On the Monetary and Financial Stability under A Public Money System - Modeling the American Monetary Act Simplified -

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1 On the Monetary and Financial Stability under A Public Money System - Modeling the American Monetary Act Simplified - The 8 th Annual AMI Monetary Reform Conf. University Center, downtown Chicago USA Sept. 0 -, 0 Prof. Kaoru Yamaguchi, Ph.D. Doshisha Business School Doshisha University, Kyoto, Japan kaoyamag@mail.doshisha.ac.jp

2 . The Chicago Plan Revisited Current Debt Money System is Neither Working Nor Sustainable! Financial Crises : 99, 008 Nat l Debt Crises: Looming Now! According to the IMF, between 970 and 00 there were 45 banking crises, 08 monetary crises and 7 sovereigndebt crises. An average of more than 0 per year! - Money and Sustainability, 0, p.7. -

3 Lessons from the Great Depression in 90s () Banking Act of 9 (Glass Steagall Act) Separation of Depository Banks from Wall Street Investment Banks - Repealed in 999 by Gramm-Leach-Bliley Act () Chicago Plan Henry Simons & Paul Douglas (Chicago) Irving Fisher(Yale) : 00% Money Plan - Failed to be Implemented

4 Designed to keep checking banks 00% liquid; to prevent inflation and deflation; largely to cure or prevent depressions; and to wipe out much of the National Debt (Third Edition) NEW HAVEN The City Printing Company At one stage in its evolution the book was mimeographed and sent to one hundred and fifty persons for criticism. First Edition, 95 Second (Revised) Edition, 96 Third Edition, 945 (57 pages) (Preface to the First Edition, xiv)

5 Chicago Plan (4 pages) Professor Emeritus of Economics Yale University, 96 As I have stated elsewhere*, I have come to believe that the plan, ''properly worked out and applied, is incomparably the best proposal ever offered for speedily and permanently solving the problem of depressions; for it would remove the chief cause of both booms and depressions, namely the instability of demand deposits, tied as they are now, to bank loans. (p.8) * 00% MONEY, Adelphi Company, NY, 96 Economic Forum, Spring Number, April-June 96, pp

6 A PROGRAM FOR MONETARY REFORM (A mimeograph circulated in July 99 by Paul H. Douglas, Irving Fisher, Frank D. Graham Earl J. Hamilton, Willford I. King, and Charles R. Whittlesey) Up to the date of writing (July, 99) 5 economists from 57 universities and colleges have expressed their general approval of this ``Program''; 40 more have approved it with reservations; 4 have expressed disapproval. The remainder have not yet replied. (86%)

7 A PROGRAM FOR MONETARY REFORM (A mimeograph circulated in July 99 by Paul H. Douglas, Irving Fisher, Frank D. Graham Earl J. Hamilton, Willford I. King, and Charles R. Whittlesey) (9) Fractional reserves give our thousands of commercial banks the power to increase or decrease the volume of our circulating medium by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions.

8 (7a) Under the present fractional reserve system, the only way to provide the nation with circulating medium for its growing needs is to add continually to our Government s huge bonded debt. Under the 00% reserve system the needed increase in the circulation medium can be accomplished without increasing the interest bearing debt of the Government. (7b) As already noted, a by-product of the 00% reserve system would be that it would enable the Government gradually to reduce its debt, through purchases of Government bonds by the Monetary Authority as new money was needed to take care of expanding business.

9 Chicago Plan Milton Friedman Nobel Prize in Economics, 98 (960, 99 with Preface) As a student of Henry Simons and Lloyd Mints, I am naturally inclined to take the fractional reserve character of our commercial banking system as the focal point in a discussion of banking reform. I shall follow them also in recommending that the present system be replaced by one in which 00% reserves are required. (p.65)

10 Debt Money: Current System - Money out of Nothing (Thin Air) - What is Debt Money? Money Supply.Currency Outstanding (Bank Notes and Coins) +.Bank Deposits (Credits) Money Supply M (Japan, 009, trillion yen) Coins % Bank Notes % Deposits % Who create Debt Money?. Bank Notes by Privately-Owned Central Bank. Credits Created by Commercial Banks (A Fractional Reserve System) Monetary Control by (and for) the Bankers

11 A Monetary Reform: Chicago Plan American Monetary Act A Debt Money System - Money out of Nothing - A Public Money System - the American Monetary Act -. Privately-Owned Central Bank issues Money (Notes). Credit Creation by Commercial Banks (A Fractional Reserve System). Monetary Control by (and for) the Elite Bankers. Government Issues Money (Nationalization of the Central Bank). 00% Fractional Reserve (Abolishment of the Credit Creation). Money as Public Utility for the Economic Growth and Public Welfare

12 . On the Liquidation of Government Debt under A Debt-free Money System: Modeling the American Monetary Act, Seoul, Korea, 00. Workings of A Public Money System of Open Macroeconomies: Modeling the American Monetary Act Completed, Washington D.C., USA, 0 We can liquidate Debt without triggering Recession, Unemployment & Inflation! US Congressional Briefing July 6, 0 At Capitol Hill, Washington DC H.R. 990 (Sept., 0) (Debt Ceiling due 8//0) National Emergency Employment Defense Act (NEED) A Bill to the US House Committee on Financial Services by US Congressman Dennis Kucinich,

13 A Monetary Reform: Chicago Plan American Monetary Act Main Product By-Product Removal of the chief cause of Booms and Depressions - Monetary Instability - Financial Instability - Income Inequality Liquidation of Government Debt without causing - Recession - Unemployment - Inflation - Contagious Recession

14 . Debt vs Public Money System Simplified

15 Transactions of Producers Producers Desired Borrowing <Desired Investment> <Factor Income> <Loan Payments> <Loan Payment (Credits)> <GDP> <Aggregate Demand> <Consumption (Bankers)> Net Cash Flow <Interest Income (Banks)> <Consumption> Inventory Aggregate Demand <Investment> <Borrowing> <Borrowing (Credits)> <Investment (Financial)> Cash/Deposits (Producers) Loan Payment (Credits) Loan Payments Factor Payments Switch (Cash Constraint) Investment Desired Investment Net Investment Investment (Financial) Capital (PP&E) Financial Assets Change in Loan Period Time for Change in Loan Period Depreciation Rate Factor Income Depreciation Change in Investment Time for Change in Investment Depreciation of Financial Assets Loan Period Loans (Credit) Disbursement Loans Disbursement <Interest Income (Banks)> Wages Profits (Dividends) Debt (Credits) Debt (Producers) Retained Earnings Initial Capital Growth Rate (Credits) Borrowing (Credits) Borrowing Growth Rate (Debt) <GDP> <Initial GDP> Appreciation of Financial Assets <Investment (Financial)> <Lending (Credits)> <Lending> Initial Cash (Producers) <Desired Borrowing (Banks)> <Lending (Credits)> <Public Money into Circulation> Depreciation Rate (Financial Assets)

16 Transactions of Consumers Consumers (Workers & Shareholders) MPC (Wages) <Consumption> Consumption <Wages> MPC (Profits) <Profits (Dividends)> Cash/Deposits (Consumers) Savings Deposit Withdrawal Time Net Assets <Wages> <Profits (Dividends)> Income (Consumers) <Interest Income (Consumers)> Deposit Withdrawals Deposits Interest Income (Consumers) Cash Demand Interest Rate Change in Currency Ratio Cashing Adjustment Time Time for Change in Currency Ratio Currency Ratio Initial Currency Ratio

17 Transactions of Banks Banks Net Cash Flow (Banks) Credit Creation Swithch Time for Credit Creation <Savings> <Loans Disbursement> Desired Borrowing (Banks) Vault Cash (Banks) Credit Creation Credit Creation Lending (Credits) Lending <Desired Borrowing> <Credit Creation > Credit Crunch Credit Crunch Loans <Loans Disbursement> Credit Crunch Switch <Credit Crunch Level> MPC (Bankers) Debt Money System <Loans (Credit) Disbursement> <Deposit Withdrawals> <Cash Demand> Debt (Banks) Deposits (Credits) Deposits (Savings) Public Money Creation Public Money into Circulation <Lending (Credits)> <Savings> <Desired Borrowing (Banks)> Time for Public Money Creation <Interest Paid (Banks)> <Interest Income (Banks)> <Public Money into Circulation> Initial Vault Cash <Interest Income (Consumers)> Consumption (Bankers) Interest Paid (Banks) Maximum Loans by BIS Ruls Equity (Banks) BIS Rules of Equity Ratio Equity-Loans Ratio Net Interest Income (Bankers) Interest Income (Banks) <Loans> <Interest Rate> Interest (Prime) Rate Prime Rate Spread <Debt Money System>

18 . Behaviors of A Debt Money System

19 Debt-GDP Ratio Keynesian GDP Determination <Debt (Producers)> Growth Rate (GDP) <Investment (Financial)> Price Sensitivity of Financial Investment Ratio Elasticity of Price Debt (Credits)-GDP Ratio GDP Initial GDP GDP-Demand Ratio <Aggregate Demand> Desired Price Growth Rate Change in GDP <Debt (Credits)> Demand Adjustment Time <Inventory> Inventory Adjustment Time GDP Aggregate Demand Equilibrium GDP Wages Consumption Investment Consumption (Bankers) Factor Income (Wages and Profits) Change in Price Price Inflation Rate Price Adjustment Time Initial Price Level

20 Keynesian GDP Determination

21 Monetary Constraint GDP No Monetary Constraint From now on let us assume I = $80 + 4% Depreciation Monetary Constraint In a Capitalist Market Economy Producers are in a state of Cash Deficiency Net Cash Flow = - Savings (Consumers and Bankers) - Loan Payment

22 Credit Creation Base Money (M0) Wages Money Supply (M) GDP Aggregate Demand Equilibrium GDP Factor Income (Wages and Profits) Monetary Constraint Credit Creation (Loans) Consumption Desired Borrowing Investment Consumption (Bankers) Under a Debt Money System, Cash Deficiency is filled in by Credit Creation

23 Equilibrium GDP by Credit Creation (00%) Desired Borrowing by Banks is 00% met by Credit Creation to attain Equilibrium GDP

24 Money Supply: M0, M and M Money Supply M Credit Creation

25 What Drives Bankers To Create Credits? As More Credits are Created Bankers Interest Incomes Increase! GREED Bankers Rent Seeking!!!

26 Consequences of Greed (): Credit Overshooting! Credit Creation (Loans) Interest Distribution Bankers' Greed Price Levels with Credit Overshooting Interest Income (Bankers) Reinforcing Feedback Loop of Bankers Greed Inflation Rates with Credit Overshooting

27 Consequences of Greed (): Income Inequality! () Income Inequality gets worsened overall Wage Distribution = Wages / NNI () Income Inequality gets worsened under Disequilibria Credit Creation (Loans) Interest Distribution Bankers' Greed Balancing Feedback Loop of Income Inequality Income Inequality Wage Distribution Credit Crunch Level Working Hypothesis Interest Income (Bankers) Wage Distribution

28 Consequences of Greed (): Credit Crunch and Recession! Reduction of M by Credit Crunch Deflation by Credit Crunch Recession (GDP and Growth Rate) triggered by Credit Crunch

29 Causal Loop Diagram of Debt Money System Inflation Financial Investment Base Money (M0) Wages Money Supply (M) GDP Factor Income (Wages and Profits) Credit Creation (Loans) Interest Distribution Wage Distribution Aggregate Demand Equilibrium GDP Monetary Constraint Bankers' Greed Income Inequality Consumption Investment Desired Borrowing Interest Demand Interest Income (Bankers) Consumption (Bankers)

30 4. Behaviors of A Public Money System

31 GDP under Debt vs Public Money System. Credit Creation (70%). Credit Creation (00%). Credit Creation (0%) 4. Public Money (70%) 5. Public Money (00%) 6. Public Money (0%)

32 Money Supply and Inflation under Debt vs Public Money. Credit Creation (00%). Credit Creation (0%). Public Money (00%) 4. Public Money (0%)

33 Interest Income and Wage Distribution under Debt vs Public Money. Credit Creation (00%). Credit Creation (0%). Public Money (00%) 4. Public Money (0%)

34 Causal Loop Diagram of Public Money System Inflation Financial Investment Base Money (M0) Wages Money Supply (M) GDP Factor Income (Wages and Profits) Public Money (Loans) Aggregate Demand Equilibrium GDP Consumption Investment Consumption (Bankers) Monetary Constraint Desired Borrowing Interest Income (Bankers)

35 Debt-vs-Public System Sensitivity Analysis 0% < Level of Desired Borrowing (Banks) < 80% Random Normal Distribution with mean = and Standard Deviation = 0. (9) Fractional reserves give our thousands of commercial banks the power to increase or decrease the volume of our circulating medium by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions. - Chicago Plan -

36 Sensitivity(Debt) 50% 75% 95% 00% Inflation Rate 0.08 Debt-vs-Public System Sensitivity Analysis Debt Money Public Money Inflation Rates Sensitivity(Public) 50% 75% 95% 00% Inflation Rate Sensitivity(Debt) 50% 75% 95% 00% Wage Distribution Year Sensitivity(Public) 50% 75% 95% 00% Wage Distribution Year Wage Distribution Sensitivity(Debt) 50% 75% 95% 00% GDP Year Sensitivity(Public) 50% 75% 95% 00% GDP Year GDP Year Year

37 5. Conclusion In the debt money system, - Bankers Greed (reinforcing loop) - Income Inequality (balancing loop) Unstable behaviors of economic growth, inflation, and income inequality. Monetary and financial instability is built in the system In the public money system, - No Bankers Greed Loop - Relatively Small Income Inequality No Credit Crunch, subduing Boom and Depression True monetary and financial stability

38 Dmnl Dmnl GDP Gap Ratio and Unemployment Rate GDP Gap Ratio times up () Results from the nd Paper (0) Workings of A Public Money System of Open Macroeconomies - Modeling the American Monetary Act Completed Unemployment rate Time (Year) GDP Gap Ratio : Equilibrium (Debt) GDP Gap Ratio : Primary Balance(=90%) GDP Gap Ratio : Excise Tax (5+5%) times up() Time (Year) Unemployment rate : Equilibrium (Debt) Unemployment rate : Primary Balance(=90%) Unemployment rate : Excise Tax (5+5%)

39 /Year Yen/(Year*Person) Wage Reduction and Inflation Rate.4 Wage Rate Results from the nd Paper (0) Workings of A Public Money System of Open Macroeconomies - Modeling the American Monetary Act Completed- Inflation Rate Time (Year) Wage Rate : Equilibrium (Debt) Wage Rate : Primary Balance(=90%) Wage Rate : Excise Tax (5+5%) times down() Time (Year) Inflation Rate : Equilibrium (Debt) Inflation Rate : Primary Balance(=90%) Inflation Rate : Excise Tax (5+5%)

40 Dmnl Dmnl Foreign Recessions Contagiously Triggered 0.0 GDP Gap Ratio.f Macroeconomic System Modeling Overview Public Money Administration Money Supply Macroeconomic System Modeling Overview (Foreign Country) Public Money Administration.f Money Supply Banks Banks.f Export 0.05 Saving Wages & Dividens (Income) Loan Import Saving Wages & Dividens (Income) Loan Consumer (Household) Consumption Gross Domestic Products (GDP) Production Producer (Firm) Consumer (Household).f Consumption Gross Domestic Products (GDP).f Production Producer (Firm).f Time (Year) "GDP Gap Ratio.f" : Equilibrium (Debt) "GDP Gap Ratio.f" : Primary Balance(=90%) "GDP Gap Ratio.f" : Excise Tax (5+5%) 0.0 Investment (Housing) Public Services Income Tax Labor & Capital Labor & Capital National Wealth Investment National Wealth (Capital Investment (PP&E) (Housing) (Capital Accumulation) Investment (PP&E) Accumulation) Public Services Investment (Public Public Services Direct and Financial Investment (Public Public Services Facilities) Investment Abroad Facilities) Government Corporate Tax Income Tax Government.f Population / Labor Force Population / Labor Force.f Unemployment rate.f Corporate Tax Results from the nd Paper (0) Workings of A Public Money System of Open Macroeconomies - Modeling the American Monetary Act Completed Time (Year) "Unemployment rate.f" : Equilibrium (Debt) "Unemployment rate.f" : Primary Balance(=90%) "Unemployment rate.f" : Excise Tax (5+5%)

41 . On the Liquidation of Government Debt under A Debt-free Money System: Modeling the American Monetary Act, Seoul, Korea, 00.. Workings of A Public Money System of Open Macroeconomies: Modeling the American Monetary Act Completed, Washington D.C., USA, 0.. On the Monetary and Financial Stability under A Public Money System: Modeling the American Monetary Act Simplified, St. Gallen, Switzerland, 0. Thank you for your Attention! We can remove the chief cause of both booms and depressions (I. Fisher) and income inequality! We can liquidate Debt without triggering Recession, Unemployment & Inflation! H.R. 990 (Sept., 0) National Emergency Employment Defense Act (NEED) A Bill to the US House Committee on Financial Services by US Congressman Dennis Kucinich,