By Hema Senanayake –
Irving Fisher was a great American Economist. His debt deflation theory in depressions published in early 1930s, is well known to economists. The Great Depression of 1929-33 unfolded before his eyes. He studied the depression carefully and subsequently, together with many leading economists of his time came up with a plan to reform the monetary system to prevent such crises. This proposal is known as “Chicago Plan.” It is a plan to retire government debt rather quickly and to enable the government to function without being indebted. It might need some adjustments, but it is a great plan that the world can use to face this continuing pandemic.
The United States must lead the world (some may disagree) and the U.S. can do it. The U.S. has led the world preventing from plunging into an economic chaos after the World War װ. Even before the end of the World War II, visionary leaders of the U.S. invited legislators and economists of allied nations to the city of Bretton Wood to discuss as to how the economies can be rebuilt in view of the devastating impact of the war. The plan they have agreed upon, made a very fundamental infrastructural adjustment to the existed international payment mechanism and that helped immensely for the quick recovery of economies worldwide after the end of the war.
Covid-19 pandemic would have done much more disaster to the economies around the world than had done by the World War II. Economies, including developed countries’, were fragile even before the pandemic hit the world. Before the pandemic began, the total global debt (public and private) amounted to $188 trillion and global debt-to-GDP ratio was 226% at the end of the year 2018. It was for this enormously indebted world, pandemic hit hard in late 2019. The economic fallout would not be able to resolve through a debt-based money creation process suggested by G20 leaders. Instead, as has been done at the end of the World War II, the US must now step in to make an adjustment to the monetary infrastructure in all countries enabling them to increase their due responses to the pandemic and resultant economic fallout. This letter is to explain the principle of such an adjustment.
Two trillion stimulus package must not be barely enough even for the United States and the $5 trillion global fund agreed upon by G20 leaders would not help enough as both stimulus packages linked to debt-based money creation, and the world is already in heavy debt as mentioned above. Many countries in the world use US dollar as their reserve currency. The U.S. must be willing to save those countries and the economies. That is how the U.S. can become the greatest nation on earth.
The IMF cannot simply do it even though its mandated task is to support countries which are facing balance of payment crises. The US is the only country that can help even to IMF in this current crisis. Such global support while taking care of the domestic issues could be enormous challenge for the United States. But the U.S. can meet this challenge carefully. How? This letter shall provide some answers to this question too.
The US is a country that has produced many farsighted thinkers almost in every area of intellectual investigation. During this global public health crisis president Trump invoked two important pieces of legislative Acts, namely, Stanford Act and Defense Production Act. Those Acts are found to be useful in the fight with this unseen enemy, the virus, COVID-19.
Previous generations of legislative thinkers enacted those Acts with great foresight. We are using them now. Similarly, some legislative thinkers of our generation together with a few economists thought about a plan to change the way we face to severe economic recessions or depressions.
The basic principle of that plan is to free the government from being indebted in facing an economic crisis. The effect of such a legislative Act would have been that the government would have found two trillion dollars for the current stimulus package without being further indebted.
Now imagine, that the same Act, if had enacted, would have been used to find the money needed to save the rest of the countries, then the U.S. President, the Congress and Senate would not have hesitated to provide 10 trillion U.S. dollar stimulus package which amounts to 50% of GDP.
Even though the U.S. Congress did not enact a legislative Act to facilitate the US government to design unprecedented stimulus package if needed to face a deep crisis like the current one, the basic proposition was presented by congressman Dennis Kucinich at a Congress hearing on July 26 2011 (Canon 402).
That submission was good, but he went a little more than what was required. That could have been the reason for not getting the necessary support for it, in the congress.
If his proposition had been designed for an Act which could be used temporarily to get over a massive crisis, similar to the Defense Production Act, I have no doubt that Kucinich’s Positive Money Act would have had enacted a long time before.
Had it been done the U.S. Congress and the Senate would not have delayed so much to approve the true trillion stimulus package. Further, the US government would have approved a few more trillion stimulus package to support other countries battered by this coronavirus possibly including the European Union. Now, what is this Positive Money Act?
It proposed for a transition from current debt-based money creation system to debt-free money creation system. In the present monetary system, most money is created when commercial banks issue loans, as such when money is created simultaneously debt is created. The proposition will change this dynamic by removing banks ability to create “credit money.” Rest of the things, such as markets and banks functioning as intermediaries will function normally.
During the transition, as commercial banks are not allowed to create money, the government must create certain amount of money that might require to facilitate the functioning of economy well. Recent, research conducted based on Dynamic Stochastic General Equilibrium Models finds that the transition from debt-based money system to a debt-free money-based system can be done smoothly. Similarly, I think the reversal too, can be done smoothly if necessary.
Then, we can imagine, that if we can do the transition temporarily, we would have found money needed for domestic and global stimulus without debt, while enabling other countries which uses U.S. dollar as their reserve currency, to create their own money domestically while getting support from the U.S. only to mop up balance of payment problems.
Let us rise up to make this fundamental adjustment to the global monetary infrastructure.