Which is More Inflationary, Government-Created or Central Bank-Created Money?

August 7, 2016 in News by Slad

Source: www.lewrockwell.com

Ellen Brown is a strong voice for money-populism. She wants to replace the FED’s current powers with government (Treasury) control over the issuance of money. She would have the Congress authorize spending which would then be financed by the Treasury’s writing of checks as payments or equivalently having the FED issue bank credits as payments. The central bank would passively cash the checks for banks who received them from customer-depositors by issuing credits (bank reserves) to the banks. The FED would in essence be a bookkeeper that transmits the credits to banks as payments to whomever the Treasury is paying. The offsetting accounting entry on the FED’s books would be to debit a perpetual and non-redeemable and non-interest-bearing government “bond”. This procedure is tantamount to the Treasury printing up legal tender pieces of paper and mailing them to whomever the Congress designates as recipients. This is tantamount to helicopter money. In such a system, the fiscal-monetary distinction disappears. This is NOT the current legal system.

Ellen Brown and her followers want this new system. This is the system that Hugo Chavez created in Venezuela after taking office. This system resulted in hyperinflation in Venezuela. The legislature spent and spent and spent and it financed the spending by issuing unlimited bank credits. Since those credits are legal money or legal tender, the system produced helicopter money in large amounts and the Venezuelan hyperinflation, said to be anywhere from 500 to 1500 percent per annum. Once the central bank lost its independent role and was neutered, once it became a passive agent, once the Treasury became the money-issuer and stopped issuing real bonds and replaced them with a mere bookkeeping entry, then political pressures took over. It doesn’t matter whether the country has a dictator or a legislature or direct democracy or an elected popular leader. The pressures are to spend more and finance it by such helicopter money. That process is what creates hyperinflations and the worse losses in value of currencies. Populist systems that merge spending with money creation by letting the Treasury issue legal tender result in hyperinflationary helicopter money because they result in unlimited money issuance by the government. It is direct money creation and spending, both occurring at one and the same time. There is no limit to it. The same kind of result occurs if a central bank loses its independence and becomes a repository for valueless “bonds” issued by the government so that the government can obtain bank credits that it can spend. That is NOT the current system in most countries, including America. It is a good thing, meaning a non-hyperinflationary thing and a non-unlimited government spending thing, that we do not have such a system. The central bank system we have is not ideal by any means, but it’s hugely better than the Ellen Brown populist system, which unlocks all restraint on money issuance because of the inevitable political temptations and pressures to print money that it lets loose.

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