25 Jan 2014

A solution : Central Bank generated Basic Income balanced by a flat rate Financial Transaction Tax

I've been thinking more about how best to fix the system.

I've already argued that Central Banks could inject debt-free money directly into the economy via an Unconditional Basic Income for all citizens. I've also argued that Central Banks should have the ability to remove excess money from the system via a universal flat-rate transaction tax on all transactions that use their currency.

Take the example of the European Central Bank. In this case, the idea would be for the ECB to create electronic accounts for every citizen in the Eurozone, and then to add a fixed amount per month to the accounts of every man, woman and child. With 333 million citizens in the Eurozone, a budget of €1 trillion a year would allow everyone to receive around €200 a month - i.e. €800 for a family of four.

In parallel, the ECB would also be given the right to impose an FTT on all Euro-denominated electronic transactions, wherever they occur in the world. Similar mechanisms would apply for the Bank of England (in the case of Sterling transactions), the Federal Reserve (for transactions in US dollars, and so forth). The rate of the FTT would be continuously adjusted to remove the desired amount of money every month. With around €2 quadrillion in euro-demoninated transactions a year, an FTT of 0.05% would allow the ECB to remove €1 trillion a year.  Note that it would be trivial to continually adjust the rate month by month, day by day, or even hour by hour to ensure that money was removed at precisely the rate required.

Here's the new idea. I propose to fix things so that the Central Bank is required to set the FTT rate at whatever is required to completely balance the injection via the citizens' accounts.  Thus, if the ECB injects debt-free money at €1 trillion a year (i.e. around €200 per month per citizen), it would be required to set the FTT rate such that the same amount of money is removed every month.

The result would be that the system would be totally safe. There would be zero possibility of causing inflation, because the money supply would actually be unaffected.   This would effectively demolish the standard argument invoked by the banking lobby that money creation without debt could run the risk of generating inflation.

It would also totally demolish the other main argument that you hear - namely that allowing politicians to get their hands on the money creation process would be an invitation to corruption. It's true that if a central bank were to hand hundreds of billions of money directly to governments, it would be difficult to ensure that the politicians would not be tempted to buy votes, or pay the mafia.  That argument completely disappears if the Central Bank is used to push new debt free money directly into the economy via citizens. It would be extremely difficult, even impossible, to manipulate that system in favour of particular interest groups.

You might be asking yourself, what's the point of injecting €1 trillion into the economy every year if you immediately remove that money via a universal financial transaction tax? Well, think about it.  Although the FTT would be absolutely universal, and paid by absolutely everyone whenever they make a Euro-denominated financial transaction, the main people who would be paying the tax would not be the ordinary man in the street. When the €200 arrives on his or her account, they would pay 0.05% (i.e. 10 centimes) to the ECB. Likewise, when that money is spent (by drawing out cash, paying with a credit card or cheque, or by using a direct debit), they would pay another 10 cents - a total of 20 centimes.  In contrast, the high frequency traders who are shifiing $5.3 trillion around the foreign exchange markets every day would end up paying proportionately far more.

In other words, without rigging the system, it would naturally be those in the financial sector who have nothing better to do with their money than speculate that would end up paying the lion's share of the €1 trillion a year in FTT. But of course, the move would not make speculation illegal - just slightly less profitable.  The traders (and their computers) would simply have to add the extra costs into their algorithms. No big deal.

But the real beauty of the idea is that, although on the face of it, you might think that pushing €1 trillion a year of money into the economy at one end, and then removing the same amount at the other is neutral, it is not neutral at all.

The point is that while the money that is being removed at the top end will currently be almost entirely debt-based money - created by commercial banks out of thin air, and for which we are all forced to pay interest - the new money being injected via the Citizens' income will be debt free. 

Progressively, over a period of several years, the money in the system will gradually change from being debt to what I would call real or honest money.

We know that the Eurozone countries debt levels currently exceed €24.5 trillion (taking together household, business and public sector debt). You might think that the situation would only be fixed once €24.5 trillion of debt-free money has been injected. But this would be wrong. The fact is that a €100 note can be used to pay off hundred of thousands of euros worth of debt by using it over and over again.

So, I suspect that even a relatively modest €1 trillion a year of new money could actually allow debt to be reduced far more quickly. Remember that Mario Draghi (president of the ECB) created over €1 trillion in the space of a few months a couple of years ago, so there is actually no real problem here. He could do it. It wouldn't even break the terms of the Lisbon treaty.

Why don't we do this straightaway? The answer is simple. The financial lobbyists who defend the interests of the commericial banks and who want to keep their monopoly on money creation will do everything in their power to keep their gravy train on the rails for as long as possible. When the financial sector can suck over 3% of GDP out of the economy every year in the form of interest payments on public sector debt alone, they will not be at all happy with the idea that anyone could introduce a way to inject debt free money into the system.

But I can see no reason whatsoever for not introducing a system where Central Banks inject debt-free money into the economy as an unconditional basic income for all citizens and then remove the exact same amount of money by imposing a universal financial transaction tax.

Fixing the ratios so that the total money supply remains stable removes one of the few remaining objections that the financial lobbies could raise.

If you can think of any other problems, do let me know.

And if there is anyone out there who would like to defend money creation as interest-bearing debt by commercial banks, feel free to post your defense here. I'll be happy to read your arguments.


  1. In support of your proposed solution I'd like to reply on one detail in your text "This would effectively demolish the standard argument invoked by the banking lobby that money creation without debt could run the risk of generating inflation." It is obscene hypocrisy of the banking lobby to say so. Debt-based money creation has the same effect on inflation as debt-free money creation. Think of the housing bubble in many countries (= inflation). In mine (NL) this led to tripling housing prices in two decades, mainly caused by lending policy of bankers. And it is even worse for three reasons: 1: charging interest on private money creation is theft from society (you sell something that you haven't bought nor manufactured). 2: it leaves people with great debts, causing effects of recession. 3: the interest payments decrease living standard of massive numbers of people. This money is extracted from the society's buying power.

    If the central bank would have recklessly printetd lots of money to support people to buy houses, we would have had exactly the same bubble. Of course,it would have been an insane thing to do. But without effects 1,2 and 3 not even half as destructive as the housing bubble that we had now.

    So, a gradual remediation program is what we need.

    But Simon is calling for opponents, not supporters. So next one please ! :-)

  2. Hi Douwe,

    Of course you are right. Indeed, if the money supply provided by banks requires interest payments at (say) 5%, then that fact alone will actually mean that we have to have inflation.

    If money creation was debt free, I think that it is perfectly possible that the system could be perfectly stable with no inflation whatsover. People would be able to increase the overall real wealth of the society by building things (buildings, roads, renewable energy systems), growing food, looking after our children and elderly, with no need at all for any inflation.

    Just keep the amount of money in the economy at the correct level so that when the economy expands, the money supply follows. Simple....


  3. OK Simon, I’ll give you a counter argument in order to provoke some more discussion!

    Regardless our opinion on this banking practice of debt-based money creation, it is a profitable business for the banks. And whatever we may think about that, nowadays banks are still weak and need these profits to survive. Most people who work in the banking sector behind the desks are honorable honest people. They will lose their jobs if more banks go broke, and what will be the consequences for the society if more banks
    collapse? More rescue operations by tax payers? It is a hostage situation that
    should be dismantled with great precaution.

    Banks, like every business, must care for their profitability, liquidity (cash flow) and solvability. All three of them have been problems in the latest years. The most recent QE operations with low interest rate have provided cash flow, and now the banks are allowed to make better margins (profitability) in order to improve their solvability.
    It is done by squeezing a non-prosperous society, right (my mortgage has not become cheaper, neither do businesses get cheaper credits), but what will be the consequences if we deprive the banks of their lucrative earning model? What alternatives do we have to teach the banks to work with smaller (i.e. normal) margins? And how should the banks be recapitalized if nobody wants (or can) re-invest seriously in banks, when their
    major earning model is taken away from them? Should the ECB become a minority
    shareholder instead of creditor in order to provide minimum solvability? It could be arranged overnight by again a conversion of the outstanding loans into shares. People will call the C-word (communism), would they be right? As an alternative for squeezing society (which is still in recession or fragile recovery) during years. Would that be a desirable situation?

    I have mixed feelings. Are there other options? A troika bank rescue fund as a shareholder (for solvability reasons) instead of another creditor? How will banks behave knowing this option is always there waiting for them if things go wrong?

    What is the way out? We should not kill the wolfs, but how can we turn them into nice and co-operative sheep?

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