Wednesday, 2 July 2014
Randall Wray’s latest ideas on debt-free money.
Randy’s latest article on full reserve, Positive Money, etc is entitled “Debt-free money: a non-sequitur in search of a policy”.
The University of Missouri at Kansas City blog where the article appears often doesn’t publish all comments that are critical of their articles, which is one way of – er – “winning the debate”. Or perhaps they don’t publish all my comments because I leave too many. Whatever the reason, I’ll deal with Randy’s article here. The article is about 3,500 words: too long to reproduce here. However, the article boils down to a few very simple points, so I’ll summarise and deal with those points, and deal with a couple of mistakes in the article.
Randy’s first mistake is where, in reference to Positive Money’s proposed committee that decides on stimulus and how much money to create and spend into the economy, he says, “Second, I like highly decentralized and mostly small, heavily regulated and supervised, community lenders making decisions over how much lending and whom to originate loans for.”
Well that’s exactly what advocates of full reserve, Positive Money included also advocate! At least they have no objection to lending in town X be decided for the most part by the banks which have a presence in that town. Randy seems a bit confused as to what full reserve consists of.
Is base money a debt?
Next, Randy expends about 2,000 words making the following points. First, commercial bank money is a debt. Indeed we’re all agreed on that. That is, as MMTers themselves often point out, commercial bank money nets to nothing. That is, for every dollar of such money, there is a dollar of debt . Positive Money also constantly bangs on about that point.
Second, Randy claims that base money is also a debt in that it can be used to cancel out an equal and opposite debt: taxes owed to government. As he puts it, “If you cannot redeem the token for . . the taxes you owe, why would you want it?”
Thus, so he claims, there is no such thing as debt-free money. Well the flaw in that argument is that THERE IS a reason for people wanting to hold the state’s money other than for the purposes of paying taxes: it’s the simple fact that money is useful stuff. It’s useful for doing business.
That is, if government demanded no taxes at all, there’d still be a demand for its money because (to repeat) money is useful. And with a view to making sure its money was the dominant form of money, government could make its money the only form of legal tender (something governments actually do in the real world).
Conclusion so far: base money can be regarded as a debt, but it’s equally legitimate to regard it as being debt-free.
Indeed there are several examples, real or hypothetical, where base money is debt free. On a desert island where cowrie shells were the accepted form of money, that money would be debt-free. Same would apply in an economy where gold coins were the accepted and dominant form of money (assuming the face value of the coins was equal to the value of the metal content).
Abolish government debt?
The final mistake of Randy’s that I’ll deal with is where he says “The “debt-free money” cranks seem to hate payment of interest by government.”
Now that’s news to me. Positive Money certainly wants to see the national debt reduced, but that’s hardly a controversial idea. Everyone from the IMF to the OECD to Rogoff and Reinhart wants likewise.
Incidentally the MMT take on that point is much simpler and at the same time more sophisticated. MMTers claim that “private sector net financial assets” (which consists of base money plus national debt) should be enough to induce the private sector to spend at a rate that brings full employment. Ergo reducing the debt for the sake of reducing it is daft. And as to how much PSNFA should consist of debt vis a vis base money, that’s a subsidiary point. But that leads nicely to my next point.
Even if the “monetary cranks” do “hate payment of interest by government”, they’re not alone. A leading MMTer, Warren Mosler, also advocates a system where government does not pay interest: i.e. doesn’t have any debt. See 2nd last paragraph here. And incidentally Milton Friedman advocated the same – see para starting “Under the proposal..”, p.250, here.
So (to repeat) even if those Positive Money “cranks” do “hate payment of interest by government”, they’re not alone in that hatred.