The Money Problem ─ Rethinking Financial Regulation

In The Money Problem, Morgan Ricks argues for a reform of the American monetary system. Taking up foundational questions of monetary policy, he asks: how would we construct a monetary system if we were starting from scratch? What are the characteristics of a “monetary” instrument? What do we mean by, and want from, financial stability? Is there a respectable basis for the special legal status of “deposits”? How should we think about the relationship between private money creation and the issuance of money by the state’s central bank, and how should the government control the supply of monetary instruments? In answer to these questions, Ricks erects a theoretically elegant institutional design, a new structure of money and banking that emphasizes two core features: First, “private money” (cash-equivalent instruments) would be taken much more seriously and treated as cash deposits by commercial and central banks alike. Monetary instruments must be identified and defined by their function; and should be issued only by a designated class of commercial entities, licensed by the state for this specific purpose. Second, such monetary instruments would then be nondefaultable, formally backed by the sovereign public treasury, as sturdy as a dollar bill. By introducing formal state sponsorship to what was previously private credit, Ricks’ design mitigates the risk of catastrophic financial panic.

Morgan Ricks is associate professor at Vanderbilt Law School. Previously, he was a senior policy advisor and financial restructuring expert at the US Treasury Department, a risk-arbitrage trader at Citadel Investment Group, and vice president in the investment banking division of Merrill Lynch & Co.