True democracy is populism—is it not? It has always struck me as odd that “populism” is used to describe a fringe politics, motivated by grievances that are viewed as illegitimate complaining. But if the not-profit-making needs of local and regional communities are determined and addressed by a democratic, majoritarian process, isn’t that what real “populism” must be? The problem, as I noted in Why MMT Progressivism is the Real Populism, is that local and regional communities have to pay people and businesses to provide the goods and services they decide are necessary for their collective wellbeing. And, since local and regional communities cannot issue their own currency, payments for their not-profit-making enterprises can only be derived by the operations of sovereign fiat money at the national level. And if that larger problem cannot be resolved—if we cannot understand how the federal government can issue fiat currency to pay for collective goods and services—how can a real populism ever unfold?
I have spent considerable time over the last several years trying to visualize an explanation of modern fiat money that frees us from the constraints of imagining that federal spending, for the collective wellbeing, must be paid for with tax revenues—or by borrowing dollars from private commerce which must be repaid with future tax revenues. Sometimes it feels like progress is being made—that modern monetary theory (MMT) has its toe in the door guarding our normative thinking about money.
One might even consider the current resurgence in federal spending by the Biden administration as a positive sign. It should be noted, however, that this new spending—unfunded by tax revenues—is not being explained through the lens of modern fiat money operations, but by the justification that interest rates are currently so low the federal government can afford to borrow great sums of money—and that new revenues, to repay the “loans” will eventually be found in the realm of new taxes on global corporations. So, really, not much progress is being made at all—at least on the topic of understanding how the fiat money system works, and how to use it to our collective advantage. And, for lack of progress on visualizing fiat money accurately, it is very likely we shall eventually (and perhaps at the most inopportune moment of confronting the climate crisis!) shackle ourselves, once again, in the chains of irrational fiscal austerity. Certainly, we are a long way from creating a rational payment system for genuine populism.
A book I recently read, Double-Entry, by Jane Gleeson-White (for which I am grateful to a footnote in Tom Wheeler’s book From Gutenberg to Google) has given me pause to consider that, perhaps, another approach to freeing ourselves from the bondage of our outdated “standard money theory” is necessary. Reading the book started me thinking that attempts to explain that the U.S. government, in its “deficit spending,” does not borrow money at all and is, therefore, not required to collect future taxes to repay a “debt”—perhaps that is too steep a hill to climb. At least it seems likely we will not be able to climb it fast enough to begin meeting the new challenges we face as a collective society—challenges which are now becoming desperate.
Double Entry is a history of—and a crucial “sociological” analysis of—double-entry bookkeeping. Its roots are traced from the merchants of Venice, and its first codified explanation in 1494 by a mathematician monk (and close friend of Leonardo DaVinci), Luca Pacioli. This explanation happened to be written just after the moveable-type printing press was invented and was, as a result, rapidly disseminated throughout Europe. Gleeson-White’s book traces the evolution of double-entry through the Renaissance, to the Industrial Revolution, through the invention of joint stock companies (i.e. corporations) and, eventually, the development of National Accounts which today calculate the Gross National Product (and supposed economic “health” of nations). Many things jumped out at me in the reading, but two gave rise to the topic of this essay:
First, double-entry bookkeeping invented the concept of financial “profit” which, from my perspective, is the source of the cognitive dissonance of our standard money theory. The calculation (and justification) of financial profit, in fact, was (and is) the ultimate purpose of double-entry. Second, the process of double-entry bookkeeping (and the concept of financial profit) established what I earlier referred to as our “normative thinking about money”—that is to say, the actual mental architecture with which we perceive and understand monetary operations. And it is this mental architecture, structured over centuries by the operations of double-entry bookkeeping, that makes the hill of federal “deficit spending” such a steep obstacle. No matter how hard you try to revisualize and reframe it, “deficit spending” will always be defined by the bookkeeping of our mental architecture about money as “spending more than you earn.” Period.
Except maybe—perhaps—there is another way to consider the whole thing altogether. And, perhaps, this other way solves the problem of “deficit spending” in a manner that makes “real populism” an actual possibility.
What is a Public Bank for?
While reading Double Entry, I found myself pondering a recent piece by Rohan Grey at RealProgressives.org explaining the “Public Banking Act” currently proposed by U.S. Representatives Tlaib and Ocasio-Cortez. What I kept wondering about is the possibility of utilizing public banks, as they are described in the proposed bill, as a “payments system” by which the federal government buys the not-profit-making goods and services Congress determines are necessary for the collective wellbeing—what I think of as “fiat spending.”
In a nutshell, what I began visualizing is a process whereby Congress, instead of “appropriating” dollars for the U.S. Treasury to spend, authorizes the Federal Reserve to establish “Public Asset Accounts” on its balance sheet. Each authorized Public Asset Account would be associated with a specific not-profit-making undertaking which Congress, by democratic process, determines is necessary or desirable for the collective wellbeing. The Public Asset Accounts would be established to hold collateral Public Banks trade to the FED in exchange for new Reserves (U.S. fiat money). The new Reserves would then be used by the Public Banks to establish “payment accounts” which would be used by local and regional organizations and businesses to implement the specific not-profit-making undertaking Congress has defined. Here is the crucial, bookkeeping thing:
The “collateral” the Public Bank trades to the FED (in exchange for new Reserves) is the public good Congress has identified in its authorization—and which, for bookkeeping purposes, has been given a specific dollar value per unit. Thus, just as the FED issues Reserves in exchange for profit-making collateral (financial securities) it is also enabled to issue Reserves in exchange for not-profit-making assets that benefit the collective wellbeing. And the Public Banks then use those Reserves as the basis for “payment accounts” which local and regional organizations and businesses use to actually create the public asset.
A quick example
Before considering the advantages of this payment system, let’s look at a quick example. Congress, by democratic process, authorizes a Public Asset Account for “American Childcare Programs—For the Purpose of Establishing, Staffing, and Operating Free-to-use Preschool, Afterschool, and Summer Day camp Programs in every local community of America.” (As you might recall, President Obama proposed something like this in his 2013 State of the Union address. What happened next was a scramble to find new tax revenues to pay for it and the eventual, quiet abandonment of the proposal because raising taxes—to avoid increasing “deficit spending” and the “national debt”—was not politically viable. Result: a not-profit-making asset America desperately needs for its collective wellbeing was left undone—another example of the “efficacy” of our standard money theory.)
But these are new times! Congress (I am now imagining) has passed the Public Banking Act and every state has at least one federally authorized, not-profit-making, Public Bank which is a member of the Federal Reserve banking system. To implement its decision to undertake the provision of free-to-use childcare in America the U.S. Congress, instead of appropriating dollars for the Treasury to spend, authorizes the FED to establish, on its balance sheet, a Public Asset Account titled “American Childcare Programs.” Congress also announces that local community groups can apply for “payment accounts” at state Public Banks to establish, staff and operate local childcare facilities. Congress also issues a set of criteria and parameters which must be met for local groups to qualify for the payment accounts—parameters which would include public ownership of the asset.
In response, Parents for Santa Fe Childcare (PSFC) organizes itself, researches the parameters and criteria established by Congress, and applies to the Federal New Mexico Public Bank for a payment account of up to $300,000 per year to establish and operate a preschool, afterschool, and summer day camp childcare program. The Public Bank does its due diligence—confirming that the community group and its business plan meets the qualifying standards set by Congress. It then establishes the PFSC payment account on its books—and PFSC proceeds to set up, staff, and operate the childcare program, writing checks on its payment account as necessary.
Now let’s walk through a quick description of how the fiat money flows. Though slightly tedious, it is important, so please try to get the rhythm of it.
- When the Public Bank issues “X bank dollars” and credits them to PSFC’s payment account, it also submits to the Federal Reserve X dollars of “American Childcare Programs” Public Assets as collateral for X dollars in new Reserves. The FED issues and credits the new Reserves to the Public Bank’s Reserve account at the central bank. The FED then records the X dollars of Public Childcare Assets in the authorized account on its balance sheet.
- When PSFC writes a check on its payment account at the Public Bank, the check goes through the end-of-day clearing process at the FED (along with all the other inter-bank transactions that occurred that business day). During this clearing process, Reserves are debited, as necessary, from the public bank’s Reserve account and credited to, as is very likely to be the case, the Reserve account of a private, for-profit bank in which the check was deposited by the vendor, or staff, who had received the check as payment.
By this process, the decision by Congress to pay American citizens and businesses to undertake the not-profit-making task of providing free-to-use childcare in local communities is translated into concrete action.
But why do it that way?
There are at least three compelling reasons.
- The first I have already alluded to: The fiat dollars we have just observed being directed to the establishment and operations of local childcare programs are not generated by tax revenues. Nor are they borrowed from existing Reserves of private commerce, an action which the norms of bookkeeping establish as a debt which must be repaid—in other words, by definition, “deficit spending.” Because they are not “deficit spending,”these allocations of fiat money for the collective benefit cannot be subjected to the political objections and arguments about “increasing the federal deficit,” or “increasing the national debt.” They are simply Federal Reserve banking operations—part of the grand machinations of everyday enterprise and commerce that are recorded on double-entry balance sheets. (Now, however, that “everyday enterprise” comprises both profit-making enterprise and not-profit-making enterprise for the collective well-being.) The Public Asset Accounts can only be critiqued, therefore, on the merits of what they intend to accomplish—what Public Asset for collective society they intend to create.
(It should be noted as well that this is not a bookkeeping “gimmick.” The Public Assets the FED receives as collateral for the Reserves it issues are real assets. In fact, it could be argued they are more real than a large portion of the assets—current or deferred—that are listed in the accounts of today’s corporate world. In the case just illustrated, the Public Assets on the FED’s balance sheet comprise a publicly owned national childcare infrastructure available, without charge, to every American family. If that is not a real asset for our modern times, I do not understand the meaning of the term!)
- Using a “Public Bank payment system,” as described above, creates (from State to State, across the country) an apolitical, universally applied process for the allocation, disbursement, and oversight of Congressionally mandated spending programs. Political machinations over control of the spending, at the state or local levels, are avoided because the decisions are “banking” decisions in the hands of federally regulated public banks.
- Finally, and of special importance to our title-topic, the allocation process is decentralized in a manner that directly involves the creative initiatives of local and regional communities. While the over-arching goals, criteria, and parameters of a given “Public Asset” are established at the “top” (by national democratic process of Congress) the conceiving and managing of each specific instance of its implementation are undertaken from the “bottom up” by local and regional citizen-organizations and businesses.
A list of possibilities
Here is a list (that comes easily to mind) of some not-profit-making “Public Assets” that Congress could authorize the FED to create an account for on its balance sheet:
- Hydrogen & Electric Fueling Infrastructures
- Sea-Level-Rise Mitigation & Relocation Programs
- Agricultural Carbon Sequestration
- Desertification Mitigation & Reforestation
- Forest-Fire Mitigation National Guard
- Zero-Carbon Community Micro-Grid Systems
- National Affordable Housing Coop
- American Childcare Programs
- American Debt-Free College
- Universal Health Care
- Fully Funded Toxic Waste Cleanups
Each one of these Public Asset Accounts (debated and authorized by the national democratic process of Congress) enables the Federal Reserve to issue new fiat money—through the due-diligence of Public Banks—directly to local citizen-organizations and/or local and regional business organizations, for the purpose of creating specific Public Assets which benefit the wellbeing of collective society. There are no tax increases required. There is no federal borrowing involved. The “national debt” clock in New York City stops clicking—and is soon turned off entirely as being irrelevant. Not-profit-making enterprise, directed by local and regional organizations and businesses, simply and quietly becomes an on-going component of the Federal Reserve banking system. This is what I would call “paying for populism.”
(Many thanks to Rohan Grey for providing crucial advice on this essay.)