Economic Heretics
are those people who have challenged the fundamental assumptions of money.
Proposed Solutions to Money’s Problems
There has been no shortage of monetary critics over the last two centuries and they have done much to identify the various problems and propose solution. They have included some of the most respected economists of their day and our own, as well as a host of others from outside the field. Their notions taken as a whole offer a comprehensive view of money’s flaws and strengths and form the basis of my offering to follow.
Solution One: 100% Money
The concept of 100% money is a fairly simple notion. It would prohibit all private parties from the practice of creating money. The 100% refers to the 100% reserve requirement that it would impose on all demand deposits in banks, i.e. the banks could not loan money that they did not possess. No one could receive money from a bank unless someone else actually gave up use and control of that money. This right of money creation, is and should be, the sole prerogative of the government, in the general interest. The concept was fully elucidated by many economists, some of who follow.
Alexander Del Mar anticipated the concept of 100% money with his basic principle that the unit of money is all such money. He wrote in the mid to late nineteenth century and was active in the Free Silver movement. A monetary historian and theoretician he wrote many books, the most pertinent here being “The Science of Money”. Money is a tool designed to measure value with precision. Money must be clearly defined and completely transparent and not subject to manipulation by any private parties.
Frederick Soddy, Nobel Prize winner in Chemistry, set his sights on money in the mid 1920’s. He was so incensed at the structure of the money mechanism that he began a whole new career as an economic critic. He believed that the system of fractional reserve banking was tantamount to legal counterfeit. He at one time advocated jailing the directors of the Bank of England. His notions informed and inspired the Chicago School’s proposals for banking reform in the early thirties.
Frank Knight of the University of Chicago wrote in a review of Soddy’s monetary critique,
“The practical thesis of the book is distinctly unorthodox, but is in our opinion both highly significant and theoretically correct. In the abstract it is absurd and monstrous for society to pay the commercial banking system ‘interest’ for multiplying several fold the quantity of medium of exchange when (a) a public agency could do it at a negligible cost, (b) there is no sense in having it done at all, since the effect is simply to raise the price level, and (c) important evils result, notably the frightful instability of the whole economic system and its periodical collapse in crises.”
Soddy saw the problem as a conflict between real wealth, actual goods and services, and virtual wealth, the monetary structure that poorly mirrored it. He supported 100% reserve requirements, and the reservation to government alone the power to create money.
Irving Fisher, Yale mathematician and economist, became the most prominent economist of his era to promote the notion of 100% Money. He dedicated the last thirty years of his life to proposal, at the cost of his own personal and professional reputation. Fisher took up the crusade after loosing a personal fortune in the stock market crash of 1929. Fisher, noted mathematical economist and monetarist, was determined to find and correct the flaw in money that created the periodic collapses that plagued mankind.
The conservative Chicago School and its principal modern representative, Milton Friedman, have been amongst the supporters of the 100% reserve requirement proposal. Ronnie J. Philips in his book “The Chicago Plan & New Deal Banking Reform” cites four prominent economists, Frank Knight, Henry Simons, Jacob Viner, and Lloyd Mints, founders of the Chicago School, who were strongly committed to the concept of laissez-faire in the industrial sphere, who did not extend this doctrinaire stance to the arena of money creation. Through their policy proposals they demonstrated an acceptance of the notion that money creation was the natural monopoly of the federal government. Early in the Franklin Roosevelt administration they proposed a 100% reserve plan, which was not enacted. They called for the complete nationalization of the Federal Reserve, the establishment of Federal Reserve Notes as legal tender, and a 100% reserve requirement on demand deposits. They would effect a split in banking functions, leaving money creation in the hands of federal government for the general interest, and the credit function to be administered through a structure of savings investment trusts. This split has become known as Narrow Banking.
Milton Friedman still claims to support the idea of 100% reserves, but says the other extreme, 0%, would be acceptable as well, allowing banking to be open to all. Caveat Emptor indeed.
Maurice Allais, French economist and physicist, adopted monetary criticism from his efforts to systematically look at the economic histories of the world’s civilizations. He was attempting to draw some general conclusions about what types of economic policies produced what types of society. As one can see in his previous quotes, he felt that society’s definition and structure of money to be among its most important and decisive factors in the type society that developed. He understood that reform limited to currency was doomed to failure unless it included not just demand deposits but other media of exchange that rose up to challenge the government’s monopoly on the creation of money.
Perhaps the best single source on the 100% Reserve Requirement is Ronnie J. Philips’ “The Chicago Plan & New Deal Banking Reform.” It is a historical overview of the idea from Soddy on into modern times. I owe the comments on The Chicago School and Maurice Allais to Philips’ effort.
Philips notes the 100% reserve requirement to be an alternative to deposit insurance, which under the 100% system would be redundant. He also argues that if the government was to stay involved in bailing out large financial institutions that have bet wrong, much of the effort of the reform will have been wasted.
Philips has done the material extreme justice and has made the case for the relevance of its application to be timeless. In his conclusion he writes. “Our present difficulties stem from the unusual mixture of government and private production of money. The real problem is how to construct financial institutions that do not impede the development of the economy, yet are flexible enough to allow for technological innovation and market discipline. The reforms of the 1930s worked reasonably well for several decades. We will be fortunate if financial reforms in the 1990s endure into the middle of the twenty-first century.”
Read this book. Buy this book.
Solution Two: Money that deteriorates over time
Silvio Gesell, Argentinean-German businessman and anarchist, wrote his masterpiece “The Natural Economic Order”, in the early twentieth century. It was first published as a series of separate articles, and in 1916 as a single volume under this title. Gesell believed that the critical flaw in the structure of money was that it did not deteriorate or suffer storage costs as other goods. This gave money an advantage that could not be overcome by the holders of other commodities. Gesell saw the economic crashes that plagued the world (and still plague the majority of people on earth) were intentionally created and maintained to throttle their populations into submission and acceptance of their lot as chattel of the propertied classes.
Gesell proposed a monetary mechanism known as Stamp Scrip. Stamp Scrip is currency issued with space for affixation of stamps on its back necessary to keep the money current. He favored a one percent per month stamp. Thus a hundred dollar note would require a one-dollar stamp each month, paying for itself in 100 months.
Gesell wished to remove all advantage to the hoarding of money, and to guarantee existence of a circulating medium. Its main success story was the Austrian town of Worgl at the height of the great depression. The local government paid stamp scrip into circulation by undertaking various civic improvements. The results were miraculous. Prosperity returned to Worgl, and the town was running a surplus until the Austrian central bank got wind of it, and quickly shut it down.
J. M. Keynes spoke favorably of Gesell’s proposals and analysis even going so far as to say that Gesell would eventually have a greater historical impact than Karl Marx. Keynes admitted the possible necessity of something like Stamp Scrip when society entered periods of liquidity traps, but only as a temporary measure.
University of Washington at Tacoma economist Guido Preparata makes a strong case that Keynes entire theory of interest is plagiarized from Gesell. “Thus Keynes appropriated Gesell’s Theory of Interest (which accounts for business paralysis when profitability sinks below basic interest- now apocryphally referred to as the ‘Keynesian trap’) but discarded the scrip (too radical)”.
Irving Fisher also wrote favorably of Gesell’s ideas, identifying that Gesell was the first economic theorist to introduce any mechanism that would directly address money’s velocity of circulation. Fisher also favored temporary issuance of Stamp Scrip during times of extreme financial distress. Fisher wrote a book on the idea, “Stamp Scrip”, but did not see it as a complete replacement for the existing system, but only a temporary measure to get things moving.
Solution Three: Universal Basic Income
The notion that a universal personal financial payment of some type would be desirable has a long history, much of which is being covered at this conference. The 1972 American Presidential Election was my first introduction to the concept of a basic income. The Republican and Democratic parties both put forward programs to replace welfare. Both plans showed promise, and both met political demise. The democratic plan fell apart when George McGovern could not explain where the money was going to come from to give everyone a $1,000 a year. The republican plan was allowed to die in committee when Richard Nixon withdrew support for this basic reform. I later ran across Milton Friedman’s free market justification for the basic income in his idea for a Negative Income Tax. I became a believer, but wandered alone for years until the Internet arrived, and I found that not only was the idea not dead, but was vibrant.
The Internet brought me to the Basic Income European Network, (BIEN) and our own United States Basic Income Guaranty,(USBIG). Please peruse the rest of the conference for the arguments from market efficiency, from social and personal justice, and just downright sensibility. The Basic Income is the most important, and I think more important than the other parts of the solution. It is the only solution I would advocate alone, without my other recommended reforms. You only need read the other papers at the conference to understand why.
Solution Four: The Single Tax, or Free Land
Henry Spartacus George wrote his magnum opus, “Progress and Poverty” in 1879. George believed that the economy, both labor and capital, suffered due to inflated land rents. His solution was to tax all land rents, replacing what he considered a landed aristocracy with a vibrant free market. Silvio Gesell dedicated “The Natural Economic Order” to Henry George. George believed the single tax on land rent would replace the destructive customs duties, and the proposal for graduated income tax, which he considered to be onerous to the promotion of prosperity. He contended the single tax would not, and would promote universal prosperity.
Silvio Gesell also recognized the unique nature of land in the economy. He believed land should be publicly owned, and privately held through a tax or rental schedule. Though his money theories are not anticipated in George, much of his land theory is. Gesell understood that there were two entities that could not be allowed to serve only private interests, money and land tenure. If any person or group of persons were to control either they could enslave their fellow man by withholding them. Money and land are unique in lack of viable substitutes.
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