A Conservative Revolutionary Economic Proposal: The Economic System

By Stephen Yearwood
Guest Columnist

I wrote in Part I of this series that my purpose in developing this proposal has been to make the economy more just. In Part II, I argued that a “democratically distributed income” (DDI) would accomplish that. I did reject, however, using taxes/public debt for that purpose (for more than one reason). In this article (to make sure we’re all singing from the same hymn book) I’ll relate the structure and functioning of the economic system, especially as it relates to creating money (needed to fund the DDI). 

Whenever I write about this proposal I always emphasize at some point that any nation could adopt it.That’s because every nation on the planet now has, most fundamentally, the same economic system. Yes: the U.S.A. and ‘Communist’ China have the same (fundamental) economic system—though they do have very different economies. 

The economy is neither more nor less than the process of producing/acquiring goods/services. The economic system is the set of institutions in which that process proceeds. The three fundamental economic institutions in every nation are money, a banking system culminating in a central bank, and a central—national—government. 

The central government is the biggest single economic actor in every nation. That’s because it produces public goods/services for a nation as a whole. It is worth noting that this proposal would put an end to any need/excuse for any welfare programs/policies of any kind (which are ‘public services’). 

Far more importantly, as far as this proposal is concerned, the central government makes the rules governing participation in the economy. Those rules can be more specific, such as those regulating particular industries concerning workers, consumers, and the environment. The central government even controls the central bank, at least as far as setting its responsibilities and its general functioning. It also has a whole regime of (national) taxes/public debt, which obviously has a huge impact on the economy—not just its functioning, but its ‘nature.’ Finally, the central government determines things like the existence/extent of private property and the profit motive. 

So that is how the U.S. and China (and all nations) can have the same economic system (most fundamentally) but very different economies. In some respects, given how relatively low ‘social services’ and taxes are in China and the U.S., they are more alike economically than either of them is like the nations of Europe. 

This proposal is concerned primarily with money. Specifically, money is needed to fund the DDI. 

Again, taxes and public debt are out. That leaves the central government out of it. The banking system is the only other source of money for a DDI in this system. 

‘Regular’ banks—the ones you and I use—create money when they make loans. They don’t take money out of the vault and hand it over. Rather, they ‘issue credit’: they credit an account with ‘money.’ Still, the amount of loans a bank can issue is limited by the amount of money a bank has in its vault. When the borrower then uses that credit-money it becomes income (usually in the form of revenue for businesses). That amount of money is ‘destroyed’—’written off the books’—as a loan is repaid. 

The other way money gets created is when it is created for the central bank or the central government to use for whatever their purposes might be. That money is currency—actual dollars (though it is mostly digitized these days). It is, however, permanent money, ‘forever money’ (even if it is stuffed under a mattress or parked in an account somewhere). 

Before 2008, the only reason currency got created (in anything like a significant amount) was for the central bank to purchase a portion of the debt created by the central government. Then the central bank started creating currency to ‘stabilize the financial system’ in times of ‘crisis.’ Then currency was created for the central government to provide incomes to people and businesses when the economy was ‘shut down’ as a response to COVID. 

Creating currency has always involved debt. There must always be an amount of ‘assets’—debt (newly created or already existing)—equal to the amount of money created. Some of that debt ends up on the books of the central government and some on the books of the central bank, depending on which is using it for whatever purposes. 

That is how the system we have has functioned for creating money. What is most important for this proposal is that as things stand there is no limit on how much money, as currency, can be created. This proposal would change that. 

I actually get around to writing about the DDI in Part IV.