Heretofore, every monetary system that has ever existed has been problematic. For starters, money in all its forms has been subject to manipulation. Metallic specie made with precious metals can be debased by the issuer or shaved, filed, or nicked by individuals. Paper currency actually creates more difficulty for individuals to tamper with the money, but is all the more easily manipulated by those issuing it, whether individual banks or central authorities.
Even with the best of intentions, issuers have tended to provide too much or too little money, contributing to economic instability in all its forms. Leaving the size of the money supply to the amount of precious metal provided by the Lord (or the amount of ‘coins’ made available by the demigods of virtual mining) does not solve that problem. Finally, it is inevitable that any monetary policy pursued by issuers will be relatively better for some at the expense of others, raising issues of justice.Besides those more generic problems, our current monetary system has a couple of others.
For one, the efficacy of using monetary policy within it to decrease inflation is well-established, but it is equally well-established that monetary policy is in itself ineffective in increasing production or consumption to avoid deflation — the condition underlying Keynes’s famous “liquidity trap.” Also, with our current monetary system, the money the economy needs is provided through debt, which, we have learned, grows faster than the economy does, making recurring crises inevitable.
The purpose of this effort is to present a sketch of an alternative monetary system. It is revolutionary without being radical; it would transform the functioning of the market-based economy, not replace it. It is neither ‘socialistic’ nor ‘libertarian’; this is about economics, not any particular political ideology. Freedom, private property, money, the profit motive, and competition would still be integral to the economy.
Moreover, changing our monetary system in the U.S. is not exactly a novel idea. Our approach to having a monetary system has been so conflicted and so haphazard that a definitive number of different systems is difficult to establish, but -- counting only the times we have had or have not had a central bank -- if we changed it one more time, that would make at least seven different systems.
Rather than contributing to instability, the proposed system would make the economy function the way the market-based economy is supposed to function in theory, without being ‘managed’ using monetary or fiscal policies. It would absolutely, indisputably eliminate recessions. It would provide the means to eliminate (involuntary) unemployment and poverty (without redistributing anything). Also, there would be no need to use taxes to fund government (though it would be funded as fully as at present, as part of the structure of the system).
The only possible macroeconomic problem would be inflation, but the system has built-in safeguards against it, prices would have our undivided attention, and with this system preventing inflation, whatever it took, would do no one any harm. Those outcomes are intrinsic to the structure of the system, as inevitable as taxes have ever been.
The heart of the monetary system presented herein is for the supply of money to originate as incomes for individuals. The general idea is for the money to originate as incomes for lots of consumers, to get circulated to the business sector via their purchases, with a large proportion of the money supply getting transferred each quarter (by banks) back to the monetary agency, which would retain the amount needed to prevent inflation and use the rest to fund government — which would (as at present) return its revenue to the private sector via its expenditures.The monetary agency would be totally separate from and independent of both the banking system and government, with no discretionary authority. It would merely be the paymaster for the people being paid that income.
We can call the money that would be paid to individuals to form the money supply the ‘allotted income.’ It would be paid to retirees, people of working age who were too incapacitated to do any work (for whatever period of time), and people employed in what can be called ‘basic labor.’ Anyone could forego the allotted income, but those three categories ensure that the allotted income would be available for every adult.
Please note that, unless one were retired or too incapacitated to do any work, one would have to work to be paid the allotted income. There would be no welfare of any kind.
That income would be the same for everyone being paid it. In the U.S., based on current incomes and prices, it should be at least $12.50/hr. ($500/wk.). [The current median income for an individual is, in round numbers, $25,000/yr.] It would become the minimum wage/salary.
Yet, it would save businesses and government money, since the wages and salaries for people employed in basic labor would be paid by the monetary agency, not the employers of those individuals. It could be prorated for part-time work; employers would pay shift differentials and pay the full amount for overtime.
We would have to work up to establishing the allotted income at that amount to prevent a shock to the economy. Once set, however, it would be fixed at that level forever; with no inflation, over time gains in productivity would increase the purchasing power of a fixed income.
It is important to understand that local labor markets would determine which positions were paid as basic labor, not bureaucrats — private or public. Initially, everyone employed in a position which was already being paid that amount of money or less would immediately be paid the allotted income.
From that point, employers could designate any position to be basic labor. They would surely try to designate as many positions as possible for that category. Individuals would be free to choose to work in those positions for that amount of money or to do something else. Over time, some positions might fall into the category of basic labor and others rise out of that category.
Due to imperfect knowledge on the part of employers and employees, the same job might be a position paid as basic labor in one company but not in another. People not employed in basic labor would be paid in full out of the revenues of their employers, as at present. Employers would compete for employees to fill positions in basic labor using benefits, such as health insurance.
This proposal is not about limiting options. Singularly self-employed people and people who worked as partners might do work that was being paid as basic labor by some businesses, but make more—or less—money than the allotted income. That income could also be paid as easily as not to one parent in a household with at least one dependent child (the same amount, not adjusted for the number of children).
Local government might be an employer of last resort at no cost to anyone, such as picking up trash along roadways, if nothing else — but only if no job which the person seeking such employment could perform was available in the local economy.
We can already see how this monetary system would solve some big problems. It would eliminate any possibility of a recession because the money for everyone being paid the allotted income would be absolutely, positively guaranteed; the people being paid it would form a large, bullet-proof body of consumers providing the business sector of the economy with a steady stream of revenue. The pay for people employed in basic labor would be set at a rate which would eliminate poverty. With local government as an employer of last resort — at no cost to anyone — there would not be any involuntary unemployment.
As the paymaster of the people being paid the allotted income, the new monetary agency would be utterly independent, part of neither the business sector nor government. That means that the monetary system would have to be extricated from the banking system. The latter would continue its perhaps damnable but nonetheless necessary existence, including the Federal Reserve System. The Fed would, however, be limited to its functions as the banks’ bank, not lending to government, creating money, or attempting to manage the economy.The new monetary agency would have no discretionary authority whatsoever. It would be a purely administrative body, providing the allotted income for those who were being paid it.
In the U.S., what is now the Social Security Administration could be extricated from government and become the new monetary agency. Social Security would no longer exist, anyway, and that agency already sends checks to people in two of the three categories of people who would be paid the allotted income.
The money for the allotted income would simply be created as needed. The money would not be ‘backed’ by gold or silver. On the other hand, neither is the money now. Whereas in today’s monetary system there is no limit to how much money can be created, however, in this proposed monetary system the amount would be determined by the number of people in the three categories being paid the allotted income—and nothing else. That difference makes all the difference.
One can see that with this monetary system there would be an unending flow of money into the economy; if all the money stayed in the economy that would cause infinite inflation. Therefore this system must have a mechanism for returning money to the monetary agency. Though the economy would have a much larger money supply than it now has, the transfer of money back to the monetary agency would establish a correspondingly smaller ‘multiplier’.
In ‘real’ terms the multiplier is the number of times the supply of money gets re-circulated in generating the GDP (Gross Domestic Product—the total amount of goods and services produced in a given period of time); in monetary terms the multiplier is the ratio of the monetary value of the GDP to the money supply at current prices. So, the GDP can increase because of an increase in output or due only to an increase in prices. The latter is monetary inflation.
In our current economy, ‘stimulus’ is usually effected by increasing the amount of money in the economy. It is then in the economy more or less permanently. It can be used again and again, for production or consumption. The Fed has ways of taking some of it out of circulation, but if monetary inflation gets underway the demand for available money gets very powerful very fast—as cash sitting in a vault, it is losing value—even though letting the money out of the vaults will add to the inflation.
Standard economic theory suggests that the most likely effect of an increase in the size of the money supply in our present economy is for it to increase real GDP initially, but eventually to have more effect in the form of monetary inflation (unless it leaves the domestic economy via imports, foreign investments, etc.).
Compared to our present situation, this new monetary system would put more money in people’s pockets with which to make purchases. That would encourage more supply, thus increasing real GDP. By regularly returning money to the monetary agency rather than leaving it in the economy, however, the larger money supply would not induce monetary inflation. (Again, we would have to increase the size of the allotted income gradually, to give time for supply, real GDP, to adjust to the increasing total demand without inducing monetary inflation.)
The transfers that would return money (eventually) to the monetary agency would be administered by the branches of the banks in which people and businesses had their accounts. Every adult and business would have to have an account in a (domestic) bank. Both businesses and individuals would be limited to how much money they could retain in their accounts. For businesses, it would be a percentage of their profits. For individuals, it could be some absolute amount for everyone or a percentage of annualized income.
When the time for the transfer did roll around, any money over the prescribed amount in any account would be transferred to the monetary agency to complete the circulation of money. For businesses that would be the end of each quarter, for individuals each month. An individual could avoid the transfer by simply spending money, thereby participating in the necessary circulation of money; that money would have to be in the account of some business somewhere (ignoring, for now, imports).
The amount of money that could be retained in accounts would be calculated to prevent the larger money supply from being inflationary as the new system was instituted. Some adjustment would probably be necessary, but as soon as possible that percentage would be set for all time. (Also, the windfall in disposable income from abolishing taxes would have to be taken into account to prevent inflation, with perhaps initially much larger amounts retained in accounts than would be the case after the dust from the transition to this monetary system had settled.)
The money from the accounts of individuals and businesses would first of all be retained by the banks as (free!) capital for one quarter. The banks would be free to utilize that money however they saw fit, but at the end of the quarter that amount of money, in total, to the penny, would have to be transferred to the monetary agency. It would be replaced by the inflow of money from the accounts of people and businesses for the next quarter. (In the first quarter of this system’s operation, money would have to be provided to banks by the monetary agency based on expectations, since no transfers from accounts would have yet happened.)
When money did reach the monetary agency, it would retain the amount of money necessary to prevent inflation, i.e., the amount that had entered the system that quarter, and use the rest to fund government. Government would return that money to the private sector via its expenditures (as at present). [Again, in the very first quarter of this system’s operation the monetary agency would have to provide the funds for government, since the agency would not yet have collected any money with which to fund government.]
It is not inconceivable that, because of excessive lending by banks, the multiplier could reach such proportions that it could cause inflation. That level of growth in the multiplier could be prevented by putting a ceiling on the amount of money that the monetary agency would send to government, with the agency retaining, in that circumstance, more money than it would otherwise.
It is perhaps not impossible that the multiplier could, for some reason, be too small, such that government was receiving insufficient funds. Using money from the monetary agency to ensure that government reached the ceiling set on its spending would prevent that. Having a ceiling on government spending and ensuring that the ceiling was reached would add even more stability to an economy with this monetary system. [That ceiling would be set as per capita spending so that it would automatically adjust with changes in the size of the population; also, that ceiling implies that there would have to be a permanent freeze on pay for all positions in government—adding a tad more to stability of prices.]Since government would be funded as part of the circulation of the money supply, that would eliminate completely that need for taxes — all taxes, personal or business: income, property, sales, payroll, etc. Yet, it would receive as much money as it does at present -- without having to pay for Welfare or Social Security.
There would also be no need for government to sell bonds: “Ban the bond!” Forthwith, public debt would be of historical interest only (also eliminating interest payments as an expenditure). Since much of our public debt in the U.S. is owed to the Social Security fund, and it would no longer exist, the debt owed it would no longer exist, either.
Finally, let’s note that a tax code is not necessary to stimulate productive real investment; savings in labor and other costs — or gains in output — are sufficient to encourage capital investments.
In the U.S. the money for government should go from the monetary agency to the federal level. What was not spent there would be apportioned among the states, based on population. Federal Representatives and Senators would know that the less they spent, the more money they could send back home to benefit the people who would determine their political fate.
As noted at the start of this essay, with this system the only possible problem for the economy as a whole would be inflation. Besides the transfer returning money to the monetary agency, having so many people with a fixed income would also help to control prices, especially for things they normally bought. In addition, another source of inflation, speculation in real estate, commodities, and currency (but only those three things), would be strongly, materially discouraged.
The absence of government bonds would largely eliminate the motive and means for speculation in currency, but government could undertake more general efforts, such as using licensing to restrict activity in those areas of the economy. If producers’ costs did rise, that would lead to more positions in those businesses being rendered basic labor (or replaced by machines, bringing to mind the long-promised revolution in robotics). That would reduce the cost of labor for those businesses, offsetting the rise in other costs, eliminating that pressure for increasing their prices.
Our economic system at present is somewhat like a star. There are forces pushing for expansion, with other forces at the same time pressing towards contraction. One set of forces grows stronger relative to the other, then the reverse occurs—or can be made to occur—we hope. The system works best with ‘moderate’ inflation supporting steady expansion—which eats into wages, all the same. That need for relentless expansion exacerbates environmental degradation.
The proposed monetary system would not create a Utopia. It would, however, solve many problems and ameliorate many more. As a system, the economy would be about as stable as the surface of the Moon, where, sans meteors, mere footprints in the dust can last forever. Best of all, though, this monetary system would make ours a more just economy.
Author's note: Justice is the subject of Part 2 of this essay; for more on this monetary system, see www.ajustsolution.com.