By Virginia Hammon & Mark Pash.
When we change our money system from debt-money created by private bankers to government-created asset money, will that lead to inflation?
No. It will establish steady-value currency that will eliminate the economy-wide boom and bust cycles caused by our current system, and that can eliminate the possibility of high or hyperinflation.
When introduced to a Just Money system – money created as an asset by government – some express fear that Congressional spending would run wild and we’d shortly have high or hyperinflation. They fear that government is incapable of honoring the need to spend within the constraints of our existing production, capacity, and raw materials; they fear that Congress would spend to please funders and constituents to garner campaign funds and votes – something that routinely happens in our current system in which Congress-members spend many hours each day on the phone working for the goodwill of their funders and raising money for the next election.
People say, “Look what happened to the German Weimar Republic after WWII, or Zimbabwe in 2008, or Venezuela since the 1980s! Let government create money and it will always get out of hand!” That generalization is private bank propaganda. The privilege and power to create the money supply carries enormous benefits for the private bank system. When bankers can convince people that government created asset money will cause high or hyperinflation, it serves to keep money creation in their private hands.
What triggers increasingly high inflation?
The reasons for high inflation are complex in a global economy. Many situations, including many beyond the scope of monetary policy, can trigger a run of increasingly high inflation: imbalances in a country’s trade deficit and balance of payments with other countries; the corruption of an authoritarian government that creates excesses of money for personal gain; an outside power’s exploitation of a country’s natural resource or production base; or the dictates of the powerful international banks for austerity measures and resource extraction that can cripple economies. These situations can all trigger inflation and the ultimate collapse of a currency.
The foundation: who & how money is created
Who creates and how the money supply is created is at the foundation of a nation’s vulnerability to high or hyperinflation. In nearly every instance when there has been hyperinflation, the money system in place allowed private banks to create the national money as debt, which is an inherently unstable system (for reasons explained in other materials). There was often an unholy deal between the bankers and corrupt sovereigns to create excess money for gross overspending on the part of the government, with interest and seigniorage benefits going to the bankers and into the private pockets of powerful people – and it spiraled out of control. (Seigniorage is the difference between the cost of production and the face value of money.)
A government of, by, and for the People, that operates transparently and with broad participation in decision-making is a crucial component of establishing a sound money system. And, it’s a bit of a chicken and egg issue. An effective and highly functioning democratic republic can only rest on a Just Money foundation; and a Just Money system rests on a functioning democratic republican form of government. But, governance is a topic for another paper.
Here is how Just Money addresses inflation concerns.
First, what IS inflation?
Inflation is when the purchasing power of a country’s currency declines. It takes more money to buy the same thing.
Costs and prices can go up in whole sectors of the economy, such as higher education or health care in recent decades. Some sectors like technology show the opposite tendency; costs and prices consistently drop for the same technological capability through increased productivity. These sector-specific increases, sometimes called inflation, are generally related to resource availability, political and fiscal policies, and can be a result of complex webs of economic and social pressures. They are not directly a product of monetary system dynamics, and do not risk whole system inflation.
Inflation is not about everyone wanting a particular kind of phone in short supply so retailers can charge more for it. That is about a big increase in demand without an adequate supply.
Here we are talking about when prices in the whole economy go up. It’s another way of saying that our money is worth less. Inflation – rising prices in the whole economy – can happen in three general ways.
A Critical or Broadly Used Good or Service
First, when there is a short supply of a critical and broadly used good or service, and there is an inadequate capacity to catch production up to demand quickly, the price goes up, and this can push up prices in all sectors. For example, everyone uses energy and we have been heavily dependent on fossil fuels. So, when the price of oil went up in the 1970s, all prices went up. The market manages the cure for this kind of inflation. It invents other kinds of energy or uses less, and that’s just what we’ve been doing over the past 50 years. Hyperinflation is not a risk with this kind of inflation.
Money Supply & Demand
The second kind of inflation happens when too much money is created – today by the private bank system. When banks – or government in a Just Money system – create and distribute money that chases after preexisting goods, services and assets, without a proportionate increase in production of any goods or services, supply and demand forces adjust the value of money. When there is too much money in the supply for the goods and services produced, each dollar is worth less, it takes more to buy the same thing, and prices go up.
The supply of money is closely tied to how it has been distributed, and where it ends up circulating. For example, there is evidence that the extraordinary amounts of new money being created by our central bank, and poured into the financial sector to shore it up, have not caused inflation on Main Street. This is because the new money mostly remains in the financial sector where it shores up balance sheets and is used for further speculation. It raises asset prices, such as stocks and real estate, beyond the level warranted for genuine growth in value, which benefits speculators.
In our debt-money system new money is created by the commercial banks and mostly distributed first to the real estate and financial sector against collateral like homes, buildings, stocks, and bonds. Much of it remains in the financial sector as money making more money for the few. The advantage of this near endless distribution and absorption of new money by the financial sector is that it keeps inflation low in the general economy. One disadvantage is that it creates asset bubbles that eventually burst, causing severe hardship.
For example, over $6 trillion was created in the month of November 2019 and poured into the coffers of the big financial players, to stave off a meltdown and consequent recession (before the pandemic arrived) and, while the total poured into the financial sector by now is well over $9 trillion, there has been no inflation on Main Street, while stock prices have continued to climb. Another asset bubble burst and recession or depression is looming – inevitable in our current money system.
Global Trade Relationships
There are also balance of trade and global reserve currency issues that impact how much currency is available within the country of origin, and how much is stored or in use in other countries. These factors can influence the domestic buying power of a currency, and hence relate to inflation.
Balance of trade and payments
A country that buys-imports significantly more than it sells-exports abroad will find itself short of money for use domestically, and this can cause deflation, or at the least be a pressure against inflation. The US buys more than it sells, and it benefits the system that much of that money comes back into the US as foreigners invest in the US or send their kids here for education. This keeps the money supply in domestic use moderately stable. The downside is that foreigners end up owning substantial percentages of real assets in the US, and this can create sector inflation – such as the Japanese home buying frenzy in Hawaii in the late 1980s. Today’s estimates of foreign ownership of US Assets range from 30 to 40%. This is a loss of sovereignty that can be considered foolish and unjust and devoid of net benefit to ordinary citizens.
Global reserve currency
It also matters that the US dollar is used globally. Roughly 60% of our cash currency is used abroad. And, dollars are a major reserve currency. In 2019, reserves of $6.9 trillion were held in dollars, representing roughly 62% of total global reserves. Since in 2019 the Fed reported our domestic M2 money supply at $15.3 trillion, you can understand what a difference it would make if the world lost confidence in the US and reduced its use of the dollar as a reserve currency. If these reserve dollars returned home to roost, we’d add $6.9 trillion in dollars to the supply in use at home, and it could cause significant inflation.
Today we maintain this dollar hegemony primarily with our military dominance, which costs about $1 trillion – roughly 21% of our government operating budget and 5% of our total gross domestic product. In our existing money system we are somewhat locked into this devil’s bargain; to maintain our purchasing power and avoid significant inflation, we must use our military might, but spending so much on military dominance means we do not spend what other countries spend on the general welfare and our economy consequently suffers. Trying to maintain dominance by force in a world shifting increasingly toward the far more productive partnership models of relationship is also a misguided long-term strategy.
Inflation is intended today
Debt-money systems intend some inflation
In a bank-created debt money system, SOME inflation is considered desirable. The private banking consortium that creates our money aims to cause 2% inflation every year because it serves the bankers to have a little bit of inflation. More often than not, the money creators surpass this goal! A little bit of inflation benefits the owner and investor class more than it benefits everyone else. As prices rise, investors can make more money on investments. While debtors also benefit by owing money that is of less value than today’s dollars, the ruling and owning class has a much greater ability to accommodate the decreasing value of money and still profit. However, ordinary people can be troubled by even low inflation as the value of our money steadily erodes. Wages do NOT keep up in our current money system. And, we’ve come to accept that steadily increasing prices are just the way the world works. They are not. They are the way the money system we use today is designed to make them work – to the benefit of the few, at the expense of the many.
In the privately-created debt-credit money paradigm, it is only high inflation that is considered a problem. Just Money advocates consider any inflation outside the goal of a steady-value currency – though a little bit now and then is inevitable in a human-created system. Perfection is impossible. Systemic intention matters.
How do we measure inflation?
The Consumer Price Index (CPI) is the standard measure of inflation in the United States. This data is collected by the Department of Labor Statistics and is used to publish comprehensive and sector-specific reports. We keep track of the prices of a basket of goods that most people use and track the overall change in the cost of this basket. What goes in the basket matters, and keeping it updated, accurate, and useful is an enormous challenge.
The CPI is a consequential economic indicator, used to judge the effectiveness of government policy, to adjust the value of other economic indicators, and as a reference point for many kinds of income payments that impact hundreds of millions of Americans.
The CPI does not include asset value inflation, such as rising prices of stock, houses, and other real estate. (Though home prices are reflected in the inclusion of the rental value foregone by home ownership that IS included in the CPI.) Additional indexes are maintained of asset-price inflation. Since in our current money system, these assets have first access to newly created money, it is important to pay attention to the asset-price index as well as the CPI.
After Just Money reform we will use ALL the indicators of price change collected and reported by the experts, AND we can ask citizens to make a simple report on how steady they believe prices have remained in the previous year for the country. This question can be asked on tax returns and/or on ballots. Aggregating the wisdom of this broad segment of the population will be an interesting and important adjunct and check on the opinions of experts. (See The Wisdom of Crowds by James Suroweicki).
What is Just Money?
Just Money is national money created by government as an asset. This is the way coins are created today. Today coins are the only money created by our government. They get into circulation when someone buys them from the government at face value with existing bank-created dollars. Our government can borrow apparently near-unlimited amounts of money created by the private banking system, but today We the People do NOT create more than about 1% of the money supply. We have fuller explanations of money systems and the many advantages of a Just Money system described elsewhere.
What prevents inflation with Just Money?
#1. Just Money is designed to keep the value of money steady
Design directs how a system functions. As noted, our current debt-based money system is designed to devalue our money at a target rate of 2% – and often overachieves. Just Money is designed to maintain as steady a value as human nature can achieve in a complex system, and its design builds in fail-safes.
A Just Money system separates the creation of money into three steps. This design and its inherent values is a major bulwark against inflation.
- We create an independent steady-value money agency that decides how much new money the economy can use and keep the value steady. This decision is based on research and is independent of politics as much as possible by the instituting mandate.
- The creation. This is a law that by fiat adds new money to the government bank account, based on the amount deemed possible and still maintain a steady-value currency.
- The distribution. The Just Money legal mandate assures diversity in the government decisions about new money distribution. The instituting law can mandate a proportion of direct distribution to individuals, states, and the federal government, for specific spending, investing, giving, lending choices at each level. At the federal level decisions will be made by Congress, respecting the open information, democratically negotiated process instituted by our Constitution.
Inherent Values. Just Money institutionalizes making the general welfare and an economy that is healthy for all the highest priorities. It creates a level playing field, and does not intrinsically transfer money from the many to the few. These inherent values and characteristics create pressure toward maximizing diverse distribution and circulation which keep inflation at bay and increases prosperity for all.
How much money can be created and keep the value steady
A steady-value money agency determines how much new money can be created in an upcoming year without changing the value of money. We are human and it will be a challenge to maintain a steady value for our money with as little inflation or deflation as possible. However, with steady-value money the goal, and an abundance of tools for monitoring and maintenance, we are capable of maintaining that steady value for our money. We can avoid the disadvantages of long-term low inflation, while wholly avoiding the possibility of high or hyperinflation. See our other materials for how this steady-value money agency can best arrive at its money creation recommendation and how money can best be distributed.
How new money is distributed to support a steady-value money
Profit-making goals remains in the private sector, but the public creation of the money supply makes the general welfare and a quality economy the primary goals of government, and takes private profit out of decision-making for the public good. Because Just Money establishes a level playing field, it will support this effort.
Widely diversified distribution is another design element of a Just Money system that works against inflation. While in theory our current system creates money in a widely diversified manner (because it is created as individual banks make loans to many individuals and businesses), most new money is loaned within the financial sector and/or requires asset collateral of some sort. And all new money creation is made based on whether the banks can make a profit from their lending. This severely constrains the diversity of distribution. Some community banks make lending for the well-being of the community a secondary goal. Most big banks make proportionately minuscule efforts to benefit the nation through their money-creation lending.
The law instituting Just Money may set parameters on new money distribution assuring broad diversity. For example, Congress could decide that 1/3 of all new money goes directly to individuals equally; 1/3 goes per capita to the states for states to determine distribution; and, 1/3 is spent by the federal Congress. This diversification will reduce the risk of inflation.
We can also spend more on the many ideas that will improve the general welfare and create a quality economy. We can experiment to see what level of basic income we can provide to all our citizens. We can implement healthcare and education for all as has the rest of the world’s richest nations have done (and many poorer ones!). We can maintain and upgrade our infrastructure, clean up the environment and develop alternative fuels. With Just Money, IF there are the resources and the people with the skills to implement government spending, there will be no inflation.
And, because Just Money will be created by the government as a national asset, if there is a drift toward inflation, the government can simply hold back on any new money creation until the value steadies. When there is a drift toward deflation, the government can create additional money and distribute it as described above. That’s an important anti-inflation AND anti-recession/depression attribute of this system.
How reducing debt reduces the chance of inflation
Eliminating the existing systemic demand for growing all kinds of debt will remove existing inflation pressure.
In our existing debt-based money system, debt must grow exponentially. That’s how money is added to the supply. New money is created by issuing debt, but the interest on the money must come from the existing supply. This exerts a pressure on borrowers to raise prices to cover their interest costs and contributes to the steady inflation rate desired by the Federal Reserve debt-money creation system.
Just Money is asset money – no debt involved. This removes the systemic pressure for increases in debt and the consequent inflation pressure.
How Just Money supports the goals set forth in our Constitution
In our current system, in which the private bank system determines how much money is created every year, their overriding concern is whether they can make profits on the loans they make that create the new money. That system has a deeply systemic pressure toward profits and growth that is not sustainable. This contributes to inflation pressure – since the easiest way to have the money to pay back interest is simply to raise one’s production and/or prices to levels that includes pay back and interest. Because this old money system creates new money based on what will make a profit for private bankers market growth and profits are institutionalized over valuing the general welfare.
Just Money shifts the overriding value to achieving the purposes set forth in the first paragraph of our Constitution – form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity. And, since it will take a great while and quite a bit of spending to come anywhere near a perfect Union, we’re unlikely to face inflation pressure any time soon.
#2. Historical precedent
History tells us that using Just Money does not cause inflation. In addition to some experiments in Colonial times, twice before the United States has created public asset money, free of debt. As an emerging nation, we created Continentals to win the Revolutionary War. And despite British efforts to counterfeit millions on printing presses off our coast to devalue and destabilize our new currency, we won the war and Congress did not overproduce the currency. Unfortunately, the bankers produced extensive propaganda blaming Congress and government for the excess counterfeited supply, were believed, and successfully took over the privilege and power to create our money.
And, when President Lincoln faced the crisis of the Civil War, Congress created Greenbacks – Just Money – free from debt, fair to all, and there was no excess inflation – even when counterfeiters doubled the supply then, too!
#3. VOTE THEM OUT
When our government has the privilege and power to create our money supply, and a mandate to keep the value steady and to distribute the new money to promote the general welfare and quality economy, then, when there is failure we can vote the decision-makers out of office. We currently have no recourse except an expensive bailout when the private banking sector creates too much money blowing up a bubble that inevitably pops.
There are additional policies that can be implemented in any money system that push back against inflationary pressures.
Encourage the 5Rs: Reuse, Repair, Renewables, Regeneration and Recycling. These policies reduce demand pressures on raw materials and commodities especially non-renewable raw materials and exploitation of the environment and its concomitant cost increases.
Tax. Just Money can reduce taxes because it reduces the cost of everything by removing the interest burden that our money carries under the current system. Taxation also remains in the tool bag for removing money from circulation should that be needed as a backup strategy against creeping inflation. Taxation also plays a role in circulating money through individual and community coffers, which is discussed in another paper here. Taxing only works as an anti-inflation strategy when the money is removed from circulation is held in the Treasury accounts and not spent back into the economy.
Sell treasury bills, notes, and bonds. When the public buys IOUs from the government this also removes money from circulation and serves to reduce inflationary pressures when the government holds possession of the money removed from circulation. In a Just Money system, the government does not need to borrow as it does today (paying roughly 17% of the entire Operating Fund on interest), but government debt can be an inflation backup tool if needed.
Usury laws. Establish maximum interest rate charges. Interest charges are sometimes a cost of doing business, but extremely high interest rates are an upward pressure on prices.
Anti-trust enforcement. Monopolies and oligopolies reduce the competition and innovation that can keep upward price spirals in check.
Balance global trade. In our global economy, trade and balance of payment deficits can diminish the value of a country’s money. Since all the countries of the world are truly only as strong as the weakest country, it behooves us to work toward a just world. Tariff and deficit management policies can be win-win and promote the well-being of all nations. In the current debt-money system, compounding interest piles up on deficit nations until they are unable to pay it back, eventually resulting in defaults, write downs, and asset seizures that create financial crises and severe human hardship. This is a deliberate choice and we can choose a better strategy.
We could create mechanisms for a surplus trade nation to send money back to a deficit nation, in order for the deficit nation to purchase goods and services from the surplus nation the following year. This would create a quality economy for all and a eliminate one of the major causes of inflation and financial crises in the global economy, where it too often ruins trade and collapses economies.
Encourage & promote. Our leadership can encourage and promote actions in the private sector that work against inflation.
Save and invest rather than over consume goods !
Spend on personal services and experiences rather than over-spend on hard goods ! These shifts reduce the strain on raw material prices and the environment.
Educate children and adults on the skills needed to think outside the box and innovate.
Just Money = steady value money !
this article in Spanish would be great !!! Congrats !!
Great article. My only caveats are that resource scarcity and productive capacity can cloud the issue, that governments can indeed abuse monetary creation for budgetary reasons, and that asset inflation is a precursor to consumer price inflation. There is no magic line that pertains to resource scarcity and productive capacity, because the resources that are easiest to access are used first, and the most productive people are hired first. While we should endeavor to reduce resource consumption and increase reliance on all people who have something to contribute, this has to be done by changing what we tax and how… Read more »