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In his
article, "From State Debt
to State Money," Rudo de Ruijter criticizes the
existing "money system" and calls for "state money". He
thinks of this as "bank reform".
State
money is reform? Not one little bit. We will have reform only when the forms
and supply of money are market-determined, not state-determined. In other
words, we will have reform only when each person decides for himself what
kind of money and how much of it he or she wishes to bid for or offer in a
free market. There is no reform when these decisions are being made for each
of us by a state, either in the present arrangement or in a greenbacker version of state money.
Our core
problem now is that money is a state creation. The Fed and other central
banks decide how much high-powered money to create out of thin air. It serves
some purposes to emphasize the Fed’s private character; but the state
created the Fed and gave it its power to create money, and the Fed works hand
in glove with the U.S. Treasury. The relevant contrast is not, as Ruijter makes it, between a private institution that
controls money and a state that controls money. This is not the either-or
choice that we face.
Our core
problem is that money is very highly politicized. State money of the kind
that Ruijter proposes is also totally politicized
money. His proposal and proposals like his that keep the power to create
money in the hands of government officials do nothing to resolve the existing
core problem.
The
either-or choice that’s important is between free market-determined
money and state-determined money. It’s between liberty and slavery in
the monetary realm of human action.
The
framers of the U.S. Constitution, having lived through an era of inflationary
finance followed by the inevitable economic bust, took the money power
entirely out of the hands of the new government. They left the determination
of money supply to the market. Furthermore, they restricted the central and
state governments to using gold and silver as money. State money creation in
the form of paper or credit was then and is now unconstitutional.
Constitutionality
aside, Ruijter’s proposal, if it were ever
enacted, wouldn’t solve the problems with our monetary system. It would
simply exchange one distant and unaccountable money power for a
closely-related version of the same distant and unaccountable money power. It
would come down on the side of slavery, not liberty.
Americans
are not a free people. If we were free, we would have monetary freedom. We do
not have monetary freedom. The U.S. government in one way and another forces
us into one collective that uses one money. How? We are pressured into using
the U.S. fiat dollar by legal tender laws, taxes that heavily discriminate
against metals, regulations that control banking, privileges accorded to the
Federal Reserve, a payments system that is geared to fiat dollars, and IRS
rules. No one has to use dollars, but try not to use them. There are
significant barriers that the state has raised to switching voluntarily out
of fiat dollars into alternative currencies or moneys.
Ruijter proposes
to replace the current unfree and collective system
with a different but closely-related unfree and
collective system:
"...we
can introduce state money, also called public money...
"Technically
this can be done rather simply. Instead of today's central bank, a new
central bank will be established, that is to say, a central bank of the
state. It will fall under the responsibility of the Ministry of Finance and
be controlled by the Parliament."
In the
U.S., this means replacing the Federal Reserve by a new central bank housed
in the Department of the Treasury, under the responsibility of the Secretary
of the Treasury and controlled by the U.S. Congress. Instead of Federal
Reserve Notes (FRNs) and the corresponding electronic credits that the Fed
creates, we would have United States Notes (USNs) and the corresponding
credits that the U.S. government creates.
In this
system, the state decides on government spending just as it does now. The
state decides on taxes as it does now. The state decides on borrowing as it
does now. However, all of these are in terms of USNs, rather than FRNs. The
new element of government finance is that the state can issue USNs and spend
them into circulation:
"In
the new system the government can very easily create a portion of permanent
money by spending an amount of money (= bring money into circulation) without
levying the corresponding taxes."
This
system replaces the Fed’s power to create thin air money (FRNs) by the
state’s power to create thin air money (USNs). The state spends as much
money as it wants to spend. It can create any amount of thin air money it
wants to, without limit, just as can the existing Fed.
State
money is a very old (and bad) idea. Individual states used it with variations
in America in colonial days.
Ruijter poses two
alternatives as opposites that are not opposites. He thinks that the creation
of money should be in the hands of a democratic government, rather than the
hands of private bankers:
"...we
still pretend to live in democracy, while one of the major attributes of
society, the creation of money, is in the hands of private bankers. De Nederlandse Bank N.V. (the Dutch central bank) is ruled
by private persons and is independent from the government."
Both
choices he poses extinguish freedom. Money creation should not be in the
hands of any monopolists or any cartel or any government or any group that
has been awarded privileges backed up by government force. Our monetary
freedom doesn’t rise if we exchange one money monopoly for another. We
are not more free when we exchange a private banker monopoly or cartel, if it
exists, for a public or government monopoly, which in actuality will be run
by a small number of self-interested officials who are influenced by narrow
lobby and interest groups and over which the general public has no more
control than it has over central bankers.
Are we more free when Congress issues USNs than when the Fed
issues FRNs? In both cases, distant bodies have political power over money.
In both cases, distant bodies decide how much money to spend and who shall
get it, and they are able to get their way because they have political power
or power derived from political power.
Ruijter has it
backwards. Democracy in the form of government control over money opposes and
diminishes monetary freedom and freedom generally. People who think that
democracy, social democracy and socialism as forms of government mean freedom
or bring freedom are suffering from a political delusion. In order to believe
such an evidently false proposition, one has to ignore the steel cages and
penalties that await anyone who attempts to opt out of the government’s
mandatory ukases. Freedom isn’t produced from the barrel of a gun, even
when that gun is pointed towards one’s head by a democratic majority.
Presumably,
USNs would be forcible legal tender, although Ruijter
does not say. An important way that the government can "very easily
create" as much new money as it wants to, place it into circulation, and
get the population to use it in preference to other moneys is to enhance its
acceptability by making people accept it as legal tender. This is what
Lincoln did in 1861 when he issued greenbacks, which were USNs that the U.S.
Treasury issued. (There was no central bank at that time.) A legal tender law
that makes people accept the USNs in payments of
debts and in other transactions is a device to drive out the competition of
other moneys.
If people
do not have to accept USNs and if a state spends or attempts to spend lots of
them into circulation, in excess of what it is going to tax back to the
state, or if people expect that the state will in the future spend lots of
them into circulation, then the value of the USNs against goods will fall.
The prices of gold and other goods will rise. There will be inflation, as
there is now. (This will happen with or without a legal tender law.)
Ruijter thinks
that interest paid on loans extended by the state central bank goes "to
the Treasury for the benefit of the population" He makes it sound as if
this eliminates an unnecessary expense of a private banking system (even one
that is not a cartel or in league with a central bank):
"The
state money system can function much less expensively than the private money
system we now have. In the first place all interest goes to the Treasury for
the benefit of the population.
This claim
is false because taxpayer capital is scarce and not without a cost. To
understand this, let’s compare the private bank lending with government
bank lending.
Suppose
that a business gets a private bank loan and pays interest on it. The
interest paid flows into the bank. However, this is not pure profit. Apart
from all of its other expenses, the bank’s cash outflows include
interest on deposits and bonds. That is part of its costs of capital. Banks
do not have access to free financial capital.
Now
suppose that the government takes over the bank and makes the same loan to
the business, and the business pays interest. It flows into the government as
one of its cash inflows. The government, having no depositors, pays no
interest to them. Instead, suppose that it returns the interest to taxpayers
as Ruijter assumes. Has the government eliminated a
cost of doing business (the cost of capital) by not having to pay interest to
depositors and has it found a new source of wealth for taxpayers? No, because
the taxpayers have replaced the depositors as the source of capital.
The
taxpayers could have invested privately in a bank and gotten a return. They
lose this opportunity when the government taxes them. If the taxpayers are
made to pay into the Treasury and do not get a return as great as they could
obtain privately, they are actually losing. If the Treasury sends them the
interest money or equivalent benefits, they merely break even.
If the
government’s bank doesn’t get capital from taxpayers or through
open market security issues that carry interest costs, then the only other
way to get capital in Ruijter’s system is to
create it out of thin air by printing USNs or by giving the business
equivalent electronic credits denominated in USNs. This inflation route is
not costless either. It takes capital from moneyholders
indirectly but surely. Whoever holds USNs finds that their notes are
competing for resources with a larger supply of USNs that has been augmented
by newly-printed notes. In the limit, if the government made direct purchases
of resources with its unlimited supply of USNs, it could outbid anyone. This
shows that it is actually taking capital away from existing USN holders.
Ruijter says that
the state bank will have "no expensive building up of capital" and
"The
state bank does not need a separate capital, because all money belongs to the
community."
He is
referring to equity claims. Although government does not issue equity claims
and does issue bonds at rather low interest rates, that does not mean that it
bypasses capital costs or has low capital costs measured by the bond rate of
return. The reason, explained above, is that either taxpayers or USN holders
or both are being forced to give up valuable capital to an enterprise run by
government that is going to make risky loans. Risk doesn’t vanish or
even diminish because government is making the risky loans. That risk
attaches to any securities or claims that are issued that finance the loans.
Costs can be hidden but not evaded.
None of
this criticism of state money issued by a government department implies
support for the existing central banking system. That system should be
dismantled. I’ve outlined how to do that here and here.
If we had
monetary freedom, Ruijter and other greenbackers could form a collective and create their own
government organization for themselves. It would not be forced on others.
They could devise their own state-owned and state-operated central bank that
issues state money in the form of paper currency or credits. Their collective
could operate as it pleased. Others of us could supply and demand moneys of
our choice in freedom.
Michael S. Rozeff
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