Written by Derryl Hermanutz
Posted previously: Part 1, Part 2, Part 3, Part 4 and Part 5. This article, Part 6, concludes the series.
Milton Friedman, Before Abduction
In his 1948 paper, A Monetary and Fiscal Framework for Economic Stability, Milton Friedman describes how a money-issuing government can use fiscal spending to add money where it’s needed and use fiscal taxation to remove money where it’s causing price inflation. Friedman went so far as to advocate using government-issued money to fund a negative income tax, which would function as a Universal Basic Income.
Friedman eloquently explains the monetary and fiscal means by which governments could operate their national money system as an economy-serving public utility; rather than private bankers and plutocrats indebting the economy to make it an interest-paying rent-cow. Friedman’s 15 page paper is the most succinctly expressed rational program for financial-cum-economic salvation that I have had the pleasure to encounter.
Milton Friedman, Post Abduction
Unfortunately, somewhere after the 1947 “Roswell incident”, Friedman seems to have been abducted by space aliens who reprogrammed his brain. It was the 1970s version of Friedman whose “Chicago Boys” led the neoliberal privatization revolution in Latin America, replacing social democrats with murderous tyrants, and crushing the people under IMF structural adjustment austerity while robbing them of ownership of their public and private property. Ask Yanis Varoufakis if anything has changed between 1970s Latin America and 2016 Greece.
What is Capital?
Economists and the public often refer to money as “capital”, which makes it sound like something real and valuable in its own right. Capital is just money in the hands of people who plan to invest rather than spend their money. (Or it is the real property which produces goods or services, property that money can buy.) And, as we have discussed frequently in the previous articles in this series, money is simply “created”. Money is just numbers. But you don’t “get” the numbers from anywhere. Banks — or governments — simply “create” the money-numbers.
The power to create the money-numbers is the power to buy the world.
Or at least it is the power to decide “who” will get money to buy the world.
It’s a very big deal.
Allocation of Power of Money
The offer to pay money activates the real economy, induces people to go to work doing the bidding of the money-spender, building or producing or performing whatever service the spender asks. Money buys ownership of all of the real assets that are for sale — land, resources, real estate, productive economic infrastructure, public utilities and public infrastructure …the list of all the assets money can buy is near absolute. For enough money, pretty much every existing thing and every imaginable human service is “for sale”. Murder, for example, is for sale at surprisingly inexpensive prices in “the murder markets”.
This “allocation” power of money is typically overlooked by “market economists”, who believe “the market” determines economic allocations. But as the originators of virtually all of the money (except coins), it is commercial banks who make the initial allocation decisions, by deciding who gets loans and for what purposes.
Bankers Love Monopolists …
Historically banks have financed monopolists who buy out or absorb their competitors, because monopolists have the market power to sustain profitability which enables the payment of bank interest and loan principal repayments. Bankers have themselves historically been monopolists, who share with their corporate comrades the belief that private government by concentrated hoards of money and property ownership is superior to political government. The corporate oligopoly ownership structure of the modern global economy is to a significant extent the deliberate creation of money-allocating bankers; not “the invisible hand of the free market“.
… And Banking is the Ultimate Monopoly
Human effort over generations and centuries built the real wealth of the world. Money-issuing bankers, not markets, allocated “ownership” of the real wealth. You cannot earn a billion dollar fortune by personally “producing” $1 billion more economic value than you consume. You acquire a billion dollar fortune by financially commandeering the productive output of thousands or millions of other people.
Modern banking became “an enormous vested interest in possession of the most powerful monopoly that the whole history of the world has ever known …the monopoly of the creation of and dealing in money, against which any other monopoly pales into insignificance, determined to use every weapon to retain this monopoly“, according to monetary reformer CH Douglas in a 1935 speech (to the King and government of Norway), titled “Money and the Price System“. Modern banking achieved this by gaining the exclusive power to issue the money of nations.
“Power” is the ability of one man or a small group of men to command great concentrations of money, economic resources, and human effort. Free market economics does not believe in power. It believes in individualism: individual men exercising only their own human power in competition with other individual men. Market economics does not believe in the corporate effort of myriad individuals acting together, cooperatively, toward their common corporate purposes. So free market economics does not describe a world populated by concentrated corporate powers.
But power is the reality of our world.
Banking’s Extended Family…
Investment banks, hedge funds, pension funds, insurance funds, and other large concentrations of many people’s money under the command of a small group of “money managers”, now join transnational commercial and industrial corporations and commercial banking corporations in the exercise of financial power. One or a few human managers “allocates” the concentrated financial and economic wealth and will of thousands or millions of people. That is “market power” today.
Bankers originally grew “fat” and powerful financing sovereigns’ wars against each other. Today shadow banks — investment banks, hedge funds, etc. — join commercial banks in exercising large concentrations of financial power that can deliberately manipulate global markets.
… Rules the World
Today governments fear the bank-dominated bond market and the bank-dominated currency exchange markets. Banks have the power to financially f___ your country, if you don’t behave.
George Soros once used his Millenium Fund to singlehandedly assault the British pound sterling — which is a very large currency — to extract a fast billion pounds from the fx movement. Ask Russia, Iran, Venezuela, and a long list of financial assault targets before them, about the power of concentrated money to f___ over and plunder your country.
Military conquest of nations is overt and visible. The conquered people know who to blame for their misery, because they can “see them”.
Financial conquest of nations is covert and invisible. The conquered people — urged on by financial agents (NGOs) who are claiming to “help” the people — typically blame their own government for their financial-cum-economic misery.
It is the Fault of Socialism
The goal of the financial agents is regime change. If a social democratic government is trying to govern a nation in the interest of its majority population, rather than in the interest of a ruling class of transnational corporate financiers and owners, then the financial powers will attack the nation’s currency and its import-export economy, to cause maximum misery to the nation’s population. The misery is blamed on “socialism”.
The people eventually cave and elect a neoliberal government who opens the country up to transnational financiers, along with commercial and industrial corporations. Foreign direct investment — which is buying up and “privatizing” the national economy and public infrastructure — is preached to the people as their salvation.
The Flow of Wealth of One Way
But the word “investment” means you plan to get more money “out” of the country than you invested “into” the country, in order to “profit” from your investment.
So just as bank credit expansion initially generates inflationary economic prosperity but ultimately becomes deflationary bust and liquidation sale to plutocrats of the wealth of nations; so FDI initially generates inflationary jobs and incomes as money is being invested “in”, but ultimately costs more national income flowing “out” as cost recovery and profits, than it added in as “investment”.
Or, all of the profit is earned by domestic plutocrats (government and private sector), and all of the costs are paid by domestic taxpayers (and/or by increased government debt, payment of which is owed by future taxpayers). Either way, ownership of the wealth of nations is concentrated into few hands, and those hands become “powerful”.
The “Trick” is Use of Public Debt to Produce Privatization
Government debt is secured by the government’s monopoly power to tax its citizens. Your income, and the public infrastructure your grandpappy’s taxes paid to build, is the “collateral” on your government’s trillions of dollars or pounds of debt owed to money-issuing banks. When your government eventually defaults — as is arithmetically inevitable — ownership of your national public infrastructure will be “privatized”. In addition to paying taxes to your government, you will now pay economic rents on the privatized public infrastructure that your forebears built with their genius and sweat and paid for with their taxes.
As a means of systematically transferring ownership of the wealth of nations from the people who built and produced it to the bankers who financed it and the corporate monopolists who conglomerated it, a privately issued money system is pure evil genius.
Public Money
If democratic governments gained the power to issue money, it would be allocated much differently. Governments would fund public infrastructure, pensions, social services, and possibly a Universal Basic Income; rather than privatization into corporate hands of formerly public infrastructure.
Rather than “lend” money into the national money supply, governments would “spend” money into the national economy. The fiscal spending provides the private economy with a supply of debt-free, interest-free money to conduct its economy-activating buy-sell transactions.
People can earn and save up all the debt-free fiat money they want, without crashing the money system. If there is too little money being spent and earned to employ the economy — and too little income being earned to enable bank debt repayments — the government can simply spend or “give” additional money into circulation.
Universal Basic Income …
Governments do not have to micromanage allocations — the “spending” of the money they issue. The most democratic way to issue the national money supply — the “free market solution” — is to money-fund a Universal Basic Income, paid monthly into the bank account of every citizen rich and poor.
Poor people would spend most of their Basic Income enhancing their lifestyle, and the businesses who sold them stuff would earn that money. People who are good at producing and earning and saving would still end up owning most of the money supply. The rich would still be rich, and get richer, in money.
But so what?
… Will Not Make the Poor Rich, Nor the Rich Poor
As long as sufficient additional money is being spent to keep the economy hired and earning incomes; and as long as people who have been rendered economically redundant by mechanization and technology are paid a Basic Income to pay their costs of living and maybe find a new line of endeavor; the accumulative urge will not crash the money system and the demand-driven real economy.
Poor people will still be poor in money. But with a Basic Income they can buy everything they need from the productive economy. So they will not be poor in real economic wealth.
The monthly Basic Income would be direct deposited in “bank accounts”. Banks — in conjunction with the IRS — already have the in-place infrastructure to administer this program. Under this program, the IRS would “pay you”: pay your monthly Basic Income, direct deposited into your bank account.
We Will Still Need Private Banking …
Yes, we need banks and literally cannot live without them. But we do not need to mortgage our existence to a monopoly of bank-issued credit/debt “money”, when our governments can create their own debt-free, interest-free fiat money.
In the present system, thousands of bankers micromanage the allocation and repayment of bank-issued financial credit. In the aftermath of 2008, the idea of “professional” financial management might ring a bit hollow. But that does not reduce our need for professional financial management, which is “banking”, and related knowledge-intensive specialty financial professions. Banking is needed for proper allocation of capital in the private sector.
The modern financial and economic world is complex. Most people don’t have a clue. Like every other modern field of endeavor that has become complex and technically sophisticated, the money system needs professionals to do the complex work. iPads are the product of the organized corporate efforts of myriad specialists. Building and globally selling iPads cannot be “democratized”. Neither can the micro-allocation of the money that funds the building and buying of iPads.
Large corporations now self-finance out of their retained earnings. Or they issue corporate bonds into capital markets where private savers (“capitalists”) can buy the bonds to fund the corporate enterprises. But corporations still depend on the bank-operated payments system, to pay out their costs and to receive payments from sales.
And below the scale of corporate transnationals, small and medium businesses and households still depend on bank credit to finance their growth and large asset purchases like houses. Individuals and small and medium businesses hold their savings in banks. And virtually everybody needs a bank account to gain access to the bank-operated payments system — that enables check and debit card payments without the need to carry around a conspicuous wad of cash.
Banks are corporations engaged in professional financial management. It is by nature a complex corporate endeavor populated by specialists. Banking performs critical “too systemically important to live without” public utility functions. We can no more live without banking than we can live without electricity.
People who get bank loans can buy stuff for themselves — like houses and cars — that they have not yet “earned”. Requiring loan repayment requires debtors to return service to the economy, for the house or whatever good or asset the debtor “borrowed” from the economy. In this respect, even banking as it exists now is an indispensable “public service”.
… But Banks are Ill-Suited to Manage the Macro Economy
Banks and other financial professionals perform essential microeconomic management of the economy’s financial credit. But at present “nobody” is performing macroeconomic management of the money system as a whole.
The macro system needs additional positive numbers — debt-free fiat money — to replace “saved” money that is removed from the spending-earning-debt paydown stream; to prevent the commercial bank credit/debt system from collapsing under savings-debts imbalances. Governments could create and spend or give this debt-free fiat money into their economies, as a policy of macroeconomic management of their money system.
I’m with Adair Turner — renowned author of the 2011 Cass Business School speech, “Debt, Money and Mephistopheles: How Do We Get Out Of This Mess?” — on this point. Rather than stripping commercial banks of their credit-issuing and debt-collecting financial management function, governments could issue debt-free fiat money as a “supplement” to the commercial bank-issued credit/debt money supply.
It is only the savings/debts imbalances that build up and crash the bank credit/debt system. Judiciously issued fiat money can prevent the crashes and keep the banking system working in spite of cycles of private debt successes and defaults.
Governments Should Not Micromanage
Financial crisis happens when savers have all the money and spenders owe all the debt; and spenders have reached their credit limit so the shutoff of the flow of new credit/debt-money stops fueling ongoing Demand. So producers lay off workers, and incomes evaporate. Unemployed debtors with no incomes default en masse, debt-financed asset prices deflate, and the banking system fails in illiquidity followed by insolvency.
When the banking system fails, the bank-operated money payments system fails. When producers are not getting paid, they stop hiring the economy to produce a Supply of goods and services for sale. The whole system spirals down into financial collapse and economic Depression.
By adding additional spendable fiat money into the pockets of “everybody” via a Universal Basic Income, governments would provide debtors with money to pay their bank debts; and would provide consumers with money to Demand the economy keep producing a Supply of what they need and want. Businesses would earn that spent money, and continue hiring the economy to produce a Supply of stuff for sale.
The whole financial collapse and economic Depression can be avoided, simply by issuing debt-free money and allocating it where it is needed. To be fair to everybody, I think you have to give everybody equal monthly amounts. This is the shotgun rather than sniper approach to hitting your macro money policy targets. The shotgun hits “everybody”, without political favoritism.
When debtors have money to make their loan payments, the commercial bank credit/debt system hums along smoothly, financing wealth production and making sure borrowers pay the economy back for what they had bought “in advance of earning it”. When consumers have money to pay for the Supply of goods and services that are produced, the economy hums along at high levels of employment and capacity utilization.
When governments money-fund — rather than tax-fund and debt-finance — their fiscal spending, governments can create all the money they need to hire people to build and maintain public infrastructure and provide public services.
The Problem of Excess Capacity
The world presently suffers a vast excess of capacity to produce private consumer goods for which there is no “market”, because consumers lack incomes and credit to get the money to “pay for” everything producers are anxious to produce and “sell”. The developed world is already awash with a tidal wave of excess consumer baubles that we waste extravagantly. Some of that capacity can be converted to producing public goods, if governments can issue money to “pay for them”.
Most businesses are apolitical and even amoral. Business owners don’t care who buys their stuff, as long as the customer has money to pay for it. If there’s a market for public goods, businesses will supply that demand to earn the money that is being offered in payment.
Reduced Cost for Public Investment
Taxpayers would not squeal about paying for public services, if governments stopped (or greatly reduced) funding public services with taxpayers’ money. Governments would still tax as an anti-inflationary measure. But governments would not need to collect taxes to “get” their spending money. Publicly issued money would fund public infrastructure and services.
Debt-financing public infrastructure typically adds 40-50% to the final cost to taxpayers, as bank interest over 15 years of amortization doubles the original capital cost of the project. Public banking solves this problem, by keeping the financing “in house”: the same fiscal authority that borrows and spends the money, earns the interest that it pays to its own public bank. When the taxpaying public “owns the bank” that their local government borrows money from, taxpayers are paying the interest to themselves.
Taxpayers get public bank-financed infrastructure for “half price”. Or they get twice the real capital cost of infrastructure at the same level of expense, whether that is supplied by tax revenues or new money. I’m surprised State and Municipal taxpayer advocacy organizations are not the most virulent proponents of public banking. They seem to assume that private bank credit at interest is the only “possible” way to fund infrastructure.
We Have Revisited the Young Milton Friedman
This is just a barebones rehash of what Friedman explained in 1948. Turner cites this Friedman paper in his “Mephistopheles” speech, and in his new book, Between Debt and the Devil: Money, Credit, and Fixing Global Finance. It’s well worth the hour it takes to carefully read Friedman’s paper, free pdf online.
When money is issued free of interest charges and free of repayment debt and in amounts sufficient to keep the economy humming along, money is no longer artificially “scarce”. Money, and the public infrastructure that privately-issued “scarce money” buys, would no longer command economics rents in the form of interest and tolls.
Why should numbers that are created out of nothing “earn money”?
The money-funded Universal Basic Income would replace interest-income that savers now depend on. Investors can still earn interest and dividends in the capital markets financial system (“shadow banks”). And governments could directly money-fund pension payouts, rather than pension funds investing in interest-bearing government debt to fund their payouts.
Government money issuance is a mortal threat to the capitalist rentier class who live rich lives by “owning” essential infrastructure — especially by owning the money issuance and allocation system — not by “working” and “producing”. There has been, is, and will be, fierce resistance by rentier capitalists, to monetary reform that undermines the “scarce money” foundation of their personal wealth and power.
Modern Feudalism
Money-wielding capitalists eliminated the land-owning rentier oligarchy of the feudal agrarian era. Industrial capitalism produced — and continues to produce — the great economic wealth that we enjoy in the modern world. The quest for money profit and money accumulation drives the capitalist wealth-production system.
But a privately-issued money monopoly mortgaged all that wealth — and financed a concentrated ownership of the productive economic infrastructure into the hands of giant transnational corporations. Incomes to buy the abundant outputs are increasingly scarce, so the industrial capacity is increasingly idle; or engaged in deliberate obsolescence to force repeated purchases of the same now-essential economic goods. The creditors have begun foreclosing and re-feudalizing the world with a new capitalist oligarchy of owners.
Can monetary system reformers eliminate the worst predations of rentier capitalism — wrest some monetary and economic democracy from the new financial and corporate oligarchy — by carving out a macroeconomic space for some debt-free fiat money issued as a public utility?
I sure hope so – because if we can’t, we’re pretty much scr___d, just as the tenant serfs were centuries ago.
