Reprinted from econintersect.com
Randy Wray's article - Debt-Free Money: A Non-Sequitur in Search of A Policy - which I can't help thinking was at least partly inspired by a monetary reform offline email conversation we had for a few days before this first came out on the New Economic Perspectives blog - points out the main shortcomings of debt-free money from the U.K's Positive Money group and the American Monetary Institute here in the U.S. (though he doesn't name this second NGO).
He and Ann Pettifor are right to worry that credit will be so constrained if restricted to what banks actually have on deposit (in which case, it might rightly not be called "credit" at all, but just lending-what-you-have) that growth would be throttled before it started.
He is also right to worry about over-centralization and about a Monetary Authority (as the AMI calls it) turning out to be either
(A) Just the Federal Reserve by another name; or
(B) A truly independent body so immune to outside pressure that it does not provide the economy with funds even when they are needed.
I don't know which is worse, though I suspect Wray, who believes the Fed is part of government already, would say B.
There are, however, other options which allow for true government issuance of money, yet are also independent of out-of-thin-air credit-money creation by banks, but with restrictions to prevent the destabilizing excesses that recur over and over, and lately each resulting in a larger crisis than the last (e.g. the S&L crisis was smaller than the 2008 credit crisis, etc. going backwards).
To set the stage, let's stipulate three virtues of any economic system:
- Simplicity - this may seem strange to economists, who seem to live for complexity, but if we are ever to sell this to the public that elects its political leaders, it must be based on simple principles that most will understand.
- Decentralization - As Wray points out, the central government or even a special committee can't anticipate overall monetary needs of the economy. And even the perception that the new Monetary Authority is holding back productivity would stir resentment.
- Redundancy - some flexibility is needed to change sources of money, or credit, which Greenbackers like me, Stephen Zarlenga, Ellen Brown, Bill Still, etc. maintain is not the same thing, and Wray and MMT do not.
We have a trillion dollar output gap right now, according to the CBO, and we've had it since 2008. One can quibble over exact figures, but that misses the larger point. The banks are not producing money, so government must fill the gap. Wray and the Modern Monetary Theory folks and Greenbackers agree on that much.
I am a Greenbacker in the model of president Lincoln. Lincoln introduced the first federal form of paper money, the first Legal tender, in fact. It was $450m in 3 installments (1862-1863), a form of debt-free money. Yes, originally it was supposed to be redeemable in gold, but in reality that never happened, and by the end of its circulation (Treasury burned the last $239m in 1996), it was not even considered applicable to the national debt, according to the Treasury's own Debt Report, Table III:
That's why the government debt didn't decrease by $239m when the stock was burned. It was as if that money never existed. Talk about government waste!
But the important point is that government did, could, and does issue debt-free money all the time. Coins are an example. Stamps are another, though for limited uses. Neither of these can ever "run out" save for the lack of metal or paper in the world.