Tuesday, August 28, 2012

Response to the Wall Street Journal

A couple of weeks ago we saw an interesting item regarding the now-perennial European debt crisis on the editorial page of the Wall Street Journal. The basic problem, of course, is that the Euro has been mishandled from the very beginning. Unlike most currencies throughout history it was not originally asset-backed, falling by default into debt backing as governments increased their hold on the economy by assuming control over the currency, and then restricting the money supply for consumption to government-issued bills of credit. No, the Euro was from the first a managed currency on the Keynesian model, almost pure chartalism, a certain recipe for disaster.

Naturally the letter was not published, but we present it now to you for your edification and enjoyment:

Dear Sir:

Solving the problems noted in "Germany's Wealth Grab" (WSJ, 08/14/12, A14) is straightforward. Given that the purpose of production is consumption, the proper use of existing savings (past reductions in consumption) is to spend on consumption, not to reinvest in new capital. Financing for new capital should come from future increases in production, not past decreases in consumption.

Financing for new capital can come from monetizing the present value of the future marketable goods and services to be produced by the very capital being financed. Discounting bills representing the present value of future increases in production at a commercial bank, and then rediscounting the bills at the Federal Reserve, as Dr. Harold Moulton of the Brookings Institution noted in his book, The Formation of Capital (1935), can provide adequate, asset-backed financing for all feasible capital projects, replacing the current money supply backed predominantly by government debt.

This is what the Federal Reserve was designed to do, not finance government deficits by monetizing the present value of the government's ability to collect taxes in the future. Adding a proviso that all new capital financed in this way be broadly owned by people who will first use the capital income to repay the acquisition debt and then for consumption will ensure that consumption levels can be maintained without increasing consumer debt or government manipulation of the currency to "stimulate" demand.


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