By J.D. Alt
A principal dilemma of the theory of modern fiat currency (MMT) is the question of how the state spends the money it issues: who decides, and by what process? It may be frustrating to watch U.S. Congressmen and Senators bicker and behave as if their national government has run out of dollars, but it is sobering to consider what would happen should these legislative prodigies suddenly realize that, in fact, there are no currency constraints on their spending at all. It is hard to imagine who, or what, would step in to impose some kind of discipline and planning for the spending spree that would ensue. I suspect that many who actually understand fiat currency are hesitant to overtly embrace it for precisely this reason—because they are unsure what structure exists, or could be put in place, that would rationally manage the remarkable levels of sovereign spending MMT makes possible.
Looking ahead, then, to a time when the cat is out of the bag and modern fiat currency is widely understood and accepted, some effort should be made to imagine how it might best be managed and controlled. This is especially difficult in the United States because of our obsessive belief in laissez-faire capitalism and reflexive fears of socialism. The fact that modern money theory requires the sovereign government to spend the fiat currency it issues appears to implicitly suggest some form of command economy, with the sovereign choosing, by virtue of its spending choices, how resources will be allocated, which industries will be preferred, and what investment goals will be pursued. The extreme aversion of the U.S. political system (the democratic process) to making these kinds of choices was illustrated by the 2009 stimulus bill in which Congress struggled mightily to agree on useful ways to spend $800 billion into the private sector in hopes of alleviating the Great Recession.
There have been times, of course, when this was not the case—but invariably these were times of extreme emergency: The Great Depression and World War II come to mind. Yet even at the height of the depression, Roosevelt struggled continuously with Congressional anti-socialists and laissez-faire business leaders to fully implement the command economy of the New Deal. The mobilization leading up to war with Germany and Japan was the same uphill political struggle until the surprise attack on Pearl Harbor revealed the full dimensions of the existential threat. The U.S. sovereign spending which was then unleashed—fully controlled and managed by the structure of a command economy the likes of which had never before existed on the planet—transformed the world in less than half a decade.
Peacetime in a democracy, it seems, is a much more difficult challenge to finance. This, I would suppose, is because in a war footing the goals—and the means required to achieve them—are, first, relatively easy to agree upon and, second, relatively clear and calculable—conditions that lend themselves nicely to the decision-making structure of a command economy. In peacetime, what exactly the nation should be striving for is not so easy to see—or, perhaps more accurately, the diversity of opinions about what the goals are, or should be, is infinitely more varied.
Given the difficulty of implementing a command economy in a peacetime democracy, it is reasonable, then, to embrace the idea of markets. Rather than the sovereign government choosing how resources are allocated through a democratic political process, the aggregate decisions of the citizens themselves—through their private purchasing decisions—make the choices instead. Adam Smith’s “invisible hand” creates a balance between what is produced and what is consumed. The political process, then, focuses on simply making sure the markets are fair and honest.
Without considering the shortcomings of the market economy model (of which, I understand, there are many) it nevertheless has the undeniable virtue of championing individual initiative, creativity, and personal freedom—notions that appeal mightily to the American psyche. But it is also, it would appear, directly at odds with the theory of modern fiat currency—for how can the sovereign government spend the fiat currency it issues without encumbering the private citizen with the messy (and usually inequitable) process of politically battling for control of that spending? Even worse, MMT appears to transform the “invisible hand” of the market into an upturned palm waiting for a hand-out—a notion that will never sit well with rugged egalitarianism in America.
L. Randall Wray suggests an answer to these questions in his most recent post “Minsky Does Rio” when he notes that “banking is inherently a joint venture” between the sovereign government and the private sector economy. Banks create “money” by giving out loans—and, as Wray tells us, “bankers do not need to use democracy to determine who gets that credit.” In other words, there is another, non-political, process for deciding how the “money” gets distributed—a market actually—and because much of the “bank money” eventually gets converted to sovereign currency through the reserve banking process, the sovereign, in effect, has inserted its currency into the private sector without having to “spend” it.
While this is a neat process, it obviously has its own downsides (which are repeatedly and eloquently chronicled at NEP by William K. Black). The least obvious (and most hurtful) of these problems, however, is that the reserve banking system effectively “hides” the sovereign spending, creating the illusion that the banking system, itself, is actually “creating” the money. With the sovereign spending component of reserve banking effectively hidden, the true and logical narrative of our monetary system becomes corrupted at a fundamental level—and we are led to believe (as President Obama, himself, leads us to believe) that our sovereign government must either collect taxes or borrow dollars in order to have dollars to spend. The irreparable damage this belief renders upon our society is being played out right now before our eyes.
This leads me to wonder if it is possible to create another market mechanism which would enable sovereign spending to proceed without “the need to use democracy”—but which would not hide the underlying logic of that sovereign spending from view. What comes to mind is something that might be called “cooperative reserves”. The underlying goal of cooperative reserves is to encourage and assist private citizens to form cooperative associations which, in one way or another, help them to live happy, healthy, and productive lives. It doesn’t really matter what the cooperative venture is—so long as it doesn’t interfere with the rights or well-being of other citizens; it could be a frivolous undertaking, such as planting flowers in public places—or it could be more serious, such as designing and building a carbon-neutral residential co-op in New York City—or establishing an Early Reading Program for a community of children. The point is that if a group of citizens forms a cooperative association, and creates a formal business plan for the achievement of a stated cooperative goal, the sovereign government would issue fiat dollars to that association for the purpose of achieving the goal. These fiat dollars would then get “spent” by the cooperative association rather than by the sovereign government.
Obviously, there are details to be worked out. What is appealing about this idea, however, is that at a fundamental level cooperative reserves might enable the “cooperative gene” in our society to more effectively compete with the “selfish gene”. Genetic theory tells us that if this were to happen, our society as a whole would become more successful—but, at present, there is little support for it. While the “joint venture” between the sovereign government and the banking industry does an impressive job supporting the interests and efforts of the “selfish gene”, the “cooperative gene” is left to beg for grants and gifts from an elite class of wealthy foundations, or to wage political battle for a few dregs of sovereign spending allocated by parsimonious U.S. Congressmen (most of whom are, by nature, competitors rather than cooperators.)
Cooperative reserves also have the potential merit of reinvigorating and strengthening the effectiveness of our democracy itself. While the task of sovereign spending seems to “paralyze” the peacetime U.S. political apparatus—bifurcating it into viciously bickering, non-productive factions—issuing dollars on a neutral, non-judgmental basis to citizen’s co-ops puts the spending choices directly in the hands of relatively small groups which, by definition, are cooperating to achieve a specific collective good. If someone does not agree with a stated cooperative goal, they are not compelled (as in the political process) to prevent that goal from being funded—instead, they simply will choose not to join that particular group. Instead, they have the option of joining a different cooperative group pursuing goals more to their liking.
I’m aware this sounds hopelessly idealistic. But remember, I’m looking ahead to the day when modern fiat currency is fully understood, appreciated, and embraced by the national mainstream. That, in itself, appears hopelessly idealistic at the present moment.