Monetary Sovereigns, Monetary Subjects: Modern Money & The Criminal Legal System

By Raúl Carrillo

I delivered the talk published below as part of a panel at Yale’s annual Rebellious Lawyering Conference, on February 17th, 2017. The panel, entitled “Financing Criminal Justice”, co-hosted by The Modern Money Network, focused on the connections between fiscal austerity and the horrors of the U.S. criminal legal system. I was joined on the panel by Thomas Harvey, Co-Founder and Executive Director of ArchCityDefenders, Judge Jaribu Hill, Director of the Mississippi Workers’ Center for Human Rights, and Mitali Nagrecha, Director of Harvard Law School’s National Criminal Justice Debt Initiative.

Together, we discussed how financially-strapped local government entities, charged with public safety, perpetuate social violence, especially upon low-income communities of color. My presentation focused on macroeconomic context. More specifically, I attempted to build a bridge between the insights of MMT and arguments asserted by opponents of mass incarceration, police brutality, and criminal justice debt.

Good afternoon, everyone. Buenas tardes. In my short legal career, I have had some hands-on experience with these issues. After law school, I joined the Enforcement Division at the Consumer Financial Protection Bureau. We did (some) work at the intersections of private consumer debt and criminal justice debt. I’m currently at New Economy Project, an anti-poverty organization, in New York City. Some of our clients do wind up behind bars because of failures to appear and failures to pay. Some do leave incarceration only to return home to frozen accounts and judgment liens in addition to the fees they were charged for their time in the system. I’m not here to speak about all that, though. I’ll leave it to the experts.

Today, I’m here on behalf of The Modern Money Network. MMN began as a group of rebellious students at Columbia Law who had some previous experience studying macroeconomics. In the past three to four years, we’ve grown into a national 501(c)3, hosting events in the U.S., Europe, and Australia. We first hosted a panel here at RebLaw in 2014. We essentially try to provide spaces for people interested in a more comprehensive counter-narrative to the Chicago School style Law & Economics. Specifically, we try to build an interdisciplinary “systems design” perspective, highlighted not only how law governs the economy, but constitutes and constructs it.

Perhaps most importantly, we try to provide auxiliary support for social justice lawyering. We don’t say people really should focus on capitalism or neoliberalism rather than white supremacy or cis-hetero-patriarchy. In fact, I don’t think it’s really possible to understand the economy without thinking about racial subordination, social reproduction, or the fact that our planet is baking. But also vice versa. A lot of us are here because we can’t afford to struggle in silos anymore.

So, I’m going to discuss a macroeconomic prism for looking at these issues. I’m going take us on a journey to the center of our monetary earth. We’ll first take a look at the core, then we’ll go to the peripheries and move back in again. So you know the main points I’m going to make on this journey, there are really just two. The first point is conceptual 1): lawyers need to be thinking in terms of balance sheets. Criminal justice debt means someone’s has criminal justice assets. The second point is programmatic, 2): without sufficient federal financing, the only way courts are going to fulfill their function in the criminal legal system is by imposing fines and fees, and this will inevitably disproportionately hurt poor communities of color.

Alright. So according to the Modern Money view, the core of any given economy is a legal entity known as a “monetary sovereign.” What is that? Monetary sovereigns have the power, to not only issue their own currency, but collect taxes, fines, and fees, in their own currency, float their exchange rates, and denominate their debts in their own currency.

Most monetary sovereigns are political states, but not all political states are monetary sovereigns. For example, Greece, which uses the Euro, does not have monetary sovereignty. The European Central Bank ultimately controls money in Greece. Senegal, which uses the CFA Franc, does not have monetary sovereignty. The French Treasury (and ultimately the European Central Bank) controls money in Senegal.

Who is sovereign? The governments of the U.S., the UK, Japan, are truly sovereign, for example. The U.S. issues its own currency, the U.S. dollar. It also taxes and fines in U.S. dollars. The payments that are due to the holders of U.S. Treasuries are all paid in dollars. Since the U.S. government abandoned the gold standard in 1971 and committed to not pegging the value of the dollar to anything else, it has achieved full “monetary sovereignty.”

This means as long as we’re talking dollars, U.S. government payments can be met. During the debt ceiling debates, even the crustiest, vanilla-iest elites pointed this out: Greenspan, Bernanke, Krugman, Buffet. As far back as 1945, in a talk delivered to the American Bar Association, New York Fed Chair Beardsley Ruml stated flat out, we do not collect federal taxes in order to spend federal money.

The U.S. government can never run out of money in the same way that the NBA can never run out of points. In 1995, Paul Samuelson, a Nobel Prize winning economist, acknowledged that the “superstition” that the federal budget must be balanced is part of an “old fashioned religion,” meant to hush people who might otherwise demand the government create more money.

Politicians may act like the U.S. government has the same constraints as a household or business, but the U.S. government can’t go broke. It can impose silly constraints on itself, like the debt ceiling, but people who actually know how monetary operations work know the U.S. government cannot run out of dollars. If you’re unlucky enough to take a Corporate Finance class at a law school, one of the first things they’ll tell you is to assume zero risk when accounting for U.S. Treasury bonds. This is because U.S. government can “inject” too much money into the system and destabilize prices, but the payments are always going to clear.

This is true financial power. And we’ll return to it later.

What about the rest of us? Monetary sovereignty implies that there are monetary subjects.

Monetary subjects need to collect legal tender. We can’t just print it or mint it or create it in on a spreadsheet with keystrokes. Just as we exist in a field of white supremacy, of patriarchy, we also exist in a field of monetarily-driven coercion. In the United States, you need dollars to eat, and unless you steal the dollars, you generally have to find a way for someone to give them to you. The government also protects property rights with cops, courts, and the clink, so most of us can’t just go get some land and live off it. Generally speaking, you’ve gotta hustle for the almighty dollar, because the strong men with the guns have told us “you have to pay us with dollars and dollars only when the time comes.”

This is how contemporary economies work. For better or worse, this is just the air we breathe. How do we deal with this?

Modern Money encourages people to think of every actor as having a balance sheet. Balance sheets can help lawyers understand the essence of money, because they are two-sided. It’s give and take, simultaneously reciprocal and adversarial. If we have financial liabilities (debt), they correspond to someone else’s financial assets. Everything nets to zero.

Many legal problems, especially ones we are discussing today, occur when your personal balance sheet is lopsided, when your liabilities outweigh your assets. Or in an immediate sense, you may not be liquid enough to satisfy an obligation enforced by the state. You may be stuck with medical debt; you may just be walking too noisily in the wrong part of town. To avoid problems, you need cash inflows to meet cash outflows. The economist Hyman Minsky called this problem a “survival constraint.”

Some entities’ survival constraints are more dire than others. Very wealthy entities can often get forgiveness from the state. We saw this during the Wall Street bailout. In a pinch, some of us in the middle might be able to liquidate a car or a house. Some of us are not so lucky at all.

Monetary subjects on the periphery must often rely on whatever credit they can get it. Throughout American history, power has been wielded by those who can play on people’s survival constraints. In the era of Jim Crow, Jane Crow, Juan Crow, farmers could only get necessary equipment from one person: the local traveling merchant. A white farmer might call him “the furnishing man,” a black farmer might call him another simpler name, “the Man.” And people would go into debt to “The Man”, who was not the sovereign, but someone further up the hierarchy. Today, some things haven’t changed. If you’re on the periphery, you deal with pawn shops, check cashers, payday lenders, or whoever happens to have financial power on your block, in whatever terms they dictate.

If you’re lucky you deal with the national banking system. You have access to banks, chartered, licensed, enfranchised by the sovereign to make legal tender available. They’re not merely financial “intermediators”, as many people will tell you. Banks do not lend out of a pile of deposits or even necessarily key their lending to a pile of deposits. What they do is generate credit and because they have special legal privileges, their IOUs are very valuable. They lend and borrow whenever they see a profitable opportunity to do so, knowing the state will back them up if things go really poorly. They’re higher up on the food chain.

Just as banks create asset-liability pairs out of thin air, so do other creatures of the state. In our federal system, state and local government entities do not have full power to issue currency. Mississippi has police power, but it can’t issue Mississippi Marks and is in fact constitutionally prohibited from doing so. It has some legal sovereignty, but not monetary sovereignty.

Likewise, courts. Most people think about courts “moderating” the payments system by settling disputes. They indeed do this. If you are a monetary subject and you have a dispute with another monetary subject, you can go to court. There are obviously exceptions. If you have a contract for illegal drugs or sex, for example, you may not be able to seek redress, but for the most part a court will settle your beef with another subject.

Like banks, courts have certain privileges. Just as a bank can create a debt for you and an asset for someone else, so can a court. The court may hold that asset, that money might go to another government entity or a private corporation. Unlike banks, though, courts can even generate new obligations between you and the state itself. And they can often take advantage of their power to load up their own balance sheets, which they do all over the country.

Why? Part of this is because courts face their own survival constraints. No matter how they do that, whether it’s by preying on poor people or via some other method, they are faced with this balance sheet logic at the core of the system. As even Chief Justice Roberts admitted during the sequestration, courts face particular pressures “because virtually all of their core functions are constitutionally and statutorily required.” If they do not get money from the sovereign, they will get it from other monetary subjects.

Other people will get much more into this, but since the financial crisis, we have seen how courts and other municipal bodies have turned to bleeding the poor. Poor folks are in the carceral system partially because cash-strapped entities cannot fund basic operations. Financial crisis begets austerity, which exacerbates the criminalization of poverty. The Ferguson Report made it crystal that the City relied upon cops as collectors. Even though it’s not even clear that some other municipalities are actually making any money this way, the driving logic remains. Courts, cops, and the clink try to get blood from stones, money from empty pockets.

So, there’s financial domination intertwisted with carceral domination. So what? Why should we care about looking at things this way? Because it affects our strategy. As the saying goes, “if you don’t know where you’re going, you’ll end up somewhere else.”

In an article in the Boston Review last fall, Donna Murch, a Professor of History at Rutgers, said that we need:

“…a larger reexamination of the economic and extractive dimensions of mass incarceration… apart from establishing more equitable means testing of people brought before the courts.”

I strongly agree. I would obviously propose the Modern Money view as the method of reexamination. Ultimately, we need to argue the case that monetary subjects should not be footing the bill for either punishment or rehabilitation. Who should be footing the bill? The monetary sovereign.

Looping back, unlike you or me, the monetary sovereign does not face a survival constraint. It can always pay. On the asset side of the federal government’s balance sheet is essentially a massive INFINITY sign. It not only has the Article I, Section 8 power to tax and spend for the general welfare, it has the operational capacity to spend or lend as much money as it wants. Although it has a price stability constraint it does not have a survival constraint. So why doesn’t it spend more money?

It’s a mix of malice, miseducation, and misunderstanding. There is a myth that the sovereign cannot afford certain things. Even if you look at things through the Modern Money view, this is often ludicrous. When Cheney went to go to war, he said deficits don’t matter. Bannon also believes in deficit spending. Indeed, the Trump administration has proposed to almost triple federal outlays to state and local governments for policing and civil asset forfeiture. Yet when earnest liberal bureaucrats or even rebellious lawyers make demands on the state they get caught up with the question, “How are you going to pay for it?” as if the government were a household that must collect or borrow before it can spend.

The answer for monetary subjects is to seize control of the monetary sovereign. It is, in essence, just more democracy. I am not pressing for it to pay for more prisons, more cops, more immigration detention centers, but it can spend enough money in a targeted fashion.

The move is to simultaneously push for decarceration, for demilitarization, etc. AND to push for federal funding of what we do want. We have to claim rights vis-a-vis the monetary sovereign, which partially means marching to the capitol and demanding our checks, like Dr. King said. The monetary sovereign should fully fund the machinery of due process, should spend the money to make sure everyone has employment, decent income, housing, education, healthcare, safe streets, safe water, safe air, etc. Back to the Freedom Budget and the kinds of programs proposed by BLM. Get some “Fiscal Feminism” in the mix. Make the monetary sovereign pay for things that actually make us safe.

Stopping austerity is not going to eliminate the drive to subordinate women and people of color generally. But the anti-austerity struggle can at least remove a great lie used to justify certain horrors.

To some people this seems like common sense. But a lot of people are going in a completely different direction:  there’s a bipartisan effort to decarcerate as a cost-cutting mechanism to protect the federal budget. I see this as a trap, as does Dr. Murch. Not only does this buy into the framework that the rightwing turns around to use to gut social services, but it does something even more sinister. In the world of financial regulation, there is something called the Bootlegger-Baptist strategy. The Koch Brothers and Rand Paul are fiery preachers saying that the carceral system is bad because it’s expensive, it’s unthrifty, it’s imprudent etc. But they’re doing this to make room for privatization. They are making space for the “bootleggers” to come in and do the dirty work. They’re making room for CCA, J-Pay, Sentinel, and all the vultures on Wall Street. (This isn’t just a theoretical concern. Gary Johnson did this in my home state of New Mexico).

Holding the monetary sovereign accountable is where it’s at. The struggle against the carceral system must also be a struggle against the cycle of austerity and crisis, which is a large part of why we’re in this mess. From 2010-2016, federal outlays of “state and local law enforcement assistance”, “juvenile justice programs”, “community oriented policing services” all dipped significantly. There all kinds of horrors going on with respect to financing the criminal legal system. But if we’re really to strike at the root, we also have to confront a funding structure that requires subjects to pay for the punishments imposed by the sovereign.

That’s the thesis. Just on a final note, my colleagues and I are trying to connect the dots between struggles and we’re here for anyone who wants to join in on that. Many people study law so as to avoid being tricked by lawyers. We think lawyers should study money so as not to be hoodwinked by financial elites. I hope that people at least consider our type of thinking as we move along and we’re here to join up with anyone who wants to team up.

These remarks have been cross-posted at Tropics of Meta.

7 Responses to Monetary Sovereigns, Monetary Subjects: Modern Money & The Criminal Legal System

  1. Brent Irving

    Ethical lawyers!! There is hope yet.

  2. The big “fix” in our economic system is the “dual mandate” imposed by congress onto the Fed. The Fed uses this dual mandate to constrain 8 to 12 million individuals to be unemployed at any given time. The 8 and 12 are from the U3 and U6 numbers for unemployment. The “partial employment” policy to control wages gives us this 8 or 12 million people with 3 options, go on the dole, mooch off of family and friends or resort to crime. And across the spectrum of these unemployed individuals, all three options are utilized. It is a crazy policy,an immoral policy and an economically stupid policy that wastes so much of our labor resources. We desperately need, as MMT has said, a job guarantee program with a 100% employment policy.

    • Raúl Carrillo

      I obviously agree we need a Job Guarantee. And we should change the laws on the books such that full employment means “anyone willing and able to work has a job.”

      I still think we need to use federal funding to ensure due process and support courts and other local bodies that serve public purpose.

  3. Wade Riddick

    “Like banks, courts have certain privileges. Just as a bank can create a debt for you and an asset for someone else, so can a court.”

    You missed the most vital bit of evidence in favor of your case. The greatest asset courts can create is slave labor. Slavery is suspended except in cases of incarceration – where it is liberally employed. Courts create a reserve of slave labor for certain blessed industries. In this sense it is a holdover of the antebellum era predating federalized currency supremacy (monetary public utility). In the plantation economy, private banks circulated their own “currencies” – though as suckers often found out, holding them made you a creditor, not rich. Similarly slaves had a certain value and hence a certain debt due to their owner if they wanted to be freed. Courts today substitute prison for the plantation and the debt is measured in years, not dollars.

    • Raúl Carrillo

      Prison labor is certainly an important part of this story, although I’m not sure it was the “most vital bit” for the purposes of this panel. I unfortunately couldn’t touch on everything in a 15 minute presentation. I chose to exclude my points on prison labor, for better or worse.

      I certainly encourage people to flesh this out. Thank you for raising the point, Wade.

  4. This is an interesting alternate perspective on what makes the criminal Justice system suck. I’m primarily interested in reducing incarceration and fees for humanitarian reasons, rather than financial. I don’t think making the government pay harder for things solves the problem of figuring it what kind of standards we should hold our projects to.

    PS the state can create money, but the money in circulation can ultimately never total more value than actual value exists. What the sovereign can do is distribute money in expectation of it creating more value, that the pool of value will inflate at the same or a higher rate than they put in currency.

  5. Raúl Carrillo

    My concerns are also humanitarian. I want to sketch out the monetary production dimension in order to better advance toward humanitarian reform.

    I agree that more federal funding doesn’t solve the problem of standards. But funding municipalities and courts so they can’t portend to rely on extraction would be a significant advancement.

    I’m not really sure what you mean by your postscript. I subscribe to the MMT view that the state should create money and target spending at the mobilization of underused real resources. In this case, I want the federal government to target spending at strapped municipalities and courts. I’m not sure there’s an obvious price stability concern here.