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Democratizing Money

The Green New Deal has been in the air lately. In a recent piece on this website, Rob Urie writes that the Green New Deal is “the last, best hope for environmental and social resolution outside of rapid dissolution toward dystopian hell.”

Quite a claim. Let’s take a closer look.

The Green New Deal, first articulated by the Green Party but now supported by many progressive Democrats, calls for “real financial reform” to address the twin problems of climate change and economic insecurity.

Included are some of the standard proposals we regularly hear, such as restoring the Glass-Steagell Act (separating commercial and investment banking), breaking up the big banks, ending bank bailouts, reducing debt burdens, regulating derivatives, and taxing bank bonuses.

These are serious proposals, and would likely provide some relief, but they are partial measures subject to rollback and evasion–just the kind of incremental strategy that has failed for decades.

But the “real financial reform” the Green New Deal calls for goes a lot further. It promises genuine radical change with two new proposals: One is to “democratize monetary policy to bring about public control of the money supply and credit creation,” and the other is to “support the formation of federal, state, and municipal public owned banks that function as non-profit utilities.”

First, some background. Most people don’t realize that the government does not issue money; the private banking system does, by issuing loans at interest. The last time the government issued money in any quantity was during the Civil War, when so-called greenbacks were printed by the Treasury department to pay for the war. Greenbacks were not debt, but direct currency printed to give government contractors money for the goods and services provided, which they then spent into the general economy, stimulating commerce.

Greenbacks were very successful; issued responsibly, only as needed, they made it possible to finance the war without onerous debt or inflation. After the war, however, private banks fought hard to eliminate greenbacks, and finally succeeded. They did not want their near-monopoly over the issuance of money undermined by public control of the monetary system. Today, well over a century later, how money is issued is again an in question.

Let’s be clear. Private banks create money by issuing loans to individuals and companies; their profit comes from charging interest and, if necessary, foreclosing on the assets of delinquent debtors. It’s essentially a private tax for a public service.
Why banks should charge interest for creating money to loan out is a mystery. It’s not that banks are lending out money they have on deposit. They have to keep a small reserve, it’s true, but something like 90 percent of loans are simply creation out of nothing. You want a mortgage from the bank and, once they approve you, they enter–magically!–the amount you need on your account. Then they charge you as much interest as they can for something that should be a public service offered on a non-profit basis.

Borrowing works for borrowers as long as they can make more profit on borrowed money than the interest that must be paid on it. Since the 1970s, however, and especially since the 2008 crisis, return on investment has lagged behind borrowing, with government, corporate, and individual debt levels now higher than ever and harder to sustain.

When the 2008 financial crisis hit, the federal government and the Federal Reserve bailed out private banks and some corporations (like GM) to the tune of trillions of dollars in taxpayer backed debt, mostly by purchasing their non-performing (worthless) assets. That got large investors off the hook, while leaving individuals and small businesses in the dust–crushed by debt and foreclosed mortgages.

The Green New Deal aims to neutralize the private banking system by which–good times or bad–the rich seem to get richer, while everybody else gets left behind. By issuing its own currency, the government would not longer have to borrow through private banks in order to spend what is necessary. It could directly purchase goods and services (infrastructure, health care, free education, transition to renewables) by issuing ‘greenbacks,’ whose value would be sustained by the public benefits they would bring.

It’s true that greenbacks were a fiat currency–issued by command of the government and backed only by faith in the government–like the assignatsof the French revolution, or the continentals of the American revolution, not to mention the marks of the Weimar republic. That these other fiat currencies notoriously collapsed in inflationary waves, wiping out any value, should give us pause.

The greenbacks, however, worked because issuance was kept proportionate to the goods and services received in turn. That was intentional; it was a deliberate ethical act, on somebody’s part, not the product of some invisible hand. The Green New Deal’s currency ideas, if implemented, are going to be no better than those in charge of managing them.

To make a fiat currency work we may need something like an Ethical New Deal to clarify the principles behind any Green New Deal. Who should issue money? Who should get it? Why? This is a discussion that’s just beginning.

The other leg of the Green New Deal’s financial reform–establishing non-profit, public banks–would provide credit to ordinary people at zero or nominal interest for vital, long-term personal investments: housing, education, or starting a small business. It’s not enough for the government to issue currency. Government contractors would be the main beneficiaries, but they are not representative of the society as a whole, and should not have privileged access to money.

Money in fairness must somehow be made available to the general public as well, and zero-interest public lending would do the trick. Banks should be public utilities, it would seem, not profit-making enterprises. Imagine being able to borrow on decent collateral the resources you need to improve your life, without having to pay back a fortune in interest.

Sound too good to be true? Maybe, but without some similar rearrangement of our monetary system, financial advantage will continue to lay with the investor class, increasing the economic insecurity of everyone else. Too many people will continue to be denied access to capital except on the onerous terms offered by the current financial system, leaving them heavily indebted if not bankrupt, for the foreseeable future.