Sunday, October 08, 2017

The Italian experiment and the truth about government debt

Money is a slippery concept. Today we think of it as paper certificates and coins. But actually, anything that is generally accepted in trade can be considered money. The rise of cryptocurrencies is demonstrating this truth. In wartime scarce but desirable and easily transported commodities such as cigarettes, alcohol, jewelry and valuable paintings can act as currency.

Debt is defined as money owed to another person or entity such as a corporation. It is an obligation to pay the money back, usually by a specified date at an agreed rate of interest. Certain kinds of debt, especially government bonds, are traded daily in the world's money markets. So confident are investors that some government bonds, especially U.S. Treasury bonds, will pay the agreed interest and be redeemed in full at maturity that they treat them as if they were cash—because they can be converted into cash in an instant in world markets.

But is government debt what we think it is? Consider the poor Italians who recently announced that they will try paying for government services with tax credits—essentially reducing a person's tax bill in exchange for services rendered or products delivered. The reason is simple. The Italian government is hard pressed for revenue which is paid in Euros, a currency which the government does not control and therefore cannot create more of.

The tax credit scheme gets around this inconvenience. But it also makes possible a far more interesting possibility. As the writer of the linked piece points out, what if instead of making book entries in a taxpayer's account, the Italian government issued paper tax credit certificates that could be used to pay taxes?

At first this seems unimportant unless one imagines that everyone who is doing work for the government receives tax credits in the form of paper tax credit certificates. Furthermore, what if those certificates were available in convenient denominations much like paper Euros? Since most Italians have taxes to pay, these certificates could be traded for goods at the local grocery store which also has taxes to pay. And the grocery store could pay its suppliers in certificates because they too have taxes to pay and so on.

Pretty soon this form of government obligation starts to look just like money. And while it essentially borrows the work of others, it does not borrow money from them. The government's obligation is then extinguished when the recipient pays his or her taxes with the certificates. (Eventually, with so many businesses accepting such certificates, banks would be persuaded to accept them as deposits into savings and checking accounts.)

All this implies that the Italian government could get back into the currency creation business to help finance its operations—even if it were to print more certificates than it had taxes due. So long as people were willing to trade them for goods and services among themselves, some portion of the certificates would remain in circulation and never be redeemed to pay taxes.

Of course, the government could overdo the issuance of such certificates, and the author offers up several ways in which the amount in circulation could be managed.

Whether the European Central Bank (ECB) would allow things to get to this point is an intriguing question. After all, the whole point of the Euro is to unify the countries using it under one currency, and in the Euro area agreement, only the ECB can issue currency.

This Italian experiment—if it were to be fully realized—would come tantalizingly close to what so-called Modern Monetary Theorists say is possible: Government finance without debt or the necessity of taxation. A government that controls its own currency can simply issue what it needs to pay for its operations. The only reasons to tax anything are 1) to carry out certain social and economic policies favoring some activities over others and 2) to create demand for the currency being issued. If government taxes can only be paid using the currency issued by the government, nearly everyone will have to have at least some of that currency.

In practice, such a currency becomes a convenient medium of exchange and is therefore almost universally adopted.

All of this may seem improbable upon first blush. But two examples suggest that it is broadly possible and even desirable. First, the United States government financed the Civil War through the issuance of Greenbacks, paper money with no gold or silver backing, only the assurance that the government would accept it in payment for taxes. Such money lives on today in what are now called Federal Reserve Notes which the U.S. Federal Reserve Bank will not redeem for anything other than more Federal Reserve Notes.

Second, many people have long predicted that the vast and mounting U.S. federal debt would cripple the country's finances and lead to an inflationary economic calamity. And yet, even as the debt mounts to a previously unimaginable size, the country seems no closer to that calamity than it did 10 or 20 years ago—at least not one associated with the federal government's debt.

What's happening is that the U.S. government is doing something through its borrowing operations that is in its ultimate effects roughly the equivalent of issuing currency. It borrows its own currency from private individuals and institutions and then uses that currency (or rather book entries denoting currency) to call upon the productive capacity of the United States (and to a certain degree the world) to satisfy its needs. Because it has not unduly strained that capacity, this spending has not pressured prices very much. (If the buying power of the currency in circulation electronically or otherwise does not exceed the productive capacity of the economy, evidence suggests that there is little reason to expect general price inflation.)

With the U.S. federal debt approaching $20 trillion and rising, many are saying that a crisis cannot be far away. But the Modern Monetary Theorist would propose an easy fix: Issue currency to buy back whatever amount of the debt is necessary to calm markets. Better yet, buy all of it and never issue debt again. (Doing this over an extended period of time would probably be best in order not to bring chaos to world money markets. And, it would demonstrate that the U.S. government is not "going broke" nor could it ever go broke as long as it issues its own currency.)

Given that the United States and many other countries issue their own currency, why should wealth in the form of interest payments be transferred to the rich who hold most of that debt, when these countries could be debt free?

What the Italian experiment highlights is that governments that issue their own currency do not have to be dependent on private credit or taxation for their spending needs. In fact, as the author of the piece linked above proclaims, it's downright crazy for such governments to borrow their own currency from private institutions and individuals when those governments can simply issue currency as needed. Only those who hold the strings of private credit and therefore benefit from current arrangements have a stake in getting the rest of us to believe that the world can be run in no other way than the one they prescribe.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at

1 comment:

Wolfgang Brinck said...

I always used to wonder how shell necklaces could be used as a currency in pre-columbian california. The necklaces in themselves had no intrinsic value. They weren't good for anything. What made them work as money was that only the people living on certain of the Channel Island had access to the shells which they drilled holes into and strung up into necklaces. Nobody else could manufacture them. The people of the channel island had exclusive control of their production.
The necklaces also were not used as money for everyday exchanges but were used mostly as payment among families at weddings and other momentous occasions.
The makers of the necklaces did not have to collect taxes from the people that used them. They simply had to make the necklaces.
They key to necklace money as with fiat currency was simply that the necklaces were universally accepted as a medium of exchange.
I think it was not too long ago after reading one of Michael Hudson's books on the evils of financialization of the economy that I realized that there really was no need for the federal government to collect taxes in order to print money. If there was, then there would be no way for the government to go into debt since federal debt by definition means that more money was spent by the government than taken in as taxes. If you can create debt without ever having to repay it, then taxes must obviously have a function other than funding the government.