This page is part of the site Global Development, dedicated to promoting a new approach to eliminating poverty, reversing environmental deterioration and generating sustained economic growth that benefits all of humanity. The site has been developed by Frans Doorman. No copy rights are claimed, but those using material are kindly requested to name the source.
Money creation for sustainable development
We’ve seen how the alleviation of poverty in the rich countries, the improvement of public services in the rich countries, and the solution of our environmental problems worldwide will require major investments in a global program for sustainable development. We’ve also seen that such an investment would be crucial for rebooting the economies of the rich countries, and jumpstart those of the poor nations. On the other hand, we’ve seen that it will not be possible to generate the needed funding in conventional ways, i.e., though re-allocation of existing capital.
Question: So we can’t generate enough funding for sustainable development in conventional ways. Now what?
Answer: There is only one way to generate the required sums of money: through money creation.Question: But can money be created – just like that?
Answer: Yes, it can. Today, it does not even require the printing of bank notes: already, a large part of the global money supply is virtual, that is, does not physically exist. It exists in the databases of central and private banks, and the international financial institutions. Therefore, in principle money creation is possible through a few keystrokes on the computer.Question: That sounds easy. Does that mean that it is possible to create limitless supplies of money, just like that, without any consequences? Make everybody rich?
Answer: No, it does not. Money creation does carry a very serious risk: runaway inflation. This can be caused in two ways. One is that the demand for goods and services resulting from the inflow of newly created money into the economy will exceed productive capacity. If that happens producers will soon notice that even if they raise their prices considerably their products will still be bought. So they’ll raise their prices, causing demand-driven inflation. The second, even more dangerous inflationary danger is loss of faith in the value of money.Question: How can those risks be avoided?
Answer: Money creation should be tied to strict conditions:Four conditions to avoid money creation from causing inflation
1. To avoid demand driven inflation the newly created demand generated by money creation, when added to existing demand, should not exceed the productive capacity. Moreover, some excess capacity should be maintained to foster competition on price and quality.
2. To maintain faith in the value of money, money creation should be done by the most reputable international financial institution: the IMF. Moreover, it should get the full support of the majority of the international financial and economic community - including the directors of the main Central Banks and the leaders of all nations with internationally accepted currencies. To be able to fulfill its new role the IMF should become politically independent – meaning it should base its decision-making purely on technical criteria. The current political influence (based on financial contributions and therefore heavily tilted towards the rich countries, especially the US) should be eliminated. And neither should the IMF become subject to a majority of – often undemocratically governed - poor nations pursuing their own interests – as is the case in some UN organizations today.
3. The supply of newly created money to a particular country should be tied to the execution of a comprehensive, multi-year sustainable development program. This national program should take account of the economy as a whole, so as to ensure that the newly created demand for local goods and services would not exceed local productive capacity and cause inflation. The program should detail the financing rhythm, i.e., the making of payments in regular installments, for example on a quarterly basis. All national programs should fit into a global program that should be matched with global productive capacity. Nationals programs would be drawn up by the countries involved, if need be supported by international experts. Fitting the national programs into the global program would be the task of a global development organization: something comparable to current international development organizations such as the World Bank and the United Nations Development Program (UNDP). As was indicated for the IMF, this organization should be politically independent, so as to be able to base its decision-making purely on technical criteria.
4. The fourth condition for financing with newly created money would be that the use and effects of the transferred funds would be subject to continuous monitoring. This monitoring would ensure that the recipient country would stick to sound fiscal and monetary policies, and would spend the granted funds adequately, according to the sustainable development program. Also, monitoring should ensure that the inflow of created money into the national and global economy would not cause inflation. In case of non-compliance or the occurrence of higher than desirable inflation, the transfers should be halted or reduced.
Question: But would governments accept such monitoring? Wouldn’t they consider it as interference in national affairs?
Answer: Perhaps. So what? Undoubtedly, the loudest protests would come form governments with the tendency to spend irresponsibly: for example, on the military instead of education and health care. Such governments would be forced to shape up – which would be good. In case they would not accept the terms support would be withheld – in which case, sooner or later, a more responsible opposition that would be willing to comply would replace them. From the viewpoint of sustainable development, that would be even better. And ask yourself this: what would citizens of countries receiving money for sustainable development think? Most likely they would be happy to give up some of the sovereignty of their national leadership in exchange for the positive results of responsible government and investment in sustainable development: better public services, a cleaner environment, more and better jobs, and the elimination of poverty.Question: What would be the worst case scenario for money creation?
Answer: The worst case scenario would be a total loss of confidence in money, and a consequent economic and financial collapse. But chances of that happening are remote, and practically nil if the financial, economic and political elite supports the idea. What’s more, chances of a financial and economic collapse are much greater if we do not resort to money creation. If the problem of chronic and growing imbalances between productivity and demand is not addressed it will, in combination with the trade deficits of the U.S. with the rest of the world and the graying of populations, almost certainly lead a major economic and financial crisis.Question: How could money creation help in avoiding such a major economic and financial crisis?
Answer: First, money creation will create increased demand for goods and services and thus, foster the increase of production capacity. Second, money creation could be used to resolve the debt problems that currently plague rich as well as poor countries – and is likely to cause even greater problems in the future.Money creation, demand, productivity, and the debt problem
Money creation would, obviously, lead to increased demand for goods and services. That demand would be met by the gradual expansion of existing productive capacity and an increase in productivity. Increased productivity would allow fewer workers to take care of growing numbers of elderly people, whereas an increase in productive capacity will lead to more economic growth. More growth will generate more tax revenues for governments, and thus, more money to pay for pensions and growing health care costs.
Money creation would also help in getting us out of the economic doldrums by resolving the debt problem. Created money could be used to pay the interest on public debt, which in some countries takes up as much as 30% of the national budget. Likewise, money could be created to pay off the principal on those debts, according to the agreed upon payment schemes. This would free funds for meeting the increased pension obligations resulting from the retirement of the baby boom generation.
It should be noted that for the whole concept of money creation for investment in sustainable development, the current indebtedness of rich and poor countries would be advantageous. This is because the supply of money to service debts would provide leverage for the supervising institutions in pushing countries towards more responsible policies and spending, in line with sustainable development.
First of all, money creation will create increased demand for goods and services and thus, foster the increase of production capacity. Second, money creation could be used to resolve the debt problems that currently plague rich as well as poor countries – and is likely to cause even greater problems in the future.
Question: Going back to the risks: we’ve had a worst case scenario. What are other scenarios?
Answer: Other, more realistic scenarios are that some measure of higher-than-desired inflation would occur. Such inflation could occur because of errors in estimating the amount of money that could be pumped into local economies and the global economy without demand exceeding productive capacity. Producers would notice the strong demand for their products, and would raise their prices. Likewise workers, through their unions, would demand higher wages, which would translate in further price increases. This could lead to a wage-price inflationary spiral.To avoid wage-price inflation, agreements between IMF and governments on supplying IMF-created money should be based on national social contracts between governments, employers and workers. Those contracts should put a lid on wage demands and price raises. If not adhered to the IMF should reduce or even halt the provision of created funds. The same should happen if inflation would rise above a previously agreed upon level of, say, 3%.
See also: Global Development - Chapter XII, Money creation: Avoiding demand-driven inflation
Question: OK, so much for inflation caused by demand exceeding production capacity. But what of inflation caused by people loosing faith in the value of money?
Answer: That would happen only if economic leaders and the financial community say it will happen: loss of faith will, in all cases, be a self-fulfilling prophecy. If a majority of experts predicts money creation will cause money to loose its value people will react by putting their money in items they would expect to keep their value. For example, they’d buy real estate, or gold. When happening on a massive scale that would cause prices of real estate and gold to rise, and correspondingly, the value of money to decrease. Thus the prophecy would self-fulfil.Question: So how to avoid this from happening?
Answer: As already indicated above, money creation without loss of faith is possible only when all or a large majority of economic and financial experts, politicians and other opinion leaders would emphasize it would be OK. That means they would have to make clear to all economic players that money would keep its value because there would not be excessive inflation. That way faith would be maintained - and the prophecy, in this case a positive one, would self-fulfil.Question: Could money creation take place for one or a few countries, i.e., at the national level?
Answer: No, it could not. Money creation must be an international, global effort in which all international financial institutions, the major central banks and the leaders of all nations with internationally accepted currencies should participate. It would be impossible for money creation to take place in only a limited number of countries, as national and international holders of the currencies involved would rapidly exchange their holdings to other currencies. That would drive down the value of the currencies that would be created, resulting in massive inflation due to loss of faith.See also: Global Development - Chapter XII, Money creation: Avoiding inflation through loss of faith
Question: But considering the risks, especially that of inflation and even hyperinflation, should we try money creation at all?
Answer: Absolutely. Money creation for sustainable development is a moral imperative. At present, billions of people suffer from terrible deprivation. Our environment is steadily deteriorating, endangering the livelihoods and quality of life of further generations. Public services are in decline, and major dangers lie ahead for an already stagnating global economy. The productive capacity - technology, labour, and natural resources - to address these issues exists or could be created rapidly. The prime obstacle to resolving these problems is, therefore, lack of money. Doing away with economic dogma can eliminate this obstacle. The theory that money creation will automatically cause inflation is an item of faith, not an established scientific fact. Considering the potential benefits and the potential risks it is, therefore, a moral imperative for all people with a social conscience and concern for future generations, to push this concept. In particular, relentless pressure should be exercised on the global economic, financial and political establishment to accept and implement money creation. To put it differently: it is unacceptable to abide by a situation in which, thanks to economic dogma, the central obstacle to sustainable development is money - the one ingredient required for production that can be created at will.Question: Why doesn’t money creation figure as topic for debate on the sustainable development agenda?
Answer: Because it is an economic taboo. Economists, bankers and other financial specialists believe it is a mathematical certainty that money creation for use by governments will lead to inflation. When involving significant sums of money, as proposed here, these economic pundits are certain runaway inflation, and possibly hyperinflation will result. As is the case with religion, dogma is not questioned. Worse than that: people consider economics a science, and therefore don’t feel confident to challenge its practitioners or tenets.For more on economics and money creation click on:
Lack of money and money creation: the economics and A new economicsFor a further discussion of the scientific weaknesses of economics click on:
Economics: poor science, strong faithQuestion: If nobody dares to put the topic on the agenda, what should be done?
Answer: All individuals and groups with a genuine concern for what’s going on in our world should rally into a coalition for sustainable development to argue, jointly, for opening the debate on money creation.Click on: Action for sustainable development
(Back) to Global Sustainable development: the issues
(Back) to Homepage Global Development
To Global Development – the book
For contact details see Homepage