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Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Five

Posted on December 29, 2011 by | Comments Off on Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Five

By Dan Kervick

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 democratic equals?   How can they help us create a society inwhich democratic solidarity trumps self-regarding and avaricious greed, and inwhich broad and shared prosperity replaces the concentrated economic privilegeand 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 modernsocieties.  But it is also important notto overrate the role of money.  The mostimportant reason to reflect on the nature of money is that by doing so webetter understand all those things that are notmoney, all of the sources of real and non-instrumental value in the world thatare the ultimate 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 sometimes seemedto 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 cannotsucceed.   The cravings for ever morepersonal freedom, and for ever more liberation from the responsibilities ofdemocratic government, will only lead to the eventual dissolution of democraticgovernment and 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, we are dependent and socialcreatures, built by nature for social and community life, and for relationshipsbased 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 and healthy.   But the rising generation of young people,whose natural and healthy sociality and friendliness has not yet been toodamaged and disfigured by the ruthless demands of the system of greed know thatsomething  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 theshadow of the current recession, we are beginning to recapture the optimistic sensethat the future is something we can envision and choose.  We can work to build a social consensus aboutthe future we want, make large and ambitious choices about the shape of thatfuture and then work with one another in the task of creating the future we haveenvisioned.   We need not sit back, wait,and just see what turns up.  Thepossibility of a mass democratic movement for profound social change beginswith the recognition that the machine of despair is a lie, and that success isactually possible.

It is starting.   Peopleall over the world, frustrated by the dismal and meaningless pursuit ofindividual achievement and material gain alone without larger social purpose, andfatigued by the insecurity, stresses and manic busyness that afflict the neoliberalindividual, are reaching out to re-forge the social contract, establish a newsense of justice based on teamwork and equality, and articulate visions of thehuman future that are a match for the inherent human dignity we sense inourselves and recognize in our fellows.  The world that we have passively allowed to be built around us bycommercial frenzy devoid of higher purpose is an assault on 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, democratic decisionsto determine the direction of the community.  It’s hard work.    But the work is inspiring and ennobling, andpeople 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 have sometimesacted in the past to diminish some of the formidable power the wealthy wouldotherwise possess over entire societies, and they sometimes even strip them ofsome of the wealth that they have earned from the sweat of others.  Plutocrats would like nothing better than toput real democracy out of business, and to leave behind nothing but a toyfacsimile of democracy – something like a high school student government thatis allowed to engage in a little democratic role-playing inside an adult socialinstitution 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 instead pervertedinto an instrument that primarily serves plutocrats in their drive to rule overthe public?   In the final installment inthis series I will propose six tasks for democratic economic reform, each ofwhich has some dependence on the democratic reform of our monetary system.

Thisis Part Five of a six-part series. Previous installments are available here: One, Two, Three, Four

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Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Four

Posted on December 28, 2011 by | Comments Off on Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Four

By Dan Kervick

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 is indeeda monetary sovereign by this kind.   Thereader might now suspect that I have yielded my rational mind over to a simplisticfiction of my own creation.   And by thispoint, the reader is probably thinking that however interesting it might be toimagine this fictional entity, the so-called monetary sovereign, such fictionshave nothing to do with the complexities of the real world, because actualgovernments maintain accounts that are indeed constrained by the amount ofmoney in those accounts and by the external sources of funding to which theyhave access.   After all, can’t a governmentdefault on its debt?  What about the recentdebt ceiling debate in the US?  Whatabout what is happening in Europe with the sovereign debt crisis?   Also, if a government like the United Statesgovernment was a monetary sovereign of the kind I have described, theconsequences would seem to be enormous. Surely if a democratic government possessed this kind of power, we wouldmake much more use of it than we do.   In short, monetary sovereignty as describedseems both too simple to be real 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 actual governmentare not carried out by a single operational center, but rather involve severalparts of the executive branch, most prominently the Treasury department.   Congress is involved as well, as is the FederalReserve System.  These branches of thegovernment are subject to various legal restrictions and constraints.  But these are all constraints that thecountry’s legislators have chosen toimpose on the government’s financial operations.  They are to that extent voluntary and could thereforebe 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 to theFed 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 several ways:  The Treasury Department can only spend ifthere are sufficient points on its monetary scorecard – that is, if sufficientdollars are credited to its bank accounts.   Its accounts are held at the Fed and administered 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 theTreasury can’t create money itself by a direct act, in the course of itsordinary operations, nor can the Fed create it 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 and borrowedfunds currently supplying Treasury accounts constitute sufficient funds for thespending.   If tax revenues areinsufficient, then in most cases the Treasury Department will sell bonds to theprivate sector, and raise funds in that way.  However, Congress has alsoimposed a debt ceiling on Treasury borrowing, so the Treasury’s prerogative inissuing bonds is 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 ofthese loopholes would be highly unusual and politically controversial.  And if Congress remained determined to keep delegatedmonetary authority with the Fed, then the loopholes would probably be closedquickly by legislation.


Also, the Treasury Department is forbidden from sellingbonds directly to the Fed.   So while the Fed is permitted to create moneyand use it for making loans to banks in the Federal Reserve System, or for thepurchase of financial assets from private sector owners of those assets, itcannot purchase bonds directly from Treasury.  And thus the Treasury cannot borrow directly from the Fed.    The two departments must instead follow amore roundabout method.   The Treasury cansell bonds to private sector dealers in an auction, as it ordinarily does.  The Fed can then, at its discretion, purchasethose bonds from the private dealers in separate auctions.   Treasury ends up with some amount ofborrowed funds, but also with a liability to pay the Fed the principle on theloan.   Any interest payments on the bondswill be returned to the Treasury, since the Fed is not permitted to collectinterest from the sale of Treasury bonds.  So the Treasury ends up in a better position than if the bonds werestill owned by the private sector dealer.  But the Treasury still owes the Fed the principle.   How these loan payments are funded is then ultimatelyup to Congress to decide.


Let’s conduct a thought experiment, and imagine how things mightwork if the Treasury could sell bondsdirectly to the Fed, and if Congress exercised more direct supervision over theFed’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 $1 billionM-bond to the Fed today, then the Treasury receives $1 billion from the Fedtoday, 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 are thoughtax revenues, sales of ordinary Treasury bonds to the private sector and salesof 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.    Inother words, it always pays the debt it owes on its M-bonds just by sellingmore M-bonds.    So, in Year One it sellsthe Fed $100 billion of M-bonds, and spends the proceeds.   In Year Two, it sells $200 billion ofM-bonds, spending $100 billion of the proceeds and using the other $100 billionto pay off the Year One debt.   In YearThree, it borrows $300 billion, spends $100 billion and uses the remaining $200billion to pay off the Year 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 itwould be just as meaningless, since the whole quantity of the previous year’sM-bond debt would be borrowed from the Fed each year, and then paid back thenext 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 is insteada fixed, modest annual amount of net money creation – $100 billion, which isjust a fraction of annual US GDP – and the ballooning debt payments are just anartifact of the convoluted M-bond method Congress has hypothetically prescribedin our thought experiment to accomplish this money creation.  The M-Bond debt owed by the government to theFed – which is itself part of the government – has a fictional 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, simply bypassing 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 never runout 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.   Congresshas thus imposed a quotidian accounting constraint – to use a term introducedearlier – on the political branches of government.   The Fed, on the other hand, is effectively permittedto spend without a scorecard.   But its spending options are limited by law: Itcan 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 to exceedits intended legal powers.  Just what theactual limits of those powers are, and how much Congressional spending power hasbeen delegated to the Fed, seems to be a matter of some controversy.  But it is clear that the Constitutionalintention is that the “power of the purse” is supposed to reside with Congress.  And thus any move by the Fed to begin conducting fiscal policy byspending money on all matter of goods and services would be extremelycontroversial 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 thosesupreme laws that are embedded in the US Constitution, Congress makes thelaws.  So in what sense can Congress beconstrained by 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 a monetarilysovereign government: that it is too goodto 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 ofgovernment money creation is frequently exaggerated.   Some commentators seem to assume that the merecreation of new money will always have a corresponding inflationary effect, nomatter how the new money is spent.   Theyare constantly warning is that “hyperinflation” is just around the corner as aresult of government money creation.   Butthis inference 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 output sometimeseven falls with additional production, as current capacity is used moreefficiently.   So businesses would havelittle 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 same unitproduction costs, and without attempting to frost the tasty new cake with anuncompetitive 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 likely pushthe private sector into a deeper deficit, which is precisely the wrong thing todo as the private sector struggles to deleverage, and as household and businessincomes fall.   And in the context of aglobal recession, where virtually every country would like to increase exportssignificantly but few countries can do so because there are not enough foreignbuyers for their goods, the clear present need is for expanded public sectorspending.


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 have recentlydrawn on these fears of private sector debt in the United States to elevatesimilar 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 monetary systemoperates, and how any monetarily sovereign government relates to the world ofprivate sector finance with which it interacts.    Hereare several facts to bear in my about federal government debt in the UnitedStates:


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 in dollars, a currency that theUS government itself controls and produces. The US government therefore simply cannotgo bankrupt and fail to pay its debts unless the US Congress chooses to prohibit the TreasuryDepartment from paying those debts, by choosingto prohibit the Treasury from making use of the inherent monetary power ofthe United States.  Now this is in factwhat the US Congress threatened to do in the summer of 2011.  That is not because the government faced anexternally imposed solvency crisis.   Itis because some members of Congress chose to manufacture a crisis bythreatening a voluntary default, inorder to blackmail American citizens and other members of Congress intoreducing the size of public sector spending.


It is true that the Treasury Department is currentlyconstrained by 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 the TreasuryDepartment’s account by any amount Congress desires, including whatever amountmight 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 that beginto remove compensating monetary assets from the non-governmental sector throughtaxation rather than processes that continually expand those monetary assetsthrough more central bank purchases of debt. Most of that transition will occur automatically.   As economic growth returns and incomes rise,tax revenues will automatically rise along with the incomes.


Some worry about the size of the debt we owe to foreignlenders, including foreign governments.   The Chinese government, for example, currentlypossesses over 9% of US treasury debt.  Politicians use this fact to portray the Chinese as a potentiallyoppressive creditor that could choose to “call in our loan” and drive us intoinsolvency or crisis.   These fears arealso overblown.   When the Chinese or otherspurchase US treasury 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 ofthose things is to buy bonds from that foreign government (or save it with afinancial institution that is itself buying government bonds).   A bond issued by the Treasury Departmentfunctions as the equivalent of an interest bearing savings account for peoplewith dollars to save.  If the dollarholding foreign nation chooses not to put their dollars in “savings” by purchasingbonds either directly or indirectly, they will have to keep their dollars in“checking” by leaving them in 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 other countries seem any lessinclined to save and do business in dollars. The dollar is currently very strong on world currency markets, despitepersistent warnings by the fear mongers that government money creation willlead to a hyperinflationary loss of value in the dollar.


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 sectortoday, but over the next five years B will pour $10,000 back down into thatinfinite money well.  That amounts to anet 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.   TheECB also lacks the capacity to carry out a fiscal policy of central bankfinanced 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 democraticgovernment encompassing all of Europe.  Rather, sovereign democratic governments have been transformed in thisinstance into something like mere business enterprises that are dependent onprivate wealth and financing for their operations.  These governments now govern only at thepleasure of bankers.

Thisis Part Four of a six-part series. Previous installments are available here: One, Two, Three

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Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Three

Posted on December 27, 2011 by | Comments Off on Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Three

By Dan Kervick


Consequences of Monetary Sovereignty

Now so far, I have described the operations of the monetarysovereign as though money were the only thing in the world.   But this is clearly not thecase.   The model of themonetary sovereign I have developed is intended to be a model of agovernment.   And whilegovernments might have nearly unlimited and very easily deployed power in thecreation and destruction of money, a government also participates in theexchange of real goods and services.   And these goods and services are clearly finite.    So there is something veryspecial 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 that government receipts – removals of money –  can come also in different varieties: there are sales, in which money is removed from aprivate sector account in exchange for some good or service delivered by thegovernment to the owner of that account – as when someone buys a carton from thepostal service, for example – and there are taxes,in which some money is removed from a private sector account without condition,with the owner of that account receiving 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 publiccannot create valuable goods out of nothing at will, or receive the benefits ofvaluable services at will.  Thesethings come in finite amounts, and it is a very big deal to the public whetheror not it possesses some good – like a bridge, a park, or a work of publicsculpture, or a dam, or a rocket engine.    It is also a very big deal to the public whetherit is performing some service for a private sector individual or firm, orwhether that individual or firm is providing a service to the public.  So, while it might make littledifference whether we think of the monetary sovereign’s monetary possessions accordingto the infinite account model, the empty account model or the quotidien accountmodel, we have no such freedom when considering the public’s possession andexchanges of real goods, or its receipts and provisions of the benefits of realservices.   When it comes tothe exchange of real goods and services, what the public possesses matters.  As democratic citizens, decisions over the public sectorprovision or acquisition of real goods and service are among the most frequentand 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 costbetween producing some unit of money, and the value that can be fetched by thatmoney in the market when it is used to purchase something, is called“seignorage”.    Inearlier times, when the public’s money was fashioned from material resourceslike gold, which had to be mined from the ground, refined and shipped at a substantialcost, seignorage was still important, but less significant than today.   But in the world of modern money,when money in colossal denominations can be created at very low cost, simply bymoving a few electrons around on some hard drives by virtue of a few keystrokeson a computer 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 of government.   If the creation of the variousforms of money were permitted to be strictly a private sector endeavor in themodern world, we might reasonably suspect it would all end up in the hands of afew financial sector oligarchs – Goldman Sachs, Barclay’s, Chase, etc. – justas these oligarchs have come to dominate other forms of financial power.   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 ownprivate benefit, while at the same time diminishing public control over thepublic’s monetary system, and robbing a democratic public of its monetary power.    And the romantic andentrepreneurial monetary rebel of today could easily become the monopolizingmonetary kingpin of tomorrow 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, andreturn now to our simple model of the monetary sovereign, which we will regardas a democratic government connected to a public sector, wielding its monetaryand other 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 Imean something that the government must do in order to carry out someoperation, and without which that operation simply cannot occur.   Because the monetary sovereign canalways create any money it needs in order to carry out a spending operation,there is no operational need for it first to acquire that money from some othersource.   In the end, recall,the monetary sovereign is responsible for all of the money that exists in themonetary system which it governs. It is the producer of the currency in that system, not a mere user ofthe currency.  It is just flatwrong to view a monetary sovereign as an enterprise like any other enterprise –such as a household, a small business, a corporation – mere users of the monetary sovereign’s moneywhose monetary power is limited to the making of exchanges, and whose monetaryscorecard is subject to ordinary budget constraints.

So the monetary sovereign has no operational need to tax orborrow in order to spend.   However,the monetarily sovereign government may have a policy need to tax or borrow. That is, the government may have reasonable policy goals – such as themaintenance of price stability, the encouragement of private sector productionand commerce, the promotion of economic equality or other goals- that are bestcarried out with the aid of taxing or borrowing.  The economist Abba Lerner encouraged us to view allgovernment financial operations functionally– that is in terms of their effects. Whether a monetarily sovereign government should engage in some particularmonetary or financial operation depends entirely on the government’s policygoals, and the degree to which 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 budget constraints.

Now this idea of a monetary sovereign might seemfrightening.   Surely thediscretionary power to create and destroy the money that is in common use is anawesome and potentially threatening power indeed.   The trepidation experienced here is not at allmisplaced.   But it is alsoimportant to realize that the existence of such power, or at least thepotential existence of such power, is inherent in the very idea of governmentalsovereignty, and that much therefore depends on the specific form of governmentthat possesses this sovereign power, and the wisdom of those who determine theactions of that government.  A democratic public – in which sovereignty is distributed equally among itsentire people, which endeavors to subject itself and its own governmentaloperations to the rule of law and appropriate checks and balances, underdurable and vigilantly maintained democratic institutions – can employ itsmonetary sovereignty wisely and on behalf of enlightened public purposes andthe 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 amonetarily sovereign government, if such a thing exists, seems to receive somethingfor nothing by virtue of a seignorage power.  The employment of that power effectively delivers benefitsto the public that are not received inexchange for something else.    All the rest of us private individuals, on theother hand, are generally required to produce something of value in exchangefor the benefits we received.  This asymmetry might not seem fair or appropriate, since the monetarilysovereign government has an unfair advantage over private sector economicactors.   Various inhospitable terms might come to mind here todescribe the monetary sovereign’s advantage:  “free lunch”, “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 wrongheaded andfalse 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 asubstantial investment – of work and sweat and tears, and even including aninvestment of many lives – in order to secure something approaching monetarysovereignty for their society.  So if they exercise this monetary sovereignty in the pursuit of publicpurposes and the general good they are hardly receiving something fornothing.   They have investeda whole lot of something in the pastin order to control 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.   TheUnited States government is the instrument by which we the people are supposedto organize and direct our common efforts toward the fulfillment of our mostimportant national goals and aspirations, including such things as “promotingthe general welfare” and “establishing justice.”   It is absurd to suggest that because a corporationlike Goldman Sachs, for example, does not possess the seignorage power thatcomes from monetary sovereignty, then the American people must decline toemploy that power themselves, in the spirit of fairness to Goldman Sachs and thedesire for a level playing field.   Goldman Sachs is not entitled to a levelplaying field with the sovereign American people.   We’re the constitutionally recognized boss in oursociety.   If the people ofthe United States have been strong enough, and diligent enough, and havesacrificed enough to deny seignorage power to Goldman Sachs but preserve it forthemselves and 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 money printingor 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 moneyis the creature of a government, and its creation and regulation subject to thelaws of that government.  Under ademocratic government, the power to create and regulate money belongs to thepublic.   The public, workingthrough its government, can’t be the counterfeiter of its own legally ordainedmoney.  It might make foolishdecisions from time to time in the way it deploys its money-creating power, butthese decisions do not encompass the counterfeiting of its own money.  It is impossible for the rightfulissuer of a currency to counterfeit that currency.

So the emotional aversion some feel to the exercise ofmonetary power by a democratic government is misguided.  Much political energy, however, hasgone into perpetuating these irrational reactions.   The owners and servants of concentrated privatefinancial power sometimes seek to shield the US public from a clear awarenessand understanding of its own monetary powers, and from recognizing that it candeploy its inherent monetary sovereignty for public purposes so long as itorganizes itself to lay hold of these powers and command them.   They would like the American people to believe that thepeople themselves, and their democratic government, are mere users of amysterious currency they do not control, and are thus dependent on the will ofothers in exercising whatever monetary power the people are permitted to wieldby those mysterious powers.   Theplutocrats promote these myths and taboos of monetary superstition because aninformed public with a clear-eyed appreciation of monetary matters wouldobviously work to prevent the further usurpation of their powers by plutocrats.

This is Part Three ofa six-part series.

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Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Two

Posted on December 26, 2011 by | Comments Off on Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Two

By Dan Kervick


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 currencysystems – the dollar system, the euro system, the renminbi system, etc. – buteven within a single system, money can take significantly different forms.   There is all of that familiarpaper and metal currency, consisting of tangible objects that can be physicallytransported from one hand to another, and that are denominated with differentface values.  But money might alsoexist simply as “points” electronically credited to someone’s digital monetaryscorecard at a bank.  These pointsare debited from and credited to various accounts, and need never be exchangedfor physical currency.   We can already see a near future inwhich the traditional material currency of metal coins and paper notes will nolonger be used.   In thinkingabout our modern monetary system, then, it is useful to think of it as anetwork of such monetary scorecards.   And we can think of the exchange of physical paper andmetal currency as just one among several ways of adding and subtracting pointsfrom the monetary scorecards of those who exchange the money.   Each individual possess such ascorecard, 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, the world of balance sheets Minsky asked us to describe containsmore than just money.  Thesebalance sheets record the ownership of other financial assets – that is,promises or commitments of money rather than money itself.   And they also contain accounts ofreal assets – items of positive valueto their owners, like cars or buildings or a book collection – that are notfinancial assets.  Finally, thebalance sheets are also accounts of liabilities– things that represent negative value to their owners, such as debts thatlegally commit the owner of the debt to an outflow of wealth over time.

A second thing to note about modern monetary systems is thatthe market value of these exchangeable monetary points lies, for all of their users,purely in their exchange value.   That is, the only value that attaches tothe acquisition and possession of money comes from the knowledge that money canbe exchanged for other things.  It is true that people also seek to acquire money as a “store of value”that they save for indefinite periods and have no definite plans to spend.   But the only reason one can besuccessful in storing value when onesaves money is that other things continue to happen out in society that preservethe use of that money as a medium of exchange.   If at any time people became unwilling to accept thatform of money in exchange, the saver would no longer be storing value when theysaved their money, but valueless points 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 valuealways have a direct practical utility, for at least some significant number ofpeople, a utility that is not dependent on the prior exchange of those itemsfor something else.   Theutility might be realized in consumption, as it is with a bar of chocolate, or inthe production of some other product or service, as with a block of iron.   It is true that for some specificpeople, the entire value of some non-monetary object might derive from theprospect of exchanging that object for something else.   So, for example, I might be aphilistine art collector who buys paintings only to store value over time andperhaps exchange them later for the things I really want.   For me, paintings function as something like money.   But I can use paintings in thispurely mercenary way, as merely something to exchange for something else, onlybecause there are other people wholove paintings for their own sake.   Similarly, I might be a prisonerwho trades goods for cigarettes, even though I don’t smoke, but only becausesome other prisoners do smoke, and are willing to give something up for thecigarettes.   But money isdifferent altogether.  What makes acertain good a form 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 dementedmisers with a perverse love for paper bills and metal coins themselves, and afew numismatic hobbyists who collect these bits of money as culturalcuriosities and works of art in themselves.  But the exchange value of money does not depend in anysignificant way of the existence of this relatively 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,legally institutionalized role in our economies, an official status that isadvertized to us by the markings and declarations on the physical currencyitself.  Almost all money in actualwidespread use is some government’s money.   The government is central in preserving the value andstability of the government’s money over time.   And we know that while we all have a great deal ofliberty to exchange the money we personally possess for other good andservices, and to exchange goods and services for money, the legal authority tocreate and destroy the official government money is tightly regulated andprotected.   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 monetarysystem stabilized over time?  How is money actually created and destroyed in a modern monetary economy?    The full answer to these questions is not simple.   Governments are complex entities,consisting of many separate branches, divisions, departments and agencies, eachwith 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 as well.    My focus will primarily beon the processes that create and destroy money.  We can put off the precise details of government monetaryoperations for now, and start instead with a simplified model.   I will call the government in this simple model a “monetarilysovereign 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 monetarysovereign’s scorecard can be thought of as very much like anyone else’smonetary scorecard.  When themonetary sovereign spends, and either buys something from someone in theprivate sector or transfers money outright to the private sector, some monetarypoints are deducted from the monetary sovereign’s scorecard and an equal numberof points are added to that private sector scorecard.   And going in the other direction, when the monetarysovereign taxes, or when someone purchases some good or service from agovernment agency, some monetary points are deducted from the private sectorscorecard and an equal number of points are added to the monetary sovereign’s scorecard.

But there are two wrinkles, two special circumstances thatmake the monetary sovereign’s scorecard very different from private sector scorecards.

First, the monetary sovereign is the seat of government, andhence the ultimate administrator of its own scorecard.   If you and I exchange money, andthe exchange takes place via our bank accounts, the banks that oversee theseaccounts administer the adjustment of the monetary points on ourscorecards.  And if two banks exchangemoney, the government, which operates a central bank that serves as a sort ofbank for bankers, administers the adjustment of monetary points between the twobank scorecards.   But when amonetary exchange takes place between the monetary sovereign and any other personor entity in the private sector, the monetary sovereign is the ultimateadministrator or arbiter of the monetary adjustment.  The monetary sovereign’s scorecard is not administered bysome 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 Treasury Department’smonetary transactions are administered by the Federal Reserve System, whichholds the Treasury Department’s accounts. But the Fed is ultimately part of the government, which means that theUS government as a whole is the ultimate administrator of the government’s ownaccounts.

The other way in which the monetary sovereign’s monetaryscorecard is different from a private sector scorecard is connected with thefirst difference:  A monetarilysovereign government reserves for itself the power of adding or deleting monetarypoints on its own scorecard or any other scorecard, at its own discretion, withoutany requirement that an equal number of monetary points are debited from anyother scorecard or credited to any other scorecard.  And the monetary sovereign uses its power to guarantee thatit is the sole entity in the monetarysystem that possesses such power.  The monetary sovereign, in other words, wields the exclusive power tocreate and destroy money in the monetary system it controls.   Currency users in the private sector, on the other hand, canonly exchange monetary points in waysthat make the books balance.  Tothe extent that agents other than the monetary sovereign are permitted toengage in money-creating and money-destroying operations, these operations takeplace only with the permission of the monetary sovereign, and under theguidance or supervision of the monetary sovereign.

There might appear to be one partial exception to the aboverestriction, however.   Privatesector banks are also permitted, within certain limits, to create new monetarypoints in the monetary system.  When a bank decides to give a loan to some new borrower, it creates adeposit account for that borrower and credits the loaned amount of dollars tothat account.  In effect, itcreates a new monetary scorecard for the borrower and puts some monetary pointson it.   As the economistsBasil Moore, Scott Fullwiler, Marc Lavoie and many others have emphasized, thosepoints need not come from anywhere.  They need not be the result of a transfer of points from some otheraccount to the borrower’s account. Although the bank might be subject to central bank reserve requirementsthat mandate the bank hold a certain percentage of money against its deposits,in its reserve account at the central bank, the bank typically has severalweeks to meet these requirements, and can acquire the reserves after making the initial loan, eitherfrom other banks or from the central bank itself.

So bank lending can in some sense create additionalmoney.   However, in a verystrict sense, what the bank borrower receives is not monetary points, but a promise of monetary points to bedelivered in the future.  Thatpromise is a liability of the bank – something it now owes the borrower and thatthe borrower can convert into money on demand.  If the borrower decides to withdraw the promised money inthe form of material currency, the bank must take cash from its vault and giveit to the borrower.   At thispoint, we can see an actual transfer of money from the bank to theborrower.  But the bank’s vaultcash has to be acquired from the monetary sovereign, and it has to pay for thatcash.

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 nostrict line that can be drawn between liabilities for money or promises ofmoney, on the 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 themonetary sovereign, and so the monetary sovereign’s decisions are ultimatelyresponsible for which lending operations a bank is permitted to conduct, and whetherthe bank’s lending results in a net increase in money in the monetary system.   The monetary system is under theultimate control of the monetary sovereign, even if the sovereign chooses not to be very assertive inexercising that control, and passively allows banks to create money as they seefit.

So let’s return to the operations of the monetary sovereignitself.    In order tobring the nature and ultimate capacities of monetary sovereignty into sharperrelief, let’s consider three distinct models or mental pictures of the monetarysovereign’s monetary operations.    These mental pictures are designed only toprovide a more vivid imaginative understanding of monetary sovereignty.   And initially at least, theymight appear to be dramatically different pictures.   But we will see that in the end the pictures are,somewhat surprisingly, fully equivalent in everything that is really essentialand important about the monetary sovereign’s operations.

The first picture can be called the infinite account model. Think of the monetary sovereign as possessing an account or monetaryscorecard that holds an infinite quantity of dollars.  When it spends in its unit of currency, it credits someamount of units X to some private sector account, but debits X units from itsown account.   When it taxes,it debits X units from some private sector account, but credits X units fromits own account.   But sinceit possesses infinitely many units of the currency in the first place, theseoperations have no effect on its own balances.   Currency units come in and go out, but the addition orsubtraction of a finite number of units from an infinite stock of units nevermakes any difference.  The sameinfinite number of units exists on the monetary sovereign’s scorecard at alltimes.

A second picture is the emptyaccount model.  In this case, thinkof the monetarily sovereign government as possessing an account that containsno money whatsoever.   Its scorecard always stands atzero.  When it spends, it credits Xunits to some private sector account, but makes no change at all in its ownaccount.   When it taxes, itdebits X units from some private sector account, but again makes no changes atall to its own account.  Since it never possesses any money on its books, the monetarysovereign’s basic monetary operations of taxing and spending can be viewed as simplycreating private sector monetary points out of thin air and destroying privatesector money, not transferring that money back and forth between the privatesector and the government.  On the empty account model, only private sector monetary scorecards aremarked up with monetary balances, and the monetary sovereign never possessesmoney 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 a quotidienaccount is scrupulous about balancing the books on its monetaryoperations.   When it spends,it credits X units to some private sector scorecard, but scrupulously debits X unitsfrom its own scorecard.   Whenit taxes, it debits X units from some private sector scorecard, but againcarefully credits X units to its own account.   Since it possesses only finitely many units in thefirst place, these operations do have an effect on its balances.  However, there is one added wrinkle:the monetary sovereign is, as before, legally entitled to create or destroycurrency units on its scorecard as a separate operation.   So in the end, while there arealways some finite number of units on its scorecard, the monetarily sovereign governmentultimately chooses exactly how many unitsthat is, since it can add or subtract units from its own scorecard at any time.   Even though the sovereign’sbookkeepers are scrupulously balancing the books when it comes to recordingexchanges to and from the private sector, the fact that the government can atany time credit or debit some additional amount makes the bookkeeper’s caresomewhat absurd or meaningless, at least with regard to the monetarysovereign’s own account.

Recognizing that degree of meaninglessness in the quotidien accountmodel is the key to grasping a very fundamental fact about monetary sovereignty.  When it comes to understanding the realeconomic effects of the monetarysovereign’s operations, it really makes no difference whatsoever which picture oneemploys.   The three picturesare all equivalent.   If themonetary sovereign is entitled to create or destroy currency units at will, it reallydoesn’t matter whether we imagine the sovereign as possessing infinitely many units,zero units or some finite number of units of its own choosing.   All that matters is what happensto the accounts in the non-governmental sector.    The monetary sovereign administers the monetary systemof the real economy, and that real economy consists of the sphere of goods andservices that are produced and exchanged by the world outside of thegovernment, a world in which the government’s money plays the role offacilitating exchange, accounting for value in a standard unit of measure andmaking payments.   Since thosepeople and entities in the private sector economy are not permitted to create currencyunits at will, unless such power has been delegated to them by the monetarysovereign, their spending and savings decisions are constrained at any time bythe number of units they possess at that time.   And the rate at which money is exchanged for goods andservices depends ultimately on the amount and distribution of money that existsout in the private sector.   Whatultimately matters, then, is whether some government operation has the effectof adding monetary points to some private, non-governmental sector scorecard,or deleting monetary points from some private, non-governmental sectorscorecard.   What happens tothe sovereign’s own scorecard is insignificant with regard to the creation anddestruction of value in the real economy, that is, with regard to all of thethings we really 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 will say, then, that taxes “remove” money from the non-governmentalsector, and that government spending “inserts” money into the non-governmentalsector.  The monetary sovereign possessesthe power of a government to make these things happen, and the insertion andremoval of money from various places in the private sector can have profoundeffects.  But what happens behindthe accounting wall separating the monetary sovereign’s scorecard for all ofthe other scorecards makes no real difference to anybody.  Whether one chooses to regard theinsertion of money into the economy as a transferof money – in accordance with either the infinite account model or the quotidianaccount model – or as the creation ofmoney from nothing – in accordance with the empty account model – really makesno difference to the effects 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. How should we understand the borrowing operations of a monetarilysovereign government?

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 has borrowed money from somebank lender?   Well it isclear that we don’t mean quite thesame thing that we mean when we talk about other non-monetary acts of borrowing and lending in the everyday world.   If my neighbor borrows mylawnmower from me, and I lend it to him, I simply hand over my lawnmower to himfor some more-or-less agreed amount of time.   He uses it for a while, and then gives it back tome.  End of story.   The value of the lawnmower hasprobably depreciated just a tiny bit as a result of the use, and my neighborhas derived some value from the lawnmower for which he did not pay me.   But if, instead of agreeing to lend him the lawnmower, I amonly willing to hand over the lawnmower for some more-or-less agreed paymentfrom my neighbor, we would probably say that my neighbor has then rented by lawnmower from me, notborrowed it.   So in essence,my act of lending constitutes a modest neighborly gift on my part.   I give the gift and my neighborreceives it.  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.   As we all know, abank loan is no gift!    In the case of money, we are talkingabout 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 thelender, and a financial liability to the borrower: it represents something thelender is slated to gain and the borrower is slated to lose.   The financial instrument, thepromise, represents a cash flow.  From the point of view of the lender, it represents an inflow ofmonetary payments, generally associated with a fixed payment schedule.  From the point of view of the borroweron the other hand, the financial instrument represents an outflow of money onthe same more-or-less fixed payment schedule.   A bond – suchas the bonds sold by businesses and governments – are essentially financialinstruments formalizing promises of this kind.   In terms of a monetary scorecard, we can think of afinancial asset like a bond as something like some marks on the scorecard correspondingto a schedule of pre-determined point increases.  The lender’s scorecard contains the bond as well as anypreviously existing monetary points the lender possessed.   As any one of the various timesindicated on the schedule transpire, some marks indicating a scheduled paymentof currency units at that time are erased, and the appropriate numbers of actualcurrency units are added to the scorecard.   Gradually what begins as a mere schedule of monetarypoints to be received in the future is transformed into some quantity of actualmonetary points.

People can also sell bonds that they have already purchasedfrom some other party.  Suppose A has purchased a bond – a schedule of monetary payments – fromB.   But suppose A no longerwants to wait for the promised money to be credited to her scorecard onschedule, and prefers some money now.   Then A might be able to find somethird party C who is willing to buy the remaining schedule of payments fromA.   A receives some moneyfrom C – that is, A’s monetary scorecard is credited by some amount and C’smonetary scorecard is debited by some amount.   Now B still owes the remaining schedule of monetarypoints, but B now owes them to C.  In accordance with the remaining schedule of payments, C’s scorecardwill be marked up with additional monetary points and B’s schedule will bedebited by that amount of points concurrently.

So, borrowing and lending money in financial markets doesnot involve any kind of gift.  Itis an exchange 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 moneyand in return receives money in the future.  Generally, people are only willing to make such an exchangeif it is mutually beneficial.  It is important to keep the mutually beneficial nature of creditrelationships in mind.  There is anunfortunate tendency in contemporary discourse about credit to regard thelender as a person who has bestowed some favor, gift or act of grace on theborrower.   But that is notthe case.   Rather, two peoplehave made a simple mutually beneficial exchange.  One party to the exchange receives from the other some moneyin the present; the other party to the exchange receives from the other somemoney 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 with borrowing.  What are the effects of governmentborrowing from the non-government sector, at positive interest?   Well, first, the private sector lender buys a bond from the monetarysovereign.   At the time ofthe purchase, some monetary points are removed from the lender’s monetary scorecard,and a schedule 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 appropriate numberof monetary points are added.  These operations are likely to be very important to the private sectorlender.   But remember that fromthe standpoint of the monetary sovereign it makes no difference what happens tothe 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, thegovernment in this case first removes money from the private sector and theninserts money into 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 understandthe effects of this operation by just reversing the time order and direction ofthe previously described borrowing operation.   When the government lends to a private sector entity, somemoney is first added to that entity’s scorecard, and then some greater amountof money is subtracted from the scorecard over time.   The government in this case first inserts money intothe private sector and then removes money from the private sector over time, ona pre-determined schedule.     But remember again that from thestandpoint of the monetary sovereign it makes no difference what happens to themonetary sovereign’s own scorecard. All that is important is what happens to the private sector scorecard:some money is in this case first added to the scorecard, and then some greateramount of money is subtracted from the scorecard over time.

Now consider the monetary effects of several of thesemonetary operations together: taxing, transfer spending, borrowing andlending.   Both money andofficial promises of money represent assets to the party that hold them.  So the effect of these governmentmonetary operations is the swapping around of government-issued financial assetson private sector balance sheets.  In each case, the monetary sovereign is mainly adjusting the scheduleson which it will insert and remove money from the private sector, and theaccounts on which it will make these changes.  In some cases it adjusts a schedule of money removals andmoney insertions forward in time toward the present; in some cases it adjusts aschedule further off in time toward the future.   It is likely engaging in a large and complexcombination of such adjustment operations at any time.    All of these adjustments helpregulate 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 drawswater out of a well and into the monetary sovereign’s well, or draws water outof the monetary sovereign’s well and into the private sector well.  Some of the hoses carry a steady flowwhenever they are hooked up.  Otherhoses are outfitted with valves that deliver their water flow in bursts, on aset time schedule.  The monetarysovereign’s various monetary operations can then be seen to consist indetaching some hoses and attaching others, sometimes swapping out one hose foranother.

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 we think of themonetary sovereign’s well as infinitely deep – as in the infinite accountmodel.   Water flows into andout of the monetary sovereign’s well.   But these flows make no difference from the standpoint ofthe monetary sovereign itself, since the sovereign’s well is always infinitelydeep and filled with an infinite amount of water.   But the flows of water make quite a bit of differenceindeed to the owners of the many ordinary wells out in the private sector.
This is Part Two of asix-part series.  Part One is here.

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Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part One

Posted on December 24, 2011 by | Comments Off on Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part One

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

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