One-Month Money — Frequently Asked Questions

What is One-Month Money about?

One-Month Money (buy from Amazon UK, Amazon US, Harriman House) is divided into two parts. Part One — ‘The Case for Change’ — explains why our current economy is inherently unstable, and why our tools of fiscal and monetary policy can only ever hope to moderate, but never eliminate, this instability. This section ends with an explication of secular stagnation in developed economies. Driven by a structural decline in workforce growth, secular stagnation will make our current remedies, already inadequate, even more so.

Secular stagnation means that, even with interest rates at rock bottom, demand will be permanently below the level required for full employment. In other words, the percentage of the productive workforce that the economy is able to employ will shrink over time, creating either persistently high unemployment or lower participation rates. The only “cure” to secular stagnation in our current system is endless government deficit spending. Much like Japan since the 1990s, our economies will have to choose between ballooning government debt and persistently weak demand.

Part Two proposes a solution to our inherent economic instability, whether the problem is one of deficient demand, as in the case of secular stagnation, or high inflation. The solution is a new monetary system that would achieve permanent full employment and stable inflation, without the need for fiscal or monetary stimulus. In the crudest possible sense, the system works by fixing demand at the level required for full employment. How this demand is allocated is determined entirely by the free market, shifting between sectors as our wants and needs change. But overall, it can never fall.

On what principle is the new monetary system based?

The solution is based on the economic idea of “Neutral Money”. The background is simple: Say’s law, which says economies are self-correcting full employment machines, is predicated on the assumption that money is neutral. When money is neutral, it is merely a veil over the real economy, a useful technology that greases the wheels of production and trade without creating any ill effects. In the early thirties, Keynes, quite rightly, tore this assumption apart — money is not neutral, he said, our economies are not self-correcting full employment machines. To combat the effects of money’s non-neutrality, Keynes then proposed his well-known combination of fiscal and monetary stimulus.

I take a different approach: we created money, so why can’t we change it? Instead of endlessly manipulating our system to drive a neutral outcome, as Keynes suggested, why can’t we devise a system of money that is actually neutral, a monetary system that is neutral by design? This way Say’s vision—a self-correcting full employment economy—becomes a reality.

What are the required changes?

Step One: abolish fractional reserve banking and return to 100% reserve banking.

Step Two: implement money expiration. Expiration means that all the money in the economy must be spent once a month, otherwise it expires. From the perspective of a salaried employee, this means that the £2,000 wage that arrives in our current account* on the 1st of November disappears by the 1st of December if it hasn’t been saved or spent. Saving can occur in all forms it does today except leaving money in our current account (or under the mattress). That means we can put money in a savings account, or buy bonds, stocks, real estate or whatever else. We just can’t hoard.**

*The US equivalent of a current account is a “checking account”.

**Please note that BOTH these steps must be implemented, otherwise the system does not work.

What happens to the money we save?

Most first time readers wonder how, faced with expiration, we can save at all. The answer is simple: when we save, the expiring money is transferred to a borrower. For example, if we deposit £1,000 into a savings account, our bank would receive £1,000, which would expire if not spent before the end of the month. The bank would then lend that money to a borrower. And this borrower would face the same dilemma as we did: she either needs to spend the money or save it before the end of the month. The point is that no matter how many hands the money passes through, someone will eventually choose to spend it — otherwise the money expires.

How do the required changes differ from similar sounding ideas?

Step One — abolishing fractional reserve banking — is similar to other 100% reserve banking proposals made over the years, from Fisher and the Chicago Plan in the 1930s, to Positive Money today. The one key difference is theoretical: whereas these groups claim that a fully reserved system is more stable than a fractionally reserved one, I believe that fractional reserve banking is flawed because it makes money intrinsically non-neutral. But it is not the only way that money is non-neutral. Hoarding, for instance, is another. For this reason, unlike Fisher and his heirs, I believe Step One alone is not sufficient. In fact, it could actually make things worse. Under a fully reserved system, money would still not be neutral, and fighting the propensity to hoard would be just as difficult, if not more so, than it is today.

Step Two, instead, is often confused with the form of money expiration proposed by Silvio Gesell and others after him. Gesell’s system was one of money depreciation, in effect a “negative interest rate on cash”. Gesell came up with a specific number, -5.2%, that he believed was sufficient to discourage hoarding and spur spending.

The difference between neutral money and negative cash interest rates is both theoretical and practical. As with Step One, the theoretical underpinning of money expiration is to render our monetary system intrinsically neutral. Gesell’s aim, instead, was simply to accelerate the velocity of money.

But there is also a key practical difference: under a system of neutral money, money only expires each month if it isn’t spent on goods and services.

And what happens when the money is spent? It freezes in a corporation’s bank account until the start of the new monthly cycle, at which point it again becomes “unspent”, and the expiry clock starts ticking. So money, as long as it is spent once each month, always retains the same nominal value.

In other words, there is no negative interest rate on cash — it merely disappears if it remains unspent.

Why is spending always at the full employment level?

First, the move to 100% reserve banking gives the central bank direct control over the money supply (defined as current account deposits and physical cash). In other words, if the central bank wants to boost the money supply from £1 trillion to £2 trillion, it could do so with ease. Today, the central bank does not have this control.

Second, money expiration ensures that the entire money supply is spent exactly once each month. No household or corporation, after all, is going to let their hard-earned money expire.

So all that’s required of the central bank is to keep the money supply at a level that buys the monthly production of a fully employed economy. If inflation is above target, it’s adding too much; if inflation is below target, it’s adding too little. The end result is spending (demand) that is always sufficient to drive full employment without the need for government or central bank stimulus.

In other words, supply creates its own demand; Say’s law holds.

(Read this post to see economist Miles Kimball’s alternative explanation.)

Why is neutral money an improvement on negative cash interest rates?

Monetary systems that allow for negative cash interest rates have been proposed by a number of economists, including Gesell, Kimball, and Buiter. All these proposals rely on the central bank to manipulate interest rates and financial markets to achieve their goal of full employment and stable inflation. Neutral money, on the other hand, achieves this dual outcome without relying on a flawed system of central planning.

In the vernacular used on this blog and in the book, the goal of central banking is to match the actual interest rate, which is the rate it controls, to the ideal interest rate, which is the rate that would lead to full employment and stable inflation. By doing this the central bank drives spending to a level consistent with full employment. The central bank, in other words, is trying to force a neutral outcome on an intrinsically non-neutral system.

But in our current system, this is well nigh impossible. The central bank, for one, simply doesn’t know what the ideal rate is. What’s more, the ideal rate is constantly changing, so even if the central bank is able to hit its target, it can’t do so for very long or with any consistency. What does this mean for negative cash interest rate systems? It means that even if the central bank were able to target negative rates, we would still suffer from business cycles—those swings from unemployment to inflation that are so damaging to our economy.

Under neutral money, on the other hand, demand is always at the full employment level. No longer would our economies rise and crash from changes in demand.

Are there any other benefits to neutral money?

Neutral money offers more benefits than just full employment and stable inflation. A full list is provided in the book, but here are a few:

A free market solution to inequality

Our current monetary system is subject to constant recessions. Whether these recessions are deliberately inflicted by the central bank (e.g. the Volcker recession in the 80s), or simply the accidental product of flawed central planning, many years pass where unemployment is nowhere near full. During this time, the negotiating power of workers is unjustly impaired.

Add to this the fact that lower income workers suffer disproportionately during recessions and we can see why the poor have the worst negotiating position of all. In other words, executives and business owners carry all the clout.

Neutral money would reduce this source of inequality by ensuring that employment is always full, not because of government diktats, but because of the invisible hand. Just how much inequality is caused by the weak negotiating position of workers? It’s impossible to say. But before unions and wealth redistribution, we should first consider neutral money.

A more democratic society

In our current monetary system there are times when large governments deficits are a necessity for full employment. And in times of secular stagnation, as we’ve seen with Japan, these deficits may well become permanent. Put another way, voters are never free to choose between a big government and a small government, but a big government and a crashing economy. And can we really call ourselves democratic if we no longer have this choice?

Neutral money, instead, allows us to choose our governments based on our values, not our economic circumstances. We can adopt a more free market approach, like the US, or a less free market one, like Denmark. Either way, employment will always be full and inflation always steady.

We can continue to worship technological advance

It seems that every day brings a new article warning us of the looming technologies that will replace workers. Here’s the latest. Ever since the industrial revolution, such arguments have been dismissed as Luddite. While unemployment may rise in the short term, the counter-argument goes, these laid-off workers will eventually find new jobs. The end result is a richer economy that better suits our demands.

In this blog post, however, I argue that secular stagnation could make the Luddite argument valid. My reasoning is this: as economies grow richer, the gap between saving and borrowing at full employment inevitably widens. But unlike in previous times, interest rates are already close to 0%, and so the central bank can’t lower rates further to close this spending gap. As a result, any future gains in productivity translate into higher unemployment (or lower participation rates).

A neutral monetary system, instead, ensures that inadequate demand is never a problem. Technological advance may well cause supply side problems such as skill mismatches, but under neutral money, it would never cause demand-driven unemployment. As a result, the supply side can adjust free of encumbrances, and we can continue on our beloved path of productivity improvements without fear of economic repercussion.

Emerging markets would have a clearer path to prosperity

Neutral money can also facilitate the flow of savings from rich countries to poor ones. While it’s true that many poor countries face real problems (i.e. supply-side problems), they also face significant monetary issues, especially high inflation. By adopting neutral money, however, these third world countries would be just as stable as developed ones, and so domestic savers would be much more inclined to chase higher rates abroad, rather than sit on low or even negative ones at home. As a result, emerging economies would be able to escape poverty with the full force of rich-world savings behind them.

The added bonus would be that secular stagnation would no longer be an affliction, but a great global boon. With the US, the UK, Europe, and Japan’s full employment economies generating far more savings than they can employ, third world countries could grow with much greater velocity than before. In return, domestic savers receive positive, instead of negative, interest rates at home. And so, far from leading to negative interest rates, neutral money could bring us positive interest rates for longer.

Could neutral money be implemented now?

Neutral money is undeniably a radical proposal. That said, it is politically agnostic. Neutral money should appeal to both sides of the political spectrum. The left will like the fact that the economy can never deviate from full employment, while the right will appreciate that this outcome is achieved entirely through market forces. The right will also appreciate the permanent end of inflation.

So politically, the theory should have broad appeal. The radicalness instead stems from the necessary change to peoples’ lives. Because of money expiration, everyone will have to pay more attention to their finances. No longer will we be able to save simply by leaving money in a current account or under the mattress. This change is radical enough that, barring the most severe and prolonged economic calamity, it is unlikely that a democratic government will ever convince its citizens to adopt this system.

That doesn’t mean, however, that we should discard it. To simply fall back on the response I’ve received from certain readers — “no one will agree to money expiration so forget it” — is both too easy and a disservice to those who may be helped by the new system.

Instead, we should ask ourselves whether we can all agree that neutral money comes with these benefits. If we do, the next step should be to figure out how to make the system work for everyone involved. This essentially means developing technologies that make coping with expiration simple and hassle free. For instance, we need software that allows for one-click saving and borrowing, or even adaptive software that learns from our behaviour and saves automatically on our behalf. In my book, I list a few promising technologies on the horizon. We need more. And more debate. The sooner we start, the sooner we’ll finish.

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12 Comments

Note that any scheme that involves clearing all balances on a “magic date” is untenable, because the money has to be “somewhere” and it would be grossly unfair to punish whoever happens to be holding the $ when the music stops.

On the other hand, having money expire X days after a “real” transaction is isomorphic to a negative interest rate, as any money that is about to expire will be (automatically for a fee, hence the negative interest rate) used to buy, and immediately re-sell, a fractional share of some art object (or through whatever machinations are required to get around the exact letter of whatever law is written).

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    Hi Eric,

    Thank you for your comment. Yes the system I propose has a magic date, but note the expiry is only conditional on the money not being spent in that month. If you spend the money, it doesn’t expire. I adjusted the FAQs in light of your comment.

    Explaining what defines “spent” helps answer your second issue. Spent means that money is transferred to a corporation (and only a corporation) in return for goods or services. Once it hits the corporation’s bank account, it becomes “spent” and is frozen until the new monthly cycle starts. When the new month starts, this spent money becomes unspent. The corporation then uses this unspent money to pay wages, taxes etc. and spends it on intermediate goods and services.

    All in all, for a given time period, a corporation’s accounting sales must equal the amount of spent money that hits their account. Otherwise they are doing something wrong.

    So how can you get around this system? Similar to what you said, you could buy a “fake” good or service from a corporation. You spend $1,000 and the money becomes spent. When the new cycle starts, that money becomes unspent, and the corporation, which is in on the game, would just “buy” the good or service back off you. Because you, as an individual, are not a corporation, this money is transferred to you as “unspent” — it doesn’t turn spent. And the expiry clock is once again ticking. If you didn’t yet want to spend the money you then would repeat this cycle.

    So there are two options for combating this problem. One option is to rely on the rule of law, and punish offenders. It’s likely these schemes would be easy to spot (what corporation, after all, continuously earns $0 in profits and pays no wages).

    The other option, which I prefer, is just to set the base level of SALES TAX at 3% for ALL CORPORATIONS. This way, you nip the problem in the bud. The only way to transfer unspent money across months is by spending it — an action that gives rise to “sales”. So if you tax all expenditure then the cheat becomes far too costly. For example, if you start with $1,000 and spend it one month, the corporation has to pay a 3% sales tax. It then gives you 3% less the next month. Unless there’s a possible state of the economy where interest rates are -3% per month (I don’t think there is) then no one can cheat the system.

    Hopefully I explained myself properly.

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I’m sorry, but this is a very silly idea, and one of the justifications proffered for it is also very silly.

It is a very silly idea because it could be circumvented by introducing bogus reciprocal goods and services transactions between friends – which would neccesitate government inspectors to assess the “validity” of each and every transaction in the economy!

The justification of avoiding forced big government is equally silly because you do not need big government to have big deficits. You can achieve the same result with smaller taxes and larger tax credits and allowances.

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    Thank you for taking the time to read and comment.

    The first thing to note is you can’t buy goods or services directly from friends. Unspent money only becomes spent when it buys goods and services from a corporation. So I think what you’re wondering is why people wouldn’t set up corporations to sell fake goods or services, and then transact with each other.

    So, the first questions is: would we need to monitor every transaction? No, I don’t think we would. Detection and punishment only has to be sufficiently likely and costly to act as a deterrent. We don’t need to pore over every transaction. In the appendices of my book I discuss why these schemes would be fairly easy to spot.

    That said, since writing the book I have come to the conclusion that monitoring is pointless. Instead, we could merely implement a base level of sales tax, as discussed in the comment above.

    Then again, we might not even need a sales tax. Miles Kimball made the excellent recommendation that unspent money should only turn into spent money if it is spent on final goods and services (this way “M”, the money supply is equal to one month’s nominal GDP, which makes targeting M much easier). This means that when a corporation buys goods or services from another corporation the expiry clock doesn’t stop.

    If I spend unspent money at a corporation I set up to sell “fake” goods or services, with the aim of cheating expiry, then what happens? The money turns from unspent to spent. And when the new month starts, it turns to unspent money again, which is sitting in the corporation’s account.

    It seems I have dodged expiry, but actually I haven’t.

    Using Miles’ recommended rules, when a corporation spends unspent money, it doesn’t become spent. Only when a non-corporation (i.e. Individuals or government) spends money at a corporation does unspent money become spent. So what do I do with this unspent money sitting at my fake corporation? It will expire at the end of the month, and I can’t spend it directly at a friend’s corporation. So I must either pay myself wages or pay out corporate profits. Since both wages and profits (and dividends) carry high levels of taxation, then I will destroy significant value by using this kind of scheme.

    Huge upheaval is required to implement neutral money, but I don’t think what you’ve pointed out is an issue.

    In response to your other point, I’m just going to disagree. While a small government may be able to send as much tax money as it wants to its citizens (but what about a government that only charges sales tax?), tax cuts are not terribly useful as a stimulus. At the very least they need to be combined with direct government spending, which by definition means a bigger government.

    While in theory a tiny government could borrow and spend many multiples of its tax revenues, it’s easier for any organisation to boost spending by smaller percentages than by bigger percentages, so a government that starts off bigger will have an easier time stimulating the economy in response to a downturn.

    What you’re saying is a government that taxes and spends only 5% of GDP could just as easily boost spending to 15% of GDP as a government that taxes and spends 40% of GDP boosting spending to 50% of GDP (in both cases the deficit rises from 0% to 10%). I’m not sure that reflects how the real world works.

    Furthermore, a smaller government means higher private incomes, which means greater volatility in demand. It also means there’s greater risk of secular stagnation (demand-side version), as savings rate grows with income.

    Most important, however, is the difficulty of transition from big to small or small to big. Can a government half in size without hurting demand? Can a government double in size without causing inflation? Neutral money ensures it can.

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I am unclear how credit will be extended under your proposal as it appears banks are mere processing agents. It seems you either need 100% peer-to-peer lending or some centralized authority such as the central bank that extends credit by substituting its reserve liabilities for those of borrowers. 100% reserve banking suffers the same flaw. Fractional banking is critical for credit creation in the economy as banks due to asymmetric risk profile have very high time preferences and extend credit accordingly, while majority of savers have negative time preferences and would be unwilling to lend directly to borrowers.

Also, something else you need to consider is that restricting bank money will lead to proliferation of private money, and I don’t mean bitcoin here, but rather the liabilities of credit-worthy third parties that can take on a role similar to what banks do today (think GE Capital). Also, if people want to hoard, they will find things to hoard such as commodities with monetary properties such as gold, oil, etc.

On a more fundamental level, the source of the business cycle is not fractional banking as bank money is endogenously created and is subject to the supply and demand constraints that exist within the economy. The source of the business cycle is the exogenous nature of the monetary base which is arbitrarily determined by the central bank or the amount of physical gold during the gold standard. Accordingly, the focus should be on a monetary rule that guides the central bank and underpins its authority to supply base money.

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    Hi there,

    Thanks so much for commenting. I’ll tackle your points one by one:

    1) The banks that controlled money would be different from the banks that funnel savings from savers to borrowers. A savings bank would merely borrow money from a saver, and then lend that money to a borrower (i.e. all savings banks are like savings and loans banks, which don’t have the power to create money but can instead raise savings from one party and lend it to another). I explain this point better in the book.

    PS I agree that we need fractional reserves in the current system. But removing it is one of the steps that would render money neutral. In a neutral monetary system, 100% reserved money enables the central bank to directly set “M”, which is required to end the business cycle.

    2) I don’t think there would be any reason to use a different form of money as a medium of exchange (although I would personally advocate outlawing alternative currencies to make setting the money supply easier). That said, you’re right that people might choose to use durable commodities to store value. But this is fine: it doesn’t change the fact that nominal spending is fixed.

    3) Worth pointing out that money is no longer endogenous in the system I propose. It is directly controlled by the central bank.

    I am very open to the idea that the problem with our current system is just that we don’t yet know how to adjust base money appropriately, but I am personally sceptical that we will ever figure out how to correctly set it. The fundamentals of the economy are always changing, and so I doubt any rule or formula will ever accurately dictate the correct policy. That said, I hope I am wrong because neutral money requires quite a hefty upheaval.

    I’m very interested to hear your feedback after reading the full book.

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Flawed scheme. As all the money that needs to be spent by the end of the month will go into “storage assets” like real estate, art, farm land, and other fixed assets creating a huge valuation bubble. Look at London and all the black money that NEEDS to be spent to surface white and what it has done for property prices.
Investment should driven by profitable business opportunities, not by a huge supply of money looking for a way to save itself from being annihilated.

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    Hi there and thank you for your comment. I think you’re mixing up two separate issues here: if there are profitable business opportunities available to absorb savings then interest rates will be high enough to attract them. We all want savings to be funneled into projects with a positive return for the economy. The problem arises when there aren’t sufficient profitable business opportunities. I think this is the point when people would turn to these “storage assets” — they’d do so in the absence of profitable investment, not just because of expiring money. And why should we stop them? If art is what they want then art is what they should get. They’re the ones who will be nursing their wounds when the bubble bursts. All that the system I propose does is ensure demand is at the full employment level. Bubbles will of course still rise and fall — it’s human nature. The good news, however, is that — unlike today — they won’t bring the wider economy down with them.

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[…] If you’re left wanting more, please see “How do the required changes differ from similar sounding ideas?” in the FAQs. […]

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[…] how does neutral money work? It’s pretty simple. Step 2 of neutral money (expiration) fixes V at a constant, since every dollar in circulation (M) is guaranteed to be spent exactly once […]

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[…] Frequently Asked Questions […]

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[…] Frequently Asked Questions […]

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