The COVID pandemic has revived the debate on helicopter money. This post presents some of the points made by Professor Joseph Huber (right) in his recent paper, ‘Monetary Financing of Helicopter Money’ which may be read here.
In the aftermath of the 2008/12 crisis Adair Turner, last chairman of the UK Financial Services Authority relaunched the idea of direct monetary financing.
The central-bank money thus issued for government spending was soon dubbed ‘helicopter money’, a derogatory metaphor used by economist Milton Friedman in 1969; he thought that helicopter money would simply raise price levels, not productivity and wealth.
But in a severe recession or crisis, extra government spending to prop up the economy has been a policy tool for decades, even if not openly funded by the central bank.
In contrast to what is generally assumed, monetary financing is not unheard-of. In a way it was common practice at all times, but in the latter half of the 19th century, the central banks underwent a role change. They turned from ‘bank of the state’ to ‘bank of the banks’, primarily or even exclusively supplying the banks with notes and account balances. This role change was advanced under the influence of neoliberalism in banking and finance and monetary financing became taboo.
A core doctrine of neoliberalism, which became ultraliberalism since around 1980, was: ‘Restrict or prohibit money creation by the government as well as money creation by the central bank for the government. Money shall primarily be created by the private banking sector. The role of the central banks is to refinance the banks, not financing government expenditure which must be funded by taxes and sovereign debt’.
However, contrary to what is claimed, ‘money printing’ continued to be practised more extensively than ever. In place of the treasuries it was the banking sector which made reckless use of the ‘printing press’ in the form of creating bankmoney on account.
Sovereign debt became an important profitable investment opportunity for banks, investment trusts, wealth funds and insurers. The treasuries issued bonds, the central banks bought them on the open market from banks and other financial institutions.
This kind of monetary and financial system has now definitely manoeuvred itself into a dead end. A better balanced and functionally more sensible role needs to be developed regarding the sovereign control of the currency and money creation and the division of powers between monetary competences, budgetary-fiscal responsibilities and financial-market functions.
In a crisis such as the subprime and debt crises of 2008/12 and the current covid-19 crisis, temporary and limited helicopter money is an effective measure. Monetary financing of QE for the real economy is certainly preferable to the previous policies of QE just for finance which flooded the banks with unprecedented amounts of central-bank reserves.
The sensible way to get the money out into general economic circulation, is by issuing the money in the form of central bank digital currency (CBDC) to be used by everyone. This is now on the agenda. The special type of money in which CBDC will be issued is not definite yet (deposit money or crypto tokens or mobile-phone tokens; accessed directly or indirectly), but issuance of CBDC is only a matter of time and of the particular design principles of implementing CBDC in coexistence with bankmoney.
In the UK the law does not prevent the Bank of England (BoE) from monetary financing. After long years of hesitation, the covid-19 pandemic has now prompted the BoE to raise the ways-and-means facility for the government from 0.37 to 20 billion pounds and to act as a primary dealer of newly issued British gilts if need be. adding to the money supply according to well-defined monetary-policy criteria, giving to the state what is of the state
Finally, CBDC can and ought to be created free of debt. A plan devised to that end was conceived of by David Ricardo in his 1824 Plan for the Establishment of a National Bank. Ricardo was the most prominent representative of the Currency School, opposing the Banking School of the time. According to his concept, the Bank of England was subdivided into an issue department, responsible for the note issue, and a banking department, concerned with the central bank’s banking operations. The separation of the note issue from the banking operations exists to the present day, although it never gained too much importance because of its inconsistent implementation, notably, leaving the notes of the country banks and, more importantly, bank deposit money untouched outside the arrangement.
The approach can be implemented in an up-to-date way by separating a money-creating currency register from the balance sheet of a central bank’s operational banking activities. The currency register would create the additions to sovereign money (solid cash as long as it exists, reserves or CBDC, the latter possibly of not just one type). The register would issue the money either into the central-bank balance sheet as a non interest-bearing but callable assignment for financial uses, or transferred to the treasury as genuine seigniorage.
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The three issues addressed in this paper – CBDC, genuine seigniorage (omitted in this summary), money tokens beyond debt – are likely to be too much to handle all at once. They do not necessarily include one another, but build well on each other. They would make monetary financing of helicopter money, which today appears to be an extraordinary thing, an ordinary integral part of the money system.
This opens up the perspective of a change in the current crisis-ridden bankmoney regime towards a money system eventually dominated by sovereign money. This too would certainly not be heaven on earth, but, if run competently, it would be free from the kind of monetary non-safety and financial instability we know today.
Monbiot focusses on Neoliberalism: the justification of a global grab of power, public assets and natural resources by an unrestrained elite
Lord Stern has described climate change as “the greatest and widest-ranging market failure ever seen”
George Monbiot continues:
“In return for 150 years of explosive consumption, much of which does nothing to advance human welfare, we are atomising the natural world and the human systems that depend on it. “The world is in the grip of Neoliberalism, an extreme political doctrine, whose tenets forbid the kind of intervention required to arrest it and appears to be little more than a justification for plutocracy, the ideology used, often retrospectively, to justify a global grab of power, public assets and natural resources by an unrestrained elite.
“The doctrine was first applied in Chile in 1973. The result was an economic catastrophe, but one in which the rich – who took over Chile’s privatised industries and unprotected natural resources – prospered exceedingly. The creed was taken up by Margaret Thatcher and Ronald Reagan. It was forced upon the poor world by the IMF and the World Bank. By the time James Hansen presented the first detailed attempt to model future temperature rises to the US Senate in 1988(3), the doctrine was being implanted everywhere”.
Those on the PCU mailing list will agree with him that “Neoliberalism protects the interests of the elite against all comers” but most will not side with his decision to support the expansion of the nuclear power industry.
As he says, we should ‘abandon the four-fifths or more of fossil fuel reserves that we cannot afford to burn’ – we add, for more than one season. And many will agree that:
“The struggle against all the crises besetting us cannot be addressed until the doctrine is challenged by effective political alternatives”.
To this end a democratic mobilisation against plutocracy is getting under way:
Chilean student outriders: ‘Our future is not for sale’
- this should start with an effort to reform campaign finance: the means by which corporations and the very rich buy policies and politicians;
- a petition will be launched later this month.
Monbiot advocates a new politics – a more fiery version of the Green Party Manifesto?
- one that sees intervention as legitimate,
- that contains a higher purpose than corporate emancipation disguised as market freedom,
- that puts the survival of people and the living world above the survival of a few favoured industries.