Written by Derryl Hermanutz
In Part 1 of this series we argued that the financial condition of human beings and sovereign governments cannot be accurately described with zero sum accounting.
I am not a corporation. My life is not my asset. I don’t owe my life to anybody as my liability.
Life does not exist on balance sheets.
Money doesn’t have to either.
Money doesn’t “have to” be created as a zero sum assets (money) minus liabilities (debt) balance sheet equation. Money can be created as debt-free “money”.
Humans can have money and stuff that is not “owed” to anybody. Corporate legal constructs cannot. Corporations are bound by balance sheet accounting, so they must offset every asset with a matching liability. Governments are not bound by balance sheet accounting, so they can issue positive sum debt-free fiat money “off balance sheet”.
Banks Create Money
Commercial banks are corporate legal constructs whose deposit liabilities function as “the money supply”. Those liabilities are matched by corporate assets that are the government’s and the economy’s interest-bearing “debts”. The debt-assets and money-liabilities are created on and exist on commercial banking system balance sheets.
The commercial banking system issues our spendable-earnable-savable money supply on its balance sheet, as linked pairs of credits and debts. Banks create and lend out the money supply in the form of “bank deposits”. Bank deposits are “our money supply”, but the bank deposits are the commercial banking system’s “liability”.
The financial description of a bank that issues credits to buy debts, is the exact inverse of the financial description of the government and the economy who issue debts to get credits.
Our money is our asset and the banking system’s liability. Our debts are the banking system’s assets and our liabilities. Virtually 100% (all except government-issued coins) of our spendable-earnable-savable money supply is created on commercial bank balances sheets as linked pairs of credits and debts, assets and liabilities.
We use commercial bank-issued credit/debt as our ‘money’ – zero sum balance sheet money that is “loaned” into existence, so “the money supply” is always owed as repayment debt to the credit-issuer.
The Federal Government Does Not Create Money
We do not use government-issued fiat money, positive sum money that is “spent” into existence, where the money supply is not owed as repayment debt to the money-issuer.
Fiat money is not issued as “credit” that is owed as “debt” within a zero sum balance sheet equation. Fiat money is issued as net positive sum “money” that is not owed to “anybody”.
MMT is not alone in believing balance sheet money is some kind of inviolable law of the universe, so that money cannot exist without an equal amount of debt existing. If all assets are also liabilities, and if money cannot be anything other than a financial asset, then all money is debt. As balance sheet inverse twins of each other, money and debt come in “linked pairs”. One cannot exist without the other.
MMT claims to be describing a fiat money system where “the government issues the money supply” as linked pairs of financial assets and liabilities. MMT believes there is no other way that fiat money can come into existence. Debt-free money is “a non-sequitur in search of a policy“. Wray — trapped inside the zero sum paradigm of corporate balance sheet accounting — sees a logical mismatch between “debt-free” and “money”.
True Fiat Money Has Existed
Starting in 1690 colonial governments issued those very non-sequiturs in the form of debt-free scrip money. The government simply printed up the money, and spent it buying from the economy whatever the government needed. Benjamin Franklin is often associated with government creating and spending — “issued” — off balance sheet money, money that was not issued as a repayable “debt” owed to the money-issuer.
Franklin did not violate the laws of reality. The space-time continuum held. The Almighty Balance Sheet did not demand Franklin pay its money back. God expressed no outrage (though bankers did), so no commandments were broken.
Franklin simply “issued fiat money”. Lincoln did too, to money-fund rather than debt-finance the North’s Civil War effort, to circumvent the ruinous 24-36% interest rates bankers demanded for loans of their ‘gold-backed’ credit/debt money. The South issued their own graybacks for the same reason.
Franklin’s and Lincoln’s governments issued their own debt-free fiat money, instead of borrowing balance sheet money from banks.
The “policy” of that “non-sequitur” was to pay for what the government needed by issuing spendable money rather than by taxing the people and rather than borrowing bank-issued credit/debt; and in the same process the fiat money-issuance policy provided the economy with a supply of debt-free and interest-free fiat “money” to use. This was in lieu of the bankers’ repayable loans of interest-bearing credit/debt money.
So the non-sequitur found its policy.
Some call it monetary democracy.
Or monetary sovereignty: governments issuing money as positive sum “money”, instead of banks issuing zero sum repayable credits as debts.
Government-issued fiat money is a positive sum alternative to the commercial bank-issued zero sum credit/debt monopoly.
Money Can Be a Public Utility …
Franklin’s government operated the colonial money system as a public utility, not as a for-profit corporate business enterprise. Debt-free, interest-free fiat money is issued by governments as “public property”, designed to provide the economy with an adequate supply of money to use in conducting its buy-sell economic transactions.
There is no need to issue assets and liabilities; credits owed as debts. The government can simply issue “money”.
Fiscal spending, not bank lending, adds money into the economy’s fiat money supply. Fiscal taxation, not bank interest and loan repayments, removes money from circulation.
…But That Is Not the Case Today
Money issuance is one of the primary powers of a sovereign “government”. If the government is not issuing the money of nations, then bankers are exercising monetary sovereignty. In other words, banking becomes the financial “government” of nations.
We can argue over who “should” issue and allocate the money of nations. But we cannot argue over who presently “does” issue the money of nations. Commercial banks — not governments — issue and allocate the money of nations. The money buys ownership of the real wealth of nations. So banks allocate ownership of the wealth of nations.
Commercial bank credit-money is issued as the private property of the money-issuers, designed to transfer ownership of the real wealth of nations into the hands of the private money-monopolists and their corporate and plutocrat fellow travelers.
The present direction and state of the world is not an accident. It is the predictable and visible result of a monetary policy that grants commercial banks a near absolute monopoly on money issuance.
Debt-free fiat money would have built a very different picture of the world, than the picture we live in today.
20th Century Reform, Proposed and Forgotten
So we see two very different “policies” emerging, from these two very different ways of issuing the money supply. Positive sum fiat money serves a “democratic” policy of broad economic flourishing. Zero sum credit/debt serves a “plutocratic” policy of private monopolization of ownership of the economy.
This cause-effect relationship is not new knowledge. During the 1930s banking system collapse and economic Depression, monetary system reformer Irving Fisher proposed a fiat money solution to the banks’ credit/debt monopoly,
“Don’t nationalize the banks. Nationalize the money.”
Fisher advocated government issuance of debt-free fiat money, to solve the collapse that was caused by savings-debts imbalances that inevitably build up within the commercial bank credit/debt monopoly.
Despite a century of monetary system analysts and reform advocates clearly explaining the nature and inevitable consequences of the private bank monopoly of money issuance, Randy Wray cannot envision the “policy” of issuing “debt-free” money and operating the money system as a public utility. MMTers ask us to believe along with them, that government-issued debt is “really” government-issued “money”.
But it just ain’t so.
The proof is in the present woeful financial state of the real world. A tragedy that cannot be solved within the paradigm of zero sum balance sheet money. Fisher and subsequent generations of monetary reformers knew this. We can know it too, by reading what they wrote.
An Extractive Monetary Monopoly
Fiat money is positive sum money. As contrasted with zero sum balance sheet credit/debt, which becomes declining sum when interest payments are withdrawn from circulation and held as bank capital, and savings are extracted from the spendable-earnable money supply that activates the buy-sell real economy.
The creation and spending of fiat money adds to the economy’s money supply without simultaneously adding to the economy’s debt. The fiat money stays in the economy as the economy’s money supply, until the government taxes it back out. Unlike bank credit, which only stays in the economy until debtors remove it to repay their bank debts.
People can save all the fiat money they want, hide it under their mattress, remove it from circulation. If there is an inadequate supply of spendable-earnable money circulating to keep the buy-sell economy functioning at a high rate, the government can just spend or otherwise distribute additional new money into the economy. If an excessive supply of money threatened price inflation, Franklin’s government simply taxed some of the scrip back out of the economy.
Franklin’s government operated the fiat money system prudently, as a public utility. Franklin’s colonial economy flourished using its supply of government-issued debt-free fiat money.
Until City of London bankers, jealous of this violation of their monopoly of ‘gold-backed’ credit/debt money issuance, successfully lobbied the British Crown to put an end to the colonial usurpation of their balance sheet money monopoly. Though the British tea tax that advantaged the British East India Company over American tea merchants was a goad, Franklin said it was Britain’s imperial assault on the colonial money system that inflamed the American Revolution.
The Bondage of Debt
Fiat money is an alternative to bank-issued credit/debt that functions as money … until the banking system collapses due to the arithmetic inevitability of savings/debts imbalances that are baked into the workings of a balance sheet money system.
People who earn and save end up owning all the credits; people who borrow and spend end up owing all the debts. One party to a buy-sell economic transaction cannot “earn money” unless the other party “spends money”. Buyers spend money, sellers earn the money. When banks issue all of the money, one party cannot earn and save money, unless some other party borrowed, spent and still owes that money to a bank as a debt repayment.
When banks are the origin of the money supply, bank lending adds to the money supply, and loan repayment removes that money from the money supply. Only new lending — and new debt — can add more money into the bank-issued money supply. One party’s money saving is made possible by somebody else’s unpaid debt owed to a bank.
This leads to what is called the business cycle, which is really a credit cycle. That will be explored further in Part 3.