Most credible economists today agree that America needs a stimulus package. It appears as if we will get a watered-down version of one very soon. The package needs to be a lot bigger than it is. But, critics cry, what kind of debt will we be leaving our children? What happens when China stops buying up our debt? Debt is indeed a serious concern, but not as great as the looming threat of another Great Depression.
But this is a false dilemma. It is possible to solve both problems in one fell swoop. The problem lies in our monetary system. Ever wondered why our government has to borrow its own money at interest? The power to create money is a power as great as any branch of government, and sometimes greater than all three branches combined. Therefore, by having our central bank partially privatized, as is the case with the Federal Reserve, the government has abdicated this power to the bankers, and allowed itself to be held hostage by this power.
The power of the Fed has often been criticized by Austrian economists, libertarians, and other gold bugs. Unfortunately, the alternative they offer is no better. They favor commodity-based currency which would arbitrarily hold back our money supply at times when more spending is needed, such as our current crisis. This is in line with the dogmatic belief of these groups that government is bad, and must be as small as possible. They believe, against overwhelming evidence to the contrary, that government intervention never works, and only causes economic problems, rather than solving them.
I do not mean to say that government intervention is always good. However, it tends to be worse when it is mixed with private interests. That is the dilemma we face with the Federal Reserve system right now. Ironically, defenders of this system appeal to the same distrust of government as its main opponents. They argue that government can't be trusted with its own money supply because it would become too politicized. But it has already become politicized. It serves the interests of the bankers, rather than the voters, as the government is supposed to do. There are current models for fully nationalized central banks, such as The Bank of England. While such models do not work perfectly, they are a step in the right direction.
Nationalizing the Federal Reserve is simply the first step toward a more perfect monetary policy. The next is to end fractional reserve banking. This is best done gently, by converting past monetized credit into US government money. This may sound inflationary at first, but it's not changing the amount of money in circulation at all. It's simply converting credit into currency. At this point, banks should lend out only the money they have in their deposits: what people think they do now.
The third step is the most crucial, but requires the first two. Once the power to create money has been reclaimed from the banks, the government can then spend money directly into existence, rather than borrowing it into existence at debt-producing interest. They can start with the $1.6 trillion that the American Society of Engineers estimate is needed to repair our existing infrastructure. Then they can use it for education, health care, and other projects which benefit the people, not the banks. Without having to pay interest on borrowed money, the projects on which the money is spent become cheaper, as there is no debt to pay off.
Some will deride this plan with fears of inflation. But infrastructure spending would not be inflationary because real wealth would be created in the process. Granted, not all spending would necessarily have such a return on investment, and in such cases, the little inflation they cause would serve as warnings of their ineffectiveness. In any case, this system would be considerably less inflationary than our current one, and would not leave us with the debt trap that we currently face.
Land value taxation forms the final piece of this plan. The value of the infrastructure spending would end up in land values as rent. With a comprehensive rent-based tax structure, this value can be recovered without hurting production or adding any burdens to taxpayers. Additionally, it can dampen any inflation that occurs by taxing it back out of the system.
By following this plan, we can have an economic system which is strong, sustainable, and debt-free. No longer will we have to weigh short-term economic concerns against long-term concerns about our national debt. Despite the dogmatic contentions of mainstream economics, there is such a thing as a free lunch.
Further reading: The American Monetary Institute
