Can our government afford to gift its entire constitutional power of money creation to private banks, and then incur massive debt to borrow back its own "legal tender"?
(Note: Due to widespread misconceptions, it must be pointed out that The Fed holds only about 10% of the national debt and cannot “send back” most of the interest paid on it…nor can it guarantee artificially low rates or extreme quantitative easing indefinitely. Going several years out, the debt is not forecasted to disappear without systematic spending cuts or tax increases…and few actually accept the new idea, “the more debt, the merrier”).
Sovereign-issued currency as the basis for monetary systems including our own has been a norm of history from which we have only relatively recently departed. Today, in our country, the pendulum has swung during the last 100 years to a virtual 100% privatization of the creation of money by private banks. The historic norm is often perceived as outside-the-box thinking, as it must be re-introduced to a new generation. Colonial Scrip, the Continentals of the American Revolution and the Greenbacks of the Civil War and Reconstruction may have made possible the existence of the United States of America today, yet in the decades since the Great Depression, the subject has become too unfamiliar to many for any kind of meaningful discussion.
There have continuously been proposals to go back to our monetary roots. Many, like the Chicago Plan, have taken the form of sweeping re-designs for the monetary system and the Federal Reserve. Some plans would leave the Fed untouched and effect a minuscule one or a few percentage points of the money supply, employing re-introduced United States Notes and/or their electronic equivalents, leaving control over monetary policy essentially as-is. Some would use the power of money created without a debt burden on the government to do what Lincoln did with his Greenbacks and even more in terms of investments in the economy. Others would use this money on a one-time basis in conformance with the established current budget, involving no increase in spending, simply an opportune chance to reduce the deficit. Some would be open to experimenting, in time, with the use of such funds to acquire income-producing assets for more meaningful reserve accounts and increased national financial security. Some would use it for cementing commitments to a serious balanced budget goal if not amendment, reassuring those concerned for unforeseen and emergency needs with the availability of a new fiscal safety valve.
There are many ideas for a minimal plan, and more ambitious plans could be separately debated and voted upon. Here’s the question: Is there any “step one” we can describe that we could use to improve upon our current situation? Would the re-introduction of any amount of the United States Notes so many of us carried in our pockets, issued as Lincoln used them without debt burden to the government, necessarily cause “hyper-inflation”, no matter how such an issuance is regulated? Have sovereign currencies always been inflationary in the past? Would government-issued money undermine the independence of the Fed, no matter the amount authorized or any mechanism for coordinating monetary policy… did such an undermining occur in the past? Is it safer to borrow hundreds of billions of dollars from the capital markets this year, assuming unnecessary debt now will discipline undesirable spending in future years? Are the inflationary effects of debt and fiscal headaches of increased debt service preferable to temptations to over-spend and cause hyper-inflation if debt consequence is minimized?
In the pages following are comments from six prominent scholars. Next month we plan to present another six to round out the dozen promised in our last issue. We invite further comments from our readers for publication or simply comments and questions off-the-record for consideration. Contributors present their own views and not necessarily those of the organizations with which they are affiliated. Few institutions have taken positions, yet, although we would very much like to see that happen in the near future.
WILLIAM GREIDER provides his perspective as a man who, if anyone would, has a finger on the pulse of newsworthy trends as one of the nation’s best-known reporters on economics and public policy. For 35 years he has covered these subjects for newspapers, magazines and television. During his 15 years with the Washington Post he served as a national correspondent, editor, columnist and assistant managing editor. He is presently a national affairs correspondent for The Nation and has continued to write national best-selling books, nine to date, which have included Secrets of the Temple: How the Federal Reserve Runs the Country; Who Will Tell the People?, The Soul of Capitalism: Opening Paths to a Moral Economy, and his latest, Come Home America: The Rise and Fall (and Redeeming Promise) of Our Country. His comment, in the form of a brief article, follows:
The People’s Money
When the financial system crashed and the Federal Reserve rushed to the rescue, people and politicians asked this question: where did the Fed get all this money? The trillions it spread among distressed banks and financial firms. Or the additional trillions the central bank used to purchase a vast store of troubled mortgage-backed securities.
Most people and politicians were astonished though financial experts and learned economists of course knew the answer. The Federal Reserve created this money out of thin air. That is what central banks do. Nothing especially new about this effort except the staggering scale and breadth of the bailouts. Who gave the Fed permission to do this? Nobody, really, not the Congress nor the President. The central bank creates its own money and sets its own priorities.
After their initial shock, some people and some politicians began to ask a taboo question. If the Federal Reserve can do this for struggling bankers, why not do something similar to help people, communities and enterprises who, after all, struggled too? Oh, no, that’s not done, authorities explained. It might disturb the economy. It might undermine the soundness of the currency.
The usual evasions and denials are mostly bunk. Contributors to the following discussion seem to agree on that though they may disagree on many underlying questions, even some technical details. The central bank has posed for 100 years as a neutral technocratic institution, beyond the reach of politics, but that isn’t true either. Congress created the Federal Reserve 100 years ago. Congress can alter it or abolish it whenever it finds the nerve to do so.
The Federal Reserve is fundamentally a political institution despite the mystique and its convenient cloak of independence. That perhaps sounds obvious, but I emphasize the point because the broad public has been educated into ignorance and passivity. Even the most sophisticated political players are often as clueless as we ordinary mortals . As a reporter and author, I have been challenging this myth for the last 30 years, first in Secrets of the Temple: How the Federal Reserve Runs the Country and more recently in the pages of The Nation. My post-crash ideas on reform:
http://www.thenation.com/article/dismantling-temple
http://www.thenation.com/article/178366/why-federal-reserve-needs-overhaul
I have always addressed the subject of the Federal Reserve’s money creation powers with this essential question: who owns this money the Fed creates? My answer is we the people are the owners collectively. Not the Treasury or federal government and certainly not the commercial banks that are shareholders in the 12 regional Federal Reserve Banks. This conclusion provides the crucial justification needed for eventually accomplishing what many of us seek – a way to harness the Fed’s money power to financing in the broad public interest.
During the Bernanke regime, I found myself writing some supportive articles about the Fed’s posture because it was literally the only governing institution in Washington that seemed to understand the depth of the crisis. The Fed was actively trying to stimulate the recovery when the president and Congress were obsessed with deficits and pulling in the opposite direction. Bernanke, I reported, was flirting with more radical measures but in the end he backed off. My articles were perhaps too generous and definitely too wishful. In any case, the media ignored the story.
http://www.thenation.com/article/167355/federal-reserve-turns-left
http://www.thenation.com/article/171126/can-federal-reserve-help-prevent-second-recession
http://www.thenation.com/article/164216/its-time-debt-forgiveness-american-style
So I focus on this political question ahead of arguing over the structural design or technical aspects. We can disagree on what kinds of projects might be eligible or what we call this “free money” or how to alter the role of the central banking and private banks. It is clear we have considerable disagreement on these and other questions. This casual forum is a good start toward exploring answers. I hope the discussion is continued and expanded. But perhaps because I dwell in Washington DC I want to talk about a plausible path toward actually accomplishing this great reform and what it might look like.
First, I estimate that the prospects have improved substantially because of events in the last few years. The shock effect and widespread pain from the financial collapse and sputtering economy are still quite potent among the general public. Nevertheless, it remains undeniable that there is still very little political traction for big reform of the money system. That can change rapidly if the mega-banks expose us to another calamity or the global economy tips into a full-blown deflation. In the meantime, we have small beachheads in the society where education and agitation are getting underway smartly.
My strong conviction is that our shared idea can succeed eventually (don’t ask me when) but only if the objective is concretely visible and practical -- relevant to the broad ranks of citizens across the usual divisions of class and income. Therefore, I want to see ideas developing from the ground up and anchored in common experiences. In that regard, I point out that the subject of money is fraught with weird folklore and associations. It makes people nervous to hear esoteric arguments over whether money is real. It sure seems real if you have enough of it.
My point is, the political basis for achieving profound reform probably cannot start with grand abstractions but it should promise grand changes in everyday life. That could be high-speed railroads and building more bridges and highways. Or it might be a tangible program for full employment – remunerative jobs for everyone willing and able to work. The response to global warming and other ecological threats to human existence could be the highest priority for public works. Again, the benefits must be universal – something that everyone rich and poor will recognize as good value in their own lives.
I am convinced that this grand idea, properly developed and wisely executed, has a potential to revive the small-d democratic spirit that has been so battered by events. It cannot come from the top down. It has to be truly grounded in we the people. We might decide to call it “democratic money.”
RICHARD STRINER, professor of history at Washington College, is the author of ten books. This proposal was first introduced in his book Lincoln’s Way: How Six Great Presidents Created American Power (2010) and in the article “How to Pay for What we Need,” published by The American Scholar in the winter 2012 issue. His comment, in article form (copyright Richard Striner):
Money Creating: a Usable Past for Tomorrow
Most economists discount the importance of cash — currency and coin — in our modern money supply. Policy-makers should ponder that fact as they consider proposals for government-created money. There is ample precedent for the creation of money by Congress. But this money-creation should employ the operational method that bankers use now: electronics.
Long ago, legal tender money was based in precious-metal coinage. Owners of gold and silver had the option of taking this treasure to the mint, where it was melted, stamped into coin, and given back. Then the “monetized” metal would circulate in market transactions. Congress created the United States Mint on this basis in the Coinage Act of 1792.
Out of this physical foundation of coin came a paper emanation that expanded the money supply: bank notes. These notes — certificates stating that the face value of the note was “payable to the bearer on demand” — began as receipts for deposits of coin that had been placed in commercial banks. But then bankers hit upon the lucrative idea of printing bank notes in great quantities — quantities that vastly exceeded the coin deposits of the bank — and then issuing this blizzard of bank note paper in the form of loans. It was a gigantic and risky juggling act, but the laws of most nations permitted it.
People didn’t have to accept these notes; they were not legal tender. But when people were willing to accept the notes, they had purchasing power: they were an operational equivalent of money. Presto: out of a coinage foundation arose an emanation of far greater purchasing power in the form of paper certificates. In 1790, Treasury Secretary Alexander Hamilton admitted the “well established fact, that banks in good credit, can circulate a far greater sum than the actual quantum of their capital in gold and silver.”
Based upon Hamilton’s recommendation, Congress chartered the Bank of the United States in 1791; it lasted twenty years until the charter lapsed. A second Bank of the United States that was given a twenty-year charter in 1816 went out of existence in 1836. In 1863, the Republican Congress created a system of national banks. To make sure that these banks would maintain enough capital “on reserve” to make their bank notes reliable, Congress forced the bankers in exchange for their charters to invest a percentage of their funds in war bonds, which had to be placed on deposit with the U.S. Treasury. A new position in the treasury was created to regulate the system: the comptroller of the currency.
After the Civil War, commercial banks began to switch from bank notes to a different form of lending via paper certificates: the checking account. After the loan had been approved, the banker would tell the borrower that the loan had been “credited” as a “deposit” to a checking account that had been set up to facilitate the loan. To spend the loan, the borrower would just write checks, directives to pay, which the bank would redeem in hard coin when the checks were presented at the bank.
These loans came out of thin air. As economist Irving Fisher explained in 1935, “when a bank grants me a $1,000 loan, and so adds $1,000 to my checking deposit, that $1,000 of ‘money that I have in the bank’ is new. It was freshly manufactured by the bank out of my loan and written by pen and ink on the stub of my check book and on the books of the bank . . . Except for these pen and ink records, this ‘money’ has no real physical existence.”
By the time that Congress intervened in the banking system again - in the Federal Reserve Act of 1913 - checking accounts had replaced bank notes as the preferred medium of lending as well as the method of payment most frequently used in commercial transactions. The Federal Reserve Notes that were authorized in 1913 (printed at the treasury and furnished to banks) were merely a convenience for customers of the bank who wished to pay for things in cash without parting with gold and silver coins. Compared to checking, these notes were of secondary importance. It was obviously easier to pay by check than send an armored car full of cash. The volume of checks that were written and deposited vastly exceeded the stock of Federal Reserve Notes - a crucial point to understand.
All national banks were required to join the new Federal Reserve System. Member banks had to park some of their reserve funds with the regional Federal Reserve bank. When a Federal Reserve bank needed currency to supply to its member banks — which in turn would supply it to the customers who were cashing checks — the regional bank would place assets on reserve as collateral for the Federal Reserve notes, which were treated as a loan. When the bank no longer needed to carry as much currency, some notes could be returned and the bank would get back some assets. The process is simpler today: banks buy as many notes as they believe their customers will need, and then their accounts at the Federal Reserve are accordingly debited. Banks also buy coins from the mint the same way. And the minting process itself has changed completely: the mint buys the metal that it needs to make coins, which have long since ceased to be pure gold or silver (except for commemorative pieces that are sold to collectors).
Now observe what has happened over two hundred years or so. From a system that was based upon the minting of gold or silver coins, which were placed in banks as a foundation for a larger “circulating medium” of paper (bank notes or checks), coins and even currency have been reduced to mere “chump change:” representational tokens for a deeper source of purchasing power that is created by banks out of nothing. The Federal Reserve confirmed all this in 1939 as follows: “Federal Reserve Bank Credit . . . does not consist of funds that the Reserve authorities ‘get’ somewhere in order to lend, but constitutes funds that they are empowered to create.”
And that’s the way our money is created nowadays — through “credit” that is pulled by the Federal Reserve system out of nothing and sent to member banks and the public in the form of loans. Moreover, paper checks have become increasingly rare: most purchases take place electronically; both “the Fed” and the treasury department are moving toward an all-electronic system.
It’s important to understand the way in which our bank-created money supply functions in order to contemplate proposals for radical change.
The historical, conceptual, and legal basis for radical change in our monetary system is the long-dormant American practice of creating new money by direct legislative action, money which (like bank-created “credit”) is pulled out of nothing but then gets spent — not lent — into circulation.
The printing of money to be spent into use by government is a practice that dates back to colonial America. The colonists were often literally cash poor in terms of circulating coin and the commercial banking profession was still in its infancy on these shores. Benjamin Franklin helped pioneer the method of “printing press money” in Pennsylvania.
Legal tender paper money was created by the Continental Congress in the American Revolution. The Civil War was partly financed on both sides by the issuance of paper money, which was spent into use. One pernicious side effect of this money creation by government was inflation: soaring prices, caused at least in part by the reluctance of creditors to accept payment in bills that were not backed by coin. Even though people under law were obliged to accept the new “United States Notes” that were created pursuant to the Legal Tender Act of 1862, they often accepted them at depreciated rates, which caused prices to rise: a barrel of flour that might cost five dollars if purchased in coin or in reliable bank notes might well cost ten dollars if purchased via government “greenbacks.”
The constitutionality of the Legal Tender Act was challenged, but in 1871 the Supreme Court upheld it in the case of Knox v. Lee. Thereafter reformers and a short-lived Greenback Party advocated the use of United States notes to pay for programs designed to create jobs or bring other forms of economic relief to farmers and workers. But the orthodoxies of Gilded Age finance precluded such action.
During the Great Depression of the 1930s, some of America’s most distinguished economists — John R. Commons, Irving Fisher, Laughlin Currie, Henry C. Simons, and Richard Lester — called for the issuance of “greenbacks.” Their particular proposals differed, but the common denominator was the principle of government-created money. In 1933, Congress made limited provision in the Agricultural Adjustment Act for the issuance of new United States notes at presidential discretion, but FDR declined to use that authority.
Since the Great Depression, a number of mavericks have proposed reviving “the greenback.” Some have advocated abolishing bank-created money altogether in favor of government “fiat money.” Others (including myself) have argued for a mixed system, a best-of-both-worlds resolution with the authority to create new money shared by the banking system, capped by the Federal Reserve, and Congress.
My proposal builds upon and extends the mechanics of the status quo. To wit: bank-created money is summoned out of nothing and sent in the form of loans through direct electronics. The small amounts of cash that we use from time to time for “chump change” transactions are provided to the public via banks. My proposal: keep this system, and persuade the members of Congress to vest themselves with the same kind of power to create new money out of nothing that bankers possess, but with a simple and crucial difference. The money created by Congress would be spent (not lent) electronically into bank accounts of government employees or vendors.
Twin streams of money creation would thereby emanate from Congress and the Federal Reserve. And these streams would converge to form a common monetary pool in the accounts of the banking system. The benefit: a built-in contra-inflationary capability. The Federal Reserve, though its operational methods (the manipulation of interest rates, the raising of reserve ratios, and the use of “open market operations,” consisting of the buying and selling of bonds) has a dazzling array of techniques through which inflation can be counteracted. Under Paul Volcker’s chairmanship, “the Fed” had great success in taming the inflation of the late 1970s.
The best way to launch my proposal on an incremental basis would be for Congress to pump a very small amount of new money into the bank accounts of government employees. If inflation results — inflation that can be clearly traced to this small infusion of money created by Congress — the Fed would be positioned to take remedial action right away. And then, if this first experiment should prove successful, the method could be extended in progressively larger operations.
The system I propose has two advantages: (1) its use of electronic transmission would make it technologically up to date and easy to implement; (2) by creating a partnership between Congress and the Federal Reserve that would retain and employ the effective forms of monetary policy that we have in place already, my proposal could overcome the most common objection to the greenback method from the orthodox: fear of inflation.
Today’s dysfunctional Congress is incapable of doing much of anything, let alone considering and implementing a visionary change of this nature. But in the next few decades our public investment challenge in the United States will be nothing less than stupendous. Here’s a way to increase our ability to pay for public necessities without higher taxes, without more deficit spending, and without inflation. It is time to start advocating this system to the public and policymakers. With luck, when the next sea change in American political culture occurs, the conceptual,
structural, and practical framework for progress will be in place.
ELLEN BROWN, Esq., is the founder of the Public Banking Institute, the author of twelve books including Web of Debt and The Public Banking Solution, and a prolific writer of current-events articles involving the banking system. She is presently running for the office of Controller of the State of California. Her comment follows:
Not only can the government issue money without creating price inflation; it needs to issue some money just to get the economy back to where it was in 2008. According to a 2012 staff report on the website of the New York Federal Reserve, the M3 money supply had then shrunk by $4 trillion from the beginning of the banking crisis in 2008. That means at least that much money could be added back in without creating price inflation.
One proposal for “reflating” the money supply is for the Treasury to simply mint some trillion dollar coins. This idea has been called “silly,” but our forefathers did it routinely, and very successfully. Why is it less silly for the central bank to create money out of thin air and lend it at near zero interest to private commercial banks, to be re-lent to the public and the government at market interest rates, than for the government to simply create the money itself, debt- and interest-free? We have lost not only the power to create our own money but even the memory that we once had that power.
The coins would not circulate (who could make change for a trillion dollar coin?) but would be deposited in the government’s account at the Fed. They would therefore not directly inflate the circulating money supply. Congress could write checks against the coins for goods and services up to the point of full employment without creating price inflation, since supply and demand would rise together. After that, it could avoid inflation by taxing the money back. The velocity of money is about seven in a vibrant economy. If the money changes hands seven times, and each of the recipients pays an average 15% tax on it, the government will get the entire outlay back, and the money supply will not have changed.
Another possibility for “reflating” the economy is the “social credit” option – issue a dividend that goes directly into the pockets of consumers, to be spent as they choose. This can be done electronically, just as the Fed conducts its quantitative easing electronically today. Again, this need not be inflationary, since goods and services will rise along with money (“demand”), keeping prices stable; and if the velocity of money is seven and the average tax rate is 15%, the government will get all its money back the next April.
NICOLAUS TIDEMAN is Professor and Head of the Economics Department at Virginia Tech. He has served as the Senior Staff Economist on the President’s Council of Economic Advisors, as an advisor to the Treasury Department and the US Bureau of the Budget and as a think tank scholar (American Institute for Economic Research). He has written a book on public choice and over a hundred articles in scholarly journals dealing, notably, with economics and public choice. His comment follows:
The problem with issuing U.S. Notes is that it may lead citizens to underestimate the cost of government spending. Government spending is efficient when citizens are willing to pay as much as it costs. If some of the cost is paid by printing money, citizens may underestimate the cost and allow government officials to spend inefficiently. On the other hand, if a given amount of monetary expansion is going to occur by one mechanism or another, it is more detrimental to the overall well-being of a society to have the benefit of the monetary expansion captured by a private banking system than to have it captured by politicians promoting excessive spending. My favored recommendation would be that monetary expansion occur by interest-free loans to all taxpayers. If that is not possible, I would recommend that monetary expansion to attain a chosen path of the price level occur by the issuance of U.S. Notes. It is very important that such a policy be accompanied by a governing mechanism that adjusts the quantity of money to stay on the chosen price path.
RONALD DAVIS, Assoc. Professor at San Jose State University, teaches topics in management science and decision analysis which he has applied to the subject of monetary reform. A white paper and a detailed legislative proposal are found on his web site. His comment follows:
On rational grounds the choice between debt-based borrowed money creation by the Fed and debt-free output based congressionally authorized money creation by the Treasury is clear: why pay for what you can get free? Creating debt-free money, whether in the form of US Note paper money or its electronic equivalent which we call US Money, is obviously superior to creating interest-bearing debt, so long as the Constitutional provision to regulate the value of money is observed. Elementary math based on Irving Fisher’s fundamental money exchange equation shows that regulating the value of money (i.e. keeping the CPI nearly constant) requires that money supply growth rate be tied to real output growth rate, as shown by the White Paper at our site. The formula relating the two (in times of constant money velocity) shows that money supply growth rate should approximately equal real output growth rate in order to keep CPI growth rate close to zero. This leads to the realization that the true and correct backing for fiat money creation by the government should be seen as the real output of the economy, that is, the very goods and services which change hands through transactions using the money supply. Therefore, the inflation prevention requirement can be accomplished by applying modern stochastic optimal control technology to appropriate macroeconomic models rather than via the interest charge disincentive to create money through debt creation. A money supply feedback control law based on the relevant macroeconomic variables will suffice to prevent inflation in the modern context (no such theory existed in 1913 when the Fed was created). In fact, the little islands of Guernsey and Jersey in the English Channel have been issuing debt free government issued money for nearly 200 years now in a responsible way, with excellent results. If they can do it without math models, then we can surely do it with NASA’s space age technologies.
Therefore we wholeheartedly agree with the drive to “bring back the Greenbacks” and believe that this can be done by coordination of money creation and debt creation. That is, if increases in debt-free money creation by the Treasury are accompanied with decreases in bond issues by the Treasury then net inflation pressures can be kept in check. A bill to reintroduce the US Note issues that provides for compensatory decreases in bond issues would therefore be non-inflationary, and therefore an excellent first step forward towards more substantial initiation of US Money issues in electronic form. The rate of issue needs to be discussed of course, but the $50 billion per month rate suggested by the editor of this newsletter seems very reasonable as a first step. It will eliminate a good fraction of the budget deficit for the current year, and if continued for at least one additional year it will also enable the setting aside of the budget sequestration cuts that have done so much damage to the economy and our military preparedness. Our proposal includes issue of sufficient new US Notes and electronic US Money to refund all allocations cut since sequestration began.
This first step should be followed up with subsequent steps that include government money creation in electronic form, i.e. US Money as well as US Notes. Our EMERGENCY US MONEY STIMULUS ACT of 2014 provides for the replacement of the $85 billion per month quantitative easing by the FED with a balanced increase in US Money issues. The quantitative easing stimulus goes to the financial sector, in contrast, the US Money issues can be targeted at all of the budget items that have been cut by sequestration, as well as infrastructure projects, education, health, and safety net expenditures. This will have a very positive effect on bringing unemployment down and pushing GDP growth up in a way that quantitative easing has failed to accomplish.
Additional elements of our longer range plan include the creation of an independent Monetary Control Authority that would coordinate the various forms of money creation in such a way as to maintain CPI at nearly constant levels, something that historically the Fed has not been able to do. Eventually, US Money could comprise a very significant portion of the money supply, and its debt-free issuance would have saved the American people a great deal in their tax burden, since there is no interest charge for a debt-free issue.
TIMOTHY CANOVA is a Professor of Law and Public Finance at Nova Southeastern University in Fort Lauderdale. He has practiced law on Wall Street, served as a Legislative Aide to the late Paul Tsongas, and served by appointment of Sen. Bernie Sanders on an advisory committee on Federal Reserve reform. An early critic of financial deregulation, he predicted and has lectured and written widely on the 2008 crisis through in The American Prospect, Dissent and the New America Foundation and published a chapter on New Deal Banking and Finance in an Oxford volume titled, When Government Helped: Learning from the Successes and Failures of the New Deal. His comment follows:
In 1999, a Republican Congressman from Illinois introduced a bill that would have authorized the Treasury Department to make up to $360 billion in interest-free loans ($72 billion a year for five years) to state and local governments for capital investments -- the kind of investments in critical infrastructure that are so needed today. The novel feature of the bill was how Treasury would finance the loans: not from tax revenues, not from borrowing, but from issuing the loans in the form of credits in United States Notes. Like the use of U.S. Notes in the past (such as the Civil War "greenback"), there would have been no cost to the Treasury or to U.S. taxpayers.
The Republican Congressman who introduced the greenback proposal in 1999 was Ray LaHood, who would become President Obama’s first Transportation secretary. Perhaps President Obama should have appointed Mr. LaHood, instead of Timothy Geithner, to head the Treasury. The LaHood bill, which was influenced by Ken Bohnsack’s “Sovereignty Loan Proposal,” made good sense in 2009, and it makes even more sense today. See: https://www.govtrack.us/congress/bills/106/hr1452/text. The nation’s infrastructure is fifteen years older and millions of Americans are out of work or underemployed, including a great many in the construction and building trades industries. The American Society of Civil Engineers has given the U.S. a grade of D+ for our deteriorating infrastructure and has estimated that more than a trillion dollars in new investments are needed in the coming years.
As the Civil War experience suggests, Treasury-issued notes could be used for a number of purposes, from helping to pay government expenses, and thereby reducing the deficit, to actually paying down some of Treasury’s outstanding debt. Lincoln used the greenback (about $450 million in U.S. Notes) to pay for necessary government expenses early in the Civil War without incurring unmanageable debt. At its peak, Lincoln’s greenback made up about 40 percent of the nation’s money supply during a time when the federal government was investing heavily in the nation’s infrastructure, from canals to railroads.
Likewise, the Federal Reserve could initiate lending programs directly to small businesses, as it did throughout the 1930s. Or the Fed could purchase bonds issued by state infrastructure banks, much as the Fed has been purchasing trillions of dollars in bonds from Wall Street. Such strategies would not cost the central bank or the Treasury a penny, and would actually help reduce deficits by putting tax-paying resources back to work.
Nobel laureate economist Robert Shiller has estimated that the federal government could employ up to a million Americans in labor-intensive programs, such as a new Civilian Conservation Corps, at a cost of only $30 billion a year -- a small fraction of what the Federal Reserve has spent in purchasing bonds from Wall Street in its Quantitative Easing (QE) programs (and about half of what the Fed is presently spending each month in its latest QE program). The LaHood bill, or better yet, an expanded version, would allow state and local government to employ several million workers upgrading our roads, bridges, water works, sewage treatment facilities, energy facilities, and other capital projects that enhance the quality of life for all of us. Meanwhile, the boost in employment would have important ripple effects, increasing effective demand for other goods and services, thereby strengthening the economy, and translating into increased tax revenues for governments at all levels. Such an approach proved highly successful for several decades, from the New Deal through the the post-World War II period, and ushered in today’s high-tech economy.
Some critics of a greenback approach will claim that it would be inflationary. Yet, by lending the newly issued U.S. Notes to state and local governments, the Treasury would be able to retire the Notes from circulation upon repayment. What is inflationary is the present approach to infrastructure finance in which state and local governments must borrow at significant interest rates, eventually repaying the principal and interest several times over. For instance, 25- and 30-year bonds issued by state and local governments under the Obama administration’s Buy America Bonds program have yields exceeding 7 percent. At that rate, the borrower will end up repaying as much in interest every ten years as it originally borrowed in principal. Over the life of a 30-year Buy America Bond, state and local taxpayers will pay four times for their capital expenditures: once in principal and three times in interest. That approach creates crushing tax burdens that far exceed inflation rates while hampering the ability of governments to provide essential services, from schools to first responders. Meanwhile, the Build America Bonds program provides investors with a 35% bond interest rebate from the Federal Government, at a cost of $50 billion a year to taxpayers, for investors who have enjoyed a nearly 40% appreciation in bond prices over the past four years.
Other critics will point out that the Treasury is already able to borrow at near zero interest, thanks to the Fed’s easy monetary policy. But the yields on longer-term maturities are higher, in the neighborhood of 3.2 to 3.6 or higher on 20- and 30-year Treasury bonds. At those rates, Treasury debt effectively doubles about every twenty years.
The LaHood bill had nearly two-dozen co-sponsors from across the full range of the political spectrum. But it never made it out of committee. Instead, in 1999 and 2000 the Congress and Clinton administration were busy “modernizing” our financial industry by gutting what was left of the Glass-Steagall Act firewalls and deregulating financial derivatives, greatly increasing systematic risk and creating a casino economy that misallocated trillions of dollars in capital and has brought harm to millions of people who played by the rules. Compared with our present system of allocating resources and financing infrastructure, use of the greenback is just common sense.
Further Reading
As we were putting the finishing touches on our May Policy Winners newsletter, an article on a similar theme appeared in the Friday, April 25 issue of the international Financial Times, endorsed by its Chief Commentator, Martin Wolf. While Policy Winners is not affiliated with the organizations noted in the two hyperlinks below, nor is it an advertiser of the recent book there mentioned and commented upon, we provide the information below for informative purposes concerning an active parallel debate we have noticed to be going on in the United Kingdom (as well as several other European countries).
http://www.positivemoney.org/2014/04/strip-private-banks-power-create-money-financial-times-martin-wolf-endorses-positive-moneys-proposals-reform/
http://www.positivemoney.org/modernising-money/
(Note: Due to widespread misconceptions, it must be pointed out that The Fed holds only about 10% of the national debt and cannot “send back” most of the interest paid on it…nor can it guarantee artificially low rates or extreme quantitative easing indefinitely. Going several years out, the debt is not forecasted to disappear without systematic spending cuts or tax increases…and few actually accept the new idea, “the more debt, the merrier”).
Sovereign-issued currency as the basis for monetary systems including our own has been a norm of history from which we have only relatively recently departed. Today, in our country, the pendulum has swung during the last 100 years to a virtual 100% privatization of the creation of money by private banks. The historic norm is often perceived as outside-the-box thinking, as it must be re-introduced to a new generation. Colonial Scrip, the Continentals of the American Revolution and the Greenbacks of the Civil War and Reconstruction may have made possible the existence of the United States of America today, yet in the decades since the Great Depression, the subject has become too unfamiliar to many for any kind of meaningful discussion.
There have continuously been proposals to go back to our monetary roots. Many, like the Chicago Plan, have taken the form of sweeping re-designs for the monetary system and the Federal Reserve. Some plans would leave the Fed untouched and effect a minuscule one or a few percentage points of the money supply, employing re-introduced United States Notes and/or their electronic equivalents, leaving control over monetary policy essentially as-is. Some would use the power of money created without a debt burden on the government to do what Lincoln did with his Greenbacks and even more in terms of investments in the economy. Others would use this money on a one-time basis in conformance with the established current budget, involving no increase in spending, simply an opportune chance to reduce the deficit. Some would be open to experimenting, in time, with the use of such funds to acquire income-producing assets for more meaningful reserve accounts and increased national financial security. Some would use it for cementing commitments to a serious balanced budget goal if not amendment, reassuring those concerned for unforeseen and emergency needs with the availability of a new fiscal safety valve.
There are many ideas for a minimal plan, and more ambitious plans could be separately debated and voted upon. Here’s the question: Is there any “step one” we can describe that we could use to improve upon our current situation? Would the re-introduction of any amount of the United States Notes so many of us carried in our pockets, issued as Lincoln used them without debt burden to the government, necessarily cause “hyper-inflation”, no matter how such an issuance is regulated? Have sovereign currencies always been inflationary in the past? Would government-issued money undermine the independence of the Fed, no matter the amount authorized or any mechanism for coordinating monetary policy… did such an undermining occur in the past? Is it safer to borrow hundreds of billions of dollars from the capital markets this year, assuming unnecessary debt now will discipline undesirable spending in future years? Are the inflationary effects of debt and fiscal headaches of increased debt service preferable to temptations to over-spend and cause hyper-inflation if debt consequence is minimized?
In the pages following are comments from six prominent scholars. Next month we plan to present another six to round out the dozen promised in our last issue. We invite further comments from our readers for publication or simply comments and questions off-the-record for consideration. Contributors present their own views and not necessarily those of the organizations with which they are affiliated. Few institutions have taken positions, yet, although we would very much like to see that happen in the near future.
Comments
The People’s Money
When the financial system crashed and the Federal Reserve rushed to the rescue, people and politicians asked this question: where did the Fed get all this money? The trillions it spread among distressed banks and financial firms. Or the additional trillions the central bank used to purchase a vast store of troubled mortgage-backed securities.
Most people and politicians were astonished though financial experts and learned economists of course knew the answer. The Federal Reserve created this money out of thin air. That is what central banks do. Nothing especially new about this effort except the staggering scale and breadth of the bailouts. Who gave the Fed permission to do this? Nobody, really, not the Congress nor the President. The central bank creates its own money and sets its own priorities.
After their initial shock, some people and some politicians began to ask a taboo question. If the Federal Reserve can do this for struggling bankers, why not do something similar to help people, communities and enterprises who, after all, struggled too? Oh, no, that’s not done, authorities explained. It might disturb the economy. It might undermine the soundness of the currency.
The usual evasions and denials are mostly bunk. Contributors to the following discussion seem to agree on that though they may disagree on many underlying questions, even some technical details. The central bank has posed for 100 years as a neutral technocratic institution, beyond the reach of politics, but that isn’t true either. Congress created the Federal Reserve 100 years ago. Congress can alter it or abolish it whenever it finds the nerve to do so.
The Federal Reserve is fundamentally a political institution despite the mystique and its convenient cloak of independence. That perhaps sounds obvious, but I emphasize the point because the broad public has been educated into ignorance and passivity. Even the most sophisticated political players are often as clueless as we ordinary mortals . As a reporter and author, I have been challenging this myth for the last 30 years, first in Secrets of the Temple: How the Federal Reserve Runs the Country and more recently in the pages of The Nation. My post-crash ideas on reform:
http://www.thenation.com/article/dismantling-temple
http://www.thenation.com/article/178366/why-federal-reserve-needs-overhaul
I have always addressed the subject of the Federal Reserve’s money creation powers with this essential question: who owns this money the Fed creates? My answer is we the people are the owners collectively. Not the Treasury or federal government and certainly not the commercial banks that are shareholders in the 12 regional Federal Reserve Banks. This conclusion provides the crucial justification needed for eventually accomplishing what many of us seek – a way to harness the Fed’s money power to financing in the broad public interest.
During the Bernanke regime, I found myself writing some supportive articles about the Fed’s posture because it was literally the only governing institution in Washington that seemed to understand the depth of the crisis. The Fed was actively trying to stimulate the recovery when the president and Congress were obsessed with deficits and pulling in the opposite direction. Bernanke, I reported, was flirting with more radical measures but in the end he backed off. My articles were perhaps too generous and definitely too wishful. In any case, the media ignored the story.
http://www.thenation.com/article/167355/federal-reserve-turns-left
http://www.thenation.com/article/171126/can-federal-reserve-help-prevent-second-recession
http://www.thenation.com/article/164216/its-time-debt-forgiveness-american-style
So I focus on this political question ahead of arguing over the structural design or technical aspects. We can disagree on what kinds of projects might be eligible or what we call this “free money” or how to alter the role of the central banking and private banks. It is clear we have considerable disagreement on these and other questions. This casual forum is a good start toward exploring answers. I hope the discussion is continued and expanded. But perhaps because I dwell in Washington DC I want to talk about a plausible path toward actually accomplishing this great reform and what it might look like.
First, I estimate that the prospects have improved substantially because of events in the last few years. The shock effect and widespread pain from the financial collapse and sputtering economy are still quite potent among the general public. Nevertheless, it remains undeniable that there is still very little political traction for big reform of the money system. That can change rapidly if the mega-banks expose us to another calamity or the global economy tips into a full-blown deflation. In the meantime, we have small beachheads in the society where education and agitation are getting underway smartly.
My strong conviction is that our shared idea can succeed eventually (don’t ask me when) but only if the objective is concretely visible and practical -- relevant to the broad ranks of citizens across the usual divisions of class and income. Therefore, I want to see ideas developing from the ground up and anchored in common experiences. In that regard, I point out that the subject of money is fraught with weird folklore and associations. It makes people nervous to hear esoteric arguments over whether money is real. It sure seems real if you have enough of it.
My point is, the political basis for achieving profound reform probably cannot start with grand abstractions but it should promise grand changes in everyday life. That could be high-speed railroads and building more bridges and highways. Or it might be a tangible program for full employment – remunerative jobs for everyone willing and able to work. The response to global warming and other ecological threats to human existence could be the highest priority for public works. Again, the benefits must be universal – something that everyone rich and poor will recognize as good value in their own lives.
I am convinced that this grand idea, properly developed and wisely executed, has a potential to revive the small-d democratic spirit that has been so battered by events. It cannot come from the top down. It has to be truly grounded in we the people. We might decide to call it “democratic money.”
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RICHARD STRINER, professor of history at Washington College, is the author of ten books. This proposal was first introduced in his book Lincoln’s Way: How Six Great Presidents Created American Power (2010) and in the article “How to Pay for What we Need,” published by The American Scholar in the winter 2012 issue. His comment, in article form (copyright Richard Striner):
Money Creating: a Usable Past for Tomorrow
Most economists discount the importance of cash — currency and coin — in our modern money supply. Policy-makers should ponder that fact as they consider proposals for government-created money. There is ample precedent for the creation of money by Congress. But this money-creation should employ the operational method that bankers use now: electronics.
Long ago, legal tender money was based in precious-metal coinage. Owners of gold and silver had the option of taking this treasure to the mint, where it was melted, stamped into coin, and given back. Then the “monetized” metal would circulate in market transactions. Congress created the United States Mint on this basis in the Coinage Act of 1792.
Out of this physical foundation of coin came a paper emanation that expanded the money supply: bank notes. These notes — certificates stating that the face value of the note was “payable to the bearer on demand” — began as receipts for deposits of coin that had been placed in commercial banks. But then bankers hit upon the lucrative idea of printing bank notes in great quantities — quantities that vastly exceeded the coin deposits of the bank — and then issuing this blizzard of bank note paper in the form of loans. It was a gigantic and risky juggling act, but the laws of most nations permitted it.
People didn’t have to accept these notes; they were not legal tender. But when people were willing to accept the notes, they had purchasing power: they were an operational equivalent of money. Presto: out of a coinage foundation arose an emanation of far greater purchasing power in the form of paper certificates. In 1790, Treasury Secretary Alexander Hamilton admitted the “well established fact, that banks in good credit, can circulate a far greater sum than the actual quantum of their capital in gold and silver.”
Based upon Hamilton’s recommendation, Congress chartered the Bank of the United States in 1791; it lasted twenty years until the charter lapsed. A second Bank of the United States that was given a twenty-year charter in 1816 went out of existence in 1836. In 1863, the Republican Congress created a system of national banks. To make sure that these banks would maintain enough capital “on reserve” to make their bank notes reliable, Congress forced the bankers in exchange for their charters to invest a percentage of their funds in war bonds, which had to be placed on deposit with the U.S. Treasury. A new position in the treasury was created to regulate the system: the comptroller of the currency.
After the Civil War, commercial banks began to switch from bank notes to a different form of lending via paper certificates: the checking account. After the loan had been approved, the banker would tell the borrower that the loan had been “credited” as a “deposit” to a checking account that had been set up to facilitate the loan. To spend the loan, the borrower would just write checks, directives to pay, which the bank would redeem in hard coin when the checks were presented at the bank.
These loans came out of thin air. As economist Irving Fisher explained in 1935, “when a bank grants me a $1,000 loan, and so adds $1,000 to my checking deposit, that $1,000 of ‘money that I have in the bank’ is new. It was freshly manufactured by the bank out of my loan and written by pen and ink on the stub of my check book and on the books of the bank . . . Except for these pen and ink records, this ‘money’ has no real physical existence.”
By the time that Congress intervened in the banking system again - in the Federal Reserve Act of 1913 - checking accounts had replaced bank notes as the preferred medium of lending as well as the method of payment most frequently used in commercial transactions. The Federal Reserve Notes that were authorized in 1913 (printed at the treasury and furnished to banks) were merely a convenience for customers of the bank who wished to pay for things in cash without parting with gold and silver coins. Compared to checking, these notes were of secondary importance. It was obviously easier to pay by check than send an armored car full of cash. The volume of checks that were written and deposited vastly exceeded the stock of Federal Reserve Notes - a crucial point to understand.
All national banks were required to join the new Federal Reserve System. Member banks had to park some of their reserve funds with the regional Federal Reserve bank. When a Federal Reserve bank needed currency to supply to its member banks — which in turn would supply it to the customers who were cashing checks — the regional bank would place assets on reserve as collateral for the Federal Reserve notes, which were treated as a loan. When the bank no longer needed to carry as much currency, some notes could be returned and the bank would get back some assets. The process is simpler today: banks buy as many notes as they believe their customers will need, and then their accounts at the Federal Reserve are accordingly debited. Banks also buy coins from the mint the same way. And the minting process itself has changed completely: the mint buys the metal that it needs to make coins, which have long since ceased to be pure gold or silver (except for commemorative pieces that are sold to collectors).
Now observe what has happened over two hundred years or so. From a system that was based upon the minting of gold or silver coins, which were placed in banks as a foundation for a larger “circulating medium” of paper (bank notes or checks), coins and even currency have been reduced to mere “chump change:” representational tokens for a deeper source of purchasing power that is created by banks out of nothing. The Federal Reserve confirmed all this in 1939 as follows: “Federal Reserve Bank Credit . . . does not consist of funds that the Reserve authorities ‘get’ somewhere in order to lend, but constitutes funds that they are empowered to create.”
And that’s the way our money is created nowadays — through “credit” that is pulled by the Federal Reserve system out of nothing and sent to member banks and the public in the form of loans. Moreover, paper checks have become increasingly rare: most purchases take place electronically; both “the Fed” and the treasury department are moving toward an all-electronic system.
It’s important to understand the way in which our bank-created money supply functions in order to contemplate proposals for radical change.
The historical, conceptual, and legal basis for radical change in our monetary system is the long-dormant American practice of creating new money by direct legislative action, money which (like bank-created “credit”) is pulled out of nothing but then gets spent — not lent — into circulation.
The printing of money to be spent into use by government is a practice that dates back to colonial America. The colonists were often literally cash poor in terms of circulating coin and the commercial banking profession was still in its infancy on these shores. Benjamin Franklin helped pioneer the method of “printing press money” in Pennsylvania.
Legal tender paper money was created by the Continental Congress in the American Revolution. The Civil War was partly financed on both sides by the issuance of paper money, which was spent into use. One pernicious side effect of this money creation by government was inflation: soaring prices, caused at least in part by the reluctance of creditors to accept payment in bills that were not backed by coin. Even though people under law were obliged to accept the new “United States Notes” that were created pursuant to the Legal Tender Act of 1862, they often accepted them at depreciated rates, which caused prices to rise: a barrel of flour that might cost five dollars if purchased in coin or in reliable bank notes might well cost ten dollars if purchased via government “greenbacks.”
The constitutionality of the Legal Tender Act was challenged, but in 1871 the Supreme Court upheld it in the case of Knox v. Lee. Thereafter reformers and a short-lived Greenback Party advocated the use of United States notes to pay for programs designed to create jobs or bring other forms of economic relief to farmers and workers. But the orthodoxies of Gilded Age finance precluded such action.
During the Great Depression of the 1930s, some of America’s most distinguished economists — John R. Commons, Irving Fisher, Laughlin Currie, Henry C. Simons, and Richard Lester — called for the issuance of “greenbacks.” Their particular proposals differed, but the common denominator was the principle of government-created money. In 1933, Congress made limited provision in the Agricultural Adjustment Act for the issuance of new United States notes at presidential discretion, but FDR declined to use that authority.
Since the Great Depression, a number of mavericks have proposed reviving “the greenback.” Some have advocated abolishing bank-created money altogether in favor of government “fiat money.” Others (including myself) have argued for a mixed system, a best-of-both-worlds resolution with the authority to create new money shared by the banking system, capped by the Federal Reserve, and Congress.
My proposal builds upon and extends the mechanics of the status quo. To wit: bank-created money is summoned out of nothing and sent in the form of loans through direct electronics. The small amounts of cash that we use from time to time for “chump change” transactions are provided to the public via banks. My proposal: keep this system, and persuade the members of Congress to vest themselves with the same kind of power to create new money out of nothing that bankers possess, but with a simple and crucial difference. The money created by Congress would be spent (not lent) electronically into bank accounts of government employees or vendors.
Twin streams of money creation would thereby emanate from Congress and the Federal Reserve. And these streams would converge to form a common monetary pool in the accounts of the banking system. The benefit: a built-in contra-inflationary capability. The Federal Reserve, though its operational methods (the manipulation of interest rates, the raising of reserve ratios, and the use of “open market operations,” consisting of the buying and selling of bonds) has a dazzling array of techniques through which inflation can be counteracted. Under Paul Volcker’s chairmanship, “the Fed” had great success in taming the inflation of the late 1970s.
The best way to launch my proposal on an incremental basis would be for Congress to pump a very small amount of new money into the bank accounts of government employees. If inflation results — inflation that can be clearly traced to this small infusion of money created by Congress — the Fed would be positioned to take remedial action right away. And then, if this first experiment should prove successful, the method could be extended in progressively larger operations.
The system I propose has two advantages: (1) its use of electronic transmission would make it technologically up to date and easy to implement; (2) by creating a partnership between Congress and the Federal Reserve that would retain and employ the effective forms of monetary policy that we have in place already, my proposal could overcome the most common objection to the greenback method from the orthodox: fear of inflation.
Today’s dysfunctional Congress is incapable of doing much of anything, let alone considering and implementing a visionary change of this nature. But in the next few decades our public investment challenge in the United States will be nothing less than stupendous. Here’s a way to increase our ability to pay for public necessities without higher taxes, without more deficit spending, and without inflation. It is time to start advocating this system to the public and policymakers. With luck, when the next sea change in American political culture occurs, the conceptual,
structural, and practical framework for progress will be in place.
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ELLEN BROWN, Esq., is the founder of the Public Banking Institute, the author of twelve books including Web of Debt and The Public Banking Solution, and a prolific writer of current-events articles involving the banking system. She is presently running for the office of Controller of the State of California. Her comment follows:
Not only can the government issue money without creating price inflation; it needs to issue some money just to get the economy back to where it was in 2008. According to a 2012 staff report on the website of the New York Federal Reserve, the M3 money supply had then shrunk by $4 trillion from the beginning of the banking crisis in 2008. That means at least that much money could be added back in without creating price inflation.
One proposal for “reflating” the money supply is for the Treasury to simply mint some trillion dollar coins. This idea has been called “silly,” but our forefathers did it routinely, and very successfully. Why is it less silly for the central bank to create money out of thin air and lend it at near zero interest to private commercial banks, to be re-lent to the public and the government at market interest rates, than for the government to simply create the money itself, debt- and interest-free? We have lost not only the power to create our own money but even the memory that we once had that power.
The coins would not circulate (who could make change for a trillion dollar coin?) but would be deposited in the government’s account at the Fed. They would therefore not directly inflate the circulating money supply. Congress could write checks against the coins for goods and services up to the point of full employment without creating price inflation, since supply and demand would rise together. After that, it could avoid inflation by taxing the money back. The velocity of money is about seven in a vibrant economy. If the money changes hands seven times, and each of the recipients pays an average 15% tax on it, the government will get the entire outlay back, and the money supply will not have changed.
Another possibility for “reflating” the economy is the “social credit” option – issue a dividend that goes directly into the pockets of consumers, to be spent as they choose. This can be done electronically, just as the Fed conducts its quantitative easing electronically today. Again, this need not be inflationary, since goods and services will rise along with money (“demand”), keeping prices stable; and if the velocity of money is seven and the average tax rate is 15%, the government will get all its money back the next April.
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NICOLAUS TIDEMAN is Professor and Head of the Economics Department at Virginia Tech. He has served as the Senior Staff Economist on the President’s Council of Economic Advisors, as an advisor to the Treasury Department and the US Bureau of the Budget and as a think tank scholar (American Institute for Economic Research). He has written a book on public choice and over a hundred articles in scholarly journals dealing, notably, with economics and public choice. His comment follows:
The problem with issuing U.S. Notes is that it may lead citizens to underestimate the cost of government spending. Government spending is efficient when citizens are willing to pay as much as it costs. If some of the cost is paid by printing money, citizens may underestimate the cost and allow government officials to spend inefficiently. On the other hand, if a given amount of monetary expansion is going to occur by one mechanism or another, it is more detrimental to the overall well-being of a society to have the benefit of the monetary expansion captured by a private banking system than to have it captured by politicians promoting excessive spending. My favored recommendation would be that monetary expansion occur by interest-free loans to all taxpayers. If that is not possible, I would recommend that monetary expansion to attain a chosen path of the price level occur by the issuance of U.S. Notes. It is very important that such a policy be accompanied by a governing mechanism that adjusts the quantity of money to stay on the chosen price path.
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On rational grounds the choice between debt-based borrowed money creation by the Fed and debt-free output based congressionally authorized money creation by the Treasury is clear: why pay for what you can get free? Creating debt-free money, whether in the form of US Note paper money or its electronic equivalent which we call US Money, is obviously superior to creating interest-bearing debt, so long as the Constitutional provision to regulate the value of money is observed. Elementary math based on Irving Fisher’s fundamental money exchange equation shows that regulating the value of money (i.e. keeping the CPI nearly constant) requires that money supply growth rate be tied to real output growth rate, as shown by the White Paper at our site. The formula relating the two (in times of constant money velocity) shows that money supply growth rate should approximately equal real output growth rate in order to keep CPI growth rate close to zero. This leads to the realization that the true and correct backing for fiat money creation by the government should be seen as the real output of the economy, that is, the very goods and services which change hands through transactions using the money supply. Therefore, the inflation prevention requirement can be accomplished by applying modern stochastic optimal control technology to appropriate macroeconomic models rather than via the interest charge disincentive to create money through debt creation. A money supply feedback control law based on the relevant macroeconomic variables will suffice to prevent inflation in the modern context (no such theory existed in 1913 when the Fed was created). In fact, the little islands of Guernsey and Jersey in the English Channel have been issuing debt free government issued money for nearly 200 years now in a responsible way, with excellent results. If they can do it without math models, then we can surely do it with NASA’s space age technologies.
Therefore we wholeheartedly agree with the drive to “bring back the Greenbacks” and believe that this can be done by coordination of money creation and debt creation. That is, if increases in debt-free money creation by the Treasury are accompanied with decreases in bond issues by the Treasury then net inflation pressures can be kept in check. A bill to reintroduce the US Note issues that provides for compensatory decreases in bond issues would therefore be non-inflationary, and therefore an excellent first step forward towards more substantial initiation of US Money issues in electronic form. The rate of issue needs to be discussed of course, but the $50 billion per month rate suggested by the editor of this newsletter seems very reasonable as a first step. It will eliminate a good fraction of the budget deficit for the current year, and if continued for at least one additional year it will also enable the setting aside of the budget sequestration cuts that have done so much damage to the economy and our military preparedness. Our proposal includes issue of sufficient new US Notes and electronic US Money to refund all allocations cut since sequestration began.
This first step should be followed up with subsequent steps that include government money creation in electronic form, i.e. US Money as well as US Notes. Our EMERGENCY US MONEY STIMULUS ACT of 2014 provides for the replacement of the $85 billion per month quantitative easing by the FED with a balanced increase in US Money issues. The quantitative easing stimulus goes to the financial sector, in contrast, the US Money issues can be targeted at all of the budget items that have been cut by sequestration, as well as infrastructure projects, education, health, and safety net expenditures. This will have a very positive effect on bringing unemployment down and pushing GDP growth up in a way that quantitative easing has failed to accomplish.
Additional elements of our longer range plan include the creation of an independent Monetary Control Authority that would coordinate the various forms of money creation in such a way as to maintain CPI at nearly constant levels, something that historically the Fed has not been able to do. Eventually, US Money could comprise a very significant portion of the money supply, and its debt-free issuance would have saved the American people a great deal in their tax burden, since there is no interest charge for a debt-free issue.
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TIMOTHY CANOVA is a Professor of Law and Public Finance at Nova Southeastern University in Fort Lauderdale. He has practiced law on Wall Street, served as a Legislative Aide to the late Paul Tsongas, and served by appointment of Sen. Bernie Sanders on an advisory committee on Federal Reserve reform. An early critic of financial deregulation, he predicted and has lectured and written widely on the 2008 crisis through in The American Prospect, Dissent and the New America Foundation and published a chapter on New Deal Banking and Finance in an Oxford volume titled, When Government Helped: Learning from the Successes and Failures of the New Deal. His comment follows:
In 1999, a Republican Congressman from Illinois introduced a bill that would have authorized the Treasury Department to make up to $360 billion in interest-free loans ($72 billion a year for five years) to state and local governments for capital investments -- the kind of investments in critical infrastructure that are so needed today. The novel feature of the bill was how Treasury would finance the loans: not from tax revenues, not from borrowing, but from issuing the loans in the form of credits in United States Notes. Like the use of U.S. Notes in the past (such as the Civil War "greenback"), there would have been no cost to the Treasury or to U.S. taxpayers.
The Republican Congressman who introduced the greenback proposal in 1999 was Ray LaHood, who would become President Obama’s first Transportation secretary. Perhaps President Obama should have appointed Mr. LaHood, instead of Timothy Geithner, to head the Treasury. The LaHood bill, which was influenced by Ken Bohnsack’s “Sovereignty Loan Proposal,” made good sense in 2009, and it makes even more sense today. See: https://www.govtrack.us/congress/bills/106/hr1452/text. The nation’s infrastructure is fifteen years older and millions of Americans are out of work or underemployed, including a great many in the construction and building trades industries. The American Society of Civil Engineers has given the U.S. a grade of D+ for our deteriorating infrastructure and has estimated that more than a trillion dollars in new investments are needed in the coming years.
As the Civil War experience suggests, Treasury-issued notes could be used for a number of purposes, from helping to pay government expenses, and thereby reducing the deficit, to actually paying down some of Treasury’s outstanding debt. Lincoln used the greenback (about $450 million in U.S. Notes) to pay for necessary government expenses early in the Civil War without incurring unmanageable debt. At its peak, Lincoln’s greenback made up about 40 percent of the nation’s money supply during a time when the federal government was investing heavily in the nation’s infrastructure, from canals to railroads.
Likewise, the Federal Reserve could initiate lending programs directly to small businesses, as it did throughout the 1930s. Or the Fed could purchase bonds issued by state infrastructure banks, much as the Fed has been purchasing trillions of dollars in bonds from Wall Street. Such strategies would not cost the central bank or the Treasury a penny, and would actually help reduce deficits by putting tax-paying resources back to work.
Nobel laureate economist Robert Shiller has estimated that the federal government could employ up to a million Americans in labor-intensive programs, such as a new Civilian Conservation Corps, at a cost of only $30 billion a year -- a small fraction of what the Federal Reserve has spent in purchasing bonds from Wall Street in its Quantitative Easing (QE) programs (and about half of what the Fed is presently spending each month in its latest QE program). The LaHood bill, or better yet, an expanded version, would allow state and local government to employ several million workers upgrading our roads, bridges, water works, sewage treatment facilities, energy facilities, and other capital projects that enhance the quality of life for all of us. Meanwhile, the boost in employment would have important ripple effects, increasing effective demand for other goods and services, thereby strengthening the economy, and translating into increased tax revenues for governments at all levels. Such an approach proved highly successful for several decades, from the New Deal through the the post-World War II period, and ushered in today’s high-tech economy.
Conclusion
Other critics will point out that the Treasury is already able to borrow at near zero interest, thanks to the Fed’s easy monetary policy. But the yields on longer-term maturities are higher, in the neighborhood of 3.2 to 3.6 or higher on 20- and 30-year Treasury bonds. At those rates, Treasury debt effectively doubles about every twenty years.
The LaHood bill had nearly two-dozen co-sponsors from across the full range of the political spectrum. But it never made it out of committee. Instead, in 1999 and 2000 the Congress and Clinton administration were busy “modernizing” our financial industry by gutting what was left of the Glass-Steagall Act firewalls and deregulating financial derivatives, greatly increasing systematic risk and creating a casino economy that misallocated trillions of dollars in capital and has brought harm to millions of people who played by the rules. Compared with our present system of allocating resources and financing infrastructure, use of the greenback is just common sense.
Further Reading
As we were putting the finishing touches on our May Policy Winners newsletter, an article on a similar theme appeared in the Friday, April 25 issue of the international Financial Times, endorsed by its Chief Commentator, Martin Wolf. While Policy Winners is not affiliated with the organizations noted in the two hyperlinks below, nor is it an advertiser of the recent book there mentioned and commented upon, we provide the information below for informative purposes concerning an active parallel debate we have noticed to be going on in the United Kingdom (as well as several other European countries).
http://www.positivemoney.org/2014/04/strip-private-banks-power-create-money-financial-times-martin-wolf-endorses-positive-moneys-proposals-reform/
http://www.positivemoney.org/modernising-money/
