Lambert here: Yes, I like a gentle polemic…
By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally published at New Economic Perspectives
Some time ago, I labeled the “debt-free money” campaign a non sequitur in search of a policy. (See here.) However, this non sequitur refuses to die. I went on to joke that if they want a debt-free money, they ought to propose that government issue bananas as currency.
I frequently am asked to do interviews and I almost always accept them. However, when I was asked last week to participate in a radio show devoted to debt-free money, I struggled mightily to get out of it. As you’ll see, the program’s producer took my idea of banana republics and ran with it. I thought readers might get a kick out of this exchange (the producer’s emails are in italics, my responses are in bold). After the exchange, I’ll summarize my objections to the notion of debt-free money.
>>> Subject: debt based money
>>>Dear Mr. Wray,
I would like to invite you to our weekly radio show. The show will discuss how to eliminate our debt money system and replace it with a wealth based money system. The basis of the theory is to have governments SPEND money into circulation as opposed to borrowing money into circulation. We would like to hear your views on the matter.
>> On 12/1/15 10:24 AM, L. Randall Wray wrote:
>>> This sounds confused to me. If bananas were money wealth, government could spend them into existence. Otherwise, I cannot make any sense of what you’ve written. I probably wouldn’t be a very good guest.
>> Subject: Re: debt based money
>> Dear Mr. Wray,
>> On the contrary, you would be a wonderful guest. As you are aware, in our current monetary system, all bananas are loaned into existence by commercial banks. And with each loan, our banana supply increases. However, each loan has an interest charge. When a commercial bank makes a loan, the principal is created, but not the interest. Consequently, in order for me to pay back all the bananas I borrowed, plus the interest, I must capture bananas that you borrowed with your principal. Also, governments need to capture bananas from your principal, to make their principal + interest loans, payments. An individual can become free of debt, but collectively, we cannot.
>> We are just proposing that governments create bananas from nothing, like commercial banks do now, but spend the bananas for infrastructure needs that everyone wants. Like roads and bridges etc. It has been done before. In 1861 Abraham Lincoln needed bananas to fight a war. Patriotic northern banks offered to lend him the bananas at 35% interest. Instead, Lincoln had the treasury create Green Back dollars. (they have written songs about these ) They were used to pay troops, buy ammunition and supplies. They were made legal tender. Bananas, spent into circulation without debt, without interest. Oh yeah, and he won the war.
>> The 1792 coinage act allowed an individual to hike his donkey into the hills, mine silver or gold, bring the metal to the U.S. Mint and the government would turn his metal into legal tender coin, free of Charge. The man preformed the labor, and his labor was directly transformed into bananas. Not as a promise to pay down the road with an interest charge, but as a legal tender banana that could be spent into circulation without debt.
>>Please come on our show. It will be fun.
> On 12/1/15 1:15 PM, L. Randall Wray wrote:
> Sovereign government can no more borrow its own IOU than you can borrow your own IOUs. And money is not bananas, except perhaps in monkey republics. Money is always and everywhere else an IOU. As my prof, Hyman Minsky, always said, discipline the analysis with balance sheets. Show me the balance sheets in which government creates and spends money that is not its liability, vs the balance sheets in which government borrows its own currency from banks. If you provide those, then we have a place to start the discussion. Otherwise, I cannot make sense of what you are arguing and wouldn’t know what to discuss.
> Subject: Re: debt based money
> That’s the point. Money doesn’t always have to be borrowed. It is a violation of natural law for us to be required to borrow money, just to participate in commerce. As a young boy you probably brushed aside an ant hill, built in the crack of a sidewalk. What did you find the next day? A partially rebuilt ant hill, a foreclosure sign or a society that did what was necessary to survive without debt?
>This proposal is completely different from what is now being practiced. It requires unlearning, common sense, and approaching the balance sheet and other orthodox systems in a completely different way. If the accounting balance sheet is your main criteria for analysis, the proposal can be manipulated to satisfy the bookkeeper. A Natural Equity or Asset Monetization Account can be created to balance your E+L = A requirements. And please keep in mind, if business man “A” starts a company, on October 1st, with $25,000 of operating equity, there will never be any discussion of where or how that equity came into circulation or existence in the first place. Whether that cash was actually an IOU or a promise to pay, is not important in any accounting system, because the balance sheet only requires data, after October 1st, not before.
<<Can you be available for the show?
<<On 12/2/15 7:47 PM, L. Randall Wray wrote:
<<All money, save bananas in your monkey republic, is debt. It is on the liability side of issuer and asset side of holder. You cannot change that through confusing semantics. If all you want is zero interest on government liabilities that is easy to arrange. You do not have to pervert either accounting or language. A simple new instruction from Congress to its creature, the Fed: Zirp forever. The deed is done. I cannot see how that could take up more than 60 seconds of a show. If you want to schedule 60 seconds, I can probably do it.
< Subject: Re: debt based money
<Wonderful. We will love to have you on. The host also wanted you to come on to discuss what you have been doing at Modern Monetary Theory. Perhaps you will be willing to stay on longer to go over that part of your work.
OK, I couldn’t wiggle out of the interview. So here is my objection to debt-free, wealth-based money.
Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.
What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is “wealth-based”, not “debt-based”. Its value is determined by the value of the plastic, cardboard, or paper.
Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.
Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.
As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal.
If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?
A “debt-free money” would not be evidence of a debt. What would it be?
Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk. Maybe the news agent is hungry for a banana.
But I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money. Calling bananas money is a perversion of the language.
I don’t think our debt-free money cranks really want government to “issue” bananas. I think they want a “money” that is a record. But a record of what? If not debt, what?
From what I gather, they want government to issue notes (many—like the producer above–love to refer to Lincoln’s Greenbacks) or electronic “money”. But what are notes or electronic entries? They are records of indebtedness—debts that can be redeemed in payments to the issuers. They are debt tokens, redeemable in payments of debts owed to their issuers.
When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks hate payment of interest by government. I’m not sure, but I think what they really want to do is to prohibit government payment of interest.
That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds. I’m with them. Advocate ZIRP, not banana money.
We don’t need a non sequitur in search of a policy.
However, there are some advocates of debt-free money who understand MMT’s point about sovereign government. Some of these even recognize that the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our (nongovernment) net financial (dollar) wealth.
But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding. (I’ll write a blog on that soon.)
Hence the conceit is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.
And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat.
While I’m somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.
Our debt-free money folks (including the producer above) believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.
But that is not true. Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.
When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury’s deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.
Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always “debt-financed” spending, using government debt.
Telling the Treasury to stop selling bonds will not stop the government from going into debt.
Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds that promise interest above zero, we will have already achieved what our “debt-free money” champions want.
However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins). Government will be in debt. But it can choose not to pay interest.
There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.
For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds.
I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent. It doesn’t pervert any accounting. It is simple and follows normal banking practice.
Your overdraft at your bank is a loan; there is no economic reason why the central bank branch of government cannot allow an overdraft by the treasury branch of government to spend funds already budgeted by the elected representatives and signed by the head of the administrative branch of government. Overdrafts are normal banking procedure; they are well-understood and not at all scary. Uncle Sam ought to be able to run an overdraft at his bank. His spending is already checked by the budget. His signature on his debt creates what is without question the most highly esteemed “note” on the planet. It is accepted all over the globe. His banker—Aunt Janet—ought to accept it.
Again, we don’t need a non sequitur in search of a policy. Our debt-free advocates usually do not tell us how they would change procedures to allow treasury to spend without government going into debt. The reference to Lincoln’s Greenbacks is not helpful.
Even if we grant the advocates the perversion of language—to say that paper money issued by treasury is not the treasury’s debt—do they really imagine that we will go back to the 1860s payments system? Uncle Sam will deliver a wheelbarrow full of notes to your mailbox on the first of every month to pay Social Security? Will Uncle Sam send trainloads of cash to Lockheed to purchase fighter jets?
(Or will Uncle Sam instead mint the trillion dollar platinum coin. Boy oh boy will someone be in trouble if that gets lost in the wash!)
In a later blog, I will address a proposal to have the Fed provide “transfers” to allow Treasury to spend, crediting the Treasury’s account with hundreds of billions of welfare that can be spent. This, I think, subverts normal bank accounting (the Fed would have no asset to offset the deposit liability to the Treasury) even as it creates a government debt (Fed reserves) transferred to private banks when the Treasury spends. In other words, it really does not eliminate government debt—it just allows government to spend debt that need not pay interest. Still, the most straightforward way to accomplish this is—as I discussed above—to direct the Fed to allow interest-free overdrafts to the Treasury. But this is not a “debt-free” way to spend.
And what about our Monkey Republic that spends debt-free bananas? With only the satiable monkey appetite driving demand for bananas, and with no taxes to be redeemed in banana debts, it would probably end up as a banana republic—putting too many bananas into circulation fueling a banana hyperinflation.