Central-Bank Funding of Government Expenditure
Since about 2013 there is talk, especially in the Anglosaxon world, of monetary financing, which is short for direct central-bank funding of government expenditure. In lieu of conventional Quantitative Easing (QE), i.e. central-bank purchases of sovereign bonds and other securities from banks and financial investors, a central bank should transfer comparable amounts of money directly to the government, free of debt. This would immediately benefit real investment and purchasing power.
The idea was put forth, among others, by Financial Times columnist Martin Wolf as helicopter money, taking up a metaphor by M. Friedman [Also see the links in the right column down].
The NGO Positive Money developed the approach in 2013 as a debt-free substitute for conventional debt-funded Keynesian deficit spending. The proposal, prepared by Andrew Jackson, can be found in the brochure titled
> Sovereign Money from page 16 onwards.
In the meantime, Positive Money is carrying out a campaign > QE for People in the eurozone, more generally also referred to as > Public Money Creation.
E. Lonergan and St. Jourdan of QE for People have written a Policy Brief > Citizens' Monetary Dividend. Upgrading the ECB's Toolkit, Sep 2016.
Adair Turner, last chairman of the UK Financial Services Authority, adopted the idea as overt money finance. In his opinion, helicopter money is no more risky than present QE > Printing money to fund deficit is the fastest way to raise rates, Financial Times, 10 Nov 2014.
Frank van Lerven has gathered a number of impressive case studies when government-issued money decisively contributed to overcoming deep-seated recessions and depressions > A History of Public Money Creation.
As conventional Quantitative Easing is ineffective in real economic terms and, on top of this, comes with undesired financial side effects, helicopter money is an alternative instrument of economic policy and would undoubtedly be beneficial to an extent, particularly in countries where there is a high level of idle capacities and a serious lack of effective demand.
On the other hand, the various ways of monetary financing have been presented as a first step towards sovereign money reform, to which, however, they contribute only marginally. The dysfunctional system of fractional reserve banking continues to exist such as it is. Budgetary and fiscal government policies, too, remain basically unchanged, including the high levels of indebtedness. Simply, deficit spending on the basis of interest-bearing bank credit is replaced with deficit spending on the basis of central bank credit free of interest. Within the present frame of central bank accountancy there is no way of issuing truly debt-free money. Seen like this, helicopter money is not really such a thrilling alternative to conventional sovereign debt under the present conditions of zero or even negative interest due to financial repression.
In order to implement helicopter money, the central bank would need to be given the option of making direct contributions to the government budget. According to EU and US law such transactions are prohibited today, so that this strange prohibition of the sovereign from creating sovereign money on own account would need to be repealed or specified.
Whether this would mean blurring the boundaries between monetary and fiscal policy is controversial. Basically, yes; seen in closer detail, not necessarily – if and as long as the central bank, as an independent and impartial state body, creates the money on strictly monetary grounds, irrespective of the wants of the Cabinet and the Parliament.
In the US – as a different, but comparable approach – there is a tradition, even though interrupted, of Treasury-issued money in addition and in parallel to bankmoney and Federal Reserve notes. Referring to the 'greenbacks', the US dollar Treasury notes of the Civil War, there was the greenback movement in the late 19th century in support of US Treasury money. Currently > The Global Monetary Forum wants to revive the option of US treasury greenbacks.
In Canada, direct financing of public expenditure by the Bank of Canada existed from 1936 through to the early 1970s. Under the conditions of that time, in particular low levels of indebtedness and a huge, widely untapped productive potential of the country, that experience was particularly beneficial.
- Josh Ryan-Collins, A Case Study of the Canadian Economy, 1935-75, Levy Economics Institute of Bard College.
- Will Abram's video > History of Canada's National Debt
lawsuit against the Bank of Canada for failure to directly extend interest-free credit to the government
On 26 Jan 2015 three judges of the Canadian Federal Court of Appeal confirmed a judgment of the previous year according to which the Bank of Canada is entitled and in fact ought to contribute to funding Canadian government expenditure by way of direct interest-free credit to the government.
The renewed judgment was initiated by an action of the NGO COMER against the Bank of Canada, and a counter-action of the Canadian government against COMER (Comité sur la réforme économique et monétaire). COMER dates back to the Social Credit movement of the 1920-40s. From 1935 through to 1974 the Bank of Canada (an independent state body since 1938) had contributed to the government budget by directly crediting the government account free of interest. The money served to fund extensive investment in the infrastructure of the country, including education and vocational training, as well as to cover the costs of the Second World War. There was no inflation except the usual and short-time post-war inflation due to peacetime conversion as well as inflation in the 1970s – as was the case everywhere at the time.
In the meantime, the Supreme Court of Canada dealt with the matter - and has rejected the complaint on the grounds that it does not see itself as the right body to tell the government or the Bank of Canada how to exercise monetary policy.
So, that road of taking legal action does not lead any further. What remains, however, is political action to be supported by a paradigm shift from bankmoney to sovereign money among experts and the public. Given the poor legal foundations of the present bankmoney regime, informed political action has priority anyway.
In this video, Uli Kortsch explains that about half of US infrastructure costs is debt service, a fact that obstructs urgently needed investment in this field as in others. He argues in favour of debt-free government-issued money to overcome that barrier. The US actually has a tradition of issuing debt-free US Treasury notes, and there are such notes existing in parallel to Federal Reserve notes up to the present day, as is demonstrated in the beginning of the video.
• 35 economists from various countries make the case for injecting fresh money directly into the real economy > A post-Brexit economic policy reset, The Guardian, 3 Aug 2016. - Among the 35 is Lord Robert Skidelsky who explains why> Helicopter money is back in the air, The Guardian, 22 Sep 2016.
• Willem Buiter, chief economist of Citigroup, calls for > EU and China to use helicopter money, Epoch Times, 15 July 2016.
• In a paper in the real-world economics review, no.68, 2014, Trond Andresen has conceived of > The Central Bank with an Expanded Role in a purely electronic monetary system which might help to make the transition from bankmoney to sovereign money.
• Larry Elliott is convinced that> Helicopter money is closer than you think, the guardian, 7 April 2016.
The British Labour ex-candidate Jeremy Corbyn also had People's QE on his agenda. Related articles published in the guardian > here, and > here, and > here.
Also see Simon Wilson at MoneyWeek, 22.8.15 > What is QE for the People?
• Ellen Brown on monetary financing, or central-bank money for the people rather than the banks
> the Citadel is Breached: Congress taps the Fed for Infrastructure Funding, Counterpunch, 16 Jan 2016.
> Time for the Nuclear Option: Raining Money on Main Street, Common Dreams, 23 Sep2015.
• 20 economists plead for > Better ways to boost eurozone economy and employment in the Financial Times of March 26, 2015.
• Martin Wolf says "I fail to see any moral force to the idea that fiat money should only promote private spending." Read full article >
The Case for Helicopter Money, Financial Times, 12 Feb 2013.
• Mark Blyth and Eric Lonergan recommend to Print Less but Transfer More. Why Central Banks Should Give Money Directly to the People, Foreign Affairs, Sep/Oct 2014