The difficulty in crafting an economic stimulus response to the coronavirus crisis only highlights a contradiction that has always existed in today’s monetary system — yet is rarely acknowledged. Money currently serves two functions that are in opposition. It is both a medium-of-exchange and a store-of-value. The more it is used for one purpose, the less is available for the other.
The money supply underwent a fundamental evolution in 1971 when Richard Nixon formally took the US Dollar off the gold standard, setting the stage for conversion to a pure debt-based fiat currency. Yet most of us, even many economists and academics, continue almost superstitiously to conceive of and work with money as though we are still trading in essential value — i.e. if Congress gives one “bag of gold” to the military, it has to be “paid for” by taking a bag of gold from public services or elsewhere. As though dollars must dug up from dollar-mines and are in limited supply.
Rather than gold doubloons, today’s fiat currency would be far better thought of simply as a coupon that entitles the bearer to a certain amount of goods or services. The number of coupons in circulation can be readily adjusted to meet the current needs of commerce. On the other hand, hoarding more coupons than one can practically use is pointless.
An initial concern in proposing a cash stimulus or basic income is that it would lead to inflation. However, when money is understood as described above, inflation would be a problem of distribution, not sheer quantity of funds.
If for example a stimulus is applied toward employment, value creation, and commerce, a robust economy is the result. If instead, the funds go largely to stock buy-backs, executive bonuses, subsidies, and predatory acquisitions (i.e. attempts to store and hoard value) the stimulus will fail — and our economy and country will be that much more troubled.
We can mitigate this crisis, we just need to be honest and smart about it.