Over a leisurely Sunday family dinner, when the conversation turns to putting the world to rights, your niece or second cousin may have asked you the following question: Why not simply create money and give it to poor people in order to make a better world?
You may have smiled at the ingenuity of this question and told them that this is simply not possible. Otherwise, money would just lose its value and inflation would rise. In any case, if it was possible, it would already have been tried.
But are you so sure about that?
Because very eminent economists have defended quite a similar idea. For example, we at the IASS work a lot on the writings of Keynes, probably the most renowned economist of the twentieth century, and he wrote the following lines in his most famous book, the General Theory:
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
In more recent times, two Nobel laureates in economics, Paul Krugman and Joseph Stiglitz, and the chairman of the US Central Bank from 2006 to 2014, Ben Bernanke, have supported the idea of central banks printing money to give it for free to states.
A few months ago, it was Adair Turner, former chairman of the Financial Services Authority in the UK, who published a book that strongly advocates the same idea. In our research, we often refer to Turner’s writings on the financial system. In his view, we cannot rely solely on private credit creation for the sound functioning of our economies. Some money should also be created to be given directly to states, a process he calls monetary finance or fiat money finance. To quote him:
“Allowing monetary finance is dangerous, since governments may create fiat money in excessive quantities and misallocate the resulting spending power to inefficient ends. But the alternative route to adequate nominal demand – by means of private credit creation – is also dangerous, since free financial markets left to themselves are bound to create credit in excessive quantities and allocate it inefficiently, generating unstable booms and busts, debt overhangs, and post-crisis recessions.
The United States was not printing fiat money in the decade before 2008, but a huge private credit boom produced a huge financial crisis. Far from printing fiat money to fund fiscal deficits, Ireland before 2008 was using fiscal surpluses to repay public debt: but it still suffered from a massive misallocation of capital investment into unprofitable real estate projects. China could have chosen in 2009 to offset the impact of the global recession with money-financed fiscal stimulus: it chose instead to use bank credit creation. But it is still left with excessive real estate and infrastructure investment in many cities and a severe debt overhang problem.
Pre-crisis macroeconomic orthodoxy combined total anathema against fiat money finance with an almost totally relaxed attitude to private credit creation. Optimal future policy must reflect the reality that we face a choice of dangers and must combine far tighter controls on private credit creation with the disciplined use of fiat money finance when needed. Our refusal to use that option until now has depressed economic growth, led to unnecessarily severe fiscal austerity; and, by committing us to sustained very low interest rates, increased the risks of future financial instability.”
Given that we work for an institute for sustainability studies, it is interesting to note that for many proponents of this idea, the money thus printed should be used to finance the ecological transition of our economies. This would then create jobs and reduce our ecological footprint and our reliance on fossil fuel.
So, the next time a child asks you this question, before you smile, remember that a lot of economists in the highest echelons of our societies are working on the same one, and that for a lot of them, the intelligent use of monetary finance could be one of the keys to building the fairer and more sustainable world we all hope for.
At least, this is how Turner, Stiglitz, Krugman, Bernanke or Keynes would have responded to that ‘childish’ question.