Written by Derryl Hermanutz
I agree with Joe’s conclusion (Joseph M. Firestone, first Related Article) that coin seigniorage is the most viable option had the debt ceiling debate remained stalemated. I would go further and argue that this is an opportunity for the government to reassert its sovereign authority to issue its own money. In this regard we need to revisit the thinking of Irving Fisher. His 1936 pamphlet, “100% Money and the Public Debt”, the last thing Fisher published, is a crisp 24 page synopsis of virtually all his previous writing.“100% Money…” lays out Fisher’s plan to replace fractional reserve banking with 100% reserve banking. Only the government would retain the authority to “issue” money. The government would lend this money to the banks at zero interest, and “each commercial bank would be split into two departments, one a warehouse for money, the checking department, and the other the money lending department, virtually a savings bank or investment bank.” Elsewhere Fisher observes that the public already believes banks lend out money they already have on deposit, when in fact bank loans actually lead to the creation of new deposits, so his 100% Money would simply convert banks into the financial intermediaries between savers and borrowers that people think they already are.
Fisher writes, “One of the primary attributes of sovereignty is the monetary function. Professor Frank D. Graham points out that President John Adams considered any private issue of money a monstrosity and fraud on the public.” (See later for Thomas Jefferson’s view of this matter; and we all know how Andrew Jackson felt about predatory banking.) Fisher continues, “In the very first article of our Constitution, it is written ‘Congress shall have power to coin money and regulate the value thereof.’ As has been seen, we have neglected this provision by letting banks usurp a Government function.”
Fisher believes the coinage provision applies to all forms of money issuance, but closer scholarship shows that the Framers themselves were divided on this matter and deliberately left out reference to non-metal money. However, since the end of gold-dollar convertibility in 1971, the US$ has been a pure fiat money, which has value only insofar as the government honors it, and which places authority over modern money squarely in the hands of the government. So functionally, if not explicitly constitutionally, issuance of ‘money’ per se is indeed a “government function” as Fisher believes. And proof platinum coinage, clearly authorized by an Act of Congress in 1996, and consistent with the explicit provisions of the constitution giving Congress the power to coin money and regulate the value thereof, is very clearly a legal government power.
Fisher’s “debt deflation theory of depressions” is based on his correct understanding of banking, that banks create deposits by making loans, and destroy deposits when loans are called in or otherwise repaid or defaulted. “…the chief cause of both booms and depressions (is) the instability of demand deposits, tied as they are now, to bank loans.” His 100% Money would “take away from the banks all control over money, but leave the lending of money to bankers. …In short: Nationalize money but do not nationalize banking.”
Fisher is certainly not alone in recognizing perverse effects of our present ‘bank-debt’ money system. Michael Hudson, Steve Keen and others have argued convincingly that, over time, our system where banks create all the money as debt at interest becomes arithmetically unsustainable unless money supply grows exponentially along with the compound interest on all the debt. The 1930s Depression saw money supply contraction. Look at a graph of money supply growth since 1946 and you will see a classic exponential curve.
The 2000’s RE bubble provided the final vertical component of postwar exponential growth with newly created mortgage money, but, like all debt fueled asset bubbles, RE popped and money supply growth has gone flat or even negative. First, borrowers could not make their loan payments and then the banks faced a liquidity crisis, which was solved by the Fed creating over $16 trillion of new money and guarantees to reliquidify the international banking system. But the deflation of asset prices has rendered the banking system and much of the household and small business sector insolvent, many owing more than their assets are worth, and the consequent economic depression has left the economy moribund and unable to endogenously grow its way back to health. In a fiat money system liquidity is easy to provide by adding keystroke money into bank account balances. Now we face the hard part, the solvency crisis.
What the system needs now, according to the Austrian School, is a good hard depression to bankrupt all the weak debtors and take down all the insolvent banks who lent unpayable sums to debtors: the Andrew Mellon solution. However, unless we also embrace social Darwinism and let all the losers die off in unemployed poverty, a depression will only further reduce GDP and government tax revenues and further increase automatic stabilizers and other welfare payments, making the deficit much worse than it is already. So Austrians: are you advocating social Darwinism or a massive expansion of the welfare state? Are you advocating creative destruction of the human losers, or a massive increase in national debt? I’ve never received a coherent answer to this question and I’m not expecting one now.
A more realistic way forward is Joe’s coin seigniorage, which gives the government a way to add non debt money into the economy simply by using the new money to fund its deficit spending. I have advocated giving monthly sums directly to Americans to restore both household and banking system solvency simultaneously. But infrastructure reconstruction is another good candidate for ongoing injections of debt free money into the equation. As Warren Mosler points out, this allows infrastructure workers to “earn” incomes, which will resurrect consumer spending, which revitalizes business investment, among other benefits of putting people back to work.
Hudson and Keen argue that debt quantitatively exceeds money so it’s arithmetically impossible for debtors to pay. Kumhof and Ranciere argue that we have reached a distributional impasse where investors now own all the money and workers and consumers owe all the debt, and the era of investors lending evermore money so consumers can keep buying is over. Investors comprise only 5% of the population so their consumption spending is too small to provide demand for the entire economy.
So either we have an absolute deficit of money-to-debt in the system (Hudson and Keen), or, at minimum, all of the money has accumulated in the hands of people who are not going to spend it (Kumhof and Ranciere). The spenders’ credit card is maxed out and defaulting. More liquidity to the banking system will not generate more loans to already overextended spenders. We are not in a simple downturn of the business cycle.
We are in what Richard Koo calls a “balance sheet recession”. Koo advocates government becoming borrower and spender of last resort in this situation, where the private sector is deleveraging rather than taking on new debt so money supply and GDP are trying to deflate. Koo advocates the Japan model, but the single flaw in Koo’s argument is that without a restoration of real economic growth, government debt grows to infinity. Japanese demographics, and indeed Western demographics generally (demographics being only one of many headwinds facing the “developed world”), preclude the likelihood of a restoration of high GDP growth. Even with very low interest rates, in a GDP-flat economy where deflation is being prevented by ongoing government deficit spending, interest payments will eventually consume over 100% of government revenues. Game over.
The only permanent solution to excessive debt is non-debt money. Fiat money is just numbers in bank accounts. The only real solution to an excess of negative numbers is the injection of some positive numbers.
More debt will not solve this debt crisis. Unless “somebody” gets some non-debt money into the hands of people who will spend it, consumer demand will remain weak, productive investment will not be viable, and the economy will not recover.
The government can provide this money debt free by minting proof platinum coins. I believe the addition of non-debt money into this equation is the only kind of solution that could actually work. $2 trillion to fund current deficit spending would be a good start.
“If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the bankers and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies,” Thomas Jefferson, in an 1802 letter to Secretary of the Treasury Albert Gallatin.
Related Articles
Coin Seigniorage: One Solution to the Debt Ceiling by Joseph M. Firestone
Casting Sunlight on the National Debt Fraud by Roger Erickson
A Bum Debt Deal – The Morss Antidote by Elliott Morss
Bank Capital is Illusory by Raihan Zamil
Coin Seigniorage and Inflation by Scott Fullwiler
Understanding the Modern Monetary System by Cullen Roche (at Pragmatic Capitalism)
Inequality, Leverage and Crisis by Michael Kunhof and Romain Ranciere
Is Ignorance Bliss? A Look at U.S. Income Inequality by Elliott Morss
Banks: Flawed Regulation by Amar Bhide
Economist Mosler’s Recipe for Greece by Warren Mosler
EU: Politics Financialized, Economies Privatized by Michael Hudson
The Global Financial Crisis Is Not Behind Us by Steve Keen
Vendor Financing and Fallacies of Composition by Derryl Hermanutz