In this sixth in our series on money basics we will discuss government authority money issuance, and its effects on the economy.
Government Created Money Issuance
Government created money is a different agreement between the state and the private banking system. Now, the state takes on the authority to create the money supply. The private banking system is left in place to manage day to day relationships between the government and us citizen users.
The money authority community has now been divided into the State money creation authority, and the private money management authority community which includes the banks.
Governments create money in the same way that banks create it, through loans from the user community asset/liability account. Again, the government has taken over the money creation process from the users. And again no products or services are traded in this transaction. In this case, the money numbers created can be characterized as a semi-permanent loan from the user community asset/liability account to the state, with no interest and no repayment schedule.
These money numbers borrowed from the user community asset/liability account in the money creation process are issued by being paid to members of the user community in exchange for user goods/services provided to the state. The government trades value from us citizen money users for the money numbers it has created through loans from our user community asset-liability account.
Us users still manage transactions between ourselves in the same manner as bank money, this time operating with money numbers created and enforced directly by the government.
Once sufficient money is in circulation, the state is now required to manage the money supply. Taxes paid to the government reduce the money supply, extinguishing existing government created money numbers, and government spending increases it, creating new money numbers, maintaining a balance in the money supply.
Or if the money supply is assessed to be balanced with need, the state can simply spend the money it receives in taxes back into the economy. This is a choice open to the government. Again we must maintain positive balances in our individual user accounts, as we cannot create money and in this case must earn money in order to have it to use.
As with bank money, if balance in the money supply is not maintained the same results will follow. If an excess of money accumulates in the economy, it will be reflected in inflation, where more and more money is traded for a given amount of value. If insufficient money is created, deflation and stagnation will occur, with insufficient money available to meet market needs. The caveat concerning the effect of helicopter money is also valid here.
Private Banks as Money Managers in the Government Money Context
In proposed State created money systems, the for profit banks are allowed to continue as local intermediaries between us money users and the state, with the stipulation that they can only manage money that they have accumulated or borrowed from the government, not create new money. The caveat here is that the banks and other lenders are still authorized to make loans and charge interest, a lesser power than controlling the creation of money with interest, but still a power.
The government can limit to some extent the power of the banks concerning who will receive money numbers by specifying what types of projects it will loan money to the banks for. This still leaves banks and other lenders as gate keepers over what the money they have accumulated through their operations will be loaned and used for, guided by their primary directive to maximize unearned income; more money to hold and/or lend.
Money and power still tend to gravitate to the major money manager community, even if more slowly than when it has the power of money creation. Over time, the banking community can regain its power.
Current Government Money Initiatives
For a number of years the American Monetary Institute, created by Steven Zarlinga, has proposed government created money. Zarlinga's book, The Lost Science of Money is the guide for this initiative. An outgrowth of this initiative was the introduction, in 2011 by Dennis Kucinich of the NEED Act.
Zarlinga's approach was utilized for the NEED Act. It includes a well developed transition from the present system to Government created money, including the fact that the FED (Federal Reserve System), our Central Bank, would require a major overhaul, functioning as a part of the US Treasury. This would become a Fourth Branch of the Government. Banks would then be required to borrow from the FED sufficient funds to cover all of their loans that require sums they do not control. They would no longer be empowered to create money.
The American Monetary Institute continues to promote this legislation, despite the death of Zarlinga. While it has a number of good points, it depends on regulation, rather than a fundamental change in the way we do money for stability. What it does not do is get rid of the ultimate driver of our economic problem, the use of interest and profit that will be shown to inevitably move money from the user community to the money authority community (the money management community in the case of government issued money).
In a recent paper, The People's Ledger: How to Democratize Money and Finance the Economy, Saule T. Omarova, who was nominated by President Biden for the position of Comptroller of the Currency (COC), but withdrew after Republicans attacked her background, had another initiative in this direction. Its main thrust was to move the money creation process from the private banks to a Government Monetary Authority (a reorganized FED) which would be charged with managing the money supply. All citizens would have an account with the National People's Ledger.
Money would be created through three channels, A discount window where private banks would borrow from the FED with limitations on funding financial instruments that do not add to the working economy, a National Investment Authority which would issue loans for critical infrastructure projects, and an expanded Open Market Operation, which would buy an interest (investment) in industries necessary for projects that mitigate global warming as well as local infrastructure.
This proposal is not as well developed in considering the transition, but considers itself as more of a thought experiment concerning possibilities for change in our money system. It remains solidly within the Capitalist paradigm, while creating new federal options that are created to moderate capitalist excesses.
Omarova's piece leaves money creation with the Fed, but with greater input from the Comptroller of the Currency and Congress. Also, oversight of State chartered banks, and Bank Holding Companies would be moved from the FED as is current practice, to the COC. National Bank oversight and chartering is now conducted by the COC. This would unify and simplify bank oversight putting it more under Government control. The banking industry unsurprisingly opposed this initiative.
Her analysis does not include any proposals concerning legislation necessary for the transition. On the other hand, it seems to this writer to assume that no such legislation is necessary. If this is truly the case it would seem that the expectations of the change in action proposed for the Fed are not feasible, considering the fact that the Regional Federal Reserve Banks, which are a part of the FED, and are owned and operated by the private banks in their regions, are expected to operate in the interest of the government rather than their owners.
As well, the Federal Reserve Central Office has on its board assigned members from the Regional Bank system. None of these players want to rock the boat of their current position of power.
As a third alternative, the US government is now considering getting rid of cash and instituting a government cryptocurrency in which everyone and every business will have an account directly with the national government. Little is known about the details of this proposal, as it is just now being discussed. A Presidential executive order dated March 9 seeks a proposal from government agencies within 180 days.
