Abolish State Money

Recently by Michael S. Rozeff: Americans, Listen to the Ruling Elite… Give Up Your Wealth for Nothing

In his article, "From State Debt to State Money," Rudo de Ruijter criticizes the existing "money system" and calls for "state money". He thinks of this as "bank reform".

State money is reform? Not one little bit. We will have reform only when the forms and supply of money are market-determined, not state-determined. In other words, we will have reform only when each person decides for himself what kind of money and how much of it he or she wishes to bid for or offer in a free market. There is no reform when these decisions are being made for each of us by a state, either in the present arrangement or in a greenbacker version of state money.

Our core problem now is that money is a state creation. The Fed and other central banks decide how much high-powered money to create out of thin air. It serves some purposes to emphasize the Fed's private character; but the state created the Fed and gave it its power to create money, and the Fed works hand in glove with the U.S. Treasury. The relevant contrast is not, as Ruijter makes it, between a private institution that controls money and a state that controls money. This is not the either-or choice that we face.

Our core problem is that money is very highly politicized. State money of the kind that Ruijter proposes is also totally politicized money. His proposal and proposals like his that keep the power to create money in the hands of government officials do nothing to resolve the existing core problem.

The either-or choice that's important is between free market-determined money and state-determined money. It's between liberty and slavery in the monetary realm of human action.

The framers of the U.S. Constitution, having lived through an era of inflationary finance followed by the inevitable economic bust, took the money power entirely out of the hands of the new government. They left the determination of money supply to the market. Furthermore, they restricted the central and state governments to using gold and silver as money. State money creation in the form of paper or credit was then and is now unconstitutional.

Constitutionality aside, Ruijter's proposal, if it were ever enacted, wouldn't solve the problems with our monetary system. It would simply exchange one distant and unaccountable money power for a closely-related version of the same distant and unaccountable money power. It would come down on the side of slavery, not liberty.

Americans are not a free people. If we were free, we would have monetary freedom. We do not have monetary freedom. The U.S. government in one way and another forces us into one collective that uses one money. How? We are pressured into using the U.S. fiat dollar by legal tender laws, taxes that heavily discriminate against metals, regulations that control banking, privileges accorded to the Federal Reserve, a payments system that is geared to fiat dollars, and IRS rules. No one has to use dollars, but try not to use them. There are significant barriers that the state has raised to switching voluntarily out of fiat dollars into alternative currencies or moneys.

Ruijter proposes to replace the current unfree and collective system with a different but closely-related unfree and collective system:

"…we can introduce state money, also called public money…

"Technically this can be done rather simply. Instead of today’s central bank, a new central bank will be established, that is to say, a central bank of the state. It will fall under the responsibility of the Ministry of Finance and be controlled by the Parliament."

In the U.S., this means replacing the Federal Reserve by a new central bank housed in the Department of the Treasury, under the responsibility of the Secretary of the Treasury and controlled by the U.S. Congress. Instead of Federal Reserve Notes (FRNs) and the corresponding electronic credits that the Fed creates, we would have United States Notes (USNs) and the corresponding credits that the U.S. government creates.

In this system, the state decides on government spending just as it does now. The state decides on taxes as it does now. The state decides on borrowing as it does now. However, all of these are in terms of USNs, rather than FRNs. The new element of government finance is that the state can issue USNs and spend them into circulation:

"In the new system the government can very easily create a portion of permanent money by spending an amount of money (= bring money into circulation) without levying the corresponding taxes."

This system replaces the Fed's power to create thin air money (FRNs) by the state's power to create thin air money (USNs). The state spends as much money as it wants to spend. It can create any amount of thin air money it wants to, without limit, just as can the existing Fed.

State money is a very old (and bad) idea. Individual states used it with variations in America in colonial days.

Ruijter poses two alternatives as opposites that are not opposites. He thinks that the creation of money should be in the hands of a democratic government, rather than the hands of private bankers:

"…we still pretend to live in democracy, while one of the major attributes of society, the creation of money, is in the hands of private bankers. De Nederlandse Bank N.V. (the Dutch central bank) is ruled by private persons and is independent from the government."

Both choices he poses extinguish freedom. Money creation should not be in the hands of any monopolists or any cartel or any government or any group that has been awarded privileges backed up by government force. Our monetary freedom doesn't rise if we exchange one money monopoly for another. We are not more free when we exchange a private banker monopoly or cartel, if it exists, for a public or government monopoly, which in actuality will be run by a small number of self-interested officials who are influenced by narrow lobby and interest groups and over which the general public has no more control than it has over central bankers.

Are we more free when Congress issues USNs than when the Fed issues FRNs? In both cases, distant bodies have political power over money. In both cases, distant bodies decide how much money to spend and who shall get it, and they are able to get their way because they have political power or power derived from political power.

Ruijter has it backwards. Democracy in the form of government control over money opposes and diminishes monetary freedom and freedom generally. People who think that democracy, social democracy and socialism as forms of government mean freedom or bring freedom are suffering from a political delusion. In order to believe such an evidently false proposition, one has to ignore the steel cages and penalties that await anyone who attempts to opt out of the government's mandatory ukases. Freedom isn't produced from the barrel of a gun, even when that gun is pointed towards one's head by a democratic majority.

Presumably, USNs would be forcible legal tender, although Ruijter does not say. An important way that the government can "very easily create" as much new money as it wants to, place it into circulation, and get the population to use it in preference to other moneys is to enhance its acceptability by making people accept it as legal tender. This is what Lincoln did in 1861 when he issued greenbacks, which were USNs that the U.S. Treasury issued. (There was no central bank at that time.) A legal tender law that makes people accept the USNs in payments of debts and in other transactions is a device to drive out the competition of other moneys.

If people do not have to accept USNs and if a state spends or attempts to spend lots of them into circulation, in excess of what it is going to tax back to the state, or if people expect that the state will in the future spend lots of them into circulation, then the value of the USNs against goods will fall. The prices of gold and other goods will rise. There will be inflation, as there is now. (This will happen with or without a legal tender law.)

Ruijter thinks that interest paid on loans extended by the state central bank goes "to the Treasury for the benefit of the population" He makes it sound as if this eliminates an unnecessary expense of a private banking system (even one that is not a cartel or in league with a central bank):

"The state money system can function much less expensively than the private money system we now have. In the first place all interest goes to the Treasury for the benefit of the population.

This claim is false because taxpayer capital is scarce and not without a cost. To understand this, let's compare the private bank lending with government bank lending.

Suppose that a business gets a private bank loan and pays interest on it. The interest paid flows into the bank. However, this is not pure profit. Apart from all of its other expenses, the bank's cash outflows include interest on deposits and bonds. That is part of its costs of capital. Banks do not have access to free financial capital.

Now suppose that the government takes over the bank and makes the same loan to the business, and the business pays interest. It flows into the government as one of its cash inflows. The government, having no depositors, pays no interest to them. Instead, suppose that it returns the interest to taxpayers as Ruijter assumes. Has the government eliminated a cost of doing business (the cost of capital) by not having to pay interest to depositors and has it found a new source of wealth for taxpayers? No, because the taxpayers have replaced the depositors as the source of capital.

The taxpayers could have invested privately in a bank and gotten a return. They lose this opportunity when the government taxes them. If the taxpayers are made to pay into the Treasury and do not get a return as great as they could obtain privately, they are actually losing. If the Treasury sends them the interest money or equivalent benefits, they merely break even.

If the government's bank doesn't get capital from taxpayers or through open market security issues that carry interest costs, then the only other way to get capital in Ruijter's system is to create it out of thin air by printing USNs or by giving the business equivalent electronic credits denominated in USNs. This inflation route is not costless either. It takes capital from moneyholders indirectly but surely. Whoever holds USNs finds that their notes are competing for resources with a larger supply of USNs that has been augmented by newly-printed notes. In the limit, if the government made direct purchases of resources with its unlimited supply of USNs, it could outbid anyone. This shows that it is actually taking capital away from existing USN holders.

Ruijter says that the state bank will have "no expensive building up of capital" and

"The state bank does not need a separate capital, because all money belongs to the community."

He is referring to equity claims. Although government does not issue equity claims and does issue bonds at rather low interest rates, that does not mean that it bypasses capital costs or has low capital costs measured by the bond rate of return. The reason, explained above, is that either taxpayers or USN holders or both are being forced to give up valuable capital to an enterprise run by government that is going to make risky loans. Risk doesn't vanish or even diminish because government is making the risky loans. That risk attaches to any securities or claims that are issued that finance the loans. Costs can be hidden but not evaded.

None of this criticism of state money issued by a government department implies support for the existing central banking system. That system should be dismantled. I've outlined how to do that here and here.

If we had monetary freedom, Ruijter and other greenbackers could form a collective and create their own government organization for themselves. It would not be forced on others. They could devise their own state-owned and state-operated central bank that issues state money in the form of paper currency or credits. Their collective could operate as it pleased. Others of us could supply and demand moneys of our choice in freedom.