(Week 22 - Wednesday, Jan. 7 / 2009)
Perhaps the most common question I hear when the idea of direct public funding (as opposed to the issuance of money via private bank loans) comes up is, "What is to prevent all this currency being issued out of the US Treasury from flooding the economy with too much money and causing inflation?"
Public funding, assuming it is done with a minimal level of integrity, is by nature not inflationary. Indeed, it is the practical answer to inflation. It is amenable to being issued in a manner that is direct and proportionate to the actual economic activity monetized.
As with almost any other mode of disbursement, public money is, presumably, not passed out willy-nilly. It is, rather, issued as part of a transparent and orderly monetization process that is coupled with the production of real wealth (e.g. public infrastructure), or the provision of tangible human benefits (e.g. health care). Another way of saying this is that money is emitted as a complement to genuine human enterprise, which is indeed its "backing."
This process could still be abused, of course, but it is hard to imagine it ever becoming as disconnected from economic accountability as with the hundreds of billions of dollars that are being passed out currently to purchase "troubled assets" (e.g. the "securities" attached to already failed ventures) in the present financial crisis. This out-of-control issuance is caused by the supposed need to "keep the banking system from collapsing," which is another way of saying the need to make the "interest" payments on old loans required to maintain money in circulation. The resultant "need" to constantly expand the pool of circulating medium with ever more sums of borrowed money would not exist within a public system, and that, in turn, would remove the essential fuel from the "inflationary" fire.
Much has been made of the supposed tendency for uncontrolled spending by politicians when they get their hands on the public purse strings. Well, for better or worse, they have "their hands on the public purse strings" now.
Furthermore, even if we were to assume the worst concerning the character of our elected representatives, would it be better if they were spending money that had a compounding "interest" charge payable to private interests attached, or funds emitted essentially at no cost directly out of the Treasury?
I seem to recall scandalous reports in the news some years ago about how the space agency NASA had paid $900 dollars for a hammer, and other such outrages. I would ask, would it be better if that hammer were purchased with money issued directly out of the US Treasury, or with funds borrowed at "interest" from the Fed? If it were paid for with money borrowed at "interest" out of the Fed, the $900 dollar price tag would be only the beginning of the cost. The "interest" charge would be added to the Federal "debt," and more money would have to be borrowed by the government to make up for that charge, which would, in turn, cause over time a further compounding of the "debt." In practice, the "cost" of the hammer would always be with us and never cease to mount.
If, on the other hand, the hammer were paid for with money issued out of the Treasury, the "cost" would be $900, and no more. The unjustifiably high price (if indeed it is that) is not a function of the monetary system. It is the result of poor bureaucratic management and lax political control. However inflated the price of an item might be, nothing is gained, and indeed much is lost by purchasing it with money borrowed at "interest."
The problem with the current private system is that it has virtually no transparency. Indeed, the bank-money financial system is a knot of complexity that even the experts cannot seem to effectively penetrate. Instead the public is subjected to endless political promises, partisan ideologies and economic bromides within an intellectual atmosphere that is basically confused. If the public cannot understand how money is being created, issued and controlled, how then can there be accountability? The direct public issuance of money would cut through the lack of transparency, control and accountability, which, in the end, is the key to controlling "inflation."
In the next column I will describe more specifically the root mechanism that currently drives "inflation."
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The complete set of columns from this series is posted at the following websites.