The Importance of Understanding Money Creation
Think of some of the richest, most powerful people in the world: Bill Gates, Warren Buffett, Jeff Bezos. They’re powerful in large part because they can pay people to do things. And they can pay people to do things because they have been able to make a lot of money in our system. Now think about the power of whoever is able to create the money that they have to make. Somebody has to do it or there would be no money. What if that somebody was us, the public? Well, it is. We just don’t fully appreciate the significance of this reality.
As a result, we think about our federal government’s finances like a household’s, meaning, as though it were a currency user, rather than a currency issuer. This is why political talk show hosts routinely challenge public spending proposals with the question: how will you pay for it? However, for a currency issuer, this question misses the point. Paying for it is never the issue. The question is whether the proposal will cause excessive inflation. This may seem like a minor adjustment in our approach to thinking about the federal budget, but it actually has profound implications.
The Problem With The Way We Currently Think About Money
The Reality of Money Creation
Public Spending Vs Private Lending
The Opportunity Presented by Changing The Way We Think About Money
Changing the way we think about money reveals immense untapped public power which holds the potential to strengthen the expression of our democratic will, and our ability to deliver widely shared prosperity and general human flourishing. To unlock this potential we need only take control of something which is already ours – the public power of money creation. In changing the way we think about money we are called upon to do nothing less than re-imagine what we are capable of achieving together as a society.
Broadly speaking, this shift in our thinking presents two key avenues for enhancing our democratic power and unlocking our untapped economic potential. The first is by increasing money creation through public spending on public priorities. Instead of assessing a spending proposal’s impact on the budget, we must learn to assess it’s likely impact on price stability.
Second, by asserting our public say over how banks allocate what is effectively public funds when they create money through lending, we can both promote the flow of credit to public interest uses, as well as curtail the overall allocation of public funds by the banks. Curtailing the private allocation of public funds could be used as a check on inflation if it ever does become a problem as a result of increased public spending. This would allow us to place the burden of keeping inflation in check on the private financial institutions which have long profited from the allocation of public funds on their own behalf, rather than placing this burden on the public. This is unambiguously a matter of economic justice as there is no reason the public should have to continue to tighten its belt so that the financial sector can continue to profit from allocating our money on its private behalf.
There are a variety of ambitious public spending proposals on the table to address our economic challenges, from a job guarantee and a basic income, to middle class tax cuts, medicare for all, and free public college, to a green new deal. These proposals, or some combination of them, could well be the basis of a renovated economic model that brings sustainable, broad-based prosperity to our economy. If we assess the viability of each of these proposals the old way, not only will our assessments be irrelevant to the actual viability of the programs, but we will almost certainly end up concluding that none of these proposals are viable. This is why we say, if we can change the way we think about money, we can change the world.