 In 1969, the monetary supplement to national currencies, the SDR, was introduced to support the fixed exchange rate system. The purpose was to allow loans to countries that needed to refinance their external exchange deficits. SDRs are claims on capital that can be freely used by IMF members. Initially, $21.4 billion in claims were issued, but after the latest increase, the amount issued is now $687 billion. The purpose of this money is to be used between countries with a foreign trade surplus to support countries in need. This money is determined in volume with a proportion of dollars, euros, pounds sterling, yen and finally Chinese renminbi since 2015, theoretically based on their respective share in international trade and central bank reserves. As a result of the basic concept, voting rights and quota proportions must be reviewed from time to time, which is done by a board. The last review took place in 2010 but was delayed until the U.S. Congress approved the decision, which did not happen until January 26, 2016. The value of the SDR corresponds to the proportion of its various monetary components, valued at market prices. It is also a unit of account for the IMF and certain international organizations. The drawing rights are available to each member country in proportion to its share in the capital of the IMF. Up to this proportion, no interest is charged between members. During the financial crisis of 2008, the system showed weaknesses with shortages in some currencies due to the inability of major countries to coordinate their monetary policies. This became particularly problematic as countries faced their own internal interest rate and regulatory needs. To address this problem, loan


The value of the SDR was originally defined by its weight in gold, equivalent to 0.888671 of fine gold for one dollar.

5.9 International Monetary Institutions


agreements were signed among 33 countries for SDR 477 billion, or the equivalent of $687 billion (as of March 2021), to allow central banks to draw down funds from the remaining quota available for other countries. As opposed to a claim created in return for a transaction, SDRs are not money but rather a process of compensation between countries, particularly countries with a balance of payments surplus and those with a payments deficit, making them a liquidity mechanism. The SDR process has a direct impact on national currencies and the books of economic agents in these countries, but it can be added to the guarantees given to debt issuers through national central banks. The latter can in turn buy instruments denominated in foreign currencies and thus intervene in the foreign exchange markets. It will be noted immediately that the system as conceived is contrary to the free market philosophy that dominated the world after the United States abandoned the gold standard and the policy of non-intervention in the foreign exchange market. The SDR system, which is similar to an interbank facility between central banks, is original in the way its value is determined, which is decided by a special IMF Executive Board that meets at least once every five years, if not more frequently because of the emergency. The value of the SDR is determined in dollars and published daily on the IMF website. The proportion of each currency expressed in dollars is determined by microeconomic aggregates to reflect the relative importance of these currencies in the global trading and financial system. The composition of the SDR was revalued in October 2021 to fairly represent the value of exports and reserves of the major currencies that comprise it. The last revaluation of the SDR came into effect on October 1, 2016, and it was revalued to fairly represent the value of exports and reserves. The last review in 2021 did not result in a revision. One could argue that by changing quotas as it did in 2016 to keep up with the changing economic power relations of currency areas, the IMF has merely followed the facts but not reformed. In fact, the IMF has not addressed the fundamental issue of monetary unity that needs to be discussed, and instead seems to have been assigned to another monetary institution, the BIS (see below). IMF loans are mainly for Argentina, Egypt, Ukraine and Pakistan and amount to SDR 204 billion. After the last reform approved on January 26, 2016, we can observe the following key figures (Table 5.1). The system for determining voting rights is based on the following criteria: the first criterion is GDP, 60% nominal at the exchange rate and 40% GDP (indexed). The inadequacy of the SDR to deal with currency units and the insufficient capacity for stakeholders to collectively respond to needs and expectations in a timely manner would be one of the reasons for the creation, at China’s initiative, of a new financial institution, the “Asian Infrastructure Bank,” which could carry out projects of continental dimension.


5 The Monetary System, the Issues

Table 5.1 Voting rights and quotas in the IMF Voting rights China







6.41 17.46

United States
























Europe Germany











































United Kingdom Netherlands

Table 5.2 Evolution of world trade



Exports (US$ billion)



Imports (US$ billion)



If we look at the figures, we see the following trade at the global level6 (Table 5.2). Classified by country in dollars, we note the following shares in world trade (year 2019): Country



United States



United Kingdom












The IMF is essentially responsible for financing international payment imbalances. In a context where payment systems have changed dramatically due to the


Source World Bank—WITS 1998/925.

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globalization of market platforms that affect the mass and velocity of money flows, we can no longer know what the appropriate level of money supply should be to ensure the liquidity needed for trade. The FSB in its report of April 1, 2021 notes that there is still room for improvement in the reporting system of systemic banks through which a large part of foreign exchange (Forex) trading is conducted. Eventually, thanks to M5 and M6, a detailed analysis of very large volumes may become possible. The withdrawal of cash in India as well as in the already highly digitized and populated Chinese territory probably validates our approaches. China’s imports alone account for 14.08% of the world’s imports, while the region (Europe and Central Asia) accounts for 31.05% of the world’s imports and North America for only 11.40%. This means that the world, subject to product qualification, could function without the United States.


The World Trade Organization (WTO)

The World Trade Organization (WTO) is a more recent multilateral international institution. It was created after the post-war IMF system in 1944, at a time considered to be the end of the reconstruction period and the emergence of a free market economy to replace it on a global scale. In 1995, it gave birth to the General Agreement on Tariffs and Trade (GATT) and governs the implementation of the 60 agreements that concluded the Uruguay Round in 1994. With 157 member countries or customs unions, its primary objective is to open up trade for the benefit of all. The latest country to join the WTO on August 28, 2012 is the Russian Federation. In an economy that must be complex to allow for permanent adaptations, instruments must be diversified but always exchangeable between them. This is necessary to avoid the drying up of instruments, especially when they are specific to a refinancing operation, but also to manage the excess liquidity of others. It is also necessary to follow up on the mistakes of the U.S. Congress such as those that led to the subprime crisis, which ultimately required taxpayer spending to refinance insolvent entities and then transferring the risk to the economy and the budget as a whole. During the Trump administration, the U.S. abandoned previously negotiated transpacific and transatlantic trade treaties that were considered detrimental to U.S. interests by the former U.S. administration. Today, new treaties are being developed between many Asian countries and the EU: the fate of the WTO is at stake. The former U.S. administration wanted changes in WTO rules, including the system of sanctions for member countries or companies that do not comply with the rules, but the new administration seems to want to reinstate the system.


5 The Monetary System, the Issues


The Bank for International Settlements (BIS)

The Bank for International Settlements was created in 1930 to manage German reparations payments after World War I: payments that were the cause of intermittent disputes and arguments between the German Reich and the Allies. After World War II, the BIS continued to function as a clearing house for central banks. The current capital of the BIS consists of 600,000 shares representing 300 million SDRs, as defined by the IMF. They were allocated to the 60 member states through their respective national central banks. The majority of its capital is held by Belgium, France, Germany, Italy, the United Kingdom and the United States. A 20-person board of directors, usually the governors of the central banks, manages the institution. It currently employs some 650 people from 54 countries. After Bretton Woods, the decision to keep the BIS alive beyond its fading war damage settlement function allowed it, through its technical services, to become a technical support center for central bank regulation. In addition to contributing to the stabilization of certain currencies in the 1970s and participating in certain IMF actions, it helped create the European Monetary Union that later became the European Monetary System. In its support function, it developed a statistical research center, known as the Irving Fisher Committee on Central Bank Statistics (IFC). To fulfill its support function and add coordination functions, the BIS also established two key committees, one for prudential supervision, known as the Basel Committee on Banking Supervision (BCBS), and the other, known as the Insurance Solvency Committee or the International Association of Insurance Supervisors (IAIS). The BCBS is mandated by the BIS Board to identify sources of stress in global financial markets. The objectives assigned to the BIS Committees are: • • • • •

increase the level and quality of capital; improve risk awareness; set new, stricter prudential ratios for banks; improve the liquidity of banks; limit procyclicality.

The Committee is composed of representatives from 27 member countries. The BIS also has a Committee on Payment and Settlement Systems (for deposit and settlement infrastructures), whose coordination is now essential to safely exploit the current digital flow of exchanges. After several stages in the establishment of standards called Basel 1 and Basel 2, it is now aiming at Basel 3, whose implementation is delayed until at least 2023 and which covers an “international regulatory framework for banks with a transitional regime with specific capital ratios, risk coverage and liquidity objectives to cover the period 2017–2027”. These standards become regulation when approved by member countries. The entire system is based on the commitments of member states. When not approved, the standards

5.9 International Monetary Institutions


have no legal force. The standards refer to minimum requirements and implementation deadlines in jurisdictions that have the flexibility to adapt the standards to stricter rules and to anticipate their deadlines. Without a hierarchical link, but with significant technical human resources, the BIS has also become the operational center of the Financial Stability Board (see following pages), which is the heart of the international supervision system. Thanks to the G20 forum of heads of state, the Basel and Solvency Committees, which have no legal power and therefore no legal responsibility, have gained recognition as institutions in charge of regulating and supervising the monetary system as it exists. The result of reflections requested by the President of the European Commission, the High-Level Committee headed by Mr. Jacques de Larosière, has naturally found its place within the monetary edifice simply because of the obsolescence of the pre-existing institutions, which are increasingly out of step with the shift in the center of gravity of a world that has become multipolar. The current monetary world, dictated by the countries that dominated the post-war period, has changed without its institutional framework really taking these changes into account. As a result of the 2007–2008 crisis and following the recommendations of the de Larosière report, the G20 countries have committed themselves by protocol to have the institutions under their jurisdiction adopt a regulatory program whose objectives include the obligation to adopt the regulatory proposals of the Basel Committee and the Solvency Committee already existing within the BIS. The BIS is a place of expertise and representation for central banks. It is also an important meeting place given its status as an informal committee of experts representing the most important private financial institutions in a factual way. In summary, the BIS is the primary contributor to the supervision and regulation of banks and insurance providers. It also provides a repository for statistics on settlements, international bank balance sheets and prudential ratios. On April 1, 2021, the FSB issued a report on the status of reforms to reduce the contagion that would result from the failure of a systemic bank through a ratio-based supervisory monitoring approach (Basel core principles—BCP). The FSB is made up of central bank governors from 18 countries, including the heads of international financial organizations, by country and by monetary zone (Governors and heads of Supervisions—GHOS). In its report, adopted after consultations (before the pandemic crisis), the FSB concludes that the system is more solid and that supervision is better, with a reduction in the risk transmitted by systemic banks and a reduction in moral hazard. All in all, this report concludes that there has been a net improvement for the economy, without, however, the strengthening of supervisory procedures having increased the refinancing costs of systemic banks.


The Main Institutions Involved in Transnational Lending

To the institutions created by the Bretton Woods aggregates, we must add the international infrastructure institutions. We mention them because they influence


5 The Monetary System, the Issues

the monetary policies of several countries through the conditions and restrictive clauses they include in loans, as well as their impact on the budgets and financial strategies of governments. The size of the projects can also be global, such as the planned Silk Roads infrastructure financing by the Asian Infrastructure Investment Bank (AIIB) with significant political influence to be expected (see below).


The World Bank Group (WBG)

The World Bank Group (WBG), a multilateral finance bank, consists of the International Bank for Reconstruction and Development (IBRD), established in 1945, and the International Development Association (IDA), established in 1960, and their subsidiaries. The World Bank Group aims to reduce extreme poverty and build shared prosperity in transition countries. With 193 member countries, IDA focuses on the poorest countries. It assists these countries by providing both technical expertise and funds in a project-based approach. Credit support is provided through loans and guarantees. In 2014, 61 billion in loans were outstanding. In 2016, over the past ten years, 114 billion in loans have been made. The total portfolio of outstanding projects amounts to 190 billion. The Group also includes the International Centre for Settlements and Disputes (ICSID), established in 1965, and the Multi-Lateral Investment Guarantee Agency (MIGA), established in 1968, to support long-term financing that cannot be financed elsewhere in the commercial financial markets. The Group is based in Washington, D.C., as is the IMF, with the largest shareholders being the United States (15.7%), Japan (15.5%) and China (5.5%).


Regional Development Banks

Established in 2015, the Asian Infrastructure Investment Bank (AIIB) is a $100 billion issued capital initiative that brings together some 70 countries for the same purpose as the World Bank Group. About 21 members are Asian countries, but with different geographic scope and holdings. The AIIB is dominated by and headquartered in China. Its emergence is the result of the Bretton Woods institutions following the changes in the balance of economic power, as well as the lack of political will to act, or the lack of the IMF’s financial resources. But it also reflects a lack of adaptation of political means and powers. After initially opposing it, the United States and its traditional allies, France, the United Kingdom and Canada, have joined the AIIB’s capital contributors. It is worth noting that the AIIB’s playing field is the world’s largest geo-economic area, with its two main players already: China, with 1.4 billion inhabitants, and India, with 1.5 billion. In total (with Southeast Asia and Japan), the AIIB area encompasses about 4 billion people. Thanks to global warming, the Silk Road is benefiting from the opening up of shipping to the United States and Europe from the north, which represents

5.9 International Monetary Institutions


a new asset for China in its plan for global expansion, which requires funding measured in billions of billions. Other infrastructure financing and government development institutions exist, such as the Inter-American Development Bank (IDB) for South America, the African Development Bank (ADB) and the Asian Development Bank (ADB) for Asia. The European Bank for Reconstruction and Development (EBRD), created in 1990 after the fall of the Iron Curtain to help the countries of Eastern Europe, has lived a lot in the time of catching up by developing heavy industries. This is why the company has been able to develop its “old” products, thereby missing out on the evolution toward the markets of the future, such as digital.7 But the changing demographic, political and economic realities underway are such that the dimensions of all infrastructure investments must be reconsidered. Only the Chinese initiative, with its infrastructure projects, responds to the ongoing need for transformation in the global economy and can serve as an example of an inclusive growth model. These investments can be quickly effective in highly educated countries and global projects can be envisaged for the benefit of all. A project of the nature of the Silk Roads, which aims to facilitate economic development through trade by linking China by sea and rail to all parts of the world, fits into this dimensional frame. The United States, together with Japan and Australia, as part of the “Blue Dot Initiative” project launched in 2021, has estimated the infrastructure investment needs in these countries to be in the order of $15 trillion by 2040, but it is difficult to see how its financing can be implemented on this scale and not yet the projects to which it can be attached. It should also be remembered that in December 2021 Europe announced a 300 billion euro ($340 billion) plan, known as the “Global Gateway”, which, without detailing the countries and projects concerned, could be financed over 10 years from European funds and, above all, could correspond to the real transformation of the European Union’s trade surpluses.


Issues to Be Discussed for the Implementation of a Renewed Monetary System

Summarizing the themes to be discussed in what constitutes a monetary system is quite simple when they have been experienced and selected for at least two millennia of economic administration, in whatever form, always linked to a political system. The first issue is the reserve role of money at the national level: a country, like its citizens, may need reserves to adjust to fluctuations in income and the timing of the production cycle as well as to the life cycle of each individual (childhood, age


We have not mentioned the very important European Development Bank (EDB) as being internal to Europe. Many countries have specialized institutions, such as France with the Agence Française de Développement (AFD), which generally cooperates with other international institutions such as the World Bank for financing. As we have already written, China also has one.


5 The Monetary System, the Issues

of education, maturity, retirement period). Very often, fluctuations in production cycles are due to changes in the price of resources (raw materials) or exports, erratic changes in exchange rates or poor fiscal policies. In essence, monetary institutions built in a vanished world (the one before the digital mutation) do not have the resources and the decision-making process adapted to answer the question of determining the appropriate volumes of reserve money needed to solve a crisis, and the decision-making process to remedy it. While the period of education is a known topic, the period of retirement and expected health conditions are unknown with the general aging of the population and the onset of a period of dependency. The monetary world, with its savings reserves, is increasingly separated from the realities of production, even though they cannot exist independently of each other, despite the natural autonomy of money as a fungible and universal good. There are still many issues to be discussed about money that monetary institutions do not address, because outside of their constituent object (even if they often do so in research documents). How to organize the link between the reserves needed for pension provision and retirement—a matter of accounting—and the real world of production to be distributed among the beneficiaries? How can the link between the reserves needed for pension provision and retirement—a matter of accounting—and the real world of production to be distributed among the entitled parties be organized? Should savings reserves be built up and who should then decide how to use them and trigger them? Reserves are liabilities and can influence the financial equilibrium. Increasing reserves, despite the pressure for faster flows, will facilitate increasing debts. The universality of money as a payment tool functions differently when it is used as a means of payment than when it is used as a reserve. A new analysis is needed to understand, separately according to its use, whether it is used to pay for the purchase of a good, an operation in the real world, or whether it is put into reserve, i.e., into savings, an operation in the monetary and accounting world that mechanically sustains the financing of the debt and its consequent increase. This approach of differentiating monetary use should allow for a more detailed knowledge of the nature of monetary flows and thus facilitate a more efficient channeling of savings to the productive economy. The concept of shadow banking, developed after the crisis of 2008, has shown the existence of this reserve currency that escapes the control of central banks but has not led to a convincing conclusion appropriate in trying to reduce it (G20 objective). What type and volume of reserves are needed to maintain the stability of the reserve power in order to satisfy the role of reserve of value that a currency should have for its users? What liquidity should be kept in a system and what power should a central bank have to maintain the fluidity of the system? These issues lead us to the question of the solvency of the issuer of debt, whether private or public, and the fate of creditors in terms of their repayment or remuneration. If we fail to answer this crucial question, the monetary system, gorged with these debts, is at risk of collapse.

5.9 International Monetary Institutions


Another issue is the international adjustment mechanisms needed to fulfill the role that the institutions described above were unable to fulfill during the last crisis (2007–2008). More specifically, it is a matter of pushing central banks, which are not designed to do so, to take responsibility for providing the missing liquidity and for balancing the shortages. A third topic worth examining is the organization that, since the collapse of the Bretton Woods structure, no longer exists as a monetary system. These are the infrastructures that allow the systems to function smoothly, safely and efficiently. They are called Financial Market Infrastructures (FMIs).


Financial Market Infrastructures (MFIs)

First, it should be noted that MFIs are not institutional and are not limited in role or number. In essence, they are private and are not set by law within specific jurisdictions. Usually governed by professional associations, they have chosen the jurisdiction under which to operate. Nevertheless, while they are not institutional, their role is to serve the monetary system and all its participants. As a result of their role, they are placed under the oversight of the system described above and sometimes imposed by agreement on all participants in the flows through specific channels (identification committees—LEI and IBAN of companies and individuals). Usually, their imposed customers are banks, brokers, funds, and financial and insurance institutions, but never private individuals.


The G20 Distinguishes Three Categories of Infrastructure

• Systemically important payment systems • Central counterparty platforms, CCPs • Guarantees of settlement of facilities, SSPs MFIs act as a coordinating mechanism that brings together a network of counterparties to support trading liquidity and the netting of exposures and settlement obligations between counterparties, and also assist institutions in managing credit risks. They are also used as a measurement tool. For example, the pricing of the International Swap & Derivatives Association (ISDA) market-based collateralized default swap on government debt will measure and provide indications of the credit risk of a country and a currency. MFIs are the key to the functioning of the system and this explains the development they have had with the large financial institutions. They provide guarantees to stabilize the financial system, which, without a guarantee of the value of the unit, has lost its reference point, the yellow metal or otherwise. On the contrary, by concentrating the risk in single places, some argue that they have increased the risk of contagion of the default.


5 The Monetary System, the Issues

We will examine in more detail the two most important financial market infrastructures: ISDA and Forex. Forex platforms for currencies: these are the electronic platforms where foreign exchange contracts are traded. This market is intended for the exchange of currencies or hedging contracts. It was created in London in 1880 under the gold standard but already existed in Siena in the fifteenth century with the Monte de Paschi of Siena. It developed in 1971 when gold was removed from the system and speculation in gold, which had previously been prohibited, resumed. London, with no taxation of UK residents, has become the jurisdiction under which the largest number of contracts are concluded and settled, ahead of New York. Today, London accounts for 43% of all transactions, while New York is at 16.5%. Japan is at 4.5%, Hong Kong and Singapore are both at 7.5% and Switzerland at 3.3%; some 6.6 trillion U.S. dollars are traded every day on Forex, equivalent to the world’s GDP every 15 days! The so-called star contract is the “peer contract” composed of two currencies. Most contracts are concluded and denominated in U.S. dollars (90%) and “peers”, guaranteeing parity, are in order, for 2019, concluded with the euro (32.3%), yen (16.8%), sterling (11.8%), Canadian dollar (4.6%), Australian dollar (8.61%), Swiss franc (5.4%), Mexican peso (2.5%) and renminbi (2.2%). The main player acting as a broker is Deutsche Bank with 21% of the market. The dominant banks are American, with seven banks accounting for 75% of trading. Japanese banks are also represented with seven banks. Various payment protocols, including MT4 and MT5, as well as the bank-only Swift protocol, are used to settle post-trade transactions on FOREX. The International Swap & Derivatives Association (ISDA) for Interest Rate Risk and Default, founded in 1985, is a private association based in New York that brings together the major players in the derivatives markets. It has 900 members covering 71 countries. It has developed the use of a single language (Financial Markup Language— XML), a standardized master contract to be negotiated and called ISDA Master Market Agreement. Its stated objective is to make markets safer and more efficient in order to reduce credit and legal risks. Its members are governments, supranational entities, market infrastructures such as foreign exchange dealers, clearing houses, custodians, and law firms and other services. Most Western systemic banks (UBS, BNP, Barclays...) as well as insurance companies (AXA...) are members. Underlying credit default swaps have almost disappeared and interest rate derivatives (IRDs) constitute the main part of the exchanges, showing the change triggered by the post-2008 FSB pressure and BIS regulations, a movement that favors the use of CCPs (centralized counterparty platforms) for bank refinancing. The central banks’ policies of lowering interest rates aggravate the risks of fluctuations in the value of the longest interest rate hedging contracts. Indeed, in the current market organization, they cannot be totally disconnected from the pair

5.9 International Monetary Institutions


they form with the available volume. In addition, certain risks of defaulting States are no longer eligible for the market. The rate guarantee hedging system operates by means of a netting where the swap contract allows for an evaluation of the rate differential which determines the remuneration to be paid to the contracting parties. A guarantee is deposited to allow liquidation and to pay in cash if necessary. About 3 billion in commitments have been deposited by EMIR participants who must sign a new contractual format (Credit Support Agreement—CSA) to adjust the calls for funds needed to guarantee the contracts, on a daily basis. Most of the contracts are denominated in U.S. dollars. The complexity often relates to the legal qualification of the events triggering the implementation of the contractual guarantees, essentially default. ISDA issued a “Benchmarks supplement” in December 2018 to accept a much broader range of default events, for example for certain interbank offered rates (IBOR). In the event of difficulties, the liquidator will decide on seniority priorities. The implementation of the consequences of default in different jurisdictions is also at stake. The International Institute for the Unification of Private Law, “Unidroit”, is working on this topic. Currently, contracts are given the force of law through the commitments imposed on commercial banks by the Bank for International Settlements (BIS). Nevertheless, there is a weakness in this system that lies in the speed and the applicable liquidation regime. The regime of daily margin calls at market value functions without interruption when the markets are calm. But, in the event of a crisis where the liquidation regime determines a totally different value, the guarantee would no longer be effective. The size of the sums involved in the derivatives markets is beyond the capacity of any single central bank. As of June 30, 2018, the notional value of IRDs (interest rate derivatives) through ISDA was US$59.8 trillion, with 48% of that for contracts with a maturity of less than one year and 40% of that total being U.S. origin (statistics are maintained by the BIS). From a functional point of view, the ISDA market, because it is mainly denominated in U.S. dollars, can also be considered as a forward foreign exchange risk market. In the event of a downturn, it will be liquidated in U.S. dollars if the collateral is denominated in that currency. This commentary is linked to other written chapters in this book that envision a new monetary unit and a cryptographic medium, both of which would combine to form a new type of e-currency, as envisioned by the ECB with the e-euro. The concept of a central counterparty works when it is private and agreed upon by regulation or set by an international treaty. Nevertheless, it requires trust in a system of law to deal with what it should be, namely credit risk. Today, it only serves the needs of banks, alternative investment funds (AIFs) and insurance companies because of the lack of monetary reform. It does not fully cover the risk of major systemic default and contagion between countries.


5 The Monetary System, the Issues

5.9.10 Attempts to Propose Alternative Solutions to Risk Concentration Not even considering the market infrastructures that could provide a solution to this issue of concentration risk, a document written in 2010 and entitled “Reforming the international monetary system”8 proposes some remedies. It recommends the development of alternatives to U.S. Treasuries as the dominant reserve asset to accelerate the transition to an inevitable multipolar system, with the euro and renminbi added to the dollar. To solve the liquidity problem, he also recommends the development of a swap system between central banks and the IMF to provide more flexible lending to countries. Finally, he advocates the establishment of a common foreign exchange reserve between the market and the IMF. The article focuses on the problem of monitoring indicators to reduce moral hazard, but also points out that sanctioning is a difficult subject. Finally, it argues, as we do, that “an international currency peg, as the world financial system stands, is neither feasible nor realistic, and transforming the Special Drawing Rights (SDRs) into a true international currency would probably not solve the fundamental problems of the international monetary system”. This means, more or less, that the revenues (as used in the swap system) do not offer any useful contribution to the foundation of a monetary system that has not yet seen the light of day with regard to the unit and subject of reserves. The article does not discuss the international use of the dollar outside the United States. But we can see that former Bank of England (BoE) Governor Mark Carney suggested in his speech at the 2019 Jackson Hole (U.S.) Annual Monetary Convention that a central bank digital currency could be considered. The suggestion coming implicitly from the representative of a central bank was certainly a deliberate provocation to open the way for discussions that Keynes had not been able to conclude in his time by trying with the Bancor to keep the pound sterling in a multilateral system. A digital currency could be shared between countries through a common contractual regulation. For reasons of image, it would be difficult to admit that a Nation could refer to its own currency without economic domination. A digital reference with only technical superiority, if chosen and regulated multilaterally, would remove this obstacle. It would certainly be a big step in the direction of a universal digital currency if it were to be approved by the international community, both technically and in use. It seems difficult today for a nation to impose its national currency as a universal standard in a multipolar world. Treasury Secretary Connally’s comment about the dollar (“It’s our currency but your problem”) is now false. If anything massive were to happen in the use of the dollar, it will be very detrimental to the American citizen. The standard of living will adjust to the productivity that will be handicapped by shorter production runs than in the rest of the world where populations are larger than in the United States,


CEPR Emmanuel Farhi (+), Pierre-Olivier Gouringhas and Hélène Rey.

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whose economic space, already relatively small with 316 million inhabitants, or 5% of the world, tends to be even smaller with the customs policy that has been carried out by the former Trump administration. The monetary advantage linked to the predominant use of the dollar, which allows the refinancing of deficits, as is still the case today, would disappear in an instant by a simple exogenous decision.

5.9.11 An Extended Stabilization System from the CCPs (Central Clearing Counterparty) Could Be Considered Swap derivative trading platforms such as ISDA or FOREX have developed. The hosting of several market systems under a single law could be considered. This framework, unified in its operating rules, could accommodate competing monetary instruments whose assessment would be facilitated by common collateral rules. These central counterparties are currently subject to detailed oversight for trading and clearing. These clearing houses could be used by central banks to stabilize their new instruments such as cryptocurrencies (see Chapter 6 on the digital currency unit used as a reference standard). These CCPs, which could define an unlimited and tailor-made number of compartments, would serve to regulate both monetary standards and the value of debts, according to the issuers. A dedicated clearing house could allow for the gradual introduction of cryptocurrencies and their exchange with other financial instruments. The dedicated compartment of a clearing house could allow for a gradual introduction of cryptocurrencies, and their exchange with other financial instruments.

5.9.12 Topics Not Yet Adequately Addressed by Monetary or State Institutions Within currency areas, the concept and reality of the monetary unit and its medium are wrongly confused. This is the case for the dollar as well as for the euro, the renminbi or the yen. This confusion makes it impossible to analyze separately the different factors that determine the value of currencies and their exchange rates, as well as prices, the balance of trade, the balance of payments, or the financial confidence, credibility and solvency of governments. It enables bad financial policies by using abstract representations instead of reality. To explain this phenomenon with facts, we can see that the recent depreciation of the yen was only done by “Abenomics”9 announcements (the Japanese equivalent of QE), without any intervention in the foreign exchange markets. If depreciation is the answer to imbalances, then why should a government have an industrial productivity policy


Named after Mr. Abe, the Japanese Prime Minister since 2012.


5 The Monetary System, the Issues

and an incentive to reform? The lack of transparency that results from this confusion between prices and productivity erases the medium-term constraints that are necessary for good competition and gives amnesty to bad fiscal policies. Without transparency, words may suffice for a while, despite the need to replace the limits that the gold standard imposed. Demographic decline can also allow for the absence of reform, because with fewer people each year, a country’s GDP per capita may not decline and may even grow while the economy stagnates or is in recession. This is illustrated by the Japanese model, where GDP per capita is growing only because of a decrease in the number of inhabitants. From another point of view, in relation to Mr. Robert Mundell’s approach to the establishment of coordination within a currency area, a study dated February 2015 addresses the issue of a fully centralized versus a decentralized monetary system in the context of disparities between member countries of the same currency area with respect to their public debts.10 This discussion is not relevant to our topic because currency areas exist and should therefore be considered as a jurisdictional definition solidly based on economic facts. It must be accepted that in the contemporary world, the most important of these, the European Union with the Euro, was created to combat economic nationalism and facilitate the mobility of men and capital. This should have resulted in a concentration of the means of production in order to allow gains in productivity through the economies of scale obtained. This discussion of the optimal economic space is necessary, even if it is not new; it must constantly evolve, following on from the work of Mundell11 on optimal monetary spaces, which was carried out in a different context than that of today. This question of the adequacy of the system to its functioning and its objectives is inevitable and concerns the dollar as well as the euro. The external use of the dollar overlaps with its internal use and explains the current trade conflicts. A study of the Japanese economy gives key indicators of the variation of GDP, public deficits, unemployment and the link with “Abenomic”. For us, this shows that monetary policies are not designed to solve structural problems, in particular those resulting from demographics and the relative lack of innovation compared to competition to adapt to changing markets. Consider the pattern of international firms that insulate themselves from exchange rate fluctuations by dispersing their production to several countries where labor costs are lower than in Japan. This allows them to adjust to any exchange rate changes, but poses a threat of monetary policy mismatches in advanced industrial economies compared with a model based on the production of raw materials or low value-added agricultural products. For global firms, we find that devaluation has no impact and that the trade deficit means little. The macroeconomic data analyzed are insufficient to address


“Coordination and crisis in currency unions,” Mark Aguiar, Emmanuel Farhi, Manuel Amador, Gita Gopinath February 4, 2015. 11 Robert Mundell is a Canadian economist. Building on the earlier work of Abbe Lerner, he developed the concept of Optimum Currency Aera (OCA) The American Review, Vol. 51, No. 4, September 1961, pp. 657/665. The aim was to support the development of the integration of the euro and to find the benefits of the resulting economic integration.

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structural issues, and again, a granular analysis is needed to appreciate trade flows in detail in order to analyze the economic entities, the actors of these exchanges. Post-industrial economies adapt peacefully to changes in the volatility of costs and resources in the means of production available throughout their sphere of influence. The human resources of the dominant country in terms of population size and education are the limit to this adaptation, at least until robots cross this new frontier. Mundell considered only the important factors in the form of aggregates (capital, labor) to evaluate an optimal zone. With the new digital payment devices that trace all monetary movements and their authors, it will now be possible to better measure the speed of monetary circulation and to analyze the tools used to operate them. This analysis will allow the political world, with full knowledge of the facts, to establish through negotiation a stable general legal framework for exchanges and thus to facilitate competition in order to give it the efficiency it should have in a market economy. We have touched on the issue of independence between the central bank and the government, but we have not yet touched on the specific issue of the European system of independent central banks and large national budgets compared to that of the European Union, which represents only 1.07% of the latter’s GNI. This observation of the virtual absence of a European budget totally differentiates the American budgetary system from that of the European Union, if we examine the following tables (Tables 5.3 and 5.4). By December 2021, Congress had raised the authorized public debt ceiling to more than $31.5 trillion. With each budget bill for the upcoming fiscal year, which begins in October, previously enacted budgets are reviewed and the impact of the new law on the “already committed” is highlighted. A tax on very high assets is envisaged, which, as a sort of wealth tax, could allow for the taxation of 20% of latent capital gains. It is still to be debated before a Congress that will be renewed in November 2022. Expenditure over the period 2021–2027: 1,074.3 billion, plus 750 billion for the stimulus package. Table 5.3 U.S. budget for 2023 (Billions of Dollars) (Biden Administration) Tax collection



State budgets

Total US debt









Corporate income tax


Payroll tax


Table 5.4 EU budget

Total expenses

Billions of euros





Source Eurostat


5 The Monetary System, the Issues

The expenditure budget represents 1.2% of the GDP of the 27 member countries. In the United States, federal government spending represents 40% of GDP. In addition, the states that make up the federation have their own budgets and can, in theory, go bankrupt without much impact on the currency. In fact, the tax system (with the exemption of most municipal taxes from state taxation) allows the refinancing of the latter by debt and its subscription by American residents or mutual funds investment. Thus, there is little risk of global transmission of a local default to international financial markets due to the broad spread of risk and the extensive use of the dollar outside the country. Ultimately, if a state in the federation experiences financial difficulties, that state can adjust and the risk remains at the local level. Even the problems of the most economically important states, which have the largest pension systems, may not quickly lead to immediate economic failure because they are legally insulated by the trust mechanism. In comparison, the more recently designed European system is based on a different environment where national budgets are paramount, and whereby the central bank currency stabilization mechanism will bear the burden of buying the government debt instruments that the markets do not absorb without raising rates. Each of the central banks in the euro zone is responsible for 80% of the purchases of national debt instruments linked to budget deficits. Despite the setting of repurchase ceilings by country, the differentiated appetite for these public debt securities creates a risk of higher rates on the instruments of the weakest states. Even with a market of average size compared to that of China, the exit of the United Kingdom weighs on the European budget. It should also be noted that if the fluidity of trade is not restored in a manner similar to that followed by Switzerland through the liberation of the exchange rate, studies show a significant reduction in economies of scale through the shrinking of the economic exchange zone. Moreover, the Brexit has a dissuasive effect on EU members who would have been politically tempted to leave the Union. The British example reinforces the current system, which maintains the requirement for greater fiscal discipline at the level of its members, the need for which has been noted in the recovery of the Greek, Spanish and even Italian situation. Compared to the American system, which has been in place for more than a century, the EU system is new and needs to be conceptually improved and its weaknesses corrected. As everywhere, the subject of sanctioning budgetary excesses is not convincing, while the new monetary theory with the COVID-19 crisis and its health priority has caused public budget deficits to explode. All transfers between economic zones within the EU will have to be rethought, and tax collection systems throughout the zone will also have to be reviewed, in order to unify their principles to meet the requirements of a monetary zone. The impact of the Greek financial crisis has been limited in comparison to the Union as a whole, as Greece accounts for 2% of EU GDP. Nevertheless, it offers, thanks to a treatment that has proven to be effective, an opportunity to set an example for a successful treatment of the crisis.

5.9 International Monetary Institutions


This includes in-depth studies on how economies of scale in services and manufacturing should be redistributed within the euro area, through greater coherence in the European tax system. The free movement of people between EU countries does not work in the same way as in the U.S., because of the effects of language and climate differentiation: for example, because of the climate, people in the north of America go to Florida for their retirement and thus make transfers that do not exist on the same scale in Europe. Florida’s tax system, with its attractive policy of not taxing personal income, allows for this migration insofar as the newcomers speak English, which constitutes a form of redistribution of wealth within the same economic zone. This transfer movement exists on a smaller scale in Europe between the north and south of the continent and, for historical reasons, goes beyond the scale of the continent by including North Africa, which is located in a different zone. China’s situation (with a combined private and public debt of 277% of GDP) or Japan’s (250.4% public debt vs. GDP in 2016) is neither dangerous for their economies nor contagious for others because most public or private debt is internal. For example, China’s debt is backed by a state-owned industry whose debt comes from an investment dynamic and can be wiped out in minutes by simply converting the debt into equity. These industries are located in three regions (Indian peninsula, China, Southeast Asia) where the labor requirements determined by growth linked to birth rates and population migration are considerable. There is a labor pool for GDP growth in the interior of the continent and in India that other regions of the world no longer have. What is considered overinvestment in heavy industries such as steel for China may not be so in other Asian economic zones. To the extent that these industries do not evolve rapidly as in the digital industries, the risk is to world prices. But is it a problem that the world is benefiting from low prices due to lower marginal costs? Again, we see here the need for a long-term consensus among nations on what is reasonable and what is not in relation to the long-term investment needs set by a target size that has not been taken into account. The question for private debt is the duration of the loan repayment and the liquidity of its investment counterpart (real estate assets generally account for the bulk of the debt). For private debt, the issue is the duration of the loan repayment and the liquidity of its investment counterpart (real estate assets generally represent the bulk of the debt). Again, this is generally an entirely domestic issue, but it raises the question of the value of counterparty financial instruments and economies of scale, as well as Asia’s new place in the community of nations, which is hardly analyzed in economic terms.

5.9.13 International Coordination, from G7 to G20 After the United States ended the convertibility of the dollar following the greenback crisis of the 1960s, a coordinated effort was needed to stabilize exchange rates. This was because the IMF and the World Bank could no longer achieve the


5 The Monetary System, the Issues

goal of maintaining a stable exchange rate system, and the United Nations multilateral system also proved ineffective. In addition, countries such as Japan and Germany were in the past, and still are today, major industrial powers and necessary participants in any international cooperation. Founded in Rambouillet, France, in 1975, this initial group of the most powerful industrial countries consisted of France, Germany, Great Britain, Italy, Japan and the United States, becoming the G7 when Canada joined a year later. The idea was to set up an informal system of the major Western economic powers, because the United States could no longer be the only one to provide stability to the monetary system. In September 1999, it became clear that it was no longer possible to limit this informal committee to the G8 (the USSR/Russia had already been added to the list of members) and that other key countries should also be represented, such as China, India, Brazil, Pakistan and Mexico, among others. In 2008, with the new global financial crisis, at the initiative of the then French president, the G20 became institutionalized despite the absence of a treaty to set its objectives and powers to achieve them. Nevertheless, the G20 has created a multi-lateral mode of communication that allows processes to take shape, and can enable negotiations between high representatives of countries and international organizations. It has its own agenda to guide what it wants to achieve and also issues press releases. The G8 itself remained a body but was reduced to the G7 when Western countries decided among themselves that this informal club, not political but economic, could or should be self-regulating with the exclusion of Russia because of the annexation of Crimea. A G7 meeting was held in Biarritz, France, in August 2019 under the chairmanship of the French president Mr. Emmanuel Macron. No press release was issued, but this may be due to the good sense of President Macron and his team and major disputes that have taken place or have been put back on the negotiating track, such as the sanctions imposed by the Western world on Iran and the taxation of GAFAs.

5.9.14 The Current Situation Under the shadow of the 1975 oil crisis and under the chairmanship of Belgian Willy de Clercq, the Interim Committee of the Inter-National Monetary Fund met in Kingston, Jamaica, on January 7 and 8, 1976. It approved the previously agreed sale of gold reserves and increased the drawing rate allowed to members in proportion to their quotas, both globally to 75% and annually to 50%, and the lending rate to 145%. The framework for a new version of Article IV of the IMF’s Articles of Agreement was also adopted to reshape the IMF’s Articles of Agreement and substitute SDRs for gold in central bank reserves and in determining the exchange value of money. This agreement formally ended the Bretton Woods fixed exchange rate system already achieved in 1973. It aimed for stability but envisaged parity adjustments

5.9 International Monetary Institutions Table 5.5 GRAB—Historical gold price chart in U.S. dollars per troy ounce 1921–2021






December 2019


December 1970


December 2017


December 1965


December 2015


December 1960


December 2013


December 1955


December 2011


December 1950


December 2015


December 1945


December 2000


December 1940


December 1995


December 1935


December 1990


December 1930


December 1985


December 1925


December 1980


December 1921


December 1975


December 1971


December 2020


April 2022


1931 was the year of devaluations (major currencies against gold) and 1971 was the year of the disconnection of the dollar

that were more like recommendations that could be vetoed by the country concerned, as well as a sales program and a sharing of profits from the rise in the price of gold. The member countries decided that they would also adopt a sales program. As we know, the sales program was never actively implemented. Later and on the contrary, China bought and continues to buy masses of gold. The SDR has never become a currency or a universal reserve asset and cannot become one as it stands, even if some economists recommend expanding its role12 (Table 5.5). By December 30, 2020, the price of gold had reached $1,586.93 per ounce and the COVID-19 crisis brought it sharply up to over $2,000 by mid-2021 while the world’s monetary gold reserves at the end of 2019 were over 35,000 tons, i.e., higher than in 2000. The Jamaica agreements are well and truly out of date. February 21, 2022 was the date when the invasion of Ukraine by the Russian Federation was launched. None of the objectives aimed at demonetizing gold were achieved, although they were pursued for several years. On the contrary, the value of gold remained high, as it remained a reference point for the central bankers, who were thereby showing their distrust in the system they had helped to build and admitting that they could only regulate and not create a new monetary order. The unilateral withdrawal of the United States in the summer of 1971 had already put an end to the Bretton Woods system, and the opposite of what was intended finally happened:


V. Michel Aglietta, Les Echos, April 19, 2022.

104 Table 5.6 Central bank reserves (in tons of gold)

5 The Monetary System, the Issues


In tons of gold

Euro zone


United States
















gold remained more than ever a reserve asset in the central banks and in the central banks of the world, and, in addition, emerging countries continue to buy gold as a reserve. Previously, since 2009, central banks have been net buyers, but the shift occurred when China, starting in 2000 with 883 tons in its vaults, increased its gold reserves to 194,874 tons in 2019 (Table 5.6). The combined total of gold reserves of the 100 central banks at the end of 2019 was nearly 34 million tons (source: IMF Counsel on gold), slightly more than in 2000. China, Russia and Poland bought considerable amounts of gold in 2019. As of June 30, 2019, at mid-year, a total of $15.7 billion worth of gold would have been purchased by central banks (according to the FT). China buys at least 450 tons of gold a year and, according to French economist Jean-Paul Betbeze, if these purchases are combined with its own production, it will have the same tonnage of gold as the United States in a few years. The reason for this shift from gold demonetization to the use of gold as a reserve by central banks is universal. Its cause is the immutable chemical nature of gold. No sovereign authority, no government, can freeze central bank reserves within their sovereign space. Central banks, in their role of last resort, cannot tie their debt to the dollar, a currency over which they have no control. This is combined with the reduced influence of the IMF and the US in the monetary sphere. Moreover, there is no substitute for the dollar, and it is the need for reserves that deprives central banks of any possible choice, than to use gold for this purpose. As General de Gaulle said in 1965, gold belongs to no one. The Jamaica agreements should have been followed by others to establish a substitute, but they never were, despite some vain efforts. None of those who met then ever thought that the time for synthetic currencies based on a basket of currencies or commodities, as Keynes imagined, was over. Their thinking was still in the industrial and colonial era. While gold may once again become a component of reserves, it is no longer, and never will be, a guarantee for money flows, especially with the QE issues that have inflated the balance sheets of central banks. This increase is solely due to the absence of a structured international monetary agreement on a currency unit. It only demonstrates the need for a reserve unit that is not specially tied to a single country to balance central bank totals. A well-constructed and protectable digital

5.9 International Monetary Institutions


currency can be such a reserve and an alternative. Thus, not only has the dollar not replaced demonetized gold, but a new and different type of competitor has emerged with digital currencies. From nothing, bitcoin has gone, in a few years, to more than e80,000 in January 2021, only to fall back below e30,000 at the end of May 2022. This shows the distrust that markets can have in currencies in which the bulk of public debt is denominated when said “Cryptocurrency” has no guarantee of value as a last resort as the dominant currency, in this case the dollar, enjoys. The causes of the American monetary crisis of 1929 can explain the Keynesian policy followed by the Kennedy administration when the economy was already in a cyclical downturn at the time of its election. The strong dollar policy with high interest rates followed by the Reagan administration in 1984 further deteriorated the industrial position of the United States, while at the same time the philosophy of free trade no longer benefited the United States, but rather the Asian producers. One helped hide the other. Treasury Secretary John Connally said at the time: “The dollar is our currency, but it’s your problem”. That was indeed true then, and doubly true. Neither the United States nor the IMF could overcome the issue of structural changes in the relative economic strength of countries and the granting of intergenerational credit, an unreflected issue. The policy of hiding real economic trends from the public was deliberate, since American society was not ready to admit the reality of its industrial decline and overconsumption of imported goods, with an overvalued dollar, driven by the geopolitical dominance of the United States. Moreover, accounting for the social debts resulting from an aging population was not politically correct, as they varied considerably according to living standards and health systems. It was not, and could not be, part of the duties of anyone, an international institution or a central bank, to raise these overly sensitive issues. Strong leadership is needed to remind people of the weight of economic realities. Structurally, it cannot exist, and even if there had been such leadership and it had spoken, it would not have been listened to. In our 2010 book on virtual money, we discussed at length the mechanism by which the 2008 crisis broke out. The fact is that the international negotiations of the 1970s focused a great deal on the issue of inflation that characterized the postwar decades, only to disappear for nearly four decades, before suddenly returning to the forefront in the last two years. The subject of monetary competition linked to the exorbitant privilege of the dollar, with the absence of a limit to its volume issued, remains to be dealt with, within the framework of a new, more balanced international system. The negotiators of the past decades did not take into account what would or could happen after the limits imposed by the gold standard were abandoned. It was not conceivable then that wealth could not only be weighted by GDPs expressed in monetary units, but could also be seen through the real exchanges resulting from production, know-how and the control of patents; today, in 2020, more of them are filed in China than in the United States. In simple terms, it was not clear how distorted the image was in relation to the reality of monetary domination, which itself can only reflect the industrial dimensions, i.e.,


5 The Monetary System, the Issues

the volumes of exchange resulting from globalization. It appears today as a sociological observation that societies, and more particularly their institutions, cannot be reformed by themselves without external events. In the absence of consensus, countries can only turn inward and, to do so, build barriers to trade. The return of inflation following various shortages linked to the war in Ukraine and a poor international adjustment between supply and demand is creating a new economic environment. The rise in prices will lead to non-reversible wage increases insofar as individuals are committed to the long term. Deflation is neither conceivable nor possible. In any case, the new, higher price levels will remain in place regardless of the state of competition and the functioning of supply and demand in future. The reality is that the phasing out of gold as a reserve asset in 1971 and the subsequent agreements in 1976 in Jamaica did not take into account what are now called emerging countries. They only took into account the rise of Japan.13 The actual role of the IMF remained to provide technical assistance to countries in need and to allow for credit support within the framework of a partnership that would address the Asian and South American crises, as the political position of these countries allowed the IMF to intervene. It was not, and has not been, specifically charged with the major issues of the day. The current issue is more fundamental. The dollar’s role as a reserve currency continued despite its voluntary withdrawal. The Jamaica monetary agreements did not take into account, as they should have, that the larger the countries, the greater the need for new infrastructure or the expansion and renovation of existing infrastructure. This is what prompted China to launch the ambitious Silk Roads project and the creation of an international banking structure to finance the corresponding investments, in addition to the existing Bretton Woods monetary institutions. The demonetization of gold was discussed, but the announced reconstruction of a monetary system never took place, due to the lack of a shared will to tackle the subject. On the other hand, in 2015 we saw the Swiss franc and its bank of issue give way to waves of purchases by those attracted by a currency backed by a “gold” guarantee, with the result that the Swiss franc rose sharply (20% in one day). Lack of International Consensus on an Avoided Issue The problem of an economy based on debt, i.e., on boosting demand, has been dealt with for the situation of small countries, possibly emerging countries, where the IMF can intervene since it was structured for that purpose, but not for large countries such as the United States, one of the founding countries of the institution, which has operated in complete independence thanks to the power of the dollar while other nations were devoted to training (notably Singapore and Japan) and to the production (China, for example) and thus circumvented the wall constituted by the international institution for a different sharing of responsibilities.


President Nixon’s speech to European leaders in 1971.

5.9 International Monetary Institutions


At the international level, the legal and commercial consequences of the globalization of financial markets were not taken into consideration, and, apart from the meaningless declarations, the IMF did not deal with financial issues that were not raised when it was created. And it was in the emergency, with the crisis of 2008, that other international bodies were created to deal with the challenges of the international financial world. The temporary end of inflation due to the cessation of Cold War conflicts marked contemporary economic history. The free trade environment that replaced it meant unlimited availability of labor and industrial capacity, with productivity gains due to the consolidation of industries on a global scale. These determinants of activity were combined with major technical advances in electronics and telecommunications. The framework in which the world had lived since the Second World War came to an end with the emergence of international companies, not only because of their financial power, as in the past with the railways or oil companies, but also because of the transnational scope of the services they provided in all respects, which made them essential global players. In the absence of sufficient statistical knowledge of the economies, Pascal Lamy,14 the WTO Chairman, addressed the issue of globalization in 2009 by stating that the available figures did not represent the reality as it should be analyzed to understand the performance of the economy. He stated and wrote then that value added would better represent international trade than gross trade. Various studies show where the value added is and who captures it. The best-known case is that of Apple, which, thanks to its innovative know-how and labor costs, captured most of the value added of its products manufactured in Asia. This topic is a key issue at the global level because of its fiscal implications. No such study exists at the global level. In 2012, Pascal Lamy also had the WTO’s presentation of statistics modified to include the notion of value added, which did not exist in the WTO. This was not necessary when nations produced everything they exported and firms were homothetic to countries. Now that the model has changed, statistics by country are no longer a relevant representation of reality. For the EU, this is a new integration, but when reading the WTO report, we see that Southeast Asia is still treated by country like the United States. There is no index of integration of the national economies under consideration to assess the data as they should be with flow analyses that would no longer be limited to exports and imports by category of products and services. Finally, and most importantly, the traditional banking system and the corresponding statistics on credits (M1 and M2) do not take into account most of the money flows that are now disintermediated by platforms and are not subject to a complete study of the risk they carry in terms of exchanges, since they only capture 25% or 50% of them, if we consider the figures for Forex, and are therefore better secured. In a context where economic agents, when they are not obliged to


Former head of the World Trade Organization “WTO”.


5 The Monetary System, the Issues

finance public treasury deficits, prefer public debt instruments backed by the power of governments to collect taxes to all types of private securities. One can see, even if hidden behind prudential rules, the regulatory incentive that pushes banking and insurance institutions to use these public instruments. In this mechanism, the logic of the market, which is geared to optimizing financial resources, is undermined in favor of financing public deficits. As liberalism proved economically efficient and the communist economic system failed, centralized economics returned through the back door. Governments, under pressure from quantitative easing and exceptional events such as the pandemic, have turned away from the constraint of discipline by short-circuiting, through regalian devices, the rules of the market aimed at ensuring healthy competition, framed however by a system of regulation capable of setting limits to all things and without which no regulation can exist. The system must be reviewed in the current environment of an expansion of economic zones to better establish balanced competition. It is simply a matter of the State maintaining a fair balance that must exclude, as a primary objective, the financing of its own operating deficits.

5.9.15 The Financial Stability Board (FSB): The Necessary “Strange Animal” As we have already explained, the G20 is the result of a major shift in the balance of economic power between countries (Western and Eastern) and the collapse of the Bretton Woods system. At the same time, since the G20 is an informal committee with no direct regulatory and supervisory powers, and operates only among state leaders without their being bound by an international treaty, its reality had to be at least politically and technically organized. The political response was to bring together all the relevant pre-existing international entities in the previous Financial Stability Forum (G7). But the dispersion would have been too great for harmonization, or at least coordination, if the members had had to take positions with their respective national authorities or political bodies. The answer was to turn to the oldest pre-existing international structure that was already issuing recommendations on banking and insurance, with a commitment from each participant to follow these recommendations. The choice therefore fell on the Bank for International Settlements (BIS), which provided the infrastructure for a new organization, the “Financial Stability Board” (FSB), whose mission is to “promote stability by coordinating the development of regulations”. The FSB is now governed by a charter, statutes and procedural guidelines. It operates by consensus of its members. The body has 68 representatives from 25 jurisdictions, 10 from international financial organizations and 9 from standard setters, i.e., regulators and central banks. Its scope covers all G20 countries as well as four key financial centers: Singapore, Spain, Switzerland and Hong Kong. Its objectives are: “Building a body of standards, a cooperation and information exchange initiative and country peer reviews on the implementation of standards”.

5.9 International Monetary Institutions


This implementation, decided in an emergency, raises the question of democratic control over bodies without legal personality, in a field where technicians may think that they are the only ones who can decide and consequently have the power to regulate. Source of questions, this power exercised without a democratic basis may be monopolized by those who exercise it, because in monetary and financial matters trust is essential and market players have no other choice, in the absence clearly defined rules, than to accept, by default, a self-proclaimed regulatory or supervisory system. The need for regulation, in order to avoid a systematic suspicion of market non-transparency, can only flourish with the complexity of the instruments, but also with the acceleration of their circulation, generating the need for a new regulatory system. The need for regulation, in order to avoid a systematic suspicion of market non-transparency, can only flourish with the complexity of instruments, but also with the acceleration of their circulation, which in turn generates “libertarian” reactions, as we have seen in the United States, for example... While the dollar remains the most widely used currency for international trade (see below about the BIS report). The FSB has no regulatory powers and operates without a mandate that can be described as an “international treaty”, even though all the parties that should be there are there. The FSB relies primarily on two standing committees: the Standing Committee on Assessments and Vulnerabilities (SCAV) and the Standing Committee on Cooperation Oversight and Regulation (SCCO). In addition to these structures, there are regional advisory groups (RAGs). No attempt has been made to give it powers of any kind. This foggy situation, if one considers at the same time the BIS (represented in the FSB), also raises the question of a necessary disconnect between regulation and supervision, technicality and strategic views. After the strategic approach of the de Larosière High Level Plan aimed at remedying the weaknesses of the existing system stemming from the Bretton Woods legacy and which was mainly implemented by technicians, nothing has really come out of the Financial Stability Board to develop a strategic plan. The plan to fight shadow banking, or parallel finance, presented at the 2009 G20 meeting was an illusory plan because it did not include the reality of the use of money issues in the context of new technologies and did not sufficiently target the actions of market players, who are always anxious to preserve their freedom of action; investment funds have thus largely escaped regulation. Without the M5 and M6 concepts of a global monetary space, this plan could only miss the elusive target it had set itself of bringing money into its former bed of the regulated space, as opposed to the unregulated space of investment funds. The operators of the financial world are evaluated by the supervisory bodies on the basis of the compliance results obtained, without the benchmarks, which are ratios resulting from the financial statements, being rethought in light of the transformations undergone, in particular those that increased the weight of market infrastructures in the refinancing process compared to that of commercial banks. What had left the banking system and which constitutes what has been called shadow banking, thus became dangerous for the banks because its stability was not guaranteed by regulation. To remedy this state of affairs, which was at the origin of the spread of the 2008


5 The Monetary System, the Issues

financial crisis, the idea spread, from the G20 onwards, that it was sufficient to monitor shadow banking players by subjecting them to reporting similar to that of the banks and by reducing their refinancing role. In this approach, it was forgotten that, beyond the regulatory issue that we insist on, the most important risk factor is the value of the exchanges rather than the path through which they pass. As for the practical results of the G20 policy to reduce shadow banking, as published by the FSB in charge of the annual report on financial stability15 (Global Monitoring report on Non Bank financial Intermediation 2019—CNBFI), they are generally weak. The BIS is responsible for the FSB’s statistical monitoring of shadow banking, which represented US$379 trillion. In its 2019 report, which uses data collected from the banking system of 29 jurisdictions representing 80% of global GDP, the FSB simply notes that shadow banking grew only slightly, by 1.4%, in 2018, in contrast to the 2012–2017 period when growth was 8.5% per year (for more details see [email protected]). The report provides an interesting analysis of shadow banking by zone and as a percentage of GDP, as well as a classification by category of entities concerned according to the stability of their refinancing, and this by zone. Obviously, the FSB’s analysis reveals nothing new by indicating that the United States has a powerful pension fund system and that savings are growing faster in Europe than in the United States. In our view, the FSB also lacks a solid foundation that has yet to be established, in terms of both its statutes and its objectives. As we have already explained in our previous books, shadow banking, which is limited to the refinancing of the banking world by itself, is absent from most financial exchanges operated mainly by companies in the competitive sector. The G20’s separation approach that it operates within a single financial world that should be governed by the same rules regardless of its status, does not address the analysis of the factors that determine the value of actual recorded exchanges, contrary to what M516 and M6 and their derivatives allow. An important structural change would be, as part of a consensual reform, to create a global database on all payment data with access limited to the competent monetary authorities, respecting the already known principles of personal data protection, and for financial institutions, the accounting requirement of reciprocity and continuity of operations. Believing in the relevance of the G20 policy is extremely dangerous in the event of a serious crisis where the collapse of monetary turnover will require the ability to determine the monetary contraction resulting from the collapse of values. Indeed, this contraction will have to determine the volume of monetary issuance needed to replace it. In our previous books, we explained how the prudential regulation of the banking sector was pushing money flows toward shadow banking institutions that are not subject to the same regulatory constraints, with, as a consequence, the possibility of a better return on invested savings. A low interest rate environment


See the CSF website. Issuing debt is only a matter of political will; determining and adjusting the components of the money supply, both overall and by region and sector of activity, is another matter that only the monitoring of M5 and M6 will allow.


5.9 International Monetary Institutions


accentuates this trend with agents naturally seeking to optimize the return on their savings. Figures taken from the October 2016 IMF report give an idea of the growth of shadow banking in China, which is combined with the reality of the general growth experienced by the country. A reorganization of the financial system that would address the issue of regulatory differences between the banking system and shadow banking could not avoid negotiations with China. This international openness is now possible because of the convergence of the technical objectives of the major central banks and the resulting internal organization of each of them. The framework already exists. With the continuing inexorable development of financial exchanges linked to the incessant growth of monetary issues, the CSF is becoming the privileged observatory of the contemporary drift of the development of a currency made of debts, without any counterpart. On July 6, 2017, the FSB issued an important paper, Guidance on continuity of Access to Financial Market Infrastructures (FMIs) for a Firm in Resolution, to recommend how a resolution process should work and be handled among monetary authorities. This FSB report shows the main communication flows that could be expected in the context of a normal liquidation procedure of a financial institution and the disposal of its assets and liabilities. Competent authorities should take steps to improve communication and coordination among themselves throughout the life of a contract in a marketplace, from inception to liquidation. A document of the FSB report is entitled Total lost absorbing capacity (TLAC) of global systemically important banks (G-SIBs). It defines a minimum collateral deposit requirement for the financial instruments and liabilities that must be held by G-SIBs and the process for releasing these deposits. This document sets the standard for loss-absorbing capacity (TLAC); the standard for collateral enforcement which can be discussed endlessly because the way assets are liquidated differs greatly from one jurisdiction to another, in terms of both process and speed. These two FSB reports, which follow the usual processes for adopting standards after exposure drafts, make the FSB a coordination authority in the same way as the Basel Committee and not a regulatory authority. While it usefully fills an empty space, it does not address on a global scale the issues of risk both within currency areas and more broadly of currency wars as well as the risk of instability of values and exchange rates. The general concept of the de Larosière report on the establishment of a European supervisory system has been sidetracked for lack of a legal basis. The main leaders of the international monetary institutions simply stated that the systemic risks of bank collapse had been avoided thanks to the improvement of prudential bumpers set by ratios. This position of the major international institutions may seem inconsistent, to say the least, because it consciously ignores the complexities and fragilities of the international monetary system, which is at stake in a global reform rather than in an adjustment through simple safety measures. The latter do


5 The Monetary System, the Issues

not address the systemic problems that arise from the fundamental rules governing the major financial balances, not to mention the geo-economic upheavals that are taking place in the world today. This systemic issue has not been openly discussed, even if the fact that the balance sheet totals of central banks have increased has become part of the public debate; a state of affairs that represents the clearest manifestation of the drift of public debts that these institutions have largely bought in order to keep their rates as low as possible. The use of the dollar to back foreign exchange contracts and the resulting bank claims has not diminished, while the US share of real trade has remained very low at 12% compared to its post-war level. We will see later that hedging on the FOREX no longer offers a real guarantee, because the dollar hedge no longer represents the reality of international trade in goods. In reality, international sellers and importers would not be penalized by a change of currency and could decide to move from an uncontrolled currency (the dollar) to a better controlled currency without accounting risk. We can already see that the PBC has decided, like the Central Bank of Russia, to reduce its exposure to the U.S. dollar, a trend that the conflict in Ukraine has greatly accelerated. In order to fulfill their mission of maintaining liquidity, central banks need currency reserves proportional to trade flows. The risk they bear concerns their dollar-denominated assets, should the dollar lose its role as the main currency of exchange. A disruption in the universe of central banks would not mechanically affect the real economy of production and trade, but would impact the financial world through collateral calls due to the decline in values. The gap between the real economy and the financial economy has widened and constitutes a major potential risk; a collapse in values in the financial world would reduce the guarantees of lenders, with the consequences of an accelerated fall in assets and a process of monetary contraction (Fig. 5.1).

5.9.16 Toward a New World We know that there is an IMF system that has established what is not a currency, but a currency substitute, the Special Drawing Rights (SDRs), which are a formula combining existing currencies according to their use. We also know that the IMF system had not, until recently, due to the absence of China, brought all stakeholders together to discuss the possibility of meeting refinancing needs. This situation led China to create in April 2015 the Asian Infrastructure Investment Bank (AIIB), intended to help finance infrastructure on this continent, while the IMF, with its limited financial resources and dependent on the control of its majority shareholders, i.e., the United States, could not cope with the new balance of power of the economies and the challenges of international trade (see the beginning of La Monnaie Virtuelle, Editions Eyrolles 2010) and was limited in its action by its financial capacities.

5.9 International Monetary Institutions


Fig. 5.1 FSB and international standards bodies

Would it be possible to create an international currency unit that would free the United States and all other currency areas (the four major currencies: dollar, euro, yen and renminbi) from the burden of having an international currency that is not distinct from its own domestic currency? We have seen in previous works that in an extended currency zone the exchange rate of the currency can be a burden, because the diversity of its comparative advantages depends on each of its geographic components. Monetary unification, without acceptance of a distribution of the comparative advantages available to each of the components, can lead to the unnecessary destruction of entire sectors. Ending the constraint of the dominant use of the U.S. currency would make it possible to better regulate the public debt of all by eliminating the need for America to provide the financial markets with the liquidity they need. It would also force all states, without distinction, to have a budgetary discipline that they quickly abandon when they no longer have a constraint to limit their debts. The principle


5 The Monetary System, the Issues

of constraint does not, moreover, exclude, as with any principle, the possibility of a derogation, provided that its necessity is clearly defined. We have seen, in the case of the American budget as well as that of the European Union countries, that a pandemic endangering human life constitutes sufficient moral justification for derogating from the rule of an annual public debt ceiling of 60% of GDP. Even if the principle of a balanced budget has not been abandoned, the absence of a doctrine and of current rules to limit its drift is open to criticism. These masses of liquidity with no purpose other than the functioning of the system maintain the risk of a general crisis, encouraged by the international use of the dollar. It is certain that if one considers it a privilege for a country (government and/or central bank) to be able to issue money and to clear negative balances without taking into account other sovereignties (General de Gaulle’s speech to the Nation INA 1963), this “privilege” becomes a poisoned gift for a nation like the United States, when it can no longer align its national economic interests with those of the rest of the world. The greenback is used for about 80% of all interbank claims.17 With real U.S. foreign trade accounting for less than 16% (WTO) of world trade for a population of 316 million, the definition of what constitutes the global public interest is bound to be challenged by those who have little or no control over an international system of parity determination. The Governor of the Chinese Central Bank did not really say anything else when he declared, at the beginning of March 2021, that “U.S. monetary policy should adapt to the new realities of real trade”. Only an international conference, in the context of a global monetary reform, could remedy this state of structural uncertainty.

5.9.17 Intermediate Synthesis Money is a tool of exchange intimately linked to the history of humankind. Without it, humanity would not become an organized society, oriented towards continuous development. After 6,000 years of history, the monetary system, after two world wars, has reached a turning point where the communicating human being has discovered that he can create as much money as he wants, for the simple reason that money is only a virtuality, a number, a logical language, intended to measure the perception of reality and not reality itself. No longer corresponding to the sociology of the contemporary world, the current monetary organization, built around the domination of the dollar linked to the supremacy of an imperial nation, no longer works, due to the fact of money volumes and a speed of circulation that is completely transformed. As a result, the debt obligations on which companies are based, and thus the behavior of citizens, are no longer credible and could be the cause of unrest in the event of a collapse in the value of portfolios or the abolition of debts.


See the BIS Report by Hyun Song Shin 2015.

5.9 International Monetary Institutions


Some even propose, as a simple financial technique, without having measured the appropriate quantities and amounts, to convert the debts already issued into perpetual loans, thus admitting the unbearable nature of the latter. This solution represents not only an admission of failure, but also a dead end and therefore a possible cause of misfortune, like any spoliation. It is in a more elaborate scheme of a general reform within the framework of a system that takes into account all the nations as well as the changes in the balance of power that we are situated, with the perspective of a way out from above by transforming the debt already issued into productive investments linked to necessary projects and to the technological revolutions underway. This is a scheme that the ancient Romans already knew when they built ports and roads to develop trade with their newly conquered territories, and that the People’s Republic of China is trying to renew on a global scale with its Silk Roads projects. It is by adopting an identical principle that we propose to reduce public debts that, without growth and therefore without new resources, the States will not be able to repay. The exchanges resulting from roads, ports and large-scale digital infrastructures are likely to meet the productive investment needs of a modern world undergoing accelerated change.


The Monetary Reform, Its Stakes and Its Modalities


The Standard as the Central Issue of a Renewed International Monetary System

Money is used to value traded goods and services and to transpose these exchanges and the resulting assets into the financial statements of economic agents. It must be based on a measuring instrument with a standard that serves as an external reference. Money, a financial instrument, is necessarily linked to a standard. The standard values the monetary instrument, either because it has an intrinsic value, such as gold by its molecule, content and weight, or because it is valued according to the rules of determination set by the markets, or because its value is guaranteed by a credible body, such as a central bank. The valuation factors combine and can be understood by their operational characteristics; the acceptability, liquidity and credibility of the medium and the mode of transmission (physical delivery or electronic transfer, both of which are established by means accepted as proof). Finally, this value may result from the reality of the price of the exchanges. As we have said many times in this book, the U.S. dollar is the most widely used standard for monetary exchange. Let us give a simple explanation for this situation. Many commodities, such as oil, are priced in dollars and are in universal use. However, in a rapidly changing world, the U.S. currency can no longer play a stable benchmark role. We know that currency exchanges carry greater risks because the participants are not economically linked to each other. The United States’ share of world trade, particularly in oil, has fallen sharply in recent decades, as has its share of trade in manufactured goods. The creation of a new universal monetary unit of reference to serve as the basis for an exchange system as we know it today is still a very distant goal, insofar as, despite the multiplication of technical means and the multiplicity of exchanges, the international financial system cruelly lacks a coherent and global vision of its environment, its objectives and its organization.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,



6 The Monetary Reform, Its Stakes and Its Modalities

In our approach to reforming the international financial system, we must consider the current situation as a period of transition toward a new model based on a new standard with a universal vocation, as neutral as possible with respect to trade and as independent as possible of geopolitical issues. An international organization, to be defined in a treaty, should set the terms of existence and measurement of the standard. In the past, some economists thought that a standard could secure a monetary system if it were indexed to the price of raw materials at a given time or even to the share of use of countries’ currencies and GDP in world trade, along the lines of the SDRs implemented by the IMF. This view, in our opinion, is not the right one, in a system that we envision as having fixed exchange rates, if we consider it a fundamental objective to allow entrepreneurs to evaluate and program their activity in the most relevant way possible. The passage of time, an inescapable phenomenon, makes this stability necessary. The multiplicity of manufactured products and raw material substitutes would make a fixed formula for determining the value of the standard impossible to establish, and its adoption would reestablish a physical constraint that the monetary policy centers wanted to avoid when gold was officially demonetized in August 1971. Such a materially fixed formula would run counter to the experience that only a market economy, with the competition it generates, can ensure progress through growth, even if its most successful participants may, in the absence of rules, have a domineering attitude that runs counter to the concept itself. As for the SDR formula, built on a basket of currencies, it does not meet the needs and purposes of a monetary standard that must first reflect the reality of trade in terms of prices and competitiveness. Indeed, a measurement system based solely on international trade and the volume of monetary reserves could not work because it does not reflect the economic and social realities of a country. It would be more relevant to control the value of trade to take into account wage levels, labor skills, hourly productivity, or the unemployment rate. We, therefore, advocate a neutral standard capable of governing the competitive world by the sole reference to a number. Since it has no physical reality to which it can be linked, its only value, once it is attached to an exchangeable medium, is that which is given to it by the consensus of its operators who use it to measure their exchanges. The standard, like a cryptocurrency, would take the consistency of a mathematical formula defined by a cryptogram. The value of the cryptogram standard, totally independent of the medium it measures, is neutral with respect to the object it evaluates. This cryptogram can easily be associated with rules allowing to control its issuance and, as soon as it is attached to a monetary support that represents a claim, to be protected by its exchange device (the blockchain, for example) and regulated in its use. At any time, the authority that issued it, whoever it may be, can change its characteristics and exchange value or both, according to the rules established by its legal status. A cryptogram linked to any type of cryptocurrency becomes an independent data that allows a verification of the continuity of exchanges in the monetary use and can, in principle, assume a function of standard. This is a major challenge for

6.1 The Standard as the Central Issue of a Renewed International Monetary …


central banks, which could lose control of monetary circulation once the digital financial instrument is issued. In our system, there can be no instability of the standard of measurement, such as that of the cryptocurrencies currently issued, whose value varies on the markets; the standard must respond to a fixed formula that allows to determine the value of an asset over time. In this context, we strongly advocate for central banks to take control of cryptocurrencies.1 It will be necessary to designate the monetary authorities to which will be attributed the power to issue a certain number of units of the standard cryptogram and to fix their rules of operation and their basic mission in order to ensure the liquidity and the stability, of this new currency as well on the internal plan as international. The setting of exchange parities between currencies will be a topic to be addressed. The institutional mechanism in charge of issuing power will be responsible for controlling the equilibrium between liquidity needs and the supply of standard units, in order to establish a mechanism that allows the stabilization of the latter. The relative scarcity of the standard, due to the limits on issuance, must ensure its value, in the same way that the limits on issuance capacities ensure the value of a cryptocurrency such as bitcoin, for example. The protocol for issuing a cryptogram is the keystone of a digital currency; around this protocol, an international negotiation will have to take place in order to define the operating procedures. In addition to controlling the issuance of the standard, the coherence of a renewed monetary system also implies a certain fixity of its value, in order to allow a fair evaluation of prices and exchange rates and their variations. The standard cryptogram, while it may vary within certain limits, must be part of an equilibrium mechanism that should naturally be piloted by the central banks, whose interventions within a mutualized operation would ensure the necessary stability. A stabilizing mechanism that would be reminiscent, in a way, of the European monetary snake or certain commodity price stabilization funds.


Why Would a Clear Separation Between the Unit and the Support Be a Positive Step Forward?

After World War II, the cancellation of old debts through inflation, reconstruction work and support initiatives, such as the U.S.-funded “Marshall Plan,” helped revive the European economies. In a context of soaring money supply and deepening U.S. deficits, the fixed parity between gold and the dollar could not hold for long. The disconnection between the standard and the medium can thus bring clarity to the exchange rate adjustment when it is necessary to make it to restore the terms of trade because of an excessive trade deficit. Exchange rate adjustment in a fixed exchange rate regime should be provided for if it allows the restoration


See our article “Inflation and Cryptocurrencies, First Challenges for Central Banks,” L’Opinion, 30 March 2022.


6 The Monetary Reform, Its Stakes and Its Modalities

of the situation of entire currency areas that can no longer meet their basic needs, especially food and health needs, at prices determined by the currency parity.


How to Protect the Inviolability of the Standard?

To be useful, the standard must have an intrinsic value (gold) or a referential definition (as the dollar currently is) that allows its value to be determined and recognized by the public. The standard must play a role equivalent to that which gold once played for money. Gold has a unique atomic formula which has been shown not to be reproducible (except by atomic bombardment, which would be more expensive than the original itself and therefore of no use). Mathematicians have been asked how to develop a cryptogram that would achieve such a goal, and several answers will certainly be given, requiring the creation of a new international authority to decide on its power in terms of control and monitoring in order to instill confidence in the users of the uniqueness of the rules of creation and their general application.


What Exchange Rate Parity with Other Currencies Should Be Adopted?

If it is decided to use a new standard unit in a financial market, the transition period poses a problem. It is a question of how to unwind existing contracts denominated in foreign currencies whose use will be mechanically reduced to the available volumes. It is not necessary to give up an existing currency. The important thing to decide for a new unit is its first exchange rate, which will become fixed by the time of settlement through the clearing of financial instruments as well as the rules governing the determination of its future value over time. There are several paths that can be followed to set the first day exchange rate and the future trading regime. In our view, this question has been answered in the mechanism for determining the value of the SDR. The SDR is “linked” to a basket of reserve currencies whose composition is reviewed from time to time when deemed necessary. After discussion, this type of mechanism could be extended and would control variations that are generally predictable since the volumes used follow the trends of the trade markets. Such a mechanism linked to the “real” markets would avoid the trade wars that take place outside of any enclosure through the intermediary of financial markets, whose limits are known to be almost independent of physical realities. These wars have a negative effect on all participants because they reduce collective trade and therefore economies of scale. A “common float system” such as the one that has been successfully developed to start from several national currencies and converge them to the “euro” could certainly be designed. To the same end, it would allow certain nations with

6.2 The Objectives of Monetary Reform Within the Framework …


similar social environments, cultures and wealth to create or expand their natural areas within the framework of an economic alliance in order to promote a better allocation of resources and economies of scale. This would end economic fragmentation. All the issues we have just mentioned in the perspective of monetary reform form the essential themes and objectives of an international treaty that will have to define the architecture of a financial system adapted to current technological realities and to the evolutions of the world economy.


The Objectives of Monetary Reform Within the Framework of an International Treaty

The reforms implemented since the 2008 financial crisis on both sides of the Atlantic have not created the foundations of a new international monetary system. Most of the effort, in fact, has focused on the stability of the banking and financial system by imposing prudential ratios and by fighting against external (or so-called parallel) refinancing of the system through shadow banking, which is uncontrolled and therefore deemed unstable. The objectives of a monetary reform must clearly aim at increasing trade, the only possible source of wealth. The achievement of this objective presupposes easy access to the payment system and its security; in other words, a redefinition of the conditions for the functioning of the monetary system within the framework of an international treaty, responsible for organizing the coherence of exchanges between nations and monetary zones and for ensuring cooperation between international and transnational organizations. Simple and clear objectives must therefore be assigned to monetary reform: 1. In order to find benchmarks in the volumes of trade and the monetary flows they generate, limits must be placed on monetary issuance in all its forms in order to realign the financial sphere with the needs of the real economy. The monetary components that are M5 and M6 (claims, debts and derivatives) can provide the tool for assessing this reality of exchanges and the speed of monetary circulation that would allow the adjustment of liquidity to the needs of the economy. 2. In order to give concrete content to this limitation of the extended money supply (with M5 and M6), an action plan covering all financial instruments, instrument by instrument, should make it possible to adjust the volumes of instruments to the liquidity needs necessary for the functioning of the real economy. 3. Reduce excessive public debt through a plan to convert this debt into productive investments. A necessary and indispensable condition for any monetary reform project. Excessive public debt already makes nominal money meaningless, insofar as the debt is de facto non-redeemable and devoid of effective remuneration for lack of a productive counterpart.


6 The Monetary Reform, Its Stakes and Its Modalities

4. Share monetary emission rights by multilateralizing them. The issuing power of states must be organized by a multilateral discussion body, according to economic and financial criteria to be defined. 5. Organize an exchange rate system with fixed but adjustable parities, taking into account changes in the needs and capacities of each country and sharing the cost of exchange rate guarantee mechanisms on the hedging markets (Forex, ISDA). 6. Organize the markets for the main financial instruments in order to place those with the greatest international exposure in a unified regulatory system, allowing international refinancing and thus accompanying the major changes in the world. This system will include a transnational mechanism to fight abuse and fraud, with the establishment of a list of principles that instruments must meet in order to solicit savings and, in the event of fraud, be reported to national authorities, with a scale of sanctions against the issuer, depending on its status, that tends toward unification.


What International Conference? Leadership Requirements, Participants and Transition Process

The first issue to be discussed at an international conference is the definition of institutions and the distribution of their monetary power. The difficulty in implementing the institutional framework stems from the fact that international organizations, such as the FSB and the G20, which are mere committees, do not have hierarchical and sanctioning powers. How, without a dominant political or economic entity setting the hierarchy of institutions, can the system organize itself? No such example has ever existed without a dominant power imposing it. Today, one can legitimately think that it would be reasonable, not to say indispensable, to obtain, among the three or four major world monetary and economic powers, a prior consensus on a multilateral mechanism. The new operational model must be totally different from what Basel III and Solvency have developed, in a conventional way, in prudential matters within the BIS.


The Rise of the FSB

At this point, it is useful to return to the conclusions of the report of the High Level Group on Financial Supervision in the EU initiated by the European Commission in November 2008 in the context of the G7 and chaired by Jacques de Larosière. This report was tasked with assessing the weaknesses of the European financial system and, in particular, its deficiencies in the area of supervision. At the same time, following the G20 meeting in London in April 2009, the powers of the Financial Stability Forum were strengthened, in line with the proposals of the High Level Group, to create the Financial Stability Board (FSB). The latter now

6.5 The G20 as a Political Leader for International Coordination


coordinates national financial institutions and international standard-setting institutions. This mission gives it the power to assess the risks that may affect the global financial system, including the identification of systemic banks and the risks they carry. It recommends to national financial institutions and financial standard setters the measures to be taken to address these risks and their consequences. The FSB also collaborates with the IMF in this risk assessment mission. In January 2013, the FSB was transformed into an association (under Swiss law) which gives it a legal existence and thus a more assertive status. The establishment of the FSB thus made it possible to avoid the constitutional difficulty of obtaining the consent of the States, which is necessary for any reform touching on monetary matters; an exclusive domain of national sovereignties that could not be approached outside of the constituent power, which had never been envisaged to be entrusted to anyone at the global level. This first stone of a global regulation having been laid outside of any legal framework with the creation of the FSB, it is now essential to build a monetary edifice with rules adapted to the new environment of the transnational financial universe in order to evolve toward an enlarged space of better organized exchanges. The exchange rules will have to be unified according to the characteristics of each instrument, its guarantees and its modes of execution of the pledge. Shared by the entire international economic community, these rules classified by instrument, by financial market, and by type of issuer will promote financial innovation and competition by making it possible to assess the effectiveness of financing the needs of companies, governments and households. The next step will be to further institutionalize the supervisory, coordinating and regulatory initiative powers of the FSB, placing them in a collective framework where the various financial institutions, national and international, can together form a global monetary system with a new coherence. In a second phase, on the basis of a negotiated international treaty, the competent constituent authorities of each member country of the agreement, will be able to ratify the new system. This renewed system will be articulated around a reference standard, rules for the issuance and exchange of financial instruments and a universal monitoring and sanctioning tool from which no one can escape. The monetary issues already made since the pandemic make this globalization necessary, but the new issues will have to distinguish between international markets and instruments and those that are only national. The national monetary authorities will define the national or international character of the instruments issued.


The G20 as a Political Leader for International Coordination

It is reasonable to think that the G20, until now an informal political body, will become the appropriate forum for drawing up the framework of a new treaty. The G20, endowed with new prerogatives correlated to the economic weight and


6 The Monetary Reform, Its Stakes and Its Modalities

trade volumes of its member states, should “naturally” play the role of the missing political body. The governance system to be put in place must include, in line with the recommendations of the High Level Group, a coercive enforcement process, with an institution, which could be, for example, the FSB, strengthened by a power of sanction and placed under the control of the G20. The latter should become the main executive forum of the system. Its legitimacy is clear, since each member state reports to national parliamentary bodies. The diplomatic conventional agreements that states have made with the OECD in the fight against money laundering, tax evasion and now the effective minimum tax on corporations, are all in the monetary domain and tend to demonstrate the feasibility of a conventional monetary reform project. The accession of the United States in June 2021, after the European countries and China, to the LMI convention (November 2016) aimed at combating tax evasion, followed by a final agreement of the G20 in Rome in October 2021, which now brings together 240 countries representing 90% of world GDP, on the sharing of taxes on the profits of large corporations and the application to all of them of a minimum tax of 15% in each of the countries, represented, in this respect, a real revolution in the evolutionary system of international regulation. Indeed, the OECD had long advocated this minimum tax.


Technical Skills: BIS and IMF

In addition to the central banks, the human resources needed for monetary operations are to be found at the IMF and the BIS, two institutions that set the rules with which the markets must operate and the digital infrastructures must function. The BIS, in particular, steers the implementation of the prudential control system, the Basel agreements for banks and Solvency for insurance. In the monetary structure that we recommend, the IMF should retain its role of surveillance, analysis and recommendation to the monetary system, with its functions of supplying liquidity, which is necessary for central banks. It will also, of course, retain its traditional functions of monitoring the macroeconomic balances of countries and resolving their imbalances. It should also take over, in the new monetary context to be created, the role of superior operator of a fixed exchange rate system, for which the setting of adjustment rules will be delegated to it. This is a role that it traditionally played before the 1976 Jamaica agreements, which put an end to the gold standard.


The Role of Central Banks Needs to Be Redefined

The central banks, as they exist, will retain their role in the exchange rate system, which will be coordinated on the basis of the principles set by the G20 to mutualize commitments in terms of public finances and exchange rates. The management of payment systems, depending on the currency, will remain with the central banks of

6.8 The Place of Companies in the New Monetary Framework


the currency areas. The central banks, on the other hand, will retain their traditional role of overseeing monetary units and sanctioning fraud relating to all instruments denominated in their respective currencies, regardless of the specialized financial instruments (mortgages, movable financing claims, etc.) and liquidity on short-term financial markets, like the components of M1 (cash and very short-term monetary deposits). As regards the main financial instruments, the allocation of their regulation, the rules of issue and the settlement of disputes related to their exchange will follow the rules already prevailing in each jurisdiction to which either the issuer or the market where they are traded is attached. The enlarged monetary area covered by M5 and M6, according to the logic developed throughout this work, will have to be deployed in order to allow the institutions in charge of risk regulation and supervision—the FSB, the BIS and the system of central banks—to achieve greater efficiency in the exercise of their role with their common institutional prerogatives defined in the framework of a treaty. This clarification work will also require a new classification of financial instruments by their underlying and their rules of execution and exchange, in order to broaden the operational scope of the markets by homogenizing the categories of instruments. This homogenization will allow for a more relevant statistical collection on the efficiency of the types of instruments and, therefore, a better assessment of the risks of recourse and a fairer competition between markets. An international conference, moreover, will have to take charge of filling the legal vacuum facing the world of new digital currencies, in which central banks, due to the growing role of cryptocurrencies, will have to become increasingly involved to guarantee the coherence of the monetary system and its stability. The creation of e-currencies can only be part of an organized framework, set by an international consensus.


The Place of Companies in the New Monetary Framework

Finally, it should be noted that the two institutions, the IMF and the BIS, are part of the central bank system and do not directly represent the business community, some of which have a systemic role in monetary matters that they did not have before the emergence of the digital world. As already described, companies today process a large part of their exchanges in a specific space different from national borders. They produce money and operate payment systems. They share debts with governments and are the financial counterpart of households. Therefore, firms with a role in the payment system should be involved in studies aimed at an international monetary negotiation. But how they will be present and represented in a negotiation is an open question.



6 The Monetary Reform, Its Stakes and Its Modalities

OECD Governance

The OECD (Organisation for Economic Cooperation and Development) is not strictly speaking a monetary institution, as it has no regulatory or management role in this area. Instead, as an institution with 38 member countries, it studies the economic indicators of each of its member states and, in addition, conducts negotiations aimed at influencing the factors that could have a positive effect on the economic growth of each of its members. These factors include demographics, education, the fight against money laundering, sustainable development and, above all, taxation, the pressure and collection of which it monitors for each country. As such, its tax department is conducting negotiations aimed at combating tax evasion. As it has no regulatory power, the OECD’s negotiation process is that of treaty adherence, as in many areas of the monetary field, which falls under national sovereignty. The OECD has achieved real diplomatic success with the so-called Based erosion profit shifting (BEPS) agreement, which was adopted in principle in 2017 and aims to ensure that economic agents do not shift their profits to low-tax sovereign countries or territories to the detriment of the countries where the wealth was created. This agreement lists the types of transactions that are to be proscribed or limited to better control profit shifting. By the end of 2021, 141 countries and jurisdictions had adhered to the BEPS regulatory framework. Obviously, the development of the digital sector, whose services are eminently relocatable, has accentuated the risk of impeding fair competition (Leveled playing field), which is the economic objective pursued by the OECD: an imbalance in competition amplified by the size of the series produced (economies of scale) according to the size of the countries that free trade favors. The economic structure of each nation determines its attitude toward the conventions promoted by the OECD. Faced with this de facto inequality, the independence of sovereignties makes it difficult to adopt conventional approaches to multilateralism. The struggles between the major powers around the taxation of digital giants are an illustration of this state of affairs. This is a geostrategic issue insofar as it concerns the collection of wealth produced (an ancestral right of seigniorage) and its sharing among nations. This is a geostrategic issue insofar as it concerns the taking of the wealth produced (an ancestral right of seigniorage) and its sharing between nations. Aware that no regulation can exist without a system of sanctions, the OECD has developed a body of sanctions to accompany the BEPS agreement, through the MLI convention (Multilateral convention to implement tax treaty to prevent BEPS related measures), in November 2016. Most European countries, as well as China, have joined this convention, while the Trump administration has opposed it. However, the Biden administration, joining the OECD in the summer of 2021 to fund its infrastructure plan, has also decided, as noted above, to levy a minimum tax with this minimum rate of 15% on companies with their economic center in the United States. At the same time, the Biden administration has initiated the process of ratifying the MLI Convention. This agreement on the idea of a universal mutualized minimum tax radically changes the financial organization of the world

6.9 OECD Governance


and the principle of seigniorage. Taxation, like money, is a regal prerogative. The potential mutualization of tax revenues of international corporations, which is the main part of the world economy, opens the way to the negotiation of a monetary treaty insofar as the American acceptance of an OECD convention approach reinforces the possibility of an international agreement of global scope. A reform that puts in place a mechanism for dealing with the current debt and sets rules for capping public deficits is the only reasonable way forward. It should also put an end to the monopolistic and domineering development of the digital giants through a more justly distributed tax system. As with the minimum tax, the implementation of monetary infrastructures should, in our approach, generate a fair sharing of powers between infrastructure operators, users, investors and the public authorities.


The Reduction of Public Debt, the Heart of a Monetary Reform


Possible Ways to Reduce Debt

The only way to escape the current unhealthy situation in which risks and their remuneration are not balanced and in which the existence of zero or effectively negative rates (inflation higher than remuneration) represents a form of violation of the social contract in which all citizens participate, is to find the mechanism that will allow all particular interests to converge and to leave society the room for maneuver necessary to achieve fundamental objectives accepted by all. This means, in concrete terms, that it is imperative to reduce the debts owed in order to re-establish a system of capital remuneration with interest on bonds and dividends on shares, proportional to the market’s appreciation of the risk, without the intervention of the States to disturb the free will of the market. A massive reduction in the stock of public debt is necessary. The concept of total or partial non-repayment of the debt has been promoted by several parties arguing the balance sheet of Central Banks can afford large write-offs due to their unique privilege to issue money. We strongly reject this path as a permissive facility whose consequences would be disastrous for the credit of states and the socio-economic balances of countries. In our view, there are three major possible ways of dealing with the necessary adjustment of public debt instruments and the resulting general excess of current debt, given that, until now, the authorities and the markets have chosen a strategy of zero or negative rates to neutralize the effects of the excess debt. A first possibility would be for central banks to raise long-term rates and thus reverse recent policies to remedy their perverse consequences for the measurement of investment returns, and to deal with existing debt by making it pay off. By doing so, the price of financial instruments would fall sharply. A third way would be a strategy aimed at pushing for debt compensation between debtors and creditors; we will see that its scope is limited. Finally, the fourth path is the conversion of debt into nonrepayable instruments such as equity and other types of perpetual debt. We discuss below the three avenues that we have identified as possible. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,




7 The Reduction of Public Debt, the Heart of a Monetary Reform

The First Path: Provoke the Reduction of the Value of the Instruments by the Rise of the Rates

Central banks, for some time, in the few years before the health crisis, thought of reversing the trend of public debt by raising interest rates that also serve as key rates for the private market. Economic agents suspicious of public debt show a marked preference for real economy assets such as corporate securities and real estate assets. Through their savings attitude, they drive up the value of real assets and lower the value of purely financial securities, such as debt securities. According to this logic, a rise in interest rates would mechanically accelerate the decline of all assets, whether financial or real. As a result, the real financial value of longterm financial paper of Central banks and the nominal value of instruments on the financial market would fall, causing a massive withdrawal of investors. The continuous rise of so-called shadow banking is the direct consequence of the quantative easing that feeds the refinancing of the debt. In fact, this system, with the balances it has established, has become indispensable to the smooth functioning of the flows of the monetary economy, and a rise in rates with remuneration corresponding to the risk would destroy this balance and, initially, would have a severe impact on the real economy. We can only note that after a few limited initiatives in terms of budgetary control, governments and their central banks, in order to control macroeconomic balances, have been forced for a long time to give up the option of raising interest rates, to which the health crisis has put a stop. Thus, motivated by a global slowdown, central banks in Europe have not proceeded to a general increase in their reference rates, which they only wish to do because of the fight against inflation. Until recently, only the Federal Reserve had raised rates and presented a timetable for doing so. Full employment in the United States would have allowed the Fed to proceed with this increase. We can easily imagine the reasons why the ad hoc committees in the Eurozone had not yet raised rates. It is the fear of the risk of breaking investment and consumption in their own jurisdiction. The FED has already given its timetable for rate hikes and balance sheet reduction, while the ECB, which has also announced its timetable under less pressing inflation conditions, has been less determined about the extent of its future monetary policy, due to the diversity of national stimulus plans. However, on June 9, 2022, at the end of the Governing Council meeting in Amsterdam, ECB President Christine Lagarde and Vice President Luis de Guindos announced decisions to halt securities purchases and to implement a program of interest rate hikes, beginning in July with a 0.25% increase and continuing in September. The extent of the rate hike will depend on the inflationary environment at that time. ECB policymakers are skillfully distinguishing between structural inflation, which remains moderate in Europe, and unpredictable inflation in energy and food commodities, the developments of which will depend on the current war situation. We can see that the level

7.1 Possible Ways to Reduce Debt


of debt and rates are variables linked to the inflation phenomenon and constitute a threat to the financial equilibrium of states and households. There is also a need for a drastic reduction in debt and the restoration of macroeconomic balances. An idea that is gaining ground! It is important to understand that an increase in interest rates would only have an effect on the instruments already issued and only on the value they have for third-party holders. We have already indicated above that the structure of the financial world assumes that debtors and creditors of the same financial instrument agree on the same balance (who owes what to whom?). Any rise in interest rates during the economic cycle will, according to accounting standards (IFRS 9), change the value of the instruments, downwards if they are rising, and jeopardize the whole system of refinancing the economy. The cost of credit in indebted economies will have a brutal impact on consumer power. This increase will have a particularly negative effect on the stock of investments, often made at fixed rates, which form the bulk of the jobs of pension institutions.


A Second Path to Debt Reduction: Organized Debt Clearance

Because the books only represent views of reality from a certain angle, it is possible to see debts as a cakewalk. In fact, debts are essentially only the counterpart of claims. Within a group of companies linked by a single economic activity and capital ties, they do not exist, but they allow the optimization of cash flow and debt on the financial markets. The multiplying factor that we know will work without changing the realities. If money is provided to a debtor to repay a creditor and he does so, and if this creditor himself repays a debt he had with a chain of successive debtors and creditors, the final creditor is the same as the one who lent the money; the first balance sheets have been reduced, and the debits and credits for the same amounts. Without in any way affecting the economy, i.e., the real world, the debts shown decrease through the offsetting of the balances. This compatible presentation, based on the consolidation of the financial statements or the consolidation of an industrial or commercial group within a monetary zone, gives a clearer view of the effective amount of debts without modifying the reality of economic exchanges, but they do not modify the amount of debts of individuals with regard to companies, nor the total of public debts. This method, which is based on the use of a single currency, gives a clearer picture of the actual amount of debt without changing the reality of economic exchanges, but it does not change the amount of debt owed by individuals to firms, nor the total amount of public debt. This method therefore has no structural significance for our discussion of debt reduction as an essential component of monetary reform.



7 The Reduction of Public Debt, the Heart of a Monetary Reform

The Third Way: Converting Debt into Equity

The third path to reducing public debt is an equity conversion to be conducted by currency area to accommodate different monetary, social and financial environments. Governments and their monetary authorities are the last resort for the recovery of all debts; they have issued false money that must be recycled to avoid a default by governments on their obligations as guarantors of monetary stability. A default that will affect all savers and pensioners. Most holders of public debt are financial and insurance institutions; this means that these debts are already frozen as they are difficult for citizens to access before maturity. For debt holders, whether national (as in Japan) or international (as in the United States), we recommend a targeted process that takes into account the characteristics of each financial and monetary system and how a zone-by-zone debt reduction would affect international balances and the rights, direct or indirect, of citizens. We recommend the creation of hive-off funds, financed by central bank issues by monetary zone, which would buy back existing assets, or create new ones, and sell them back to the debt-bearing institutions in exchange for these debts, the collection of which they give up in exchange for new property rights. They exchange, as it were, assets that have been devalued with certainty, for potentially profitable assets. New money would be issued, but since it would not be used for consumption, it would have no effect on the real economy. The debts to be acquired being moreover already almost irrecoverable and de facto sterile for the creditor, their conversion, with little or no interest, would also have no impact on the sovereignties of the States if the modus operandi of the defeasance funds is developed zone by zone. The difficulty would lie only in the transfer of voting power to the ultimate creditors over existing companies and new investments by the funds. The difficulty would lie solely in the transfer of voting power to the final creditors over existing companies and new investments by the funds. During the transition period, the institutions holding the debt swaps would not intervene in the markets. In the end, this debt reduction could only have a positive impact on investments, the image of a country and industries and also indirectly on the real economy. The difficulty is that a conversion process would require finding existing productive assets in proportion, or similarly, public assets or services to be conceded to the private sector. More importantly, with respect to social liabilities, we noted earlier that pension obligations are generally shared between the public and private sectors (U.S. social security, Japan, Europe); these benefits are increasing in many countries, and often the elderly are potentially dependent on certain future expenses that are not accounted for or are underestimated because they are generally not accounted for in the books of companies or civil administrations. These debts, which are non-current in nature, are sometimes accumulated at least for accounting purposes and their balance partially used to finance often long-term assets with a return. The path we choose to reduce debt is therefore a conversion of debt into equity. As we have seen, this has to be done separately in each currency zone in order to

7.2 Implementation of a Public Debt Reorganization Scheme


adapt the process to the different monetary, social and financial environments in each country. In this exploration of possible avenues, we have clearly excluded interest rate manipulations because they are, on the one hand, coercive and, on the other hand, spoliating for the public. Because of the accumulation of public debt in the system, which is represented by very long-term instruments (50-year issues in some countries), the time has come when interest rates on public debt could be increased; this would not really affect the cash flow of pension plans and insurance savings contracts, nor would it affect their beneficiaries over time. In this logic, the process should be decentralized in order to analyze its consequences on individuals and to provide them with the necessary guarantees for those whose pension rights will be opened in the short term. It should be noted, however, that an uncoordinated process of raising interest rates on public debt would be dangerous and unthinkable in the long term at the international level, especially for dollar-denominated debt, because it would trigger flows to the most financially sound countries. Instead, we envisage a dismantling of the current system of unconventional central bank intervention (QE), organized over time with national monetary authorities. This intervention system would make it possible to link debt reduction, the resulting rise in interest rates, and the stabilization of flows and exchange rates. The process of setting targets should therefore be decided according to a zone-by-zone approach and should retain a certain flexibility at each revision, while being associated with an international agreement such as the one that existed with the IMF for the stability of currency exchange rates, which, according to our logic, should be restored. The reduction of debt and the concerted increase in interest rates would be planned over time, in the framework of an international agreement to be negotiated. In our approach, we preserve the current functioning of the markets built on three linked parallel systems: one for financial instruments still considered as nonmonetary, the other for currency exchange and the last for interest rates; this would leave central banks with a great deal of flexibility to direct their monetary policies over a transitional period. But we are resolutely reorienting the functioning of the system toward a liberalization of interest rates, which should result naturally from the reduction of public debt and its transformation into productive investments.


Implementation of a Public Debt Reorganization Scheme


Debt Reduction Process in the Western World

The central idea of our approach, in the face of runaway debt, is not to arbitrarily decree a principle of non-repayment of the debt, or of perpetual staggering, but to transform into real wealth creation deflationary financial masses that no longer have an economic reality because they no longer bear interest and are therefore


7 The Reduction of Public Debt, the Heart of a Monetary Reform

virtual in nature, i.e., based on the good faith of the central banks and their governments to guarantee them as a last resort… Thus, to facilitate the return to the real economy, we propose that a significant part of the public debt be converted into equity in companies, with a view to finding new profitable investment projects. We suggest that part of the public debt be reprocessed by exchanging public securities currently issued at very low, or negative, rates for products with progressive rates that ensure the holder, over the long term, a better total profitability after transformation. In the logic of our analysis, most public debts can be cleared within the main economic zones, with the exception of the volume of reserve currencies that are used outside their zone of origin, which is obviously the case for dollar debts, which for the US Treasury alone amount to 28,000 billion dollars, 64% of which is held by non-residents. The specificity of the dollar zone will thus have to be taken into account in the framework of our monetary reform project. The debt transformation process, as we envisage it, decentralized by currency zone or State, will be based on structures such as hive-off funds that will have ownership of the new debt issued and that will direct the funds collected toward investment projects, the management of which they will control and entrust to professionals. However, a significant portion of these funds will have to remain liquid in order to meet the commitments made to the holders of the debt, particularly in the context of pension systems, so as not to disrupt the servicing of the latter, especially when moving from a pay-as-you-go system to a funded system. In addition, to avoid disruption in the private sector, which is the receptacle of investment, equity instruments intended to replace debt should be stripped of voting rights as a general rule, unless the target company or newly created business wants to retain them to internationalize their activities and appeal to their own consumers. In 2008, during the financial crisis, the world’s stock markets were at very low price levels (see World Exchange Forum statistics). But by the time the pandemic crisis hit, they had returned to their pre-2008 value levels. The financial world, over the years, has thus understood that the markets would not collapse, thanks to the unwavering support of the central banks, which have undertaken to provide them with long liquidity at low or even negative interest rates. In this deflationary context, marked by technological breakthroughs, a debt-for-equity swap, by restoring confidence in the reliability of balance sheets, would create a dynamic of economic growth that would trigger a further rise in stock market indices. Indeed, since total assets and liabilities are equal, the reduction in debt would mechanically increase net equity and allow a reasonable interest rate scale for investment return and risk assessment, whereas today interest rates are subject to constraints due to taxation and special systems to promote the sale of government bonds. This debt swap could be carried out gradually in one or two stages, in order to avoid sudden imbalances in the money supply. It will have to be controlled by a parallel international monetary agreement.

7.2 Implementation of a Public Debt Reorganization Scheme



Feasibility of the Exchange Project for Western Countries

In order to assess the purpose and feasibility of the exchange project, it is necessary to examine the relevant key aggregates. Essentially, we need to know what debts are involved and what the stock markets and GDP can accommodate as new instruments in comparison. We need to know what equity is available relative to debt, and what the need for new equity investment is.


Reminder of Some Basic Data

World Bank and IMF estimates put the global amount of private and public debt together at between $225 and $270 trillion (in round figures, 30% public debt, 30% non-financial corporate debt, 40% household debt). At the same time, the capitalization value of the main financial markets is estimated at 95 trillion dollars.1 The pre-crisis global GDP was 88 trillion (World Bank, 2019). The total assets of the four major central banks amount to $34.7 trillion (see Chapter 3). Assuming that the average public debt of the major countries will be, depending on the country, between 100 and 120% of GDP after the stimulus packages, this means that, in order to reduce public debt to an average level of 60% of GDP (considered a desirable level at the time of the Maastricht Treaty in 1992), it would be necessary, as already mentioned, to cap the amount of debt at 60% of GDP, i.e., 88,000 billion multiplied by 60%, which gives a result of 53,000 billion. If we stick to the amount of public debt (one third of the global debt), the amount to be transformed through the issuance of new securities would be 100,000 billion (i.e., one third of the 300,000 billion, taking into account the post-COVID-19 debt) from which we will remove 53,000 billion, i.e., an amount of 47,000 billion, which is equivalent to an issuance of private securities corresponding to half of the current capitalization of the world’s main stock exchanges. To take the scale of the operation, it would be three times the annual GDP of China, twice that of the United States and 3.3 times that of the European Union! While our approach deals exclusively with public debt, it is worth remembering that any corporate defaults will be passed on to public finances, which are ultimately responsible for financial stability, as was amply demonstrated by the 2008 crisis, when public finances came to the rescue of large institutions such as the American insurance company AIG. However, we will not deal with this private aspect of economic risk, which is part of the normality of business life and the commitment of agents, with the exception of risks of a systemic nature, such as those relating to the infrastructures of the monetary system.


The World Federation of Stock Exchanges (WFSE) estimates that the total capitalization of all its members is 95 trillion.


7 The Reduction of Public Debt, the Heart of a Monetary Reform

The operation we propose can only be carried out over one or more decades, by simultaneously creating infrastructure funds and reorganizing the operating framework of both the World Bank and the Asian Infrastructure Bank, as well as the various regional development banks. Obviously, each monetary zone, and possibly each country, depending on its degree of economic and monetary self-sufficiency, must be taken separately to envision such an operation, with a special vision for the United States, given the role of the dollar in the monetary world. The U.S. public debt exceeded 28,000 billion (April 2021), or more than 100% of national GDP. Public debt will also exceed this rate in most countries, with the exception of Germany, which cannot now be considered separately from the entire Eurozone, which allows us to generalize. China, subject to uncertainty for lack of knowledge of the financial functioning of its provinces, is in 2019 at a level of indebtedness that amounts to almost 100% of its GDP of $14,000 billion, of which 54% is made up of private debt. The Eurozone will be at 100.8% by the end of 2022 (source: European Commission). It should also be noted that in November 2021, a bipartisan agreement in the U.S. Congress definitively adopted the support and investment plans proposed by the new Biden administration for a little over $3,000 billion, corresponding to the $1.9 trillion “Rescue America” program, already distributed to individuals and businesses, and the “Job Plan” for infrastructure for a volume of $1,200 billion over eight years. The Family Plan, on education and health, for an amount of 1,800 billion dollars, has yet to be finalized. We can see that these figures are compatible with world production capacities and needs, given that the markets have always rejected short-term refinancing projects for long-term refinancing (e.g., the Channel Tunnel or the Mont Blanc). They have an unlimited life expectancy and return on investment. As an example, the investments already made in relation to the so-called Silk Roads initiative are estimated at 3,700 billion dollars. The European Union, for its part, has decided on a stimulus package for collective projects amounting to 750 billion euros, which will be refinanced by loans underwritten on behalf of the EU. The investments corresponding to the resources collected will be carried out by each member country. Government and state debts are estimated at (U.S. dollars): – United States: 26,265 billion (Source: White House 2022) – EU: 11,107 billion (Eurostat 2020) × 120% = 13,330 billion post-COVID-19 – China: $7 trillion (Standard & Poors Global Ratings estimates that local government debt could add another $5.8 trillion to China’s estimated public debt). We can think that the private debts in the world are of the same order of magnitude as the public debt. The total (private + public) amounts to 248% of world GDP. According to the statistics of the Banque de France, the private debt (non-financial private sector—NFPS) of the Eurozone in relation to GDP is 118.8%. The rate for

7.2 Implementation of a Public Debt Reorganization Scheme


the United States is 128%, 294% for Japan, 100.4% for Germany and 104% for the United Kingdom.2 We can also assume that public debt, estimated on average at the end of 2019 at 84.20% of world GDP, will increase by 20% over the period 2020–2022 due, on the one hand, to the contraction of GDP over the year 2020 by 10 points on average, with a recovery of only 8% in 2021 (i.e., a net decrease of 2%), and, on the other hand, under the effect of the support and recovery plans decided to deal with the consequences of the health crisis and the resulting budgetary deficits. The latter will be mechanically financed by new debt that central banks and the financial institutions under their control have already decided to buy back as part of plans to ensure the markets’ liquidity (Long Term Refinancing Operation (LTRO)), which was replaced during the health crisis by the Pandemic Enmergency Purchase Program (PEPP), has now become the standard intervention. According to a study by the OFCE (dated January 29, 2021), 31% of German debt, 20% of Italian debt, 23% of French debt, 43% of Japanese debt and 22% of U.S. debt have been bought back by the respective central bank systems, the FED, ECB or BoJ. The European Commission has validated the plans corresponding to the 750 billion it has decided to commit by guaranteeing the issue. In the logic we are developing, in light of the decisions taken by the G7 countries in May 2021, it is clear that Western leaders have integrated the idea that only growth and investment can justify an increase in public debt to both support the economy and reduce debt.


Principle of the Transformation of Public Debt into Investment Securities

To understand the transformation process on which our debt treatment method is based, it is useful to recall the principles of public debt transformation that govern a central bank. First of all, it is important to know that a central bank is an institutional monetary body, often constitutional in nature, with the power to manage the national currency (or a currency of a monetary zone) and to ensure monetary issues within the framework of a public service mission that aims primarily at ensuring the stability of its currency. Its mission and its objectives are fixed and, in principle, intangible and constitutive, except for parliamentary intervention in accordance with the constitution of the country or countries concerned. First, it should be remembered that a large part of money is created by the activity of economic agents when they offer a service, produce, sell or exchange a good, and, on this occasion, grant credit through payment terms. This money is part of a single, larger monetary universe, which we have already described in our previous books and which is called M5 and M6, and which also includes the reference of a standard currency, steered by the central bank, and without


Source: Banque de France Eurosystem, May 2021.


7 The Reduction of Public Debt, the Heart of a Monetary Reform

money cannot find representation. In the United States, corporate debt is of the same magnitude as household debt: 15,588 billion versus 16,612 billion, or 74% of GDP. According to a process already described, the central bank, in our world today, issues money, a simple book entry, without counterparty and largely without rules or with rules that it sets itself, alone or with other central banks. These are the so-called unconventional policies (QE), in principle designed to be neutral. They are now buying up all types of assets. In so doing, the central bank issues money, as we define it, either by subscription or by buying back public debt or financial securities on the secondary market. As it has issued money, it can destroy it, with the exception, however, that it does not interfere with the contractual rights of the holder, i.e., that it does not deprive the holders of the contracts, in particular the savers to whom the pension funds and other collective savings instruments are dedicated. Private debt and public debt are both certainly debts. However, as actors of last resort, central banks have been forced over the years to buy back excessive debt, and thus to monetize it. In the logic of the conversion of public debt that we are proposing, the capital increase operation will support companies in their indebtedness through the repayments that it will allow. Indeed, subscriptions to productive projects will be processed directly or indirectly by funds supporting industrial branches and will lower private debt ratios, with projects remaining totally at the discretion of entrepreneurs as when they invest and borrow. This conversion operation should lead, through the multiplication effect of the values accepted by the markets, to an appreciation of the PER (Price Earning Ratio) and an increase in the exchange values of investments. To carry out such an operation, the central bank can only buy the issued public debt or exchange it for other securities. It so happens that the main holders of public debt instruments are financial institutions, banks, insurance companies or other financial institutions, such as pension funds. Households do not, or only marginally, own public debt instruments directly. In a context of negative interest rates, these financial instruments have little real value for their holders. The mere fact that they are stored in financial institutions is a demonstration of this non-value. In fact, the social contract we want to establish consists in exchanging a large part of these non-values in terms of GDP production for the hope of assets that can generate a return thanks to entrepreneurial action.


A Major Entrepreneurial Project at the Heart of a New Economic Paradigm

It is indeed, in our logic, a great entrepreneurial project to be set in motion. Once redeemed and paid for at their fair price by the central bank or an ad hoc fund, these instruments could be purely and simply canceled, the resulting loss being only of an accounting nature and therefore only a convention without effect. It is no more important than the previous issue, except that a new issue took place

7.2 Implementation of a Public Debt Reorganization Scheme


when the public debts were exchanged for capital securities. The decisive issue is that the new securities correspond to an economic reality so that the new holder of the rights has the hope that he has not been robbed. The new instrument issued must therefore have been used for real investments, contrary to the current process, which unwittingly reinforces the budget deficit policies of certain states, because it has not analyzed that reality will eventually take precedence over accounting convention. Only GDP can be distributed. In view of the non-limitation of issues permitted by the removal of the “gold” standard in the early 1970s, we recommend correcting the drift that has accumulated by canceling the excess of public debt, which will become, by backing productive projects, credit pledged against future production. In future and to avoid a new drift, it will be desirable that no increase in debt be authorized to States without backing an investment project. This new rule should be based on agreed multilateralism, i.e., not imposed but agreed. At the time of these new issues and repurchases by the system of central banks, it will be necessary to decide on the ceiling and the distribution of these operations by zone, and to retain, through non-cancelation, part of the repurchased debt, which would then be used as an adjustment fund for the money supply to regulate its value.


A Dynamic Process to Build

The new monetary issues by central banks, carried out by buying up public debt and housed in hive-off funds (ad hoc government funds) controlled by the central banks, will be used to buy, through these funds, shares in companies or to subscribe to new issues of company capital on the best possible terms, in order to resell them progressively, when market opportunities allow, at a price higher than the cost of issue. The profit generated in this way is the result of two factors: the first is the reduction of debt, which reinforces the financial stability of the companies benefiting from these investments. The second is linked to the expected profitability of the projects that the capital increase process will allow to finance. Obviously, the gain will vary throughout the process depending on the progress and results of the projects initiated. The gains made by the hive-off funds between the time of their creation and the development of the projects, or simply generated by the proceeds of the portfolio, will be used to buy back the public debt which is thus de facto neutralized. The loss for the hive-off funds, and therefore indirectly for the central banks, which results from the cancelation of the repurchased debt is compensated for by an entry in the national budget and must be included, for constitutional reasons, in a finance law. The balance is zero, since through the repurchase, debtor and creditor merge. In the real world, therefore, and in summary, there is nothing else to do but to proceed with the transformation of the repurchased debt into company shares. The cancelation of this debt, with the central bank belonging to the nation concerned, is only a virtual transfer that rids the system of assets that are currently unprofitable and unrecoverable by its beneficiaries in exchange for the reality of projects with


7 The Reduction of Public Debt, the Heart of a Monetary Reform

profitable prospects. The value of the projects should be assessed in light of the timetables adopted at the time of their selection. For state-owned enterprises with significant debt, the system may vary slightly, with the cancelation of their own debt through repayment being made directly by these public entities, which will repay the state that financed them subject to meeting profitability commitments.


The Transformation Process

The process requires two major conditions. The availability of company shares traded on the markets or the existence of activities to be restructured within existing entities with a potential for recurring profits, or research and industrialization projects, all of which are likely to generate profits in the long term. In the case of investment in public stocks, a special attention should be paid to limit the impact on the share prices which could be the case if the investment represents an excessive part of the public markets (9 trillion euros for Stoxx600 and 30 trillion dollars for SP500). The investment can also be channeled through unlisted infrastructure projects with recurring revenues generated by ports, railroads, water supply, digital infrastructure and hydrogen investments for in addition to the above, we are also working to “green” mobility, i.e., transport vehicles (9 billion in Germany and 7 billion in France and Spain). The second factor is the increase in the value of equity portfolios which will determine the ability of central banks and their hive-off funds to buy back part of the public debt. Such increase has been observed for public equities in all periods following the bottom of a financial crisis: SP 500 average recovery over 2 years is 54%, Stoxx600 showing even higher figures. Similarly infrastructure investments benefit from economic recoveries. These conditions would make it possible to create guaranteed profits for the hive-off funds, in order to repay by exchange the debts currently accumulated by the savings, insurance or pension systems or which would be bought back from them. This process parallels the process of repayment and netting of debts against assets. It avoids the costly constraints on financial institutions to stabilize debts with prudential bumpers and tax systems that can then be relaxed. The dividends from the investments are positively received by the new investors, i.e., the hive-off funds, with reasonable returns for viable projects that can again be remunerated. The debt relief mechanism that we propose, based on projects, aims in the long term to re-establish the truth of rates according to the market’s appreciation of the risks borne, but above all to allow for a shared development of the world according to a 10-year financing plan that would not affect private contractual relations and that would leave the sovereignty of nations intact. We integrate into our scheme the prospect of interest rate variations, with the idea that rates, freed from administrative and prudential management, will settle on a normal scale based on a fair assessment of the risks that free competition should allow.

7.3 A—The General Dimension of the Project


In this context, retired savers will have to be protected against erratic market movements. Negotiated programming between the economic leaders of the populations concerned will be necessary. When interest rates have risen because of the reduced supply of secured debt, i.e., public debt, thereby reducing the value of bond portfolios, a reserve intended to make up for the variations in the value of the portfolios will be set up to compensate the categories of savers affected. Thus, with better economic effects, all factors will combine to set in motion a positive dynamic. The following discussion of the implementation of debt-to-productive investment begins with Europe. We will then examine the exceptional situation of the United States, followed by some developed and rapidly developing countries, and finally some developing countries.


A—The General Dimension of the Project

We have estimated the world debt at 250 trillion dollars (IMF and World Bank sources). Due to the negative impact of the pandemic on GDP and the new issues authorized to cope with the monetary contraction, it is expected to grow by 20%, and to be raised to 300 trillion, or more than 300% of a world GDP decreasing from the maximum level reached of 87,000 billion in 2019. It is interesting to refer to a work of the Asian Development Bank (ADB, 2017) which estimates the infrastructure needs for its intervention area at 26,000 billion for the period 2017/2030. The Chinese Belt & Road Initiative (BRI) clearly provides an example for a large country and its connection to the rest of the world of what could be designed to convert programs already made into projects that would encompass the world, including the projects of the international financing institutions and notably the Chinese Silk Roads project, which could then all be coordinated and completed by integrating the Latin American projects already identified (Raguemos aqueduct in Chile, the Coast to Coast Railway linking Brazil, Paraguay, Bolivia and Peru, the corridor link between the oceans in Guatamala, the high-speed train and the Bogota metro in Colombia) estimated by the Inter American Development Bank at US$150 billion and, above all, the investment needs in Africa estimated by the McKinsey Institute at US$2.5 trillion by 2025 and, lastly, the American stimulus plans, mentioned above. These projects could be conditional on all countries respecting a status of freedom of passage or circulation or use. Concerted action at the global level would thus bring the economic orders of magnitude of the projects to be developed into line with the volumes of investment required to transform the astronomical amount of the world’s debt and its necessary potential profitability. It is recognized that economic development is a factor of stability and that poverty, like inequality, is a risk factor that can jeopardize social equilibrium and peace. It should be noted that in the American initiatives, as in those of the European community, the financing plans are already integrated into the budget and are in place, and that the presentation by sector has been retained, as shown in


7 The Reduction of Public Debt, the Heart of a Monetary Reform

the investment world by the eagerness of private investors to subscribe to SPACs (Special Purpose Acquisition Companies) structured by sector without investment projects already identified. This new configuration reinforces our proposal and the possibility of building large, profitable projects and finding managers capable of developing them. Hundreds of billions of dollars have been raised since 2020 through the markets, through SPACs alone. By 2021, SPACs had raised $138 billion by the end of October.


B—The Debt Transformation Process for the Eurozone

Where to start, and how to start? To gain public support for a process of transforming public debt into productive assets, proponents will have to prove not only that the idea is beneficial, but that it will also be fair to all throughout its life. The process of debt transformation in Europe is designed to be applied throughout the Eurozone with country-by-country adjustment without interfering with the treatment of debts between private actors that will not be affected by the changes underway. Savings rates in the euro area have always been high at 13–15% of GDP (compared with less than 5% of GDP over the long term in the United States), while budget deficits have never exceeded 10% and the overall trade balance has remained in surplus.3 The budgets of the major countries are either in balance or close to the 3% deficit limit originally agreed in the EU treaties. This means that, on the macroeconomic level, imbalances can be offset (refinancing of the banking system through non-territorial financial borrowing). Most countries are in a position to aim for a balanced budget subject to certain additional efforts that governments are already required to make under the Council agreement of 26 October 2011 (Golden Rule), but they would still have to address the accumulated deficits that created public debt. The savings of Europeans have been recorded in the books of the issuers of the debt and are mainly issued in fixed income financial instruments denominated in euros or dollars, as they correspond mainly to retirement benefits which are generally expected to be guaranteed and to be funded in instruments considered risk free. Even if interest rates rise, the instruments in which these reserves are held will, at their term, be repaid at their nominal value. Government debt is the natural choice for this purpose. In the real world, in the absence of inflation, bonds, when secured against financial risk, are considered very safe, especially when they pay fixed interest and are therefore predictable in terms of future income if held to maturity. Stocks are considered riskier and better paying.


The trade balance of the Eurozone (19 countries) after seasonal impact has been positive since October 2011 (39 billion in 2019) with a large contributor (Germany), with a surplus of more than 180 billion in 2021. The United States, for their part, experienced in 2020 a deficit in their trade balance of 678 billion dollars (Bureau of census); China for its part recorded in the same year a surplus of 535.40 billion dollars.

7.4 B—The Debt Transformation Process for the Eurozone


Since savings are already accumulated in long-term statutory vehicles (pension and insurance systems), if not directly in long-term public debt, a monetary reduction of the debt without confiscation would only be an accounting issue without any impact on the debt level situation; a new debt replaces an old one, which, in any case, is no longer repayable.


Creation of a Hive-Off Fund Called Transformation Fund or “TF”

After significant government contributions, the ECB, accompanied or not by the IMF, would buy, through a dedicated hive-off fund, publicly traded shares for about 5 trillion euros. This operation would be financed by a line of 5,000 billion euros from the ECB, with an expected upward variation in value of 20% of the 5,000 billion, or 1,000 billion euros (see “T” account below). It would be done, at the national level, through entities, sovereign wealth funds and others, to be created or already in place, which are organized in a way that respects the best rules of governance. As each country already has the legal structure necessary to ensure proper governance of the assets in which it may invest with a sovereign wealth fund, or an equivalent for pensions, it is possible to delegate the operation to existing funds, appropriately organized to select and monitor projects. An example of this is the Norwegian sovereign wealth fund, whose value in 2020 was 1,117 billion euros, with a return of over 100 billion euros in 2020. In order to explain the envisaged debt reduction process, we describe it in successive periods. The current trading on regulated stock markets in Europe is not sufficient on its own to feed such a fund. The process will require an additional source of equity and debt instruments for investment (new issues of listed companies, IPOs, capital increases of SMEs; a whole process to be organized by each country). About 13,480 billion (source: Eurostat, January 21, 2021) of European public debt, which must be brought down to the targeted debt ratio of 60% of GDP in the face of a public debt of around 100% (source: BDF, January 21, 2021 and 98.1% by 2020), which could follow the general trend and rise to 110%. digital sector companies, which are necessarily at the heart of current transformations and have public service charters, could be the priority beneficiaries of investments, as could the transport, health and infrastructure sectors in general. Profitable projects relating to infrastructure programs, innovative sectors such as mobility projects (hydrogen, research), would be initiated and would be the subject of investments, which would be accounted for in an ad hoc fund of a size that would allow for the redemption at the appropriate level of the debt already issued. The 750 billion investment plan spread out over time, similar to the Biden plan on infrastructure, known as the “American Jobs plan”, which is planned over ten years. The target debt reduction, post-COVID-19, is 13,480 billion multiplied by 110%, i.e., a total debt of 14,830 billion, representing 110% of the GDP of the Eurozone. In order to bring the rate down to 60%, half of this debt would have to be eliminated, i.e., a little less than 8,000 billion euros.


7 The Reduction of Public Debt, the Heart of a Monetary Reform

In the interests of tax fairness, the authorities will be able to levy a tax, country by country, on households that have paid little or no tax on their property income or capital gains, if they sell their property in order to subscribe to investment funds intended to finance projects that are the subject of public debt conversion. At first glance, this tax measure is expected to raise around 250 billion euros. The expected annual dividends on the securities portfolio are deemed to be 4% of the 5 trillion originally invested through the ECB loan, or 200 billion. These will be re-injected into the financial system in a circular process, since the transactions only take place between financial institutions where these public debts are located and without having any direct interaction with the contractual world of the private sector. In the end, the public debt that has lost any value other than a chimerical promise of repayment is paid for with a kind of. It is a “monkey’s currency”, but it is likely to have a return value one day. To initiate the process and benefit from the “value” effect of debt reduction, the central bank would provide lines of credit to ensure project financing during the investment period. The balance sheet of the fund could be presented as follows: “Balance sheet in billions of euros—in “Time 0” the starting point Liabilities

Assets Portfolio

5 000

ECB loan

5 000

Potential of portfolio appreciation

1 000


1 000


6 000


6 000

General ledger of the Treasury (billions of euros) for one year Balance sheet and result Liabilities

Assets Cash and Portfolio


1 450

1 450

Dividends of the portfolio


Unrealized capital gains

1 000

Exceptional tax



1 450

The financed projects would become commercial enterprises or dedicated to a competitive public service, and would be handed over to the holders of public debts in exchange for the waiver of the recovery of their claims. The capital gain of 1,000 billion represents the difference in value between a hypothetical project and a decided and launched project.

7.4 B—The Debt Transformation Process for the Eurozone



The Exchange of Acquired and Subscribed Shares for Debt

The (TF) will complete the purchases already made of public debt to the extent of its capacity and will exchange them for “profitable” infrastructure and sector projects. “FT” balance sheet—Q1 (after distributions and swaps of public debt securities) (EUR billion) Assets


Exchanged public debt

5 000


1 450

Exchangeable public debt

1 450

ECB loan

5 000

Exceptional tax



6 450


6 450

At the end of the operation, the ECB loan will be repaid by the treasuries with the cash generated by the projects. Over 10 years, the ECB debt of 5 trillion can be repaid if the unrealized capital gains already realized are increased from 20% (T0) to 60% over the life of the loan, which is a typical IRR (internal rate of return) based on an average return of 15% per year. The transformation fund will have at its disposal the portfolio acquired at the beginning of the process of 5,000 billion, to which have been added the interest on the debt of 200 billion and the exceptional tax of 250 billion, making a total of 6,550 billion, with the added value generated by the launch of the projects of 1,000 billion. The outstanding public debt will thus be reduced from 13,480 billion to 7,030 billion (13,480 − 6,450 = 7,030). Insurance companies, commercial banks and other FIs, depending on their capacity, will be able to contribute to the Transformation Fund in a complementary manner, and the jobs will also be converted into “projects”. It is likely that a “freeing” of the interest rate market will follow, generating a rise in interest rates due to a reduced supply of public debt securities. It will be up to the central bank to make the appropriate policy. The debt transformation process we have just described will have generated, even before the projects begin, a volume of capital of 1,450 billion euros. It should also be remembered that almost a quarter of European public debt has already been bought by the central banks of the Eurosystem over the years, i.e., 2,800 billion euros. It should also be noted that the U.S. federal bank had, by the first quarter of 2021, repurchased 5.4 trillion in U.S. government securities. These amounts repurchased by the central banks, like the amounts exchanged for the transformation of the debt and transferred, in our scheme, to the hive-off fund (TF), constitute, in fact, a neutralization of the debt, since the hive-off fund and the central bank both belong to the community of citizens; any loss or profit that concerns their financial instruments is theirs. This neutralization, which could go as far as a partial legal cancelation of the debt, comes up against an institutional obstacle that must be removed by a new European legislative provision that allows central banks to cancel the debt. Moreover, the level of money supply necessary for trade liquidity


7 The Reduction of Public Debt, the Heart of a Monetary Reform

will depend on the legal mechanisms implemented to guide savings in each country. The mechanisms for determining this mass already exist, with the assistance of the BIS, within the Eurozone. It remains to develop international negotiations that will make it possible to determine the levels between the zones for each currency concerned.


Neutralization of Public Debt by Allocation of Securities Representing Investments

The public debt acquired in this way would be neutralized in an amount of up to 6,000 billion, depending on the capital gains realized over time. The remaining debt will be kept at rates now defined by the market. An expected rise in rates will automatically lead to a fall in the value of the previous debt already issued at rates below the new market rates. In addition to the public debts already acquired today as a result of the various buy-back programs and held by the central banks and not transformed into investments, we propose the introduction of an obligation to convert the portfolios of the pension systems of 10% of their net value to be served from debt securities into shares of companies provided by the sale of the securities previously acquired (the 5,000 billion above) by the ECB. The Transformation Fund of each country or zone will contribute its shares and obtain debt securities in exchange. As a result, the EU’s public debt instruments will be reduced from 11.4 trillion to 4.7 trillion, a reduction of 6.4 trillion, or 50% of their total before the issuance of the so-called COVID-19 bonds (by the stimulus packages), which will probably bring it back up to over 6 trillion. The capital gains on the shares acquired and exchanged carried by the global financial system with the multiplicity of these management instruments, including when they exist, by pension funds, will be attributed to the holders of these securities. In order to encourage the entrepreneurial spirit and to take into account the lengthening of life expectancy, contributors to pensions (after a certain age) will have the possibility of exchanging the transferred tax-free capital gain for a guarantee of redemption of their new securities, which will be granted to them and which will allow them, when they so wish, to convert them into liquidity and, above all, to create a link with the fate of their investment. As already indicated, the Transformation Fund is expected to amortize the public debt it has underwritten, 5 trillion, progressively with the sale of new securities underwritten or acquired, including the income from the infrastructure funds. The acquisition of the debt will be against a conversion commitment with securities currently at minimum profitability with almost zero rates.

7.4 B—The Debt Transformation Process for the Eurozone



Joint Commentary on the Taxation, Trading Process and Legal Status of Trading Rights in Projects

It is understandable that the balance sheets of the new companies created to carry the new projects, or the pre-existing companies that will have benefited from the investments, will be greatly improved by the increase in their equity, as will the situation of the State’s balance sheet, which will be reduced at the same time to levels of public debt that are sustainable and adapted to each situation. The IMF and any similar entities that may succeed it in the framework of an international treaty will organize the dismantling of tariff barriers that threaten to be re-established as a result of economic tensions, as long as a new mechanism is not put in place for the determination of the targeted exchange rate bands. The savings systems and especially the euro-denominated instruments in them become industry-oriented funds. By the time the new exchange rate system is effectively stabilized, the stock exchanges will be at levels corresponding to the potential of the companies listed on them. The balance sheets of insurance companies and banks will be restored with an improvement in the rating of sovereign debt and its portfolio and an increase in the value of corporate securities portfolios. In reality, not much will have happened. The residual balance of public debt, reduced to between 50 and 60%, will be retained by the transformation fund to regulate the liquidity of the system.4 The financial reality of the whole process is that nothing happens in the economic system except reallocations of redistribution rights, because the process does not immediately affect the short-term liquid flows of individuals. This process affects their long-term savings by increasing the accounting balance in the balance sheets of the companies they own, often without knowing it. It improves the ratios, reducing the government debt that it would otherwise had to pay either through inflation and the collapse of the currency, or through national budgets and tax levies. The use of direct taxation to pay off public debts would have been the wrong solution because of its deflationary effect. In the proposed system, there is no effect of reducing consumption. On the contrary, if values increase through the “wealth effect”, consumers can reduce their savings rate and thus boost production. Moreover, subscribing to private corporate issues will have a deleveraging effect on the economy and will increase the independence ratio of companies (it will reduce gearing), so that the market’s appreciation of companies will improve and justify increases in quoted prices. We can thus see that public debt buybacks will act like monetary issues. This implies an international agreement between the main central banks concerned for projects that are often transnational, an agreement that is now conceivable in the current circumstances of a lack of interest payments by the debtors, the States. On


The Maastricht Treaty provided for a 60% limit, which was suspended during the health crisis and until 2022.


7 The Reduction of Public Debt, the Heart of a Monetary Reform

the other hand, the financing of projects will have a real effect on economies and will constitute the pivot of a sharing of new interests pooled at the international level.


The Specificity of the Exchange Scheme

Profitable investment projects, the list of which as well as the overall quantum is yet to be established, will entail financing needs that cannot come from taxation (due to already existing tax pressures, according to OECD estimates) (Table 7.1). In one way or another, the financing of projects can only be ensured by new monetary issues, whose returns will be pledged on a future profitability that will exist solely because of the requirement for investments in infrastructure (mobility, hydrogen, roads and ports, digital). The offer of new opportunities and new economic spaces mechanically generates an increase in the value of investments, as has already been shown by past examples, such as the roads and ports in ancient Rome or the more recent Silk Roads from China. Trade and industrialization are self-perpetuating and create wealth. The proportion between the debts to be repurchased, referred to in the FT diagram above (see p. 231), with the basic envelope of 5,000 billion, and the new debts issued in the context of structuring projects, will be determined both by the pre-existing masses (public debts to be reduced to 60% of GDP) and by the result of the identification of the projects to be implemented. Investors’ assessment of the profitability of these projects will act like a market that sets the rules and assesses the prospects in terms of return and risk. The mix of debt buybacks to neutralize them and the creation of value by the projects initiated reduces the relative weight of debt on the economy. If one estimates, before inventory, the total conceivable scale of these major investment projects at three or four times that of the Silk Roads, evaluated on the basis of Table 7.1 Tax Burden Ratios

Country China 2015

Tax rates 9,374

Global mandatory levy 20,1






















European Union



United States of America



Source OECD Tax Policy Centre 2018

7.5 C—The Process for the US Dollar Zone


estimates of the Asian Development Bank, around 20,000 billion dollars by 2049, we obtain an order of magnitude of the sums to be invested at the global level in order to make the global debt burden, estimated at 300 trillion dollars, bearable.


An Unavoidable Transformation

This scheme outlined above certainly requires further study and refinement, but we believe it is worth serious consideration, as debt transformation will either be voluntary or forced by the collapse of the monetary system, which will render debt collection ineffective. As the unification of taxation and pension benefits across Europe is not envisaged and may not even be possible, as demographic situations and health care coverage are unlikely to be harmonized across EU member states, each member state will have to conduct its own study and take into account how the diverse legal rules can be made consistent within the European financial system. Each country, in coordination with the Commission, will adapt the arrangements for exchanging public debt held by its collective savings and pension instruments to its own legal constraints.


C—The Process for the US Dollar Zone

The U.S. debt reduction process cannot be conceptually different from that of all other public debt treatment programs, so a debt transformation scheme similar to the one proposed for Europe could be put in place by the administration and Congress. However, since the dollar is the basis of the international monetary system and its dominant standard, it is also necessary, in order not to upset the balance of trade in goods and services, that common rules for determining the terms of exchange and the functioning of the financial markets be drawn up conventionally at the world level in a treaty that will address the subject of the definition of a relevant monetary standard that can serve as a fixed exchange rate. Moreover, as we have already emphasized, in determining the money supply necessary for trade and for the servicing of social commitments, account must be taken of the specificity of the funded pension system and of the system of financing the economy by the financial markets, for the most part. The US public debt, which will amount to $28 trillion in 2021, is considered overwhelming in relation to a population of 328 million, and the budget outlook in the latest budget bill shows a primary deficit of 16.7% of GDP in 2021, and 7.90% and 5.6% in 2022 and 2023, respectively (White House’s Government publishing office, Washington 2021 fiscal year 2022). This debt will reach 120% of GDP by 2031 after the new administration’s recovery programs (the family plan and the infrastructure plan), according to the adjustment to the federal budget law that was decided by Congress in the fall of 2021. Over the years, the United States has suffered from a situation described as, the “exorbitant privilege of the dollar” is linked to the fact that the military superiority


7 The Reduction of Public Debt, the Heart of a Monetary Reform

and political stability of American power have made this currency an undisputed reserve currency that is responsible for at least part of the world’s growing instability. This geostrategic superiority of the greenback, like the withdrawal of gold, has not only had negative effects, quite the contrary. It has created a more economically integrated world where China and Vietnam have become major production territories and the United States a necessary consumption hub that has enabled digital innovation and economies of scale, while Europe has improved its trade surplus. Of course, imbalances contribute to progress, but they are limits when they no longer correspond to reality in terms of education and the balance of real military forces that can be deployed. The limits that have been crossed, which have made the American debt unrepayable, have created a risk of currency warfare, whereby the American state would try to impose its point of view on the exchange rate of the currency and its counterpart in the form of exchanges in the real world, to which it can no longer adapt and from which it can no longer escape. This country will thus experience a decrease in the bargaining power of its population. Similarities can be found in policies to impose tariffs on trade. They are nothing more than an artificial devaluation of currency exchange rates. As discussed above, these artificial policies cannot be sustained and should be outlawed. This was already the case in the WTO agreement of the 1990s. Since an agreement was reached in the past, a new agreement can be reached for the future. An international plan to limit and progressively correct imbalances must be developed, in which each zone will readjust by addressing the causes of the imbalances that affect the fundamentals of its economy, i.e., education, research and innovation, and currency imbalances. This will enhance competition in these areas and avoid setting negative limits to free trade. An unidentified number of dollar-denominated contracts for unknown amounts have accumulated over the years and continue to accumulate outside of U.S. jurisdictions, due to the reserve role of the dollar. This historical situation is independent of U.S. trade deficits. This extraordinary volume in number and value of dollar-denominated contracts acts as a real but uncontrollable threat to the monetary system. It is disproportionate to the means available to international institutions to regulate currency exchanges. The latter must be regulated in order to stabilize parities and prohibit speculation and sudden variations that would destroy or unduly subsidize producers who cannot adapt to the pace of production. This objective logically implies moving toward a system with a fixed exchange rate for the dollar against the other major currencies. This desire for stabilization would mechanically pave the way for the necessary international negotiations, either to freeze the exchange rate directly during the conversion period, or by creating a separate fund that would serve as a tool to combat any speculative attempt to disrupt the current monetary system during the transformation period. An international agenda will need to be established, as no single currency area is able to ensure trade liquidity on its own, as debt and exchange rate issues are linked. Moreover, the conversion process we propose requires the existence of reputable

7.5 C—The Process for the US Dollar Zone


projects and the managers and entrepreneurs to drive them. However, in the current context, it is necessary to give ourselves the time necessary for projects to emerge. The absence of projects to meet investment needs or the lack of a population with a spirit of initiative is a possible limit to the debt transformation plan we are proposing. If we consider that the level of debt must return to 60% of GDP after the projects already partially committed (electrification of mobility, green energy and energy independence …), it is $12.6 trillion of U.S. public debt that must be treated by trans-formation into projects. In addition to the major projects already undertaken by the Washington administration, it is necessary to consider the international needs, “as much of the United States as of North America, Canada, Mexico on the one hand, and of South America, on the other, both of which have little or no interest in the project set up under China’s leadership and which the Bretton Woods organizations are no longer able to refinance without a revamped monetary system, bringing together the interests of each country through the financing of common infrastructures”.


A Realistic Global Objective

The size of the global equity markets is sufficient to make the process of converting debt into profitable projects feasible. The size of the needs demonstrated by the implementation of the Chinese Silk Roads project, but also the technological breakthroughs underway in digital technology, means of payment or energy are sufficient in number and volume to feed large-scale conversion plans. The European Fund for Strategic Investments (FEEIS), known as the “Juncker” Fund, initiated in 2015 by the European Union with the support of the EIB, has made it possible to mobilize 514 billion euros in a few years and to start 1,400 projects that have involved 1.4 million SMEs. About 750 billion EU recovery plan (Next Generation EU) adopted in 2021 does not solve the problem of accumulated debts, even if it gives greater coherence to European construction through the solidarity between states that it manages, because it is financed by the Commission and not directly by the states. These investment volumes give an idea of the scale of the financial stakes and the possibility of collective governance to carry them out, both by economic zone and internationally. The United States is such a large country that infrastructure projects such as transportation, roads and railroads, as well as fiber optic projects, can be found very easily. The White House’s budget proposal, which includes the American Jobs Plan, estimated infrastructure needs at $3 trillion, even though the text that was finally adopted reduced this to $1 trillion (on November 15, 2021). The plans, both those adopted and those still awaiting approval, are designed for a ten-year period. They take into account the expected returns essentially over the next ten years, with a time limit for their implementation.



7 The Reduction of Public Debt, the Heart of a Monetary Reform

The 60% Cap

At the time of the Maastricht Treaty, a ceiling of 60% as the ceiling for public debt within the European Union was set independently and more or less arbitrarily. In retrospect, the choice of this average government debt ratio, which logically should depend on each of the savings and refinancing systems, probably represents the path of reason. This ceiling, in light of experience, has shown itself to be an acceptable equilibrium threshold. By reducing the basis of remuneration, it frees the financial system from the constraint of administered rates that excess liquidity has created, forcing public debtors, in agreement with central banks, to intervene to reduce them. The universal implementation of this 60% ceiling would reinforce the supply and demand mechanism that should guide monetary policies throughout the world. The same approach will be followed for China and the euro/dollar zone. This plan, which needs to be refined and then fixed, is probably the most desirable because it conditions the question of the sharing of monetary responsibilities, where trade-offs must be made.


D—Countries that Do Not Have Monetary Autonomy (So-Called Peripheral Countries) and Asian Countries that Together Form a Fast-Developing Zone

Highly developing or already emerging countries are a diverse universe and very few (perhaps none) enjoy monetary independence, as we have seen with the use of the dollar, which dominates the world of international trade, while the euro is second and the renminbi is used almost exclusively for internal trade. There are several types of important or fast-developing countries which in themselves constitute alternative poles. Some have abundant natural resources and do not depend on a currency to import the basic agricultural products they need to meet the needs of their population, or the raw materials and energy they need to run their industry. This is the case of Brazil and Argentina, for example. Others are rapidly industrializing (Vietnam) if they are not already highly developed, such as South Korea, which in a few decades have become major economic powers. Others are, from now on, dominant, with a reality in size and human resources that underpins a greater independence than anywhere else in the world, such as China and Japan. Countries like Switzerland or Singapore have no serious imbalance problems and benefit from the fact that their currency is not a reserve currency but is perfectly convertible. Because of the absence of such a monetary privilege, they are forced to keep their national finances in order and must have a budget showing balanced trade. In the long run, they win because they have no choice but to adapt their currency to the market and, in order to increase their GDP, they are bound to find growth in a constant improvement of their productivity; this implies an efficient administration and industry, accompanied by a good education system.

7.6 D—Countries that Do Not Have Monetary Autonomy (So-Called Peripheral …


China’s successful path is more original. With its exceptional size, this country has found the way to overcome its economic backwardness. With a self-controlled currency that is not subject to the laws of the market, it has been able to implement very quickly the fundamentals of its development model: education, industrial self-sufficiency and a monetary framework that recycles trade surpluses into the Chinese economic circuit. China and Japan have no external debts; residents subcontract and hold the national debt, thus ensuring their independence from any external creditor. We believe that the problems that any social organization encounters, for this category of highly developed countries, are not monetary in nature, even if they may benefit or suffer from a reform in the event of monetary flows destabilizing the international commercial exchanges on which they are very dependent. The last category of countries includes only one example, India. India is the world’s largest country by population. Geographically, it is a subcontinent in itself and could operate in autarky if it did not need competition and exports, as it has done for decades, and maintain its strong growth. As long as it trains sufficient engineers and has the capacity to feed its population, it can operate in a sustained growth mode, even if its over-administration and federal organization are an obstacle to the development of large enterprises. Asian countries, including India, Vietnam and China, are protected from the risk of capital flight by central bank regulations that limit outward currency flows. Most other countries in the world will be affected by a change in the use of the dollar as a currency for international trade. These countries are already facing the move to a “de-dollarized” world. The multilateral treaty, Compressive & Progressive Agreement for Transpacific Partnership (CPATP), was developed in 2015 and signed in February 2017 between Canada and 10 other countries: Australia, Brunei, Chile, Malaysia, Mexico, Peru, Singapore, Peru and Vietnam. In January 2017, the United States under the presidency of Donald Trump, left the negotiation. Japan and New Zealand have joined so that there are now 12 countries participating, but 3 new countries have manifested their interest in being part of it, Taiwan, Colombia and Great Britain. The treaty has been little changed and is applicable since December 2018, while leaving the United States’ place open. The new text includes 13 chapters that cover customs duties, data protection rules, labor law and environmental standards, intellectual property protection, investment protection and dispute resolution. This CPATP treaty is an example of an economic integration treaty that the geopolitical threats to certain zones can only strengthen, based on the model of the European Union during the cold war. Moreover, many countries in the zone, such as Vietnam, have concluded free trade treaties with the EU. From now on, and more than ever, the classic issue of the mobility of production factors within each major economic zone will arise everywhere in the face of the geographical diversity of territories and their resources. Monetary reform must help to optimize the resources of territories and to develop better distributed competition. A monetary reform that restores the capacities of developed countries will be useful because it will open the way to more trade.


7 The Reduction of Public Debt, the Heart of a Monetary Reform

Aspirations to dismantle large economic areas are and must be doomed to failure because they go against efficiency and productivity gains due to economies of scale allowed by the size of firms and markets. There also remains the issue of coherence between globalized firms that contribute to economies of scale. Indeed, the organization of zones, which facilitates competition through the mobility of production factors and the uniqueness of means of payment, must not hinder trade through tariff and non-tariff regulations that reduce competition.


E—Project Availability, Side Effects and Common Currency Issues

The investments needed for a debt conversion operation can be found either through the development of pre-existing companies and an increase in their capital to finance their development, or through the creation of new companies, new sectors and the development of infrastructures that are necessarily collective in nature and use (transport, digital networks, port infrastructures, etc.). Whatever the nature and form of the projects, they must be part of an overall plan structured around major sectors, according to the model already adopted by China and adopted by the United States and Europe. Pre-existing companies: as stock market capitalization statistics show, the obstacle to the process described above for Europe will be to find enough financial instruments available on the financial markets. It is also necessary to increase the volume of trading. But the proposed process will contribute to this objective with new issues, even if they will have to be stripped of voting rights on the occasion of capital increases, so as not to change the governance equities. Approach by sector: the major monetary zones have chosen to set out the axes in which to deploy their projects, these are the sectors. The American plans, the Infrastructure Plan and the Social Plan together, amounting to 3,000 billion dollars, are already organized according to the themes they are to address (roads and bridges, housing, greening, digital transformation), while the European Commission only accepts, to allocate its 750 billion euro plan, the national plans that include 37% of investments for the energy transition and 20% of investments related to the digital transformation. Ultimately, the implementation study of the general debt conversion plan will have to determine the appropriate level of debt neutralization and the level of money supply that should be achieved in each zone and to define, within the framework of an international negotiation, the distribution of the conversion rights of assets located outside each currency zone.

7.8 F—Common Success Factors, Coordination and International Aspects: …



F—Common Success Factors, Coordination and International Aspects: Moving Toward a Multilateral Monetary World

It is important in considering monetary reform to know what effects will affect the determination of a currency’s benchmark, exchange rates and the rights to issue the new currency. Without considering the factors that will influence the circulation of money, a reform would be subject to the vagaries of massive liquidity shifts that would dry up some economies and flood others. Restoring room for maneuver in the management of monetary policy for regulatory authorities (rates, exchange rates) in the financial markets is one of the ultimate objectives of the debt transformation process, which will allow economies to return to competition and project selection taking into account risks and potential returns. In the current context, this can only mean an increase in interest rates to cover the risk premium of any economic act. Today, the interest rate on the 10year German Bund is slightly above 1. This means that these instruments are safe and fully liquid compared to others that are less safe and whose holder demands to be remunerated for the risk he takes by holding them. In effect, the fact that the interest rate on public debt is close to zero means that the German government, with its sovereign power to levy taxes, can repay the debt of the creditors who hold them. The latter will not receive any remuneration. Since there is no risk, time has no value at present and should have no value at all, because, having become “money”, this debt is now neutral in time, and has all the characteristics of money, since it can be paid without notice. Since it loses no liberating power over time, its holders can keep it without term. German public debt instruments correspond to a definition of money that refers to the classic monetary aggregates (M1) but, being rare because of Germany’s balanced budget situation, these instruments do not have the same characteristics as money. The German public debt and its default swap rate are used as a reference to measure the risk carried by other currencies. The German government debt rate and its default swap rate are used as a benchmark to measure the risk carried by other currencies. In contrast, dollar-denominated instruments, issued around the world and held by a multitude of creditors, have different characteristics because of the diversity of their issuers and the macroeconomic imbalances they face. The responsibility for the dollar’s guarantee of last resort, given this currency’s share of international trade (85%) and the volume of dollar claims held by foreigners, should no longer depend on the sole commitment of the Federal Reserve, but should be shared among the various central banks concerned in proportion to the origin of the flows. Only a progressive plan in an international negotiation could deal with this issue of mutualizing monetary responsibility and, in so doing, free the U.S. economy from the constraints of the dollar that have slowly destroyed it when most observers thought it was a privilege imposed on other nations. For the United States, the exit from the current situation will have to be neutral.


7 The Reduction of Public Debt, the Heart of a Monetary Reform

The decline in the U.S. share of international merchandise trade from the end of World War II (50%) to the present (23%) and its share of world exports from 28% in 1948 to 8% in 2020 should be a warning of the vulnerability of the dollar system for all players in world trade, although this statistic should be put into perspective, given that U.S. international groups produce outside the United States and that the structure of trade has changed considerably with the explosion of the digital sector, which did not exist after the war. The IMF, or its successor, should reorganize the exchange rate system and propose, as part of a debt transformation plan, the withdrawal of volumes of dollars that no longer correspond to exchanges carried out in this currency. These dollars are floating in such volumes that at any moment, by displacing their use, they can cause it to drown. As a tsunami wave would do with constructions, the exchange rate system can fall into crisis and be destroyed by a displacement of liquidity. Economic statistics expressed in dollars cannot provide a relevant representation of trade, insofar as the greenback can no longer be a representative standard for costs and sales prices in the world. The current statistical system should be ignored and replaced by the WTO’s approach to corporate control over flows and margins, rather than corporate jurisdictional dependence. Such an alternative approach would capture the benefits of globalization, in terms of economies of scale and short-term competition. It would also allow for sound regulation, i.e., the setting of economic boundaries for companies rather than by country, despite the reluctance of 200 countries to sign the BEPS (Base erosion profit shifting) treaty, which aims to allow each state to retain a taxable share of the economic profit made by each company, regardless of where it operates. This new statistical approach would also give greater visibility to the sharing of taxes between jurisdictions and better inform management that competition for budgets and taxes will be an important driver for business management when choosing which jurisdiction to locate their operations. Those with the best efficiency will be chosen when making the choices. Knowledge of cash flows, data and analysis from M5 and M6 will help inform these decisions.


The Conditions and Challenges of a Successful Transformation Plan

The key to success is to understand, beyond the generality of our project, the differences between countries and then deduce what the appropriate overall debt reduction dimension should be for each country. The Financial Stability Board (FSB) has established a regional advisory group in all the jurisdictions it covers for priority areas of reform, and through the BIS, experts have much of the necessary information, such as the “financial account balances”. Part of this calculation will be to examine different pension benefit systems to address demographic trends and their implications for other liabilities. It is also important to analyze fiscal fairness in order to gain the confidence of citizens in the monetary reform process and

7.9 Conclusion


to end the policy of fixing funds in regulated fiscal or prudential spaces such as pension and life insurance plans.


The Deployment of the Device and its Requirements: No Speculation

The processing scheme, its general framework, the processing obligation and the tax status must be finalized and disclosed at once according to a specific timetable. The investment process requires finding projects, either for infrastructure or for production; this may take some time and be spread over a period of 3 to 5 years. The process of exchanging public debt securities and the process of creating investment securities to be exchanged for the newly issued investment securities are self-explanatory but linked by their common purpose. To avoid any risk of speculation and evasion, the announcement of such an operation must be sudden and complete and accompanied by guarantees as to the valuation of the public debt claims to be transformed and the method of valuation of the projects to be remunerated. Even more importantly, one of the conditions for success will be to establish a mandatory commitment to budgetary equilibrium with sanctions. Without such a commitment, the monetary reform project we are proposing would be meaningless, since it would not put an end to the vice of the current system, which is that it no longer has the frontier of a physical standard that limits the possibilities of public deficit. Consolidation of Eurozone debt and its coverage will allow policymakers to stop covering deficits with new instruments whose fiction cannot hide the fact that they can only discharge an obligation by increasing GDP. Finally, possible excessive flows between and within zones could occur during the deployment of the transformation process, and monitoring systems must be made available to stem them.



The world today is confronted with an excessive money supply linked to the failure of the international financial organization to regulate a world that no longer has anything to do with the post-war world, which is now disparate. Without leadership, the international community has not been able to collectively create a discipline to regulate the issuance and use of money, which is essentially a collective good, and thus control its value. Attempts at reform by some leaders of international organizations after the Jamaica agreements, which put an end to the gold standard, proved futile. The zero interest rates that we experienced until last spring have come to an end, and the appointment with reality has arrived. Without any limit to its growth, the public debt, the one that finances the deficits of the States, has reached the prodigious level of 100,000 billion dollars, that is to say


7 The Reduction of Public Debt, the Heart of a Monetary Reform

about 115% of the world GDP of 88,000 billion dollars in 2021. With no counterpart in real and profitable goods, this debt is, in fact, a non-value for those who hold it, either directly or in a hidden way through pension systems and other financial institutions. Without the process of transformation into profitable assets that we propose in this book, this debt without counterpart is not likely to remunerate its holders, either today or tomorrow. In our approach, we have taken the position that the contractual relations between economic agents should not be disrupted by a monetary reform centered on the public sphere. Our project aims only to correct the excess of public debt that disrupts and makes impossible the economic functioning that the markets should guide in a regulated framework. As it stands, the only choice for the holder of the debt is to hedge its value by placing it in financial instruments, expressed in the safest and most liquid currencies, guaranteed by a central bank. This system can only work on the basis of low or even negative rates. This policy is inherently unstable and risky. It has led to a quadrupling of the total balance sheets of the main central banks in ten years. This excess feeds the risk of potential inflation on fixed or liquid assets, which is only waiting to be triggered by the occurrence of an event. In the end, holders of currencies and liquid assets without credible benchmarks hedge their risk with real assets. In the end, holders of currencies and liquid assets without credible benchmarks hedge their risk with real assets. A fundamental reform reducing public debt will allow us to get out of the trap of rates constrained by the high level of public debt. The approach of hedging through productive projects that we propose could, in the spirit already historically initiated by the United States and France with the post-war stimulus packages, logically complement the approach with very low or simply subsidized long-term rates to finance long-term projects and the risk that accompanies them. Given that the entire economic and financial world is largely based on the activity of the four major currency zones—dollar, euro, renminbi and yen—it is in these zones that the effort must be deployed as a priority. The choice of unlimited growth of the money supply, daring because unprecedented, was made necessary by the long changes in the economic environment and, more recently, by the brutality of the pandemic crisis. This policy was unavoidable to save the productive system. Is it sustainable in the long run? This is the question that our era can no longer evade. We note that this monetary growth has allowed, after the profound halt in the volume of production of the last two years and the resulting crisis of monetary contraction, a global economic recovery that has reached unprecedented levels of production, but which has, at the same time, created shortages in many sectors of activity. There is no doubt in our mind that the only possible remedy to this excess of debt and liquidity—and to the resulting shortages, disorders and risks—lies in massive investment in profitable infrastructure and industries. The productive process generated by these new investments would give access to property rights on the future profits resulting from the implementation of the projects. This value created by the profits made will serve as a counterpart to the abandonment of

7.9 Conclusion


their claims by private sector creditors, households and companies, in exchange for a right of ownership over the projects carried out and their profitability, after an exchange with the central bank. The exchange, conditional on the existence of new profitable assets, would, in the end, be nothing more than a central bank entry, whereas the latter, in fact, already largely holds the public debt. The sums exchanged would, in a way, be shifted from debts to investments. In this vein, China, with the Silk Roads, took the necessary initiative in 2013 that international institutions, and in particular public regional development banks, were unable to carry out. In the long term, China’s Silk Roads Initiative, the Belt and Roads Initiative (BRI) since 2017, is already well underway, with, by the end of 2021, $3.7 trillion in financing projects set up by a dedicated fund, the BRI Fund, which is soliciting specialized banks, notably the Asian Infrastructure Investment Bank (AIIB), to finance companies directly. To be eligible, projects must be located in one of 72 defined regions that cover almost the entire world, especially the emerging countries surrounding China, but also Europe, including Italy, Austria and Luxembourg in the West. We note that since its creation in 2016, 480.3 billion have already been committed by the AIIB while, for the same period, only 86.8 billion have been committed by the World Bank. To globalize and accelerate this process of massive investment, some 47,000 billion dollars of debt, already issued, can be exchanged for productive investment, according to the scheme we have presented in this book, in order to reduce global public debt to 60% of world GDP. We estimate that putting the excess savings held by firms and households into circulation in the productive economic circuit will lead to a growth in GDP of at least 3% per year, or about 30% over 10 years. Over this horizon, world GDP should therefore evolve in the 115,000 billion. This increase in GDP will automatically reduce the public debt ratio to around 45%. Will the negotiators of a treaty thus have the necessary margin to take into account the diversity of debt situations and, above all, to obtain a consensus of all states on budgetary rules that are now binding? The opportunities exist and the investment process is already underway on a large scale, but too often remains limited to the territory of sovereignty, as we see with the United States’ infrastructure plan ($1.2 trillion) or the European investment plan with its 750 billion euros. The United States, on the other hand, has launched, with Japan and Australia, a bonding mechanism, called “Blue dot network” of strategic investments is estimated at a total of 15,000 billion dollars. Its scope, however, will be limited by the monetary capacities of the banks of the countries concerned and the reality of trade, Japan’s trade surpluses are certainly significant, but they have become limited for the United States. Conversely, China, through its BIS projects, is recycling its massive trade surpluses. However, each major geo-economic area is planning vast infrastructure investment plans, a significant part of which will necessarily have an international and transcontinental dimension, given the very nature of infrastructure projects that can be spread over vast areas. Under these conditions, it seems difficult to imagine that the various countries will not be forced to negotiate among themselves to regulate and share their projects in regions of the world where they will inevitably meet.


7 The Reduction of Public Debt, the Heart of a Monetary Reform

The Chinese mechanism is based on a monetary system which, operating in one of the largest economic areas in the world, can live on itself through its exchanges, even if it had to depend essentially, in its initial expansion phase, on its exports to the West. The Western world, on the other hand, has, in a way, achieved a form of collectivization of its economic universe through the action of artificially fixed administrative rates and the intervention of central banks, which guarantee, as a last resort, the public debts that irrigate the economic fabric and which have acquired, de facto, a monetary character, without which they would no longer be negotiable. The cohabitation of the two models, the Chinese and the Western, raises the question of relations between nations with regard to the challenge of a monetary reform in which each State and monetary zone must be able to exist with its own characteristics, but in a coherent system that takes note of the new realities of international trade. The new economic order that is unfolding carries a risk of fracturing the world, which would not benefit any of the actors. The idea of a negotiated compromise around a renewed monetary order should be a realistic solution. In our view, the creation of a universal standard is necessary to measure the solvency of national issuers, to settle international transactions, with the possibility, in the long run, of serving as a reserve value. A new anchor, therefore, which would allow a minimum of stability and order to be generated in global exchange rate movements, in a context where the reign of the dollar is collapsing. A new agreement will have to establish the collective and individual limits to be set for issuers of instruments. A fixed exchange rate monetary system implies that the price is the adjustment variable of supply and demand and the price itself the result of the negotiated value of the currency. The value of the currency depends partly on the cost of its medium and essentially on the quality of the issuer (a State or a monetary zone). The value of this universal standard, moreover, can only be based on a limit to its duplication under the guidance of the central banks that will control its use. A treaty will have to determine the rules of fixity that allow the financial calculation of the profitability of investments (IRR) and facilitate the growth of trade as well as, when necessary (in the case of high inflation or other crises), the rules of adjustment. If the greenback is no longer destined to play the role of quasi-exclusive reserve currency, then it seems logical, given the technological evolution of financial markets, that a digital currency, defined by the major central banks, should become the universal standard that will serve as a regulator for this new monetary configuration. This prospect of setting up a digital monetary standard would only confirm an evolution that is already well underway. The major central banks of the international financial system have all embarked on central bank cryptocurrency projects. Monetary reform is the only possible remedy to the disorder and risks generated by the gap between the real world and the virtual world represented by the new monetary space of M5 and M6 that records all exchanges and their prices. A reform that must complete what has already been accomplished in the framework of the high-level report, known as the “de Larosière Report”, which has allowed the international financial system to survive, thanks to a prudential mechanism that has

7.9 Conclusion


contributed to avoiding the failure of systemic financial institutions undermined by excess liquidity. This excess of liquidity led to a considerable increase in the value of assets, while the real economy, as represented by the GDP figures, experienced only a small increase. The treatment of the debt and the reform of the monetary system must therefore be carried out simultaneously. The monetary system is the best framework for nations to redefine a new international order better adapted to the realities of the contemporary world. The transformation of debt that we propose, in a climate of threatening international tensions, is a peaceful response to the challenge facing states, which is not to renege on their word in the face of the commitments they owe, with the historical consequences that this would represent. The geopolitical dimension of a new international financial order is indeed at the heart of the challenges of the contemporary world.


The world today is confronted with an excessive money supply linked to the failure of the international financial organization to regulate a world that no longer has anything to do with the post-war world, which is now disparate. Without leadership, the international community has not been able to collectively create a discipline to regulate the issuance and use of money, which is essentially a collective good, and thus control its value. Attempts at reform by some leaders of international organizations after the Jamaica agreements, which put an end to the gold standard, proved futile. The zero interest rates that we experienced until last spring have come to an end, and the appointment with reality has arrived. Without any limit to its growth, the public debt, the one that finances the deficits of the States, has reached the prodigious level of 100,000 billion dollars, that is to say about 115% of the world GDP of 88,000 billion dollars in 2021. With no counterpart in real and profitable goods, this debt is, in fact, a non-value for those who hold it, either directly or in a hidden way through pension systems and other financial institutions. Without the process of transformation into profitable assets that we propose in this book, this debt without counterpart is not likely to remunerate its holders, either today or tomorrow. In our approach, we have taken the position that the contractual relations between economic agents should not be disrupted by a monetary reform centered on the public sphere. Our project aims only to correct the excess of public debt that disrupts and makes impossible the economic functioning that the markets should guide in a regulated framework. As it stands, the only choice for the holder of the debt is to hedge its value by placing it in financial instruments, expressed in the safest and most liquid currencies, guaranteed by a central bank. This system can only work on the basis of low or even negative rates. This policy is inherently unstable and risky. It has led to a quadrupling of the total balance sheets of the main central banks in ten years. This excess feeds the risk of potential inflation on fixed or liquid assets, which is only waiting to be triggered by the occurrence of an event.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,




In the end, holders of currencies and liquid assets without credible benchmarks hedge their risk with real assets. A fundamental reform reducing public debt will allow us to get out of the trap of rates constrained by the high level of public debt. The approach of hedging through productive projects that we propose could, in the spirit already historically initiated by the United States and France with the post-war stimulus packages, logically complement the approach with very low or simply subsidized long-term rates to finance long-term projects and the risk that accompanies them. Given that the entire economic and financial world is largely based on the activity of the four major currency zones—dollar, euro, renminbi, yen—it is in these zones that the effort must be deployed as a priority. The choice of unlimited growth of the money supply, daring because unprecedented, was made necessary by the long changes in the economic environment and, more recently, by the brutality of the pandemic crisis. This policy was unavoidable to save the productive system. Is it sustainable in the long run? This is the question that our era can no longer evade. We note that this monetary growth has allowed, after the profound halt in the volume of production of the last two years and the resulting crisis of monetary contraction, a global economic recovery that has reached unprecedented levels of production, but which has, at the same time, created shortages in many sectors of activity. There is no doubt in our mind that the only possible remedy to this excess of debt and liquidity—and to the resulting shortages, disorders and risks—lies in massive investment in profitable infrastructure and industries. The productive process generated by these new investments would give access to property rights on the future profits resulting from the implementation of the projects. This value created by the profits made will serve as a counterpart to the abandonment of their claims by private sector creditors, households and companies, in exchange for a right of ownership over the projects carried out and their profitability, after an exchange with the Central Bank. The exchange, conditional on the existence of new profitable assets, would, in the end, be nothing more than a Central Bank entry, whereas the latter, in fact, already largely holds the public debt. The sums exchanged would, in a way, be shifted from debts to investments. In this vein, China, with the Silk Roads, took the necessary initiative in 2013 that international institutions, and in particular public regional development banks, were unable to carry out. In the long term, China’s Silk Roads Initiative, the Belt and Roads Initiative (BRI) since 2017, is already well underway, with, by the end of 2021, $3.7 trillion in financing projects set up by a dedicated fund, the BRI Fund, which is soliciting specialized banks, notably the Asian Infrastructure Investment Bank (AIIB), to finance companies directly. To be eligible, projects must be located in one of 72 defined regions that cover almost the entire world, especially the emerging countries surrounding China, but also Europe, including Italy, Austria and Luxembourg in the West. We note that since its creation in 2016, 480.3 billion have already been committed by the AIIB while, for the same period, only 86.8 billion have been committed by the World Bank. To globalize and accelerate this process of massive investment, some 47,000 billion dollars of debt, already issued, can be exchanged for productive investment,



according to the scheme we have presented in this book v. Chapter 7, in order to reduce global public debt to 60% of world GDP. We estimate that putting the excess savings held by firms and households into circulation in the productive economic circuit will lead to a growth in GDP of at least 3% per year, or about 30% over 10 years. Over this horizon, world GDP should therefore evolve in the 115,000 billion. This increase in GDP will automatically reduce the public debt ratio to around 45%. Will the negotiators of a treaty thus have the necessary margin to take into account the diversity of debt situations and, above all, to obtain a consensus of all states on budgetary rules that are now binding? The opportunities exist and the investment process is already underway on a large scale, but too often remains limited to the territory of sovereignty, as we see with the United States’ infrastructure plan ($1.2 trillion) or the European investment plan with its 750 billion euros. The United States, on the other hand, has launched, with Japan and Australia, a bonding mechanism, called the “Blue dot network”, of strategic investments estimated at a total of 15,000 billion dollars. Its scope, however, will be limited by the monetary capacities of the banks of the countries concerned and the reality of trade, Japan’s trade surpluses are certainly significant, but they have become limited for the United States. Conversely, China, through its BIS projects, is recycling its massive trade surpluses. However, each major geo-economic area is planning vast infrastructure investment plans, a significant part of which will necessarily have an international and transcontinental dimension, given the very nature of infrastructure projects that can be spread over vast areas. Under these conditions, it seems difficult to imagine that the various countries will not be forced to negotiate among themselves to regulate and share their projects in regions of the world where they will inevitably meet. The Chinese mechanism is based on a monetary system which, operating in one of the largest economic areas in the world, can live on itself through its exchanges, even if it had to depend essentially, in its initial expansion phase, on its exports to the West. The Western world, on the other hand, has, in a way, achieved a form of collectivization of its economic universe through the action of artificially fixed administrative rates and the intervention of central banks, which guarantee, as a last resort, the public debts that irrigate the economic fabric and which have acquired, de facto, a monetary character, without which they would no longer be negotiable. The cohabitation of the two models, the Chinese and the Western, raises the question of relations between nations with regard to the challenge of a monetary reform in which each State and monetary zone must be able to exist with its own characteristics, but in a coherent system that takes note of the new realities of international trade. The new economic order that is unfolding carries a risk of fracturing the world, which would not benefit any of the actors. The idea of a negotiated compromise around a renewed monetary order should be a realistic solution. In our view, the creation of a universal standard is necessary to measure the solvency of national issuers, to settle international transactions, with the possibility, in the long run, of serving as a reserve value. A new anchor, therefore, which would allow a minimum of stability and order to be generated in global exchange rate movements, in a



context where the reign of the dollar is collapsing. A new agreement will have to establish the collective and individual limits to be set for issuers of instruments. A fixed exchange rate monetary system implies that the price is the adjustment variable of supply and demand and the price itself the result of the negotiated value of the currency. The value of the currency depends partly on the cost of its medium and essentially on the quality of the issuer (a State or a monetary zone). The value of this universal standard, moreover, can only be based on a limit to its duplication under the guidance of the central banks that will control its use. A treaty will have to determine the rules of fixity that allow the financial calculation of the profitability of investments (IRR) and facilitate the growth of trade as well as, when necessary (in the case of high inflation or other crises), the rules of adjustment. If the greenback is no longer destined to play the role of quasi-exclusive reserve currency, then it seems logical, given the technological evolution of financial markets, that a digital currency, defined by the major central banks, should become the universal standard that will serve as a regulator for this new monetary configuration. This prospect of setting up a digital monetary standard would only confirm an evolution that is already well underway. The major central banks of the international financial system have all embarked on central bank crypto-currency projects. Monetary reform is the only possible remedy to the disorder and risks generated by the gap between the real world and the virtual world represented by the new monetary space of M5 and M6 that records all exchanges and their prices. A reform that must complete what has already been accomplished in the framework of the high-level report, known as the “de Larosière Report,” which has allowed the international financial system to survive, thanks to a prudential mechanism that has contributed to avoiding the failure of systemic financial institutions undermined by excess liquidity. This excess of liquidity led to a considerable increase in the value of assets, while the real economy, as represented by the GDP figures, experienced only a small increase. The treatment of the debt and the reform of the monetary system must therefore be carried out simultaneously. The monetary system is the best framework for nations to redefine a new international order better adapted to the realities of the contemporary world. The transformation of debt that we propose, in a climate of threatening international tensions, is a peaceful response to the challenge facing states, which is not to renege on their word in the face of the commitments they owe, with the historical consequences that this would represent. The geopolitical dimension of a new international financial order is indeed at the heart of the challenges of the contemporary world.


Appendix A: The HTDA Project to Track Exchanges in a New Digital Monetary Universe The HTDA (HighTech Data Audit) project is directly based on the observation that: 1. companies, not banks, are the counterparties of any individual; and 2. money, as evidenced by a transaction includes any claim that can be transferred against immediate refinancing or an exchange. This is the M5—M6 theory developed in chapter four: “The two observation spaces within the two linked worlds of exchange.” The logical consequence of this observation is that the obligation of companies to keep books and records is extended to a global monetary space, that of exchange and its monetary representation. It is in this global space that companies must keep track of their data to feed the monetary monitoring system. In principle, companies recover ownership of the data of any transaction in which they participate. This is the integrity obligation. This scheme is largely realized in Europe through the tax declaration and invoice digitization obligations, all of which are deposited on an institutional platform by companies. The latter, for their part, have increasingly sophisticated tools to control and monitor their operations, thanks to the development of cross-referencing capabilities. This is the logic behind our HTDA (HighTech Data Audit) project, which is based on a, particularly, powerful data crossing software that offers professionals a complete vision of the interactions between the world of exchanges and the monetary space. A technology that secures exchanges and gives access to an almost unlimited mass of data for those involved in registered exchanges. This information process reinforces the monetary surveillance that we advocate insofar as the transactional data will ultimately be aggregated at the level of the surveillance agencies to produce the elements that make up M5 and M6. The company that provides the data will benefit from

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 J.-F. Serval and J.-P. Tranié, Financial Innovations and Monetary Reform, Future of Business and Finance,




a management tool that it will be the only user, except in the case of a judicial investigation for the presentation of evidence. It will be able to use a model for the processing and storage of its data. The first implementation cases were delivered in 2021. The collection through payment systems, storage and processing capabilities is such that granular transactions are tracked with detailed knowledge about individuals and companies. In addition to the democratic protection of freedom and business secrecy required by stakeholders, the HTDA system can naturally serve as a proof system of the reality of transactions. The HTDA project proves that all transactions are an endless chain in terms of their monetary aspect. In the accounting world, this is the “double display rule.” In the technological world of HTDA, all transactions are interrelated and readable in their many forms. Missing or incorrect correlation is located as an anomaly and the AI will determine the reason. The analyses are protected from public access which can be opened under judicial control in case of fraud.

Appendix B: Glossary ABS (Asset Backed Securities):

AMF (Autorité des marchés financiers): ANC (Accounting Standards Authority):


ARC (Accounting Regulatory Committee): Bancor:

A repayable financial instrument backed by a mortgage or asset. They are removed from the balance sheet by banks. French authority responsible for the regulation of listed securities and financial markets and issuers. French body with authority to transpose European regulations into French regulations and to give suggestions to international accounting standard setters. German supervisory board for the German audit profession. Equivalent to the PCAOB in the United States or the H3C in France. The CRA is part of the European Union’s accounting standards approval system. British economist John Maynard Keynes’ proposal was to create a world bank (the International Clearing Union, or ICU) that would then issue its own currency (the Bancor) based on the value of 30 representative commodities, including gold, exchangeable for national currencies at fixed rates. All trade accounts


Basel Committee (Basel Committee on Banking Regulation):

BCFP (Bureau of Consumer Financial Protection): BEA (Bureau of economic analysis): BIS (Bank for International Settlements):


were to be measured at the Bancor, while each country was to have an account at the ICU. Created within the Bank for International Settlements (BIS), this committee meets four times a year with four objectives. These are: strengthening the security and reliability of the financial system, establishing minimum standards for bank supervision, disseminating and promoting best banking and supervisory practices and promoting international cooperation in the field of prudential supervision. It is at the origin of the so-called Basel Accord which was implemented by a European directive applicable since January 2008. The following agreement called “Basel III” provides for a progressive application depending on the standard concerned. By definition, the United States, which is not bound by such a directive, has a website for monitoring its own regulations in the same direction and aims to comply with the standards of the Basel Committee of American banking institutions, since all BIS participants are members of this Committee. The current regulation known as Basel III (BCBS Basel Core Principles) was published in December 2017 and is called “Core Principles.” An American administration created by the socalled “Dodd Frank” law. U.S. government statistical organization. Publishes the National and Production Accounts (NIPA) of the United States. Created on May 17, 1930 to oversee war damage compensation, it is based in Basel, Switzerland. It is the bank of central banks. In addition to its role of clearing between central banks, it houses technical committees, notably statistical, as well as several international supervisory committees. These include the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors (IAIS). These committees, composed of regulators of the member countries, must develop supervisory rules that the


BoE, Bank of England:

BoF, Banque de France: BOG, Board of Governor:

BoJ: BRIC (country):

Bureau of Census:


CAE (Council for Economic Analysis): CBO (Congressional Budget Office): CDO (Collaterized debt obligation):


G20 countries have committed themselves to enforcing for their respective banking (Basel II and III) and insurance (Solvency II) sectors (press release from the G20 meeting in Toronto on June 26 and 27, 2009). Central Bank of England, Bretton Woods (Bretton Woods and Jamaica Agreements). The Bretton Woods agreements, signed in July 1944 by the 44 Allied nations of the Second World War, established a world currency: the dollar, redeemable in gold and with which any currency of the signatories was exchangeable. They also established a fixed exchange rate system (at 1%). These agreements succeeded the earlier pre-war agreements called the “Genoa Agreements” which included the pound sterling. The unilateral withdrawal of the United States in August 1971 ended them. The Bretton Woods Agreement also created the IMF (International Monetary Fund) and the World Bank. In 1976, the so-called Jamaica Agreement ended the fixed exchange rate system and gold as a reserve. French central bank, member of the European Monetary System. Board of Governors of the Federal Reserve System (United States). An agency of the Federal Reserve Bank of the United States. Central Bank of Japan. An acronym used by the FSB for Brazil, Russia, India and Korea. It is part of the EMDEs, the emerging high growth countries. U.S. government statistical agency under the Bureau of Commerce. It collects data on the United States and by state. Directive on bank recovery and resolution 2014/59 EU. Refers to the European Directive for Bank Resolution. Independent advisory committee to the French Prime Minister on economic issues. Office of the U.S. Congress responsible for assessing the appropriateness of budget plans. Debt security guaranteed by a third party.


CDS (Credit default swap):

Census Bureau: Central Counterparty (CCP):

CESR (Committee of European Regulators): CFTC (Commodity Future Trading Commission): Commercial paper (asset-backed): CRS (Congressional Research Service): CSF (Conseil de stabilité financière or Financial stability counsel): D SIB (Domestic systemically important banks): Deutsche Bundesbank, German Central Bank: DFA (Dodd Frank Wall Street Reform & Consumer Act):

DGS (Directive on Deposit Guarantee Schemes): DLT (Distributed Ledger Technology):


A financial instrument that guarantees the repayment of a debt by an exchange contract replacing the original signature with a new one in the event of default by the issuer. U.S. government statistical agency that collects U.S. statistical data. Central counterparty clearing house. This market organization assumes two functions; that of intermediary in a transaction, and that of compensation and settlement of the balance. This committee brings together the European stock exchange supervisors. U.S. authority responsible for overseeing derivatives markets. Repayable financial instrument backed by a guarantee on a portfolio of receivables. Service attached to the U.S. Congress. Succeeded the FSF in 2009.

These are the national systemically important banks. The FSB distinguishes globally important banks from domestic systemic banks. Member of the European single currency system. Passed by Congress on May 20, 2010, as a response to the 2007 crisis, with 10 titles and 848 pages, the Act strengthened oversight of U.S. financial markets and supervision of banks and insurers. The FED has been able to expand its role in the financial sector with orderly liquidation processes for bank assets, the creation of new agencies and increased powers for the FED to cover non-financial institutions in addition to banks. Directive that organizes the guarantee of 100,000 euros per account on cash deposits made with banks. Also known as “Blockchain.”


EBA (European Banking Authority):

ECB (European Central Bank):


ECON Commission: EFRAG (European Financial Reporting Advisory Group): EMDE (Emerging Markets and Developing Economies) EMH (Efficiency Market Hypothesis):


EMU (Economic and Monetary Union): ESM (European Stability Mechanism):


Based in Paris One of the three European supervisory authorities for the financial sector. With a Supervisory Board and a Management Board, it organizes stress tests and transparency exercises. It is now coordinated with the ECB through the colleges. Based in Frankfurt (Germany), it is the central bank of the 18 member countries of the euro zone and the ultimate supervisor of the European Union’s banking system. The European Central Bank, based in Frankfurt, Germany, is the central bank of the 18 member countries of the Eurozone and the ultimate super-supervisor of the European Union’s banking system. European Parliament Committee on Economic and Monetary Affairs. Independent committee advising the Commission and CRA on accounting standards. Acronym now used in FSB documents. It includes BRICS, China and all Asian countries. The assumption made by economists that markets can be perfect if they are transparent in determining the equilibrium price at which a financial instrument should be traded. Regulation 648/2012 on European market infrastructures. European regulation adopted in response to G20 commitments to regulate private clearing houses and to ensure that the registration and clearing of derivatives is done solely through them. Refers to the implementing treaties forming the euro zone. Created within the European Union as a stabilization mechanism linking the central banks of the zone. It is the equivalent of the IMF for the euro zone. It can support a member country in financial difficulty by buying debt securities or lending money. Its action is limited by agreements between the central banks in order to force member countries into fiscal discipline.


ESMA (European Security and Markets Authority): ETF (Exchange-traded funds): Euro:

Eurostat: FASB (Financial Accounting Standard Board): FCA (Financial Conduct Authority): FCA (Financial Conduct Authority):

FCA (Financial Council Authority):

FDIC (Federal Deposit Insurance Corporation):


One of the three European supervisory authorities for the financial sector. Based in Paris (France). Trust stock instrument traded as representing an asset. The Euro zone, created in 1991, is the monetary zone for those European countries that have adopted the single currency, the Euro. Today there are 17 of them: Germany, Austria, Belgium, Cyprus, Estonia, France, Greece, Finland, Hungary, Iceland, Italy, Luxembourg, Malta, Portugal, Slovenia, Slovakia and The Netherlands. All 27 members of the European Union are potential members of the Eurozone. The meeting of the Eurozone finance ministers is called the Eurogroup. The Eurozone has a population of 311 million. Statistical institution of the European Union, based in Frankfurt, Germany. Based in Norwalk, it is the U.S. accounting standard setter. The FCA’s mission is to protect consumers and markets, ensure proper implementation of regulations and guarantee competition. UK supervisory authority for financial markets and securities listing. On April, 2012, two new bodies replaced the FSA: the Prudential Regulation Authority (PRA), part of the BoE, to supervise the 1,700 largest financial institutions, and the Financial Conduct Authority (FCA) to protect consumers and markets, ensure proper implementation of regulation and guarantee competition. Created by the UK Services and Markets Act 2000, it is responsible for the quality of services provided to the UK financial community. It examines, through inspections, the quality of the audit work provided to British companies when they are listed on the stock exchange. Its reports are public. It is the entity that guarantees the deposits made by the American public in banks. It covers about 7 trillion U.S. dollars.


FED (Federal Reserve System):

Financial Services Division in charge of the administration of the European Commission: FIO (Federal Insurance Office):

Fire wall:


FSB (Financial Stability Board):

FSF (Financial Stability Forum):

FSOC (Financial Stability Oversight Counsel):


Created in 1913, it is based in Washington (USA). It brings together the central banks of each of the states that make up the United States. It includes some of the most important commercial banks. An essential part of the European Union’s effort to complete the internal market within the framework of free movement of capital. This is a new agency resulting from the socalled Dodd Frank law. It operates within the U.S. Treasury Department and collects statistics on the insurance sector and raises the appearance of systemic risks when necessary. It also represents the United States in international negotiations, while the States are still directly responsible for regulating this sector. A mechanism designed to stop financial contagion due to price or value failures. It must have a trigger mechanism (e.g., collapse of a key counterparty, violation of transactional pricing value over a defined period of time (stock prices). There must be a previsional rescue and exit mechanism and process. Market switches and circuit breakers are possible elements of these mechanisms. An electronic platform for trading and hedging currencies with standardized contracts. Trades $6.6 billion per day (2019). 88% of contracts are for $, 32.3% for Euro, 16.8% for Yen. The FSB was created to organize the international coordination of supervisory bodies and the monitoring of systemic risks and regulation. Based in Basel, with the BIS. A cooperative organization created in 1999 at the international level to promote financial stability. Initially, twelve central bank representatives met. It was created by the Dodd Frank Act within the U.S. Treasury Department and comprises 10 regulators for coordination purposes. It covers both the banking and non-banking financial sectors. It has the power to deem an institution to be a systemic risk and to decide


G7 and G20:

GAO (Governmental Accounting Office):

GATT (General Agreement on Tariffs and Trade): GDP (Gross Domestic Product):


whether to dismantle it. Works with the Office of Financial Research. The Group of 7 was created at the Rambouillet summit (France) in 1975. It brings together the 7 most industrialized countries as they were classified by the Bretton Woods agreements, the United States, the United Kingdom, Canada, Germany, France, Japan and Italy. This gathering became the G8 with the accession of Russia, which had been present since 1994 but only joined in 1997, and then the G20 on September 25, 1999, with a meeting in Washington in which new members participated: China, Brazil, India, Turkey, Australia, Chile, Poland, Pakistan, Saudi Arabia, Mexico, South Africa and Nigeria. Since the 2007 crisis, the G20 has become an institutional body, meeting at least once a year on a working agenda, with the IMF Managing Director and the European Commission. The decisions taken in this body are made public through press releases. The U.S. Government Office is an independent, non-partisan agency that works for Congress. It is often referred to as the “watchdog of Congress.” The GAO investigates how the federal government spends taxpayer dollars. The GAO is essentially the comptroller for collections and expenditures and an auditor for budget performance reports. It also acts as a tribunal for claims regarding the bidding process. Created in 1947 to reduce trade barriers, it is the predecessor of the World Trade Organization. It is the addition to the market value of the output produced and services provided by a country’s residents and goods during a year. A distinction is made between GDP at current prices and GDP deflated by the PPI. Comparisons are difficult because of the different cost-of-living structures between countries. For this reason, most of the statistics provided


G-SIB (Global systemically important banks):

G-SII (Global systemically important insurers):

IAG. Inter Agency Group:

IAS (International Accounting Standards):

IASB (International Accounting Standards Board):

IFAC (International Federation of Accountants):


IFRS (International Financial Reporting Standards):


(see the IMF’s October 2012 Global Outlook) are given as a percentage change from the previous year. These are the banks of global systemic importance. The FSB organizes the regulation of banks by separating systemic banks from small banks. These are the insurers of global systemic importance. Same as for banks, but within the framework of Solvency for insurance companies. G20 Interagency Group on Economic and Financial Statistics. It includes the BIS, the ECB, Eurostat, the IMF, the OECD, the World Bank, the UN and the FSB Secretariat. Accounting standards issued by the IASB. These are the most widely used standards in the world and outside the United States, which uses the standards issued by the FASB. International accounting standard-setting body based in London. This Board sets accounting standards that the professional bodies of CPAs and equivalent in most countries have decided their member auditors should use when they do not use national standards or when required by law (primarily for listed companies or companies that issue financial instruments). Typically, many countries and political unions such as the European Union subject the endorsement of these standards to a single transposition process. Bringing together most of the national professional accountancy bodies in New York, this institute plays a key interface role with regulators and international institutions. National institutes typically commit to following the rules established by IFAC for the governance, education and ethics of the CPA profession worldwide. The International Forum of Independent Audit Regulators comprises 46 independent regulators. Accounting standards issued by the IASB.


IMS (International Monetary System):

INSEE (Institut National de la Statistique et des Etude Economiques): IOSCO: IPSAB (International Public Sector Accounting Standards Board):

ISDA (International Swap and Derivatives Association):

Level 1

Level 2


Liquidity Ratio:


Refers to the rules and institutions for international payments. According to the IMF, “these include countries’ monetary regimes, the rules for intervention if an exchange rate is set or managed in some way, and the institutions that support these rules when problems arise (through official credit controls or party changes).” Based in Washington, DC. Is a public organization responsible for national statistics. International Organization of Securities Commissions. Supported by IFAC, IPSAS sets the International Public Sector Accounting Standards (IPSAS). As a private organization, although the IMF, the United Nations, the OECD and the World and European Community (EC) Commission jointly participate in the work of the Board, no nation individually commits to implementing their developed standards. Private organization created in 1995 and grouping the main private institutions dealing with derivatives. Manages standardized and complementary contracts. Based in New York (main office). A category of long-term financing considered by supervisors to be permanent. Equities are included in this category, but other instruments that are not callable by the holders can be assimilated to perpetual bonds with coupon subordination (LT 2 Lower Tier 2). Long-term financing considered by the regulator to be permanent or supplementary to permanent. Usually unclaimed. Political-economic position according to which individual initiative must be left free of governmental limitations. Theory developed by Robert Nozick and Charles Murray in the twentieth century. LEM (Leverage Exposure Measure Ratio) required of banks by Basel III with the objective of protecting banks by stable refinancing liquidity coverage (Liquidity Coverage Ratio and The Net Stable Funding Ration).


LTRO (Long Term Refinancing Operations):

MBS: MFIs (Financial Market Infrastructures):

MGI (McKinsey Global Institute): MICA (Regulation Market in crypto assets):

MIFID (Markets in Financial Instruments Directive): MIGA (Multilateral Investment Guaranties Agency): Modern Monetary Theory:

MOFAs (Majority Owned Affiliates):


Long-term refinancing operation. Linked to the ECB’s monetary policy, this operation consists of buying public debt on the secondary market. It is the European equivalent of the quantitative easing (QE) policy of the U.S. Federal Reserve. Mortgage Backed Securities, Financial instruments backed by real estate. They provide services that are essential to the functioning of financial markets, such as systemically important payment systems, trading liquidity support platforms, clearing of exposures such as interest rates, credit default risk and settlement with counterparties and securities settlement facilities. MGI is the business and economic research arm of McKinsey & Company. The European Union’s MICA Directive on crypto assets aims to unify the market for crypto assets and the market for service providers, custodians, marketplaces and traders. This directive establishes a licensing regime for “CASPs” (license for cryptoasset payment service providers—Chapter 1 article 57 and 59). This directive passes the responsibility for its implementation to ESMA.EU 2019/1937with a deadline of 2024. It establishes a legal regime for all crypto assets and separates stable coins and ICOs. European Union Directive on Markets in Financial Instruments, 2004/39/EC 13. Multilateral agency member of the World Bank Group. The monetary theory developed by Georg Friedrich Knapp in “The State Theory of Money” (1905) and Alfred Mitchell Innes in “Functional Finance Proposals” whereby government deficits are not a problem because newly issued money is not a problem as long as there is still unemployment and will ultimately return to the central bank. Refers to reports to be filed by U.S. companies.


NBFI (Non-Banking Financial Institutions): NIPA (National income and product accounts): NSFR (Net stable funding ratio or long-term structural liquidity ratio): OCC (Office of the Comptroller of the Currency): OECD (Organization for Economic Cooperation and Development):

OFI (Other Financial Institutions): OFR (Office of Financial Research):

OMB (Office of Management & Budget):


A definition used to describe the players in lending and investment institutions that are not subject to banking regulation. U.S. System of National Accounts. Means the net stable funding ratio. Acronym used by the Basel Committee and the FSB. One of three U.S. banking agencies along with the Federal Reserve System Board (FDRS) and the Federal Insurance Corporation (FDIC). Created by treaty in September 1961 and based in Paris, it is the successor and result of the administration of the Marshall Plan to rebuild Europe after World War II. With a staff of 2,500 and 34 member countries, including the United States and Canada, it now spans an area larger than Europe. Its declared objective is to build a stronger, cleaner and fairer world. The production of its statistical service and its economic studies service were of great help for our project. These are financial and credit institutions that do not fall under the legal definition of a bank. Established within the Treasury Department by Dodd Frank, in 2010, the OFR is composed of two sections. A data center and a research and analysis center. It must provide the FSB with the flow of information necessary to carry out its supervisory functions. The DRAO has subpoena powers. U.S. Civilian Administration to assist the President of the United States in the development and execution of the federal budget, and to complement his vision across the executive branch. OMB is the largest component of the Executive Office of the President. It assists a wide range of federal government departments and executive agencies in implementing the president’s priorities. Among five offices, one is charged with improving performance, another with procurement efficiency and another with developing e-government.


ONS (Office for National Statistics): Physiocrats:

PPI (Producer Price Index): QAR (Quality Assurance Review): QE (Quantitative Easing):


RRI (Resolution Reform Index):

RWA (Risk Weighted Assets):

S&L (Savings & Loans):



An independent British statistical agency founded by the contractor. Philosophical movement founded by the French economist François Quesnay, according to which economic development must be based on agricultural production (see François Quesnay bibliography). Index to deflate current prices from inflation. EBA regulations require banks to undergo an asset quality review (AQR). Policy pursued by the FED and other central banks (Chinese, Japanese and European) consisting of buying debt on the financial market in order to provide liquidity and to steer rates. Contraction of Sale and Repurchase Agreement, where two parties agree to sell certain assets as collateral for a loan to the other party and to reverse the transaction at a specified future date. Index for organizing a bank liquidation. To avoid the contagion of a bank failure, the Financial Stability Board (FSB) has prescribed a framework regulation that regulators must impose in the order of priority of a bank’s creditors in the event of a failure. For systemic banks, this means that they must provide a liquidation plan in case of difficulty. This plan provides that the bank has enough money in its balance sheet (capital and reserves) to pay off its creditors (the bail-in). Only then are the assets sold. This index has 3 sub-indices of equal weight. Corresponds to the risk-weighted valuation of banks’ on- and off-balance sheet financial portfolios. It is used by the supervisory authorities to implement capital adequacy or leverage limits and for stress testing. These U.S. banking institutions specializing in housing loans are under the supervision of the Home and Housing Department. Sampling in this book refers to the use of a fixed physical unit of reference, a standard, to measure a traded good or service. It requires


SDR (Special Drawing Rights):

SEC (Securities & Exchange Commission): SEFM (Single European Financial Market):

SMU (Single Market Union):

SNA (System of National Accounts):

Speed (of circulation of money):

SSM (Single Supervisory Mechanism):


the use of numbers. Weight or lengths are sample units. Time is not. Instrument created by the IMF and given by the latter institution to Member central banks to refinance their needs. Its parity is determined by a basket of currencies whose proportion and value are readjusted every 5 years. U.S. agency that oversees and regulates securities markets and issuances. Its headquarters are in Washington, DC. An ESMA-led project to unify financial markets in Europe (single resolution mechanism). Organize the resolution and recovery processes “resolution assessment process” and its oversight for systemic banking institutions and European cross-border banks. It is associated with (1) a Single Resolution Board (SRB) with appropriate authority over National Resolution Authorities (RAs) to regulate a resolution process and a Single Resolution Fund (SRF) to finance the process if needed. A project of the European Commission is to organize a single market in euros for the trade of financial instruments. The Commission’s objective is both to standardize trade in these instruments and thus to deepen the market. In 2008, the United Nations Statistical Commission approved the System of National Accounts, which validates the practice of quadruple entry. It is a comprehensive system of macroeconomic statistics that captures integrated and consistent information on the economic activities of all residents as well as non-residents. This is the number of times a unit of currency is traded over a given period. Tracking is typically done with M1 and M2 relative to GDP (see Federal Bank of St. Louis Research Center). Refers to the European Union’s new mechanism for coordinating fiscal policies and the banking system within the euro area. The ECB is responsible for operating this supervisory



TLAC (Total Loss Absorbing Capacity):



UNCTAD (United Nations Conference on Trade and Development): USITC (United State International Trade Commission): WFE (World Federation of Exchanges):

WTO (World Trade Organization):


mechanism through a dedicated Supervisory Board (SB). In the monetary world, it is the action of the Institute of Monetary Issuance to stamp a number on a monetary instrument to represent the number of units in the currency that the instrument represents. Stamping is usually a privilege granted by constitutions. Loss-absorbing capacity. To avoid the contagion that would result from the failure of a financial institution on other institutions or banks, the Basel agreement has provided for a commitment by the supervision authorities to ensure that the institutions under their supervision, depending on whether or not they are G-SIBs, comply with minimum coverage ratios based on the TLAC. European parliamentary mechanism through which the European Union, the Commission, the Council of Ministers and the Parliament reach agreement on a draft regulation or directive. A Russian word for a carriage drawn by three horses. In this context, it is the gathering of the European Commission, the ECB and the IMF organized with experts to monitor the financial crisis of some European countries in difficulty to which loans were granted under conditions (Greece, Ireland and Cyprus). United Nations organization that monitors the evolution of commercial forms of distribution. U.S. civilian agency responsible for investigating international trade with the United States and competition. World Federation of Stock Exchanges. Association of 154 stock exchanges worldwide. Provides statistics and information on listings, capitalizations and trading. Based in London. It is both a statistical agency that collects data on international trade and a forum for the settlement of trade disputes. Based in Geneva.



Appendix C: List of Central Monetary Institutions International organizations Bank for International Settlements (BIS)*

European Central Bank (ECB)*

European Commission (EC)*

International Monetary Fund (IMF)*

Organization for Economic Coordination and Development (OECD)*

The World Bank*

International standards bodies and other groups Basel Committee on Banking Supervision (BCBS)*

Committee on the Global Financial System (CGFS)*

Committee on Payment and Settlement Systems (CPSS)* Financial Action Task Force on Money Laundering (FATF)(EC)

International Association of Insurance Supervisors (IAIS)*

International Accounting Standards Board (IASB)*

International Organization of Securities Commissions (IOSCO)

International Deposit Insurance Association

Argentina Banco Central de la República Argentina*

National Committee of Values

Ministry of Economy and Public Finance

Australia Reserve Bank of Australia*

Australian Securities and Investments Commission

Australian Prudential Regulation Authority

The Treasury*

Brazil Banco Central do Brasil*

Securities and Exchange Commission*

Department of Finance*

Canada Bank of Canada*



Canada Deposit Insurance Corporation

Ontario Securities Commission

Office of the Superintendent of Financial Institutions*

Department of Finance*

Canadian Securities Administrators

Autorité des marchés financiers, Quebec

China People’s Bank of China*

China Banking Regulatory Commission*

Department of Finance*

France Bank of France*

Autorité des marchés financiers*

Ministry of the Economy*

Germany Deutsche Bundesbank*

Federal Financial Supervisory Authority*

Bundesministerium der Finanzen*

Hong Kong RAS Hong Kong Monetary Authority*

Office of the Commissioner of Insurance

Securities and Futures Commission

The Treasury

India Reserve Bank of India*

Securities and Exchange Board of India*

Department of Finance*

Indonesia Bank Indonesia*

Supervisory Agency for Capital Markets and Financial Institutions (BAPEPAM)

Ministry of Finance

Italy Banca d’Italia*

Institute for the Supervision of Private and Group Insurance (ISVAP)

National Commission of Companies and Stock Exchange*

Ministry of Economy and Finance*




Bank of Japan*

Financial Services Agency*

Department of Finance*

Korea Bank of Korea*

Financial Services Commission*

Ministry of Strategy and Finance

Mexico Banco de México*

National Banking and Securities Commission

Ministry of Finance and Public Credit of Mexico

The Netherlands De Nederlandsche Bank*

Autoriteit Financiële Markten

Ministerie van Financiën*

Russia Central Bank of the Russian Federation*

Federal Financial Markets Service (FMS)*

Department of Finance*

Saudi Arabia Saudi Arabian Monetary Agency

Ministry of Finance

Singapore Monetary Authority of Singapore

Department of Finance*

South Africa South African Reserve Bank

Financial Services Commission

Department of Finance*

Spain Banco de España*

National Securities Market Commission

Ministry of Economy and Competitiveness*

Switzerland Swiss National Bank*

Swiss Financial Market Supervisory Authority

Federal Finance Administration*

Turkey Central Bank of the Republic of Turkey*



Banking Regulation and Supervision Agency

Ministry of State for the Economy

Accounting Standards Board of Turkey

The Financial Markets Council of Turkey

The Under-secretariat of the Treasury guest_user=treasury

Turkish Financial Intelligence Unit (MASAK)

The Savings Deposit Guarantee Fund

United Kingdom Bank of England*

Financial Services Authority*

HM Treasury*

United States of America Canada Deposit Insurance Corporation (CDIC)

Office of the Comptroller of the Currency (OCC)

Board of Governors of the Federal Reserve System*

Federal Reserve Bank of New York

U.S. Commodity Futures Trading Commission

National Association of Insurance Commissioners (NAIC)

U.S. Securities and Exchange Commission (SEC)*

United States Department of the Treasury*

*Indicates the presence of a representative in the FSB


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