By Dan Kervick
A new year is upon us. And even before its first hour has been rung in, 2012 is already takingshape before us as a pivotal year in global politics. We canall feel the awakening under way. Arevived longing for equality, shared prosperity and democratic solidarity isinspiring a vibrant new politics around the world. Thisnew activist spirit is quickened by the keen apprehension of young people onevery continent that something is very, very wrong with the present economicand political order. The risinggeneration, heirs to sick and damaged societies that have been unbalanced bydecades of plutocratic rule and antisocial cupidity, have now begun to rouse themselves- and in the process they have rallied the moral outrage of their fellowcitizens.
In the face of so much hope and energy, cynicism fallsincreasingly mute. The young occupiersof the public squares are giving new heart to all of those older, beleaguered reformerswho worried that they might never see real change in their countries duringtheir own lifetimes. Young people almost everywhere – from the defiantstreet vendor Mohamed Boazizi in Tunisia to the indignados in Spain to the participants in the Occupy movementacross the United States and elsewhere – are rejecting the destruction wrought ontheir societies by a debased system of economic predation, environmental recklessness,elite privilege, corporate fraud and sheer inhuman greed. The youthful protestors are determined to restoredemocratic society and human decency, and redeem the dimming promise of their commonfuture, and they have set their sights on the global dictatorship of big money. The 1%, once complacent in their impregnablefortresses of cash, can be heard to speak in worried tones of late. They lean pensively from their tower windows,no longer quite so comfortably aloof, and hear the rebel footfalls down on thestreets in the dark.
The task the new activists have set themselves isformidable, because the economic disorders in need of repair are so numerous. The maladies here in the United States areparticularly acute: Real unemployment iswell up into the double digits – despite standard government habits of cookingthe official unemployment books by not counting various classes of peoplewithout jobs. Unemployment rates amongthe young are especially appalling. Income disparities and polarization arestaggering: For example, CEO pay in theUS is now many hundreds of times higher than average worker pay, and the shareof national income going to workers is now at its lowest level since thecountry began measuring that share almost 60 years ago. The share of income going toward corporateprofits, on the other hand, is at the highest level since 1950, and yet many ofthese profits have been harvested by firing workers and cutting costs, not fromnew production. And by some recent measures, the proportion ofAmericans who count as either “poor” or “lower income” is close to 50%. As always, political power follows wealth,and that ineluctable social fact poses a large part of the challenge forreform. The greater the gap between therich and the not-rich, the greater the capacity of the rich to buy the kinds ofpolitical influence they need to prevent change.
So the problems are not small, and they will not be easy toaddress and fix. We therefore need tobattle for social and economic changes along many fronts. But as the new generation of activists pointour societies toward these necessary reforms, so many of which pertain to theoppressive and unjust power derived from the control of concentrated money, theywould be well advised to focus significant attention on the monetary system itself. The monetary systems that currently exist aredeeply flawed: they are antiquated; theyare socially inefficient; they are undemocratic; they lack openness andaccountability; and they privilege elite financial interests over the interestsof ordinary citizens and the public interest. Citizens in every country must begin to work together to reassert publiccontrol over their monetary systems, and assure that those systems are subjectto democratic governance. And they mustresist calls to expand the rule of private sector wealth over our monetarysystems, and to reduce the public’s control over money even further below thelevel at which it currently stands. Thepublic’s money must remain in public hands, so it can be mobilized for publicpurposes.
The aim of this essay is to assist the bourgeoning newmovement for a more just and democratic world by contributing some ideas towarddemocratic reform of our monetary systems. These ideas do not primarily take the form of detailed policyinitiatives or specific legislative proposals, although some specificsuggestions along these lines are offered at the end of the essay. Instead, the focus is on providing a generalframework for understanding the role of money and monetary institutions in themodern world – a framework that helps to clarify what money is, and also pointsclearly toward what money could be. Themonetary system we actually have is an instrument of the plutocratic order ofneoliberal money manager capitalism. Buta monetary system fit for a democratic society lies within our grasp.
Few of the ideas in this essay are original. A good part of my thinking on the subject ofmoney and monetary theory has been inspired by the work of a school of contemporarypost-Keynesian economists and independent writers and researchers whose viewsoften go under the name “Modern Monetary Theory” – or “MMT” for short. Some prominent thinkers in this field areL. Randall Wray, Scott Fullwiler, Stephanie Kelton, Warren Mosler, William K.Black, Marshall Auerback and William Mitchell. And like many of these thinkers, my thinking has also been stronglyinfluenced by the 20th-century economists Hyman Minsky and Abba Lerner. But I hasten to add that there are severalplaces in what follows in which I defend or suggest views that either divergefrom, or go beyond the views that have been defended by the aforementionedauthors.
1. The Public’s Money
I have claimed that the public’s money must remain in publichands. But what do I mean when I call amonetary system – such as the US dollar system – “the public’s money”?
I don’t mean that each and every dollar literally belongs tothe public as public property. TheUnited States government is ultimately responsible for the oversight of themonetary system and the ongoing creation of new dollars. But as dollars are created they are exchangedfor goods and services, and thereby become the property of the individuals whoproduce those goods and services.
Nor do I mean that each and every dollar that is created comesinto existence as a direct consequence of some act of public or governmentalchoice. Clearly this is not thecase. The main force driving the creation of dollarsis the banking system. Banks bring newdollars into existence by making loans that support the economic activity ofbusinesses and individuals in the real economy. These loans expand the total sum of bank deposits, and bank deposits areproperly regarded as one form of money. Money in a more restricted sense – physical currency and bank reserves –primarily comes into existence only after the fact in conformity with centralbank policies that accommodate the desires of ordinary banks and their customersto expand bank deposits.
But the dollar is the public’s money because the dollarsystem is the monetary system that US citizens, by right, control. Constitutionally,the people of the United States are sovereign over their government, and the powerover the US money supply is vested in Congress, the political branch closest tothe people. The bureaucratic engine ofdollar control – the Federal Reserve System – was created by an act of Congressand possesses all of its monetary powers by delegation of Congressionalauthority. Congress and the Fed set the rules for thebanking system, and thus govern the processes through which new dollars arecreated and existing dollars are destroyed. The US government can thus be viewed as a monopoly producer of thedollar, even though it has delegated operational responsibility for thosemonopoly powers to the Fed. And privatesector banking plays the large role it does only because some of thegovernment’s monopoly power has been chartered out to the banks, presumably tofulfill a public purpose.
And yet, there is good reason to believe that the public’s monetarysystem is broken, and that the public purposes for which it is supposed toexist are being thwarted. As we can now clearly see, banks and otherfinancial institutions blew up a vast speculative bubble of financial products leadingup to the crash in 2008, a bubble filled with airy, foolish and fraudulentpromises leveraged and re-packaged many times over. The Fed did nothing to prevent thisinternational-scale Ponzi scheme from unfolding, and we are all now dealingwith the financial carnage that resulted. And, as I will argue, the powerful monetary tools that could now bedeployed to restore full employment and prosperity are locked up in an outdatedand elitist system designed more to protect the reckless financial institutionsthat caused the disaster than to serve the public that is paying the price ofthe disaster. This deeply undemocraticmonetary system is still directly supervised by the Fed.
But it would be a mistake to focus too single-mindedly onthe Fed and its failures. The keymonetary malefactors in the current crisis are a derelict and increasinglymalevolent US Congress, a Congress which appears actively hostile to the verypeople it was elected to represent, and which works daily to serve theplutocratic masters who fund Congressional campaigns and sit atop our society’sfinancial hierarchies. It doesn’t haveto be this way. The Fed is a creatureof the US Congress; it was created by the US Congress; and it continues to playits role in the formation of monetary policy at the pleasure of the USCongress. Congress has all the powerand capacity it needs to seize control of our monetary system on behalf of thebroad public it represents, and to steer latent and untapped US financial powertoward full employment and broad prosperity. But it refuses to make use of its inherent Constitutional powers toanswer these pressing national needs, and works instead to protect the vestedfinancial interests of the very few. The Congress that currently exists has beenbought by the plutocracy. So it will beup to the American people to lead the charge on behalf of monetary democracy.
2. Reflections on Modern Money
Before considering what it would mean to make our monetarysystem more democratic, let’s begin by calling to mind a few familiar featuresof money and modern monetary systems in general, features we all intuitivelyunderstand as users of money in a modern monetary economy.
First, money obviously comes in very different forms. Not only are there different currency systems– the dollar system, the euro system, the renminbi system, etc. – but evenwithin a single system, money can take significantly different forms. There is all of that familiar paper andmetal currency, consisting of tangible objects that can be physicallytransported from one hand to another, and that are denominated with differentface values. But money might also existsimply as “points” electronically credited to someone’s digital monetaryscorecard at a bank. These points aredebited from and credited to various accounts, and need never be exchanged forphysical currency. We can already see anear future in which the traditional material currency of metal coins and papernotes will no longer be used. Inthinking about our modern monetary system, then, it is useful to think of it asa network of such monetary scorecards. And we can think of the exchange of physical paper and metal currency asjust one among several ways of adding and subtracting points from the monetaryscorecards of those who exchange the money. Each individual possess such a scorecard, but so do businesses,governments and other organizations.
Conceiving of our monetary transactions in this way iscompatible with the intellectual framework developed by Hyman Minsky, who said,“A capitalist economy can be described by a set of interrelated balance sheetsand income statements.” However, theworld of balance sheets Minsky asked us to describe contains more than justmoney. These balance sheets record theownership of other financial assets – that is, promises or commitments of moneyrather than money itself. And they alsocontain accounts of real assets –items of positive value to their owners, like cars or buildings or a bookcollection – that are not financial assets. Finally, the balance sheets are also accounts of liabilities – things that represent negative value to their owners,such as debts that legally commit the owner of the debt to an outflow of wealthover time.
A second thing to note about modern monetary systems is thatthe market value of these exchangeable monetary points lies, for all of theirusers, purely in their exchange value. That is, the only value that attaches to the acquisition and possessionof money comes from the knowledge that money can be exchanged for otherthings. It is true that people alsoseek to acquire money as a “store of value” that they save for indefiniteperiods and have no definite plans to spend. But the only reason one can be successful in storing value when one saves money is that otherthings continue to happen out in society that preserve the use of that money asa medium of exchange. If at any timepeople became unwilling to accept that form of money in exchange, the saverwould no longer be storing value when they saved their money, but valuelesspoints on a meaningless scorecard.
The fact that the value of modern money is purely based onits acceptance in exchange makes money different from all of the non-monetaryitems that we accumulate and exchange. Non-monetary items of value always have a direct practical utility, forat least some significant number of people, a utility that is not dependent onthe prior exchange of those items for something else. The utility might be realized inconsumption, as it is with a bar of chocolate, or in the production of someother product or service, as with a block of iron. It is true that for some specific people, the entire value ofsome non-monetary object might derive from the prospect of exchanging thatobject for something else. So, forexample, I might be a philistine art collector who buys paintings only to storevalue over time and perhaps exchange them later for the things I reallywant. For me, paintings function as something like money. But I can use paintings in this purelymercenary way, as merely something to exchange for something else, only becausethere are other people who lovepaintings for their own sake. Similarly, I might be a prisoner who tradesgoods for cigarettes, even though I don’t smoke, but only because some otherprisoners do smoke, and are willing to give something up for thecigarettes. But money is differentaltogether. What makes a certain good aform of money is that its value for pretty much everyone lies entirely in the fact that others willaccept it in exchange. There is nonon-monetary, non-instrumental foundation for the exchange value of money. There might be a few demented misers with aperverse love for paper bills and metal coins themselves, and a few numismatichobbyists who collect these bits of money as cultural curiosities and works ofart in themselves. But the exchangevalue of money does not depend in any significant way of the existence of thisrelatively small number of people.
Thirdly and finally, it is clear that governments play avery important role in the regulation of contemporary monetary systems, and inthe creation and destruction of the monetary units in that system. The monies we use have an official, legallyinstitutionalized role in our economies, an official status that is advertizedto us by the markings and declarations on the physical currency itself. Almost all money in actual widespread use issome government’s money. The governmentis central in preserving the value and stability of the government’s money overtime. And we know that while we allhave a great deal of liberty to exchange the money we personally possess forother good and services, and to exchange goods and services for money, thelegal authority to create and destroy the official government money is tightlyregulated and protected. It is to suchofficial, government administered monetary systems – at least when they existin democratic societies – that I refer when I describe a monetary system suchas the dollar system as “the public’s money.”
But how do those governmental monetary processeshappen? How is the monetary systemstabilized over time? How is moneyactually created and destroyed in a modern monetary economy? The full answer to these questions is notsimple. Governments are complexentities, consisting of many separate branches, divisions, departments andagencies, each with its own assigned powers and authorities, and many distinct operationalcenters have their hands on different aspects of the monetary system. The private sector plays a key role aswell. My focus will primarily be onthe processes that create and destroy money. We can put off the precise details of government monetary operations fornow, and start instead with a simplified model. I will call the government in this simplemodel a “monetarily sovereign government”, or just a “monetary sovereign”.
Monetary sovereigns can come in different forms, but in ademocracy the people as a whole are supposed to be the ultimate seat and sourceof the government’s sovereignty, including its sovereignty over monetaryoperations. Think of the monetarysovereign, no matter what individual or group of individuals constitute andexercise that sovereignty, as possessing a single monetary account of its own -a single unified monetary scorecard. Initially, the monetary sovereign’s scorecard can be thought of as verymuch like anyone else’s monetary scorecard. When the monetary sovereign spends, and either buys something fromsomeone in the private sector or transfers money outright to the privatesector, some monetary points are deducted from the monetary sovereign’sscorecard and an equal number of points are added to that private sectorscorecard. And going in the otherdirection, when the monetary sovereign taxes, or when someone purchases somegood or service from a government agency, some monetary points are deductedfrom the private sector scorecard and an equal number of points are added tothe monetary sovereign’s scorecard.
But there are two wrinkles, two special circumstances thatmake the monetary sovereign’s scorecard very different from private sectorscorecards.
First, the monetary sovereign is the seat of government, andhence the ultimate administrator of its own scorecard. If you and I exchange money, and theexchange takes place via our bank accounts, the banks that oversee theseaccounts administer the adjustment of the monetary points on our scorecards. And if two banks exchange money, the government,which operates a central bank that serves as a sort of bank for bankers,administers the adjustment of monetary points between the two bankscorecards. But when a monetaryexchange takes place between the monetary sovereign and any other person orentity in the private sector, the monetary sovereign is the ultimateadministrator or arbiter of the monetary adjustment. The monetary sovereign’s scorecard is notadministered by some third party, but by the monetary sovereign itself.
It is true that the scorecard of some agency within the government might beadministered by some other agency of the government. In the US system, for example, the TreasuryDepartment’s monetary transactions are administered by the Federal ReserveSystem, which holds the Treasury Department’s accounts. But the Fed is ultimately part of thegovernment, which means that the US government as a whole is the ultimateadministrator of the government’s own accounts.
The other way in which the monetary sovereign’s monetaryscorecard is different from a private sector scorecard is connected with thefirst difference: A monetarily sovereigngovernment reserves for itself the power of adding or deleting monetary pointson its own scorecard or any other scorecard, at its own discretion, without anyrequirement that an equal number of monetary points are debited from any otherscorecard or credited to any other scorecard. And the monetary sovereign uses its power to guarantee that it is the sole entity in the monetary system thatpossesses such power. The monetarysovereign, in other words, wields the exclusive power to create and destroymoney in the monetary system it controls. Currency users in the private sector, on the other hand, can only exchange monetary points in ways thatmake the books balance. To the extentthat agents other than the monetary sovereign are permitted to engage inmoney-creating and money-destroying operations, these operations take placeonly with the permission of the monetary sovereign, and under the guidance orsupervision of the monetary sovereign.
here might appear to be one partial exception to the aboverestriction, however. Private sectorbanks are also permitted, within certain limits, to create new monetary pointsin the monetary system. When a bankdecides to give a loan to some new borrower, it creates a deposit account forthat borrower and credits the loaned amount of dollars to that account. In effect, it creates a new monetaryscorecard for the borrower and puts some monetary points on it. As the economists Basil Moore, ScottFullwiler, Marc Lavoie and many others have emphasized, those points need notcome from anywhere. They need not bethe result of a transfer of points from some other account to the borrower’saccount. Although the bank might besubject to central bank reserve requirements that mandate the bank hold acertain percentage of money against its deposits in its reserve account at thecentral bank, the bank typically has several weeks to meet these requirements,and can acquire the reserves aftermaking the initial loan, either from other banks or from the central bankitself.
So bank lending can in some sense create additionalmoney. However, in a very strict sense,what the bank borrower receives is not monetary points, but a promise of monetary points to bedelivered in the future. That promise isa liability of the bank – something it now owes the borrower and that theborrower can convert into money on demand. If the borrower decides to withdraw the promised money in the form ofmaterial currency, the bank must take cash from its vault and give it to theborrower. At this point, we can see anactual transfer of money from the bank to the borrower. But the bank’s vault cash has to be acquiredfrom the monetary sovereign, and it has to pay for that cash.
Now since bank deposits can be exchanged just about asfreely as money in any form, they can be legitimately defined as one form ofmoney itself. There is perhaps no strictline that can be drawn between liabilities for money or promises of money, onthe one hand, and money itself, on the other hand. But ultimately, however we define “money”,all of these banking operations are administered and regulated by the monetarysovereign, and so the monetary sovereign’s decisions are ultimately responsiblefor which lending operations a bank is permitted to conduct, and whether thebank’s lending results in a net increase in money in the monetary system. The monetary system is under the ultimatecontrol of the monetary sovereign, even if the sovereign chooses not to be very assertive in exercising that control, andpassively allows banks to create money as they see fit.
So let’s return to the operations of the monetary sovereignitself. In order to bring the natureand ultimate capacities of monetary sovereignty into sharper relief, let’sconsider three distinct models or mental pictures of the monetary sovereign’smonetary operations. These mentalpictures are designed only to provide a more vivid imaginative understanding ofmonetary sovereignty. And initially atleast, they might appear to be dramatically different pictures. But we will see that in the end the picturesare, somewhat surprisingly, fully equivalent in everything that is reallyessential and important about the monetary sovereign’s operations.
The first picture can be called the infinite account model. Think of the monetary sovereign as possessingan account or monetary scorecard that holds an infinite quantity ofdollars. When it spends in its unit ofcurrency, it credits some amount of units X to some private sector account, butdebits X units from its own account. When it taxes, it debits X units from some private sector account, butcredits X units to its own account. Butsince it possesses infinitely many units of the currency in the first place,these operations have no effect on its own balances. Currency units come in and go out, but theaddition or subtraction of a finite number of units from an infinite stock ofunits never makes any difference. Thesame infinite number of units exists on the monetary sovereign’s scorecard atall times.
A second picture is the emptyaccount model. In this case, thinkof the monetarily sovereign government as possessing an account that containsno money whatsoever. Its scorecardalways stands at zero. When it spends,it credits X units to some private sector account, but makes no change at allin its own account. When it taxes, itdebits X units from some private sector account, but again makes no changes atall to its own account. Since it neverpossesses any money on its books, the monetary sovereign’s basic monetaryoperations of taxing and spending can be viewed as simply creating privatesector monetary points out of thin air and destroying private sector money, nottransferring that money back and forth between the private sector and the government. On the empty account model, only privatesector monetary scorecards are marked up with monetary balances, and themonetary sovereign never possesses money of its own.
Finally, there is the quotidienaccount model. The monetarilysovereign government is seen on this model as always possessing a finite amountof currency units – just like a private sector entity. At all times, some finite number of monetaryunits are on its monetary scorecard, and the monetary sovereign running aquotidien account is scrupulous about balancing the books on its monetaryoperations. When it spends, it creditsX units to some private sector scorecard, but scrupulously debits X units fromits own scorecard. When it taxes, itdebits X units from some private sector scorecard, but again carefully creditsX units to its own account. Since itpossesses only finitely many units in the first place, these operations do havean effect on its balances. However,there is one added twist: the monetary sovereign is, as before, legallyentitled to create or destroy currency units on its scorecard as a separateoperation. So in the end, while thereare always some finite number of units on its scorecard, the monetarilysovereign government ultimately choosesexactly how many units that is, since it can add or subtract units from its ownscorecard at any time. Even though thesovereign’s bookkeepers are scrupulously balancing the books when it comes torecording exchanges to and from the private sector, the fact that the governmentcan at any time credit or debit some additional amount makes the bookkeeper’scare somewhat absurd or meaningless, at least with regard to the monetarysovereign’s own account.
Recognizing that degree of meaninglessness in the quotidienaccount model is the key to grasping a very fundamental fact about monetarysovereignty. When it comes tounderstanding the real economic effects ofthe monetary sovereign’s operations, it really makes no difference whatsoeverwhich picture one employs. The threepictures are all equivalent. If themonetary sovereign is entitled to create or destroy currency units at will, itreally doesn’t matter whether we imagine the sovereign as possessing infinitelymany units, zero units or some finite number of units of its own choosing. All that matters is what happens to theaccounts in the non-governmental sector. The monetary sovereign administers themonetary system of the real economy, and that real economy consists of thesphere of goods and services that are produced and exchanged by the worldoutside of the government, a world in which the government’s money plays therole of facilitating exchange, accounting for value in a standard unit ofmeasure and making payments. Sincethose people and entities in the private sector economy are not permitted tocreate currency units at will, unless such power has been delegated to them bythe monetary sovereign, their spending and savings decisions are constrained atany time by the number of units they possess at that time. And the rate at which money is exchanged forgoods and services depends ultimately on the amount and distribution of moneythat exists out in the private sector. What ultimately matters, then, is whether some government operation hasthe effect of adding monetary points to some private, non-governmental sectorscorecard, or deleting monetary points from some private, non-governmentalsector scorecard. What happens to thesovereign’s own scorecard is insignificant with regard to the creation and destructionof value in the real economy, that is, with regard to all of the things wereally care about.
Going forward, then, it will be good to use neutral terms todescribe the effects of the fundamental monetary operations of the monetarysovereign, terms which do not depend on which of the three models we use toconceive of these operations. We willsay, then, that taxes “remove” money from the non-governmental sector, and thatgovernment spending “inserts” money into the non-governmental sector. The monetary sovereign possesses the power ofa government to make these things happen, and the insertion and removal ofmoney from various places in the private sector can have profound effects. But what happens behind the accounting wallseparating the monetary sovereign’s scorecard for all of the other scorecardsmakes no real difference to anybody. Whether one chooses to regard the insertion of money into the economy asa transfer of money – in accordancewith either the infinite account model or the quotidian account model – or asthe creation of money from nothing –in accordance with the empty account model – really makes no difference to theeffects of these operations in the private sector economy.
So far, I have discussed only two main kinds of governmentmonetary operations: taxing and spending. But I have neglected to discuss borrowing, another significantgovernment financial operation. Howshould we understand the borrowing operations of a monetarily sovereigngovernment?
To answer this question, we should begin by asking what wemean by “borrowing” and “lending”, in the financial senses of those words. What does it mean to say someone hasborrowed money from some bank lender? Well it is clear that we don’tmean quite the same thing that we mean when we talk about other non-monetary acts of borrowing andlending in the everyday world. If myneighbor borrows my lawnmower from me, and I lend it to him, I simply hand overmy lawnmower to him for some more-or-less agreed amount of time. He uses it for a while, and then gives itback to me. End of story. The value of the lawnmower has probablydepreciated just a tiny bit as a result of the use, and my neighbor has derivedsome value from the lawnmower for which he did not pay me. But if, instead of agreeing to lend him thelawnmower, I am only willing to hand over the lawnmower for some more-or-lessagreed payment from my neighbor, we would probably say that my neighbor hasthen rented by lawnmower from me, notborrowed it. So in essence, my act oflending constitutes a modest neighborly gift on my part. I give the gift and my neighbor receivesit. That’s all.
But clearly, that is not at all the way we are using theterms “borrowing” and “lending” when we apply these terms in the usual way tothe borrowing and lending of money. Aswe all know, a bank loan is no gift! In the case of money, we are talking about an exchange or trade. When people borrow money, they acquire somemoney in exchange for a promise, a promise to pay some other amount of money inthe future – almost always a greater amount. The promise then represents a financial asset for the lender, and afinancial liability to the borrower: it represents something the lender isslated to gain and the borrower is slated to lose. The financial instrument, the promise,represents a cash flow. From the pointof view of the lender, it represents an inflow of monetary payments, generallyassociated with a fixed payment schedule. From the point of view of the borrower on the other hand, the financialinstrument represents an outflow of money on the same more-or-less fixedpayment schedule. A bond – such as thebonds sold by businesses and governments – are essentially financial instrumentsformalizing promises of this kind. Interms of a monetary scorecard, we can think of a financial asset like a bond assomething like some marks on the scorecard corresponding to a schedule ofpre-determined point increases. Thelender’s scorecard contains the bond as well as any previously existingmonetary points the lender possessed. As any one of the various times indicated on the schedule transpire,some marks indicating a scheduled payment of currency units at that time areerased, and the appropriate numbers of actual currency units are added to thescorecard. Gradually what begins as amere schedule of monetary points to be received in the future is transformedinto some quantity of actual monetary points.
People can also sell bonds that they have already purchasedfrom some other party. Suppose A haspurchased a bond – a schedule of monetary payments – from B. But suppose A no longer wants to wait forthe promised money to be credited to her scorecard on schedule, and preferssome money now. Then A might be able to find some thirdparty C who is willing to buy the remaining schedule of payments from A. A receives some money from C – that is, A’smonetary scorecard is credited by some amount and C’s monetary scorecard isdebited by some amount. Now B stillowes the remaining schedule of monetary points, but B now owes them to C. In accordance with the remaining schedule ofpayments, C’s scorecard will be marked up with additional monetary points andB’s schedule will be debited by that amount of points concurrently.
So, borrowing and lending money in financial markets doesnot involve any kind of gift. It is anexchange in which each party gives something up and each party receivessomething in return. The borrowerreceives present money and in return gives up money in the future. The lender gives up present money and inreturn receives money in the future. Generally, people are only willing to make such an exchange if it ismutually beneficial. It is important tokeep the mutually beneficial nature of credit relationships in mind. There is an unfortunate tendency incontemporary discourse about credit to regard the lender as a person who hasbestowed some favor, gift or act of grace on the borrower. But that is not the case. Rather, two people have made a simplemutually beneficial exchange. One partyto the exchange receives from the other some money in the present; the otherparty to the exchange receives from the other some money in the future.
But let’s return now to the case of a monetary sovereign,and look at these borrowing and lending processes from the perspective of amonetary sovereign’s operations, in line with any one of the three models wedescribed before. Start withborrowing. What are the effects of government borrowing from thenon-government sector, at positive interest? Well, first, the private sector lender buys a bond from the monetarysovereign. At the time of the purchase,some monetary points are removed from the lender’s monetary scorecard, and aschedule of pre-determined monetary points is added to that scorecard. Then over time, some of the marksrepresenting pre-scheduled monetary points are removed and the appropriatenumber of monetary points are added. These operations are likely to be very important to the private sectorlender. But remember that from thestandpoint of the monetary sovereign it makes no difference at all what happensto the monetary sovereign’s own scorecard. All that is important is what happens to the private sector scorecard:some money is first subtracted from the scorecard, and then some greater amountof money is added to the scorecard over time. And since that lender is part of the private sector, the government inthis case first removes money from the private sector and then inserts moneyinto the private sector over time, on a pre-determined schedule.
Now what if, instead of borrowing from the private sector,the monetary sovereign lends to theprivate sector? We can understand theeffects of this operation by just reversing the time order and direction of thepreviously described borrowing operation. When the government lends to a private sector entity, some money isfirst added to that entity’s scorecard, and then some greater amount of money issubtracted from the scorecard over time. The government in this case first insertsmoney into the private sector and then removes money from the private sectorover time, on a pre-determined schedule. But remember again that from the standpoint of the monetary sovereign itmakes no difference what happens to the monetary sovereign’s ownscorecard. All that is important is whathappens to the private sector scorecard: some money is in this case first addedto the scorecard, and then some greater amount of money is subtracted from thescorecard over time.
Now consider the monetary effects of several of thesemonetary operations together: taxing, transfer spending, borrowing andlending. Both money and officialpromises of money represent assets to the party that hold them. So the effect of these government monetaryoperations is the swapping around of government-issued financial assets onprivate sector balance sheets. In eachcase, the monetary sovereign is mainly adjusting the schedules on which it willinsert and remove money from the private sector, and the accounts on which itwill make these changes. In some casesit adjusts a schedule of money removals and money insertions forward in timetoward the present; in some cases it adjusts a schedule further off in timetoward the future. It is likelyengaging in a large and complex combination of such adjustment operations atany time. All of these adjustmentshelp regulate the flow of additional money into and out of the private sector.
Think of it this way: The private sector can be imagined as a collection of wells, and eachwell is outfitted with a collection of nozzles to which one can attachhoses. Each hose either draws water outof a well and into the monetary sovereign’s well, or draws water out of themonetary sovereign’s well and into the private sector well. Some of the hoses carry a steady flowwhenever they are hooked up. Other hosesare outfitted with valves that deliver their water flow in bursts, on a settime schedule. The monetary sovereign’svarious monetary operations can then be seen to consist in detaching some hosesand attaching others, sometimes swapping out one hose for another.
But just as before, remember that it doesn’t really matterwhat happens to the monetary sovereign’s own well. This is perhaps easiest to imagine if wethink of the monetary sovereign’s well as infinitely deep – as in the infiniteaccount model. Water flows into and outof the monetary sovereign’s well. Butthese flows no difference from the standpoint of the monetary sovereign itself,since the sovereign’s well is always infinitely deep and filled with aninfinite amount of water. But the flowsof water make quite a bit of difference indeed to the owners of the manyordinary wells out in the private sector.
3. Consequences of Monetary Sovereignty
Now so far, I have described the operations of the monetarysovereign as though money were the only valuable thing in the world. But this is clearly not the case. The model of the monetary sovereign I havedeveloped is intended to be a model of a government. And while governments might have nearlyunlimited and very easily deployed power in the creation and destruction ofmoney, a government also participates in the exchange of real goods andservices. And these goods and servicesare clearly finite. So there issomething very special about money which is yet to be considered.
Let’s remember that government spending – insertions ofmoney – can come in different varieties: there are purchases, in which money is inserted into a private sector accountin exchange for some good or service delivered to the sovereign; and there arestraight transfers, in which somemoney is inserted into a private sector account without condition, with thegovernment receiving nothing in return. Similarly, we need to recall thatgovernment receipts – removals of money – can come also in different varieties:there are sales, in which money isremoved from a private sector account in exchange for some good or servicedelivered by the government to the owner of that account – as when someone buysa carton from the postal service, for example – and there are taxes, in which some money is removedfrom a private sector account without condition, with the owner of that accountreceiving nothing in return.
In a democratic society, we should think of the owner of themonetary sovereign’s account as the entire public, representing a significantportion of the economy usually called the publicsector. The public cannot createvaluable goods out of nothing at will, or receive the benefits of valuableservices at will. These things come infinite amounts, and it is a very big deal to the public whether or not itpossesses some good – like a bridge, a park, or a work of public sculpture, ora dam, or a rocket engine. It is alsoa very big deal to the public whether it is performing some service for aprivate sector individual or firm, or whether that individual or firm isproviding a service to the public. So,while it might make little difference whether we think of the monetarysovereign’s monetary possessions according to the infinite account model, theempty account model or the quotidien account model, we have no such freedomwhen considering the public’s possession and exchanges of real goods, or its receiptsand provisions of the benefits of real services. When it comes to the exchange of real goodsand services, what the public possesses matters. As democratic citizens, decisions over thepublic sector provision or acquisition of real goods and service are among themost frequent and important decisions we have to make.
And herein lies an important difference between theproduction of money and the production of other goods. Traditionally, the difference in cost betweenproducing some unit of money, and the value that can be fetched by that moneyin the market when it is used to purchase something, is called“seignorage”. In earlier times, whenthe public’s money was fashioned from material resources like gold, which hadto be mined from the ground, refined and shipped at a substantial cost,seignorage was still important, but less significant than today. But in the world of modern money, when moneyin colossal denominations can be created at very low cost, simply by moving afew electrons around on some hard drives by virtue of a few keystrokes on acomputer keyboard, the value that is derived from seignorage is even moresignificant.
A democratic public that possesses seignorage power shouldbe very hesitant to give it up, as it would for example, by ceding monetarypower to private sector corporations with their relatively small collections ofself-seeking owners and their hierarchical, non-democratic forms ofgovernment. If the creation of thevarious forms of money were permitted to be strictly a private sector endeavorin the modern world, we might reasonably suspect it would all end up in thehands of a few financial sector oligarchs – Goldman Sachs, Barclay’s, Chase,etc. – just as these oligarchs have come to dominate other forms of financialpower. Nor should the public take acasual attitude toward free-styling monetary entrepreneurs who might seek toemploy innovative technologies to invent forms of money that have the potentialto succeed in supplanting the public’s money. They would thereby reap seignorage profit for their own private benefit,while at the same time diminishing public control over the public’s monetarysystem, and robbing a democratic public of its monetary power. The romantic and entrepreneurial monetaryrebel of today could easily become the monopolizing monetary kingpin oftomorrow without the restraint of democratic governance.
So let’s turn away from these anti-democratic nightmarescenarios of the public’s monetary powers falling into private hands, and returnnow to our simple model of the monetary sovereign, which we will regard as ademocratic government connected to a public sector, wielding its monetary andother powers on behalf of public purposes.
It is important to recognize that a monetary sovereign hasno operational need, strictlyspeaking, to borrow or tax in orderto spend. By an operational need I meansomething that the government must do in order to carry out some operation, andwithout which that operation simply cannot occur. Because the monetary sovereign can alwayscreate any money it needs in order to carry out a spending operation, there isno operational need for it first to acquire that money from some othersource. In the end, recall, the monetarysovereign is responsible for all of the money that exists in the monetarysystem which it governs. It is theproducer of the currency in that system, not a mere user of the currency. It is just flat wrong to view a monetarysovereign as an enterprise like any other enterprise – such as a household, asmall business, a corporation – mere usersof the monetary sovereign’s money whose monetary power is limited to themaking of exchanges, and whose monetary scorecard is subject to ordinary budgetconstraints.
So the monetary sovereign has no operational need to tax orborrow in order to spend. However, themonetarily sovereign government may have a policyneed to tax or borrow. That is, thegovernment may have reasonable policy goals – such as the maintenance of pricestability, the encouragement of private sector production and commerce, thepromotion of economic equality or other goals – that are best carried out withthe aid of taxing or borrowing. Theeconomist Abba Lerner encouraged us to view all government financial operationsfunctionally – that is in terms oftheir effects. Whether a monetarilysovereign government should engage in some particular monetary or financialoperation depends entirely on the government’s policy goals, and the degree towhich the operation helps advance those policy goals. Lerner thus called this approach togovernment financial operations “functional finance”, and contrasted it withthe ideal of “sound finance” – an ideal based on misconstruing monetarilysovereign governments as mere currency users subject to ordinary budgetconstraints.
Now this idea of a monetary sovereign might seemfrightening. Surely the discretionarypower to create and destroy the money that is in common use is an awesome andpotentially threatening power indeed. The trepidation experienced here is not at all misplaced. But it is also important to realize that theexistence of such power, or at least the potential existence of such power, isinherent in the very idea of governmental sovereignty, and that much thereforedepends on the specific form of government that possesses this sovereign power,and the wisdom of those who determine the actions of that government. A democratic public – in which sovereigntyis distributed equally among its entire people, that endeavors to subjectitself and its own governmental operations to the rule of law and appropriatechecks and balances, under durable and vigilantly maintained democraticinstitutions – can employ its monetary sovereignty wisely and on behalf ofenlightened public purposes and the general good.
The idea of monetary sovereign can also inspire a differentkind of emotional reaction in people: not fear, but disapproval. The public sector under a monetarilysovereign government, if such a thing exists, seems to receive something fornothing by virtue of a seignorage power. The employment of that power effectively delivers benefits to the publicthat are not received in exchange forsomething else. All the rest of usprivate individuals, on the other hand, are generally required to producesomething of value in exchange for the benefits we received. This asymmetry might not seem fair orappropriate, since the monetarily sovereign government has an unfair advantageover private sector economic actors. Various inhospitable terms might come to mind here to describe themonetary sovereign’s advantage: “freelunch”, “ill-gotten gains”, “theft over honest toil”, “counterfeiting” etc.
This emotional reaction can be hard for people to shake, andis even in some sense natural, but it is grounded in a profoundly wrongheadedand false analogy between the sovereign role of a self-governing people under ademocracy, on the one hand, and the role of private individuals, households andcompanies on the other. First of all,The United States government and its people have made a substantial investment– of work and sweat and tears, and even including an investment of many lives –in order to secure something approaching monetary sovereignty for theirsociety. So if they exercise thismonetary sovereignty in the pursuit of public purposes and the general goodthey are hardly receiving something for nothing. They have invested a whole lot of something in the past in order tocontrol a monetary system they can use to accomplish these public goals.
Second, a democratic government like the government of theUnited States is not just one enterprise among others in a competitive economicgame of rising and falling fortunes, a game in which the government musttherefore “play by the same rules” as every private sector individual,household or firm. The United Statesgovernment is the instrument by which we the people are supposed to organizeand direct our common efforts toward the fulfillment of our most importantnational goals and aspirations, including such things as “promoting the generalwelfare” and “establishing justice.” Itis absurd to suggest that because a corporation like Goldman Sachs, forexample, does not possess the seignorage power that comes from monetarysovereignty, then the American people must decline to employ that powerthemselves, in the spirit of fairness to Goldman Sachs and the desire for alevel playing field. Goldman Sachs isnot entitled to a level playing field with the sovereign American people. We’re the constitutionally established bossin our society. If the people of theUnited States have been strong enough, and diligent enough, and have sacrificedenough to deny seignorage power to Goldman Sachs but preserve it for themselvesand their democratic government, then tough for Goldman Sachs. But good for us.
Finally, it is absurd to claim, as some monetarycommentators across the generations sometimes have, that government moneyprinting or its modern electronic equivalents represent something analogous tocounterfeiting, as though the money used by a sovereign government were theproperty and creature of some mysterious third party or extra- governmentalpower or entity that the government then fraudulently manufactures foritself. In modern economies money is thecreature of a government, and its creation and regulation subject to the lawsof that government. Under a democraticgovernment, the power to create and regulate money belongs to the public. The public, working through its government,can’t be the counterfeiter of its own legally ordained money. It might make foolish decisions from time totime in the way it deploys its money-creating power, but these decisions do notencompass the counterfeiting of its own money. It is impossible for the rightful issuer of a currency to counterfeitthat currency.
So the emotional aversion some feel to the exercise ofmonetary power by a democratic government is misguided. Much political energy, however, has gone intoperpetuating these irrational reactions. The owners and servants of concentrated private financial power sometimesseek to shield the US public from a clear awareness and understanding of itsown monetary powers, and from recognizing that it can deploy its inherentmonetary sovereignty for public purposes so long as it organizes itself to layhold of these powers and command them. They would like the American people to believe that the peoplethemselves, and their democratic government, are mere users of a mysteriouscurrency they do not control, and are thus dependent on the will of others inexercising whatever monetary power the people are permitted to wield by thosemysterious powers. The plutocratspromote these myths and taboos of monetary superstition because an informedpublic with a clear-eyed appreciation of monetary matters would obviously workto prevent the further usurpation of their powers by plutocrats.
4. Is the United States a Monetary Sovereign?
I have set out a simplified model of a monetarily sovereigngovernment. But near the end of theprevious section, I began to suggest that the United States government isindeed a monetary sovereign by this kind. The reader might now suspect that I have yielded my rational mind overto a simplistic fiction of my own creation. And by this point, the reader is probably thinking that howeverinteresting it might be to imagine this fictional entity, the so-calledmonetary sovereign, such fictions have nothing to do with the complexities ofthe real world, because actual governments maintain accounts that are indeedconstrained by the amount of money in those accounts and by the externalsources of funding to which they have access. After all, can’t a government default on its debt? What about the recent debt ceiling debate inthe US? What about what is happening inEurope with the sovereign debt crisis? Also, if a government like the United States government was a monetarysovereign of the kind I have described, the consequences would seem to beenormous. Surely if a democraticgovernment possessed this kind of power, we would make much more use of it thanwe do. In short, monetary sovereigntyas described seems both too simple to bereal and too good to be true.
These skeptical intuitions are reasonable, so they need tobe addressed. First, let’s consider thequestion of whether monetary sovereignty is toosimple to be real.
I will argue that the government of a country like theUnited States is much closer to the ideal of monetary sovereignty than thetypical citizen recognizes. To theextent the model is overly simplified, that is due entirely to choices we have made about how ourgovernment should be organized internally. The financial and monetary operations that occur in our actualgovernment are not carried out by a single operational center, but ratherinvolve several parts of the executive branch, most prominently the Treasury department. Congress is involved as well, as is theFederal Reserve System. These branchesof the government are subject to various legal restrictions andconstraints. But these are allconstraints that the country’s legislators have chosen to impose on the government’s financial operations. They are to that extent voluntary and couldtherefore be altered.
Congress has chosen, for example, to make the US Treasury,and even Congress itself to some extent, function as a currency user rather than a currency issuer, and has attempted to assign tothe Fed all primary responsibility for direct decisions over the increase anddecrease of the money supply. Ultimatemonetary authority obviously resides in Congress, but Congress has delegatedmuch of that authority to the Fed, and has been reluctant to exercise theauthority directly by engaging in direct monetary operations on behalf of thepublic it represents.
These restrictions have been implemented in severalways: The Treasury Department can onlyspend if there are sufficient points on its monetary scorecard – that is, ifsufficient dollars are credited to its bank accounts. Its accounts are held at the Fed andadministered by the Fed. It isforbidden from overdrawing its accounts at the Federal Reserve, and the Fed hasno authorization to credit those accounts directly and unilaterally. So the Treasury can’t create money itself bya direct act, in the course of its ordinary operations, nor can the Fed createit directly for the Treasury. IfCongress has authorized some spending by the Treasury Department, the Treasurycan only carry out that spending if the combination of tax revenues andborrowed funds currently supplying Treasury accounts constitute sufficientfunds for the spending. If tax revenuesare insufficient, then in most cases the Treasury Department will sell bonds tothe private sector, and raise funds in that way. However, Congress has also imposed a debtceiling on Treasury borrowing, so the Treasury’s prerogative in issuing bondsis capped.
The Treasury Department does possess, through its operationof the US Mint and as a result of certain loopholes in existing authorizationsto mint coins, a potential source of direct control over monetaryoperations. But taking advantage of theseloopholes would be highly unusual and politically controversial. And if Congress remained determined to keepdelegated monetary authority with the Fed, then the loopholes would probably beclosed quickly by legislation.
Also, the Treasury Department is forbidden from sellingbonds directly to the Fed. So while theFed is permitted to create money and use it for making loans to banks in theFederal Reserve System, or for the purchase of financial assets from privatesector owners of those assets, it cannot purchase bonds directly from the Treasury. And thus the Treasury cannot borrow directlyfrom the Fed. The two departments mustinstead follow a more roundabout method. The Treasury can sell bonds to private sector dealers in an auction, asit routinely does. The Fed can then, at itsdiscretion, purchase those bonds from the private dealers in separateauctions. Treasury ends up with someamount of borrowed funds, but also with a liability to pay the Fed theprinciple on the loan. Any interestpayments on the bonds will be returned to the Treasury, since the Fed is notpermitted to collect interest from the sale of Treasury bonds. So the Treasury ends up in a better positionthan if the bonds were still owned by the private sector dealer. But the Treasury still owes the Fed theprinciple. How these loan payments arefunded is then ultimately up to Congress to decide.
Let’s conduct a thought experiment, and imagine how thingsmight work if the Treasury could sellbonds directly to the Fed, and if Congress exercised more direct supervisionover the Fed’s purchases of Treasury dept.
Suppose the Treasury Department were permitted to issue aspecial class of bonds – call them “M-bonds”. These bonds could not be sold to privatesector purchasers on the open market, but could only be sold to the Feddirectly. Suppose that the bonds carriedno coupon payments and 0% interest, and matured in a year. In other words, if the Treasury sells a $1billion M-bond to the Fed today, then the Treasury receives $1 billion from theFed today, and next year they pay the Fed exactly $1 billion, with no interestpayments in between.
Suppose also that the Fed were not permitted to refuse tobuy M-bonds. Let’s imagine that Congresshas passed a law mandating that, if Treasury issues an M-bond and offers it forsale to the Fed, the Fed has to buy it. But let’s also assume that Treasury is still not permitted anyoverdrafts on its account at the Fed. Congress continues to mandate that any Treasury spending must be clearedthrough its Fed account, and that the only ways of funding that account arethough tax revenues, sales of ordinary Treasury bonds to the private sector andsales of M-bonds to the Fed.
Now, finally, let’s suppose that the Treasury Department hasa standing policy of funding $100 billion of public sector spending each yearthrough the sale of M-bonds. It also hasa policy of issuing new M-bonds each year to meet the full costs of servicing its outstanding M-bond debt. In other words, it always pays the debt itowes on its M-bonds just by selling more M-bonds. So, in Year One it sells the Fed $100billion of M-bonds, and spends the proceeds. In Year Two, it sells $200 billion of M-bonds, spending $100 billion ofthe proceeds and using the other $100 billion to pay off the Year Onedebt. In Year Three, it borrows $300billion, spends $100 billion and uses the remaining $200 billion to pay off theYear Two debt. Etc.
We can see that the portion of Federal debt attributable toM-bond issuance grows arithmetically by $100 billion each year. So the national debt continues to rise. But we can also see that that portion of thedebt is relatively meaningless. And itwouldn’t matter if M-bonds were not sold at 0% interest, but carried somepositive interest rate – say 10% or more. In the latter case, the debt due to M-bonds would not rise onlyarithmetically, but would rapidly compound. But it would be just as meaningless, since the whole quantity of theprevious year’s M-bond debt would be borrowed from the Fed each year, and thenpaid back the next year with additional borrowings from the Fed. The Fed would be required to purchase thisadditional M-bond debt each year, so the rising debt places no rising burden onthe US Treasury or the American taxpayer.
It should be clear at this point that the entire functionaleffect of all that borrowing and repayment with M-bonds could be accomplishedby the following simpler alternative operation: Congress simply mandates that each year that the Fed must directlycredit $100 billion to Treasury Department accounts at the Fed. No bonds. No borrowing. End of story. While this might appear to be an entirelydifferent kind of operation, ultimately they are just too different mechanismsfor accomplishing exactly the same effect. Thus, the rapid arithmetical rise in M-bond debt in our thoughtexperiment is not functionally equivalent to a cycle of hyperinflationaryrunaway money printing. There isinstead a fixed, modest annual amount of net money creation – $100 billion,which is just a fraction of annual US GDP – and the ballooning debt paymentsare just an artifact of the convoluted M-bond method Congress hashypothetically prescribed in our thought experiment to accomplish this moneycreation. The M-Bond debt owed by thegovernment to the Fed – which is itself part of the government – has afictional quality.
It is vital to recognize, then, that the third party privatesector involvement in the current borrowing relationship between the Fed andthe Treasury is entirely voluntary on the part of the US government. Congress could remove it at any time, simplyby passing the appropriate legislation. Congress could also, at any time, direct the Fed to credit TreasuryDepartment’s accounts – their monetary scorecards – by any amount Congress seesfit. The recent debt ceiling crisis,therefore, is entirely the result of self-imposed, voluntary governmentconstraints. The government can neverrun out of money unless it chooses tosubject itself to various self-imposedconstraints.
Congress has not provided itself with any institutionalizedmeans for conducting monetary operations directly, and has imposed on bothitself and the Executive Branch – the two political, elected branches of thegovernment – a system that requires both branches to act as though they are themere users of a currency that is controlled by the Fed. Congress has thus imposed a quotidianaccounting constraint – to use a term introduced earlier – on the politicalbranches of government. The Fed, on theother hand, is effectively permitted to spend without a scorecard. But its spending options are limited by law:It can buy government bonds and other bonds on the open market. It can also lend funds to banks at a rate ofits own choosing. But it can’t buy abattleship, or hire 100,000 people to spruce up the national parks or build ahighway or rail line, or simply send checks to selected American citizens. Or at least if it tried to do these thingsit would likely be challenged legally for conducting operations that appear toexceed its intended legal powers. Justwhat the actual limits of those powers are, and how much Congressional spendingpower has been delegated to the Fed, seems to be a matter of somecontroversy. But it is clear that theConstitutional intention is that the “power of the purse” is supposed to reside with Congress. And thus any move by the Fed to beginconducting fiscal policy by spending money on all matter of goods and serviceswould be extremely controversial to say the least.
It sounds a little bit strange, of course, to say thatCongress has imposed operational constraints or restrictions on itself in the area of monetarypolicy. After all, apart from those supremelaws that are embedded in the US Constitution, Congress makes the laws. So in what sense can Congress be constrainedby laws of which Congress itself is the author and master? We might think here of the ancient Greekhero Odysseus, who had himself bound to the mast of his own ship to prevent hisship’s ruin on the rocky island of the Sirens. But the important thing to remember in this area is that while the USCongress might be bound by laws that Congress itself has created, these lawscan be changed at any time by the same Congress that enacted them. Congress can intervene in US monetaryoperations at any time, since US monetary power is constitutionally vested inCongress.
So the parts of the government that can actually accomplish a lot with their spending – Congress andthe Executive Branch – are presently required by law to act as mere currency users that must draw on private sectorfunding sources to carry out that spending, while the part of the governmentthat is permitted to act as a currency creator – the Fed – is subject to fairlystrict limits on what it canaccomplish and whom it can affect with that spending.
The whole system seems cumbersome and byzantine when viewedin this light. But perhaps theseself-imposed constraints have important policy justifications? Perhaps Congress in its wisdom has seen thatmonetary power is simply too dangerous for direct democratic governance, andthat even Congress itself cannot be trusted to carry out monetary operations inconjunction with spending and taxing operations, in a democratically influencedfashion? We will return to thisquestion later. But for now, let’s turnto the other instinctive reaction to the model we have developed of amonetarily sovereign government: that it is toogood to be true.
If the monetary sovereign is not subject to any operationalrequirement either to tax or to borrow in order to spend, and if the monetarysovereign has the power to create money at will, then isn’t that the ultimatefree lunch? Doesn’t that mean that agovernment of this kind can spend without limit either to purchase goods orservices for the public sector or to effect direct transfers of monetarybonanzas to private sector accounts?
We all know something is wrong with this suggestion, if weinterpret it in its most obvious sense. And where it goes wrong is in its loose use of the word “can”. Of course, in one sense the monetarilysovereign government can spendwithout limit. There is no operationalconstraint on this spending. The USCongress can authorize as muchspending as it desires, and of almost any kind. It can, if it chooses, permitthat expanded spending to go forward in the absence of any additional taxrevenues. It could remove the debt ceiling and authorize, or even direct,unlimited borrowing by the Treasury. Orit could direct the Fed to credit theTreasury Department account directly with some large amount of money. It couldeven eliminate the Treasury Department’s Fed account entirely, and simplydirect the Fed to clear any check issued by the Treasury Department, and alwaysmake a payment directly to the account of whatever bank presents that Treasurycheck to the Fed.
In the purely operational sense of “can”, our government cando all of these things. But we all knowthat under many circumstances, such actions could have very bad effects. In addition to whatever operationalconstraints do or do not bind government actions, there are also what we havecalled policy constraints. A policy constraint on government actions issimply a policy choice the government has made that cannot be effectivelycarried out if the government does not act within that constraint. And if the policies are sensible ones, thepolicy constraints are sensible as well.
One such policy which most governments seek to implement isa price stability policy. For goodreasons, governments seek to prevent prices on goods and services from risingor falling too much in a short period of time; or from rising or fallingsharply and suddenly, or in an accelerating fashion; or from behaving in anerratic and unpredictable manner. Priceinstability of these kinds can have an inhibiting, recessionary effect oneconomic activity, as the participants in the economy struggle to predict theoutcomes of their medium-term and long-term contracts and transactions. If a monetarily sovereign government suddenlyauthorizes the creation of excessively massive amounts of new money, and simplyspends that money into the private sector directly to make public sectorpurchases, or transfers it to individuals who in turn spend it, the effectcould be a sharp and sudden surge in the level of prices. High inflation and shortages of goods are thelikely result.
And yet the risk of runaway inflation as a result of governmentmoney creation is frequently exaggerated. Some commentators seem to assume that the mere creation of new moneywill always have a corresponding inflationary effect, no matter how the newmoney is spent. They are constantlywarning us that “hyperinflation” is just around the corner as a result ofgovernment money creation. But thisinference does not meet the test of either common sense or consideredexamination. Adding money to theeconomy only exerts pressure on prices if that money is in the marketplace, inthe hands of customers, competing with other potential customers for goods andservices to bid up the prices of those goods and services. If the money is inserted into the economy insuch a way that it mostly goes into savings or bank reserve buffers, it willnot contribute to price pressure. Suchappears to be the case with recent “quantitative easing” policies pursued bythe Fed.
But even if the money does accompany hungry customersstraight into the marketplace in pursuit of goods and services, it still mightnot exert much pressure on prices. Itreally depends on how and where the money is inserted. Consider an economy like the one we areenduring currently, with double-digit real unemployment and substantialunderutilized human and material resources. Many businesses are experiencing empty shelves, unused warehouse space,vacant office space, idle productive machinery and internal systems operatingwell short of their capacity. Inresponse to a surge in demand from new customers with money to spend, suchbusinesses can ramp up production rather quickly. They can hire workers from among the hugearmy of unemployed people hungry for jobs, put productive capacity back online, and fill up existing shelves or distribution facilities with very littleadditional cost per unit of output. Infact, with so much underutilized capacity, the cost per unit of outputsometimes even falls with additional production, as current capacity is usedmore efficiently. So businesses wouldhave little reason in these circumstances to raise prices on the basis of costpressures alone. At the same time, anybusiness that is even tempted to raise prices in response to the new demandwould face intense pressure from their competitors, who have been starved forcustomers throughout the recession, and who will be only too happy to keepprices low and reap increased revenues from boosted sales alone, with the sameunit production costs, and without attempting to frost the tasty new cake withan uncompetitive price increase.
So, inflation fears vented over proposals for moregovernment deficit spending assisted by sovereign monetary power are oftenoverblown. An economy in a deeprecession like ours would likely benefit greatly from such a direct expansionof government spending.
In fact, not only is government spending in a recessionlikely to be beneficial, but the decision to throttle down government spendingand reduce deficits – that is, the decision to practice austerity – ispositively harmful in the same circumstances. That is because, in the absence of any change in a country’s currentaccount status with respect to its trade abroad, any decrease in the governmentdeficit corresponds to an aggregate worsening of private sector balance sheetpositions. If the government insistson pushing its own balance sheet into a position of surplus, it will likelypush the private sector into a deeper deficit, which is precisely the wrongthing to do as the private sector struggles to deleverage, and as household andbusiness incomes fall. And in thecontext of a global recession, where virtually every country would like toincrease exports significantly but few countries can do so because there arenot enough foreign buyers for their goods, the clear present need is forexpanded public sector spending.
But suppose our government chose to expand spending bymaking use of additional borrowing from the private sector? In that case, the additional deficitspending would drive up the national debt. Isn’t there great risk in these high debt levels? If the government’s debt goes to 100% ormore of our entire annual national product, isn’t that dangerous? Many pundits are warning these days aboutthe allegedly calamitous level of debt and the threat of ruin or bankruptcygovernments face as a result.
And private sector debtis certainly a big problem. As we havediscussed, individuals, households and firms – unlike monetarily sovereigngovernments – are mere users of debt instruments and monetary instruments theydon’t control, and operate under real and inviolable budget constraints. They can face insolvency if their debts gettoo large. And even if they are not inimmediate danger of insolvency, high debt burdens place serious limits on theability of private sector borrowers to spend their income on satisfying otherwants and needs.
Politicians haverecently drawn on these fears of private sector debt in the United States toelevate similar fears about the debts of the US government. We hear politicians and other nationalopinion leaders warn that the government faces “bankruptcy”. They say that it is “broke” or “out ofmoney”. And they are exploiting thesefears to pressure Americans to reduce the size of their public sector spending,and grant even more power to the private sector firms that helped steer us intoour current crisis. But the claimsbehind these warnings about government debt are often downright false. At best they are often wildly overblown, andbased on significant misunderstandings about how our government’s monetarysystem operates, and how any monetarily sovereign government relates to theworld of private sector finance with which it interacts. Here are several facts to bear in my aboutfederal government debt in the United States:
First, the US government, as a monetarily sovereign nationthat is the monopoly producer of the US dollar, can face no solvency risk otherthan a voluntary, self-imposedsolvency risk. The US borrows indollars, a currency that the US government itself controls and produces. The US government therefore simply cannot go bankrupt and fail to pay itsdebts unless the US Congress chooses toprohibit the Treasury Department from paying those debts, by choosing to prohibit the Treasury frommaking use of the inherent monetary power of the United States. Now this is in fact what the US Congressthreatened to do in the summer of 2011. That is not because the government faced an externally imposed solvencycrisis. It is because some members ofCongress chose to manufacture a crisis by threatening a voluntary default, in order to blackmail American citizens andother members of Congress into reducing the size of public sector spending.
It is true that the Treasury Department is currently constrainedby Congress to sell its bonds to private sector lenders. But that is again an arrangement thatCongress has chosen. At any timeCongress could enact legislation permitting direct borrowing from the Fed –effectively creating what I called “M-bonds” – or direct the Fed to credit theTreasury Department’s account by any amount Congress desires, includingwhatever amount might be necessary to pay any existing debt liabilities. So there is simply no risk of US governmentbankruptcy other than the risk that the US Congress might, somewhat recklesslyand fanatically, choose to default onUS government debt.
The only real constraint that needs to be born in mind inthe area of government borrowing is the policy constraint of pricestability. Once economic activityreturns to full capacity, the need to preserve price stability will requirethat government debt liabilities to the private are met through processes thatbegin to remove compensating monetary assets from the non-governmental sectorthrough taxation rather than processes that continually expand those monetaryassets through more central bank purchases of debt. Most of that transition will occurautomatically. As economic growthreturns and incomes rise, tax revenues will automatically rise along with theincomes.
Some worry about the size of the debt we owe to foreignlenders, including foreign governments. The Chinese government, for example, currently possesses over 9% of UStreasury debt. Politicians use thisfact to portray the Chinese as a potentially oppressive creditor that couldchoose to “call in our loan” and drive us into insolvency or crisis. These fears are also overblown. When the Chinese or others purchase UStreasury debt, they purchase it with dollars – dollars they alreadypossess. There are only so money thingsyou can do with a foreign government’s currency you possess. One of those things is to buy bonds fromthat foreign government (or save it with a financial institution that is itselfbuying government bonds). A bond issuedby the Treasury Department functions as the equivalent of an interest bearingsavings account for people with dollars to save. If the dollar holding foreign nation choosesnot to put their dollars in “savings” by purchasing bonds either directly orindirectly, they will have to keep their dollars in “checking” by leaving themin bank accounts earning lower interest. Why would they do that?
Suppose the Chinese decided they no longer wanted topurchase US government debt. What wouldthey do with their dollars? Their onlyreal alternative would be to exchange those dollars for something else. That is, they could buy something with thedollars in markets where the dollar is accepted – primarily America. At that point, it is hard to imagine themedia screaming, “Crisis! Chineseseeking to buy massive amounts of American goods!”
Under current arrangements, as we have seen, the TreasuryDepartment is constrained to sell bonds on the private market. So the fear might be that even if the Fed isprepared to buy up as much Treasury debt as is needed in order to supportTreasury spending operations, the Fed might not get that option if skittishprivate sector borrowers refuse to buy government debt at high prices. Again, the problem with this line ofthinking is that the entire world that does business in dollars has no otheroptions but to save its dollars in savings vehicles that are in one way oranother founded on government debt liabilities. The Fed exercises tremendous control overinterest rates through its open market operations. So realistically, there will always belenders ready to purchase bonds that the government issues, at the interestrates we desire, so long as the Fed stands ready to purchase as much governmentdebt as needed to set the interest rates its desires to set. Borrowing costs for the US government remainextremely low, despite the warnings of those who fear federal government debtis too high. Nor do people in othercountries seem any less inclined to save and do business in dollars. The dollar is currently very strong on worldcurrency markets, despite persistent warnings by the fear mongers thatgovernment money creation will lead to a hyperinflationary loss of value in thedollar.
Some of those who spread fear about dramatic inflation orhyperinflation resulting from government money creation point to the recentrounds of “quantitative easing”, in which the Fed purchased large quantities offinancial assets on the private market. Since the Fed effectively creates the money on the spot that it needs topurchase those assets, some fear that this massive program of purchases hasflooded the economic system with money, and the pressures from this deluge willeventually lead to a runaway rise in prices. But it is important to recognize that when the Fed buys financialassets, that purchase amounts to a removal of money from the economy over timeas well as an insertion of money in the present.
Suppose that some private sector entity A possesses a bondissued by some other entity B, where B can be either the Treasury Department orsome private sector lender. Supposethat the bond commits B to the payment of $10,000 to A over the next fiveyears, on some pre-determined schedule. Now suppose that the Fed offers to purchase this bond from A for $9000,and that A decides to sell the bond because A prefers the $9000 now to thedelayed receipt of $10,000 over five years. It is true that when the Fed makes the purchase it inserts an additional$9000 into the economy. But rememberthat $10,000 was originally supposed to move from B to A over five years. Now the $10,000 will flow from B to the Fedrather than to A. In other words, theFed has poured $9000 out of its infinite money well into the private sector today,but over the next five years B will pour $10,000 back down into that infinitemoney well. That amounts to a net removal of $1000 from the privatesector. All the Fed has done with itsbond purchase is swap out one financial asset- a bond – for a different asset –some money. It has adjusted theschedule of insertions and removals of money from the private sector withouteffecting a net increase in the amount of money inserted.
Finally, before moving on to a discussion of making the USmonetary system more democratic, it will be worthwhile saying a few words abouthow the current European monetary system falls short of the kind of monetarysovereignty – or near monetary sovereignty – I have attributed to the system inthe United States.
European governments are all part of a currency union – theEurosystem. Each government issues itsown bonds and each operates its own central bank. All of these transactions occur in Euros,the common currency of the Eurosystem. But those national central banks are subject to rigorous policyconstraints set by the European Central Bank. The individual countries themselves do not set their own monetarypolicies, and they borrow in a currency they do not themselves control. In effect this makes each government acurrency user rather than a monetarysovereign. If we think of governmentbonds as the equivalent of bank savings accounts, then each of the governmentsis in effect the equivalent of a savings bank that competes with the other governments in the Eurosystem to offerattractive interest rates to savers. This gives holders of Euros tremendous bargaining power to drive up bondyields and interest on government debt, because they can always take theirmoney elsewhere to other governments if they don’t get the yields theywant. And since the individualgovernments do not control their own monetary policies, they cannot maintainspending during periods of low revenues by selling debt directly to theirnational central bank and drawing on the money-creating power of that nationalcentral bank. Only the European CentralBank can alter those monetary policies, but the ECB is prohibited by treatyfrom buying government debt directly. The ECB also lacks the capacity to carry out a fiscal policy of centralbank financed spending operations in Europe.
In effect, then, the technocratically-managed ECB runsEurope’s private banking system and the private banking system runs Europe’sgovernments. The citizens of Europehave turned their capacity for economic self-determination over to anundemocratic, continent-wide banking conglomerate. This is the worst kind of nightmare in thelong struggle between democracy and private wealth. It’s not as though the Europeans havesurrendered their sovereignty to be part of a larger sovereign democratic government encompassing allof Europe. Rather, sovereign democraticgovernments have been transformed in this instance into something like merebusiness enterprises that are dependent on private wealth and financing fortheir operations. These governments nowgovern only at the pleasure of bankers.
5. Where We Can Go from Here
I have asked the reader to follow me through a lengthyseries of reflections and thought experiments on the nature and role of moneyin modern economies. Some might ask whythis issue is so important. How canthese ruminations on the nature of modern monetary systems help guide ourthinking on the task of building a more fair and decent society of democraticequals? How can they help us create asociety in which democratic solidarity trumps self-regarding and avariciousgreed, and in which broad and shared prosperity replaces the concentratedeconomic privilege and supremacy of the few?
It is important to keep the political problem of money inproper perspective. No one needs to bereminded that money plays an incredibly significant role in modern societies. But it is also important not to overrate therole of money. The most important reasonto reflect on the nature of money is that by doing so we better understand allthose things that are not money, allof the sources of real and non-instrumental value in the world that are theultimate ends we seek and the ultimate sources of our happiness. And as we improve our understanding of thepurposes served by money and monetary systems, our improved understanding canhelp liberate us from our dependency on monetary systems controlled by thepowerful.
Clearly money is just an instrument: a tool that helps us to organize our economiclives. It is used for assigningquantitative values to the real goods and services we produce. It assists in the production, distributionand exchange of those goods and services, and in the prudent storage of valueand purchasing power over time. Amonetary system cannot be separated from the larger economic and social orderof which it is a part. A moredemocratic monetary system will therefore be part of a more democratic economicsystem and a more democratic society.
The cause of genuine democracy will, of course, requiresteps that go well beyond reform of the monetary system. If we seek a more democratic society, one inwhich decision-making power over our everyday lives and common futures is moreevenly distributed among all of our people, it will be necessary for all of usto embrace the demanding responsibilities of democratic governance. This can be hard to do in the face of somany decades of governmental failure, where government itself has sometimesseemed to have become nothing but a tool of the plutocracy. Some of the tendency in recent history amongdissidents and reformers has been to pull away from one another other ratherthan pull together. Some of us hopeonly to liberate ourselves from government and from one another in order to beleft alone to pursue our individual happiness on our own terms.
This thoroughly individualistic approach cannot succeed. The cravings for ever more personal freedom,and for ever more liberation from the responsibilities of democraticgovernment, will only lead to the eventual dissolution of democratic governmentand the triumph of authoritarianism. Either we work together as equals to govern our lives and govern oursocieties, or ambitious and ruthless people commanding great stores of wealthwill take advantage of the vacuum to seize control and govern our societies forus. The urge for freedom is natural andpraiseworthy, but the dream of a real and durable freedom that can existoutside the cooperative efforts of a democratic people practicing vigilant andindustrious democratic governance is not the dream of a free people, but thetwilight illusion of a defeated and alienated people who have given up on thekinds of freedom and well-being that can only be achieved through socialsolidarity and teamwork. In the end, weare dependent and social creatures, built by nature for social and communitylife, and for relationships based on love, fellowship and friendship.
We have been living in recent decades through an anti-socialera of greed, separation and inequality. Those of us who have lived this way for a long time might have becomeaccustomed to the norms and practices of this era, and might even haveconvinced ourselves that these norms and practices are appropriate andhealthy. But the rising generation ofyoung people, whose natural and healthy sociality and friendliness has not yetbeen too damaged and disfigured by the ruthless demands of the system of greedknow that something is wrong. They know that our present way of economiclife is disordered and out of balance.
The anti-social era has been marked by a fatalisticpassivity in the face of unregulated commerce and market behavior. But the forlorn era of low socialexpectations is dying; we can feel it. People are tired of being on their own. The defeatist dogma about social change characterizing this dying era isthat we can’t choose our society’s future, because people are too weak andstupid and selfish and limited for collective effort to succeed on a largescale. The future can only emerge in an entirely unpredictablefashion from the crisscrossing patterns of individuals pursuing their own personalgoals without any significant degree of social cooperation orcoordination. The result of this trendin thinking has been a withering of the social imagination and the enfeeblementof the democratic practices of our people.
In the neoliberal world of the past few decades, politicshas become small, unambitious and managerial. This dispirited managerial government presides over a society in whichpathologies of social living are promoted as virtues: radical individualism,greed, ambitions of supremacy, cravings for isolation, hatred of community, anda debasement of healthy human relationships into commercial and exploitativetransactions come to be seen as normal. But the gloomy religions of self-seeking isolation are not justdebilitating; they are dispiriting. AsDavid Graeber has written, “the last thirty years have seen the construction ofa vast bureaucratic apparatus for the creation and maintenance of hopelessness,a giant machine designed, first and foremost, to destroy any sense of possiblealternative futures.”
The fading era of market fundamentalism andhyper-individualism was trumpeted as the “end of history.” But history is starting up again. In the shadow of the current recession, weare beginning to recapture the optimistic sense that the future is something wecan envision and choose. We can work tobuild a social consensus about the future we want, make large and ambitiouschoices about the shape of that future and then work with one another in thetask of creating the future we have envisioned. We need not just sit back, wait, and seewhat turns up. The possibility of a massdemocratic movement for profound social change begins with the recognition thatthe machine of despair is a lie, and that success is actually possible.
It is starting. People all over the world, frustrated by the dismal and meaninglesspursuit of individual achievement and material gain alone without larger socialpurpose, and fatigued by the insecurity, stresses and manic busyness thatafflict the neoliberal individual, are reaching out to re-forge the socialcontract, establish a new sense of justice based on teamwork and equality, andarticulate visions of the human future that are a match for the inherent humandignity we sense in ourselves and recognize in our fellows. The world that we have passively allowed tobe built around us by commercial frenzy devoid of higher purpose is an assaulton that dignity.
It is notable and inspiring that as the Occupy Wall Streetmovement took shape around the United States and other parts of the world, theparticipants in the occupations organized themselves as communities of equals,in which every voice is equally prized and harmonious consensus is avidlysought. The hunger for democraticcommunity and self-determination is palpable. This is not the laissez faire form of self-determination, in which eachindividual strives only to determine the course of one individual life, but amore encompassing phenomenon, in which people strive to build and sustain communitiesand then work together as equals in order to make well-founded, democraticdecisions to determine the direction of the community. It’s hard work. But the work is inspiring and ennobling,and people are naturally drawn to it.
In both the United States and Europe, policy-making elites –whose allegiances are to the plutocrats who are responsible for funding andsustaining the political operations of these elites – are aggressively workingto take advantage of the stress and confusion caused by the present globaleconomic crisis to dismantle progressive social systems. They are targeting systems of publicownership and organized social cooperation, and are working to undermine thecapacity for democratic governance. Forthe very wealthy, democratic governments represent nothing butcompetitors. These governments havesometimes acted in the past to diminish some of the formidable power thewealthy would otherwise possess over entire societies, and they sometimes evenstrip them of some of the wealth that they have earned from the sweat ofothers. Plutocrats would like nothingbetter than to put real democracy out of business, and to leave behind nothingbut a toy facsimile of democracy – something like a high school studentgovernment that is allowed to engage in a little democratic role-playing insidean adult social institution that the students really don’t control.
So the plutocrats have put out a stark and coordinatedmessage through the media channels they control, and through the opinion-leadersthey own and influence. It is a messagedesigned to invoke fear and panic, and to achieve democratic surrender: The message is that we are out of money,that our governments are bankrupt, that they must opt for austerity anddownsizing and contraction, and that we must hand over even moredecision-making to bankers, bond markets and technocrats – the functionaries ofthe plutocracy.
This message is preposterous. Societies build their futures and commonwealth out of the real resources they possess, not out of money. Money is only a tool, and it is the simplestand most inexpensive tool we can make. Modern democracies are very rich in human, material and technologicalresources. We are not “out of” anythingimportant of real and fundamental value. The plutocrats might be out of ideas; and they are running out oftime. But the democratic peoples overwhom the plutocrats are trying to reassert control are only out of patiencewith the plutocracy.
And this brings us back to the issue of monetarydemocracy. The time has come to considersome specifics: What role can money playin building a more democratic society? How should we organize our monetary system so that the public’s money isruled by the public and made to serve public purposes, and is not insteadperverted into an instrument that primarily serves plutocrats in their drive torule over the public?
Six Tasks forDemocratic Monetary Reform
I will conclude by proposing six social tasks for the risinggeneration – six challenging tasks whose successful pursuit will help usachieve a more just, equal and democratic society. It is my view that the resulting societywill not only be fairer and more decent. It will also be more economically productive, and will better promotehuman happiness and flourishing by more effectively distributing the goods andservices we produce. Most of us willbe happier in such a society as well, because the practices of democraticequality do a better job satisfying the human desires for cooperation, solidarity,trust, stability and fellowship that are the foundation of the social life forwhich human beings are naturally framed.
Extreme laissez faire capitalism of the kind extolled offand on over the past two centuries, and increasingly preached by economists,financiers and conservative thinkers over the past four decades, is a perversedistortion of human nature, foisted upon us by cold and demented thinkerscaptivated by inhuman notions of efficiency and domination. In the end, it is a system that reduces eachhuman being to an object whose value is nothing beyond what it is worth in themarket. We need to restore a socialbalance, in which private property, entrepreneurialism and commercial activitydo not dominate our lives and set all the rules for our existence, but functionwithin a democratic social order framed by a politically coherent and effectivecommitment to the public good. In ademocratic social order there exists an activist public sector controlling asubstantial store of social goods, and channeling democratic energies andintelligence into the ambitious perfection of such goods.
The six proposed tasks are not intended to be in any wayexhaustive. They all pertain to theeconomic sphere of life alone. But therealization of a genuinely democratic society will require efforts thattranscend the economic sphere. We needto rejuvenate the democratic spirit in America, educate ourselves and ourfellow citizens on the unfulfilled potentialities of democratic existence,recapture the salvageable institutions of our threatened but still existingdemocracy, and further expand the institutions and habits of democraticpractice. There is much to be done, butthe prospect of doing it is exciting.
Task One: Full Employment
The first task is to employ all of our people and endunemployment as we know it. We mustcommit our societies to the goal of full employment, and build an economicorder in which a job is always provided by either a public or private sectorenterprise for everyone willing and able to work. We must be willing to invest continually inhuman development in order to provide everyone with the skills and knowledgethey need to contribute meaningful work to our productive activities, andparticipate meaningfully as fellow citizens in our democratic society.
Unemployment should not be regarded as some sort ofinescapable curse visited upon us by the mysterious providence of the invisiblehand and the hard tutelage of the business cycle. It is not an essential economic medicine orpurgative that we are required to swallow for the sake of our long-termeconomic health. It is a social choice that we have made. And it is a bad social choice. Yes,private sector enterprises rise and fall, and their employment needs are constantlyshifting. But we have it within ourpower to organize the public sector to absorb workers who have been releasedfrom their private sector employment, and employ them immediately in usefulpublic enterprises. Then as privatesector activity picks up and generates a demand for more workers, we canrelease public sector workers back into the private sector economy. Human needs and desires always far exceedour capacity to satisfy those needs and desires, and that means that there isalways plenty of work to be done.
The system of persistent unemployment we have now is a badsocial choice, but it is the social choice many plutocratic power-brokersprefer. So long as mercenary privatewealth is permitted to call the shots in our economy, many of those at the topwill find it preferable to dispose of unwanted human beings and their labor byjettisoning surplus workers from the active economy from time to time, just toput them on a low cost dole. The alternative– in which a democratic government is permitted to exercise its organizationalpower and pool social resources in order to employ the unemployed – is a threatto the power and wealth of plutocrats. By preserving a permanent pool of unemployed workers, the plutocracyensures a permanent buyers’ market for labor, keeping wages down and workerbargaining power at a minimum. Thisallows the owners of private sector enterprises, working together with theirmost well-paid executive employees, to steer a greater portion of the revenuesof the enterprise into the hands of the owners and top executives. A full employment economy, on the otherhand, would restore bargaining power to workers, and permit those workers toretain a greater share of the firm’s revenues as wages.
The plutocracy also wishes to preserve the myth that ifthere is work that could be done, but that some private sector firm is notperforming already, then it must be unprofitable work that is just not worthdoing. But that’s an error. For one thing an immense amount of the goodsin this world are owned by the public at large or by nobody at all. Private capital will be invested only when itcan bring about improvements in someone’s private property, the property ofthose who are investing their own capital or investing capital they haveborrowed from others. This usuallygenerates a surplus that can then be sold on the market. That’s the only way the investor can profitfrom those improvements and productive processes, and that means that privatecapital has no interest in investing in those things from which no privateindividual or firm profits. But thepublic owns or draws value from a great many goods that lie outside this sphereof profitable private investment. It canadd substantial, usable value to the world by organizing public investment inthese goods.
Look around and ask whether or not there is valuable work tobe done. Of course there is. There is always far more work to be done thanthere are people to do it. Human beingsare mortal and limited, and when we succeed in achieving something new, thatonly frees us up to move on to something else that we were not able even tobegin to address before. When we failto employ ourselves in doing that work because of our ideological commitmentsto an existing system of private enterprise, we stupidly deprive ourselves ofthe productive efforts of many unemployed people who are willing to work. The existence of needless mass unemploymentwithin the present system only shows that the existing system is incomplete andinefficient, and that it is not the full answer to the satisfaction of humanneeds.
Adam Smith, a much more moderate and reasonable man than issometimes painted by the crazed disciples of laissez faire who have adoptedSmith as their patron, also recognized that the system of private enterprise isnot sufficient to satisfy all social needs. He recognized the need for public employment, because he recognized thatthere are ends we can pursue that, “though they may be in the highest degreeadvantageous to a great society, are, however, of such a nature that the profitcould never repay the expense to any individual or small number of individuals.”
We always possess the capacity to do what we need to do inorder to employ the unemployed. The monetarysystem should never stand in our way. Since the public’s money is only a tool, and since these monetary toolscan be produced and wielded by a democratic society in whatever quantities areneeded to pursue public purposes, it is absurd to argue one cannot afford togenerate real value in the world because of a lack of money. As we create additional real value in theworld, we can concurrently create the additional money we need to measure thatadditional value, to efficiently manage the entry of that added value into theexisting economy, and to pay those who produced the additional value. Since the process adds new goods andservices to the economy, rather than simply creating more money to chaseexisting goods and services, the additional money we bring into existence inthis way does not exert significant inflationary pressures and destabilizeprices.
Unemployment has tremendous social and individualcosts. It leads to the loss of skillsand capacity over time as a changing economy moves further and further ahead ofthe workers who have been jettisoned from it. These abandoned workers are then increasingly transformed into a burdenon others. Unemployment also leads topsychological depression, shame and humiliation, and creates invidious socialcaste distinctions between the employed and the unemployed. Our current social practice of deferringall employment decisions to private sector entities, and permitting massiveunemployment for long periods of time, is not just unnecessary. It is cruel, barbaric and stupid.
It is notable that during the current economic crisis, thenational government in the United States decided early on to turn itsattentions away from employment and toward the plutocratic agenda of publicdebt reduction. The government waswilling to tolerate official unemployment standing between 9% and 10%. That, of course, is only the misleading official number. That this national policy direction of forcedand recession-intensifying austerity was partly set by a Democratic administration, which rammed a deficit and debtreduction agenda down the throat of the national debate by appointing a“Deficit Reduction Commission” headed by committed conservative deficit hawksfrom both parties, is an indication of just how deeply both major nationalparties are now embroiled in the game of protecting the interests of thewealthy and neglecting the interests of tens of millions of desperateAmericans.
So the young Americans who take on this first task ofemploying all of our people can expect to face a broad and bipartisan front ofresistance from politicians in the employ of private corporations and financialinterests. There are, to be sure, goodpeople in government as well. But theyare in the minority, and will need the kind of support that only a massmovement can provide.
Task Two: Public Investment in Our Future
The second task is actually an extension of the first task,and further develops the insight from Adam Smith quoted from the previoussection. The private sector does a goodjob with the day-to-day management of, and innovation in, productive processesthat make new goods and useful technologies and services available tomarkets. Entrepreneurs who want todevelop these new products, or make old products in a better and more efficientway, can very often work out the meansof creating a viable and sustainable business operation around theirproduction, and can thus attract the private sector financing they need tobuild those businesses and market the products. We all benefit from much of thisentrepreneurial creativity and industriousness. But we need to recognize that many of thelarger scale investments a society needs to carry out in order to sustainprogress and build prosperity do not just happen by themselves through thehubbub of entrepreneurial innovation. They often possess a scale, scope and degree of organizationalthoughtfulness and planning that cannot or should not be carried out by privatesector business enterprise.
Even if some of these major national-scale infrastructureprojects can be carried out byprivate sector corporations commanding massive supplies of private capital, itmight not always be a wise social decision to allow those corporations toassume those responsibilities. Notethat what Smith said is that some highly advantageous social ends cannot becarried out in a way that brings profit to some small number of individuals. But of course, if we allow large oligopolistic private corporations toacquire ownership and control of everything that is important to us, then thosecorporations might be able to profit by investing in the satisfaction of largesocial needs. Yet any enterprise withthe power and capital and political muscle to build, say, an entire nationalinfrastructure for electric car use, or a national electrical grid or a systemof mass education maintaining national standards, will possess too much powerto place in corporate hands. Allowing such vast quantities of economicpower to flow into oligopolistic or monopolistic corporations is likely tobestow on those corporations the power to dominate politically the democraticcommunities they have been chartered to serve.
Note that there is an inherent tension between the corporateform of organization and the organization of a democratic society. Corporate decision-making structures areindeed the very antithesis of democracy: They are hierarchical, secretive, and profoundly undemocratic commandsystems. It is arguable that we need topermit such institutions to exist on smaller scales. Or perhaps we don’t. But in any case, if hierarchicalcorporations as we know them must exist, limiting the degree and scope ofcorporate power is in itself an essential public purpose for a democracy.
Vigilant preservation of those limits requires thatdemocratic communities at the national, state and local level deliberate in anopen and rational way on the future shape of their communities and on theirdesired way of life. They should atemptto achieve a broad consensus on those desired forms of life, and then retainsufficient control over real decision-making power so that they can carry outthe plans that will determine the long-term shape of their community’sfuture. Democratic communities mustalso seek to retain ownership of substantial amounts of public land andinfrastructure within their communities. In the end, the world is governed by those who own it. Building a decent and just future requiressubstantial public command of resources and a commitment to democraticallyorganized public investment of those resources.
But it is not enough to invest in physical infrastructurealone. We also need to invest in ourpeople. We are still making do with anantiquated education system in which we devote a great many resources toeducating our youth, but then leave our citizens on their own for the rest oftheir lives to provide for any desirable remaining education. We should consider the possibility that sucha system is no longer viable in an era in which technological and intellectualchanges are constant and rapid, and in which fewer people are employed in typesof work that do not require the continual improvement of knowledge andknowledge-based skills. We should considermoving to a system in which people are given periodic paid furloughs from work,say every five years, to return to school for six months for additionalpublicly-delivered education. There isno reason at all that a public education needs to be pigeonholed as a purelyK-12 system. 21st centurypeople require educational services spread across the lifespan.
We need to reaffirm community responsibility for most formsof education. Although some forms ofeducation might be of benefit only to the individual who receives theeducation, most forms of education benefit all of us directly orindirectly. A prosperous andenlightened democratic community will develop the talents and unexpressedcapacities of its citizens, and distribute these human development costswidely. And the more equal our societybecomes, the more those human development costs pay off for all of us. In a society organized to preserve broadsocial and economic equality, the benefits of higher education aren’t allpoured into generating extravagant incomes for the privileged class of highearners who happen to have received that education, and who profit from itindividually, but are directed back into the community as the educatedcontribute the value of their enhanced skills and knowledge to generallybeneficial production and activity.
These enhanced education programs can be integrated with thefull employment commitments discussed in the first task. For all of our people – at certain stages oftheir lives, at least – we should regard teaching or learning, or both, as thatperson’s job. There are many usefulthings we can pay the unemployed to do, but among those things are the jobs ofteaching others the things that these unemployed people already know, and oflearning something from someone else so that new knowledge can be brought backinto the world of productive activity to create value that couldn’t have beencreated before. Those people for whomthe private sector is not providing employment represent a large treasure troveof unutilized skill and knowledge. Weneed to create the institutional frameworks in which those skills can passedonto others, while new skills are acquired at the same time, and in which thesecitizen educators and learners are then able to draw an income to support theirparticipation in this vital area of public investment.
In thinking about the needs for public investment in ourphysical infrastructure and our people, we should never allow ourselves to beoverwhelmed and dazzled by the complex instrumentalities of money and monetarytools. The only thing that ever standsbetween our desires for the world we want and the realization of that world isthe existence of real resources. If theresources exist, we can always create whatever additional monetary tools andfinancial instruments are needed to command those resources and organize theirallocation. We can adjust our monetarypolicies to give democratic communities the monetary powers they need to betterdirect their communities’ resources into the channels in which they desire themto flow. And besides additionalmonetary policy tools, there remain the traditional tools of taxation. Private sector systems for distributingincome are sometimes wasteful and crude in the aggregate, and do not adequatelyreflect social needs and values that are not manifested in the marketplace bypurely self-seeking customers. Toadvance such values, the public sometimes needs to take surplus savings thatexist in wasteful and unnecessary abundance on the monetary scorecards of themost fortunate individuals, and direct those savings toward publicpurposes. Critics sometimes claimredistributive taxation of this kind is a mere zero-sum shift of productiveeconomic activity in one sector of the economy to productive activity inanother sector. But that is nottrue. In some cases it is a positive netshift of idle low-productivity savings into highly productive activity.
Task Three: PublicStewardship of the Financial Sector
The third task is to reassert public authority over thefinancial sector of our economy. Thelate economist Hyman Minksy persuasively argued that financial instability isnot just an anomalous blip of temporary dysfunction in generally stable andself-regulating financial markets. Rather, Minsky said, a tendency toward financial instability is inherentin the normal functioning of a capitalist economy. Periods of financial stability, in fact, lieat the roots of instability. Robustsystems of finance naturally evolve into systems characterized by higher andhigher degrees of risky, speculative lending, and ultimately higher degrees ofwhat Minsky called “Ponzi lending”. Stability is itself destabilizing. Preventing instability therefore calls for regulation, since a systemthat is inherently prone to instability does not regulate itself.
Few people these days are in need of further convincing thatfinancial professionals are not always the sober and steady managers of moneyand investment funds that their defenders sometimes like to present themselvesas being, or that they effectively regulate themselves through the disciplineof market forces. The US financialsector blew up a bubble of overleveraged and toxic debt based on liar loans andrunaway home prices leading up to the crash of 2007 and 2008, a bubble inflatedby a combination irrational exuberance, irresponsible management and outrightfraud. The banks and shadow bankscrashed our economy into the ground.
Human beings come in many varieties. But there will probably always be among usthose who seek to steal, defraud, scam, swindle, manipulate, chisel, plunderand exploit. The quantitative mazes andfine print of financial transactions and contracts provide fertile ground forsuch activity. The financial world isfull of very clever people who devise increasingly clever ways of insertingtaps into our society’s massive flows of money and siphoning off some of theflow for themselves. It is essentiallymoney for nothing, but it can generate huge short-term rewards for some of thelucky investors, and huge compensation packages and bonus for the cleverengineers of the leaky ductwork of money streams. Sometimes the complex movements of money andvalue are so mathematically complicated that even relatively sophisticatedpeople who have had millions and billions stolen from them can’t even say forsure if they have been robbed, or if they just made bad decisions in purchasinglegitimate services. To imagine thatthese dens of greedy money pillagers can be self-regulating if left to theirown devices, and that market competition generates all the information that isnecessary to enable investors and savers to make prudent decisions with thefunds for which they are responsible, is naïve in the extreme. And in a modern economy, we are allentangled in the maze of money. Even themost frugal, modest and cautious people are dependent on the behavior of theguild of financial engineers. So inthe end, not only do the schemers and scammers exploit individuals. Their destabilizing pyramids of monetaryliabilities collapse and destroy whole economies.
The University of Missouri, Kansas City economist andregulator William K. Black has commented on the “three dees” – deregulation, desupervision, and de factodecriminalization – that helped bring our financial system to the ground:
Deregulation occurswhen one reduces, removes, or blocks rules or laws or authorizes entities toengage in new, unregulated activities. Desupervision occurs when the rulesremain in place but they are not enforced or are enforced more ineffectively.De facto decriminalization means that enforcement of the criminal laws becomesuncommon in the relevant industries. These three regulatory concepts are ofteninterrelated. The three “des” can produce intensely criminogenic environmentsthat produce epidemics of accounting control fraud. In finance, the centraltask of financial regulators is to serve as the regulatory “cops on the beat.”When firms gain a competitive advantage by committing fraud, “private marketdiscipline” becomes perverse and creates a “Gresham’s” dynamic that can causeunethical firms and officials to drive their honest competitors out of themarketplace. The combination of the three “des” was so criminogenic that itgenerated an unprecedented level of accounting control fraud, which in turnproduced unprecedented levels of “echo” fraud epidemics. The combination drovethe crisis in the U.S. and several other nations.
I will leave it to people like Black and other experiencedfinancial sector sleuths and regulators to recommend the specific regulatorypolicies that are needed to bend the financial sector back toward the publicpurposes it is supposed to serve, and to make sure large and risky financial venturesare not allowed to escape the regulatory watchdogs – perhaps by moving into the“shadow banking” sector. But I do wantto suggest one specific item. We shouldtake a close look at creating public options for banking: not-for-profit,public savings and lending institutions that provide low-cost, low-riskalternatives to private sector banks, and that can be used when appropriate toadminister and subsidize programs of local public investment through thetargeted issuance of low interest loans – and perhaps sometimes even negativeinterest loans.
Task Four: Reorganize Monetary Policy
The topic of banking naturally leads us into the fourthtask: the reorganization of monetary policy. Under our present system, a quasi-independent and weakly accountablecentral bank is supposed to be responsible for all aspects of monetary policy,while Congress and the Executive Branch handle the fiscal policy operations oftaxing and spending. The system has beenwith us so long that it is difficult for many people to conceive ofalternatives. But such alternatives canand should be considered.
The division between fiscal and monetary policy is actuallysomewhat artificial. It is an analyticaldistinction useful for understanding different dimensions of macroeconomicpolicy. But in practical terms it isdifficult to separate fiscal operations from monetary operations, and the factthat they are institutionally separated in our current governmental frameworkkeeps economic policy makers from acting in as coherent and efficient a manneras they could. The institutionalseparation between monetary and fiscal policy also creates needless confusionin the mind of the public, and manufactures pseudo-problems from the needlesslycomplicated manner in which Treasury spending is partially funded by Fedpurchases of Treasury bonds through private intermediaries. This puts relatively meaningless debt ongovernment books, leading to public fears of budget crises, bond vigilantes andinsolvency. The austerity mongers, doomsayersand enemies of progressive government then call out this debt in their endlessattempts to manipulate public fears and crush public sector activism. These prophets of public penury arecontributors to the plutocratic effort to subordinate democratic governments tocorporate rule.
We have already discussed how this situation can bechanged. Fiscal policy need not rely tosuch a high degree on the issuance of debt to the private sector. Instead, we should enact monetary reformsthat provide for the direct crediting of Treasury Department accounts by anamount to be determined each year, as economic conditions warrant anddemand. We can expand deficits throughpurely monetary means when necessary. No added debt; no additional taxes – just money directly created by thesovereign monetary power of the United States government and the Americanpeople. But this is not a reform theFed can enact on its own. Only Congresscan legislate these changes. Activistsneed to take the case for monetary reform directly to Congress.
There are certain public purposes that are always bestserved by the public sector, no matter what else is happening in theeconomy. But there are other publicneeds which arise cyclically, and some which are entirely unpredictable. In a deep recession or depression, governmentneeds to expand its spending dramatically. The most efficient and least confusing way to do this is through directmonetary operations: clean, unconfusing money creation without the complexdance of bond sales mediated by private sector dealers and auctions.
Elitists and ant-democratic central bank enthusiasts haveusually argued that these kinds of reforms would put too much monetary policypower directly in the hands of a democratic rabble, and that reckless populistpoliticians wielding this kind of power would inevitably destroy our economyand spawn hyperinflationary chaos by succumbing over and over to theirresistible allure of free money. Bunk. These pessimistic warningsare only a stale replay of similar charges that have been levied againstdemocratic government in generation after generation. Elitists and aristocrats in every era have always said that democracies can’thandle anything important: they can’t handle civilian control of the military;they can’t handle religious and political liberty; they can’t handle theselection of leaders; they can’t handle the legislation of laws; they can’thandle the writing of a budget and the management of public finances. They have always been wrong. Democratic countries around the world perform these tasks routinely, andthe consequence of the rise of democratic government over the past century, andthe defeat of aristocratic and authoritarian alternatives, has been aspectacular surge in global prosperity.
So now the question is the reform of monetary policy, andthe elitists are wrong again. Decisionsabout the orderly creation, destruction and employment of the public’s moneyare no less amenable to routine democratic debate and thoughtful legislativedecisions than are any other economic decisions carried out by alegislature. Despite the political upsand downs, democracies generally do a perfectly creditable job managing thepublic finances and the public treasury. Monetary policy is a matter of public policy and should be debated andcarried out via the political process just like any other public policy in ademocracy. We will surely make baddecisions from time to time, just as we do in other areas. But over the long run, democracy will do amuch better job with monetary policy than do secretive central bankers, whoanswer mainly to the plutocratic elite, and who during a crisis quicklysacrifice the public interest to those elite interests.
Task Five: Promote Equality
The fifth task is to take significant and deliberate stepsto promote equality of economic condition. Economic inequality rots the foundation of a democratic society.
For too long we have been told, or tried to tell ourselves,that democracy can coexist with profound inequalities in wealth and income, andthat we can erect a wall of institutional structure that will protectdemocratic institutions from the encroachments of plutocrats. We have been told, or tried to tellourselves, that even in a world in which a single wealthy person can buy morethan can be purchased by a million of his poorer fellow citizens, thatunpleasant fact does not keep us from adhering to a rigorous principle of oneperson, one vote. We have been told, ortried to tell ourselves, that even a society with gross inequalities in wealthcan sustain a system of genuine equality of opportunity.
These are absurd and preposterously naïve views. And it is a real mystery how any significantnumber of mature and worldly people could ever have been induced to believethem.
The things in the world that we call “wealth” consist of allof those things that are produced either by nature or by human effort, that canbe transferred from some persons to other persons, and that people desire topossess either individually or collectively. Wealth consists in the objects of human desire, and the value of theseobjects is measured in the end by the degree to which people desire them. Those who control wealth thus control theobjects of desire; and those who control the objects of desire control people,since people are beings filled with desire. In other words, wealth equals power
No system has ever been devised, or could be devised, inwhich a few participants in society are permitted to control most of theultimate sources of human power, in far greater amounts than other people, butin which that privileged few does not succeed in exercising the power theypossess to seek their preferred ends in the political sphere. Those who are permitted to own the lion’sshare of wealth will always own the lion’s share of decision-making power. Since democracy consists in the equaldistribution of decision-making power throughout the whole body of aself-governing people, no real democracy is possible in the presence of grossinequality of wealth. Inegalitariandemocracy is a delusional doctrine; as unrealistic as the dream of a harmonioussymphony orchestra consisting of 99 dog whistles and one tuba.
Similarly, no system can be devised in which people possessanything approaching a real equality of opportunity unless that system at leaststrives to create something approaching a real equality of condition. Opportunity in life depends on the resourceswith which one begins life. Butinequalities of wealth and condition are passed on from one generation to thenext, in one way or another, both among individuals and withincommunities. Unless we take steps tolimit the grossly unequal accumulation of resources throughout a lifetime, wecannot prevent gross inequalities in the resources with which people in thenext generation begin their lives.
There are many things we can do to promote a more equalsociety: We can restore income balancethrough redistributive taxation and much higher marginal tax rates; we canprevent those inequalities from arising in the first place by enacting maximumwage laws or wage ratio laws; we can restore the bargaining power of workersthrough a national full employment program and a revitalization of organizedlabor; we can reform corporate governance so that companies are chartered toexist primarily to provide incomes for the people who work and produce in themevery day, not for the absent and invisible owners who do nothing but buy andsell pieces of those corporations; and we could reform inheritance laws toprevent inequalities arising in one generation from being propagated andmultiplied in the next.
Task Six: Public Stewardship of the Environment and OurCommon Wealth
The final task is to affirm and secure public stewardshipover things of inestimable value that profit-seeking commercial enterprises arealways threatening to ravage, exploit and destroy.
We have discussed a great many things that pertain to thegoods we produce and exchange, the things of value that we make out of whatalready exists, and whose production and distribution is organized through themedium of money. But it is important toremember that the most supremely valuable things in life were made either by noliving human being or by no human beingat all, living or dead. The sublimities of the natural world; thebeloved natural human habitants in which we make our homes and feel ourselvesat home; the marvelous and diverse fellow creatures with whom we share our world;the ancient and powerful seas, mountains, forests and winds; and theinnumerable products of human art, industry and intellect that have been passeddown to us from earlier generations of earnest and optimistic human beings, andthat are now the common inheritance of every one of us – these things comprisethe all-too-frequently ignored foundation of value in a meaningful humanexistence. They usually cost us littleor nothing to acquire; but the cost of destroying them is immeasurable.
The pursuit of the good requiresnot just the creative production of new forms of value from the resources wepossess; but the preservation of those sources of great value that alreadyexist. These springs of value speak tous and comfort us in voices that transcend the capacities of our very finiteand predominantly instrumental everyday intelligence, and they are the groundthat brings forth and nurtures all of the myriad objects of everyday use. These fundamental goods are as irreplaceableas they are beloved. Human commerce hascontributed greatly to the improvement of our life on Earth. But the commercial life and its exigenciescan also reduce us to a mean, blinkered and mercenary relationship with thethings and beings that surround us. Commerce thoroughly unleashed, commerce that is not directed by wise anddeliberate stewardship and foresight, can result in the thoughtless destructionof what is great in the manic production of what is merely transientlyuseful. The primordial goods belong to allof us, the great democratic community of humanity. Part of the task of democratic reform, then,must be to preserve for ourselves and our fellow citizens what is sublime andgreat. We must ensure the equal and sustainedaccess for all human beings to thecommon inheritance of all human beings.
The preceding is a draft version of work inprogress. For permission to quote oruse portions of this essay, or to pose questions or comments, please contactthe author at [email protected].