By Dan Kervick. Cross posted from New Economic Perspectives
A new year is upon us. And even before its first hour has been rung in, 2012 is already taking shape before us as a pivotal year in global politics. We can all feel the awakening under way. A revived longing for equality, shared prosperity and democratic solidarity is inspiring a vibrant new politics around the world. This new activist spirit is quickened by the keen apprehension of young people on every continent that something is very, very wrong with the present economic and political order. The rising generation, heirs to sick and damaged societies that have been unbalanced by decades of plutocratic rule and antisocial cupidity, have now begun to rouse themselves – and in the process they have rallied the moral outrage of their fellow citizens.
In the face of so much hope and energy, cynicism falls increasingly mute. The young occupiers of the public squares are giving new heart to all of those older, beleaguered reformers who worried that they might never see real change in their countries during their own lifetimes. Young people almost everywhere – from the defiant street vendor Mohamed Boazizi in Tunisia to the indignados in Spain to the participants in the Occupy movement across the United States and elsewhere – are rejecting the destruction wrought on their societies by a debased system of economic predation, environmental recklessness, elite privilege, corporate fraud and sheer inhuman greed. The youthful protestors are determined to restore democratic society and human decency, and redeem the dimming promise of their common future, and they have set their sights on the global dictatorship of big money. The 1%, once complacent in their impregnable fortresses of cash, can be heard to speak in worried tones of late. They lean pensively from their tower windows, no longer quite so comfortably aloof, and hear the rebel footfalls down on the streets in the dark.
The task the new activists have set themselves is formidable, because the economic disorders in need of repair are so numerous. The maladies here in the United States are particularly acute: Real unemployment is well up into the double digits – despite standard government habits of cooking the official unemployment books by not counting various classes of people without jobs. Unemployment rates among the young are especially appalling. Income disparities and polarization are staggering: For example, CEO pay in the US is now many hundreds of times higher than average worker pay, and the share of national income going to workers is now at its lowest level since the country began measuring that share almost 60 years ago. The share of income going toward corporate profits, on the other hand, is at the highest level since 1950, and yet many of these profits have been harvested by firing workers and cutting costs, not from new production. And by some recent measures, the proportion of Americans who count as either “poor” or “lower income” is close to 50%. As always, political power follows wealth, and that ineluctable social fact poses a large part of the challenge for reform. The greater the gap between the rich and the not-rich, the greater the capacity of the rich to buy the kinds of political influence they need to prevent change.
So the problems are not small, and they will not be easy to address and fix. We therefore need to battle for social and economic changes along many fronts. But as the new generation of activists point our societies toward these necessary reforms, so many of which pertain to the oppressive and unjust power derived from the control of concentrated money, they would be well advised to focus significant attention on the monetary system itself. The monetary systems that currently exist are deeply flawed: they are antiquated; they are socially inefficient; they are undemocratic; they lack openness and accountability; and they privilege elite financial interests over the interests of ordinary citizens and the public interest. Citizens in every country must begin to work together to reassert public control over their monetary systems, and assure that those systems are subject to democratic governance. And they must resist calls to expand the rule of private sector wealth over our monetary systems, and to reduce the public’s control over money even further below the level at which it currently stands. The public’s money must remain in public hands, so it can be mobilized for public purposes.
The aim of this essay is to assist the bourgeoning new movement for a more just and democratic world by contributing some ideas toward democratic reform of our monetary systems. These ideas do not primarily take the form of detailed policy initiatives or specific legislative proposals, although some specific suggestions along these lines are offered at the end of the essay. Instead, the focus is on providing a general framework for understanding the role of money and monetary institutions in the modern world – a framework that helps to clarify what money is, and also points clearly toward what money could be. The monetary system we actually have is an instrument of the plutocratic order of neoliberal money manager capitalism. But a monetary system fit for a democratic society lies within our grasp.
Few of the ideas in this essay are original. A good part of my thinking on the subject of money and monetary theory has been inspired by the work of a school of contemporary post-Keynesian economists and independent writers and researchers whose views often go under the name “Modern Monetary Theory” – or “MMT” for short. Some prominent thinkers in this field are L. Randall Wray, Scott Fullwiler, Stephanie Kelton, Warren Mosler, Marshall Auerback and William Mitchell. And like many of these thinkers, my thinking has also been strongly influenced by the 20th-century economists Hyman Minsky and Abba Lerner. But I hasten to add that there are several places in what follows in which I defend or suggest views that either diverge from, or go beyond the views that have been defended by the aforementioned authors.
1. The Public’s Money
I have claimed that the public’s money must remain in public hands. But what do I mean when I call a monetary system – such as the US dollar system – “the public’s money”?
I don’t mean that each and every dollar literally belongs to the public as public property. The United States government is ultimately responsible for the oversight of the monetary system and the ongoing creation of new dollars. But as dollars are created they are exchanged for goods and services, and thereby become the property of the individuals who produce those goods and services.
Nor do I mean that each and every dollar that is created comes into existence as a direct consequence of some act of public or governmental choice. Clearly this is not the case. The main force driving the creation of dollars is the banking system. Banks bring new dollars into existence by making loans that support the economic activity of businesses and individuals in the real economy. These loans expand the total sum of bank deposits, and bank deposits are properly regarded as one form of money. Money in a more restricted sense – physical currency and bank reserves – primarily comes into existence only after the fact in conformity with central bank policies that accommodate the desires of ordinary banks and their customers to expand bank deposits.
But the dollar is the public’s money because the dollar system is the monetary system that US citizens, by right, control. Constitutionally, the people of the United States are sovereign over their government, and the power over the US money supply is vested in Congress, the political branch closest to the people. The bureaucratic engine of dollar control – the Federal Reserve System – was created by an act of Congress and possesses all of its monetary powers by delegation of Congressional authority. Congress and the Fed set the rules for the banking system, and thus govern the processes through which new dollars are created and existing dollars are destroyed. The US government can thus be viewed as a monopoly producer of the dollar, even though it has delegated operational responsibility for those monopoly powers to the Fed. And private sector banking plays the large role it does only because some of the government’s monopoly power has been chartered out to the banks, presumably to fulfill a public purpose.
And yet, there is good reason to believe that the public’s monetary system is broken, and that the public purposes for which it is supposed to exist are being thwarted. As we can now clearly see, banks and other financial institutions blew up a vast speculative bubble of financial products leading up to the crash in 2008, a bubble filled with airy, foolish and fraudulent promises leveraged and re-packaged many times over. The Fed did nothing to prevent this international-scale Ponzi scheme from unfolding, and we are all now dealing with the financial carnage that resulted. And, as I will argue, the powerful monetary tools that could now be deployed to restore full employment and prosperity are locked up in an outdated and elitist system designed more to protect the reckless financial institutions that caused the disaster than to serve the public that is paying the price of the disaster. This deeply undemocratic monetary system is still directly supervised by the Fed.
But it would be a mistake to focus too single-mindedly on the Fed and its failures. The key monetary malefactors in the current crisis are a derelict and increasingly malevolent US Congress, a Congress which appears actively hostile to the very people it was elected to represent, and which works daily to serve the plutocratic masters who fund Congressional campaigns and sit atop our society’s financial hierarchies. It doesn’t have to be this way. The Fed is a creature of the US Congress; it was created by the US Congress; and it continues to play its role in the formation of monetary policy at the pleasure of the US Congress. Congress has all the power and capacity it needs to seize control of our monetary system on behalf of the broad public it represents, and to steer latent and untapped US financial power toward full employment and broad prosperity. But it refuses to make use of its inherent Constitutional powers to answer these pressing national needs, and works instead to protect the vested financial interests of the very few. The Congress that currently exists has been bought by the plutocracy. So it will be up to the American people to lead the charge on behalf of monetary democracy.
This is Part One of a six-part series.