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The Follies of the Modern Greenbacker Movement

Lately there has been growing interest in what might be called the modern Greenbacker movement, in homage to the historical political party [1]. The new movement deplores the current system under which the government issues interest-bearing debt to commercial and central banks. Instead, the modern Greenbackers want the government to create new fiat money directly to cover its fiscal deficit. The movement has backing from mature authors [2] as well as glib 12-year-olds [3]. But there are dangers in this approach — it could be a cure worse than the disease.

The basic complaint—largely accurate—of latter-day Greenbackers is that the structure of modern banking and monetary systems allows private individuals (the bankers) to effectively issue money out of thin air in the process of giving loans and taking assets onto their balance sheets. When the government runs a fiscal deficit (by spending more than it collects in tax receipts during a given period), it covers the gap by issuing new bonds, which are effectively IOUs in the taxpayers’ name, and thereby enlarging the national debt. To the extent that the banks (including the central bank) end up holding this new debt, the total stock of money is enlarged (causing price inflation) and, to add insult to injury, the taxpayers must then pay interest on this debt to the private bankers.

This is a very convoluted process, but when one drills down to its essence, the Fed and the commercial banks are arguably giant counterfeiters. (Interested readers can see a step-by-step breakdown of the swindle in my article here [4].) In this light, it is completely understandable that so many people reject the current system and seek to replace it with something seemingly more democratic.

It’s here where the modern Greenbackers go awry. Recognizing the absurdity of allowing bankers to issue new money, then lend it to the government (taxpayers) at interest, the Greenbackers want to cut out the middleman. They want the government to reclaim control of the printing press—which of course need not even “print” money in this age of electronic financial transactions—and to issue new money whenever its spending exceeds its revenue. This would still be inflationary and raise prices (other things equal), to be sure, but modern Greenbackers argue that at least the taxpayers wouldn’t be shackled with a national debt hanging over them, requiring massive transfers just to pay interest each year.


To repeat, this cure could be worse than the disease. The fundamental danger is that an unchecked power to issue new money might prove too tempting for political officials, who would seek to curry favor with the public through various spending programs that were “paid for” through a general rise in prices. Yes, the present system is indeed absurd, but at least citizens understand—however vaguely—that massive government budget deficits will ultimately prove painful. This recognition, as well as the procedural requirement of periodically raising the formal debt ceiling, at least puts some brake on the growth in federal spending.

In the limit, one could imagine the Greenbacker program not only abolishing government deficits but also all forms of taxation itself. Every year, the government could decide how much it wanted to spend, and then simply “print” that much new money. The IRS could be shut down, and no one would ever need to fill out a tax form again. Besides the savings in explicit tax payments, individuals and businesses would be spared the expense of hiring CPAs. Furthermore, removal of the tax burden would instill a massive dose of “supply-side” incentives for more work and output.

At first blush this sounds like a wonderful proposal. Yet there is one tremendous downside: the government would debase the currency, perhaps gradually but possibly in a snowballing catastrophe. For example, in Fiscal Year 2011 [5] the federal government spent $3.8 trillion. In mid-year, the “M2” monetary aggregate [6] was $9.0 trillion. Thus, if we assume (unrealistically) that the demand for money stayed constant, then financing the federal government’s purchases through the printing press would have led to a 42 percent increase in prices in the year 2011 alone.

The problem is deeper than even that, however. Faced with the prospect of such large annual rates of price inflation, and with their inherent unpredictability to boot, people would flee the dollar. In other words, not only would the supply of dollars increase much more rapidly, but the demand to hold dollars would rapidly decline. The result would be a fall in the dollar’s purchasing power much greater than the issuance of new money alone would have suggested.

To be sure, today there is a sophisticated school of thought—called Modern Monetary Theory or MMT [7]—that is aware of these difficulties. For precisely the reasons I have given, MMTers want to retain the government’s power to tax, in order to “extinguish” money from the system when price inflation is unacceptably high. But if we can understand why financing government spending purely through inflation would lead to disaster, such that we need to “rescue” the system by adding taxation, then Greenbacker proposals suddenly seem much more dubious.

Ultimately, all government spending redirects resources away from the private sector and into politically directed channels. Arguments about how to finance this spending—whether through explicit taxation, borrowing, inflation, or some combination of the three—often reduce to empirical claims about each method’s relative ability in constraining the spending in the first place.

So long as Americans think it’s fine for the federal government to stick its nose into just about every facet of our lives, there is no magic bullet to transform Uncle Sam into a mere financial nuisance. No, a massive empire requires massive tribute, regardless of the mechanisms through which it is transferred. The proposal to scrap the current system, and simply hand a raw printing press over to the politicians, should give any conservative pause.

Robert P. Murphy is author of The Politically Incorrect Guide to Capitalism [8]. His blog is Free Advice [9]. Follow him on Twitter [10].

8 Comments (Open | Close)

8 Comments To "The Follies of the Modern Greenbacker Movement"

#1 Comment By Bob Roddis On June 27, 2012 @ 1:56 pm

The MMTers’ program of taxing away inflation is about the most naïve thing I’ve ever heard. The entire “progressive” Keynesian worldview is based upon the masses being so inept that they cannot even determine their own prices and wages without help from nanny the government.

So, in the midst of an inflationary disaster, the masses are going to vote to tax themselves in a “fair and equal” manner in order to tax away and burn what’s left of their own purchasing power DURING THE CRISIS ITSELF? Of course, we know that voters are always so insightful, wise and unselfish.

But David Colander, a co-author of a 1980 book with the original Abba Ptachya Lerner (King of the MMTers, author of “The Economics of Control”) wrote that Lerner wanted to make it illegal to change prices without a permit in order to control inflation:

Initially he [Lerner] toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [page 12]


#2 Comment By MamMoTh On June 27, 2012 @ 2:45 pm

Where’s the hyperinflation Murphy?

#3 Comment By Septeus7 On June 27, 2012 @ 9:07 pm

What about those spiking interest rates after those downgrades?

How exactly have those “massive deficits” proved painful for the private sector seeing as those deficits are private sector income.

All of those cronies who received the stimulus and bailout funds that increased the deficit certainly aren’t complaining about getting that money. According Murphy having income is painful.

The issue isn’t fiat currency, or fractional reserve banking but fraud. Bob apparently thinks it is better to let credit creation completely in the hands of private scammers like Jamie Diamond than a sovereign currency that is subject to public politics. God forbid the chance of public input, it’s not like the people count for anything, we have balance sheets to worry about.

The American Conservative should have a real MMT/MMR blogger like Cullen Roche write a response to this anti accounting nonsense.

Not all conservatives are Austrian Neoliberals and rah rah laissez faire capitalism and frankly the tried of apologetics for the plutocrats.

#4 Comment By marris On June 27, 2012 @ 10:20 pm

> How exactly have those “massive deficits” proved painful for the private sector seeing as those deficits are private sector income.

There are two problems: redistribution of real resources away from less-connected groups to more-connected groups and bidding away of non-idle resources by government projects.

The only good thing about the spending may be that it stimulates the use of previously idle resources. But I’m not holding my breath.

#5 Comment By Scott Baker On June 28, 2012 @ 11:24 am

First of all, Greenbackers and MMTers don’t generally get along, so it is unfair to lump them together. One of the critical differences is that Greenbackers (like me) believe that the Fed is not part of the Federal Government, and MMTers believe it is. I’ll just say MMT is wrong because you can’t owe money to yourself, and we do owe money to the Fed or to anyone else who buys our Treasury Bonds, so both these parties are not part of the government. There are Supreme Court decisions and numerous copies of the Washington DC phone book also verifying this.
Second, some 1/4 of our tax dollar goes just to pay interest on the debt. Most Greenbackers would NOT use U.S. Notes (the only official “Greenbacks” first issued by Lincoln to fund the Civil War (that worked out pretty well, didn’t it?) when NYC banks wanted 24-36% interest, and 14 times after that through 1974), and indeed, under present law, U.S. Notes are specifically enjoined for being used to pay off or even counted against the debt (Good!). Instead we would use this new DEBT-FREE money to pay for infrastructure, maybe Social Security debt, etc. (See Dennis Kucinich’s HR2990 for a rather long, albeit liberal, wish list of things to buy). This would stimulate the economy, increasing jobs and tax revenues…and THOSE could be used to pay off the debt, which we would never have to incur again! Right now, it is literally impossible to extinguish debt without extinguishing money, leading to deflation and even depression. The banks do this already by tightening credit.
Historically, that is EMPIRICALLY, it is the private sector that makes wild gambles and bubbles, not the government. Now, if you care only about ideology, not evidence, I can’t help you. But there was a reason the original Greenback formed in the late 19th century. People saw that it worked. The fact the powerful bankers got their way (and probably helped finance Greenback Father, president Lincoln’s assassination – check the suppressed testimony at the trial back then), does not change the fact that a Public Option for money is, was, and always will be a great idea.
Oh, and as for taxes. The only fair tax is a Land Value Tax. Get rid of all other productivity-destroying taxes. Is that Conservative enough for you?
— Scott Baker, president of Common Ground-NYC

#6 Comment By Ralph Musgrave On June 29, 2012 @ 1:48 am

Robert Murphy’s article is riddled with mistakes. He clearly does not understand the monetary or banking system. It would take me far too long to deal with all the mistakes. So I’ll deal with a few.

First, there is the last sentence of his second paragraph, which reads, “To the extent that the banks (including the central bank) end up holding this new debt, the total stock of money is enlarged (causing price inflation) and, to add insult to injury, the taxpayers must then pay interest on this debt to the private bankers.”

It is true that when the central bank buys debt, the money supply rises: the CB prints new money to buy the debt. As to Murphy’s assumption that the effect is inflationary, that assumption is extremely questionable, first for a theoretical reason. This is that the fact of the CB buying debt does not increase private sector assets. It just changes their nature or composition.

That is, monetary base and government debt are very similar in nature, thus the effect of swapping one for the other is minimal. And indeed, that point is backed by the empirical evidence. We’ve had an ASTRONOMIC AND UNPRECEDENTED amount of “central bank buying of debt” (i.e. QE) recently, and where’s the inflation? MaMoTh (above) also asks: where’s the inflation? Quite right.

As to Murphy’s claim that when a PRIVATE BANK buys government debt the money supply is increased, that is nonsense: in this scenario, the central bank just debits the private bank’s account in the books of the central bank with the amount of the purchase. Thus there is a REDUCTION in the total amount of money in the hands of the private sector!!!!

Meanwhile the amount of money in the hands of the non-bank private sector remains unaltered.

Next, Murphy’s claim that Greenbackers think the IRS could be shut down is total rubbish. No responsible bunch of Greenbackers ever made that claim.

It is true that banning private money creation WOULD FACILITATE a finite reduction in tax, all else equal. And doubtless some greenbackers overestimate the extent of this tax reduction. But no one has ever said the IRS can be completely shut down.

Next, Murphy claims that greenbacker proposals would mean that “the government would debase the currency”. Well this may be news for Murphy, but the “government” in the sense of “government and central bank combined” ALREADY HAS the power to print and spend any amount of money anytime.

Under a fiat currency there is clearly a danger of excessive money printing taking place. And in practice inflation is often a percent or two above target. But that’s no big disaster. And then there is the occasional disaster in the form of Weimars and Mugabwes. But those are rare events, even in relatively irresponsible counties.

#7 Comment By JChancey On July 2, 2012 @ 12:26 am

To the question “Where is the inflation?” It has largely been directed into asset prices (gold, stocks. etc) but is also appearing in basic commodities like food and energy. If you believe the government inflation statistics you are delusional. Real inflation is running at 6-8% and more like 10-12% in some sectors. The dollar is being debased, and as long as we have any form of fiat money this will continue. The only path to a stable economic system is commodity money.

#8 Comment By Anonymous On July 2, 2012 @ 1:25 am

“Historically, that is EMPIRICALLY, it is the private sector that makes wild gambles and bubbles, not the government.”
Wild gambles are an incentive-based indicator of a bubble, not a causal process. By your logic, every grand economic development is primarily attributable to private sector actions because they are the major actors. That doesn’t change the fact that the public sector plays writer/director and uses incentive and knowledge as its script, regardless if intentional.