Index

4: A Faustian Bargain?

Joseph Huber & James Robertson, Creating New Money: A Monetary Reform for the Information Age New Economics Foundation, London, 2000 Review by William Krehm

This is a remarkable little book, both for the gallantry with which it advances one of the central issues of our times, and for some essential matters it avoids, possibly in the hope of expediting its attack. For any serious student of monetary theory it is useful reading. Let us begin by noting its positive features.

The autbors have carried their message right into the City to the Old Lady of Threadneedle St.: "central banks will take over from the commercial banks the function of issuing new non-cash money for public circulation." Basically this amounts to a revival of "100% money formulated by Irving Fisher, Henry Simons and others in the thirties, when the commercial banks had closed their doors or were surviving on the dole. It was essentially due to the banks’ default that ‘100% Money’ proposals surfaced in Chicago.

"Between 1928 and 1938, [in the US] 100% of net amount of money created was created by government. Bank deposits or Bank-Created Money (BCM) in 1938 were no greater than in 1928 because of the Great Liquidation followed by a period when the banks were too frightened to make loans andl or the public was too frightened to borrow from the banks. The primary engine of recovery from the Great Crash was Government Money-Creation, GCM."1

The picture is very different today. Not only have the commercial banks taken over almost the entire new money creation in the conventional sense, but the stock market, mutual funds, underwritings. Countless new institutions are gushing credit that by practically all criteria qualifies as money. These can be summed up in the classical Latin maxim "non olet"–"it stinketh not," i.e. the winnings from these games are acceptable in payment of debt not excluding government taxes.

It is a weakness of the Huber-Robertson book that it does not mention the proliferations of such new credit creation other than by the banks proper, but increasingly melded with them. Including ir in their survey of near-monies would reinforce their basic argument for the return of seigniorage to the state. Returning seigniorage to the state is in no way invalidated, by the probability that reassigning a portion to private banks might then be useful–in return for their covenant to restrict their activities to socially useful banking. Aspects of a public utility would thus again be recognised as an essential feature of banking.

The present denial of seigniorage by decades of deregulation threatens to bring down the entire financial structure as in the thirties. When this occurs government-created money will be seen as the only creditworthy refuge. That provides an opportunity–the first in seventy years–for undoing the encroachments of the financial sector on every aspect ofsociery including the productive market economy itself.

To take advantage of this long-awaited opening, we will have to be better armed than with only an agenda for 100% money. One of the amazing things about this noteworthy little book is the readiness of the authors to accept uncritically a whole menu of strategic positions of the financial power structure, Thus (p. 11): "How the government should spend [the new seigniorage revenue] does not affect, and should not be confused with, the principle that new money should be created as debt-free public revenue and not as debt-constituting banking industry assets. When this principle has been accepted and the arrangements for creating new money as public revenue are settled, the question of how the revenue is to be spent will be a matter of governmenr budgetary policy and political decision in the ordinary way."

"Governments will have the option to use the new seigniorage revenue to reduce taxation. This is important at a time of pressure to reduce existing taxes." [our emphasis] Nowhere is there an attempt to examine such matters as the needs of the ecology, our population explosion, the neglected infrastrucures of the public sector, the reappearence of long-controlled diseases in new virulent forms, political revolutions frustrated by the denial of social programs that would offer them the possibility of peaceful stabilisarion; the urgent need to bring the brigandage of deregulated interest rates under control, the complete disregard of human capital in the GDP statistics. However, behind the government’s surrender of seigniorage lurked the systematic conquest of key power positions by the financial community.

That is alluded to by Robertson in his Mansion House speech: "Mason Gaffney, the distinguished professor of resource economics at the University of Southern California, has pointed out that right-wing libertarian economists are wrong when they proclaim TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). The truth is TISATAAFL (There Is Such A Thing As A Free Lunch). The important questions are WIGI (Who Is Getting It?) and WOTOGI (Who Ought to Get It?). In fact the economy offers many free lunches, as we shall see."2 And that being so, it makes little sense to surrender key chapters of our economic history, some of them still recognised in our law books, and reduce our arsenal to the one tool of 100% money. Civil discourse with the opposing side is always to be applauded. But blindly accepting the official views on inflation, on fiscal responsibility, on the disregard of public Investment in human and even much physical capital, would be not dialogue, but surrender.

We are told governments will have the option to use the new seigniorage revenue to reduce taxation. This is important at a time of pressure to reduce taxes" (p. 13). It is in fact far from clear that governments will have this option. To form a serious opinion on the subject we would have to examine the extent of the damage already inflicted by our deregulated markets in each on the various subsystems of our society and the biosphere. For example, let us take water and atmospheric pollution. In each of these subsystems the remaining margin of tolerance is what determines our basic priorities. The same can be said of the population explosion and the aging of our population. Then we would have to consider the possibility of moving from a financial system where 95% and more of interest-bearing credit has replaced interest-free legal tender to 100% legal tender-backed money. We would have to decide whether from leverages attained as high as 400:1 banking can be shrunk to a one-to-one leverage without having to raise interest charges unacceptably high. Banks do have their costs, even if we should bring them back to banking as strict intermediaries.

Only by applying system analysis can we know what options are really available. This discipline sets up the problem in terms of subsystems. A subsystem is defined by the fact that it must continue in working order if the system as a whole is to function. If sociery can do without that, the operation simply fails to qualify as a subsystem. The corollary:

for all subsystems to continue functioning, they must not be allowed to cannibalise one another.3

Scientists developed the notion of entropy almost two hundred years ago, when a French engineer noticed that heat will flow from one body to another only if a difference in heat levels exist. If that is dissipated, there is no way of harnessing the remaining heat even though it is present everywhere. ("Entropy" builds up). By the mid- 19th century physicists had proved the equivalence of energy in all known forms–thermal, chemical, electro-magnetic, gravitational. It is possible for one subsystem, say, electro-magneric, to renew its negentropy (difference in potential) by drawing on that of another–say a thermal one. Entropy build-up cannot on its own be reversed. Niagara Falls will never flow upward.

The entropy notion is indispensable for monitoring the ransacking of negentropy of one subsystem by another. But that is the very hallmark of our globalised, deregulated age. Yet a caveat is in order: there is no exact parity between one form of socio-economic negentropy and another. Unlike the case of physical systems, what we are dealing with when we talk of social negentropies is a useful metaphor rather than a physical equivalence. What is involved in socio-economic subsystems is the specific means and motivations necessary to keep each subsystem working.

100% money by definition does away with far less destructive ways of controlling the volume of credit creation than by raising interest rates. The statutory reserves that existed throughout the developed world required banks to deposit with the government or the central bank non-interest-bearing legal tender equivalent to a proportion of the deposits the banks held. By raising or lowering that proportion central banks were able to influence the amount of credit the commercial banks created. Since reserves are still in place in the two foremost monetarist countries, the US and Germany, 100% money would be surrendering strategic positions for the reconquest of monetary power by the nation.

And here we come to the central weakness of the book. "It will be an essential, integral part of seigniorage reform to ensure that the central authority’s decisions on how much new money to create are independent of government interference." That is not what Abe Lincoln said in the quotation that heads H&R’s Chapter 2: "The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity."

Why then would H&B write (page 17) "it will be an integral part of reform to ensure that the central authorities’ decision on how much new money to create are independent of government interference." That puts in the hands of the central bank the decision whether we can afford to do anything to save the biosphere and society. It is a strange conceit that the governments that have repeatedly bailed our our sporting banks are not to be trusted, but central banks that have abused the manipulation of interest rates to flatten out prices with no attempt to understand what might be moving them, can be put in charge of decisions on funding programs on which society’s survival depends.

Of dialogue we can never have too much. But it must not be purchased as part of a Faustian bargain. Accepting the City’s view on inflation, fiscal responsibility, the independence of the BoE vis-a-vis the Government is a high price to pay for 100% money. Moreover, there is little likelihood that the BoE would accept 100% money. But if H&R’s views prevailed, monetary reformers would face the coming financial crisis toothless and tamed.

A wiser course is to proceed by discrete steps from what has already been tried and found to work. In that way in a crisis we will stand a good chance of convincing a good many business people of good faith--especially in the productive economy–ofthe need for the return of seigniorage to the government, in order that it might be redistributed in part to responsible bankers. These would contract to use their limited powers of money creation for socially useful purposes.

 

1 ‘W.F. Hixson, It's Your Money, COMER Publications, 1997, p. 115.

2A,p. 3.

3The application of systems theory to economics was dealt with in William Krehm Babel’s Tower: The Dynamics of Economic Break-Down, Toronto, 1977. and most recently in Economic Reform, July, 2000.

–from Economic Reform, Sept. 2000