Can the Green New Deal Be Funded Within the Current Monetary System? John Howell 8-17-2019 University Heights, Ohio

Outline What is the current monetary system? Its operation – how it works Its consequences A viable alternative – sovereign money Estimated costs of the GND and other needed government programs Funding proposals

Money (account money) is being created all the time – over ¾ of a trillion dollars within the last year. Money is being created all the time; this is account money (95% of all money, the rest is currency)

$1.5 trillion! New money created between Oct. 2014 and Oct. 2016 Who created most of this new money? The U.S. government The Federal Reserve banks Banks (where we have our checking accounts) I don’t have a clue. C is correct. The U.S. Government does create money in the form of coins. The Federal Reserve creates its Federal Reserve notes, our bills. Coins and bills, however, make up a very small part of the money supply, less than 5%. The rest is account money, existing only as numbers in accounts. Account money is created by banks.

Money comes either from banks or from the government. Government can create money. Banks can create credit which we use as money. The bulk of new money created each year is created by banks as account money. In the U.S., government does create coins and spends them into circulation, but about 95% of our money is neither coins nor bills. It is account money, created by banks, existing only as numbers in accounts.

Big Picture of the Money Flow Banks – the financial sector Interest payments Lending Loan repayment The Economy Money supply depends on rates of borrowing and repayment, e.g., good time vs. depressions/recessions. Where does the interest come from? More loans. Interest flows into the financial sector with every dollar in circulation. 1. The money supplies varies, depending on lending rates and repayment rates. 2. Where does the borrower get the money to pay the interest? Where does the economy get the money to pay the interest?

A bank balance sheet Assets Cash (reserves) Securities Loans outstanding Physical facilities Liabilities Deposits Capital (equity) Assets Liabilities It is hard to understand how banks create money out of nothing. To understand it, one must understand bank balance sheets. Here is such a balance sheet. The bank’s money is describe in two ways – as assets and as liabilities. Liquid assets are in blue; illiquid assets in red. The underlying assumption is that all bank money has come from borrowing or for selling; thus the assets and liabilities must always be equal.

To understand how banks create money we have to understand bank balance sheets. To a first approximation the money supply equals the money in the banks. It is estimated by adding up the liabilities of all of the nation’s banks. But note, there are different measures of the money supply.

How do banks create money? Balance sheet of a bank making a loan Assets Liabilities Assets Liabilities Assets Liabilities When a bank makes a loan it enters in its accounts a new asset, the loan which will be paid back to the bank over time, and a new liability, namely the money the bank is making available to the borrower. When the borrowed money is withdrawn, it goes into the economy and the assets and liabilities of the lending bank return to the totals which existed prior to making the loan. Now, however, a portion of the banks assets are illiquid (red) because they have been loaned out. before after

Balance sheet of a bank receiving a deposit When the money generated by one bank goes into circulation it finds its way into another bank, for instance, the bank of the seller of the house for which the loan was obtained. When a deposit is made into a bank its assets and liabilities both rise. The total money supply reflects the sum total of deposits in both banks. That total has risen from the making of the loan. This is the way our money supply rises. before after

From M. McLeay, et al. Money Creation in the Modern Economy, Quarterly Bulletin (Bank of England), 2014, Q1, pp. 14-27 The transfer of money from a borrower’s bank, the buyer’s bank, which creates the new money, to the seller’s bank is illustrated. The money supply increases by the amount of the loan made.

Consequences of the current bank-money system Concentration of wealth within the private sector Austerity for the public sector – federal, state, local, schools Instability of the entire economic system – booms and busts Unsustainability of an economic/monetary system which depends upon growth Concentration of power

An alternative monetary system – sovereign money The National Emergency Employment (NEED) Act introduced into Congress in 2012 by Representative Dennis Kucinich Transfers money creation from the private banks to the federal government. Dissolves the Federal Reserve System by transferring its essential functions into the Treasury Department

Government under the NEED Act Will have a new revenue source. Will annually provide 25% of new money created to the states on a per capita basis. Can pay off the federal debt as it becomes due. Can fund needed federal programs. Can provide a direct citizens dividend. Can maintain the money supply so as to minimize, and ultimately eliminate, inflation. Can adapt to increases or decreases within the economy without the threat of recession or depression. See the Guide to the NEED Act at www.democracyovercorporations.org.

Banking under the NEED Act Intermediation – money deposited with banks as savings accounts (time deposits) and as equity will be lent out as mortgages, car loans, business loans, etc. Payment systems – money deposited in banks as transaction (checking) accounts will not be loaned out; it will be held in “bailment,” fully backed directly by the federal government. Banks will charge for payment services they render. Banks will no longer be bailed out if they fail as a result of making risky investments which default. The need for that will be gone, since the payment system will no longer be threatened by bank failure. Interest rates will be capped at 8%. Because under the NEED Act banks will no longer be able to use deposits in checking accounts as a source of liquidity for making loans, their sources of money for making loans will be savings accounts, deposited for specific periods of time, and equity (money put by investors into the bank). An additional provision is made for banks to borrow from a Revolving Fund in the Treasury Department should additional liquidity be necessary to maintain bank lending for mortgages, business loans, etc.

How to pay for the Green New Deal and other needed programs

Estimated cost of proposed programs Green New Deal $5 trillion/year for 10 years Universal Basic Income $3 trillion/year Medicare For All $1.2 trillion/year Free tuition/student debt forgiveness $0.125 trillion/year Infrastructure $0.433 trillion/year for 10 years Paid family leave Social Security expansion Total $8.758 trillion/year

Enacting all of these new taxes still leaves a gap of $5.8 trillion. 2019 US budget $4.4 trillion/year Estimated cost of new programs $8.8 trillion/year Estimate by DavId Pakman of how much could be squeezed out of new or increased taxes $3 trillion/year Enacting all of these new taxes still leaves a gap of $5.8 trillion.

What about more government borrowing? Could the government borrow an additional $5.8 trillion per year to cover the gap? In 2019 the government borrowed about $0.9 trillion (the annual deficit). The current federal debt is $22 trillion. The interest on that debt is the 3rd largest government expenditure, behind only healthcare and defense.

Approaches to funding Government borrowing from the Federal Reserve banks in the form of low, or zero, interest loans, never to be paid back Public banking – nationalizing the big banks, which could then lend to the government at low, or zero interest rates, rolling those loans over each year ( = never paying off the principle) Sovereign money – government created money replacing bank creation of money (e.g. the National Emergency Employment Defense Act introduced into Congress in 2012) (For #1 and 2 see Ellen Brown’s book, Banking on the People, (2019)) Government is currently forbidden from borrowing directly from the Federal Reserve (Banking Act of 1935 and subsequent amendments). That could be changed by legislation, but the Fed would have to agree to do this. This proposal also leaves banks in the business of money creation, amplifying the potential inflation problem.

Conclusions Now is the time to seek opportunities for a better world during this period of political chaos and fear that seems to surround us. Now is the time to be considering the monetary system – its centrality and the role its reform can play in bringing us a better and sustainable world. Many thanks To Greg Coleridge for introducing me to the topic of monetary reform. To the American Monetary Institute where my thinking matured. To the Athens Monetary Literacy Group for their contributions to my thinking. To the Alliance for Just Money for its commitment to action.