Greens for Monetary Reform

The Constitutional Approach

by Howard Switzer, GPTN

Money is becoming a hot topic and for good reason. Money can be used to create or destroy, the question is, who is deciding which?

Christine Desan is the Leo Gottlieb Professor of Law at Harvard Law School. She started a group there called Just Money around the same time the Alliance for Just Money was being organized. She organized a 'Democratizing the Money' conference in 2018 that members of the Alliance attended. She teaches about the political economy of capitalism, the constitutional law of money, the international monetary system, constitutional history, and legal theory. She as been gently challenging the status quo with papers such as How to Spend a Trillion Dollars. Its message is what we have been repeating for the last few years, that the central feature of capitalism is the private for-profit monetary system.

By privileging banks as money creators, it also enables them to determine distribution. Operating according to criteria that are privately determined, banks decide which recipients will benefit from the expansion of a medium that is public. The process is clearly discriminatory.

A particular kind of hardwiring characterizes capitalism. That system amounts to the governing (constitutive) determination that the public medium of the economy — money — should be created by banks, predominantly banks operating for private profit. The determination is strange, indeed sui generis, because governments can make money without any financial intermediary or involvement. Despite its anomalous nature, the banked design for creating the money supply has gone viral in the last three centuries. During that time, it has determined the way both private and public spending happens.

Indeed, the system is “hard wired” for private profit and spending is directed to maximize profits for the few at the expense of the many. As our friend, Edgar Wortmann of Ons Geld said: “It is appropriate for lawyers to be monetary reform activists because economists deal in assumptions while lawyers deal in facts."

Just Money is inviting papers and ideas for forums for their next event: Money as a Democratic Medium 2.0, June 15-17, 2023.

Next, please read Kevin McCormick's more in-depth review of her paper, How To Spend a Trillion Dollars.

On Spending a Trillion Dollars

by Kevin McCormick GPTX

Harvard Law Professor Christine Desan has written an article that, in my view, provides a thorough and important argument in favor of reform of the United States monetary system. Proponents of monetary reform often lack scholarly support for their view that the status quo is basically unfair and fundamentally flawed. This article, How to Spend a Trillion Dollars, provides that support and also a wealth of references to historical scholarship. (also available at kmm2016.org, with permission)

The Federal Reserve monetary system is largely unchallenged in the United States. Yes, there are critics, but criticism expressed in the media is shallow, often self-serving, and often mistaken. When the important criticisms are made — environmental destruction, unsustainable exponential economic growth, gross inequality, pervasive anxiety, dominance of cartels and monopolies, and constant imperial warfare — they are not directed against the "money power." Yet these ills are very much the manifestations of the Federal Reserve monetary system. "To figure out . . . modern capitalism, we need to 'follow the money' — not to its ends, but its beginnings. We need to learn how money is created, allocated, and dispensed. Understanding the design enables us to see its consequences."

The extensive article begins with a chronicle of the financial response to the Covid pandemic crisis. While providing detail and supporting documentation, the author shows that the focus of the pandemic response was for the benefit of the banking and financial system. Why should this be the case? Not because it serves the public, but ". . . because it is the essential circuitry, the hardwiring, of economic exchange within our peculiar architecture."

Christine Desan describes in detail the "hardwiring" of the monetary system. "Dollars and financial assets . . . issue together and from the center of the system." Government issued bonds are exchanged for private credits (Federal Reserve Notes). Private commercial banks create and issue credit in exchange for individual (or business) promises to repay. "The design of the system . . . appoints [banks] to determine its distribution in money."

When people borrow "money" from a bank, the bank is actually providing them credit on the bank’s books in the shape of a deposit account, . . . When a borrower spends that credit, she is transferring the credit to someone else’s bank account.

This bank credit is unique because it is treated as legal tender and expands the money supply. The design of the system — the hardwiring — gives the commercial banks the power to determine to whom and for what purpose new credit money will be issued. "In short, banks . . . make inherently political decisions about credit allocation insofar as they wield the singular privilege to create money." This is a systemic source of inequality and is fundamentally inappropriate for our circumstances. People who are denied bank credit or who are over-indebted lose economically and in many other ways. Moreover, the public policy agenda is subjugated to the commercial banking cartel agenda.

This privileged position of the banking cartel developed opportunistically. "[T]heir story is not one rooted in their prowess in advancing capital or even allocating credit; it is rooted in their expedient rise as agents making currency and exploiting the opportunity that came with that role." Banks originated as issuers of bank-notes which represented metal currency. Private debt notes were circulated and acted as currency. Banks established payment systems to exchange and account for these notes, eventually developing securities markets to discount notes. Investors gained a charter as a national bank to issue notes to the government. The Federal Reserve system is a direct descendant of the Bank of England system.

The question is posed: "Should we restructure the current financial architecture given the banking system’s selective reach, the vast public investment required to maintain it, the escalating inequality associated with its operation, and the system’s apparent incapacity to nourish many individuals and households?"

Christine Desan makes the case that "direct-issue" dollars are the necessary remedy. The classic example, the "greenback" U.S. Note issued in the Civil War, is discussed as are many other examples. It is shown that direct-issue dollars will serve the public far better than the Federal Reserve Note has done.

A direct-issue dollar is radically transparent. It works without compounding public debt. It locates authority appropriately in hands democratically accountable, even as it makes use of central banking safeguards. It can target immediate needs. It could issue in ways that respond to private demands currently unmet. It could remedy the brittle dynamics of a design that puts money creation singularly in commercial banks. The experiment is well-worth the price.

This article is worth thorough reading and reflecting. While at times dense, it is a coherent and honest discussion of the monetary system which gives ample support for the essential arguments in favor of reforming our present monetary system.

Ben Bernanke's 2022 Nobel Prize in Economics is an Embarrassment

By Monetary Peace — Nov 21, 2022

A number of economists were outraged by the Nobel Prize committee’s recent awarding of the 2022 Nobel Prize to Ben Bernanke. They say that Bernanke and the two other prize winners use models of the economy that misrepresent how banking and money creation actually work. These dissenting economists believe the Nobel-winning papers actually confuse and mislead the public and policy makers about the cause of financial crises and how to guard against them. That’s a far cry from the Nobel Prize committee’s claim that Bernanke and the two others revealed important truths about “banks and financial crises”. What’s all the fuss about?

Public Outrage

First off, here are just a few public statements made by economists in the days after the announcement:

• “Bernanke (and his two companions) have preserved false ways of thinking about banks and financial crises, and suppressed realistic models of banking and financial crises.” - Steve Keen, Distinguished Research Fellow, University College of London
• “The Nobel went to a flat-earth theory of banking that most everyone knows is wrong” - Pavlina Tcherneva, Research Associate, Levy Economics Institute at Bard College
• “It might seem bizarre to a non-economist that the Bank of Sweden Nobel Memorial award for economics has been given to people who wrote a model of banking in which money does not exist. I will leave it at that.” - Steven Hail, Lecturer in Economics, Torrens University:
• “The decision to award the ‘Nobel Prize’ to former Federal Reserve Chairman Ben Bernanke is not only an odd one… but a dangerous one as well. ‘Nobel Prizes’ go a long way in seemingly legitimizing the views of the recipients, and when they are awarded to someone for ‘research on banks and financial crises’ that is fundamentally flawed, incorrect, and quite simply wrong, the results can be disastrous.” – Louis-Philippe Rochon, Full Professor of Economics, Laurentian University and Editor-in-Chief, Review of Political Economy:
• “The model perpetuates a view of banking which has been shown to be wrong time and time again. In this view, banks receive money from depositors which they lend out to borrowers. A well-known bulletin by the Bank of England put lie to this.” - Rethinking Economics (association of economics students)
• “Bernanke’s Nobel prize is harmful because it rewards faulty thinking on how banks actually work” - Frances Coppola, MarketWatch.
• “The core argument that banks act merely as intermediaries between savers and investors deliberately neglects the extent to which banks create money ex nihilo.” - David Fields, Monetary Policy Institute.
• "A Nobel Award for the Wrong Model: Diamond-Dybvig-Bernanke is a flawed model of banking that has no room for a lender of last resort”, Peter Bofinger, Professor of Economics, Money and International Economic Relations, University of Würzburg.

What’s wrong with Bernanke’s models?

Some of these economists’ wrote detailed explanations of why Bernanke and the other prize winners’ models are fundamentally flawed. Many of their explanations are written in academic language and engage in theoretical debates that are difficult for a general audience to understand. Here is what is wrong with the Nobel Prize winners’ models in a nutshell:

1. Ben Bernanke and the two other award winners believe that banks take in deposits from savers and lend those deposits out to borrowers. The mathematical models that underpin their research assume this is how banking works. However … [Kotlikoff (2018)]
2. This is not how banks actually work. In the real world, banks create new money every time they make a loan and destroy money every time a loan’s principal is repaid. This means that the relationship between banking, money, and the economy is fundamentally different than what Bernanke and the two other prize winners assumed. [Gorton and Metrick (2012)]
3. Whether the Nobel Prize winners’ assumption that banks lend out depositors’ savings is correct or incorrect is not a matter for debate. It is definitively incorrect. In 2014, an empirical examination of bank accounting software verified that banks create fresh new money every time they make a loan. Dozens of authoritative sources from central banking, banking, law, and economics have also confirmed that this is the correct understanding of how banking works. [Covitz, Liang, and Suarez (2013)]

Why does it matter that Bernanke’s models are wrong?

First off, Bernanke’s model failed in 2008 to predict the financial crisis. Today, his model will still fail to predict financial crises caused by contractions in bank lending. It is, in fact, mathematically incapable of predicting or explaining crises driven by the financial sector (which are the most destructive kind of financial recessions). This is because bank money creation and destruction is not included as a variable in his model’s equations and datasets. The same is true for the models of the two other 2022 Nobel Prize winners in economics.

Secondly, Bernanke’s models lead to incorrect beliefs about how to prevent future bank-led financial crises. For example, his supposedly ground-breaking idea that deposit insurance will prevent widespread financial crises was proven false by the 2008 crisis. Deposit insurance did not stop runs on individual banks by large depositors until governments stepped in to guarantee the entire banking sector. Most importantly, deposit insurance does nothing to stop creditor runs, which were the major impetus for the 2008 crisis.