The Illusion About Money That Cripples Social Progress
Despite other advancements of modern civilized society, most citizens and institutions continue to labor under significant illusion and superstition about the nature of modern money. This, despite the fact that money permeates, if not dominates, most aspects of life in modern society.
Money has evolved from objects of actual value (precious metals, gems, livestock), to receipts or tokens for the same, to today’s fiat currency — essentially a transferable coupon; inherently valueless, but one whose fungibility is guaranteed by a respected agency, and therefore may be exchanged for designated amounts of goods or services.
A persistent confusion about money, one responsible for perhaps the majority of economic problems, is the perception that, as in days of old, the value of a monetary instrument is one and the same with the valued object it may represent. In other words, burn a $100 bill, and one hundred dollars of value is gone from the economy. Yet note that the actual cost of producing a $100 bill is about 12 cents per. The rest is simply an agreement (formally known as “seigniorage”).
Prior to the unhooking of money from the Gold Standard (around the time of the Great Depression), money could be exchanged for precious metals, and therefore came to evoke the same emotional response as to the latter (think “Pavlov’s dogs”). Because of this, we continue to treat money as a zero-sum affair — like gold or silver, the world contains only a fixed amount, therefore spending on any one thing absolutely must be balanced or “paid for” by a corresponding sacrifice elsewhere.
In recent years, some interesting alternative perspectives and proposals have begun to emerge — such as the notion of a universal basic income (UBI) or Modern Money Theory (MMT).
MMT in particular challenges the above by proposing that, at the national level, the money supply can be expanded as needed — essentially without limit — so long as the new funds go toward productive activity (as opposed to speculation or hoarding).
In other words, the present-day conditions under which large sectors of the population struggle with un-or-underemployment, economic insecurity, poverty, and lack of essential services, and under which important public and private projects go unfunded, are all conditions unnecessarily created by the artificial limits placed on the money supply by outdated economic, political, and institutional thinking.
Yet many mainstream economists, even on the “progressive” side, are aghast at the MMT proposal, declaring that it would be wildly inflationary. Well … yes and no.
Currently, the problem with any new issuance of money, even if used to fund real Main Street needs, is that it tends to quickly rise to the top and largely stay there — sucked up by the powerful, connected interests in banking, Wall St, and major corporate and private interests. So long as these entities are able to absorb cash without limit, inequality will continue to grow and the cycle will repeat.
The danger of inflation then derives from the fact that at some unpredictable moment, any of the above entities, in pursuing private interests, may release large amounts of cash into the economy, thus destabilizing the economic balance.
A Central Problem
Whether considering MMT or conventional monetary policy, a major, under-acknowledged problem with modern money is that it serves two opposing functions: it is both a medium of exchange and a store of value. These uses are in conflict — the more that money is used for the one purpose, the less is available for the other. This is primarily why, despite being one of the wealthiest societies, with more money in circulation that ever before, large segments of the population continue to struggle with chronic recession, stagnant wages, job insecurity, and ever growing levels of inequality.
Money as a Public Utility
MMT begins to break through the illusion of money as a literal store of value by emphasizing the utility nature of money. Publicly supplied utilities such as roads, bridges, water and power, air traffic control, education, policing and courts, all support vastly more economic activity than the costs of providing these services. However, money is the one exception. Imagine for example the impact on commerce if the cost of building a highway had to be factored in each time a commercial vehicle traversed it. Or, considering money as a tool for commerce, imagine the nature of the construction industry if its primary purpose was not to build useful structures but simply to use that activity as an pretext to acquire ever more tools of the trade.
Some will find this controversial, but consider that in a truly abundant, civilized society, there would be little need to accumulate and hoard vast wealth. When money circulates freely, it is more readily available for performing work, hiring employees, and making necessary purchases. Big-ticket projects would be, as they are today, collective public and private ventures.
MMT and Inflation
Perhaps the primary criticism of MMT is the possibility that it may lead to inflation. Again, this is only true to the extent that any newly issued funds would be siphoned and hoarded for value-storage purposes rather than used to fund necessary productive activity. There are two basic solutions to this problem, one blunt (and therefore challenging to implement) and one more natural and gentle. In a word, these are taxation and demurrage.
Taxation as a Solution
Virtually every currently proposed solution to national economic problems — recession, joblessness, inequality, under-funded programs and services — involves some sort of redistribution of funds. Do we cut Medicare to pay for tax cuts or do we raise taxes to pay for Medicare? Do we cut military spending to pay for infrastructure programs or vice-versa? Or do we raise tax rates across the board in order to provide additional general funding? Or, do we “kick the can down the road” through deficit spending, with the previous choices deferred to the future?
Again, all of these pseudo-dilemmas are premised on a medium of exchange that is limited in supply, and therefore must be carefully or competitively (or cravenly) apportioned. A vast amount of real work needs doing, and vast numbers of un-and-underemployed people are eager to do it. Yet it is as though the Federal Reserve has a scarcity of paper and cheap metals, and the central banking system computers have only a limited supply of electrons (… and the wealthy 1% possesses the vast majority of them).
From this perspective, widespread poverty and recession is an absurdity, yet it persists due to the above-mentioned conflicting functions of money (store-of-value vs medium-of-exchange). So long as some, for whatever psychic or moral reason, feel an unbridled compulsion to hoard up ever more symbolic value-tokens (money) — even apart from any practical need or use — the problematic economic trends of recent decades will only continue.
A second reason for the current poverty-in-the-midst-of-abundance scenario is the entangled relationship of money and power. (The cynical take on the “Golden Rule”: “He who has the gold, makes the rules.”) The experience of recent decades suggests that increasing wealth readily translates to increasing political and legislative influence. Under such conditions, short of a French Revolution, hoping for a voluntary or acquiescent redistribution of funds, initiated from the top, seems unlikely.
Demurrage as a Solution
Apart from taxation or other coercive means, there exists another method to resolve the conflicting functions of money: demurrage.
Demurrage is essentially a storage charge for parked assets. In regard to money, it might easily be thought of as a negative interest rate. Again, ideally, the purpose of money is to circulate and facilitate economic activity. Funds that are parked relatively idle in accounts or underproductive “investments” are not serving this function. Negative interest discourages the excessive accumulation and long-term storage of funds since their value will be gradually eroded over time.
“Good” Money and “Bad” Money
Stated most simply, money is put to beneficial use when used to fuel productive social and economic activity. In contrast, money tends to create social and economic harm when used primarily to “make more money”. Much if not most of this harm is the result of the pursuit of monetary wealth (profit), often apart from any true need, while not factoring in all of the costs. (Wall Street “lightning trades” perhaps being one of the more egregious examples of activity that diverts wealth from productive, creative activity into vast personal fortunes, without creating any social or economic benefit.)
Since under a demurrage system, stored funds lose value over time, there is natural incentive to keep the money circulating, thereby fueling productive activity.
This also provides a natural check on inflation. If excess funds exist in some sector of the economy, circulation will slow at that point and the money will begin to pool in accounts — whereupon it will be drawn out of the system through demurrage (perhaps progressively applied).
Admittedly, the above challenges some commonly accepted fiscal sacred cows. For example, few would argue that saving for the future is a bad idea. And certainly, there are unanticipated expenses and larger purchases that one might want to prepare for. Yet there is no clear demarcation for the point where fiscal prudence becomes excessive, irrational hoarding. Since money is tied to no specific need, there is no natural “enough” point, and more tends always to seem better. At that point collectively, we begin to function less and less like a cohesive society and more and more like individual fiefdoms, solely responsible for our own security and happiness — and worse, in competition to varying degrees with all others.
Complementary Currency as a Proposed Solution
If a currency serves conflicting functions, yet both functions are necessary, one logical solution would be to have separate media, each optimized for its particular need and use. Our current debt-based Federal Reserve national currency works quite well for large, institutional, public and private ventures — those that require large amounts of capital and typically seek the same. These revolve around money’s store-of-value function.
Yet for individual citizen-workers and small business, which primarily depend upon commerce (money as a medium-of-exchange), the current system seems to be decreasingly functional — as indicated by the ever-growing levels of inequality. A demurrage-based medium of exchange issued on a credit basis rather than debt — one that maximizes circulation and minimizes hoarding — would be better suited to this need.
If so, how might such a scenario be implemented? As things presently stand, expanding existing major institutions in a radically new direction would be … well, “difficult” to put it mildly (… as the unresolved, decades-long debate on healthcare suggests.) The current system is clearly working for some, and they will be understandably resistant to any change that appears to threaten their status quo.
Accordingly, for purposes of implementing the proposals of MMT or a basic income on a demurrage basis, rather than working through existing banking and related institutional channels utilizing conventional Fed currency, we propose the creation of a parallel currency system — one designed specifically for Main Street needs. This would have the further benefit of ending the perennial public/private tug-of-war for funding social needs versus those of investment.
Note that this proposal is not simply issuing more Fed dollars under a different name but instituting a currency that operates by some fundamentally different principles. It might even be privately issued. However, a detailed account about the way an economy might function under such a two-currency system is beyond the scope of this paper. Further elaboration can be found in the linked articles below.
Sadly, there are some who are so psychically and morally conditioned by the current paradigm that they may feel all is not right in their world unless large sectors of the population struggle and suffer economically — controlled by fear rather than being inspired by hope. Yet objectively, at this stage in the evolution of human culture, there is absolutely no need, excuse, or justification for economically induced suffering, beyond a lack of vision. We should, and we can, do better.
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