The People’s Money (Part 3)

An Explanation of the Federal Reserve Money system and what it means for the potential accomplishments of American Democracy


The big surprise of our tour of the Federal Reserve system (please see PARTS 1 & 2) is that the FED (America’s central bank)—as it is presently authorized to operate—can create “money,” as necessary, to support not only the undertakings of private enterprise, but the undertakings of public enterprise as well. Please recall that public enterprise produces needed goods and services which private enterprise cannot produce at a profit or, to make its profit, must set prices higher than what most citizens can afford to pay. To accomplish what private enterprise cannot, therefore, the U.S. Treasury, as directed by Congress, pays U.S. citizens and businesses directly to produce the goods and services of public enterprise.

The fact that the Federal Reserve system is able to create the “money” required for this spending is a surprise because we, the American voters, have always been led to believe that public enterprise is “financed” by a different method: namely, some combination of taxing private profits/income and borrowing from the investment capital of private enterprise. What we discovered, instead, is that, yes, taxes do fund some portion of the Treasury’s spending—but the remainder of the funding is derived from operations that have nothing to do with “borrowing” in any meaningful sense of the term.

What we clearly observed and documented on our tour is that the Reserves (fiat dollars) which the U.S. Treasury uses to meet the federal government’s spending requirements come, in fact, from three sources: (1) federal tax collections; (2) the voluntary exchange of privately held Reserves for future Reserves issued by the Treasury (i.e. “treasury bonds”); and (3) the exchange of future Reserves issued by the Treasury (i.e. “treasury bonds” again) for new Reserves issued by the FED. This third source is a multi-step process because the FED is not allowed to trade directly with the Treasury—but the net result of the operation we observed on our tour is exactly the same as if it did.

The federal government, we discovered, doesn’t ever “borrow” anything—and what we are persuaded to think of as a “national debt” is, in fact, merely a bookkeeping tally of some portion of the undertakings of public enterprise. It is not something that has to be “repaid” to anybody in the future; it is not something that future tax collections will have to reimburse. Nor is there a limit on the number of Reserves that can be created to pay for public enterprise: what is limited is not the availability of fiat money (the “Reserves” of the Federal Reserve system), but the real resources—skilled labor, technology, energy, materiel—which the Reserves are used to employ. If the need for some public enterprise exists, and the real resources are available to meet the challenge, the Reserves can be issued, as necessary, to employ those resources.

The implications of this “surprise discovery” are game-changing. As I write, for example, Elizabeth Warren has just released her long-awaited formula to pay for Medicare-for-all—a $50 trillion +/- federal spending commitment. Playing the old game, Elizabeth’s formula pulls out all the stops on raising taxes on the super-wealthy and large corporations—and pieces together a multitude of spending adjustments and projected cost savings to miraculously come up with the “money” necessary to pay American medical providers to provide medical care to Americans. (Elizabeth has, of necessity, carefully manipulated all these pieces within the old-game formula so it doesn’t appear the government has to “borrow” dollars—a proposition which American voters have been trained to view as political suicide.)

Mission accomplished! Except, having now stretched the old-game formula as far as it apparently can go to accomplish goal no. 1 of public enterprise (universal healthcare) we are left to wonder about the other major, money-intensive, public enterprise challenges we presently face as a collective society:

(2) student debt—$1.6 trillion plus $47 billion per year for free tuition at state colleges; (3) early child-hood care and development—$70 billion per year; (4) affordable housing—$350 billion for 7 million units (5) climate change—$90 trillion for the “Green New Deal.” And let’s now add another one to the list: (6) large-scale middle-class job displacement via the pending AIbot revolution—$148 billion per year (as a conservative estimate) for a job guarantee.

That’s a total of about $110 trillion over the next decade—after we’ve paid for universal health care—for the undertakings of public enterprise that are genuinely, if not existentially, needed by the citizens of modern American society. How is the old-game formula going to work with a number like that? And what’s going on, anyway? Have we suddenly, in the twenty-first century, become exceedingly and unreasonably profligate in our needs?

Why we need a new game formula

You can’t help but consider how fortuitous the “surprise discovery” we made in our Federal Reserve tour really is. As it happens, modern society seems to have evolved to a point where the old-game formula is, mathematically, simply incapable (as exemplified in the calculations above) of addressing the major challenges modern society confronts. Specifically, there seems to be a dramatic increase in the kinds of goods and services modern society needs, but which the profit model of private enterprise cannot provide—or cannot provide at a price that a large percentage of society’s membership can afford to pay.

To effectively function, then, modern society requires a new approach to public enterprise—and a new understanding of how U.S. citizens and businesses will be paid to undertake and implement it. What our tour of the Federal Reserve system has shown us is this goal can be (and currently is being) accomplished within the existing operations of the Federal Reserve system. If only we could clearly see it.

I should emphasize, now, that the intention here is not to denigrate or call for the curtailment of the private enterprise system. As I proposed in PARTS 1 & 2 of this essay, private enterprise and public enterprise are partners in the larger American Enterprise. As things have evolved, however—and continue to evolve with every more rapidity—the new structures of modern society are requiring larger and larger inputs from the public enterprise side of the equation.

To glimpse how this is so, let’s briefly look, one by one, at the previously listed money-intensive challenges we’re currently facing. The first four can be considered with just a few casual observations:

1. Universal Health Care

Before World War 1, health-care goods and services involved a relatively limited and straightforward set of technologies and skills. Doctors did simple surgeries, set bones, applied poultices, prescribed homeopathic tinctures, administrated morphine and, for the most part, watched, comforted and advised both patients and families. A doctor’s bill, almost by definition, was limited to a certain magnitude simply by the limitations of what a doctor could undertake to do, or what medications could be prescribed.

In today’s modern society, of course, things couldn’t be more different. There’s hardly a human medical condition that cannot be ameliorated or totally cured by the application of advanced technologies and pharmacology. These are administered in highly technical hospital complexes attended by specialized teams of highly trained physicians and aides. Illnesses or conditions that a few generations ago were simply accepted as one’s lot in life, or end-life, can now be routinely treated—and cured. And the “doctor’s bill” can now be virtually as unlimited as the amazing outcomes provided.

The problem, of course, is that only a fraction of American citizens has the income and/or wealth to buy these outcomes. To be profitable—or even to be provided at cost (out of empathetic generosity)the modern medical services of private enterprise must be priced beyond the means of most members of modern society. The ethical choice of modern society is stark: either a large percentage of citizens must go without available medical services—or public enterprise must step in and make up the difference.

2. Student debt

It should not be a surprise that modern American society has generated a student debt crisis. Two or three generations ago most young people, embarking on a career in life, didn’t need a college education. Most employment involved manual skills. Employment that required technical thinking or management skills could be obtained by apprenticing or learning on the job. College was reserved either for learning highly complex/professional skills—e.g. medicine, law, mathematics and science—or as a badge of upper-class identity in the fine arts.

In modern society, the availability (and social status) of manual employment has dramatically declined. Production and management skills, in virtually every employment field and endeavor, have become highly technical and specialized—requiring expensive, post-high school degrees and training before a career can be embarked upon. In itself, this could be viewed as a positive evolution except, of course, for one big problem: Most career-aspiring youth do not have the financial resources to buy the required higher education and, as a result, are forced into substantial debt to do so. The perversity of being pushed into debt in order to begin earning a living is one of the most extraordinary structures modern American society has yet produced—and it weighs heavily on many crucial aspects of our collective well-being, including family formation and consumer markets.

The only remedy to this evolved structure of modern society is for higher education—and specialized technical training—to be undertaken as a public enterprise. (What could possibly be, by the way, a more logical investment by collective society in itself?)

3. Early childhood care and development

Three generations ago, the challenge of early childhood care and development—outside the realm and context of the parental family—did not exist. Pre-school children grew up in, and were nurtured by, an extended family context which covered the bases of their needs and early acclimation to the norms of becoming a socially productive individual. Families paid nothing for these services—other than the hours “donated” as parent, grandparent, aunt, uncle, or neighbor.

Transition, now, to modern American society: Extended family structures have been spatially fractured and displaced. Grandparents, aunts, uncles and cousins are, typically not around to donate childcare hours to a young family. Neighbors are typically only casual acquaintances, at best—and hardly open to stepping in for a few hours of care. The difficulty is exacerbated by the fact that, in most modern families, both parents are obliged to be employed to earn wages adequate to meet basic living expenses. Or, most problematic of all, many families have only a single parent—usually working more than one job to make up for the lack of a second income. The modern pre-school child, as a result, is virtually “abandoned.”

Private enterprise, of course, provides child-care services which “solve” this problem of modern society. Except the price for these services—even if it simply covers operating costs and expenses—must be set far beyond the ability of most families to pay. Result: either modern society must suffer the uncalculated (to date) consequences of a generation of poorly nurtured and acclimated children—or public enterprise, in defense of itself, must produce high quality child-care, as needed, for every American family.

4. Affordable Housing

Before the two World Wars, most Americans lived and worked in rural communities that revolved around agriculture and subsistence economies. Housing for the most part was a simple structure, providing shelter from the elements and an organizational matrix for the tools, implements, and subsistence activities of family life. A dwelling was something that could be put together with hard-nosed, hands-on-and-neighbor-assisted labor—and there was plenty of land-space to be owned or rented in the rural communities for that purpose.

In the non-subsistence, consumer-structure of modern society, most citizens (in order to have access to employment and education) must live in high-density megalopolises where a dwelling space is, of necessity, created by an entirely different process—a process that unfolds within a highly regulated and technical context. And while private enterprise, with great relish, rapidly produces dwellings in these complicated urban contexts, its necessary profit and overhead demands that prices for the dwellings be set far higher than what a growing number of families can afford to pay.

If every American family is to have access to an affordable dwelling, then, public enterprise must play a major role in the construction and/or ownership operations of strategic segments of the housing industry.

The big disconnect

In each of the cases just described, the structure of modern society has evolved to create a human need for goods and services—or a technical level of goods and services—which previously did not exist. And while private enterprise has the real resources to produce those goods and services, it either cannot do so within a profit-making structure, or it must set prices at a level beyond what a significant membership of society can afford to pay. Another way of visualizing this imbalanced structure is to say that private enterprise, in producing the goods and services that modern society uniquely needs, is no longer able to provide adequately compensated employment for a large segment of that society’s members—thus enabling them to be consumers of the goods and services. This endemic under-employment, relative to the goods and services that an average citizen needs to buy to live an existence of relative health and well-being, has become, in fact, the primary structural disconnect of modern society itself. And it is this disconnect (among other things) which is necessitating the dramatic growth in public enterprise.

Of all the structural changes modern society is imposing on its citizens, however, the most challenging are the next two items our list. By comparison, the four we’ve just briefly considered—devastating as they may be to the well-being of families and collective society—are mere aggravations. The ultimate magnitude of the necessity for public enterprise—and of the Federal Reserve system’s ability to create the fiat money necessary to marshal efforts to undertake that enterprise—becomes apparent when we consider, now, the challenges of (a) climate change and (b) massive job displacement by AIbots. Let’s consider these in reverse order because, as we’ll see, the former may well be the savior of the latter.

5. Massive job-displacement by the AIbot revolution

When my brother went to college (this is less than one generation ago!) he used a slide-rule to make calculations in his engineering courses. He even gave me (I was still in high-school) a slide-rule (in a beautiful leather case) for Christmas—and showed me the rudiments of its use. Before I got to college myself, the slide-rule was useless—replaced by the hand-held electronic calculator. (The oddest thing, for me, was abandoning the leather case, which had suggested the protection of something magically precious that was now rendered meaningless.)

In modern society today, the calculations of technology do not even require human input. Measurements of all kinds are taken by robotic machines, organized as data by other robotic machines, then sorted, evaluated, and applied to a task (“stay in the middle of the road!”) by artificial intelligence communicating with another robotic machine. The relentless (and “logical”) effort by private enterprise to eliminate from any given task or goal the overhead expense, inconvenience, and inefficiency of human labor has brought us to the brink of a situation that’s difficult to rationally comprehend: a society in which human participation in the production of needed things—even the creative contribution of human thought and ingenuity—have a rapidly diminishing role to play in the efforts of private enterprise. Which points directly, of course, to an approaching, overwhelming problem of massive unemployment.

There are those who say that, as with the industrial and digital revolutions, “work” will simply transition, and people will re-train themselves to do new things. The march of “progress,” they say, inevitably must replace old work and employment paradigms with new roles. And this might indeed prove to be the case with the AIbot revolution as well—except this time, at least from the perspective of profit-making private enterprise, the last of the contributing human organs is being replaced: the BRAIN. How do you recover from that? What role remains for the human being to earn his daily bread produced by the AIBot?

Perhaps I just misspoke. There is one human organ left which private enterprise’s profit motive cannot (I don’t think) replace. I’ll save that thought for PART 4 of this essay which will consider the challenge of climate change, and how, ironically, it might be what saves us—with a lot of help from the operations of the Federal Reserve system—from ourselves.


8 responses to “The People’s Money (Part 3)

  1. A very insightful post, clearly explaining many of the underlying causes and dynamics of our neoliberal nightmare. There is one statement in it, however–echoed in much of MMT discussion–which IMHO is slightly inaccurate by being only partially true. “If the need for some public enterprise exists, and the real resources are available to meet the challenge, the Reserves can be issued, as necessary, to employ those resources.” Perhaps implied here, but too often not clearly stated, is that fiat money allows a currency-sovereign nation not only to use existing resources but often to create new or additional resources to supplement existing ones. Need more GP doctors, for example, to make universal health care run more smoothly? A developed nation can create them as easily–hell, much more easily–than Cuba did, by substantial new public investment in appropriate medical education, training, etc. The “real resource constraint” largely applies only to limited NATURAL resources, or to others impossible or extremely difficult to create, and thus MMT should make this crucial point more clearly and carefully than it does.

  2. In an accounting sense, you’ve described a pathway for the public enterprise to pay for new or expanded programs. Government can create money to pay for these efforts. You are proposing to exchange newly created money for labor.

    In mainstream macroeconomics, money is used as a medium of exchange so that, over time, one man’s work can be efficiently exchanged for second man’s work. In an exchange of work-for-work sense, I think we and MMT still have a lot to explain.

    A reasonable explanation can be found by thinking of money not as a classic macroeconomic ‘medium of exchange’, but as a ‘valuable coupon’. Thinking this way, the government action of creating money is equivalent to the action of a local store who creates a coupon having value within store. (The dissimilarities disuniting money and coupon are easily bridged.)

    By uniting money and coupon, we can logically find a micro economic model to help us solve (or begin to solve) our public enterprise problems. The early child care problem (being maybe simpler) will be used as an example:

    Home improvement giant Lowe’s could undertake to improve child care problems for it’s employees and friends of employees. Lowe’s could invite applications from eligible candidates and then grant valuable coupons to selected recipients. To minimize fraud, the coupons could be limited by (1) only redeemable by certified child care providers and (2) only redeemable at Lowe’s outlets.

    The federal government could do the same thing using money. Government could give a child care coupon to selected recipients with the coupon only redeemable by certified child care providers when presented at banks. Banks (acting on behalf of government) could redeem the coupons with money (while Lowe’s could have redeemed with either money or merchandise).

    Lowe’s owns money and merchandise. There should be no question of the ability of Lowe’s to carry out this theoretical program.

    On the other hand, the federal government, while having the ability to create money/coupons and give them away, does not own the resources ultimately given away when the coupons are redeemed. (This fact is at the root of the disconnect between MMT policy proposals and mainstream economic theory.)

    There’s neither time nor space available in this comment to expand the coupon/money parallels for each of the six societal problems but parallels could be found. It seems to me that macroeconomic policies are much easier to analyze when we can find a micro economic analogs.

  3. Developed MMT explains the hookup between the government and valuable things. The government has the power to pass laws requiring the citizens to do this or that. It’s logically possible to say the the government “owns” everything in the country because the government can require, through laws, that some things be used in this or that way. In the absence of money, this takes the form of corvee labor, and expropriation.

    MMT looks at the modern situation, where goods are traded in the National Market, even by the government. In this situation, the government’s act is to require that citizens pay taxes — requiring the citizens to get money to pay taxes with — resulting in the creation and existence of the National Market where citizens trade the things that they can exchange in order to get money. In out daily lives we see lots of trading, and relatively little taxation, but the logical hookup is still there.

    Whoever wants to study this should probably look up Eric Tymoigne’s series at this site and start there.

  4. Can the MMT be the solution to private debt ?

    The MMT is more and more popular (especially for left/democrats parties) as it could allow the financing of projects such as ecological transition, minimum income for all or heath insurrance for all. These projects are big challenges that the US is facing right now.
    Alexandria Ocasio-Cortez, a democrat representative, argues that MMT could finance the “Green New Project” which ensures the ecological transition and full-employment, the decrease of social inequalities and inflation.

    The coming up of the MMT is the sign of a new approach to debt (public and private) and to tax policy.

    Can MMT really be the solution to debt?

  5. Nowadays, MMT represents a large debate and those who disagree think that if it is a solution to the actual issues of our societies, it could be very dangerous for the future of our economic system.

    In accordance with them, I think that, if MMT could improve the global situation over the short term, there is also a huge risk of inflation, if not hyperinflation, over the long term. The fact that some sectors need more and more money to develop and that the State can create as much money as it needs isn’t viable. It would finally harm people’s purchasing power and kill private companies.

    In fact, knowing that some issues need a State intervention, as you mentioned it very well, don’t you think we also need to establish strong limits to MMT today to avoid that situation of hyperinflation ?

  6. To Coralie B:
    Great question to help clarify our thinking. Thanks!
    Let’s be very precise with our terms here. The “solution” to private debt is for the debt to be repaid. The “solution” to public debt—where, by the term “public,” we refer to state and municipal bonds—is also for the debt to be repaid. In the case of what is often considered “sovereign debt,” however, —where the sovereign government is the issuer of the fiat currency the “debt” is denominated in—there is, in fact, NO “debt” for the simple reason nothing is “borrowed.” Instead of “borrowing,” the sovereign trades something of equal or greater value—specifically, in the case of the U.S. treasury bonds, “future” Reserves (which are the sovereign U.S. fiat money). There is, therefore, no debt “problem” which requires a “solution.”
    There would be no private debt “problem” either if the borrower simply traded something of equal or greater value, and the lender, therefore, did not require repayment because they already possessed (by virtue of the trade) something equal, or greater, than what repayment would provide. In private lending and borrowing, however, this is not the case—and the lender expects that which was given to be returned.
    To be crystal-clear, the possessor of a “future” dollar issued by the U.S. Treasury has only one expectation: that on the future stipulated date, the Federal Reserve will make the “future” dollar real—or, to put it another way, that the FED will trade new Reserves for the “future” dollar (which it then simply cancels). This is something the Federal Reserve is set up, organized, and managed to do, every day—so long as the sovereign government remains in power.
    In short, then, MMT isn’t a “solution” for private debt. What it explains, instead, is that public enterprise does not have to either tax or “borrow” to pay American citizens and businesses to undertake and accomplish useful things (like, for example many components of the Green New Deal)—and, having earned those dollars, American citizens and businesses may well be better positioned to repay their private debts.

  7. Thank you for this really insightful post.

    The main argument in favor of MMT is that countries who issues their money such as the US, JAPAN or Canada actually don’t need to borrow money or sell bonds, because it is actually the sole issuer of the currency . Debt is actually money issued by the government that they didn’t get back as taxes. Under the MMT, governments could theoricaly spend as much as they need to because they are the sole printer of the currency.

    As all your proposals sure seems really attractive I have multiple questions for you :

    How long do you think the US could sustain a growing deficit? Are you not afraid that such massive spending would inexorably causes endless cycle of inflation especially with full employment? What happens when the Treasury’s spending outpace the limited resources available in the economy?

    If the main solution proposed to counter inflation is to raise taxes, do you think it can positively impact the American economy in any way ?

  8. financial matters

    This is somewhat of an aside but I was wondering if you could she some light on this. We are told that the Fed (and similarly the Bank of Japan, etc) can build up huge balance sheets injecting large amounts of money into bank reserves (including ‘excess’ reserves which are available for such things as covering the repo market) because these reserves don’t leak out to the economy and thus lead to inflation.

    But if these reserves are used to cover repo operations I don’t see how they aren’t leaking into the economy as they are essentially buying things like MBS and stock funds from dealers. These are supposed to be repurchased but that assumes nothing goes wrong. I think we are likely seeing ‘inflation’ here in creating bubbles like in the housing and equity markets.

    It would seem that an even deeper issue is that we have our money market funds dependent on things like the repo market and the fx swaps market which are being supported by the Fed.

    “”On September 16, 2008, The Reserve Primary Fund broke the buck when its net asset value (NAV) fell to 97 cents per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.””

    I’m not sure what we’ve done to help insure that this doesn’t happen again.