Blog 21 Optimum Monetary Stability 2

Any commentator today on the Great Depression of the 1930's is bound to say that the stock market crash in October 1929 did not CAUSE the depression.

So thoughtful commentators have asked a more fruitful question: Why, when there were plenty of skilled workers, lots of industrial capacity, huge supplies of natural resources, and thousands of people in need of the products, why were there so many people unemployed?

The proposed answer at the time was "overproduction" - more goods being produced than people wanted. The correct diagnosis we now know is shortage of money to buy those goods.

So let's turn this apple upside down. Everything was available for prosperity - except money. But for ten years everybody seems to have stumbled blindly along doing the wrong things. The banks called in loans and governments were erroneously persuaded to cut spending, to lower taxes, to balance budgets. We now call that program "austerity'. What's important is that these measures just further reduced the money supply. They still don't work today

The outbreak of World War II loosened the purse strings. Governments taxed and borrowed and created money Banks returned to their preferred occupation - making loans. So the war and its costly resettling aftermath were financed with ease. Peacetime prosperity returned. and 1945 to 1975, in my view, were the best years of the 20th century.

So what have we learned? That in times of trouble, when private money dries up, governments should borrow, and go into debt (the sky will fall!) to keep their economy ticking? No. Not if there is a better plan. And that's what this blog is about.

Sorry for the long introduction. Why don't you get a coffee and leave the next part - the good stuff - till tomorrow.

Dad, why doesn't the government create its own credit money?.
Because the banks tell them it would be inflationary.

                                               Would it?

                                                        No.     

                                               Are banks that much smarter than the government?

Maybe the time has come for governments to make stability their real goal and to provide a larger proportion of the money supply. Enough to have a permanent compensating effect for the ups and downs of the money created by private banks' loans.

Imagine a fish tank. It has a leak at the bottom. Doubtful future for the fish. But give the tank a faucet to keep the water level stable. That seems like a no-brainer. Even your average politician should be able to understand it.

Now let's say the tank's leak represents interest payments on the money supply, and that the intake faucet is government-created  non-interest-demanding, permanent money. So turn on the faucet until a suitable stable balance between non-debt and debt money has been created. At present the ratio is 3% to 97%. History suggests a 25% to 75% ratio works better.

So how to get there? Michael Rowbotham's 1994 book The Grip of Death outlines a process.

I call it The Tidy Two-Step.

Step 1

Count the money in circulation.  (Government economists do it all the time; they call the total, M1, or M2.) Count it for two years in a row. For simplicity, let me start with hypothetical small figures.

2013        $1,000,000  (97% of which is debt-money)

2014        $1,200,000      "     "       "     "   "        "
Difference  $200,000

Step 2  In 2015 inject $200,000 of non-debt money into the money supply.

By the next count at the end of 2015, the percentage of debt-money will be down from 97%, because the government created non-debt money remains in circulation indefinitely, and some bank debt money will have been repaid to the banks during the year, and so taken out of circulation. Get the idea?

Two questions about Step 2

Question 1. How do you create the $200,000 in non-debt money? Same way the banks create debt money - out of thin air. It is a non-interest-bearing issue from the national central bank.

Note: it is not borrowed money and it is not tax money.

Question 2. How does Rowbotham propose to get this money into the economy?

In two ways:

1.  Infrastructure projects (road repair, park development, bridges, dams, railway tracks, sewage plants, seniors residences, etc., etc.) The construction employs workers, who get paid, and spend. Simple?

2, A direct payment to everyBritish citizen over 18 years of age. He calls it a "BASIC WAGE".

Now, hold on. Before you go into a rage and tell us what banks have been saying about such an idea since before Hector was a pup, let me say  that the amount needed for Britain in 1997 worked out to 1500 British pounds per citizen.

That is not enough to create "welfare dependence", and it is not big enough to have an inflationary or shock effect in any one year. Almost nobody is going to hide it under their mattress. It will be spent. Spent.


In Rowbotham's calculation for Britain, the equilibrium point - of bank-loaned debt-money and permanent non-debt money in M1 - will be reached in the eleventh year. The BASIC INCOME amount, decreased each year, will have reached zero.

Well, that's more than enough for one blog. Spare me till the next one to tell you the two countries with the best chance for success in implementing this stabilizing process.