This paper examines the benefits of a debt-free financial system independent of the government. An absolutely independent Central Bank Sovereign Monetary System would allow the Central Bank of any country to create debt-free money to finance government spending and make the government financially independent forever. A Central Bank Monetary Fund (CBMF), provides part of the solution. We propose a system that provides solution to the problems of debts, borrowing and bond-age using an independent monetary system, that would make money sufficient but not excessive. This system would work perfectly for any country if the CB becomes free from control of any authority, not the government or the banks. The CBSM would not only make money available for the use of the government forever, but it would also end poverty at all fronts. As long as all embedded measures to avert monetary inflation were strictly observed, the system would help achieve our macro-economic goals, and solve all the structural problems that have besieged our civilization since its inception. This system would make the market economy perfect the way it is supposed to be, it would be possible to avoid further environmental degradation, in fact, we would be able to ameliorate the environment. The economy would be stable, sustainable and self-regulating, since our economic output would be determined by the structure of our demography, and only that.
Abstract.
An absolutely independent Central Bank Sovereign Monetary System would allow the Central Bank of any country to create debt-free money to finance government spending and make the government financially independent forever. A Central Bank Monetary Fund [CBMF], provides part of the solution. We propose a system that provides solution to the problems of debts, borrowing and bond- age using an independent monetary system, that would make money sufficient but not excessive. This system would work perfectly for any country if the CB becomes free from control of any authority, not the government or the banks. The CBSM would not only make money available for the use of the government forever, but it would also end poverty at all fronts. As long as all embedded measures to avert monetary inflation were strictly observed, the system would help achieve our macro-economic goals, and solve all the structural problems that have besieged our civilization since its inception. This system would make the market economy perfect the way it is supposed to be, it would be possible to avoid further environmental degradation, in fact, we would be able to ameliorate the environment. The economy would be stable, sustainable and self-regulating, since our economic output would be determined by the structure of our demography, and only that.
1. Introduction.
Governments, businesses and even individuals have always relied on the bank loans as the major source of finance [Ryan-Collins, et al 2011]. While the system works well enough for countries that are monetarily sovereign, because they have independent political power over their own monetary system and currency; however, that system has proved to be unstable and vulnerable to manipulations, leading to the boom burst cycles that cause severe economic pains, it is also limiting the society in achieving the macro-economic goals, adding more to our structural problems [Minsky, 2013]. The system has left everyone, including the government, dependable on the private banks for financing, which is limiting the ability of the governments to meet the society's needs. More poignantly, the system only works against the developing countries, making them financially dependent, economically backward, environmentally devastated. As long as the economies of the developing countries continue to depend on the funds from the rich countries, inequality will continue. The deeper problem of lack of understanding of money as a social institution, and as a social relationship, and its functionality from the side of the general public, can be traced down to the constitutions of every nation. Constitutions are not lucid and are less resourceful on the initial source of financing the government, and nothing about achieving financial independence for the nation. In order to generate taxes, fines, royalties, duties, etc. the government must first spend money into the economy, the constitution is never explicit on that initial spending [Mosler, 2012].
A government with sovereign currency can always expand its fiscal position to finance its expenditures. Countries that have sovereign currency can never become insolvent, monetarily sovereign governments can never run out of their own money [Wray, 1998]. Countries borrow billions every year, but never invested on research into how to attain self-financing. In our modern market economy money is the instrument of creating wealth that would necessarily benefit everyone, it is a means to end poverty which also is in the interest of all. The capacity of money to perform these two functions effectively has been limited by the authorities of those who create money and sell it as a commodity to the governments, businesses and individuals. Whereas we are no longer in the commodity money system, the transactional money is not grown and it is not a manufactured product, it is only abstract numbers that banks generate and sell [Ryan-Collins, et al, 2011]. Thus, money the only resource that can be created at will has become the major obstacle to meeting human social needs!
2. Functionality.
The CB would create the money and distribute it as fixed allotted income to be paid to three categories of people in the society, as well as the governments at all levels. This would solve problems of public and private debts, borrowing and bond- age, using an independent monetary system. The CB in this highly essential role is envisioned to become the fourth arm of the government in our social relationships following from the executive, the legislative, the juridical, and the monetary. The CB creates money, distributes money and controls monetary inflation, it does not have any discretional power, and nobody should have the power to control it, not the government or the banks [Yearwood, 2004]. The CB would pay an amount equivalent to an average national income to: 1) the people who are too old to work, 2) the adults who are too incapacitated to work, here being unable to work would mean that a person is unfit to perform any job even with all the technologies available today, losing the ability to work would not mean one has to live a wretched live, and 3) the people whose salaries and wages are below the average national income. The current average national income would become the minimum income for everyone; thus, nobody would be poor. The aggregate of the money that goes to the government and individuals in the system would constitute the total sum of the money in the economy for the period. That would be a vast amount of money in the economy.
There would be a constant flow of money into the economy, money would be sufficient but not excessive. Constant supply of money to the economy would eliminate the problem of economic recessions once and for all [ Keynes, 1930 ]. The system would make our market economy perfect and fair, the way it is supposed to be. The fixed allotted income would be paid gradually until the desired level of income has been achieved, thereafter it would never change. People will have accounts in the banks of their choice as at present, money would be sent to the account in the first hour of the first day of every month unfailingly. The amount in the account would never exceed the sum of the fixed allotted income, thus people would get the amount they spent at the beginning of every month. However, people would be able to manage their wealth, such as maintaining a savings account. The fixed allotted income would be paid by the CB. All other positions above the average national income would continue to be paid in full by employers as at present. To be sure, the allotted income would be prorated for part-time work; employers would pay the shift differentials and pay in full for overtime. There would be no limit to how much a person can earn, such that a CEO could be earning millions. Small scale entrepreneurs would have their revenues as income to keep, without taxations. Employers might want to designate more positions for the fixed allotted income, it would be left to an employee to accept such position for that income. Over time, positions could, in terms of pay, rise out of and fall into that category. The same job might be minimum pay in one labor market but not in another. Employers would use incentives to attract employees in the minimum pay labor market in a free labor market. Companies would no longer pay bonuses and benefits, but could compensate employees with company, subsidized house rents, daycare, health insurance, overseas vacations etc., these measures are to control monetary inflation. To that end, it must be noted that bonuses, whether in the form of money, or stocks, etc., would have to be banned. Allowing bonuses would interfere with the optimal functioning of the system.
Also, this paradigm would alter the structure of inequality and social power in society for people who now have an income that is less than the current median income, they would no longer have to depend on businesses or wealthier people or taxes for an income equal to (at a minimum) the current median income. In current market-based economy the ‘possession arrow' makes all the difference: whether one is in control of that for which others are competing or one is in competition for something controlled by some other(s). The CBSM would reverse that relationship for minimum-pay positions: employers would compete in a free labor market for employees to fill those positions. The system would provide more empowerment to women who have to depend on men for their livelihood.
Finally, it would be as fair as not to pay a single parent/legal guardian looking after at least a child alone, irrespective of the number of children in the household, the single parent/guardian would receive the same fixed allotted income. CB would also pay small scale farmers to boost food production and input, and reduce costs of importing food that can be produced locally, particularly in the developing countries. The allotted income would not be requested for anyone. Healthy adults unwilling to work would get nothing.
3. The Circulation of Money.
The microeconomic paths money takes in the economy are not the subject. That is the reason for the absence of arrows to and from the banking system and individuals, business, or government. The money goes from the central bank to individuals and government, thence to the business sector in the form of purchases of goods and services.
Abbildung in dieser Leseprobe nicht enthalten
(A portion of the money going to government goes to individuals employed in it.
Setting aside international outflows, money spent by individuals and governments would have to be in the account of some business, in the form of revenue/profits. Corporate businesses would be required to return part of their profits to the CB. The amount of money collected from corporate businesses would be available free for some time to the banks in which the account was held for lending to businesses at no more than 2-3% APR, it should never be invested or speculated. That free money would create a downward pull on all interest rates. At the end of the period an amount equal to that which had been collected would have to be transferred to the CB.
To illustrate the circulation of money in the economy, if in an imaginary country 10 million people were being paid EURO €500/month (without any forms of taxation) that would be €15 billion/qtr. (€60 billion/yr.). We assume that all of that money would be spent; there would be a multiplier of 2.5; and the transfer would be set at 90% of the money in accounts, assuming currently in our country total personal savings plus the total amount of money in checking accounts is 10% of total personal income, so that is roughly the percentage of income that is being retained). For one quarter that would be: €15 billion x 2.5 = €37.5 billion. That's the total income for the quarter for the whole economy, businesses and individuals. For this illustration, 10% of that figure remains in the accounts of businesses and individuals (those paid by their employers, not paid the allotted income-because in our assumptions they spent it all), with 90% (€33.75 billion) being returned to the monetary agency. We then subtract from that number the amount of new money, i.e., the amount spent by those being paid the allotted income, which gets retained by the monetary agency: €33.75billion - €15billion= €18.75 billion. That is the amount of money that would be available for government for one quarter. Four quarters like that would provide government with €75 billion for the year.
This only illustrates more concretely the functionality of the proposed Central Bank Monetary System. The actual amount of money people and businesses could retain in their accounts would depend on the actual size of the supply of money and how much money we wanted to provide for government, while above all preventing monetary inflation. It would take a few months of gradual approach before the system could stabilize. In the first month of implementing this monetary system, the CB would have to create money for the government prior to first transfer. CB would create the money for the fixed income as needed. It would simply create each month the necessary amount of money to pay that income to however many people were to be paid it. As can be expected this system would have a vastly larger supply of money than exists at present, but a correspondingly smaller multiplier.
Governments at all levels would be funded by the CB at the current per capita level of total government spending, the amount to be given to the government would have to be determined by the population, and only that. Money not spent by the government would also be returned to the CB. If the amount collected from banks is short of funding the government, CB would create additional fund needed. Like now, the money would not be backed by gold or anything specie and would not be converted to any asset upon demand. The money would not be requested for anyone.
4. Inflation Control Mechanism.
Paying so many people a fixed allotted income and returning money back to the CB will stabilize price in time especially for those goods and services those people purchase. Unproductive speculation in assets needed for production which are bought, not as part of a process for producing goods and services, but only to sell them for a profit. Such unproductive speculation can increase the costs of those assets to producers who actually need them for those businesses to function.
Three categories of productive assets are especially vulnerable to unproductive speculation: real estate, commodities (including retail energy), and currency. All of them affect the cost of doing business. Therefore, their purchase should be limited to their use in producing goods and services (or personal use, such as buying a house in which to live or purchasing currency to use on a trip abroad). A tax of 99.9% must be charged on speculations on these three items. Additionally, a ceiling on government spending would further short-circuit speculations on the currency and control monetary inflation. In the Modern economy as it is currently structured, deflation is a problem. With the allotted income as the supply of money deflation that did occur would increase the purchasing power of the (fixed) allotted income while that income, combined with the funding of government, would provide a solid ‘floor' for the economy.
5. Geopolitical Scope
Foreign Direct Investment would have zero effect on the system. Net export would give boom to employment in the country and more money that would be retained by the CB, while net import would mean outflow of money, in such situations, the CB would create enough money (QE) to stimulate the economy [Keynes, 1930]. This system would work perfectly for a group of countries in a monetary or economic union. Nations that were not using this monetary system could be adversely affected. They could lose significant money to nations with it - in net outflows, or be overwhelmed by money coming from nations with it - net inflows.
Countries using this system would however, enjoy similar standard of living, sustainable development, full employment, end to poverty, end to forced migration, crimes, armed conflicts, and more importantly, they would form a united front against environmental degradation, all these would be achieved without redistributing anything, without debts and without any further regulations. The government would no longer be allowed to issue bonds to borrow money since CB would always provide the needed money to meet all of the government spending. The system described herein is prescriptive, it provides a blueprint of how we are going to organize our monetary and financial systems in the future. At this stage, all we need to do is put aside all our prejudice and ideologies about money, more so that the system itself would come at no costs to any country, it has nothing to do with any ideologies, neither communism or capitalism or religious, it is purely economics. Humanity and societies face huge economic, social and environmental problems that threaten the livelihood of millions of people. We need a system that would allow us live within the planetary means while the welfare of everyone is being met.
6. Environmental and other Social Problems
Obviously, the CBSM system would make the market economy more environmentally sustainable, total output to include that induced by government spending would be governed by demographics. The system would end the endless growth imperatives with all the nature depleting externalities. [Daly, 2010]. In the Modern economy unemployed people have formed a ready reserve of labor on which employers could draw. This means of achieving total employment would keep that reserve of labor in place, but people without jobs that included benefits would have a sufficient income while in that position, which would in turn provide leverage in negotiations for benefits associated with prospective employment. Regarding the labor market, the aforementioned home-employment option would be the most important option to consider in adopting this Central Bank Sovereign Money system. It would presumably, significantly reduce the supply of labor available for work outside the home. It would especially be a boon to poorer nations with dreadful rates of structural unemployment. Anyone unable to find a job in the local economy could be hired by the local government to perform public service, or join an NGO that would require no additional investment by government while being paid the allotted income [Minsky, 2013].
The greatest boon to sustainability offered by this model, however, is that it makes the traditional model of development unnecessary for less developed nations. That model is a vicious assault on the environment, devastating the whole continent at an irreversible rate. There is sufficient productive capacity (in everything except food) to provide for the material needs of everyone currently on the planet. Implementing this system in the less developed nations would establish viable economies in them without the need for environmentally destructive ‘growth'. Money would flow to people where they live, generating local demand for goods and services. That would provide the means for a kinder, gentler form of development, with small-scale, local retail and crafts with small farms for local production of food [Yearwood, 2004].
7. Conclusion
We have proposed a system for financing government spending without loans. It would make sufficient money available for the use of the government without monetary inflation. To solve the problems relating to using debts, bond- age, and all forms of redistribution to finance government spending, we proposed a Central Bank Sovereign Money system, that would be administered by the monetary agent of the Central Bank, i.e.: the Monetary Fund. Obviously, there is more to this CBSM system paradigm than can be described on a few pages, but we can say with absolute certitude that whichever form its implementation took in any country, the economic benefits would be immense compared to the existing one. To effect a smooth transition to this system, it would have to be debated in the parliament for the appropriate legislation. A gradual approach is needed until the system is stabilized, and once stable, would never change.
References
1 Ryan-Collins, J., Greenham, T., Werner, R. and A. Jackson (2011). Where Does Money Come From? London: New Economics Foundation.
2 Minsky, H. (2013) Ending Poverty: Jobs, Not Welfare, Annandale-on-Hudson, Levy Economics Institute.
3 Mosler, W. (2012) Soft Currency Economics II: What Everyone Thinks That They Know About Monetary Policy is Wrong, US Virgin Islands, Valance.
4 Wray, L. R. (1998). Understanding Modern Money: The Key to Full Employment and Price Stability. Cheltenham, UK: Edward Elgar.
5 Yearwood, S. (2004) A just solution: Democratic Capitalism: The Demand Economy
6 Keynes, J. M. (1930). A Treatise on Money. New York: Harcourt, Brace & Company.
7 Daly, H.E. (2010). “From a Failed-Growth Economy to a Steady-State Economy”. The Solutions Journal 1.2: 37-43.
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- Quote paper
- William Olufemi Adeleke (Author), 2021, Central Bank Sovereign Money. Debt-Free Financial Independence System, Munich, GRIN Verlag, https://www.grin.com/document/1144106
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