As alarm bells sound over the advancing destruction of the environment, a variety of Green New Deal proposals have appeared in the US and Europe, along with some interesting academic debates about how to fund them. Monetary policy, normally relegated to obscure academic tomes and bureaucratic meetings behind closed doors, has suddenly taken center stage.

The 14 page proposal for a Green New Deal submitted to the US House of Representatives by Congresswoman Alexandria Ocasio Cortez does not actually mention Modern Monetary Theory, but that is th it’s e approach currently capturing the attention of the media – and taking most of the heat. The concept is good: abundance can be ours without worrying about taxes or debt, at least until we hit full productive capacity. But the devil is in the details….

MMT advocates say the government does not need to collect taxes before it spends. It actually creates new money in the process of spending it; and there is plenty of room in the economy for public spending before demand outstrips supply, driving up prices.

Critics, however, say this is not true. The government is not allowed to spend before it has the money in its account, and the money must come from tax revenues or bond sales.

In a 2013 treatise called “Modern Monetary Theory 101: A Reply to Critics,” MMT academics actually concede this point. But they write that “these constraints do not change the end result,” and here the argument gets a bit technical. Their reasoning is that “The Fed is the monopoly supplier of CB currency [central bank reserves], Treasury spends by using CB currency, and since the Treasury obtained CB currency by taxing and issuing treasuries, CB currency must be injected before taxes and bond offerings can occur.”

The counterargument, made by American Monetary Institute researchers among others, is that the central bank is not the monopoly supplier of dollars. The vast majority of the dollars circulating in the United States are created, not by the government, but by private banks when they make loans. The Fed accommodates this process by supplying central bank currency (bank reserves) as needed; and this bank-created money can be taxed or borrowed by the Treasury before a single dollar is spent by Congress. The AMI researchers contend, “All bank reserves are originally created by the Fed for banks. Government expenditure merely transfers (previous) bank reserves back to banks.” As the Federal Reserve Bank of St. Louis puts it, “federal deficits do not require that the Federal Reserve purchase more government securities; therefore, federal deficits, per se, need not lead to increases in bank reserves or the money supply.”

What federal deficits do increase is the federal debt;  and while the debt itself can be rolled over from year to year (as it virtually always is), the exponentially growing interest tab is one of those mandatory budget items that taxpayers must pay. Predictions are that in the next decade, interest alone could add $1 trillion to the annual bill, an unsustainable tax burden.

To fund a project as massive as the Green New Deal, we need a mechanism that involves neither raising taxes nor adding to the federal debt; and such a mechanism is actually proposed in the US Green New Deal – a network of public banks. While little discussed in the US media, that alternative is being debated in Europe, where Green New Deal proposals have been on the table since 2008. European economists have had more time to think these initiatives through, and they are less hampered by labels like “socialist” and “capitalist,” which have long been integrated into their multiparty systems.

A Decade of Gestation in Europe

The first Green New Deal proposal was published in 2008 by the New Economics Foundation on behalf of the Green New Deal Group in the UK. The latest debate is between proponents of the Democracy in Europe Movement 2025 (DiEM25), led by former Greek finance minister Yanis Varoufakis, and French economist Thomas Piketty, author of the best-selling Capital in the 21^st Century. Piketty recommends funding a European Green New Deal by raising taxes, while Varoufakis favors a system of public green banks.

Varoufakis explains that Europe needs a new source of investment money that does not involve higher taxes or government deficits. DiEM25 proposes for this purpose “an investment-led recovery, or New Deal, program … to be financed via public bonds issued by Europe’s public investment banks (e.g. the new investment vehicle foreshadowed in countries like Britain, the European Investment Bank and the European Investment Fund in the European Union, etc.).” To ensure that these bonds do not lose their value, the central banks would stand ready to buy them above a certain yield. “In summary, DiEM25 is proposing a re-calibrated real-green investment version of Quantitative Easing that utilises the central bank.

Public development banks already have a successful track record in Europe, and their debts are not considered debts of the government. They are financed not through taxes but by the borrowers when they repay the loans. Like other banks, development banks are moneymaking institutions that not only don’t cost the government money but actually generate a profit for it. DiEM25 collaborator Stuart Holland observes:

While Piketty is concerned to highlight differences between his proposals and those for a Green New Deal, the real difference between them is that his—however well-intentioned—are a wish list for a new treaty, a new institution and taxation of wealth and income. A Green New Deal needs neither treaty revisions nor new institutions and would generate both income and direct and indirect taxation from a recovery of employment. It is grounded in the precedent of the success of the bond-funded, Roosevelt New Deal which, from 1933 to 1941, reduced unemployment from over a fifth to less than a tenth, with an average annual fiscal deficit of only 3 per cent.

Roosevelt’s New Deal was largely funded through the Reconstruction Finance Corporation (RFC), a public financial institution set up earlier by President Hoover. Its funding source was the sale of bonds, but proceeds from the loans repaid the bonds, leaving the RFC with a net profit. The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more; and it funded all this while generating income for the government.

A System of Public Banks and “Green QE”

The US Green New Deal envisions funding with “a combination of the Federal Reserve [and] a new public bank or system of regional and specialized public banks,” which could include banks owned locally by cities and states. As Sylvia Chi, chair of the legislative committee of the California Public Banking Alliance, explains on Medium.com:

The Green New Deal relies on a network of public banks — like a decentralized version of the RFC — as part of the plan to help finance the contemplated public investments. This approach has worked in Germany, where public banks have been integral in financing renewable energy installations and energy efficiency retrofits.

Local or regional public banks, says Chi, could help pay for the Green New Deal by making “low-interest loans for building and upgrading infrastructure, deploying clean energy resources, transforming our food and transportation systems to be more sustainable and accessible, and other projects. The federal government can help by, for example, capitalizing public banks, setting environmental or social responsibility standards for loan programs, or tying tax incentives to participating in public bank loans.”

UK professor Richard Murphy adds another role for the central bank – as the issuer of new money in the form of  “Green Infrastructure Quantitative Easing.” Murphy, who was a member of the original 2008 UK Green New Deal Group, explains:

All QE works by the [central bank] buying debt issued by the government or other bodies using money that it, quite literally, creates out of thin air. … [T]his money creation process is … what happens every time a bank makes a loan. All that is unusual is that we are suggesting that the funds created by the [central bank] using this process be used to buy back debt that is due by the government in one of its many forms, meaning that it is effectively canceled.

The invariable objection to that solution is that it would act as an inflationary force driving up prices, but as argued in my earlier article here, this need not be the case. There is a chronic gap between debt and the money available to repay it that actually needs to be filled with new money every year to avoid a “balance sheet recession.” As UK Prof. Mary Mellor formulates the problem in Debt or Democracy (2016), page 42:

A major contradiction of tying money supply to debt is that the creators of the money always want more money back than they have issued. Debt-based money must be continually repaid with interest. As money is continually being repaid, new debt must be being generated if the money supply is to be maintained.… This builds a growth dynamic into the money supply that would frustrate the aims of those who seek to achieve a more socially and ecologically sustainable economy.

In addition to interest, says Mellor, there is the problem that bankers and other rich people generally do not return their profits to local economies. Unlike public banks, which must use their profits for local needs, the wealthy hoard their money, invest it in the speculative markets, hide it in offshore tax havens, or send it abroad.

To avoid the cyclical booms and busts that have routinely devastated the US economy, this missing money needs to be replaced; and if the new money is used to pay down debt, it will be extinguished along with the debt, leaving the overall money supply and the inflation rate unchanged. If too much money is added to the economy, it can always be taxed back; but as MMTers note, we are a long way from the full productive capacity that would “overheat” the economy today.

Murphy writes of his Green QE proposal:

The QE program that was put in place between 2009 and 2012 had just one central purpose, which was to refinance the City of London and its banks.… What we are suggesting is a smaller programme … to kickstart the UK economy by investing in all those things that we would wish our children to inherit whilst creating the opportunities for everyone in every city, town, village and hamlet in the UK to undertake meaningful and appropriately paid work.

A network of public banks including a central bank operated as a public utility could similarly fund a US Green New Deal – without raising taxes, driving up the federal debt, or inflating prices.

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This article was first published under a different title on Truthdig.com. Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including Web of Debt and The Public Bank Solution. A 13^th book titled Banking on the People: Democratizing Finance in the Digital Age is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

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Stein goes even further than Sanders on several key issues, and one of them is her economic platform. She has proposed a “Power to the People Plan” that guarantees basic economic human rights, including access to food, water, housing, and utilities; living-wage jobs for every American who needs to work; an improved “Medicare for All” single-payer public health insurance program; tuition-free public education through university level; and the abolition of student debt. She also supports the reinstatement of Glass-Steagall,  separating depository banking from speculative investment banking; the breakup of megabanks into smaller banks; federal postal banks to service the unbanked and under-banked; and the formation of publicly-owned banks at the state and local level.

Going beyond Bernie, she calls for large cuts to the bloated military budget, which makes up 55% of federal discretionary spending; and progressive taxation, ensuring that the wealthy pay their fair share. Most controversial, however, is her plan to tap up the Federal Reserve. Pointing to the massive sums the Fed produced out of the blue to bail out Wall Street, she says the same resources used to save the perpetrators of the crisis could be made available to its Main Street victims, beginning with the students robbed of their futures by massive student debt.

It Couldn’t Be Done Until It Was

Is tapping up the Fed realistic? Putting aside for the moment the mechanics of pulling it off, the central bank has indeed revealed that it has virtually limitless resources, as seen in the radical “emergency measures” taken since 2008.

The Fed first surprised Congress when it effectively “bought” AIG, a private insurance company, for $80 billion. House Speaker Nancy Pelosi remarked, “Many of us were . . . taken aback when the Fed had $80 billion to invest — to put into AIG just out of the blue. All of a sudden we wake up one morning and AIG has received $80 billion from the Fed. So of course we’re saying, Where’s this money come from?”

The response was, “Oh, we have it. And not only that, we have more.”

How much more was revealed in 2011, after an amendment by Sen. Bernie Sanders to the 2010 Wall Street reform law prompted the Government Accounting Office to conduct the first top-to-bottom audit of the Federal Reserve. It revealed that the Fed had provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the economic crisis. “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else,” said Sanders in a press release.

Then there was the shocker of “quantitative easing” (QE), an unconventional monetary policy in which the central bank creates new money electronically to buy financial assets such as Treasury securities and mortgage-backed securities (many of them “toxic”) from the banks. Critics said QE couldn’t be done because it would lead to hyperinflation. But it was done, and that dire result has not occurred.

Unfortunately, the economic stimulus that QE was supposed to trigger hasn’t occurred either. QE has failed because the money has gotten no further than the balance sheets of private banks. To stimulate the demand that will jumpstart the economy, new money needs to get into the real economy and the pockets of consumers.

Why QE Hasn’t Worked, and What Would

The goal of QE as currently implemented is to return inflation to target levels by increasing private sector borrowing. But today, as economist Richard Koo explains, individuals and businesses are paying down debt rather than taking out new loans. They are doing this although credit is very cheap, because they need to rectify their debt-ridden balance sheets in order to stay afloat. Koo calls it a “balance sheet recession.”

As the Bank of England recently acknowledged, the vast majority of the money supply is now created by banks when they make loans. Money is created when loans are made, and it is extinguished when they are paid off. When loan repayment exceeds borrowing, the money supply “deflates” or shrinks. New money then needs to be injected to fill the breach. Currently, the only way to get new money into the economy is for someone to borrow it into existence; and since the private sector is not borrowing, the public sector must, just to replace what has been lost in debt repayment. But government borrowing from the private sector means running up interest charges and hitting deficit limits.

The alternative is to do what governments arguably should have been doing all along: issue the money directly to fund their budgets.

Central bankers have largely exhausted their toolkits, prompting some economists to  recommend some form of “helicopter money” – newly-issued money dropped directly into the real economy. Funds acquired from the central bank in exchange for government securities could be used to build infrastructure, issue a national dividend, or purchase and nullify federal debt. Nearly interest-free loans could also be made by the central bank to state and local governments, in the same way they were issued to rescue an insolvent banking system.

Just as the Fed bought federal and mortgage-backed securities with money created on its books, so it could buy student or other consumer debt bundled as “asset-backed securities.” But in order to stimulate economic activity, the central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called “non-marketable perpetual bonds with no maturity date” – bonds that can’t be sold or cashed out by the central bank and that bear no interest.

Green Party 2016 presidential candidate Jill Stein. (Gage Skidmore / CC-BY-2.0)

The Bernanke proposal (which he says could also be used by the US Fed in an emergency) involves the government issuing bonds, which it sells to the central bank for dollars generated digitally by the bank. The government then spends the funds directly into the economy, bypassing the banks.

Something similar could be done as a pilot project with student debt, Stein’s favorite target for relief. The US government could pay the Department of Education for the monthly payments coming due for students not in default or for whom payment had been suspended until they found employment. This would free up income in those households to spend on other consumer goods and services, boosting the economy in a form of QE for Main Street.

In QE as done today, the central bank reserves the right to sell the bonds it purchases back into the market, in order to reverse any hyperinflationary effects that may occur in the future. But selling bonds and taking back the cash is not the only way to shrink the money supply. The government could just raise taxes on sectors that are currently under-taxed (tax-dodging corporations and the super-rich) and void out the additional money it collects. Or it could nationalize “systemically important” banks that are insolvent or have failed to satisfy Dodd-Frank “living will” requirements (a category that now includes five of the country’s largest banks), and void out some of the interest collected by these newly-nationalized banks. Insolvent megabanks, rather than being bailed out by the government or “bailed in” by their private creditors and depositors, arguably should be nationalized – not temporarily, but as permanent public utilities. If the taxpayers are assuming the risks and costs, they should be getting the profits.

None of these procedures for reversing inflation would be necessary, however, if the money supply were properly monitored. In our debt-financed system, the economy is chronically short of the money needed to support a dynamic, abundant economy. New money needs to be added to the system, and this can be done without inflating prices. If the money goes into creating goods and services rather than speculative asset bubbles, supply and demand will rise together and prices will remain stable.

Is It in the President’s Toolbox?

Whether Stein as president would have the power to pull any of this off is another question. QE is the province of the central bank, which is technically “independent” from the government. However, the president does appoint the Federal Reserve’s Board of Governors, Chair and Vice Chair, with the approval of the Senate.

Failing that, the money might be found by following the lead of Abraham Lincoln and the American colonists and issuing it directly through the Treasury. But an issue of US Notes or Greenbacks would also require an act of Congress to change existing law.

If Stein were unable to get either of those federal bodies to act, however, she could resort to a “radical” alternative already authorized in the Constitution: an issue of large-denomination coins. The Constitution gives Congress the power to “coin Money [and] regulate the value thereof,” and Congress has delegated that power to the Treasury Secretary. When minting a trillion dollar platinum coin was suggested as a way around an artificially imposed debt ceiling in January 2013, Philip Diehl, former head of the U.S. Mint and co-author of the platinum coin law, confirmed:

In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years. The Secretary authority is derived from an Act of Congress (in fact, a GOP Congress) under power expressly granted to Congress in the Constitution (Article 1, Section 8).

The power just needs to be exercised, something the president can instruct the Secretary to do by executive order.

In 1933, President Franklin Roosevelt engaged in a radical monetary reset when he took the dollar off the gold standard domestically. The response was, “We didn’t know you could do that.” Today the Federal Reserve and central banks globally have been engaging in radical monetary policies that have evoked a similar response, and the sky has not fallen as predicted.

As Stein quotes Alice Walker, “The most common way people give up their power is by thinking they don’t have any.”

The runaway success of Sanders and Trump has made it clear that the American people want real change from the establishment Democratic/Republican business-as-usual that Hillary represents. But real change is not possible within the straitjacket of a debt-ridden, austerity-based financial scheme controlled by Wall Street oligarchs. Radical economic change requires radical financial change, as Roosevelt demonstrated. To carry the baton of revolution to the finish line requires revolutionary tools, which Stein has shown she has in her toolbox.

Cross-posted from Truthout and originally titled “Can Jill Stein Carry Sanders’ Baton? A Look at the Green Candidate’s Radical Funding Solution”

Photo by 401(K) 2013

The post Jill Stein’s Radical Funding Solution appeared first on P2P Foundation.

From the Abstract:

“Conventional notions of public money as public expenditure based on taxation of privately created wealth will be critiqued. Public money will be defined as the creation of public currency free of debt, and therefore free of the necessity to grow. It will be argued that both sovereign deficit and debt are misleading concepts and stem from neoliberal ‘handbag economics’ that sees the public sector as a dependent household. Through exploring two circuits of money, public and commercial, it will be argued that growth driven capitalist economies are dependent on the public creation of public money. The seeming dominance of the commercial circuit reflects the ‘Janus-faced’ role of central banks that supports both debt and growth. The alternative to debt is a money system based on surplus expenditure (deficit) that can enable social and public exchange of use-value rather than exchange of commodity value for profit.”

Here are some extensive excerpts:

* From the Introduction:
The background to this paper reflects three crises: environment, inequality, money/ finance. I want to argue that money/finance is key to the other two. Concerns about climate change and other ecological problems are side-lined by the demand that economic growth, that is, profitability in money terms, must be maintained at all costs, or that remedial action cannot be afforded, that is, there is not sufficient money. The post war move towards greater equality has also been reversed by financialisation and the concentration on financial assets and financial speculation, all represented as growth in money terms. This is not to deny the importance of other economic factors, but money itself has been largely neglected in economic debate.

Instead, the politics of money should be seen as a key aspect of political economy. Environmental and social priorities are rejected by the claim that money is in short supply. However, there was no shortage of money when it came to the banking bailout. Money cannot essentially be in short supply as it is an entirely social construct.There is as much or as little as those who create, control and determine the distribution of money choose there to be. In this context I do not distinguish between notes and coins and bank credit in the definition of money as both create the supply of public currency. I want to argue that the financial crisis must be seen as a crisis for money, or more precisely, a crisis of the privatisation of the supply of the public currency. What the crisis reveals is the key role of publicly created money in sustaining private finance. Yet, the ideology of what I describe as ‘handbag economics’, claims that the 1 public sector has no right to the money that it, itself, creates. Publicly created money must only be used to support the privatised creation of the public currency as debt. There is quantitative easing for the financial sector, but not the people.

Worse, the people are punished through austerity for the deficits and public debts created by the crash. If sustainability and social justice are to be achieved, the privatisation of the public currency needs to be challenged. Public money must be a public resource that addresses democratically determined priorities (Mellor 2010). The 2007-8 crisis was not just a crisis of banking and finance but a crisis of the supply of public currency. The major fear that triggered the vast creation of public currency by public authorities was that the ATM machines would dry up. Certainly banks and financial institutions were insolvent as well as illiquid, but for the public the most immediate sign would be that there would physically be no money. However, the monetary authorities did not get the printing presses going, there was no time. It would take months, if not years, to produce enough banknotes to ‘back’ bank deposits. Also there was no other representation of value such as gold, which in any case would be not sufficient, even if the link with gold had not long been abandoned (if it was ever effective anyway).

States and central banks backed their banking systems with nothing but their authority. They said the money was there and people accepted it. States nationalised or bailed out banks, central banks made rock bottom loans they did not expect to get back, and attempted to ‘quantitatively ease’ the amount of money in circulation by buying up various forms of debt or investment. In all cases they used public money, that is money created and circulated by public monetary authorities. The newly issued public money did not originate outside of those authorities, it was not ‘made’ elsewhere. Conventional economics has a contradictory attitude to this public money-creating capacity. While public expenditure is seen as dependent upon the ‘wealth-creating’ sector (states must not ‘print money’), it is quite accepted that monetary authorities create money. This is even graced with the title of ‘high powered money’ or ‘base money’. However this is not considered to be public money in the sense that the public has any right to it. It is created as public currency, in the public’s name, but it is only to be circulated via the banking system. The one body that must not ‘print money’ is the public itself through its public (but not necessarily democratic) organ the state. The people and the state can only borrow money from the banking and financial sector which includes the central bank.

Neoliberalism has made this clear by deeming central banks, with their authority to create money, as independent of any democratic institutions. States themselves are just another borrower. When states stepped into to rescue their banking sectors, they overran their expenditure plans dramatically, that is, they went into deficit. This required ‘borrowing’ under which excess state expenditure was securitised by the central bank and sold on to financial investors. The public sector was then pilloried for being in debt and forced into austerity. I want to argue that public deficit and debt is not a ‘problem’. In fact, commercial monetary economies cannot function without a long run surplus of public expenditure (deficit) over tax extracted. They cannot exist without publicly created money, that is, money free of debt spent into circulation or public currency made available to exchange for bank loans. There is no truth in the claim that environmental or social justice solutions cannot be ‘afforded’. There is no 2 shortage of money. What does exist is a dominant ‘handbag economics’ that ignores the social and public history of money. It also does not acknowledge that bank accounts are as much public currency as notes and coin. There is nothing private about bank-created money. In the last resort it is a public liability. Why, then, is it ideologically and in practice, captured as a private, rather than a public, resource? In response to the crisis, monetary authorities offered an almost blanket guarantee of their public currency in whatever form it was held. Intangible promises were made to support intangible money. This raises the question of the nature of money itself (Ingham 2004). What kind of money was in crisis and what kind of money was rescuing it? The crisis is acknowledged as being a crisis of credit supply and toxic debt as banks threatened to fall down like a line of dominos. As Duncan argues, this failure of ‘creditism’, the growth of debt, was equivalent to the collapse in money supply in the 1930’s (2012: 32). In the run up to 2007-8, banks were not just issuing credit, they were issuing the public currency. This challenges the conventional nostrum that there are two different kinds of money, ‘real money’ (notes and coin, central bank reserves) and ‘credit money’ (bank accounts).

* The Public Circuit of Money

One of the earliest proponents of a public conception of money was the German, Georg Knapp (1842-1926). Far from a market-oriented and privatised view of money, Knapp saw the state as central to the existence of money. In his major work The State Theory of Money (1905/1924) Knapp argues that money is not an economic phenomenon linked to the market; it is very much a public phenomenon: ‘money is a creature of law’ (1924:1). For this reason, he sees the study of the monetary system as a branch of political science and ‘the attempt to deduce it without the idea of a State ..(is)..absurd’ (1924:viii). It is states that establish the status of money forms such as coins, public currency notes or abstract notions such as the pound sterling. Keynes echoed Knapp’s view: ‘‘that money is peculiarly a creation of the state’ (1971:4) and claims it has been so for four thousand years.

While for conventional economics the first function of money is as a medium of commodity exchange, Knapp stresses money as a more general means of payment. Although money is used in market exchange, there are many situations in which payment does not relate to the market, such as fees, fines or taxes. In fact, Knapp sees public administrative payments as a better grounding for the status of money than general acceptance in trade: ‘the money of the state is not what is of compulsory general acceptance, but what is accepted at the public pay office’ (1924:vii). Knapp acknowledges that commodities of material value (such as precious metal) have been used in exchange, but he does not consider this to be money. In fact, money only comes into play when the actual form of payment has no intrinsic value: ‘money comes into being when the material is no longer the means of payment’ (1924:25). He goes on to argue that even where money is made of precious materials, ‘the soul of the currency is not in the material of the pieces, but in the legal ordinances that regulate their use’ (1924:2). He notes that the first question a trader will ask in a new country is, what is the nature of the currency? At the time that Knapp was writing, paper money was well established and he wanted to defend the view that ‘the much-derided inconvertible paper money is still money’ (1924:38). Knapp sees all forms of money as a chartal or token (chartal comes from the Latin for token).

Paper or other non-material money is not inferior to metal money, as both are part of an administrative monetary system: ‘Coins are stamped discs made of metal’ while ‘warrants are stamped discs of paper’ (1924:56). Knapp’s state theory of money has a very different view of the origin and nature of money from conventional economics. Money is created by the state as a convenience for society ‘the State….creates it’ (1924:39). Knapp sees it as 6 particularly beneficial to the taxpayer that the state creates the money that it later accepts in payment of tax as it ‘frees us from our debts to the state, for the state, when emitting it, acknowledges that, in receiving, it will accept this means of payment’ (1924:52). What Knapp is describing is a public circuit of money. Money is created and circulated through state expenditure and retrieved as tax. A public sector circuit reflects the long history of sovereign creation of money. Early coinage was created free of debt and spent, mainly on war or aggrandisement. The money was then left to circulate or demanded back as tax. When modern bank lending emerged, rulers combined public money creation and taxation with borrowing from the commercial money sector and the sources of public funding became intertwined. The public circuit is obscured because public expenditure is an ebb and flow of money. States do not wait to collect taxes before engaging in expenditure. It is only when outgoings and tax income are brought together in the accounts that the balance between them can be seen. The sequence of taxation and expenditure is therefore circular: taxes are spent and expenditure is taxed. Rather than seeing the circuit starting with tax to fund expenditure, expenditure can be seen as providing money to pay taxes.

The ‘chicken and egg’ nature of the public circuit creates confusion over the role of the central bank (or equivalent public authority such as the Treasury). The central bank/Treasury can be seen as lending money for public expenditure pending the receipt of taxes, or it can be seen as creating money for public expenditure that will be redeemed through taxation. If the public monetary authority behaves like a commercial bank, it will see this money as a loan to the state. Future taxation is then a fiscal matter of retrieving the money to repay the loan (with interest). If the monetary authority sees itself as a public agency, the public currency could be created debt free, and spent, pending possible future taxation. Depending on how the public money circuit is interpreted, the incoming tax can be seen as being drawn from activities in the private sector (based on commercial wealth-creation) or it can be seen as the state’s own expenditure being returned. Given that in modern economies there is both public and commercial creation of public currency, both are true. Both circuits can be seen as creating value by providing goods and services. While the commercial sector extracts its value as price on the market, the value of the public sector is judged by the quality of its provisioning. If the creation of public currency is not through the commercial sector, money does not have to be issued as debt. Unlike the banks, publicly created public currency doesn’t have to be commodified. It can be spent or allocated as a public resource without the need to be returned (with profit). However it is not wise to create unlimited amounts of money. The public money circuit is therefore completed not by repayment of debt, but payment of taxes or fees. Tax in this case is not a fiscal instrument as in the commercial money circuit (raising taxes from individuals, households and companies for the public sector to spend) but a monetary instrument, to retrieve money from circulation that could otherwise be inflationary. This creates a very different position for the taxpayer. Instead of ‘hardworking families’ paying out their ’hard-earned money’ in taxes, they can be seen as returning money that has done its work in creating public benefit (paying doctors, building bridges, environmental work, care for the elderly).The main difference between the 7 commercial and public circuits of money is that publicly created money may be issued as debt, but bank created money can only be issued as debt. While the former can be used for social purposes on a sustainable basis, the latter must demand growth and profitability. The former can spend more money than it seeks in return (surplus expenditure), the latter always wants to receive more money than it creates.

* Rethinking Deficit

Recognising the public circuit of money puts deficit spending in a new light. Running a deficit does not need to put the public sector into the red. A deficit means that the public sector is spending more money than it is asking back in tax. How this is perceived depends on whether the source of money is seen as emerging from the public or commercial circuit of money. The role of the central bank is critical here. If the extra public expenditure is seen as being ‘borrowed’ from the central bank it will be sold on to the financial sector and added to the national debt. Seeing the central bank as exercising the sovereign prerogative to create money, would allow the additional money to circulate debt free. If the ‘deficit’ is not taxed, it can filter into the private sector and be a net gain to the economy as a whole. Quite the opposite occurs when there is the demand for the public sector to balance the books, or, worse, go into surplus. If the public sector takes more in tax and payments than it spends, it is extracting money from the economy. As Duncan argues ‘however much government spending is cut by, the economy simply contracts by that amount’ (2012:24). Far from being a problem, there needs to be a public deficit. Creation by public authorities of money that is not reclaimed is necessary, otherwise the privatised money supply will go into crisis, as a purely debt-based money supply is not sustainable. Rather than demanding an end to budget deficits, they should be seen as a key element of macroeconomic policy in creating financial stability (Arestis and Sawyer 2010). As Wray argues, ‘if government emits more in its payments than it redeems in taxes, currency is accumulated by the non-government sector as financial wealth’ (2011:7) … ‘affordability is never the issue, rather the real debate should be over the proper role of government, how it should use the monetary system to achieve public purpose’ (2011:17). Suggesting that the state should openly reclaim its money-creation power, will almost inevitably be met by the assertion that the issue of debt free public currency risks inflation. This ignores the monetary role of taxation; as Galbraith has pointed out, fiscal policy can be used to manage excess demand as well as managing falling demand (1975:306-7). If more money is issued than can be absorbed by the level of goods and services in the economy, taxation can be used to retrieve that money. Critics of states ‘printing money’ tend to ignore the inflationary pressures of the floods of bank issued debt that have led to a series of asset-price booms. Good and bad management of money can occur in both state-based and bank-based money creation. Securitising public expenditure as debt, while not fiscally necessary, does have monetary and financial uses. Its monetary role is similar to that of taxation, to withdraw money from the economy. Its financial role is as an investment. In times of 8 crisis, public debt, far from being a problem, is an essential asset for the financial sector. Following the recent crisis, investors were willing to embrace negative real interest rates for the safe haven of sovereign debt. Even bailout countries such as Portugal were able to return to the commercial markets at a reasonable rate of interest relatively quickly. Pension funds and other financial institutions rely heavily on public debt. However, selling public deficits as debt is socially unjust, as repayment of that debt falls on the public while the investments are mainly a source of benefit to the already wealthy who can directly or indirectly ‘buy’ the debt. A fairer way is to remove money through progressive taxation, particularly of capital, as Piketty suggests (2014). The choice between additional taxation or increasing national debt is highly ideological and goes to the heart of modern public finance. In the run up to the crisis there was no sense of the public sector as a legitimate creator of money or of a public money circuit. Only the commercial circuit of money figured in the dominant ‘handbag economics’. “

* The Democratisation of Money

Commentators from the left and right have largely ignored the democratic potential of money. Instead they focus on the ‘real economy’ which is generally taken to be the capitalist productive sector. Money is seen as an epiphenomenon. What money circuit theory points out is the importance of the credit circuit in stimulating the productive process. Obtaining credit gives the borrower access to goods and resources that they have not yet ‘earned’. If this is true of the commercial money circuit it is equally true of the public money circuit. The creation and circulation of public money give people access collectively to goods and services. In Marxist terms it stimulates use value rather than exchange value or more correctly it stimulates monetary exchange for use rather than monetary exchange for profit. As argued earlier, money does not represent a value in itself, it is a representation of entitlement (access to goods, services or resources) matched by an obligation on others to accept it in payment. This is true for both the public and commercial circuits of money. In the same way that the commercial money circuit enables a commercial economy, the public money circuit can enable a public economy. There is no need to invent the public circuit – it already exists. Public money free of debt demonstrably exists, as when the central bank creates money it owes it to no-one. Any decision to then issue this money as a loan is purely ideological. There is also a public money circuit of expenditure and taxation where the need for surplus public expenditure is demonstrated by the fact that most states run deficits. Conventional economics also recognises the anomalies of currency monetary theories with the epicycle–like notions of fractional reserve banking and real versus credit money. To democratise money it is necessary to expose the illogical and ideological nature of conventional thought. The public sector is not monetarily dependent on the private sector, it is the private sector that is dependent upon public money. Money is not a political irrelevance. It is also not commercial in essence. Money can be the servant, not the enemy of radical democracy. Historically its origins lie in social convention and public authority as well as commercial credit. Democratised 13 money provides the potential to organise complex, large scale economies on a collective basis without undue bureaucracy or top down planning. In my forthcoming book I discuss in detail how democratised provisioning through the use of publicly created money could be achieved (Mellor in press). As Felix Martin argues: ‘ money is the ultimate technology for the decentralised organisation of society…only democratic politics provides the sensitivity to current conditions and the legitimacy … that is necessary for money to work sustainably’(2014:272). Deficit is therefore not a deficit – it is surplus expenditure. In the absence of handbag economics, more money can be circulated than will be reclaimed. This money would be free of debt or obligation and therefore be free to circulate.

Most importantly for capitalist economies, it could provide unencumbered money to pay debts and enable the extraction of profit. Rather than privatised money being ‘made’ in the market and then (grudgingly) extracted as tax to fund the public sector, a public economy would work the other way around. Public money would be created free of debt and used to enable democratically determined public services and policies. A monetary decision would be made as to how much should remain in circulation and suitable taxes then imposed (on environmental and social principles). The private sector would then earn the remaining money in circulation by providing goods and services on a commercial basis. The commercial provision of money as debt would cease to create new public currency and would revert to what orthodoxy says banks do – act as a conduit between savers and borrowers.”

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