The best way to launch my proposal on an incremental basis would be for Congress to pump a very small amount of new money into the bank accounts of government employees. If inflation results -- inflation that can be clearly traced to this small infusion of money created by Congress -- the Fed would be positioned to take remedial action right away. And then, if this first experiment should prove successful, the method could be extended in progressively larger operations.
The system I propose has two advantages: (1) its use of electronic transmission would make it technologically up to date and easy to implement; (2) by creating a partnership between Congress and the Federal Reserve that would retain and employ the effective forms of monetary policy that we have in place already, my proposal could overcome the most common objection to the greenback method from the orthodox: fear of inflation.
Today's dysfunctional Congress is incapable of doing much of anything, let alone considering and implementing a visionary change of this nature. But in the next few decades our public investment challenge in the United States will be nothing less than stupendous. Here's a way to increase our ability to pay for public necessities without higher taxes, without more deficit spending, and without inflation. It is time to start advocating this system to the public and policymakers. With luck, when the next sea change in American political culture occurs, the conceptual, structural, and practical framework for progress will be in place.
Page Seven
Ellen Brown, Esq., is the founder of the Public Banking Institute (http://publicbankinginstitute.org/), the author of twelve books including Web of Debt and The Public Banking Solution, and a prolific writer of current-events articles involving the banking system. She is presently running for the office of Controller of the State of California. Her comment follows:
Not only can the government issue money without creating price inflation; it needs to issue some money just to get the economy back to where it was in 2008. According to a 2012 staff report on the website of the New York Federal Reserve, the M3 money supply had then shrunk by $4 trillion from the beginning of the banking crisis in 2008. That means at least that much money could be added back in without creating price inflation.
One proposal for "reflating" the money supply is for the Treasury to simply mint some trillion-dollar coins. This idea has been called "silly," but our forefathers did it routinely, and very successfully. Why is it less silly for the central bank to create money out of thin air and lend it at near-zero interest to private commercial banks, to be re-lent to the public and the government at market-interest rates, than for the government to simply create the money itself, debt- and interest-free? We have lost not only the power to create our own money but even the memory that we once had that power.
The coins would not circulate (who could make change for a trillion-dollar coin?) but would be deposited in the government's account at the Fed. They would therefore not directly inflate the circulating-money supply. Congress could write checks against the coins for goods and services up to the point of full employment without creating price inflation, since supply and demand would rise together. After that, it could avoid inflation by taxing the money back. The velocity of money is about seven in a vibrant economy. If the money changes hands seven times, and each of the recipients pays an average 15% tax on it, the government will get the entire outlay back, and the money supply will not have changed.
Another possibility for "reflating" the economy is the "social-credit" option -- issue a dividend that goes directly into the pockets of consumers, to be spent as they choose. This can be done electronically, just as the Fed conducts its quantitative easing electronically today. Again, this need not be inflationary, since goods and services will rise along with money ("demand"), keeping prices stable; and if the velocity of money is seven and the average tax rate is 15%, the government will get all its money back the next April.
Nicolaus Tideman is Professor and Head of the Economics Department at Virginia Tech. He has served as the Senior Staff Economist on the President's Council of Economic Advisors, as an advisor to the Treasury Department and the US Bureau of the Budget, and as a think-tank scholar (American Institute for Economic Research). He has written a book on public choice and over a hundred articles in scholarly journals dealing, notably, with economics and public choice. His comment follows:
The problem with issuing U.S. Notes is that it may lead
citizens to underestimate the cost of government spending. Government
spending is efficient when citizens are willing to pay as much as it
costs. If some of the cost is paid by printing money, citizens may
underestimate the cost and allow government officials to spend
inefficiently. On the other hand, if a given amount of monetary expansion
is going to occur by one mechanism or another, it is more detrimental to the
overall well-being of a society to have the benefit of the monetary expansion
captured by a private-banking system than to have it captured by politicians
promoting excessive spending. My favored recommendation would be that
monetary expansion occur by interest-free loans to all taxpayers. If that
is not possible, I would recommend that monetary expansion to attain a chosen
path of the price level occur by the issuance of U.S. Notes. It is very
important that such a policy be accompanied by a governing mechanism that adjusts the quantity of money to stay on the
chosen price path.
Page Eight
Ronald Davis, Assoc. Professor at San Jose State University, teaches topics in management science and decision analysis which he has applied to the subject of monetary reform. A white paper and a detailed legislative proposal are found on his web site, http://www.monetaryreform-taskforce.net/. His comment follows:
On rational grounds the choice between debt-based borrowed money creation by the Fed and debt-free output-based congressionally authorized money creation by the Treasury is clear: why pay for what you can get free? Creating debt-free money, whether in the form of US Note paper money or its electronic equivalent, which we call US Money, is obviously superior to creating interest-bearing debt, so long as the Constitutional provision to regulate the value of money is observed. Elementary math based on Irving Fisher's fundamental money-exchange equation shows that regulating the value of money (i.e. keeping the CPI nearly constant) requires that money-supply growth rate be tied to real-output growth rate, as shown by the White Paper at our site. The formula relating the two (in times of constant-money velocity) shows that money-supply growth rate should approximately equal real-output growth rate in order to keep CPI growth rate close to zero. This leads to the realization that the true and correct backing for fiat money creation by the government should be seen as the real output of the economy; that is, the very goods and services that change hands through transactions using the money supply. Therefore, the inflation-prevention requirement can be accomplished by applying modern stochastic optimal-control technology to appropriate macroeconomic models rather than via the interest-charge disincentive to create money through debt creation. A money-supply feedback-control law based on the relevant macroeconomic variables will suffice to prevent inflation in the modern context (no such theory existed in 1913 when the Fed was created). In fact, the little islands of Guernsey and Jersey in the English Channel have been issuing debt-free government-issued money for nearly 200 years now in a responsible way, with excellent results. If they can do it without math models, then we can surely do it with NASA's space-age technologies.
Therefore we wholeheartedly agree with the drive to "bring back the Greenbacks" and believe that this can be done by coordination of money creation and debt creation. That is, if increases in debt-free money creation by the Treasury are accompanied with decreases in bond issues by the Treasury, then net inflation pressures can be kept in check. A bill to reintroduce the US Note issues that provides for compensatory decreases in bond issues would therefore be non-inflationary, and therefore an excellent first step forward towards more substantial initiation of US Money issues in electronic form. The rate of issue needs to be discussed of course, but the $50-billion-per-month rate suggested by the editor of this newsletter seems very reasonable as a first step. It will eliminate a good fraction of the budget deficit for the current year, and if continued for at least one additional year it will also enable the setting aside of the budget-sequestration cuts that have done so much damage to the economy and our military preparedness. Our proposal includes issue of sufficient new US Notes and electronic US Money to refund all allocations cut since sequestration began.
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