In This Article:
- What is a modern monetary system, and how does it work?
- How could Central Bank Digital Currencies change the way we manage money?
- Why is our current financial system outdated?
- What lessons can we learn from countries testing CBDCs and other innovations?
- How would Fed accounts and streamlined Treasury operations benefit individuals?
How a Modern Monetary System Can Transform the Economy
by Robert Jennings, InnerSelf.com
The financial system we use today is a relic of a time long gone—a time before computers, instant communication, and modern technology. The Federal Reserve, the central institution in managing the economy, still operates with structures designed for a pre-digital world. Back then, processes were manual, transactions were slow, and communication delays were common. Banks and financial intermediaries, such as primary dealers, were essential to fill these gaps.
In that era, these intermediaries served a purpose. Commercial banks connected individuals, businesses, and governments to the broader financial network. Primary dealers acted as intermediaries between the Federal Reserve and the financial markets. These roles were critical when settlements took days, and communication meant paper trails and face-to-face interactions. But we’re no longer living in that world.
The tools of the digital age have transformed how we communicate, transact, and manage complex systems. Yet, the financial system has barely evolved. This outdated framework introduces inefficiencies and inequities that persist despite the advances we’ve made in technology. It’s time to question why we continue to use a system built for the early 20th century when the 21st century offers us far better options.
How the Fed Creates Money Today
To understand why the system needs reform, we first have to look at how the Federal Reserve creates money today. The process might sound mysterious, but it boils down to a few key mechanisms.
The Fed doesn’t "print money" in the literal sense. Physical cash is produced by the U.S. Treasury. Instead, the Fed creates money digitally through tools like open market operations (OMO). In these operations, the Fed buys U.S. Treasury securities from financial institutions. When the Fed makes these purchases, it credits the reserves of the seller’s bank. This digital credit is money that didn’t exist before—it’s created out of thin air.
These reserves form the foundation for the banking system to lend more money. Under the fractional reserve system, banks can lend out a multiple of the reserves they hold. This creates more money in the economy, expanding the money supply. It sounds efficient in theory, but there are major limitations.
The first issue is dependence. The Fed relies on commercial banks to use these reserves for lending. But during crises, banks often hoard reserves instead of lending them out. This bottleneck can stall the Fed’s efforts to stimulate the economy. The second issue is access. The benefits of this system are concentrated in the banking sector and large financial institutions, while ordinary people see little direct impact.
There’s also a legal barrier. The Fed cannot directly fund government spending or interact with individuals. Instead, it operates through a network of primary dealers—large financial institutions that profit from trading government debt. These intermediaries add layers of cost and complexity that are unnecessary in today’s world of instant communication and digital platforms.
Why the Current System No Longer Works
The current system isn’t just outdated—it’s inequitable, inefficient, and unnecessarily complex. At its heart, the system depends on intermediaries like banks and primary dealers to carry out functions that technology could perform directly. This reliance creates two major problems: inequity and inefficiency.
First, let’s talk about inequity. The current system disproportionately benefits large institutions and wealthy investors. These entities have access to low-risk, high-return government bonds and enjoy privileged relationships with the Federal Reserve. Meanwhile, everyday Americans have limited options for safe, high-yield investments. Most people are stuck with savings accounts that offer minimal interest or are forced to take on risk in volatile markets.
Next is inefficiency. When the Fed adjusts interest rates or takes other actions to manage the economy, the effects must trickle through banks and financial markets before reaching consumers. This process can take months, diluting the impact of monetary policy. In a crisis, this delay can prolong economic pain, as we saw during the 2008 financial meltdown and the COVID-19 pandemic.
Modern technology makes these inefficiencies unacceptable. Instant communication, digital payment systems, and blockchain technology could replace many of the intermediaries that slow down and complicate the system. The tools for a more direct, efficient framework are already available.
A Vision for a Modernized Monetary System
The Federal Reserve could interact directly with individuals and businesses. Instead of relying on commercial banks to lend money or primary dealers to buy government debt, the Fed could create a system that serves everyone, not just a select few.
One of the most transformative ideas is allowing individuals and businesses to hold accounts directly with the Federal Reserve. Think of it as a public banking option. These accounts would offer risk-free savings, as they would be backed by the central bank itself. Interest rates could be set by the Fed, providing a safe and attractive alternative to private banks.
Imagine receiving stimulus payments directly into your Fed account during a crisis. No delays, no middlemen, no waiting for Congress to debate how to distribute funds. Payments would be instantaneous and universally accessible. This system could also help people who are unbanked or underbanked—those who currently lack access to traditional banking services. By offering Fed accounts, we could ensure that everyone has a secure place to save money, make payments, and participate in the economy.
Another game-changing idea is streamlining how the government issues debt. Today, individuals can buy Treasury bonds through programs like Treasury Direct, but the process is cumbersome and underutilized. By integrating Treasury investments into Fed accounts, individuals could easily invest in government bonds, earning stable returns without needing a broker or financial adviser.
This approach would democratize access to safe investments, allowing ordinary Americans to benefit from the stability of U.S. government debt. It would also simplify the government’s funding process, reducing costs and increasing transparency.
With a direct Fed system, monetary policy could be far more effective. For example, the Fed could adjust interest rates on Fed accounts to encourage saving or spending, depending on economic conditions. It could also implement targeted measures, like raising rates for high-income savers while offering lower rates for low-income households. This flexibility would make monetary policy more responsive and equitable.
Addressing Challenges and Resistance
Of course, such a transformation wouldn’t come without challenges. The first major hurdle is resistance from the banking sector. Commercial banks profit immensely from their role as intermediaries in the current system. They earn money from deposits, fees, and lending operations. A direct Fed system would threaten their business model, leading to significant pushback.
Inflation is another concern. Critics might argue that allowing the Fed to directly deposit money into individual accounts or fund government operations could lead to runaway inflation. However, this risk can be managed through careful controls, such as adjusting interest rates or setting strict limits on money creation.
Then there’s the legal framework. Current laws prohibit the Fed from directly interacting with individuals or underwriting government debt. Changing these laws would require bold legislative action, which can be difficult in a polarized political environment. However, history has shown that transformative change is possible when the benefits are clear.
Some Countries Are Modernizing
Several countries are already experimenting with elements of a modernized monetary system, providing valuable insights into how these ideas might work in practice. These initiatives primarily involve Central Bank Digital Currencies (CBDCs) and central bank involvement in underwriting government debt. While no nation has fully implemented the direct individual account or streamlined Treasury support model outlined here, these efforts represent steps in that direction and demonstrate both the potential and challenges of such changes.
One of the most prominent areas of exploration is the development of CBDCs. These digital versions of a country’s fiat currency are issued and regulated by central banks, aiming to provide a secure, efficient means of payment and potentially allow citizens to interact directly with the central bank. The Bahamas, for example, was one of the first nations to launch a CBDC, introducing the "Sand Dollar" in 2020. This system enables residents to use digital wallets linked to the central bank, facilitating transactions without relying on traditional banking institutions. Similarly, Nigeria launched its eNaira in 2021, a digital currency designed to enhance financial inclusion and create new pathways for economic activity, though adoption has been gradual.
China has also been a trailblazer in this space, rolling out its Digital Currency Electronic Payment system, known as the digital yuan or e-CNY. The program has expanded to pilot cities and even international markets, such as Hong Kong, where local shops began accepting the digital yuan in 2024. These initiatives demonstrate the feasibility of central banks providing digital alternatives to cash, though public adoption and education remain significant hurdles.
In addition to CBDCs, some countries are taking steps to directly support government debt through central bank interventions. Japan is a striking example, with the Bank of Japan (BOJ) purchasing massive amounts of government bonds to maintain low-interest rates and stabilize the economy. By 2018, the BOJ owned more than 40% of Japan’s outstanding government debt. This level of direct support has provided insights into how central banks can manage government funding in a controlled environment, though it raises concerns about inflation and the blurring of fiscal and monetary policy boundaries.
China, too, has taken direct steps in this direction. In 2024, the People’s Bank of China (PBOC) purchased billions of yuan in long-term government bonds to manage cash flow conditions and stabilize domestic debt markets. Such interventions highlight the potential for central banks to act as a more active partner in government financing while offering a preview of the challenges involved.
These examples illustrate that parts of the modernized monetary system we envision are already being tested. From digital currencies offering direct public interaction with central banks to central bank involvement in government debt markets, the groundwork is being laid. However, these efforts also underscore the complexities of implementation, including the need for robust technological infrastructure, public trust, and careful management of inflationary pressures. They provide a glimpse of what a 21st-century monetary system could look like, offering lessons for countries like the United States to consider as it evaluates the future of its financial system.
Modernizing our financial system will require a combination of legislative reform, technological innovation, and public education. Congress must authorize the Fed to implement direct accounts and support streamlined Treasury operations. At the same time, we need secure digital platforms capable of handling real-time transactions.
Educating the public is also crucial. Many people distrust financial institutions and government programs, often because they don’t understand how these systems work. By explaining the benefits of a modernized Fed—lower costs, increased financial inclusion, and more effective monetary policy—we can build broad support for these changes.
Globally, this shift could position the United States as a leader in monetary innovation. Other countries are already exploring central bank digital currencies (CBDCs) and similar reforms. If we act now, we can set the standard for a 21st-century financial system.
To summarize the financial system we use today was built for a world that no longer exists. It reflects a time when communication was slow, transactions were manual, and intermediaries were indispensable. But today’s technology has rendered these limitations obsolete. We now have the tools to create a system that is efficient, equitable, and transparent.
By allowing individuals to hold accounts at the Federal Reserve, earn interest, and invest directly in government debt, we could democratize access to financial benefits and make monetary policy more effective. These changes wouldn’t just streamline the system; they would transform it, ensuring that everyone—not just the wealthy and well-connected—can share in the prosperity of the economy.
The question is no longer whether such a system is possible. It is. The real question is whether we have the will to embrace the future and leave behind the relics of the past.
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About the Author
Robert Jennings is co-publisher of InnerSelf.com with his wife Marie T Russell. He attended the University of Florida, Southern Technical Institute, and the University of Central Florida with studies in real estate, urban development, finance, architectural engineering, and elementary education. He was a member of the US Marine Corps and The US Army having commanded a field artillery battery in Germany. He worked in real estate finance, construction and development for 25 years before starting InnerSelf.com in 1996.
InnerSelf is dedicated to sharing information that allows people to make educated and insightful choices in their personal life, for the good of the commons, and for the well-being of the planet. InnerSelf Magazine is in its 30+year of publication in either print (1984-1995) or online as InnerSelf.com. Please support our work.
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This article is licensed under a Creative Commons Attribution-Share Alike 4.0 License. Attribute the author Robert Jennings, InnerSelf.com. Link back to the article This article originally appeared on InnerSelf.com
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Article Recap:
This article delves into the potential of a modern monetary system and Central Bank Digital Currencies to transform money management. It explains the inefficiencies of the current system, explores how direct Fed accounts and Treasury integration could improve access and equity, and highlights real-world examples from countries like China and Japan. These ideas promise a fairer, more efficient financial future.
