Government need not borrow to finance recovery

There a divide in the Green Party economics community between those who insist that the issue of new money must remain as a monopoly of private institutions in the pursuit of profit above all other considerations of the welfare of society and planetary life-support systems (and here I have to re-iterate my bewilderment that socialists in the Green Party still support this view) and those that insist that Government, acting on behalf of the people, should take over at least part of that monopoly.

It is presented as a black and white choice, but it does not have to be either-or. It can be both-and. The privilege of creating new money can be split between government and private institutions, and the proportions of the split can vary according to financial conditions.

We have reached a point (not through the triumph of monetary reform theory, but through the internal contradictions within the free market capital system itself, to coin a phrase) where the banks have all but ceased to lend, in response to the fact that they have unwisely over-lent in the past, and because they have stupidly invested in fantastical, irrational, obscure and illegal financial instruments called derivatives, especially CDSs and CDOs.

With no new money flowing into the economy, the present recession is exacerbated. The Government is rightly trying to kick-start the economy by spending, although it is spending on some irredeemably stupid things - the Trident WMD figured in the plans put out by Darling a few days ago. And it is getting the money by borrowing at interest. We are not told exactly who it is that they are borrowing from.

It is the contention of monetary reformers that instead of borrowing, it is entirely within the power of Government to act as a bank (it is after all the bankers' bank) and issue new money as investment grants, zero-interest loans, low interest loans or high interest loans, depending on the ecological value of project they are lending to. This situation is a remedy for the present inequitable situation where the profit from lending is privatised, and the risk from lending is socialised, and it offers a way of financing the Green New Deal without committing future generations to huge debt repayments.

The central objection to this proposal from supporters of the current financial system is "It Will Cause Hyperinflation!!".

The fact is that throughout history until recent times, money has been created by the government, and hyperinflation has not been a constant feature of financial history. It comes about when government is incompetent, that is, has lost control of the economy, or in specific difficulties (as in post WWI Germany). Civil war is a frequent factor in hyperinflation.

If the Govt issues the money carefully, making sure that the money in the system is matched to the goods and services in the system, just as it does now with interest rates (which is criticised as being the only club in the financial bag) inflation is not a necessary consequence of government issue of money.