It has always surprised me to see that all the tallest buildings in a city are owned by banks. It seems odd because the banks role seems too simple to be that profitable. But now that I have learnt how money is created I finally understand why. For those that don't know here is how it works. When a bank gives a loan it is allowed to invoke its special privilege. It loans that money from the central bank. But the central bank didn't just have the money sitting around, it actually just created it. There is no limit on how much money banks can loan this way other than the types of loans they are allowed, by regulation, to make and the demand from the public for those types of loans. And this is the only way money is created which which means that all money that exists in the economy is money that is on loan from banks. And eventually will be repaid. At which point the money ceases to exist. So banks take a percentage of literally all the money in the economy because of the margin between their retail interest rates and the official cash rate. No wonder they are rich as heck.
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. - Henry Ford
Now it would be natural to wonder how we ended up with such a crazy system. And how a society that employs such a crazy system can work at all. How we ended up with it is pretty easy to answer. Banks have pretty much always created money. It's kind of a natural progression where eventually the banker realises that they don't need to actually have all the money they lend out since most of it just sits in their vaults doing nothing. Which is an unregulated fractional reserve system. And eventually leads to problems when banks get too aggressive with the amount they keep in reserve. And our current system is essentially just the regulations that were put in place to manage the situation. Regulators couldn't ban fractional reserve banking because it was too late. The money the banks had created was in the economy and had caused inflation. Removing the money was practically if not politically unfeasible so the problem was just managed instead. And eventually reserve requirements were removed all together once everyone was confident that they weren't necessary. Leading us to our current system where the money supply is only limited by societies demand for loans at the official cash rate + bank margins.
Answering the other question is a bit harder but my guess is just that since it was implemented very slowly its affects went unnoticed. Though it does cause high rates of inflation when the economy is perceived to be growing. Particularly in housing. Since the banking system is never blamed for these problems there is little will to change the system. In a recent parliamentary debate hardly any MPs even showed up to discuss the issue. And a large percentage of political funding comes from banks so it's unlikely that any changes could be made anyway.
Now on to the fun part. Let's design a better monetary system. I think the amount of money in the economy should be stable. I think this is obvious because otherwise you have to answer the question of who should get the new money when it's created. (BTW, the answer to that question in our current system is mostly the owners of the appreciating assets. i.e real estate owners. i.e old people). Though I do believe that the money supply should adjust with the population. Which might seem odd but really it's the only way to have a truly stable supply of money in the long term. But who gets the money when it's created you ask? And who loses it when it is destroyed? Well that's easy. It's the person becoming a citizen that gets the new money. And it's the person leaving the economy that has their money destroyed. If the person enters the society via immigration they must purchase their new money. If they are born into it they will simply be given the money.
And how would this system prevent a decentralised fractional reserve system from developing? Just stipulate that all transactions in the currency must take place on a public ledger. That way banks can't lend money they don't already have. And stipulate that all transactions in the economy must take place using the official currency unless it's impractical to do so. This is to prevent banks from creating their own currencies as occurred in the USA before it was banned. This would have the additional benefit of making a lot of fine grained data about the economy widely available. Which would be useful for entrepreneurs.