3. Public Money Creation
Breaking it Down
We've said that two of the most elementary observations that can be made in the field of monetary economics are:
- Every country should have a debt-and-interest-free national currency base.
- All households and all governments should have access to interest free financing.
And that's because money is created in two spheres:
- The public sector.
- The private sector.
Both of which should be democratically legitimate.
In our first bite-sized piece, we looked at the basic foundation of money and saw why all households (and all governments) should have access to money/credit interest-free (0% + fees). Let's now look at the creation or facilitation of a democratic, reliable national base currency.
It would be pretty straightforward to simply state that every country should have a democratic, debt-and-interest-free national currency base and leave it there. Who would disagree? Most people, if they were to analyze their thinking, would assume that something like that is already the case, that governments create money democratically... because that's what they're there for.
And the idea that governments should have to 'borrow' a national currency base, into existence, as a debt repayable with interest, is illegitimate on its face.
But it's worth exploring more and seeking greater clarification around the nature of these processes and the relationships they engender. And, although it's a largely semantic concern once the core issue has been addressed, it's interesting to ask: If money is inherently debt-based, then would a public, government-issued currency base still be a public debt? If so, to whom?
When we looked at private sector money creation for households, we saw something that should be democratically just but in practice wasn't. Households' access to money (to money creation) is presented to households as 'loans' of already existing money, allowing the financial sector to achieve steep supernormal profits through the taking of interest (compensation for those "putting up" and "foregoing use of" their money). Well, the same structural relationship exists for national governments too. National governments, just like households, 'borrow' money into existence from banks (central banks in this case). And that constitutes the public sector's contribution to the money supply.
In some ways this shouldn't surprise us. We've already seen how banks create the private sector's contribution to the money supply. And we've seen that money is, fundamentally, transferable records of debt which are given their life within the banking system. Thus we've seen that money is, really, "a creature of the banking system". That contrasts well with those who think, falsely, that money is a "creature of the state". So the idea that public money creation might also be taking place through banks might not be entirely surprising.
But we should be surprised that governments too, like households, must 'borrow' this money into existence as 'loans' repayable with interest. These debts are expensive and they weigh heavily on populations all over the world, resulting in the run-down of public services ('austerity') and the transfer of money and assets from an unfairly indebted society to those taken to be "lenders" to the state.
We saw that, in the private sector, money can and should be created much more democratically - interest free. We would expect to see something at least that democratic in the public sector. So, would we expect a national currency base to be "a debt but interest-free" too?
Well, let's begin by reasserting the most important point of all: If democratic public money creation can be described as a debt, then it must be a very different kind of debt to that which we have today (a debt associated with 'borrowing' and owed by society to those taken to be lenders to the state). If, then, public money creation can be described as a debt, it must be a debt owed by society either to the holders of that currency or to society itself.
Unsurprisingly, this appears to be one of those areas where the public sector is a special case. And we can arrive at the same conclusion no matter what concept we have of money - chartalist, debt-based... - so long as we believe it can be issued democratically by or for national governments.
Public sector money creation, just like private sector money creation, adds to the overall amount of currency in circulation - which we could envisage as a big pool in the heart of our economies. When money is created, the pool grows; when money is repaid, the pool shrinks. All other things being equal, if money is created and paid back in balance, the pool would remain consistent in its size.
We instinctively feel that when money is created for ordinary people, like you and me, we must honor it - that is, we must pay it down again. But not, of course, because it was "someone else's money". The money was created when we needed it and never belonged to anyone prior to that. The reason we must pay this money back comes down to a general sense of fairness and the fact that if everyone could go into debt (which creates money) and not honor it, then we'd all drown in a pool of money growing bigger and bigger without any reciprocal effort to pay it away again.
We pay money back to the financial system, not because it was "someone else's money", but to maintan:
in the system.
Public sector financing, like private sector financing, would expand money through issuance and shrink money by recovering it - which governments do through taxes, or sales of public goods and services to the holders of that currency.
But... should we think of that money as a 'debt', in the way we think of it as a debt for households?
Well, as stated, it must be a debt either to the holders of currency, or to society as a whole. And these groups might be largely indistinguishable. If we take it to be a debt we owe to society, then it is a debt society owes to society, "a debt we owe ourselves"... which surely cannot be described as a debt at all. What does it mean to say that you owe yourself $100, or an ounce of gold? If we take it to be a debt to the holders of currency, then what would we owe them? We would owe them the acknowledgement and respect of their legal titles and their ability to redeem those titles on the system; we owe it to the holders of money to accept their money in payment for goods and services - and note, that's all across society, not just 'taxes'. But this kind of 'debt' is not what we saw with households.
In the case of household debt, we saw it was a very active obligation. Households had to go out and recover the money their debts created in order to pay it away again. To recap, that was to maintain the fairness and stability of the system. It would be no good whatsoever if such debts were passive - a debtor could simply take the money his debt created, lie in luxury on a tropical beach and claim to be "willing to accept common currency in return for his efforts" - efforts he's going to spend the rest of his days choosing not expend. Clearly, no system could work like that.
So, unless someone has a very good reason to make a government do the same thing (i.e. pay out of existence all the units of currency they create), then these cannot be equivalent obligations or debts. Indeed, governments appear to have a very much contrary obligation: to provide a persistent currency base that allows people to make savings, immune from demands for repayment. That wouldn't be possible if every unit of currency in circulation were a debt that someone insisted had to be paid away again.
In fact, let's set aside the slightly nebulous word 'debt' for a minute and try to be more precise. Let's describe the obligation side of money as "an obligation to..." In the case of households, it was "an obligation to recover all the units of currency created and pay them away again." In the case of nation states, it must be something more like "an obligation to do all we can to maintain the system in its fairness and stability." These are two very different obligations for two very different entities: individuals vs the speical case of all of us collectively as a whole.
We should, perhaps, at this point, acknowledge that the only reason public sector currency creation is recorded and regarded as a 'debt' today is because public sector financing too has been established around the notions of 'lending' and 'borrowing'. Under any other circumstances, be they arising from chartalist or debt-based concepts of money, there is simply no reason to record that money as a debt. While governments would clearly benefit from knowing how much they've contributed to a currency's overall supply, there is no reason to record that issuance as a debt.
And we shouldn't let an overzealous attachment to banks' balance sheet accounting conventions lead us astray either. There's no reason for public central banks to record this money as 'liabilities' and there's no reason to 'balance them off' against government assets either. Even if we accept the terms 'assets' and 'liabilities' to describe the creation and circulation of money, the public sector is an obvious 'special case' and we shouldn't expect the government's bank to account for itself the way a private commercial bank should.
Every unit of currency created should be created democrtically - and at a minimum interest free - no matter where that money is created or by whom.
Let's tie this up with an outline of 4 different types of debt that we see again and again:
Debt arising from household's access to financial services: This is a real debt. It might not be the result of 'lending' or 'borrowing', so should not have interest added to it (0% + fees), but it is a debt and should be honored.
Debt arising from the lending and borrowing of already-existing money: This category of debt would be a real debt and interest is sure to be payable. It is, however, in most cases, the most socially destructive form of debt. Few people who have access to banking services in a democratic society should be left to face this kind of option. Both democratic and human rights should offer a high level of protection first, by ensuring universal access to interest-free financing.
National debts derived from the creation of a national currency base by central banks: This category of debt is really not a debt at all. Public money creation is a basic democratic necessity; a necessary public good and public right.
The international debts of nation states: These are the governmental equivalent of household debts. Just like household debts, these are facilitated by banks and endogenous money creation. They are real debts, but should also be interest-free.