[This article was published in the Fall 2011 issue of The Journal of Social, Political and
Economic Studies, pp. 277-300.]
Capitalism’s Deepening
Crisis:
The Imperative of Monetary
Reconstruction
Dwight D. Murphey
Wichita State University,
retired
At one level, a world consensus has come to favor the market
economy, and yet the recurrent economic crises to which such an economy is
subject have again come to pose an ever-deepening threat to its legitimacy
(i.e., its acceptance within a society).
The Great Recession that began in 2007 illustrates, as have many crises
before it, the insufficient financial foundation that has long been questioned
by thoughtful commentators from both Right and Left. The insufficiency will become increasingly
apparent as non-labor-intensive technology continues to move the world away
from remunerated employment for many millions of people. That is the context in which this article
explores the author’s thinking about (1) the crisis just mentioned; (2) the
proposals for monetary reconstruction set forth, especially by a number of
prominent economists, in “the Chicago Plan” in 1939 and by the American
Monetary Institute today, involving a move away from fractional reserve into
full reserve banking and shifting money-creation from the banking system to a
governmental Monetary Authority; and (3) why it is desirable, indeed vital,
that the money that is created be used to establish a “shared market economy”
that will both support a vigorous market economy and establish a system of
broad income distribution. Such a use would
differ substantially from the uses (many of them highly desirable in themselves
but geared toward governmental activism) proposed by the American Monetary
Institute, which has been leading the way in support of the Plan.
Key Words: Crisis of capitalism, monetary reconstruction, Chicago Plan,
American Monetary Authority, Irving Fisher, American Monetary Institute,
Anthony Zarlenga, Dennis Kucinich, Shared Market Economy, fractional reserve banking,
full reserve banking, government creation of money.
I. Capitalism’s Expanding Crisis
Since World War II, a world consensus has come into being in
support of the market economy (i.e., “capitalism”) as by far the most
innovative and productive economic system.
Democratic socialists in Europe abandoned their opposition to the
private ownership of capital soon after the war, as we saw in Germany where in
1959 the Bad Godesberg Program made a sharp break with Marxism and public
ownership. (Later, we will see how in 1960 F. A. Hayek noted this abandonment
of strict socialism.) The collapse of the Soviet Union and its satellite
empire, and the move of Chinese and Vietnamese Communism into market systems,
contributed enormously to the world consensus.
(This is not to say, of course, that these are free markets as
envisioned by laissez-faire
philosophy, since there is most often considerable government involvement,
especially at the “commanding heights.”)
The Great Recession that began in 2007 has, however, served as a
potent reminder of a fact that serious commentators on both the Right and the
Left have long taken quite seriously, leading over the decades to an abundance
of theories about what ought to be done.
This is that market economies are prone to recurrent “business cycle”
crises – crises that always cause painful dislocations to individuals, families
and firms, and that sometimes are so severe that they threaten the continued
existence of a market system. With the
severity of the most recent collapse, it is apparent to many serious observers,
as it was during the Great Depression, that “capitalism is in crisis.”[1] In view of the world’s recent consensus in
favor of the market economy, it is perhaps safe to say that such a situation is
no longer tolerable to either the Left or the Right.
What we see is the old conundrum: dislocation, failure and much
personal misfortune at the very same time that there is immense and increasing
productive capacity. The situation is
not unlike that of a man who, in otherwise perfect health, is imperiled by a
gushing artery.
On top of the long-standing problem of the business cycle, market
economies (and indeed economies of any kind) are now confronted with a rapidly
developing force that portends a displacement far beyond anything seen
before. The wondrous new technologies,
many but not all driven by computerization, are capable of addressing human
needs and wants at heretofore undreamt-of levels. They are, however, essentially
non-labor-intensive. This means that in
the future the return from economic effort will mostly go to the owners of the
technology, not to hundreds of millions (more likely, billions) of people who
provide labor. This displacement of
remunerated employment renews in heightened form the dilemma of misfortune in
the midst of great productive capacity.
It has become imperative, therefore, that the issue of “what makes
the market economy, otherwise so innovative and productive, go so wrong?” be
brought to a head. As we will see, the
United States came close to confronting the issue in the 1930s, only to let the
moment slip away. The ideas existed for a sound, meaningful way to address the
problem, and were supported by a considerable number of prominent economists (who
included, as we will see, Irving Fisher, Henry Simons, Paul Douglas and others)
– but were never acted upon. Much of the
near-despair felt in the United States today stems from intellectual failure. There is a chaotic stew of conflicting and
radically inappropriate ideas, leading to much stridency and posturing but
little that truly meets the situation.
It is in that context, and further because of the deeper cause of
displacement from advancing technology, that there is every reason to take
advantage of the present heightened concern and to provide capitalism, at last,
with a structural foundation conducive to its stability and long-term
success.
The economists who in the 1930s proposed a renovation of that
foundation started with the insight that the monetary system is as vital to the
health of the economy as the circulatory system is to the man who would bleed
to death from the severed artery. They saw
that the United States suffered from a wildly inappropriate system of
money-creation. It was (and remains) the
banking system that brings most of the economy’s money into existence through
the mechanism of “fractional reserve” banking.
This money-creation is subject, through credit expansions and
contractions. to wide and recurrent fluctuation. Economic activity – and with it the fortunes
of industries, firms and individuals – feeds off of that money supply,
sometimes over-feeding and at other times going desperately hungry.
A leading economist of that time, Irving Fisher, wrote that “an
underlying cause (or precondition) of great booms and depressions is the 10%
system [by which he meant fractional reserve banking] itself.”[2] He was one of six economists centered at the
University of Chicago who in 1939 drafted “the Chicago Plan” called “A Program
for Monetary Reform.” In the Plan, it is
said that “a chief loose screw in our present American money and banking system
is the requirement of only fractional reserves behind demand deposits. Fractional reserves give our thousands of
commercial banks power to increase or decrease the volume of our circulating
medium by increasing or decreasing bank loans and investments.” It went on to say, in unison with Fisher,
that “this situation is a most important factor in booms and depressions.”[3] (Fisher was circumspect in adding that the
cycles might not altogether be done away with, since “little ripples” would
still be possible. But little ripples
are hardly what threatens the legitimacy of the market economy.)[4]
“Fractional reserve” and “full reserve banking” explained. Because eliminating the fractional reserve system is such a
critical element in the market economy’s structural renovation as envisioned by
the Chicago Plan and its successors, it is important to start with an
understanding of how the fractional reserve system creates and destroys money,
and of how the “full reserve” alternative works. Fisher explains it in detail, giving an
example of a banking system that starts with $1 million in capital. When this money is lent out, the borrowers
don’t pocket it, but put it back into the system as depositors. (In fact, when a loan is made, the borrower
ordinarily doesn’t receive the cash as such, but is given a credit to his
account for the amount of the loan, giving him a deposit of that amount.) This gives the system the deposits upon which
to lend the money out again, which it does, leading to more deposits and then
more loans. The cycle can continue until
the banks reach the limit of the lending that is permitted by law under the
law’s reserve requirement (of, say, 10%, which, if that’s the requirement,
means that there has to be at least the $1 million to stand behind $10 million
of deposits). The result of this process
is that the initial capital has had $10 million of spendable funds added to
it. This is the credit expansion. The money evaporates to the extent that the
banks at some point, in a credit contraction, shy away from making so many
loans. Under the fractional reserve
system just illustrated, the primary source of money-creation in the economy is
the banking system.[5]
The alternative favored by Fisher, by the Chicago Plan and others,
is “full reserve banking.” This requires
the banks to keep all of the money on hand to match any demand deposit (i.e., one, such as a checking account, where the
depositor retains the right of continued use of the money, to spend or give
away). In Fisher’s example, the banks
can lend out their capital, but can’t re-use the deposits created by the loans
to make further loans; they must keep the $1 million to match the $1 million of
deposits. In effect, the banks hold the depositors’ money in trust for the
depositors. There is no money-creation
through a multiplication of the deposits.
Time deposits, which are those
that don’t give the depositor an ability to spend the money until an agreed
term has expired, are very different from demand deposits. With them, the banks are permitted to use the
deposited money to make loans. Doing so
does not expand the money supply, because the depositor has no current use of
the money. Most people today are
familiar with this primarily in the form of “certificates of deposit,” which
represent loans for a specified period of time to the issuing bank to provide
money for the bank to relend.[6]
II. The Proposals: To Establish a Functional
Monetary Structure for a Market Economy
The Chicago Plan and that set forth recently by the American
Monetary Institute consist of three main elements:
1. Abolishing fractional
reserve banking and installing a full reserve system in its place.
2. Establishing an independent governmental
Monetary Authority (Fisher called this a “Currency Commission”) which will be
the sole source of money-creation, acting under a legally defined standard
about the extent of monetary issuance.
The creation of money will be done as an act of sovereignty, with the
money defined by law as legal tender.
The banking system will no longer be the vehicle for money’s
creation.
3. Putting the money into
circulation through governmental expenditures and loans for a number of
purposes that are thought to be desirable.
(It is here that the author of this article will have a suggestion that
is more market- and individual choice-oriented than the expenditures, many of which are highly desirable, proposed
in the American Monetary Institute’s plan now before the U.S. Congress. The latter plan of how the money is used would
lead to an enormously active federal government and perhaps through that to a
planned economy.)
We have already told in part the origin of the Chicago Plan, but
further details are in order. The
concept was first put forward in a 6-page memorandum issued by six University
of Chicago economists in March 1933.
This memo, signed by economist Frank Knight, was followed by a second
memo, signed by economist Henry Simons, that November. These beginnings came to more complete
fruition in the draft proposal “A Program for Monetary Reform” that was
circulated in July 1939. The authors of
this fleshed-out draft were economists Paul Douglas, Irving Fisher, Frank
Graham, Earl Hamilton, Willford King and Charles Whittlesey. The proposal was well received in the
economics profession, with 235 economists from 157 universities and colleges
approving it. Even though the authors
included such strong supporters of “free market” economics as Fisher, Knight
and Simons, the Program’s supporters also included prominent names from the
left side of the ideological spectrum, such as Rexford Tugwell and Gardiner
Means. Just the same, the Program was
never published and did not result in legislation. This should arguably be counted as one of the
most fateful acts of omission in American history. As the world rushed on into World War II, the
1930s crisis of capitalism receded as an object of immediate interest.
More recently, the main impetus behind the plan has come from a
dynamic advocate, Stephen Zarlenga, the author of an extended review of world
monetary history, The Lost Science of
Money, and founder of the American Monetary Institute, which has put the
proposal into the form of “the American
Monetary and Financial Security Act” (which, despite the word “Act,” is not
intended to suggest that it has thus far been enacted into law).[7] For simplicity’s sake, it is sometimes
referred to as simply “The American
Monetary Act.” U.S. Congressman Dennis
Kucinich (D-Ohio) has offered a “16-point plan for economic recovery” which
incorporates the American Monetary Act as one of its central features. Accordingly, Kucinich introduced an extensive
bill into the House of Representatives, HR 6550, on December 17, 2010, and it
was referred to the Committee on Financial Services, also known as the House
Banking Committee.
In what follows in this section, we will elaborate further on the
first two planks of the plan (full reserve banking and the government creation
of money). We will leave our discussion
of the third plank (how the money is to be spent) for a separate section, since
it deserves attention as raising issues of an entirely different kind.
The elimination of fractional reserve banking. In the American Monetary
Institute’s formulation, what we have referred to as “demand deposits” and
Fisher called “check-book money” are given the name “transaction
accounts.” The money in such an account
is held by the bank as a bailment, in trust for the depositor. No interest is paid by the bank; in fact, the
bank may charge a reasonable fee for handling the account. The form this commonly takes today is
checking accounts; the money can be withdrawn at will by the depositor, or
transferred to a payee by a negotiable instrument.
What we have referred to as “time deposits” (and Fisher called
“savings deposits”) are called “U.S. Money Accounts” by the AMI. The money is placed in the account for a
specified period of time, or is subject to being withdrawn only upon the giving
of adequate notice. The money can’t be transferred
to a third party. It is, in effect, out of circulation except for the bank’s
ability to lend the money to borrowers.
Since the deposit is for the purpose of providing the bank money with
which to make loans, the depositor will be paid interest.
In today’s system, people are accustomed to being allowed to draw
their money out of savings accounts at will, in effect treating them as
equivalent to checking accounts. Under
full reserve banking, this will no longer be the case, since the money must not
be permitted to go into dual (or multiple) use (which, if allowed, would
replicate fractional reserve banking).
Accordingly, the U.S. Money Accounts will be more akin to the
“certificates of deposit” that people are familiar with today.
Considerable attention is given by Irving Fisher in his book 100% Money, by the Chicago Plan, and by
the AMI plan to how the transition can be made from fractional to full reserve
banking.[8] The literature suggests various ways to do
it, one of which is for the Monetary Authority to provide enough of its
newly-issued money to the banks “to bring the reserves behind their demand
deposits up to 100%.” Fisher says the
money can be provided by the Monetary Authority’s “buying some of the bonds,
notes, or other assets of the banks or lending it to the banks on those assets
as security.” Stephen Zarlenga credits
Oxford professor Frederick Soddy with having conceived this method of
transition, which Soddy called “the 100% Reserve Solution.” Zarlenga observes that if the law simply
required banks to provide 100% reserves without providing them the money to do
so, “as presently being advocated by some misguided monetary reformers,” the
effect would be “a disastrous deflation, and [as a result] a repudiation of all
monetary and banking reform.”[9] In today’s economy, where banks have made so
many bad loans, an issue that will need to be addressed is whether to purchase
or loan against bank “assets” that are of dubious quality. The transition to full reserve banking may need
to be postponed until the banks’ loan portfolios are caused to be in much
better shape.
Would this pumping of money into the banks be inflationary? The authors of the Chicago Plan pointed out
in response that it would not be, since
doing so “would not inflate the volume of anything that can circulate.” Fisher agreed.[10]
At the same time that money is provided to establish the full
reserve for demand deposits, the Monetary Authority would gather in all Federal
Reserve Notes (the United States’ present form of money) and exchange them for
its own newly created money at equal face value. The result, again, would not be an increase
in the quantity of money.
It should be noted that the extent and intricacy of the world
financial system has grown in recent years to the point at which many
institutions other than traditional banks are involved in credit-creation. To the extent their activity replicates that
of fractional-reserve banking, they would need to be brought under the purview
of the plan. The manner of how that is
to be done should perhaps be left to economists who have an intimate knowledge
of the new institutions.
Establishing a Monetary Authority to create and issue money. Zarlenga’s book argues
strongly that money-creation is a prerogative of sovereignty, which he sees as
unfortunately having been delegated to the banking system. He says that “our review of Greek, Roman,
Byzantine, Venetian, Dutch, and English money, until the formation of the Bank
of England [in 1694], showed monetary control was generally either in
government or religious hands and was inseparable from ultimate sovereignty.”[11] Irving Fisher saw it the same way, asking:
“Why continue virtually to farm out to the banks for nothing a prerogative of
Government?”[12]
In his book, Zarlenga proposes “that ultimately the monetary power
should be constituted as a fourth branch of government.”[13] This would call for a Constitutional
amendment (which the author of this article has considered desirable, in any
case, as part of installing the “shared market economy” which will be explained
later here). We notice, however, that
Congressman Kucinich’s bill, HR 6550, calls instead for establishing “the
Monetary Authority as an authority within the Department of the Treasury.” In either case, the intention is that the
Monetary Authority be independent (and, under Kucinich’s version, not subject
to control by the Treasury Secretary).
Under HR 6550, it would consist of “9 public members appointed by the
president with the advice and consent of the Senate.” They would serve 6-year terms, with the terms
being staggered. (The Federal Reserve
would be retained as an agency called the “Bureau of the Federal Reserve” to
administer the law, with one of its functions being to continue as the
country’s check-clearing house.)
The government-created money is referred to in the AMI plan as
“U.S. Money,” and by Fisher in his book as “Commission Currency.” The domination as a “dollar” would continue.
An exceedingly important feature under any of the versions of the
plan we have mentioned has been to have a “governing principle of monetary
policy” defined by law, as distinct from broad powers lacking direction. The
authors of the Chicago Plan wrote that “the criteria for monetary management
adopted should be so clearly defined and safeguarded by law as to eliminate the
need of permitting any wide discretion to our Monetary Authority.”[14] The Monetary Authority would be charged with
the responsibility of acting within that
governing principle. Fisher suggested
that it would be wise to make the Authority’s members subject to impeachment if
they do not adhere to the legally-defined standard.[15]
There is bound to be much discussion by monetary experts of
precisely how the legal standard should be worded. The “governing principle” that is written
into HR 6550 is that “the supply of money in circulation should not become
inflationary or deflationary in and of itself, but will be sufficient to allow
goods and services to move freely in trade in a balanced manner. The Monetary Authority shall maintain long
run growth of the monetary and credit aggregates commensurate with the
economy’s long run potential to increase production, so as to promote
effectively the goals of maximum employment, stable prices, and moderate
long-term interest rates.”[16]
“Maximum employment” has quite naturally been a principal goal of
monetary policy in the past, and continues to be seen as such in the present,
because the great majority of people have always “earned their living” from
jobs. However, it is important to see
that it will no longer be appropriate as technology continues its inexorable
march toward job displacement, even during periods of boom. We might expect that the “maximum employment”
feature will rather soon be recognized
as obsolete, subject of course to the mental inertia that will cling to
established expectations. The rest of
the governing principle just quoted would seem suitable, and fits well into the
proposal for a “shared market economy” which we will examine in the next
section.
The arguments pro and con. The fact that so many leading economists in
the 1930s favored the Chicago Plan may make it seem uncontroversial. That impression would be seriously mistaken,
however, since any proposal for monetary restructuring runs into at least three
major obstacles: (1) the social, political momentum that is bound to come from
people’s being accustomed to the existing banking system, which they will be
inclined to see as immutable; (2) the opposition that may well come from the
existing banks and financial system, whose members are likely (whether
justified or not) to see the proposal as threatening their own interests; and (3)
the presence of a number of passionately embraced economic theories that have
different insights into what is needed and, as we will see, some highly
significant concerns about the Plan .
Accordingly, the “pro’s and con’s” must be weighed carefully.
In recent years, the free-market Austrian School of Economics has
surged into prominence in the context of world free trade, taking a leading
role in today’s prevailing global economic ideology. The Chicago/AMI plan fits well into one
central aspect of the School’s thinking: its long-standing perception that the
credit expansions and contractions arising out of fractional reserve banking
are the principal cause of booms and busts.
The late Murray Rothbard, one of the pillars of the Austrian School,
considered fractional reserve banking a form of fraud, and hence something that
the law even in a laissez faire
system should prohibit.[17] The author of this article studied under
Ludwig von Mises of the Austrian School in the mid-1950s, and did so (before
going on to law school) primarily to satisfy his urgent need to know whether
the proponents of a market economy knew of a satisfactory solution to the
business cycle threat to its existence.
Although he heard of the 100% reserve idea, he didn’t become aware of the
proposal to treat money-creation as an act of sovereignty properly placed in
the hands of government. The reason he
didn’t, he supposes, is that the Austrian School has had an abiding distrust of
government. This has led the School down
other avenues, such as to the gold standard and/or “free banking.” The distrust of government trumped a fairly
obvious solution to the monetary problem – so much so that for many years this
author never heard of the Chicago Plan.
If anything, the distrust has heightened, so that it is a major feature
of the thinking on the American Right.
The reasons for doubting
the trustworthiness of “political money” are summarized well by Kevin Dowd in
his book The State and the Monetary
System.[18] He quotes Milton Friedman’s sensible
observation that a reasonable commentator will suppose that “if only we tell
them [the monetary authorities] what to do, then there’s no reason why able,
well-meaning, well-intentioned people should not carry out those ideas. But then we discover, over and over again,
that well-intentioned, able people have passed laws, or have established
institutions – and lo and behold, they don’t work the way able,
well-intentioned people expected or believed they would work. And it isn’t an accident that it happens. It happens for very systematic, explicit
reasons.”
Dowd sees these systematic reasons as including “an internal
threat” that “there is no guarantee that the people controlling the central
bank [i.e., the Monetary Authority] will promote the social interest.” They may well “put their own interests
first.” We are struck by the possibility
that this could very well happen, especially in our contemporary society; in
the lead-up to the recent financial crisis, there was a well-nigh ubiquitous
culture of self-serving venality in which “putting your own interests first”
supplanted any sense of trusteeship or consciousness of systemic
well-being. We are not well positioned
to have faith in the objectivity and public-spiritedness of even the most
prominent people. Even the possibility of corruption is not entirely to be
discounted. We should perhaps add that the members of the Monetary Authority will
lack the spur of possible personal financial loss, which is something that is
no doubt keenly felt by bankers who face bank failure. If they perform poorly, the members will
primarily face harm to their reputations.
Dowd also sees “external threats”
that “come from politicians and interest groups seeking to use monetary policy
for their own ends.” He says “the
historical tendency is for constraints against intervention to break down under
the pressure of these vested interests.”
Again, contemporary American culture reinforces such concerns, since the
political system seems almost entirely in the hands of money, pressure groups
and special interests. Unless the
Monetary Authority is effectively insulated from such pressures, including the
calls that often arise in a democracy for an inflationary policy, adherence to
the statutorily defined principle will likely prove evanescent. This suggests that full consideration must be
given to how to assure such insulation.
Zarlenga, on the other hand, gives extended treatment in his book
to the episodes in American history when government has done the
money-creation. He is stout in his
defense of the Continental currency issued by the American colonies during the
American Revolution: “We saw many examples of the colonial governments’ paper
money working well… [T]he colonies never issued more currency than was
authorized by their legislatures.” What
led to the expression “not worth a Continental,” he says, was egregious British
counterfeiting, designed to destroy the American currency.[19] Further, he points to the periods 1812-1817
and 1837-1857, periods of government-created money, as “excellent.” Then in 1862 the U.S. Congress passed the
“Legal Tender Act” providing for the issuance of fiat money that was declared
to be legal tender. The result was the
“Greenback period” (the Greenbacks were also called “Legal Tender Notes”). U.S. Congressman Ron Paul has criticized the
Greenbacks because Congress expanded the initial issue considerably under the
pressure of paying for the Civil War, thus depreciating it. Zarlenga, however, points out that the Treasury
held true to the amounts legislated by Congress, and that “the Greenbacks
demonstrated that government-issued fiat money served the commercial,
industrial and fiscal needs of the nation even in the middle of warfare.”[20] In all, Zarlenga says “government has a far
superior record in issuing and controlling money than the private issuers have
had.” He says a “false specter of
inflation is always raised” against government-created money, observing that
“inflation is avoided because real material wealth has been created in the
process.”[21] The runaway German inflation of 1923 is often
cited in support of this “specter of inflation,” Zarlenga says, but “it was a
privately owned and privately controlled central bank” [the Reichsbank] that
fed “private speculators” as they “speculated against the nation’s
currency.” He observes that “currency
speculation on a scale large enough to affect the currency’s value is still
erroneously viewed as a legitimate activity,” and urges that limits be placed
on currency speculation that exceeds what is needed to serve normal business and trading needs
(which are to have a hedge against risk).[22]
It is worth noting that the pull toward an abuse of government
money-issuance to produce economic expansions will be far less if the money
that is created goes toward funding a “shared market economy” than if it is
spent directly on an array of public projects and social-welfare measures. The latter will set up a continuing clamor
for more, a clamor that anyone who wishes to succeed in politics will find
almost impossible to resist. If, on the
other hand, the money goes into the purchase of index mutual fund shares to
finance the broad array of economic enterprises, and the profits from those
shares are used to underwrite the incomes of a population that can spend that
income as the individual recipients choose, which is a brief description of the
“shared market economy” concept, the result will not be the encouragement of
countless benefit-seeking groups.
The debate about whether a Monetary Authority can be trusted is
bound to rage around any proposal such as that of the Chicago/AMI plan. We can’t hope to exhaust it here. Two things do seem apparent, however, and in
this author’s opinion cast the weight, when taken on balance, in favor of the
plan:
(1) That there is indeed reason to keep a jealous eye on how the
Monetary Authority performs (and although there will be pressures to cause it
not to be faithful to its statutorily-defined governing principle, there will
also be many who will give it critical scrutiny precisely to hold it to that
standard). What will be needed will be a
strong ethos, indeed a consensus, that the governing principle be adhered to. If the proposed plan is adopted, continuing
efforts should be made to fashion and maintain such a consensus and to insulate
the members of the Monetary Authority from extraneous pressures.
(2) That, just the same, it has now been demonstrated for the
umpteenth time that the alternative – the present system of fractional reserve
banking with its bank creation of the money supply – is clearly not tenable as
a foundation for a market economy. Those from any persuasion, Right or Left,
who support a market economy must seek an alternative. Certainly, people who
most passionately support capitalism should do so. This trumps the need to
distrust government, especially if we realize that capitalism has never been
wisely conceived as a lawless, institution-free system; sometimes those of a
more “libertarian” bent don’t fully realize that a market economy requires a
framework suitable to itself. The
needful functions of government are important, even essential; and concern
about the abuse of government ought not to prevent the performance of those functions. And still another point deserves mention:
some free-market advocates accept trade cycles as normal to the market, and
give little emphasis to the misery they produce. We would hope that libertarians will come to
see that this view ill-serves the future prospects of the market economy, since
it allows a recurrent falsification of the good-faith reliance that millions of
people repose upon such an economy.
There is, of course, much more to say about the advantages and
disadvantages. One enormous advantage is
that money would no longer represent debt owed by the government, but would
simply be money in itself. From the AMI:
“As the late Congressman Wright Patman, Chairman of the House Committee on
Banking and Currency for over 16 years, said, ‘I have never yet had anyone who
could, through the use of logic and reason, justify the Federal Government
borrowing the use of its own money.’” It will be possible to retire all U.S.
indebtedness, removing a major item from the federal government’s annual budget
(in 2007, the AMI tells us, the interest cost on the national debt was $465
billion, 17% of the year’s budget). The
national debt has become a major focus in American domestic politics.
Another is that the political and financial power of banks and of
other institutions performing bank-like functions will be vastly reduced. This is saying a lot in the context of the
recent financialization of the American economy and the role that money and
interest groups play in the U.S. political system. The long-existing centrality of “the money
power’s” influence is a major reason the fractional reserve system has been
kept in place.
An advantage of great importance is that a clear stabilization of
the money/banking system will give other countries reason for renewed
confidence in the dollar, and hence will strengthen the position of the dollar
as the world’s reserve currency.
A matter that deserves consideration is whether the plan would
cause any adverse repercussions on the international scene. It is perhaps significant that the many
economists who favored the Chicago Plan did not think it necessary even to
consider this possibility, apparently thinking it of negligible importance. Indeed, it is difficult to see why a stable
monetary/banking system would not better serve global finance than the present
system of incredible leverage expansion and contraction. There is, however, bound to be much future discussion
of the implications of the plan, and such discussion is to be encouraged.
In 100% Money, Irving Fisher spent several pages listing the
advantages and responding to objections.[23] Among the advantages we have not mentioned so
far are: “There would be practically no more runs on commercial banks.” “There
would be far fewer bank failures.” “Our
monetary system would be simplified [and] banking would be simplified.” When he addressed the objection that there
would be a curtailment of lending, he
said that “in the long run, there would probably be much more money lent; for
there would be more savings created. The
only limitation on bank loans would be… that no money could be lent unless
there was money to lend.” Rothbard
responded to this objection along the same lines.[24] Would bankers be injured? No, Fisher said, because “they would share in
the general benefits to the country resulting from a sounder monetary system
and a returned prosperity…[and] they would be almost entirely freed from risk
of future bank runs and failures.” He
anticipated that bankers would oppose the plan, but he argued that if they were
to look at their interests dispassionately, they would find the plan conducive
to their profession’s long-term well-being.
Would the plan constitute a nationalization? Of money, yes; of banking, no. In his
book-length discussion of the history of money, Zarlenga analyzes various
concepts that have, in his view, led the world astray in understanding both
money and banking. He says that “the way
one defines money will determine who controls the money system.” One idea about the nature of money is that
money should take the form of a commodity, such as gold. This deviates substantially from Aristotle's
observation, with which Zarlenga agrees, that “money exists not by nature, but
by law,” being an attribute of sovereignty.
Another idea is that money is debt, in which case it will be controlled
by bankers. A third is Keynesianism,
which sought to work within the system but in doing so failed to see the
obvious advantages of returning money-creation to government. And Zarlenga sees chronic weakness in the
sort of “free banking” proposed by some libertarian economists, who believe
that market discipline and concern for reputation will, in a laissez faire context toward banking,
channel banking into sound operation.
[This expectation is the same as we saw before the Great Recession in
the consensus supporting “efficient market” theory.] Contrary to such an expectation, Zarlenga
says that “they don’t consider that often in the short term the potential for
loot is so great that it will be taken without regard to honesty. They also ignore that reputation can be
influenced by public relations expenditures and advertising.”[25] As an attorney, the author of this article
has for many years seen the countless abuses that occur in the
home-construction industry (which is a model of virtually pure laissez faire, subject to almost no
regulation), where the market definitely fails to weed out the crooks and
incompetents.
III. The Difference Between
the AMI Plan and the “Shared Market Economy” Proposal
The idea of a “shared market economy” has been put forward by this
author in articles in this Journal and
in his book The Shared Market Economy
which has been published to his website.[26] It is summarized, perhaps most conveniently, in Chapter 17 of
his book The Great Economic Debacle – and Beyond.[27] (The idea is not original with this author,
since others have thought of something quite similar.[28]) As indicated earlier,
the proposal grows out of the realization that remunerated employment will
continue to become less and less available as the way for people to receive
their livelihood. Even though the
non-labor-intensive technology will offer splendid productive potential, that
potential will (1) not be sustained by mass demand, and (2) millions of people will suffer distress,
inevitably (3) putting great stress on the political/social/economic system,
unless there is a way both to keep the market economy vibrant and to distribute
the immense productivity to the population.
The “shared market economy” accordingly proposes having a governmental
monetary authority pump money into an independent agency that will invest the
money in “index mutual funds” (i.e., private funds that in turn invest in firms
according to their proportion in the market).
This would make the funds originating from government money-creation a
principal, although not the only, source of money for business investment and
operation; at the same time, the earnings from the fund shares that are
realized by the independent agency would constitute the money that the agency would
distribute to the population. (These
earnings would amount to much of the profit made by the firms in the
market.) It would not be a “guaranteed
annual wage” system, since the incomes will grow with the advancing
productivity of the technology. (They
could decrease, but that is unlikely in a system where booms and busts are
greatly mitigated, as they will be if
the Chicago/AMI plan is implemented.)
Under this proposal, the money created by the Monetary Authority would
mostly go toward the support of business and of earnings distribution, although
it would be essential first to use the money to make the transition from
fractional reserve to full reserve banking, and highly desirable then to pay
off the national debt.
This differs meaningfully, as we have said, from what is proposed
by the AMI/Kucinich plan, which would have the money go toward a broad array
of projects, many of them very socially
beneficial (although the desirability of a given project would be subject to
debate, as it is today). Among the
projects mentioned are universal health care, universal pre-schooling and
college education, funding for the states, covering the deficits in Social
Security and the other entitlement programs, and rebuilding America’s physical
infrastructure. More broadly, the
expenditures are to be for whatever Congress decides is “for the general
welfare.” Far from “starving the beast”
(i.e., the federal government) as many limited-government proponents have
sought, the plan would provide the federal government with abundant resources. By contrast, the “shared market economy” plan
would feed the newly created money to business in a neutral way through index
mutual funds and to citizens to spend according to their own choices. Spending by the federal and state governments
would have to be funded, as they are today, by taxation.
What needs to be seen is that the “shared market economy” idea
invokes market-originated productivity, on the one hand, and each citizen’s
individual choice of expenditure of the income he receives, on the other. It is very much a “libertarian” (although
this author thinks of it more as a “classical liberal”) idea. The AMI/Kucinich plan as now formulated
places government at the heart of the money’s use. Depending upon how American society evolves,
doing so can be consistent with individual liberty – or lead to very serious
violations of it.
Which of the tendencies just referred to would prevail?
In his book The Constitution
of Liberty, F. A. Hayek argued that “there is undeniably a wide field for
non-coercive activities of government” and that “there is no reason why the
volume of these pure service activities should not increase with the general
growth of wealth. There are common needs
that can be satisfied only by collective action… We must recognize that, as a service
agency, it [the state] may assist without harm in the achievement of desirable
aims which perhaps could not be achieved otherwise.” He makes an excellent discussion of the
nuances of this in Chap. 17 of that book.[29] Such consistency with individual liberty is
possible if Congress simply provides money for various purposes that have
little or very little of what we might call “directive” quality. By this, we mean providing money while
leaving it up to the recipient as to how it is spent. For example, “funding of state governments”
is consistent with true federalism if the federal government leaves it entirely
to each state as to how it spends the money.
To the extent, on the other hand, that strings are attached and mandates
made, the states become instrumentalities of the federal government. A universal health plan that would provide
money to individuals who could then decide how it was spent on health services
would leave individual choice intact, and even unleash competitive market
forces to attract people’s health-care dollars; but one that directed what
services were to be performed, and/or by whom, would not. (The same goes for education.) One might think that spending for
infrastructure improvement would be neutral, but that isn’t necessarily so,
since decisions need to be made about what infrastructure is to be
expanded. Years after the Eisenhower
interstate highway system was built, it has become apparent that it pointed
American society in the direction of motor vehicle use rather than rails and
public transportation. This illustrates
that even infrastructure spending has long-term society-forming choices built
in. That this is so does not itself
point to infringements on personal liberty, but it does point to the central
role that government may well assume.
Threats to individual liberty can come in several ways.
The one that has most commonly worried the millions of Americans
who have sought “limited government” has been that government, by its very
nature, just “tends to expand.” One
thing piles on top of another, and the constituencies calling for more, both
inside government and outside, become more powerful. Moreover, the agenda of the past century’s
American “liberalism” has been an ever-present call for additional government The AMI/Kucinich plan, as it now stands, fits
into that mold.
At one time there was a conscious socialist movement calling for
the government ownership of the “means of production” and wanting “central
planning.” Hayek observed as early as
his 1960 book, as mentioned above, that this had gone into disrepute. It is, accordingly, not the threat to
personal freedom that it was, say, in the 1930s when the pages of The New Republic, for one, trumpeted it.
What seems to this author to pose the greatest threat to personal
freedom in American society today comes from another source – the propensity
for ideological absolutism, the most
compelling of which comes from the main opinion-making
academic-professional-business elite.
Once something is introduced as desirable, it is quite soon given the
mantle of a moral truism. Anyone who
takes exception to it is, then, detestable as morally aberrant. In Democracy
in America, Alexis de Tocqueville wrote of the ubiquitous tyranny of the
majority. But today we see something
rather different than that; it is a mental strait-jacket imposed from above and
embraced by an acquiescent population.
When ideological or religious enthusiasms arise outside the elite we
have referred to, such as we see in the opposition to abortion, their role may
be significant, but they are nevertheless peripheral, almost never
prevailing.
If a vast program of federal governmental expenditure comes to be
guided by the enforced-from-above consensus, which it almost certainly will be
in today’s America, the effect can be disastrous to individual liberty. This will be of little concern to those who
understand the consensus to represent the highest morality, and accordingly discount the very existence
of those who dissent; but those who see their highest value in personal freedom
will have much reason to prefer the “shared market economy” with its neutral funding
of business and individual autonomy.
Even where there is such autonomy, the moral absolutes will continue to
establish the public mindscape and thereby determine the direction that
people’s personal choices take. But at
least those absolutes won’t be backed by hundreds of billions of dollars.
One can hope that these
considerations will receive careful and perhaps sympathetic attention from
Anthony Zarlenga, the American Monetary Institute, Dennis Kucinich and all
those who otherwise come to see the wisdom of the Chicago/AMI plan. Many of the public purposes they wish to see
supported will certainly be possible under the “shared market economy”
alternative, since a vibrant economy and general income distribution will make
considerable resources available.
Any legislation on this subject will, it is hoped, be preceded by
much careful consideration of the concepts involved. An article such as this one, in an academic
journal, is intended to contribute to that discussion.
No matter how well the plan is worked out, it would be less than
realistic to suppose that there will not be much that will stand in its
way. The lethargy of what’s customary
will be a sizeable obstacle, but that will in all likelihood not be as great an
obstacle as the opposition of those within the world financial system who see themselves
as profiting from the current system. It
may take a crisis far beyond the current one to spur action or even so much as
serious thought about an alternative to the existing financial structure. Let’s hope not.
[1] Notice, for example, the reference to this crisis in the titles of some recent books: Richard Posner’s The Crisis of Capitalist Democracy, Pat Choate’s Saving Capitalism, and John Bogle’s The Battle for the Soul of Capitalism. These are all by commentators sympathetic to a market economy.
[2] Irving Fisher, 100% Money (New York: Adelphi Company, 1936 revised edition), p. 120.
[3] See the Wikipedia entry for “A Program for Monetary Reform,” at http://en.widipedia.org/wiki/A_Program_for_Monetary_Reform, pp. 5 and 14.
[4] Fisher, 100% Money, 134.
[5] See Fisher, 100% Money, pp. 36-41 for his more complete statement of the illustration.. The Austrian economist Murray Rothbard gives a similar illustration in his Man, Economy, and State (Princeton: D. Van Nostrand Company, Inc., 1962), pp. 705-709.
[6] The “full reserve system” is explained on pages 15 and 18-19 of “A Program for Monetary Reform” (see footnote 3 here).
[7] Extensive information about this entire subject and about the AMI proposal is available on the Web from the American Monetary Institute.
[8] Irving Fisher, 100% Money, p. 9; Sections 301 and 302 of the AMI Plan that is available on the Web at the AMI site; and page 16 of the Chicago Plan as it appears in the copy referenced in Footnote 3 here.
[9] Stephen A. Zarlenga, The Lost Science of Money: The Mythology of Money – The Story of Power (American Monetary Institute).
[10] Fisher, 100% Money, p. 15.
[11] Zarlenga, Lost Science of Money, p. 433.
[12] Fisher, 100% Money, p. 19.
[13] Zarlenga, Lost Science of Money, p. 657.
[14] See pages 9 and 10 of the Chicago Plan as set out in the source cited in Footnote 3.
[15] Fisher, 100% Money, p. 213.
[16] See Sec. 302 of HR 6550.
[17] Rothbard, Man, Economy, and State, p. 702.
[18] Kevin Dowd, The State and the Monetary System (New York: St. Martin’s Press, 1989), pp. 179-185. The quote from Milton Friedman is on page 182.
[19] Zarlenga, Lost Science of Money, Chap. 14, and page 434.
[20] Zarlenga, Lost Science of Money, p. 477.
[21] See the statement by Zarlenga in the AMI’s paper “Presenting the American Monetary Act,” p. 3.
[22] Zarlenga, Lost Science of Money, Chap. 21, especially 575, 586, 587.
[23] Fisher, 100% Money, pp. 11-18.
[24] Rothbard, Man, Economy, and State, p. 708.
[25] Zarlenga, Lost Science of Money, p. 444.
[26] For a hyperlink to the book, see the first paragraph of the site at www.dwightmurphey-collectedwritings.info
[27] Dwight D. Murphey, The Great Economic Debacle – and Beyond (Washington, D.C.: Council for Social and Economic Studies, 2011). This book may be ordered through Amazon.com or from the publisher at 1133 13th Street, NW #C-2, Washington, D.C. 20005.
[28] Most notable, perhaps, is Major Clifford Hugh Douglas in the early twentieth century; see page 156 of my book The Great Economic Debacle – and Beyond. Jeff Gates’ book The Ownership Solution: Toward a Shared Capitalism for the 21st Century (Reading, MA: Addison-Wesley, 1998) proposes a plan similar to, but not identical to, that which the present author favors for a “shared market economy.” Irving Fisher suggested a “social dividend.” The mention of these authors is by no means meant to be exhaustive.
[29] F. A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), pp. 257-259, and all of Chap. 17.