Munich Personal RePEc Archive

Abolishing privately created money would increase GDP.

Musgrave, Ralph S. (2017): Abolishing privately created money would increase GDP.

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In an economy where privately created money is banned, i.e. where the only form of money is state issued money, there is no obvious reason why interest rates would not settle down to some sort of genuine free market level. On the assumption normally made in economics, namely that GDP is maximised where market forces prevail unless market failure can be demonstrated, and given that there is no obvious reason to suspect market failure under the latter ban, that means that GDP is maximised where privately issued money is banned.

One reason for thinking a state money only system (SMO) is more of a genuine free market than the existing system is that in free markets, producers normally bear the full costs of production and pass those costs on to customers. However, under the existing bank system, private banks can obtain money for free (administration costs apart) because those banks can effectively print money. Other corporations do not have that privilege. I.e. under SMO, banks and non-bank corporations are on an equal footing.

It might seem odd to claim that SMO is closer to a free market than the alternatives, given that free markets are normally associated with scenarios where the private sector dominates, or (same thing), associated with the state playing little or no role. However the latter generalisation does not apply to money. A hint as to why is contained in the well-known phrase “money is a creature of the state”. That is, governments inevitably play an important role when it comes to a country’s currency, thus the only question is: what should that role be?

While interest rates are higher and debts are lower under SMO, any deflationary effect of those higher rates is easily countered by creating and spending more base money and/or cutting taxes.

If SMO in fact maximises GDP, and that system is implemented, states (or more specifically central banks’) ability to adjust interest rates is curtailed. Given that it is widely accepted that interest rate adjustments are a good way of adjusting demand, that might appear to be a weakness in the argument here. In fact there are glaring flaws in artificial interest rate adjustments. Thus the latter apparent weakness is not a weakness at all.

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