This commentary is by Wavell Cowan of Montpelier, a research scientist, inventor, entrepreneur, businessman, social activist, and author.
Tom Wagner argues that rising government debt is not a problem. Deficit spending is a consequence of the fact that the financial sector creates the new money required by the economy. This is great for the financial sector (where Tom earns his money) but is now a problem that needs fixing.
The solution is conceptually quite simple. The federal government, instead of authorizing the financial sector to create the new money supply needed by the economy (as it now does through the fractional reserve system), could itself create this new money supply by spending it directly into the economy to replace deficit spending.
The ups and downs in the GDP over the centuries in both the UK and USA have been precisely mirrored by the ups and downs in the money supply. Therefore, matching the money supply required for any particular level of economic activity is the fundamental “technical” challenge that needs to be addressed.
Too little money, and the economy will fail to achieve its growth potential. Too much money will mean the economy is unable to meet the demand created by the money supply and the resulting price inflation will adversely affect the value of the currency.
The technical solution to this problem requires the scientific analysis that will produce a statistically strong mathematical connection between relevant variables in the economy and the money supply necessary to sustain the economy at an optimum level of activity. Once this model exists, a robust means to ensure the required money supply is actually available needs to be put in place.
The fractional reserve system by which the private banking sector increases the money supply is not only far from robust, but incapable of meeting the criteria that any decent scientific analysis would establish for a workable system of money creation. No legitimate scientific enquiry would make the creation of the money supply solely dependent on increasing the total of the private and public debt in the economy. Yet this is precisely how the money supply is now created.
Any such enquiry would further propose a direct and clear connection between the system of money creation and the public good, something currently nonexistent.
From this perspective, only a money creation system controlled by Congress can successfully meet the suggested scientific criteria. This would have a government agency undertake the scientific modeling essential to any rational form of money creation. The increase in the money supply dictated by this model would be achieved by government legislation to spend this required new money directly into the economy to support infrastructure and other investment needs based on considerations of the public good.
The new money needed to meet the demand in the economy would thus be provided by public sector spending before flowing into the banking system as the deposits that would become the funds available for the activities of the financial sector. In effect, the fractional reserve system would disappear, and banks would be required to maintain cash reserves that covered 100% of their loan portfolios.
Such a system would free the economy from the debt-driven fluctuations in the money supply currently responsible for recurring recessions and the existence of the business cycle. It would also eliminate the need for government borrowing and deficit spending as the means to increase the money supply.
This would eliminate the “casino” economy we are now experiencing and make possible the option to pay down the already enormous public debt.
