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Brief comparison
Quantitative easing is unpredictable and it seems likely to be relatively slow in action. These properties, together with the effective retention of Bank Rate as the control variable, could cause instability of the sort that we have recently experienced.
Fiscal stimuli are slow in action and are expensive to the government and to the tax payer. Retention of the Bank Rate as control variable could again cause instability. Both with quantitative easing and with fiscal stimuli the predicted UK financial loads have been considered by some commentators to be so large that successive UK governments may not be able to support them.
In contrast, the proposals of the present discussion should be relatively highly predictable and fast in action. The proposals include three stimuli and a credit supply, as well as the removal of the burden of toxic assets, all at substantially zero cost to the national governments and taxpayers. International co-operation would therefore be greatly simplified, once the system has been demonstrated. The recession would be cured relatively rapidly. The system would be continued after the recovery from recession, giving a very stable recovered economy and a growth rate which is both large and the greatest attainable. The relatively rapid recovery from recession and the strong growth afterwards would keep to a minimum both the personal burdens of unemployment and the financial loads on governments - well within governments' support capacity. The present proposals could be set up very quickly.
Summary of the present discussion
Newly printed money or its equivalent is issued frequently to a rota of people who will spend it as an extra within about 2 weeks, with the amounts of money dependent on the frequent monitoring of prices and of the stocks of goods and services that are for sale, and of their rates of change, and without the money being sterilised. When the money issue has been well established and the recession is giving way, bank credit is made subject to requiring the backing of a proportion of central bank money, with the required proportion increasing to absorb the non-circulating notes which become passed to the banks.
The method gives an urgent and rapid increase in the rate of purchasing, so that prices, particularly of cars, can return to pre-recession values, so that industry can return to profitablity, so that people can achieve full employment, and so that the collapse of the structure of much of the world manufacturing industry can be prevented. The population is given enough money such that, when it is added to the money which they already receive, they are able to purchase and to keep purchasing all the stocks of goods and services that are for sale. The pain of the recession would go. The pains promised for after the recession would go. Prices would be stabilised such that their average remains constant. And high growth would be established: production for the whole economy would be able to increase without limit as far as the market is concerned, and the whole production would be purchased - provided organisations can keep prices and inventories as required. And the basic cause of the present chaos would be eliminated as variable Bank Rate would not be used as a control.
Simultaneously, in a second stimulus a joint credit issue between the government with newly printed money and one or more banks would increase the availability of credit as appropriate. And in a third stimulus printed money would be used to lower stirling if necessary for a balanced total trade. A further action removes the burden from toxic assets.
Fundamental philosophy and justification The most fundamental backing for money, for any money, is the existence of the goods and services which can be bought with it. The whole population by their work have created the goods and services. Bank created credit has not contributed more than interest free government currency would have done. Consequently it is natural justice for the population to be given sufficient new money, such that, when added to the payments which the population already receive, the population in total can buy the whole of production - without the need to borrow bank credit.
Introductory discussion
Some time back on the 28th November '08, in the Financial Times on the usual one page of 'Comment and Analysis', two very well known commentators Martin Wolf and Philip Stephens encapsulated what was then the problem of modern finance: even if we print and issue new money and put it into circulation, we must later sterilise it by selling bonds in order to take it out of circulation again. This sterilising kept us in line with the "Washington consensus" that we must at all costs avoid the horrors of printing money.
At the time Philip emphasised that we were trying to break out of the problem. And indeed we were breaking out. The Washington consensus has now been abandoned and money printing is taking its place. However in the writer's opinion there is not an adequate programme for using the printed money. For curing the present situation requires that
1. the creation of the money and it's distribution shall be very tightly controlled, both in timing and amount,
2. the use of the money shall be closely directed to the organisations and people who will rapidly and reliably spend it as an extra to what they would otherwise have spent, and
3. there is enough new money distributed for the work in hand, issued sufficiently rapidly.
The proposals described in the present discussion have been designed for these targets. The proposals are well suited to the situation and are recommended for adoption.
The November '08 criticisms of issuing new printed money were rather general and implicit, whereas on 8th December '08 on page 18 in the FT Alistair Milne gave a very specific criticism of the process of printing money. The matter is discussed on the page linked below. The conclusion is reached on the linked page that Alistair has pointed out a weakness of the present monetary system. Fortunately, restructuring is simple, at least to specify. Alistair's criticism is then avoided. Nevertheless, the restructuring is only to avoid the government making highly excessive interest payments and so would wait until the main cure for the recession has been put into place and is successfully working.
Before considering the details of the present proposals it is appropriate to consider the generalities of the situation.
In total in the present discussion three different stimuli will be proposed, all based on the controlled printing of money or its equivalent. Most of the present discussion is either general or centered on the first stimulus. The second and third stimuli dovetail into the later part of the discussion as their need becomes apparent. Comprehensive action is specified overall, including for the supply of credit and for the removal of the burden caused by toxic assets. The proposed action is applicable to every economy and costs essentially nothing.
Now the fundamental backing for printed money, and for any other money (even with the gold standard), is the food and clothing and shelter and all the rest of an economy's production which we can buy with the money. All the gold in the world would lose its value if these items produced by an economy ceased to be available. On the other hand, any paper which has been issued by the government and which has been made legal tender becomes fully acceptable as money when the required items of production are all available and when each item is, on average, available at constant price. ("Production" is here considered generalised to include services.)
The items of production forming the backing for the currency as above have been produced by the population as a result of people's past and present work. Furthermore the creative part of bank credit, as opposed to the part directly from customer savings, has added nothing to the economy more than would be added by say paper currency issued interest-free by the government. Consequently the situation of natural justice must be that the population should in total have enough money in its pockets to be able in the ordinary course of living to buy continually, and to keep buying, appropriately, the whole of production. In no way should the population's ability to buy, appropriately, the whole, be dependent upon any one section of the population - the banks - having to create credit, especially now that the banks have on so many occasions shown their unreliabilty.
In the present downward turmoil, with the population reducing its spending, and with money circulation slowing dramatically, the need is therefore for the government as the representative of the population to authorise and to legalise newly printed money to be issued to parts of the population as a free gift. Now it is essential that the manner of issue is completely stable. Firstly, the amount has to be sufficient such that, when added to the payments which the population otherwise receives, the new money enables the population to buy and keep buying appropriately all the production. And secondly, the rate of issue must be such that on average each item of production remains at constant price.
A highly stable manner for the above issue of printed money is described - given a tiny amount of updating - in a letter from the present writer to the Financial Times of 26th February '69. The money so issued would not be sterilised. The money would be issued on a rota basis to people who would usually spend the money almost immediately, say mostly within 2 weeks, and who would spend it as an extra to their usual purchases. The amount of money issued would be controlled such that all the production would be purchased, so that prices rose back to pre-recession values, and so that subsequent prices remained substantially constant at that level. The money issue would then give a very stable economy. In particular, the economy would subsequently be expanded continually, provided prices are maintained slightly below their nominal target and inventories are maintained slightly above their nominal target. Moreover the economy would also be found to increase the pressure on employers to increase production, as the present drag caused by the limits of the purchasing power of the market are, for the economy as a total, eliminated: as far as the market is concerned, all production, without limit, would be purchased, provided total inventories and average prices are maintained as specified. That also would be found to increase the bargaining power of employees.
The above manner for issuing printed money based on the '69 FT letter is therefore found to be the perfect solution to the recession. Detail is given in the linked pages indicated below, together with the other required actions. The recession should be cured relatively quickly, without the government having to borrow in order to cure it. After the recession the economy should climb to a healthy level. Alistair Darling's problems in the UK in curing the recession and extensive pains afterwards in paying for the recession, and similar problems in other countries, are then replaced by positive opportunity. There would be greater reliability in the economy. And the basic cause of the present chaos would be eliminated as variable Bank Rate would not be used as a control.
Fiscal stimulus
It is to be noted that the conventional fiscal stimulus, besides requiring repayment of the borrowing, also gives a nominally equal negative stimulus in the part of the economy where the money has been borrowed. So the net stimulus is marginal. Consequently the nominal total of the fiscal borrowing has to be vast for the net effect to be adequate for the purpose in hand. In contrast, when properly handled, the free issue of printed money and the other stimuli now recommended are not so-called sterilised and have no compensating negative stimuli. Instead they have a permanent effect on the money in circulation: the stimuli repeat every time the money circulates. Therefore on two counts the amount needed for the printed money stimuli as are here being recommended is correspondingly "small". The risks if any are therefore small. And being printed money the cost is substantially nothing.
The Weimar Republic and Zimbabwe
A general comment is that one has the impression that quite a lot of people in influential positions are adamantly against printed money because of its previous misuse - the Weimar Republic and Zimbabwe are commonly quoted. The reasoning seems to the writer to be rather like the situation would have been had the world refused to use aircraft for civilian transport - for airliners and for air cargo - because previously aircraft had been used for bombing. However the potential advantages of printing money particularly in the present circumstances are so great that one may surely ask decision makers and all even slightly influential people to study the possibilities - even if that means reading the present discussion.
The present discussion argues that the controlled issue of printed money as based on the '69 letter maintains constant prices (and implies that it can do so better than any other method based on any principle). Even, however, if in the present exceptional circumstances the bad state of the banks causes their credit issue to be highly volatile, and if oil and gas prices are also highly volatile, the present discussion would still provide substantially constant prices, by the close monitoring that is part of the '69 method and by the supplementary responses proposed as part of the present adaptation of the '69 method.
The other web pages
Alistair Milne's criticism and its avoidance is discussed in:
The fundamentals of the controlled manner for the free issue of printed money is described in the 1969 letter of the Financial Times:
A more complete description of the proposals to deal with the present situation is given in the page entitled
"The Plan
The money issue for recovery from recession - and other matters":
The derivation framework that has been used for the optimised control and which leads to the corresponding response of the economy may be found in:
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