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The Monetary System: Analysis and New Approaches to Regulation


An important guide to how money works and a new model for financial health

The recent global financial crisis raised questions on how to balance actions based on short-term decision making against the uncertainty of impending long-term change in the economic environment. The Monetary System outlines the conceptual basis required to build a new and more stable financial system, paving the way for an economic policy model that places emphasis on rotation – rather than on inventories – of financial instruments that would result in improved policies.

In this important text, Jean-François Serval and Jean-Pascal Tranié explore the historical context of money and reveal how transactions work in today's global economic environment. The Monetary System is a compelling work that answers a number of key questions about our current financial situation: What underpinning of democratic society facilitated a transition to the uncontrolled creation of money? What were the major drivers and what are the consequences that characterize the current economic impasse? How can one forecast future trends? What can be done to "fix" the present economic system?

Based on exhaustive research, the book offers an overview of the present economic situation throughout the world that is defined by slow growth, rising debts, and low inflation. The authors envision a healthy economic future and put forward a new model for the global economy.

The Monetary System is a comprehensive resource that gives banking professionals, auditors, financial advisors, policy makers, as well as others interested in the topic, keen insight into our current economic situation and offers an understanding of the factors that can help shape a sound financial future.

JEAN-FRANÇOIS SERVAL is President of Serval & Associés, a European accounting practice, and founder and head of United States operations of Constantin Associates, a multinational accounting firm. He is a member of the European League for Economic Co-operation and the International Fiscal Association.

JEAN-PASCAL TRANIÉ is President of Aloe Private Equity. He has held senior executive positions at Veolia Énergie and was head of Vivendi's Media and Multimedia divisions, before becoming CEO of the Viventures Partners venture capital arm.

List of Figures xi

List of Tables xiii

Acknowledgements xv

Foreword And Introduction xvii

Chapter 1
From Antiquity to Modern Times; Monetary Development Over 5000 Years What History Explains and Comparison within New Contexts 1

The Origin of Money; From Antiquity to Modern Times 1

A Metallic System Allowing Intrinsic Measurement

Stamping: Ingots to Coinage 2

Grounding the Guarantees of Stamping: From an All-Metallic

System to Paper Bills 3

The Rise and Fall of Civilizations 5

What Can We Learn from Ancient and More Modern History? 9

Questions and Answers 11

Chapter 2
Modern Times - Liberation and Growth of the Money Supply The Facts Presented in Monetary Units and Resulting Regulatory Needs 13

Monetary Evolution Backed by Economic Growth 14

Development of a Global Financial Market Economy 15

Citizens Emerging in the Process of Financialization 20

The Realities 20

Causes Underlying Emerging Macroeconomic Realities 22

Resulting Needs for Standardization, Regulation and Supervision 23

Questions and Answers 25

Chapter 3
Past and 21st-Century Money Analysis 27

Defining “Today’s Money” 27

Money Defined by its Functionality 27

The First Function: Price Setting -Money as a Measurement Standard]Based Source of Information 29

The Second Function: A Payment and Trading Instrument 36

The Third Function: A Reserve 36

Links between Monetary Functions 37

The Intrinsic Definition of Money 38

A Trifunctional Monetary Support System 38

How To Ground Trust In Money: Audited Financial Statements For Government and Central Banks 43

Seignorage and the Privilege of Issuing and Stamping Money 43

Traditional Seignorage in General 43

The Modern Seignorage Privilege 44

Legal Tender and Seignorage 47

Evolution of Money into a Segregated Intermediation Tool with Imprecise Frontiers 47

Linguistic Definition of the Word “Money” 47

Money Today 48

The Demise of Traditional Conceptual Approaches 50

The Operational Scope of Money and its Use 52

The Extension of Money with Disintermediation 53

Direct Financing and Hedging of Risk 53

Replacement of Bank Loan Financing by Securitization and the Impact of Pro-cyclical Effects 54

The Origin of Securitization 54

The Securitization Concept and Its Implementation 56

Securitization Financing via Trust-Derived “Shadow Capital” Originating from Retirement Accounts, Direct Savings and Trade Deficits 58

Guarantees on Receivables: A Securitization Multiplier 59

Extending the Field of Debts and Guarantees 60

Deviations from Effective Risk Control: The CDS Case 61

Towards the Full Liberation of Money from Any Referential 62

Guarantees and the Extension of Monetary Instruments Liberated from Unified Backing and Issuance Constraints 64

Monetary Effects of Guarantees 65

Shadow or Parallel Banking Systems 65

Before Accounting for Any Transaction -The Sampling Topic The Mix Up between Numbers and Formulae 70

Questions and Answers 72

Chapter 4
The Contemporary Basis for Money Expression: Accounting Ledgers 77

Book Balances are Either Money or Potential Money 77

A Single Worldwide Language; Accounting and Financial Statements 78

The Consistency-Based Principle of Bookkeeping 78

The “Double-Posting” Principle 79

Consequences of the Basic Accounting Principles 80

Concepts and Rules to Report Exchanges and Determine the Image of Financial Statements 81

The Image Presented by Financial Statements Influences the Analysis of Economic Data and Transactional Exchanges 88

Direct Systematic Impact of Accounting Standards 91

Double-Entry Consequence 91

Value Consequence 91

Where Misleading Standards Generate Distorted Images 91

Valuation Incertitude in Accounting Standards 91

The Appraisal Spark Plug that Drives a Continued “Fair Value” Crisis 92

Monetary Aspects of Financial Statements 93

The Necessary Approach in Accounting: A Hierarchy of Dangerousness 95

Degrees of Contagion (“Interconnection”) 96

The Fair Value Conceptual Mistake Contributes to Instability and Distrust 97

A Need for Mathematical Approaches 98

Questions and Answers 99

Chapter 5
The Regulation and Observation Limits Already Accepted, Compared with the Realities of Modern Exchanges 103

Monetary Regulation and Follow-up 103

A Retrospective Analysis of Classic Money in Operation 103

Governmental and Central Bank Monetary Operations 104

Inception, Monopolies and Measurement Aggregates as Classical Mechanisms for Issuing Money 104

Traditional Monetary Aggregates 105

Monetary Aggregates in Central Banks 106

Accepted Concepts that Complement Traditional Monetary Analysis - Limits and Evolution 107

From the Known Money Multiplier through the Banking System to a New Perspective 107

Traditional Regulatory Measures to Ensure Banks’ Stability Limits 109

Money Issuance through Central Bank Interventions 109

The Investment Multiplier 110

Following Up on Regulating Money Issuance in a Changed Economic Environment Monetary Supervision: An Ancient Question 111

The Present-Day Non-utility of Classical Aggregates 112

New Forms of Monetary Exchange 114

The Driving Role of Monetary Velocity 118

Are Central Banks Prerequisite Institutions that Should Remain Independent from Sovereign Authority? 120

New Policies to Stabilize the Banking System 125

The Insufficiencies of the Current System for Satisfying Information Needs 125

Questions and Answers 126

Chapter 6
Redefining the Monetary System and Measurements of Monetary Flow - Towards M5 and M6 129

At the Core of the Issue: The Definition of Currency 132

The New Environment: Broadening the Definition of Currency 133

New Monetary Aggregates Define Extended Concepts of Money 135

Defining New Classes of Monetary Aggregates: M5 and M6 135

M5/M6 and their Derivatives M5 ′/M6′ : Determining Definitions and Uses 137

Segregation and Derived Aggregates: M5′ and M6′ 140


The Utility of M5 and M6 Aggregates 142

From a Practical Point of View, What are the Data Limitations for Determining the Values of New Monetary Aggregates? 142

What Information Will These New Aggregates Yield? 142

A New Aggregated Conceptual Approach Allowing Operational Transactions and Financial Ones to be Reconciled 143

The Resulting Breakthrough 143

Defining New Money - The Difference Between Shadow Banking Money, Virtual Money and the New Aggregates 145

Legal Segregation between Different Types of Money, Depending on Underlying Guarantees and Transferability 145

Shadow Banking is Different from Virtual Money 146

Questions and Answers 146

Chapter 7
The Monetary System 149

International Exchanges - Interactions and Monetary Zone Coherence 149

General Framework 150

Description of the Current Operational System: Distinction between National and International Systems 151

The Current International System 152

The International Set-up 152

The International Monetary Fund 153

The Bank for International Settlements 157

The World Bank Group 158

The World Trade Organization 159

International Coordination 160

G5 to G20 160

The G20’s Reasons to Exist 160

The Coordination of Goals Assigned to the G20 161

Troika 161

Micro- and Macro-prudential Surveillance Agencies’ Framework 162

Coordination Issues Inside the Eurozone as Opposed to International 167

The European Stability Mechanism and the European Central Bank 167

The Banking Union 169

The Fiscal Policy Coordination Issue Compared with the USA 173

The Growing Issues of the Size of the Monetary Zones -Research for Optimum 175

The Monetary Interaction of Systems 178

General Interaction: Scale Economies Resulting from Monetary Integration and Political Obstacles 178

International Microeconomic Regulation Coordination Specifics 178

Transnational Realities about Financial Instruments’ Markets and Systemic Risk Measurement 180

Handling the Social Obstacles of Monetary Unification 181

The Answer to Heterogeneity 181

Europe and the USA 182

The US Answer to Inequalities 182

The EU Answer to Inequalities 182

The General Monetary Policy on Both Sides: Reinforce Equity, Regulate Transparency -A Dead End 184

The Disputed Strategy: Addressing Macroeconomic Imbalances 186

Allocated Roles and Goals in the International Monetary Set-up 188

Today’s International Situation and Issues 189

Questions and Answers 190

Chapter 8
What is the Conceptual Essence of Contractual Money, Constraints and Implications? 193

The Intrinsic New Conceptual Views on Money 193

Resilient Open Questions in a New Environment 196

Stability and Guarantees 198

Money as a Measurement Instrument: The Need for Stability 198

Money Guarantees and Trust 200

One Key Consequence of the New Set-up: The Final Trap 202

The Emergence of a New Seignorage 204

Spreading the Seignorage Rights between Chartered Financial Institutions Accepted to Trade Instruments and the Central Banks’ Right to Drive Values 204

Social Roles of Money: Transferable, Reserve or Bubble? How to Determine Sociological Thresholds from Different Dimensions 205

Modelling the Monetary Windbag Analysis 207

A Tentative Formula: STD (Serval-Tranie-Douady) 208

Debt versus Equity Instruments: The Need for Big Data 211

Questions and Answers 211

Chapter 9
The New Nature of Money in Electronic Times 215

New Horizons Concerning Exchanges, Time and Guarantees 216

Time: A Different Dimension 221

Social Time and Anticipation 222

Speed Efficiency, Risks and Market Switches 223

Transparency Effect and Risk of Centralization: The CCP Example 223

Money Accumulations and Interactions 224

From Excessive Accumulation Derives Non-level Playing Fields 224

Determining the Appropriate Amounts of Accumulation 226

The Paradox of Availability of Money Masses as a Policy Tool for their Holders 227

The Implosion Risk of the Money Trap 227

Questions and Answers 228

Conclusion 231

Glossary 241

References 247

Selected Articles 253

List of Monetary Central Institutions and Others (International and National) with Websites 257

Index 265