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, 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.
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.
This is Part One of asix-part series.