Donald Trump is right—and his critics are wrong. (I’ll bet you never thought you’d read that on this blog.)
This one actually comes from a reader (ht: db) who wanted to know what I thought of the recent article by Ellen Brown on the debate concerning Trump’s “reckless” proposal to “print the money.”
First, though, a couple of key corrections: First, modern money takes the form of both bank deposits and currency (bills and coins).* Second, while sovereign governments (like the United States) can create money, they don’t print it (at least most of it). Instead, they create it electronically by purchasing financial assets or lending money to financial institutions (as with the various rounds of so-called quantitative easing, which increased the Fed’s holdings of mortgage-backed securities and other forms of bank debt and were purchased by new money that simply appeared on the banks’ computers).
Aside from that, Trump is right (as Brown explains), both historically and theoretically.**
The United States has long created money—to finance war, to purchase private and public debt, and so on—stretching back to Abraham Lincoln’s $450-million greenback program on up to the total of $4.2 trillion across three rounds of quantitative easing. In every case, it was money created by the government from nothing.
And, theoretically, that’s exactly how government money creation works. The only real distinction that needs to be made is between using the newly created money to purchase private debt and thus to create bank reserves (as was the case with quantitative easing) and using it to directly finance government deficits or to pay off government debt (otherwise known as monetizing the debt). The latter usually falls under the rubric of “helicopter money,” a term coined by Milton Friedman in his now-famous paper “The Optimum Quantity of Money”(pdf):
Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.
The effects are, of course, different in those two different uses of government-created money but the basic idea—that a sovereign government can create money for many different purposes—remains the same. It’s simply not controversial—or at least it shouldn’t be.
The only real issues from the government creation of money are (1) timing and (2) who benefits. Obviously, creating more money under conditions at or close to full employment has implications that are very different from a situation characterized by less than full employment (as has been the case for the past eight years). If resources are not being fully utilized, more money (helicopter or otherwise) does not lead to hyper-inflation. So, the critics who claim that, under current conditions (with millions of people who are unemployed or underemployed), creating more money is inflationary are simply wrong.
As for who benefits, that’s the real controversy—and the issue that is rarely discussed. Creating money to finance purchases of private debt from banks obviously improves bank balance sheets (and the incomes of their owners and the power wielded by the boards of directors) but it doesn’t necessarily stimulate economic growth (if banks are unwilling to lend, because for them it’s not profitable), and it doesn’t help homeowners and others who are drowning in debt. In fact, one can argue, as former head of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota recently did, that Federal Reserve’s policies after the Great Recession actually contributed to increasing wealth inequality in the United States.
That’s the real issue, as it is with all forms of government financing. Who benefits? Think about increasing taxes versus running deficits. Would wealthy individuals prefer to be taxed to finance government expenditures or, instead, do they want to be paid (via interest payments) for the privilege of lending money to the government? The answer is obvious.
Continually raising the specter of deficits and debt keeps the debate within their purview. Their real opposition to creating money is based on the fact that they’d have less control over the amount and kind of government expenditures that might be made. Things might get out of control—not the price level (that’s just a scare tactic, which too many people fall for), but the mass of ordinary people. They’re the ones who could demand and who would benefit from new schools and better-paid teachers, clean drinking water and more drug clinics, programs that offer jobs as well as assistance in forming worker-owned enterprises, and so much more through the expenditure of government-created money.
That, of course, is not what Trump (or, for that matter, Clinton) is proposing. But it’s the issue that really should be at the center of economic and political debate in the United States.
*When a bank makes a loan, a deposit is created in the borrower’s bank account. Thus, new money is created as a bookkeeping entry, with the loan representing an asset and the deposit a liability on the bank’s balance sheet. Thus, for example, the total amount of U.S. money (defined in terms of M1) at the end of April 2016 was $3,184.9 billion, the major components of which were currency ($1,365.9 billion) and bank demand deposits ($1,298.4 billion). Currency is an even smaller proportion of “near money” (defined as M2), which totaled $12,659.3 billion at the end of April.
**At least right now, unless and until Trump changes his mind and announces a very different approach.