Special Edition: A Truly Historic Moment of Opportunity

With the imminence of a two-year budget deal including targets for the next decade comes removal of the only substantive objection we have heard from any expert to re-introduction of debt-free United States Notes….that the ability to fund deficits without cost may tempt Congress to throw itself into reverse and spend our way into hyper-inflation. That unlikely scenario will be gone with the amount of spending to be done established by the budget. The only decision yet to be made concerning this budget is whether to fund the deficit with Federal Reserve Notes that will cost the government hundreds of billions of dollars to borrow or to fund it at least in part using historic debt free United States Notes issued directly by the Treasury. We can as much as turn the 2014 deficit into a surplus.

Is there really a choice as simple as that? Yes, if we properly design our “new” alternative. Consider: The original authorization for US Notes (Lincoln’s “greenbacks”) was for a limited dollar amount. But the widening Civil War required additional issuances at the same time that massive wartime shortages drove up prices as they would have no matter what form of currency was used. There was inflation, during the course of the war – as much as 80%. At the end of the war, however, prices and the value of the greenback stabilized. Labor and agrarian interests sought to expand the number of greenbacks in circulation to foster growth and, it was alleged, to make debts repayable with cheaper dollars. Banks and creditors fought for re-introduction of the gold standard as the means then in use to tighten the money supply. There went the debt-free greenbacks, due solely to the operation of a political contest. That is the only reason we don’t have them today. Today, neither gold nor silver backs either US Notes or Federal Reserve Notes and we have other ways to tighten or expand the money supply - a new game.

Congress could, once again, authorize an issuance of greenbacks (paper and electronic equivalents) limited by dollar amount. There might also be a limited authorization time, perhaps with a one-year sunset date. That would give Congress a chance to assess how things are going. Interim administrative assessments could be made by the Fed and the Treasury, as the US Notes need not be issued all at one time. The Fed and the Treasury coordinated effectively during the 80+ years that United States Notes and Federal Reserve Notes circulated side-by-side. Even if we fund the whole deficit by US Notes, that would only be about 5% of the conservative M2 money supply measure (see our October newsletter). The Fed would clearly remain in the driver’s seat. Should the US Notes eventually be withdrawn from circulation, that can happen exactly as it did before; you can still deposit US Notes at a bank, but you’ll only get Federal Reserve Notes if you withdraw cash. The rest is “swallowed by the machine.” Let’s be clear: a dollar is a dollar, by law “Legal tender for all debts, public and private.” Nothing “backs” Federal Reserve Notes any more than US Notes–in both cases it is only the “legal tender” declaration of the government, which allows either Federal Reserve Notes or US Notes to purchase Treasury bonds, gold or anything else according only to their dollar denomination. There is absolutely no technical or practical reason why United States Notes cannot be issued again, used interchangeably, just as in the past.

If we were in the middle of another Civil War, the buying power of Federal Reserve Notes would decline just as much as United States Notes. Neither form of currency is “weaker”. With the gold and silver standards now abolished, both have value sustained by precisely the same things: (1) the initial fiat power of government to declare them “Legal tender for all debts, public and private”; (2) limitation of the total number of dollars of both types in circulation; (3) the health of the US economy, in which a factor is the financial health of the US government (which the use of debt-free US Notes would promote). Unlike the Civil War period, we now have a Federal Reserve capable of tightening the money supply, of which the US Notes would be “a drop in a rainstorm”. The Fed would be able to effect monetary policy on its own, even without the cooperation of the Treasury concerning its pittance, but isn’t it reasonable that there would be cooperation again? Besides, we are not just at a sensitivity crisis point, not on the very verge of collapsing into hyper-inflation, but rather in a position to, without precise micro-management, expand employment and production (supply in balance with demand).

Are debt-free United States Notes more inflation-causing than an equal number of dollars in Federal Reserve Notes? Absolutely not. That question was specifically addressed by a Congressional Research Service paper.

Does it really cost the government less to issue debt-free United States Notes than to borrow Federal Reserve Notes, given that the Fed returns interest on Treasury bonds to the Treasury? You bet it does! We are surprised by how often that question comes up. The Congressional Research Service report cited above notes that only 10% of the federal debt is held by the Federal Reserve. The rest of the debt is funded by other borrowing, primarily selling Treasuries to domestic and foreign investors who will not return the interest, who may not always be as able or as motivated to purchase them as today, and who will require higher returns when interest rates rise from today’s all-time lows.

Why haven’t we wisened up to the use of debt-free United States Notes before? We have. The politics surrounding the greenbacks after the Civil War reflected a struggle between massively powerful interests – 19th century labor and agrarian interests versus banks and wealthy creditors - with the later coming out on top. However, the debate has raged on in every decade since, as described in past issues including the November, 2013 Policy Winners. Is there still a struggle going on, sometimes behind-the-scenes, with the banks and the very rich pitted against working class interests? Indeed there is. But….

We need not think in terms of a winner-take-all sweepstakes. Let’s put it in perspective: We have licensed the banks to create money “out of nothing” via the fractional reserve system that allows them to lend 10 times or so what they actually have. This is the way most of our money is created. What gives the money that they lend value? It is nothing that the banks do. It is nothing more or less than the fiat power of government stipulating that the money is “Legal tender for all debts, public and private.” This license we have given the banks is very generous indeed. (We would throw counterfeiters in jail).

After the redistribution of wealth from the great middle to the “uber rich” we have seen during recent decades…by now a phenomenon well-known to the public at large…and after the Great Recession, is the public in the mood to be just a bit less generous toward the banks and the money masters? Is it too much to ask that the public be given, say, five percent of the benefit the banks are given…that the government license to itself, in accordance with the mainstream of historical orthodoxy, the old sovereign right to create money - even if just a tiny part, not all (as per the Chicago Plan) of our money?

Why should we go hundreds of billions of dollars further into debt this coming year, rather than be willing to fight a little over the bitty scrap we need? The irony is, if we use United States Notes wisely to strengthen the governments’ financial position and the health of the economy, everyone will gain at least some benefit…including the banks and the very rich. If there’s one thing we should have learned from the Great Recession, when both the banks and the public had their scary moments, it is this: Ultimately, we’re all in the same boat together and the ability to bail it out is our underlying security.

A moment of opportunity? Our slow recovery, our present super-consciousness of debt, our recent history of failures of “the system” and now the establishment by Congress of the spending we will do can come together as a unique moment of willingness to try something new–particularly in the cautious manner here proposed. We can escape the dismal “science” (?) of dire fiscal prophesying by showing a new willingness to explore and work out new solutions, now that Congress has initiated a fresh start. The stars may not so align and such a moment of opportunity may not re-appear for a very long time.

A New Grand Bargain, Wrapped Up in a Bow!

Santa knew what we needed: a new Grand Bargain!

The perfect Christmas gift is a fully satisfactory solution to a true need. It is not the pile of scraps from which desperate efforts might or might not yield a makeshift winter coat for a child, but is the well-made, well-fitting coat with hat, gloves and scarf that arrives before the full bite of winter. So it is as we enter December surrounded by last year’s discarded idea scraps and a sense of resigned desperation, lacking a realistic plan to avoid our second “fiscal cliff”. We hear dispirited talk of things that did not work before, and of theories of what might happen in a show-down yet to come…but there has been no equivalent to the timely arrival of a coat that is ready, complete and capable of providing warmth when needed. We do have a babe in a manger – the Affordable Care Act – but as many seem bent on strangling that babe as on working out the salvation it can be for those most in need of it. We did have food stamps, which have fed many hungry children, no matter how our scrooges may have wanted to judge their parents. But our society has gotten so jaded that we select vestigial efforts to feed the hungry and care for the sick as those things to first discard, while the ultra-wealthy rack their brains to think of things they do not already have to put on their list for Santa. What we have seemed to lack, barreling toward our January deadlines with our eyes firmly closed, is a solution for our affairs of state, come January, as practical as a winter coat!

For many months, talk of a solution to our fiscal crisis has involved the idea of a “grand bargain” – an agreement that the quid pro quo for not savaging the present budget would be cuts in long-term spending, with mention most frequently made of entitlements. “Don’t get too over-wrought about near-term deficits”, is the proposition, “we’ll deal together on spending in the long term bye and bye.” Those who have read our last two newsletters know we propose dealing with our deficits now, not in the bye and bye, by using a small store of debt-free United States Notes as our country has done, quite successfully, in the past. We have pointed out that our current Federal Reserve Notes (upon which all those electronic debits and credits are based) are a printed, fiat money currency with absolutely nothing “behind them” but the authority of the government to declare them “Legal tender for all debts, public and private.” For reasons that escape a great many of us and have since Franklin and before, the government is willing to borrow a congressionally-determined amount of fiat money from others which it has created, plunging the nation further into debt, rather than use the orthodox system of printing up the same number of dollars, on the same presses, for its own use, within the medium of exchange requirements of the economy.

Last year’s “grand bargain” of which we heard so much, nominally focused on issues of debt, short-range vs. long-range. Why should our proposal, which would reduce the debt, call for the negotiation of such a “grand bargain?” Why wouldn’t the Party of Lincoln embrace the solution of Lincoln and his Republican Congress? It is not, unfortunately, the Party of Lincoln we will have to contend with. It would have to be someone even older than us and preferably a Republican to tell the tea party newcomers, “I knew Abraham Lincoln – and you, sir, are no Abraham Lincoln.”

The truth is debt itself has never been the number one item on the agenda. It’s talk about debt that is. Talk about debt can be used to keep government from growing, and to minimize government spending so as to avoid the true concern of very rich contributors – inflation. We do not hear inflation-fearing calls from this interest group for increased bank reserve requirements, which would temper the amount of money being created “out of nothing” by our private banks, as most of our money is. The Congressional Research Service Report for Congress #96-672, Paragraph 4 under “Other Forms of Money”, states that United States Notes are no more inflationary than a like dollar amount of Federal Reserve Notes. What we have is the unfounded fixed idea among some that any spending by the government (yet not by others) raises the specter of inflation; that any lending (not spending) by the Federal Government directly comparable to lending done by private banks…is inflationary, whereas lending done by private banks is not; and that any investment by government, however similar to that done by private investors and Wall Street is inflationary when done by the government but not so when done by private investors and Wall Street.

It is for these rather spurious reasons, as we see it – yet reasons we must acknowledge and address - that we need a “grand bargain”, even to negotiate the elimination of our FY 2014 deficit. It would be interesting to observe a debate in which the erstwhile deficit hawks protest, “No! We want a deficit!” even as their opponents argue for greenback elimination of it. Human nature being what it is, however, we know we have to provide for a resolution of such a dispute before it even begins.

As we have sent our newsletter to over 1,000 economists during the last year, we have learned what the substantive arguments are concerning our often-proposed use of debt-free greenbacks. It turns out there is only one such argument against it – the concern that being able to fund a deficit without cost would make it too easy for government to grow and spend too much money over time, resulting in problematic inflation. Getting the real issue on the table is the first step to finding a solution. Debt never has been the most-feared thing, and no plan to reduce our national debt has ever been sufficient to relieve what is. Indeed, if we totally got rid of the national debt, what would happen to the Treasury bond reserves against which banks can leverage by a factor of ten or so to lend money they don’t actually have? Preservation of the Federal Reserve and of a healthy amount of national debt is vital to the big banks and the big-money interests – so our proposal concerns only a minuscule portion of the money supply, a minor correction to our insolvency iceberg course.

So the “grand bargain” we propose is akin to a balanced budget amendment for future government spending in exchange for debt-free funding of our current skinnied-down FY 2014 budget. We would hope for a way to bring back food stamps and to make affordable health care, the noblest idea of Republican as well as Democratic administrations, work – but those are no new ideas.

United States Notes would be a new and immensely useful tool in near-future years when realistic spending goals will still leave a small delta versus tax receipts. We need to avoid what even the IMF now sees as ruinous austerity in order to give our economy a chance to fully recover rather than weaken this coming year, and we should co-invest with banks and private investors in real, income-generating assets as described in our September newsletter. The 535 members of both houses could form many committees to find ways for government to operate more efficiently, to lower healthcare costs, to eliminate outmoded subsidies and to better enlist private sector investments to profitably do things society needs done and not necessarily by government. We can reduce our total debt, not just our annual deficit, if we follow in the footsteps of those most notable for doing it - Harry Truman and Bill Clinton. (Republicans have had more modest successes, but for fairness’ sake we should mention Dwight D. Eisenhower and the holding of the line by Richard M. Nixon).

As cited in last month’s newsletter, Abraham Lincoln declared: “the privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest opportunity.” The needy girl in the story quickly recognized the gift she had been given was good enough, and started to wear her new coat. Whether Washington will remember its past triumphs and act upon them in the manner of Lincoln and the practical young girl in our story remains to be seen - and indeed will be, in the very near future. Meanwhile, the gift is for the taking.