Public Money Creation – Neither Right nor Left, Just the Way Forward

Jeremy Corbyn’s proposal for ‘People’s Quantitative Easing’ has helped get the debate on money creation into the mainstream. On the one hand, it is a breath of fresh air to see well-known politicians propose reforms that Positive Money has been advocating for the last five years. On the other, it is frustrating because a robust concept that can be apolitical has been politicised. Indeed, People’s QE types of proposals are neither right nor left, but simply the way forward!

Those familiar with monetary policy and economics in general, will know that there are a number of alternative proposals to conventional QE. The one thing these proposals have in common is that central bank money should be created and used to finance real economy expenditure, rather than being injected into financial markets. The various proposals for this form of state led money creation  have been referred to as QE for People, Overt Monetary Financing (OMF), Green QE, Helicopter Money, Strategic QE, and Sovereign Money Creation. We collectively refer to these as Public Money Creation proposals.

The point being that there is a long history to central banks creating money for productive spending – the idea did not begin nor end with Jeremy Corbyn or Richard Murphy. Indeed, throughout history many states have successfully used their money creating powers to grow their economies (without triggering hyperinflation).

A full-throttle discourse on the subject, however, did not commence until the 1930s. As a response to the Great Recession, a number of economists suggested that central bank money creation be used to stimulate aggregate demand and increase spending. Far from being socialist radicals, these ideas actually originated with economists that included the likes of Irving Fisher, Jacob Viner, and Henry Simmons, some of the fathers of so called ‘free-fundamentalism’. Indeed, the idea was later notoriously brought to the mainstream by the infamous free-market fundamentalist, Milton Friedman.

The idea however, is supported by a number of economists associated with the political left as well. Most pertinently, John Maynard Keynes endorsed the idea as early as 1933. More recently, Ben Bernanke suggested that the Bank of Japan implement a form of monetary financing to thwart the economic stagnation that had been burdening Japan since the beginning of the 1990s.

In sum, there is a strong intellectual body of history behind the various alternative proposals for QE. That this body of history is composed by some of most important economists of our time, on both sides of the political spectrum, should show that these types of ideas are credible and merit more consideration. Ultimately, Public Money Creation proposals are neither right nor left, they are simply the way forwards!

Paul Douglas & Aaron Director (1931)

“It is possible for government to increase the demand for labor without a corresponding contraction of private demand, and that this is particularly the case when fresh monetary purchasing power is created to finance the construction work.”

Source: Douglas, F. P. H., & Director, A. (1931). The Problem of Unemployment. New York: The Macmillan Company

Lauchlin Currie, Harry Dextor White & Paul Ellsworth (1932),

“It is strongly recommended that the Government immediately commence a program of public construction on a nationwide scale. Such a program would stimulate directly the building and construction industry and those industries engaged in the production of raw materials and tools, and indirectly a large number of other lines of enterprise, through the expenditure of the earnings of the reemployed. The revival of these industries would involve a further, secondary increase in employment, which in turn would stimulate recovery in other lines in ever widening circles. As employment in industry at large increased, a gradual reduction in government expenditure on construction would be called for, and would permit the return of men engaged on such work to their ordinary occupations. This program should be financed, not by taxation, which serves principally merely to divert expenditure from one channel to another, but by an issue of bonds. It would probably depress the bond market unless the Federal Reserve Banks or member banks come to its support, as they did during the war, by purchasing a large portion of the government issues. Indeed, such action by the Federal Reserve Banks will be essential to the success of the plan herein outlined; otherwise a large bond flotation will heighten the long term borrowing rate and discourage new undertakings on the part of private corporations and municipalities.”

Source: Cited in Laidler, D. E., & Sandilands, R. J. (2002). An early Harvard memorandum on anti-depression policies: an introductory note. History of Political Economy, 34(3), 515-532.

John Maynard Keynes (1933)

“An increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or a public authority must be called in aid to create additional current incomes through the expenditure of  borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.”

Source: Keynes, J. M. (1933). An Open Letter to President Roosevelt. New York Times.

Jacob Viner (1933)

“Assuming for the moment that a deliberate policy of inflation should be adopted, the simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks.”

Source: Viner, J. (1933). Balanced Deflation, Inflation, or More Depression

Henry Simons (1936)

“The powers of the government to inject purchasing power through expenditure and to withdraw it through taxation—i.e., the powers of expanding and contracting issues of actual currency and other obligations more or less serviceable as money—are surely adequate to price-level control.”

Source: Simons, H. C. (1936). Rules versus authorities in monetary policy. The Journal of Political Economy, 44(1), 1-30.

Mariner Eccles (1942) Chairman of the FED

“If the market situation happens to be unfavorable on any given day when a financing operation is up … the Federal Reserve System should be in a position where it can take care of it by a direct purchase from the Treasury of an issue of securities.”

Source: Cited in Garbade, Kenneth. “Direct purchases of US Treasury securities by Federal Reserve banks.” FRB of New York Staff Report 684 (2014).

Abba Lerner (1943)

“The government can print the money to meet its interest and other obligations, and the only effect is that the public holds government currency instead of government bonds, and the government is saved the trouble of making interest payments. If the public spends, this will increase the rate of total spending so that it will not be necessary for the government to borrow… and if the rate of spending becomes too great, then is the time to tax to prevent inflation.”

Source: Lerner, A. P. (1943). Functional finance and the federal debt. Social research, 38-51.

Milton Friedman (1948)

“Under the proposal, government expenditures would be financed entirely by either tax revenues or the creation of money, that is, the issue of non-interest-bearing securities. Government would not issue interest-bearing securities to the public; the Federal Reserve System would not operate in the open market. This restriction of the sources of government funds seems reasonable for peacetime. The chief valid ground for paying interest to the public on government debt is to offset the inflationary pressure of abnormally high government expenditures when, for one reason or another, it is not feasible or desirable to levy sufficient taxes to do so … It seems inapplicable in peacetime, especially if, as suggested, the volume of government expenditures on goods and services is kept relatively stable. Another reason sometimes given for issuing interest-bearing securities is that in a period of unemployment it is less deflationary to issue securities than to levy taxes. This is true. But it is still less deflationary to issue money. Deficits or surpluses in the government budget would be reflected dollar for dollar in changes in the quantity of money; and, conversely, the quantity of money would change only as a consequence of deficits or surpluses. A deficit means an increase in the quantity of money; a surplus, a decrease. Deficits or surpluses themselves become automatic consequences of changes in the level of business activity. When national money income is high, tax receipts will be large and transfer payments small; so a surplus will tend to be created, and the higher the level of income, the larger the surplus. This extraction of funds from the current income stream makes aggregate demand lower than it otherwise would be and reduces the volume of money, thereby tending to offset the factors making for a further increase in income. When national money income is low, tax receipts will be small and transfer payments large, so a deficit will tend to be created, and the lower the level of income, the larger the deficit.”

Source: Friedman, M. (1948). A monetary and fiscal framework for economic stability. The American Economic Review, 38(3), 245-264.

Gottfried Harbler (1952)

“The importance of the wealth-saving relation goes beyond the case usually designated by the Pigou effect, viz., beyond the effect of an increase in the real value of cash balances and government bonds due to falling prices. Suppose the quantity of money is increased by tax reduction or government transfer payments, government expenditures remaining unchanged and the resulting deficit being financed by borrowing from the central bank or simply printing money…consumption and investment expenditure will increase when the quantity of money grows. I find it difficult to believe that this might not be so.” 

Source: Haberler, G.. (1952). The Pigou Effect Once More. Journal of Political Economy, 60(3), 240–246. Retrieved from http://www.jstor.org/stable/1826454