Make Money Creation Democratically Accountable, Financial Times

Home » Blog » 2011 » December » 14 » Make Money Creation…

 

A letter on debt-free money creation was published in Financial Times, Wednesday 14th December 2011

Despite the Bank of England having created money and massively bought up government debt with it, the hope that the cash received would somehow translate into new bank lending has not happened. 

So when is the penny going to drop with the coalition government so that a public agency is set up to direct newly-created money to productive, non-inflationary purposes? The creation of such money used for new infrastructure in particular could be issued debt-free and interest-free.

Why on the one hand do we ask private banks to provide loan funds, at interest, for public investment, but we do not ask the government to direct some of the Bank of England’s new money, debt-free, directly into such investment?

Our current system benefits private banks, but burdens us with taxes. Surely we are missing two great opportunities: to make money creation democratically accountable and, when used for public investment, debt-free?

Read the whole letter here.

Stay in touch

Trackback from your site.

  • Rob Slack

    If Government used “debt free money” to fund infrastructure projects then that money would be a form of taxation; a mechanism by which the government appropriated resources/real output. The extra money in circulation would tend to raise prices so money balances held by all non-government units would be devalued in real terms…the tax.
    When the government borrows at interest it must discount the future value of its spending at the “cost of capital”..based on borrowing costs.

    If money is to have value then either it must have intrinsic value (e.g. gold) or it must represent a claim against someone…in effect it must be debt.

    One problem using real assets as money is they have alternative uses, so using them as money increases the demand for scarce assets.

    Why is there a worry about debt based money? We need money and we need debt (lending/borrowing is socially desirable, it allows people to plan consumption in preferred ways).

    Clearly there are risks if banks over extend credit but to reject fiat money because it can fail is like rejecting fiat cars because they can crash.

    • donald dietrich

      Rob, I think what you are saying is that money created debt free for infrastructure projects is inflationary “tax”. But its my understanding that money creation in this way would not be inflationary, because it is being spent for goods and services. Also with a change to the system in this way, inflation could be controlled by tax, decreasing the money supply.
      I used to believe the same as yourself, that it must have intrinsic value or be backed by something “gold” or “debt contract”. But I have found recently that it is not what backs the currency that’s important, its the amount in circulation. One of many problems with debt based money is that a country needs perpetual growth/more and more loans, to the public, to create the money/interest necessary for all of the outstanding loans to keep the economy running. This does not work and having recessions every 7 years or so reflects this. I agree with you that we need money, but we don’t NEED debt, at least at the point of creation. PM does not advocate an end to interest per say. Only at the point of creation by government.
      Your right, that borrowing is desirable but only when you want to borrow, not when you have to. When banks become true intermediaries there is no reason why they cant loan at interest, because society and our economy will not be dependent on them for our social needs, the way we are today, a loan would actually be a LOAN and society would be the investors. The way most people think they work today. PM is not rejecting fiat money at all. They are calling for 100% reserve banking. Meaning that money in your current account can not be touched or used for unethical lending with out your permission and insured 100% by the government or some other kind of insurance co. There is a great video on the website under problem and solution that explains their proposals in detail.

    • Joao Granchinho

      “If Government used “debt free money” to fund infrastructure projects then that money would be a form of taxation; a mechanism by which the government appropriated resources/real output.”
      -Gov’t wouldn’t be appropriating anything, it would simply get the economy running, employing people and getting infrastructure improvements, or public services running. If we have the manpower, the resources and the knowledge why shouldn’t it get done?

      “If money is to have value then either it must have intrinsic value (e.g. gold) or it must represent a claim against someone…in effect it must be debt. ”
      -Fiat money is money that derives its value from government regulation or law. It’s a social construct, we collectively agree that those paper bits, and those digital bits have that much value. No need for any of it to represent debt, or to be issued by private companies at interest into circulation.

      “Why is there a worry about debt based money?”
      -Because private companies (commercial banks) create new money mostly for non-productive activity (obviosly because it’s more profitable for them), whereas Gov’t is democratically liable in it’s allocation of money.

    • RJ

      Rob

      “If money is to have value then either it must have intrinsic value (e.g. gold) or it must represent a claim against someone…in effect it must be debt.”

      I agree totally with you comment here. Money is a financial asset so debt free money is not possible

      Interest free money is possible but might cause monetary inflation.

      And money backed by Govt debt that can be realistically treated as will never be paid back is also possible (and could therefore be classified in the Govt accounts as say base money rather than Govt debt).

      PM needs to be clearer IMO on what they mean by debt free money. Its a popular term used by money reformers but I haven’t a clue what is meant by it. Or how backed by detailed journal entries (as money is created and destroyed by journals)and detailed steps how this debt free money would be released into the economy.

      • Joao Granchinho

        In a peer reviewed paper published on The American Economic Review (Volume XXXVIII – June, 1948) entitled “A monetary and fiscal framework for economic stability”, Milton Friedman, winner of the Nobel Prize in Economics endorsed the Government issued debt-free currency. In particular I quote: “A reform of the monetary and banking system to eliminate both the private creation and destruction of money and discretionary control of the quantity of money by central bank authority.”

        Link to the full paper:
        http://www.hilbertcorporation.com.ar/amonetaryandfiscaleconomicstability.pdf

        • Rob Slack

          An n the 63 years since, no has taken a lot of notice!

  • Rob Slack

    I’m sure you meant that sincerely. With respect I must say it was pure tosh.

    One example:

    ” But its my understanding that money creation in this way would not be inflationary, because it is being spent for goods and services. Also with a change to the system in this way, inflation could be controlled by tax, decreasing the money supply.”

    Then why not just raise the tax in the first place?

    Extra money in circulation will always be inflationary, long run (except money grows only at a rate to finance real increases in spending). Using “debt free money” to finance government spending really was the Mugabe way.

    • DozyHole

      With respect, it seems you may be talking tosh Rob.

      “Then why not just raise the tax in the first place?”

      Is the answer not obvious? You spend when it is deemed necessary to have more money in circulation, taxing may not be needed. On the same principle, if it is deemed there needs to be less money in circulation then you tax more.

      “Extra money in circulation will always be inflationary”

      You realise the banks have more than doubled our money supply in recent times? Was that inflationary, of course it was, take house prices for example.

      Ruling out debt free money using the inflation argument is pure nonsense.

      • RJ

        ” Using “debt free money” to finance government spending really was the Mugabe way.”

        But this is not correct of course. Mugabe did not use debt free money. He used Govt printed notes and coins (which is not debt free) but never had a strong enough Govt to back the amount of money issued.

        And this is the problem you raise. Unless money is backed by something (a strong taxing Govt for example) it will have no value.

        Govt issued notes and coins have value if it can be used to pay tax. Tax away this demand for notes and coins (or central bank reserves) and the value will quickly drop. Especially if it is printed to fund overseas purchases.

      • Stevo!!

        Extra money in circulation will always be inflationary”You realise the banks have more than doubled our money supply in recent times? Was that inflationary, of course it was, take house prices for example.
        Ruling out debt free money using the inflation argument is pure nonsense.

        Thank you!  Inflation only really occurs if there is not enough spending on goods and services to soak up the supply of money!  Why is inflation such a bad thing anyway?  Economists today have an obsession with it!  A dose of inflation would help to reduce the amount of debt that exists.  I think the presumption here as well is that banks lend money by lending the money thay have in their deposit accounts, much like pension funds do.  They do not!!  Banks create money every time they issue a loan, increasing the money supply in turn. How is THAT not inflationary?

        Why should a government have to go in debt to a private institution to the tune of billions of pounds a year to fund public spending when it could quite easily create the money to pay for those services itself?  Funding the government with created money is going to make public services cheaper as the government isn’t paying principal and interest back to the banking system.

        Of course spending money without limit WILL undoubtedly cause hyperinflation.  If we actually started making real things again and created goods and services in this country that people need, the chance of inflation will be substantially lessened.

        It’s insane that our governments have been running up a debt and remortgaging it since the 17th century.  It makes financial and democratic sense for the government  to create its own money!

    • http://www.facebook.com/groups/327886425672/ Joseph Hitselberger

      The simplest explanations of inflation (price increases) are either more demand than supply, or less supply than demand (or both).

      By itself, reducing loose credit (fractional reserve banking) is deflationary as it would decrease demand. By itself, adding positive money would be inflationary as it would add additional demand. Together, each policy is an offset of the other.

      • Joao Granchinho

        FRB is deflationary you say? All evidence points to the contrary. Look at every currency in the world, they continuously lose value due to inflation under FRB (or even non-reserve banking as happens in the UK, which is even worse). Do you have evidence to support this claim?

        • Joao Granchinho

          Brain meltdown… nevermind.

      • Nic the NZer

        Hi Joseph,

        Would you change your mind if I was to show you evidence that the financial system increases the size of the money supply in and of itself? e.g that money creation is an endogenous process.

        There is plenty of good empirical research into this when you care to look at it.

        Yes, increasing the money supply is often (not always by the way) inflationary. But a democratically accountable institution which doesn’t spend it is obviously much better than a non-democratically accountable institution which does spend it as a mechanism for managing this.

  • Rob Slack

    Please note I replied to a post that said, roughly, create money, spend it and then “tax it back out”…so why not just raise a tax in the first place?

    I don’t understand why you commented on monetary expansion and house prices AS IF you disagreed?

    If government funds spending with “debt free money” it appropriates a portion of GDP and leaves as much nominal spending power in the hands of others…but with less to buy. That must be inflationary.

    • DozyHole

      “I don’t understand why you commented on monetary expansion and house prices AS IF you disagreed?”

      I was making the point that inflation has more to do with the amount of money created(and where it is created to an extent) and not much to do with how it is created.

      The quantity of money must be controlled by an objective independent body. Leaving it to politicians and/or private banks is a disaster waiting to happen.

  • Rob Slack

    “Gov’t wouldn’t be appropriating anything”

    If government commands use of resources it appropriates them. If the economy is at/near full employment then it does so at the cost of other uses of resources.

    “No need for any of it to represent debt, or to be issued by private companies at interest into circulation.”

    Banks (tend to) pay interest on money (liabilities) of banks.

    ” create new money mostly for non-productive activity (obviosly because it’s more profitable for them),”

    people borrow to spend…often on goods and services that must be produced.

    Note, banks sell liabilities against themselves. We voluntarily use those liabilities in exchange…we use them as money.

    • Joao Granchinho

      Instead of going into private debt to pay for public services Gov’t ought to pay issuing its own money and spending it into circulation. It’s not appropriating anything. The money is good because it’s backed by the Gov’t, by all of us as a society. This money would not cause inflation, because Gov’t can always tax it out of circulation. It’s as inflationary as the current model in the worst case scenario, in the best case it’s neutral. It all depends on who’s monitoring the money supply and how relaxed their monitoring is. Furthermore it puts pressure on the Gov’t not to inflate the currency because the Gov’t is then the sole accountable entity, and can be punished on the next election.

      “(…)people borrow to spend”
      -This is true and there’s nothing wrong with it. But Gov’t isn’t an individual. And it shouldn’t need to incur private debt in order to get the country running. An individual has a choice when he wants to buy something, he either saves money, or borrows it. Gov’t doesn’t have this choice, it has to borrow and continue to borrow ever growing amounts of money to keep the country running. This is wrong, we must end this bankocracy.

      • Rob Slack

        Whenever a government spends it is appropriating resources, regardless of how it finances the spending. If a government creates money, spends it and then taxes it back out all it has done is paid for spending by taxes (and that is always how government spending is financed in the final analyis, even Mugabe style was just an inflation tax).

        Why shouldn’t the G (i.e. us) pay interest on borrowing? It is the compensation required to persuade others to defer consumption.

        Juggling with money will never solve real problems.

        • Joao Granchinho

          “Whenever a government spends it is appropriating resources, regardless of how it finances the spending.”
          -I’m not sure what you mean with “appropriating resources”, but I suppoose it is irrelevant to the debate as you say yourself “regardless of how it finances the spending”. So I don’t understand why you would use that as an argument against debt-free money.

          “Why shouldn’t the G (i.e. us) pay interest on borrowing?”
          -No one said interest should not be paid on borrowing. We’re saying Gov’ts shouldn’t be borrowing to finance themselves in the first place. Gov’ts are sovereign bodies, and as sovereign shouldn’t need to borrow from private companies to be able to run the country they were elected to. Because in the end if they don’t have that power, then we’ve been voting on the wrong class of people.

          “Juggling with money will never solve real problems.”
          -I agree. That’s exactly what is happening today with commercial banks. That’s exactly what we’re fighting against. We want a monetary reform so this juggling with money ends, so we can finally see some responsible allocation of new money.

          • Rob Slack

            “appropriating resources”…e.g. If G uses resources it has appropriated them.

            Governments borrow from *people*…on behalf of *people*. If the borrowers want the lenders to lend they may need to offer interest to persuade them. Not when G borrows from, say XYZ bank, it is really borrowing from the *people* who own the bank and others who have lent money to it. So if you say a country should not pay to borrow you are saying G should use it s power to force some people to pay. That is tax. Borrowing allows intertemporal choices..G can defer taxes so they are paid by those who will benefit from the spending.

            This “debt free money” created and put into circulation by G is just a tax. Either G taxes it back out of circulation OR it leads to Mugabe inflation. Why not just raise the tax?

            Why should not G pay interest on borrowing, since G is just an agent of people, borrowing from some to fund spending?

            all this debt free money talk seemsto be derived from some kind of money illusion. Reality rules.

          • Nic the NZer

            It should be pointed out Rob, all money is Fiat and you can’t have money without government. Money is not a phenomenon of nature it is created by law and governed by it. Also a sovereign country has control of it’s own money, and any decision regarding the regulation of it is therefore under it’s parliament, in a democracy.

            So what you can observe is that a government (through its bank) creating and spending it’s own money is the most natural thing. What is not natural is a private, unelected institution, creating money in the governments name, and then spending it. Both are inflationary, but only one is democratically accountable.

            The decision to hand over creation of national money to private individuals is the decision to favour them, over others who have not the means. There is a saying ‘no taxation without representation’, who gave all these unelected institutions the right to ‘tax’ me through inflation, which they create.

        • Nic the NZer

          Sorry Rob,

          Your ‘deferred consumption’ argument falls down on the fact that money is created endogenously. This means that credit money does not require one to go without consumption so that another can consume. In fact to make this the case is one of the key PM changes to the financial system.

          Maybe you should have a serious look at the PM proposals, because they are designed to lead to a financial system which behaves much as you describe. Certainly more so than the financial system in place today.

  • Rob Slack

    I think Mugabe’s printing was what PM call debt free money…he printed it and spent it…much as a counterfeiter does.

    I don’t see why PM seems so concerned over debt money. We must have debts and the nature of bank liabilities makes them good assets to use as money (in normal circumstances).

    • Marky

      Debt moneys existance is not the problem per se, Rob the main thing to understand is the proportion of ‘debt money’ we currently have is a HUGE problem.

      Loans are useful, and will always be around, but with so much of our money being backed by debt, the debt is currently impossible to pay off.

      Now we’ve hit bad times, people either won’t, or can’t take on more debt fast enough, meaning many current debts cannot ever be paid (by virtue of the amount of the interest not existing in any way, shape, or form) If debts cannot be paid, more people lose everything, thus spend even less, leading to less debt being taken on, in a vicious circle.

      Also, forever taking on more and more debt to fuel our economy requires us to forever increase the rate of consumption of our resources, but they are certain to run out if we don’t change tack (oil production is already in decline), as without the resources in our economy, the ‘debt’ value of the money will start to evaporate at some point.

  • http://www.facebook.com/groups/327886425672/ Joseph Hitselberger

    A criticism by Milton Friedman on Keynes is that Keynes’ theories provided an economic rationale for additional government spending, and government spending became less disciplined.

    If implemented, Positive Money faces the same sort of problem, although it’s more of an endgame question for positive money, but still very important. The author is on the right track. This question can be answered through democratic methods.

    There are several aspects. The first is that when new money is created, it can be created with the people, democratically, rather than through the banks. This is more demand-side economic management.

    On the finance side, many in positive money have suggested “full-reserve” banking. I don’t wish to recover that subject, but rather an alternative or a supplement, using democratic methods.

    To set up a democratic system it would be better to incorporate modern advancements. Rather than elections every few years, marketing research can be used to get timely democratic decisions.

    Marketing Research has grown up over the last 30 years and can be considered an advanced form of democracy. Most people are familiar with the way marketing research contacts the public and asks for their opinions, so that those opinions can be evaluated statistically, usually for the benefit of business, banking or the government.

    Marketing research is a faster way to gather opinions and to make decisions. Not only does marketing research gather public opinion faster, it also gathers the opinions of experts faster too. If done well, it can be substantially better than the current banking system of loan processing and evaluation. The reason it can be better is because you would get more information. You would know what the public wants and what the experts think. Marketing research is a democratic way of making finance an economic decisions. This process is lost on most economists because marketing research is relatively new.

No Announcement posts

back to top