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A definitive solution to the debt crisis
Carmine Gorga
Like the glass ceiling, the national debt is a crystal ceiling that one can see; yet, countervailing forces deny its very existence. Worse. Being a crystal ceiling, words do not help to define the problem and solutions multiply.
It is true that national budgets are not the same as family budgets. The reason is that the government can create money. But on which basis does this happen; is it truly thin air?
Together with Stuart Weeks, I was sitting down with Professor Galbraith once. Soon after he coiled down to kindly try to reach my height, I told him that one of the fundamental rights to which my research pointed is the right of access to national credit.
“What do you mean by national credit,” he asked in his gravelly voice. Keep in mind that he had just republished a book titled Money. I was truly scared. If he does not know what national credit is, who will ever understand?
I said, “But Professor, National credit is the power to create money.”
“I like the direction of your thrust,”he thundered back.
That is the basis on which money is created: national credit; we must be clear about that. And we must be clear that the value of national credit is created not by the glitter of Wall Street but by the blood, sweat, and tears of all the people of the nation; indeed, we must also be clear that, since over 70% of the value of the gross national product is given by the value of consumer goods, then the poor contribute to that value with mouths to be fed and backs to be clothed.
And this is not enough yet to understand basic monetary issues, because, strange as it might seem to the uninitiated, economists do not know what money is. If you go to the economics textbooks, you do not find a definition of money; you immediately plunge into the discussion of the functions of money. The discussion is so fast and intriguing that you cannot possibly realize you are in unknown territory.
The light comes, not from economics, but from the law. And economists, in search of pure science, do not commingle with lawyers and political scientists. But then they end up talking to themselves, and economics, as widely realized today, becomes irrelevant!
More precisely, it is not economics, but mainstream economics that is irrelevant—as I analyzed in a paper published in 2008 in Forum for Social Economics. There I also pointed out how “to return relevance” to economics.
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The key point is that money is a legal institution. Money is a claim on wealth. A dollar bill in my pocked is not wealth in itself, but a claim on real wealth in your hands. The moment of truth occurs when you and I decide to exchange one for the other.
That is the fascination of the market for economists; but they are a bit premature in their exultation. They fail to realize what happens before and after the moment of the exchange. All that is considered in Concordian economics, a paradigm that provides a new atlas to navigate our perilous economic waters.
In Concordian economics, all starts with Mother Nature, as ecologists know. But then they fail to realize that Mother Nature never works alone. She works with the Monetary Authority. And there economists and ecologists will eventually meet.
But we are not there yet. We need to know precisely what the Monetary Authority does and what it should do. That is what Norman Kurland and I started to look into far away 1987. Working out some key implications of Louis O. Kelso’s thought, we started designing a “True Golden Standard.”
The Gold Standard is what some economists are still searching for. Clearly, it would be nice to have an objective standard to guide our actions. Yet, this is an illusory understanding of economics. And it is also quite retrogressive because it fails to acknowledge the failings of the Gold Standard. The price of gold goes up and down. And the Gold Standard led to one crisis after another.
But there it is. The light is scattered in all directions and some people are even led to believe that the Monetary Authority can do anything. As Keynes pointed out, we are in a world in which “nothing is clear and everything is possible.”
There are some people so far into the future they believe that the government can mint a $1 Trillion platinum coin through which we can start going through the debt ceiling without bashing our heads too badly. Other people have gone back to the issuance of Colonial “scrip.” In between these two extremes there is the call to the Federal Reserve System (the Fed) to create as much money as necessary. But necessary for what? Amidst great resistance, some want to give the government power to monetize its debt, power to cover the expenses of the government—up to covering the national deficit—by creating money. This policy goes under a variety of names, the most common of which today is Modern Money Theory (MMT). This is granting the government unlimited power to create money.
The Golden Standard is the golden mean. It creates a balance between the issuance of money and the creation of real wealth. The search for this balance creates an automatic restraint on the otherwise unrestrained power of the Monetary Authority.
Here is the gist of the Golden Standard. Limits to the creation of money by the Fed were not clearly spelled out in its constitutive Act of 1913. Limits must be clearly spelled out now through internal administrative powers of the Fed or through legislative powers of the US Congress. They are as follows:
First. New money must be issued exclusively for the creation of new real wealth—neither for the purchase of financial assets nor for the purchase of consumer goods or goods to be hoarded.
Second. New money must be issued as a loan, not as a grant, with interest at cost of administering the loan.
Third. Since national credit is a common good, the issuance of such loans must benefit the entire population, a goal that can be reached by issuing loans to public agencies that create real wealth such as roads and bridges, to individual entrepreneurs as well as to cooperatives and mutual institutions, and to corporations that establish Employee Stock Ownership Plans (ESOPs).
If money is created within these limits, no organization will grow too-big-to-fail—and no threat will ever again arise against the stability of the monetary system. Hence, no bailouts would ever become necessary again.
Since the initiative to create money resides with the people who need a loan for capital expansion and job creation, this is not Trickle-Down but Bottom-Up monetary policy. It respects the American, rather than the European, conception of money. Money is created, not by private banks, but by the Central Bank as an asset—not as a debt—on the basis of the power of national credit.
Earlier versions of this essay were published in the Gloucester Daily Times of 24 January 2013 and Cape Ann Beacon of 1 February 2013.
Carmine Gorga, PhD, a former Fulbright Scholar, is president of The Somist Institute, a research organization in Gloucester, Mass. Through The Economic Process, To My Polis, and numerous other publications in economic theory and policy, he has transformed economics from a linear to a relational discipline. To bridge the gap between theory and policy, see his forthcoming What is at Stake: Recovery in Six Months or Ten Years. Dr. Gorga blogs at www.a-new-economic-atlas.com and www.modern-moral-meditations.blogspot.com.