By Dan Kervick, a PhD in Philosophy and an active independent scholar specializing in the philosophy of David Hume who also does research in decision theory and analytic metaphysics. Cross posted from New Economics Perspectives
Now so far, I have described the operations of the monetarysovereign as though money were the only thing in the world. But this is clearly not the case. The model of themonetary sovereign I have developed is intended to be a model of agovernment. And while governments might have nearly unlimited and very easily deployed power in the creation and destruction of money, a government also participates in the exchange of real goods and services. And these goods and services are clearly finite. So there is something very special about money which is yet to be considered.
Let’s remember that government spending – insertions ofmoney – can come in different varieties: there are purchases, in which money is inserted into a private sector account in exchange for some good or service delivered to the sovereign; and there are straight transfers, in which some money is inserted into a private sector account without condition, with the government receiving nothing in return. Similarly,we need to recall that government receipts – removals of money – can come also in different varieties: there are sales, in which money is removed from aprivate sector account in exchange for some good or service delivered by the government to the owner of that account – as when someone buys a carton from the postal service, for example – and there are taxes,in which some money is removed from a private sector account without condition, with the owner of that account receiving nothing in return.
In a democratic society, we should think of the owner of the monetary sovereign’s account as the entire public, representing a significant portion of the economy usually called the public sector. The public cannot create valuable goods out of nothing at will, or receive the benefits of valuable services at will. Thesethings come in finite amounts, and it is a very big deal to the public whetheror not it possesses some good – like a bridge, a park, or a work of public sculpture, or a dam, or a rocket engine. It is also a very big deal to the public whether it is performing some service for a private sector individual or firm, or whether that individual or firm is providing a service to the public. So, while it might make little difference whether we think of the monetary sovereign’s monetary possessions according to the infinite account model, the empty account model or the quotidien account model, we have no such freedom when considering the public’s possession and exchanges of real goods, or its receipts and provisions of the benefits of real services. When it comes to the exchange of real goods and services, what the public possesses matters. As democratic citizens, decisions over the public sector provision or acquisition of real goods and service are among the most frequentand important decisions we have to make.
And herein lies an important difference between theproduction of money and the production of other goods. Traditionally, the difference in cost between producing some unit of money, and the value that can be fetched by that money in the market when it is used to purchase something, is called “seignorage”. In earlier times, when the public’s money was fashioned from material resources like gold, which had to be mined from the ground, refined and shipped at a substantial cost, seignorage was still important, but less significant than today. But in the world of modern money, when money in colossal denominations can be created at very low cost, simply by moving a few electrons around on some hard drives by virtue of a few keystrokes on a computer keyboard, the value that is derived from seignorage is even more significant.
A democratic public that possesses seignorage power should be very hesitant to give it up, as it would for example, by ceding monetary power to private sector corporations with their relatively small collections of self-seeking owners and their hierarchical, non-democratic forms of government. If the creation of the various forms of money were permitted to be strictly a private sector endeavor in the modern world, we might reasonably suspect it would all end up in the hands of a few financial sector oligarchs – Goldman Sachs, Barclay’s, Chase, etc. – justas these oligarchs have come to dominate other forms of financial power. Nor should the public take a casual attitude toward free-styling monetary entrepreneurs who might seek to employ innovative technologies to invent forms of money that have the potential to succeed in supplanting the public’s money. They would thereby reap seignorage profit for their own private benefit, while at the same time diminishing public control over the public’s monetary system, and robbing a democratic public of its monetary power. And the romantic and entrepreneurial monetary rebel of today could easily become the monopolizing monetary kingpin of tomorrow without the restraint of democratic governance.
So let’s turn away from these anti-democratic nightmare scenarios of the public’s monetary powers falling into private hands, and return now to our simple model of the monetary sovereign, which we will regardas a democratic government connected to a public sector, wielding its monetary and other powers on behalf of public purposes.
It is important to recognize that a monetary sovereign has no operational need, strictly speaking, to borrow or tax in order to spend. By an operational need I mean something that the government must do in order to carry out some operation, and without which that operation simply cannot occur. Because the monetary sovereign can always create any money it needs in order to carry out a spending operation,there is no operational need for it first to acquire that money from some other source. In the end, recall, the monetary sovereign is responsible for all of the money that exists in the monetary system which it governs. It is the producer of the currency in that system, not a mere user ofthe currency. It is just flat wrong to view a monetary sovereign as an enterprise like any other enterprise – such as a household, a small business, a corporation – mere users of the monetary sovereign’s money whose monetary power is limited to the making of exchanges, and whose monetary scorecard is subject to ordinary budget constraints.
So the monetary sovereign has no operational need to tax or borrow in order to spend. However, the monetarily sovereign government may have a policy need to tax or borrow. That is, the government may have reasonable policy goals – such as the maintenance of price stability, the encouragement of private sector production and commerce, the promotion of economic equality or other goals- that are best carried out with the aid of taxing or borrowing. The economist Abba Lerner encouraged us to view all government financial operations functionally – that is in terms of their effects. Whether a monetarily sovereign government should engage in some particular monetary or financial operation depends entirely on the government’s policy goals, and the degree to which the operation helps advance those policy goals. Lerner thus called this approach togovernment financial operations “functional finance”, and contrasted it with the ideal of “sound finance” – an ideal based on misconstruing monetarily sovereign governments as mere currency users subject to ordinary budget constraints.
Now this idea of a monetary sovereign might seem frightening. Surely the discretionary power to create and destroy the money that is in common use is an awesome and potentially threatening power indeed. The trepidation experienced here is not at all misplaced. But it is also important to realize that the existence of such power, or at least the potential existence of such power, is inherent in the very idea of governmental sovereignty, and that much therefore depends on the specific form of government that possesses this sovereign power, and the wisdom of those who determine the actions of that government. A democratic public – in which sovereignty is distributed equally among its entire people, which endeavors to subject itself and its own governmental operations to the rule of law and appropriate checks and balances, under durable and vigilantly maintained democratic institutions – can employ its monetary sovereignty wisely and on behalf of enlightened public purposes and the general good.
The idea of monetary sovereign can also inspire a different kind of emotional reaction in people: not fear, but disapproval. The public sector under amonetarily sovereign government, if such a thing exists, seems to receive something for nothing by virtue of a seignorage power. The employment of that power effectively delivers benefits to the public that are not received in exchange for something else. All the rest of us private individuals, on the other hand, are generally required to produce something of value in exchange for the benefits we received. This asymmetry might not seem fair or appropriate, since the monetarily sovereign government has an unfair advantage over private sector economic actors. Various inhospitable terms might come to mind here to describe the monetary sovereign’s advantage: “free lunch”, “ill-gotten gains”, “theft over honest toil”, “counterfeiting” etc.
This emotional reaction can be hard for people to shake, and is even in some sense natural, but it is grounded in a profoundly wrongheaded and false analogy between the sovereign role of a self-governing people under a democracy, on the one hand, and the role of private individuals, households and companies on the other. First of all, The United States government and its people have made a substantial investment – of work and sweat and tears, and even including an investment of many lives – in order to secure something approaching monetary sovereignty for their society. So if they exercise this monetary sovereignty in the pursuit of public purposes and the general good they are hardly receiving something for nothing. They have invested a whole lot of something in the past in order to control a monetary system they can use to accomplish these public goals.
Second, a democratic government like the government of the United States is not just one enterprise among others in a competitive economic game of rising and falling fortunes, a game in which the government must therefore “play by the same rules” as every private sector individual, household or firm. The United States government is the instrument by which we the people are supposed to organize and direct our common efforts toward the fulfillment of our most important national goals and aspirations, including such things as “promotingthe general welfare” and “establishing justice.” It is absurd to suggest that because a corporation like Goldman Sachs, for example, does not possess the seignorage power that comes from monetary sovereignty, then the American people must decline to employ that power themselves, in the spirit of fairness to Goldman Sachs and the desire for a level playing field. Goldman Sachs is not entitled to a level playing field with the sovereign American people. We’re the constitutionally recognized boss in our society. If the people of the United States have been strong enough, and diligent enough, and have sacrificed enough to deny seignorage power to Goldman Sachs but preserve it for themselves and their democratic government, then tough for Goldman Sachs. But good for us.
Finally, it is absurd to claim, as some monetary commentators across the generations sometimes have, that government money printing or its modern electronic equivalents represent something analogous to counterfeiting, as though the money used by a sovereign government were the property and creature of some mysterious third party or extra- governmental power or entity that the government then fraudulently manufactures for itself. In modern economies money is the creature of a government, and its creation and regulation subject to the laws of that government. Under a democratic government, the power to create and regulate money belongs to the public. The public, working through its government, can’t be the counterfeiter of its own legally ordained money. It might make foolish decisions from time to time in the way it deploys its money-creating power, but these decisions do not encompass the counterfeiting of its own money. It is impossible for the rightful issuer of a currency to counterfeit that currency.
So the emotional aversion some feel to the exercise of monetary power by a democratic government is misguided. Much political energy, however, has gone into perpetuating these irrational reactions. The owners and servants of concentrated private financial power sometimes seek to shield the US public from a clear awareness and understanding of its own monetary powers, and from recognizing that it can deploy its inherent monetary sovereignty for public purposes so long as it organizes itself to lay hold of these powers and command them. They would like the American people to believe that the people themselves, and their democratic government, are mere users of a mysterious currency they do not control, and are thus dependent on the will of others in exercising whatever monetary power the people are permitted to wield by those mysterious powers. The plutocrats promote these myths and taboos of monetary superstition because an informed public with a clear-eyed appreciation of monetary matters would obviously work to prevent the further usurpation of their powers by plutocrats.