Wednesday, May 8, 2013

Debt-free money—of course we can rebuild our infrastructure

Back in the day when the Producer giants walked the earth, Thomas Edison and Henry Ford were asked about the financing of a large infrastructure project at Muscle Shoals.  Edison's answer, as it appeared in the New York Times on December 6, 1921, describes perfectly the essential Producer position on money.  Why, asks Edison, does the government need to go into debt to build projects that increase the wealth of the nation and employ the energies of its citizens—if the government can issue an interest-bearing bond, why doesn't it just go ahead and issue the necessary currency.  In both situations, the taxpayers are backing the venture.  The difference is that if the government issues the currency, all the money can be spent on the project.  If the government issues a bond, less than half of the money goes for the project.

The basic argument that Edison makes is that the money is made good by the hard work and ingenuity of those who build the infrastructure.  Because the money is immediately validated by the project, it is neither inflationary NOR deflationary.  Read Edison's argument.  It is absolutely relevant for today.

“Now, as to paper money, so called every on knows that paper money is the money of civilized people. The higher you go in civilization the less actual money you see. It is all bills and checks. What are bills and checks? Mere promises and orders. What are they based on? Principally on two sources—human energy and the productive earth. Humanity and the soil they are the only real basis of money.

“Don’t allow them to confuse you with the cry of ‘paper money’. The danger of paper money is precisely the danger of gold—if you get too much it is no good. They say we have all the gold of the world now. Well, what good does it do us? When American gets all the chips in the game the game stops. We would be better off if we had less gold. Indeed, we are trying to get rid of our gold to start something going. But the trade machine is at present jammed. Too much paper money operates the same way. There is just one rule for money, and that is, to have enough to carry all the legitimate trade that is waiting to move. Too little or too much are both bad. But enough to move trade, enough to prevent stagnations on the one hand and not enough to permit speculation o the other hand, is a proper ratios.”

“Then you see no difference between currency and Government bonds? “Mr. Edison was asked.

“Yes, there is a difference, but it is neither the likeness nor the difference that will determine the matter; the attack will be directed against thinking of bonds and currency together and comparing them. If people ever get to thinking of bonds and bills at the same time, the game is up.

“Now, here is Ford proposing to finance Muscle Shoals by an issue of currency. Very will, let us suppose for a moment that Congress follows his proposal. Personally, I don’t think Congress has imagination enough to do it, but let us suppose that it does. The required sum is authorized –say $30,000,000. The bills are issued directly by the Government as all money ought to be. When the workmen are paid off they receive these United States bills. When the material is bought it is paid in these United States bills. Except that perhaps the bills may have the engraving of the water dam, instead of a railroad train and a ship, as some of the Federal Reserve notes have. They will be the same as any other currency put out by the Government: that is, they will be money. They will be based on the public wealth already in Muscle Shoals, and their circulation will increase that public wealth, not only the public money but the public wealth—real wealth.

“When these bills have answered the purpose of building and completing Muscle Shoals, they will be retired by the earnings of the power dam. That is, the people of the United States will have all that they put into Muscle Shoals and all that they can take out for centuries—the endless wealth-making water power of that great Tennessee River—with no tax and no increase of the national debt.”

“But suppose Congress does not see this, what then?” Mr. Edison was asked.

“Well, Congress must fall back on the old way of doing business. It must authorize an issue of bonds. That is it must go out to the money brokers and borrow enough of our own national currency to complete great national resources, and we then must pay interest to the money brokers for the use of our own money.

Old Way Adds to Public Debt.

“That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

“Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000—that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is terrible the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost on that account. Under the present system of doing business we simply add 120 to 150 per cent. to the stated cost.

“But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent., whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.

“If the Government issues bonds it simply induces the money brokers to draw $30,000,000 out of the other channels of trade and turn it into Muscle Shoals: if the Government issues currency, it provides itself with enough to increase the national wealth at Muscle Shoals without disturbing the business of the rest of the country. And in doing this it increase its income without adding a penny to its debt.

“It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay: but one promise fattens the usurer, and the other helps the people.

If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.

“Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable: they will be considered as gilt-edged paper. Why? Because the Government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency on the Muscle Shoals instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?”

Says People Must Pay Anyway.

“The people must pay any way: why should they be compelled to pay twice as the bond system compels them to pay? The people of the United States always accept their Government’s currency. If the United States Government will adopt this policy of increasing its national wealth without contributing to the interest collector—for the whole national debt is made up of the interest charges—then you will see an era of progress and prosperity in this country such as could never have come otherwise.”

“Are you going to have anything to do with outlining this proposed policy?” Mr. Edison was asked.

“I am just expressing my opinion as a citizen” he replied. “Ford’s idea is flawless. They won’t like it. They will fight it, but the people of this country ought to take it up and think about it. I believe it points the way to many reforms and achievements which cannot come under the old systems.” more
Edison and Ford on Muscle Shoals makes the following story all the more amazing.  Re-inventing the wheel—debt-free money was the big topic of conversation at the Milken Institute Global Conference.  A bunch of hedge funders listened as one of their own got all excited about an idea that has been around since before the USA was formed.  Note that these moneychangers think the idea was first proposed by Milton Friedman. (sigh)
John Carney, NetNet | May 2, 2013


In this context, the Wednesday morning presentation by Dan Arbess, a partner at Perella Weinberg and chief investment officer at PWP Xerion Funds, was startling because of how deeply it broke from the standard narrative.

We've been wrong to assume that the economic crisis is over, Arbess said. We stopped the crisis from reaching Great Depression levels through drastic fiscal actions such as TARP and the Obama administration's fiscal stimulus. But almost as suddenly as we started, we stopped these efforts, which Arbess says has resulted in us being "mired down" for the past four years.

What's kept us afloat has been monetary policy, but that's now reaching its limits, according to Arbess. The threat of deflation is once again rearing its head.

"The persistent risk in our economy is deflation not inflation," Arbess said.

His proposed solution is that we start directly funding government expenditures through the central bank. That is, we should stop relying on taxes or further debt issuances to finance government—or at least reduce our reliance on taxes and bonds. Just let the Federal Reserve pay the government's bills by exercising its money creation powers.

Although Arbess didn't say so directly, he's clearly been influenced by a groundbreaking February speech of Adair Turner, the chairman of the British Financial Services Authority. Turner termed the policy of using newly created money to directly finance tax cuts and new spending "Overt Monetary Financing" and argued that the inflationary effects of such a policy were misplaced in the context of clear targets and an independent central bank.

Arbess pointed out that this idea isn't really all that new. It's been around since Milton Friedman argued in a 1948 paper that all government deficits should be financed with noninterest bearing fiat money. Ben Bernanke, chairman of the Federal Reserve, argued explicitly in 2003 that Japan should consider "a tax cut … in effect financed by money creation." It was this idea—which people termed "helicopter money"—that got him the nickname Helicopter Ben.

Of course, any talk of direct central bank financing of government triggers fears of hyper-inflation. Arbess argues that the key to avoiding inflation would be to have clearly stated growth and inflation targets. When these were reached or exceeded, the Fed would end or taper off the Overt Monetary Financing policy.

How much more stimulating would OMF be than quantitative easing? Consider the thought experiment proposed by Anatole Kaletsky:

At present the Fed prints $85 billion of new money monthly and distributes it to banks and Wall Street investors by buying government bonds. And the Fed has promised to continue this monthly "quantitative easing" until such time as unemployment drops and is clearly and sustainably declining to more normal levels. Now suppose instead that the Fed divided its $85 billion monthly money production into 300 million checks of $283 each and sent these to every man, woman and child in America. Suppose, moreover, that the Fed promised to keep sending out these checks, worth more than $1,000 a month for a four-person household, until the United States reached its unemployment target—and the Fed chairman added that he would increase the checks to $1,500 or $2,000 a month for that household if $1,000 monthly proved insufficient. There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment—and no doubt that it would be infinitely more effective than distributing money to bond investors and banks through QE.

For a very old idea, it's still a radical notion. Arbess gets credit as the first hedge fund manager to raise it in such a public way. more


  1. Jon Carney knows Warren Mosler very. Rather two-faced that he doesn't credit Mosler for re-discovering & writing for decades on fiat currency operations.

    Not to mention Bill Vickrey

    Plus, this echoes what Ben Franklin (1727) observed about the Colonial currencies going back to the 1600s.

    Then, of course, there's John Law

  2. There's also this 1932 Senate Testimony by Marriner Eccles, who went on to be Fed Chair for ~17 years.

  3. And, the ideas of CH Douglas are also as even more clearly expressed than Edison's.

    CH Douglas on "Social Credit" (labor has to make enough to consume what it produces; Duh!)

  4. Carney's a jerk. He's a spineless little corporate weasel like the rest of them over there at CNBC. He's prone to making really stupid and contradictory comments.

    It probably bothers him to no end that Warren has been at the forefront when it comes to this stuff. All he can do is dish out his miserly portions of credit every once in a while. Who knows, maybe his bosses at that idiot network warned him.

  5. Thanks for weighing in.

    As someone who grew up around monetary discussions in the context of USA agriculture, I never realized that discussions of monetary policy had ever gone away. I believe it is easily the most debated subject in all of USA politics—and that includes slavery. I understand these debates left the front pages after Volcker's experiment with high rates began, but they hardly left. In rural Minnesota, several bankers were actually shot in the early 1980s. I personally think the subject important enough to have included a chapter in Elegant Technology.

    But yes, we are fans of Eccles, Franklin, and CH Douglas around here. Tony is a Civil War buff so his specialty is Lincoln. He has a point. There are a lot of interesting monetary theories out there—Lincoln actually made his work. But so long as you side with those who believe money is largely validated by high-quality work and not some comparison to a bright yellow metal, any discussion of who said what first is nothing more than good clean fun. After all, some of these ideas can be traced back the Sumerians.

  6. Great article. Doesn't it always amaze you how clearly the "thinking class" of people understood the money problem 100 years ago, 200 years ago? But now in our "information age" it is big radical news that bankers issue money as debt at interest which eventually bankrupts nations, when governments could issue that same money free of debt and free of interest and the people could prosper. At least it's encouraging that people high on the policy making food chain, like Adair Turner, are beginning to publicly advocate "the policy that dare not speak its name": government issuance of its own money.

  7. Thanks. Is there a newletter service or some way I can be updated with this blog? Regards.

    1. You are welcome.

      This blog updates it presence with whatever instruction set comes with blogger. Generally speaking, there is at least one new post every day. I usually post right after midnight Central time. Hope you become a regular.

  8. Great Post! If you're interested in debt free money, you may be interested in my new e-book: I'm surprised Mike Norman didn't reference it!