A very specific criticism

On the Home page in the 'Introductory discussion' the first paragraph of the main text summarized what seemed to be a fairly common view concerning printing money, but the criticisms were rather general and implicit. However, on 8th December '08 on page 18 the Financial Times gave a very specific criticism of the process of printing money and freely distributing it:

Eric Lonergan of M&G Investments had proposed printing large amounts of money for free distribution to households in order to cure the recession. In reply, Alistair Milne, a Reader in banking at Cass Business School, City University London, argued that billions of notes would end up placed in bank accounts (presumably because of the popularity of plastic and other forms of bank money for general use). These notes would increase bank reserves with the central bank and cause the central bank to have to pay interest. Alistair said that the amounts of interest could be very large, sufficient to threaten the financial stability of the central bank and government. Consequently on Alistair's argument, the process of printing money for free distribution was unacceptable.

There is, however, a broader context.

In an economy with only a single form of money, and with the single form of money being paper money issued as legal tender by the government, the government would have the responsibility for maintaining the health of the economy. It would also, however, have the power to maintain the health of the economy, in so far as it could control the money issue at substantially zero cost. For if there was a sudden lack of spending leading to a recession, the government could merely issue more money after the manner recommended on the other pages of this website. The cost would be substantially zero and, if carefully carried out, the cure for the recession could be rapid and complete. If the single form of money were electronic, the same situation would hold. And in fact, provided the government was the only supplier of money, the money could be in dual form, with both paper money and electronic money, and still the same situation would hold.

When, however, the government allows the banks to be a second supplier of money, potentially problems can arise. The government must not be so generous to the banks that the government itself becomes unable to carry out its responsibilities. That is what has happened today. Even though, today, it is the banks which have caused the recession, it appears to be the manner of functioning of the banks that, under Alistair Milne's criticism, is also preventing the government from freely issuing its own money. Instead of the government being able to cure the recession rapidly and at zero cost, it has to borrow huge amounts of money and pay it back later. Economic commentators agree that the borrowing is necessary and may not even be enough, yet the borrowing as intended is so great that some commentators wonder whether such borrowing and its repayment may completely overwhelm the country. The general situation of the recession is widely agreed to be serious. Many people, including some of the banks' own previous staff, have lost their employment. Moreover the matter is highly urgent: industry is affected and previous experience of the present crisis is that it has become rapidly worse when it was not expected to do so. Action is therefore required.

The solution must be that the government restructures the role of the banks in relation to the money circulation in such a way that the government is properly able to carry out its responsibilities - and in such a way in fact that the government is able to cure the recession rapidly and without borrowing in order to do so.

Fortunately the required restructuring changes are simple - at least in their specification. The restructuring would require that ordinary bank credit is backed by at least a small proportion of government legal tender in order to be legal tender. In other words ordinary bank credit would be regulated such that it requires the backing of a certain proportion of legal tender in the form of non-interest-bearing government printed notes to be held by each bank in order for its ordinary credit to be legal tender. The initial required proportion of notes would be set to fit reasonably the averages already existing at banks. The specified proportion would then be gradually increased when the new printed money is issued, such that the extra notes so required by the banks reasonably matches the extra that is being issued. In that way the recession would rapidly be cured by the money that is being issued and almost immediately spent, while Alistair Milne's criticism would be being avoided.

But start curing the recession first

The restructuring is only to avoid the government having to make excessive interest payments and so can wait until the main cure for the recession has been put into place and is successfully working. Time should not be lost discussing the restructuring before taking all the necessary main action and starting the main cure.