posted on 21 December 2015
by L. Randall Wray, New Economic Perspectives
Some time ago, I labeled the "debt-free money" campaign a non sequitur in search of a policy. (See here.) However, this non sequitur refuses to die. I went on to joke that if they want a debt-free money, they ought to propose that government issue bananas as currency.
I frequently am asked to do interviews and I almost always accept them. However, when I was asked last week to participate in a radio show devoted to debt-free money, I struggled mightily to get out of it. As you'll see, the program's producer took my idea of banana republics and ran with it. I thought readers might get a kick out of this exchange (the producer's emails are in italics, my responses are in bold). After the exchange, I'll summarize my objections to the notion of debt-free money.
>>> Subject: debt based money
>>>Dear Mr. Wray,
>> On 12/1/15 10:24 AM, L. Randall Wray wrote:
>> Subject: Re: debt based money
>> Dear Mr. Wray,
> On 12/1/15 1:15 PM, L. Randall Wray wrote:
> Subject: Re: debt based money
OK, I couldn't wiggle out of the interview. So here is my objection to debt-free, wealth-based money.
Imagine a cloakroom that issues "debt-free" cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don't get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.
What is a "debt-free" cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is "wealth-based", not "debt-based". Its value is determined by the value of the plastic, cardboard, or paper.
Imagine a sovereign that issues "debt-free" coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt - as a promise to redeem yourself in tax payment - but rather as a bit of base metal.
Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.
As MMT says, "taxes drive money". If you cannot use the sovereign's token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal.
If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?
A "debt-free money" would not be evidence of a debt. What would it be?
Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I'd take it. I wouldn't worry whether I could redeem it. I'd eat it. If I weren't hungry, I might exchange it for a newspaper at the kiosk. Maybe the news agent is hungry for a banana.
But I don't find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not "issued". They are cultivated, harvested, transported, marketed. They've got value. But they are not money. Calling bananas money is a perversion of the language.
I don't think our debt-free money cranks really want government to "issue" bananas. I think they want a "money" that is a record. But a record of what? If not debt, what?
From what I gather, they want government to issue notes (many - like the producer above - love to refer to Lincoln's Greenbacks) or electronic "money". But what are notes or electronic entries? They are records of indebtedness - debts that can be redeemed in payments to the issuers. They are debt tokens, redeemable in payments of debts owed to their issuers.
When I've engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The "debt-free money" cranks hate payment of interest by government. I'm not sure, but I think what they really want to do is to prohibit government payment of interest.
That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds. I'm with them. Advocate ZIRP, not banana money.
We don't need a non sequitur in search of a policy.
However, there are some advocates of debt-free money who understand MMT's point about sovereign government. Some of these even recognize that the sovereign government's debt is the non-government's asset. Indeed, the outstanding US Federal Government Debt is (identically) our (nongovernment) net financial (dollar) wealth.
But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding. (I'll write a blog on that soon.)
Hence the conceit is that if we found another way - printing debt-free money - to finance spending without issuing more debt, Congress would jump at the chance to spend more.
And if government would spend more, then we wouldn't need so much private debt to keep the economy afloat.
While I'm somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.
Our debt-free money folks (including the producer above) believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.
But that is not true. Government cannot spend "bank money"; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank - which is a branch of government.
When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury's deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government's own IOU that the Treasury is spending.
Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always "debt-financed" spending, using government debt.
Telling the Treasury to stop selling bonds will not stop the government from going into debt.
Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds that promise interest above zero, we will have already achieved what our "debt-free money" champions want.
However, the currency spent by government and accumulated as net financial assets won't be "debt-free money" but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins). Government will be in debt. But it can choose not to pay interest.
There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.
For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds.
I'm not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other "debt-free money". And it is at least operationally coherent. It doesn't pervert any accounting. It is simple and follows normal banking practice.
Your overdraft at your bank is a loan; there is no economic reason why the central bank branch of government cannot allow an overdraft by the treasury branch of government to spend funds already budgeted by the elected representatives and signed by the head of the administrative branch of government. Overdrafts are normal banking procedure; they are well-understood and not at all scary. Uncle Sam ought to be able to run an overdraft at his bank. His spending is already checked by the budget. His signature on his debt creates what is without question the most highly esteemed "note" on the planet. It is accepted all over the globe. His banker - Aunt Janet - ought to accept it.
Again, we don't need a non sequitur in search of a policy. Our debt-free advocates usually do not tell us how they would change procedures to allow treasury to spend without government going into debt. The reference to Lincoln's Greenbacks is not helpful.
Even if we grant the advocates the perversion of language - to say that paper money issued by treasury is not the treasury's debt - do they really imagine that we will go back to the 1860s payments system? Uncle Sam will deliver a wheelbarrow full of notes to your mailbox on the first of every month to pay Social Security? Will Uncle Sam send trainloads of cash to Lockheed to purchase fighter jets?
(Or will Uncle Sam instead mint the trillion dollar platinum coin. Boy oh boy will someone be in trouble if that gets lost in the wash!)
In a later blog, I will address a proposal to have the Fed provide "transfers" to allow Treasury to spend, crediting the Treasury's account with hundreds of billions of welfare that can be spent. This, I think, subverts normal bank accounting (the Fed would have no asset to offset the deposit liability to the Treasury) even as it creates a government debt (Fed reserves) transferred to private banks when the Treasury spends. In other words, it really does not eliminate government debt - it just allows government to spend debt that need not pay interest. Still, the most straightforward way to accomplish this is - as I discussed above - to direct the Fed to allow interest-free overdrafts to the Treasury. But this is not a "debt-free" way to spend.
And what about our Monkey Republic that spends debt-free bananas? With only the satiable monkey appetite driving demand for bananas, and with no taxes to be redeemed in banana debts, it would probably end up as a banana republic - putting too many bananas into circulation fueling a banana hyperinflation.
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