, Gloucester, MA

January 24, 2013

My View: Tackling the debt crisis

My View
Carmine Gorga

---- — Like the glass ceiling, the debt is a crystal ceiling that one can see. Yet, countervailing forces deny its very existence.

Worse, being a crystal ceiling, words do not help to define the problem and solutions multiply.

It is true that national budgets are not the same as family budgets. The reason is that the government can create money.

But on which basis does this happen; is it truly thin air? Together with Stuart Weeks, I was sitting down with Professor Galbraith once. Soon after he coiled down to kindly try to reach my height, I told him that one of the fundamental rights to which my research pointed is the right of access to national credit.

“What do you mean by national credit,” he asked in his gravelly voice. Keep in mind that he had just published a book titled “Money.” I was truly scared. If he does not know what national credit is, who will ever understand?

I said, “National credit is the power to create money.”

“I like the direction of your thrust,” he thundered back.

That is the basis on which money is created: national credit.

We must be clear about that. And we must be clear that the value of national credit is created not by the glitter of Wall Street, but by the blood, sweat, and tears of all the people of the nation; indeed, we must also be clear that, since over 70 percent of the value of the gross national product is given by the value of consumer goods, then the poor contribute to that value with mouths to be fed and backs to be clothed.

The light comes, not from economics, but from the law. And economists, in search of pure science, do not commingle with lawyers and political scientists. But then they end up talking to themselves, and economics, as widely realized today, becomes irrelevant.

The key point is that money is a legal institution. Money is a claim on wealth. A dollar bill in my pocket is not wealth in itself, but a claim on real wealth in your hands. The moment of truth occurs when you and I decide to exchange one for the other.

There are some people so far into the future they believe that the government can mint a $1 trillion platinum coin through which we can start going through the debt ceiling without bashing our heads too badly. Other people have gone back to the issuance of colonial “scrip.”

The golden standard is the golden mean. It creates a balance between the issuance of money and the creation of real wealth. The search for this balance creates an automatic restraint on the otherwise unrestrained power of the monetary authority.

Here is the gist of the golden standard. Limits to the creation of money by the Federal Reserve System (the Fed) were not clearly spelled out in its constitutive act of 1913. Limits must be clearly spelled out now through internal administrative powers of the Fed or through legislative powers of the U.S. Congress. They are as follows:

First, new money must be issued exclusively for the creation of new real wealth — neither for the purchase of financial assets nor for the purchase of consumer goods or goods to be hoarded.

Second, new money must be issued as a loan, not as a grant, with interest at cost of administering the loan.

Third, since national credit is a common good, the issuance of such loans must benefit the entire population, a goal that can be reached by issuing loans to public agencies that create real wealth such as roads and bridges, to individual entrepreneurs as well as to cooperatives, and to corporations that establish Employee Stock Ownership Plans (ESOPs).

If money is created within these limits, no organization will grow too-big-to-fail — and no threat will ever again arise against the stability of the monetary system. Hence, no bailouts would ever become necessary again.

Since the initiative to create money resides with the people who need a loan for capital expansion and job creation, this is not trickle-down but bottom-up monetary policy.

Carmine Gorga, a former Fulbright scholar, is president of The Somist Institute. He is the author of numerous publications in economic theory and policy, including the forthcoming “What is at stake: Recovery in six months or ten years?”