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Abstract

Based on a system-dynamics model of the financial-economic system described in an earlier paper, we present a model-based exploration of debt-free money creation as an alternative to the existing money as debt system. The money is created free of debt by a public body. Private banks become financial intermediaries which collect deposits and then lend these out as loanable funds. Model experiments show that coordinated debt-free money creation according to a ‘money creation rule’, for example directed towards price stability and/or full employment, can stabilize boom–bust cycles. It avoids ever-increasing debt levels, makes asset price bubbles less severe and less likely, and reduces volatility and resulting short-termism in economic decision making. Rather than via the interest rate, economic stability can be better maintained by directly controlling the amount of money in the financial-economic system via the complementary tools of money creation and taxation. Under the Debt-Free Money alternative, the financial-economical system will be more resilient against future discontinuities such as increasing environmental costs than the current Money-as-Debt system. In the DFM alternative, a more or less stationary economy can be sustained, which suggests that the Debt-Free Money system might be a prerequisite to overcome the future transition to a sustainable economy.