That being the case, we weren't paying too much attention to our e-mails. We tended to rush through them just to get them out of the way. We almost missed the thread in the Kelso Binary Economics Group about retiring the (U.S.) national debt in the twinkling of an eye. (We headed this series of postings "In the Blink of an Eye" purely as a matter of personal preference, not out of any dislike of Hostess confections or anything else.)
Thus we were pleasantly surprised early this morning opening our neglected e-mails to discover that we could escape from doing too much work while resting up from the rigors of the recent holiday weekend. (If you don't think it's rigorous being in the choir and having to stand for hours at a time when you can't find your special concert shoes, and listening to what amounts to substantially the same sermon four times in a row . . . try it sometime.)
In short, we received the following query from a long-time Just Third Way supporter. Names are deleted to protect the guilty and to make the series generic; also we did some editing and corrected some spelling that we don't think changes the substance any:
We need some expertise here. If we can bail out insurance companies and banks, one argument is that we can bail out the U.S. government by converting U.S. government securities ("Treasuries") to cash and thereby eliminate the national debt. This gimmick would be better than merely declaring national bankruptcy as Brazil and Argentine did in order to start their economic miracles. Our present policies are self-destructive, so almost anything would be better than repeating what we do over and over again without any effect, which is a behavior that is normal only in insane asylums.
Although this is now all theoretical, it might offer an opportunity to restrict all money creation to productive investment through rediscounting eligible commercial paper, as envisaged in Section 13 of the Federal Reserve Act of 1913 but rarely if ever used, or at least to create a two-tier interest rate whereby money available for consumption would carry high interest rates in order to steer money to productive uses. This could double our gross national product and through broadened capital ownership triple the money available for consumption.
This sounds like something that the Tea Party would love and could thereby introduce Capital Homesteading via the backdoor as an add-on. In my comments below as a pragmatist I've suggested some possible boomerang effects, but how could either the liberals or the conservatives object on principle?
Have we mentioned how much we love it when others do our work for us? Anyway, we'll give the brief answer today, and follow it up the rest of this week (and possibly beyond) to give the explanation(s) behind the quickie answer. Also, as we've noted a couple of times in the News from the Network (posted each Friday on this blog, free plug), we've been working on a paper covering the subject of money, credit, banking and finance from the perspective of binary economics in more depth, and the first draft is finished. Right now we're adding footnotes and cites, and refining the language, but we hope to have it ready "soon" (whatever that means), largely because we're trying to schedule a meeting with a potential publisher for next week . . . or whenever we can get it.
Now to the "quick answer."
From within the "Banking School" principles of the Just Third Way, the proposed conversion of existing government securities into "cash" is not a viable option.
[N.B., 19th and 20th century writers frequently used the terms "Banking School" and "Banking Principle(s)" interchangeably. That is, when they weren't confusing the elasticity of currency that occurs "naturally" with the application of Banking School principles, with the elasticity of currency that results from State manipulation of the currency under some applications of Currency School principles. (We'll discuss the "convertibility" issue and its relation to the two schools of finance, that is, a paper currency redeemable in gold and silver, some other day.)]
Here's why (briefly):
From a Just Third Way perspective, the proposal does nothing to meet government obligations and retire outstanding debt. It would simply transform one outward appearance of money into another by modifying the definition without changing the thing's substantial nature.
This is because all money is, in a sense, debt — just as all debt is money, as Henry Dunning Macleod explained — "money" and "credit" being simply two different forms of the same thing. A debt is a contract that requires the delivery of something of value in order to be satisfied, either on demand, or on the occurrence of some specified future event, such as a maturity date.
To oversimplify a little, the key to a sound currency is whether the "money debt" is backed by the present value of marketable goods and services in which the issuer of the money has a property stake (ownership), or whether the debt is backed by a promise to pay out of future tax revenues.
Under the theory of government held by the Founding Fathers of the United States, the government does not have a property stake in the tax base. That is, the State does not own the general wealth of the economy, usually cited as the backing of the currency under the present system. In the U.S. system, taxes are construed as a grant from the citizens, not an exercise of property by the State.
Thus, in effect, under the present system, the federal government is making promises for other persons (yes, the government is a "person") to keep. The "other persons" are the future generations who are going to get stuck paying the bill for today's deficit spending, assuming we avoid national bankruptcy.
Can we, then, bail out the U.S. government by converting U.S. government securities ("Treasuries") to cash and thereby eliminate the national debt?
No.
Why?
Assuming that by "cash" we mean "M1" and "M2," i.e., the Federal Reserve's (current) definition of "money" — coin, banknotes, demand deposits (checking accounts), and selected time deposits (savings accounts) — adding "Treasuries" to the Federal Reserve definition of "money" would do absolutely nothing. All that would be accomplished is a change in definition, a verbal sleight-of-hand. The reality — a gigantic pile of debt owed by the federal government to holders of its instruments — would remain unchanged.
This is because there is no legal difference as money between the token coinage, Federal Reserve Notes (direct obligations of the federal government, not the Federal Reserve, thanks to William Jennings Bryan . . . long story), or any other negotiable instruments issued by the government. They are already "money," and can all be used to settle debts by holders in due course until redemption — assuming that people still have faith in the "faith and credit" of the U.S. government, and will accept the instruments in the expectation that the government will (eventually) make good on them.
That isn't much of an answer, so we'll explain ourselves starting tomorrow. Remember: even at over 1,000 words, that's the short answer.
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