Rethinking Fiat Money

I recently stumbled upon an essay by an architecture and design critic, Jordan Hruska, which illuminates what I believe is the essential mission of Modern Money Theory. The title of the essay is “Rethinking Design Thinking.” In essence, Mr. Hruska outlines the need for design professionals to re-imagine products and services from a radically new perspective. (The “traditional” perspective, of course, has been to envision and design products and services such that the making of them minimizes production costs, thereby maximizing profits in the marketplace—a twofold imperative that necessarily includes the challenge of balancing the aesthetic desirability of a thing with the “costs” of producing and marketing it.)

The new perspective, which Mr. Hruska suggests is needed, is to design products and services such that making those products (or providing those services) employs the maximum number of people in a manner most satisfying to their work experience. Going even further, the new perspective suggests that products and services be specifically designed to provide work for marginal employees, people who would otherwise be considered “unemployable” by the traditional perspective; and a step further still, designing products and services such that the making of them eliminates or repairs (or both) the reckless environmental damages so common to the traditional quest for profits.

Asking designers to do this, of course, supposes that corporations and developers—the profit-making beings who employ designers—will pay for such services. Speaking as an architect who has worked for a number of developers, I can say (with emphasis) this supposition seems tenuous. Nevertheless, Mr. Hruska points out the growing interest in an enlightened business model called the “benefit corporation”—a model which might well employ designers to re-evaluate a set of products and services along the lines just described. The “benefit corporation” seeks to methodically balance the goal of making profits with the goal of achieving certain social benefits (e.g., more diverse workforce, better working conditions, fairer wage structures, more sustainable supply chains, etc.)

This model of the “benefit corporation” should certainly be applauded and championed. It is important to acknowledge, however, that the scope of social or collective benefits it can undertake is limited by an inherent conflict—and this conflict illuminates the need for something larger to accompany and support not-profit-making goals. The “benefit corporation”—no matter how enlightened—cannot escape the reality that the money used to patronize the social benefits must be generated by the profit-making side of the business. This, obviously, creates limitations. Even more, it creates a tension in which the social or collective benefit will always be the beggar, the orphan that needs to be cared for and subsidized. And while that care is a wonderful thing to provide, it does not change the orphan’s needful status, or the limitations on what can be undertaken on its behalf.

But what if the orphan can create its own money to pay for its own needs? And what if, in doing so, the orphan creates new opportunities for profit-making enterprise itself? What if, in other words, the orphan is transformed into an equal partner in the overall structure of human economic affairs? This may sound like the plot for a Dickensian novel but, in fact, it is a precise description of what I think of as rethinking the reality of modern fiat money—a rethinking that enables collective society to achieve the full potential of its profit-making and not-profit making endeavors.

Empowering Not-Profit-Making Enterprise

Our “orphan,” to repeat, comprises the social or collectively beneficial goods, services, and employment which society requires to fully prosper—but which do not generate financial profits. Consequently, they are not or cannot be provided by profit-making enterprise (except on a charitable basis)—and must, therefore, either be abandoned or provided by the state. The orphan is an orphan because our standard money theory imagines that the dollars the state must use to pay people and businesses to provide those collectively beneficial goods and services can only come from the current profits and wages of private enterprise (in the form of taxes)—or from future profits and wages (in the form of government “borrowing” which must be repaid with future taxes.) In other words, the orphan must be taken care of with “other people’s money.”

But charity is voluntary—whereas taxes are coerced. Hence the bitter feelings of being imposed upon by the government, and the resentful feelings that the orphan is taking advantage of hardworking taxpayers—feelings so easily stoked and inflamed by zealous politicians. Hence the endless political struggle to provide the not-profit-making goods and services collective society needs on so many fronts—a struggle which even the most zealous “benefit corporation” is helpless to overcome.

A modern understanding of fiat money—as it is currently being explored and explained—reveals this imagined reality of the standard money theory to be false. It turns out the “orphan”—collective society itself—is perfectly capable of creating its own money for its not-profit-making needs. And it does so by means of the same Federal Reserve system that private enterprise uses for its own profit-making ventures.

The money-creating operation I am referring to is put into action when the U.S. Treasury—in concert with the Federal Reserve central bank—issues “future” Reserves (U.S. fiat money) in the form of treasury bonds. The Treasury then trades those future Reserves for present Reserves held by private enterprise. (Private enterprise is happy to make this trade because it receives more future Reserves than it gives up in the trade—and it is an ultra-safe way to “park” money that is not currently needed for profit-making investment.) The Treasury then uses the present Reserves it has traded for to purchase not-profit-making goods and services for the collective benefit. It’s as simple as that.

The operation is completed when the future Reserve treasury bonds mature: The Federal Reserve, as a matter of course, issues the new Reserves necessary to make the bond’s promise good. Or, in the case where the FED, itself, holds the treasury bond—which means it has already traded new Reserves in exchange for it—the future Reserves are simply cancelled. U.S. treasury bonds, then, are the “orphan’s” money, and the Treasury is authorized by the sovereign government to issue them, as necessary, to meet its spending needs for the common welfare. (Unless, of course, a misinformed, misdirected, or politically maligned U.S. Congress chooses to say otherwise.)

The Orphan as Partner to Private Enterprise

Let’s now imagine a concrete example of transforming the “orphan” into a partner for private enterprise—while, at the same time, providing a not-profit-making good that America desperately needs. I will choose, not arbitrarily, the topic of affordable housing. As background: families who pay forty percent or more of their income to provide themselves with a roof and hearth are cash-strapped and unable to meaningfully participate as consumers of the goods and services private enterprise would like to sell. Today, in the U.S., this accounts for over 25% of the market for profit-making ventures—a loss of market which says nothing of the struggle and burden these families face to adequately provide for themselves.

Next, we will set aside as unnecessary, cumbersome, and ineffectual, the sad history of federally owned and managed “public housing,” of tax-credit financing, vouchers, and other miscellaneous programs that have strived to place otherwise homeless people in dwelling units so they can then, to some degree, participate in the consumption of private enterprise’s goods and services. We will replace all that with an entirely new and simple process—A National Affordable Housing Co-op—funded by the operations of modern fiat money. Here is an outline of how it could work:

The Co-op purchases dwelling units and retains ownership, in perpetuity, of the land and infrastructure associated with them. The Co-op purchases these dwelling units in every American community, rural, urban, and suburban. Any citizen—or person on a legal path to citizenship–may choose to become an active member of the Co-op. Active Co-op members can then purchase an available Co-op dwelling of their choice. The purchases are financed by the Co-op such that the monthly payment is 30% of the member’s income. As already noted, only the dwelling structure, itself, conveys; the Co-op retains ownership of the land and infrastructure associated with the unit. Thus, even though the unit is privately owned, maintained, and improved, it remains within the “portfolio” of the Co-op. If the member decides to sell the dwelling unit, it can be purchased by any other Co-op member, with the Co-op financing the sale for the buyer as before, and the seller receiving the equity he has built up, in addition to reimbursement for any qualifying improvements he has made as the dwelling owner.

The National Affordable Housing Co-op obtains its dwellings by purchasing them on the open market—at market price—from private, design-build contractors who build (or renovate) the dwelling units within specified parameters established by the Co-op. The Co-op, in other words, becomes a market for private, profit-making, design-builders across the country. The Co-op establishes the kinds of dwelling units it is willing to purchase—size, quality, location, low-rise, single-family, multi-family, etc. Design-build companies—large developers as well as small, sole-proprietor businesses—identify available land or existing building stock that will meet the Co-op’s criteria and assemble a project proposal for developing the property into Co-op dwelling units. The Co-op then purchases the completed/renovated dwellings from the design-builders and makes them available to its members.

Fiat-Funding Operations

Dwelling units are purchased by the National Co-op using Reserves (U.S. sovereign fiat money) generated by the operations of the U.S. Treasury and Federal Reserve, as earlier described. We should review that process, now, one more time—just to be certain that something nefarious (like “printing money”) is not taking place:

Reserves are voluntarily debited from the banking system and replaced with future Reserves (which various bank-dollar accounts, consequently, now have claims on). The debited Reserves are credited to the Treasury’s spending account. The Treasury spends them to buy the Co-op dwelling units—and in doing so, bank-dollars are credited to various bank accounts, and the Reserves are credited, once again, back to the banks—albeit in a different configuration than they were before. In aggregate, however, the banking system now has the same number of Reserves as before, plus the future Reserves—and the bank-dollar accounts have been increased by the amount of the future Reserves, reflecting the work that has been done to build the Co-op dwelling units.

There are several important things to observe here. The first is that the trading and spending of the Reserves causes real work to be undertaken, real services to be provided, pays real income to real people—and creates the affordable housing many American’s desperately need. It is a win-win situation all around: It has not “cost” anybody (i.e. taxpayers) anything. Not a single dollar has been taken out of anybody’s pocket to be “given” to someone else. There is no basis for anyone to feel resentful or burdened by some imagined government coercion or over-reach.

The second thing to observe is that creating Reserves to purchase not-profit-making Co-op dwelling units is no different than creating Reserves for the purposes of profit-making enterprise. In each case, the net result is that goods are produced, services are provided, and wages are paid. The only distinction between the two is the “mechanism” by which the Reserves are created. In the case of profit-making enterprise, Reserves are created, as necessary, to honor the bank-dollars that private enterprise borrows from banks. In the case of the National Co-op housing, the Reserves are created by trading future Reserves issued by the Treasury for present Reserves in the banking system.

The third thing to observe is that financing the National Affordable Housing Co-op (our “orphan”) creates a multitude of opportunities for profit-making business. The design-builders who research, envision, and build or renovate the dwelling units (which the Co-op subsequently purchases) make their profits and, in doing so, employ engineers, architects, excavators, carpenters, masons, electricians, plumbers, and painters. Because the dwelling units are made affordable by the Co-op, their new owners are able to buy household goods and furnishings—generating profits for another set of businesses, and employment for another set of wage-earners. The “orphan,” in other words, has become a full partner with an extensive private enterprise that builds and furnishes affordable housing in America.

Enabling Structures—an Architecture for Modern Fiat Money

The fiat-funded National Affordable Housing Co-op, just sketched out, is an example of what I call an “Enabling Structure.” This is the architecture which, among other things, enables fiat money to flow to people who will build or do something that is needed by collective society—but which profit-making enterprise, by itself, is unable or unwilling to undertake. It is an architecture which can be strategically applied to any of the many challenges that modern society now confronts—climate change and carbon sequestration, health care, early childhood care and development, education and learning, soil erosion and desertification, wildlife habitat restoration, and the chronic unemployment of a robot-operated, profit-driven economy. Most important, it is an architecture which does not expand and bloat a federal bureaucracy, but which pays private, profit-making enterprise to explore, develop, and implement solutions for the collective well-being. Furthermore, it is an architecture that asks nothing in taxes—an architecture that gives but does not take.

This brings us back to the beginning of this essay and Jordan Hruska’s suggestion that design professionals begin re-imagining the world from a new perspective. Enlightened corporate business models which combine social benefit with profit-making are to be championed and encouraged—but it seems clear the heavy-lifting for the crucial, not-profit-making missions that designers should turn their attention to can only be accomplished by the strategic use of modern fiat money. Enabling Structures—such as a National Affordable Housing Co-op just outlined—could provide an active market for all the re-imagined concepts that design professionals can come up with. All those ideas that address real challenges, that benefit real people, real communities, and real ecosystems, all those ideas that need to be tried out and tested but which offer no prospect of financial profits—now they would have a place to go, and a paymaster to write them a check for their efforts. And—this is important—one of the biggest beneficiaries of all this positive, creative energy (and newly employed populous) will be profit-making enterprise itself.

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