Mohandas Gandhi once gave a useful summary of the political process: “First they ignore you. Then they laugh at you. Then they fight you. Then you win.” Each tactic will be used for as long as it remains effective. After all, why would your opponents pay you the compliment of acknowledging your arguments unless they absolutely have to? The appearance of jokes, then, is often a significant moment. It marks the point where the first line of defence has collapsed.
Before the financial and economic crisis, there weren’t many people interested in talking about the mechanics of money creation and hardly anyone paid them much attention. Since then, the world’s central banks have bailed out the financial sector with money whose origins were mysterious to most people, the Federal Reserve has launched three rounds of quantitative easing and the Bank of England has apparently thrown caution to the wind in its efforts to fend off a deflationary spiral.
The recent flurry of interest in the trillion dollar coin is a sign of how far we’ve come. In the summer of 2011, Jack Balkin came up with an apparently wacky idea. He suggested that the American government could circumvent the debt ceiling by issuing a trillion dollar coin and depositing it at the Treasury’s account at the Federal Reserve. The money could be used to meet the government’s outgoings without any increase in borrowing. This last debt ceiling crisis has put the issue back on the table.
A new discussion
Imperious silence about the mechanics of money creation no longer cuts it. Too many people have begun to ask questions about where money comes from, and why exactly some banks are too big to fail. Still, we are some way off the moment when a serious discussion of money will become possible. The present arrangements can only survive for as long as they remain undisturbed by general comprehension. Once we can think clearly about money, the game will be up for everyone who benefits from the current distribution of risks and rewards. This is something that the powerful have good reason to prevent, if they can.
|Counting the Cost
Beyond the fiscal cliff
So here come the jokes. Jon Stewart on the Daily Show hooted at the very idea of a trillion dollar coin: “I am not an economist, but if we are just going to make s— up, I say go big or go home – how about a twenty trillion dollar coin?” Stephen Colbert came up with “we should have known a coin was Obama’s solution to everything. It was right there in his slogan: ‘Change’.” Last week America’s big league satirists were serving up the next best thing to silence – the sound of high status laughter.
The journalists were at it, too. Heidi Moore over at the Guardian called it “an elegant solution – if you are a cartoon villain given to sitting in a vast underground bunker and innovating plans for world domination while petting a white cat”. Paul Vigna finished his blog at the Wall Street Journal with the warning that “if printing, or minting, money was a real solution to a nation’s problems, Zimbabwe would be an economic superpower”. Hilarious stuff.
Moore also made what she thought was a serious objection to the idea of a trillion dollar coin: “The US mint probably doesn’t have the capacity to create one out of real bullion”. This was one of those illuminating moments when the Guardian and right-wing cable news were of one mind. Last week, Fox News told its viewers that a trillion dollar coin would weigh as much as 89 blue whales. And how silly would that be! Except coins don’t have to be made of precious metal to be worth money, any more than dollar bills needs to be made from pixies’ petticoats.
Moore had the sense to acknowledge that, yes, “the mint could, on the direction of Treasury, just make a platinum-finished coin that bears the face value of $1tn”. But, she insisted, that “would just create a nonsensical level of inflation in the value of the US dollar”. Funnily enough, both she and Vigna were wrong about that. Paul Krugman points out that “printing money isn’t at all inflationary under current conditions – that is, with the economy depressed and interest rates up against the zero lower bound”.
“When confidence collapses the government steps in to prevent a disaster. In the confusion the bankers run off with the loot and, after a brief pause, start calling for governments to take action to reduce their unsustainable debts.”
There are more problems with the idea that increasing the money supply is inflationary than Krugman wants to admit. Banks effectively print money when they issue loans. In other words, the financial sector is responsible for the creation of most of the money in circulation. To put it in terms familiar to Jon Stewart, banks make money up as they go along – trillions of dollars of the stuff. As the level of debt increases, so does the money supply. This can happen for long periods without any noticeable impact on the price of goods. The credit bubbles in the United States and the United Kingdom inflated at a time of persistently low inflation.
Onto a different model
So why do we let banks lend our money into existence and charge interest into the bargain? In theory, the profit motive makes bankers think carefully about who they lend money to and why. Productive enterprises and canny entrepreneurs will get the funds they need and the economy will grow. It’s a lovely idea. In the real world banks prefer to lend money against real estate and other speculative assets. As long as the supply of credit increases, prices rise, interest payments are met and bonuses are paid. Everyone is a genius. When confidence collapses the government steps in to prevent a disaster. In the confusion the bankers run off with the loot and, after a brief pause, start calling for governments to take action to reduce their unsustainable debts. Hence cuts in government expenditure.
The record shows that banks aren’t terribly good at managing the money supply. Perhaps it’s time to think about an alternative model, where those ultimately responsible for liabilities in the financial system determine where credit is allocated. That is to say, the citizen body as a whole decides what kinds of activities it wants to fund through the creation of debt and hence new money. After all, both the overall level of debt and the uses to which it is put are matters of pressing public interest. They are not particularly complex. In fact, as Galbraith says, they are repellently simple.
But don’t expect a rational discussion just yet. The US Treasury has now announced that it has no intention of minting a trillion dollar coin. For a while money creation will vanish from the news. The next time it appears we’ll have to wade through some more gags about how silly it would be if the monetary system operated as it in fact operates. We are gregarious creatures and it is easy persuade us to stay away from subjects that those in authority insist are absurd. But ridicule will not obscure so simple a truth forever. Eventually the jokes will wear thin and we will have a fight – or a debate – about who controls the economy, a secretive state in cahoots with shifty and disreputable private banks, or a sovereign people.
And then, if Gandhi was right, we’ll win.
Dan Hind is the prize-winning author of The Threat to Reason and The Return of the Public. Last year he published two online essays, “Common Sense” and “Maximum Republic”.
Follow him on Twitter: @danhind