How will you pay for it?

“But, how will you pay for it?”

This is the most common question I am asked when I discuss my platform.  Here is a brief summary of how a country like the U.S. that creates its own sovereign currency can pay for resources that are available in its currency without contributing to the national debt or raising taxes.  Also, see the videos and references below for more.

Article I, Section 8 of the Constitution of the United States gives Congress the sole power to coin United States money. Congress delegates, but does not give away, this authority to the Treasury Department and the Federal Reserve, which Congress created in 1913 as the Central Bank of the United States, and the primary banking agent of the Treasury Department. The 12 Fed regional banks issue US reserves (additions to reserve account balances), to all Fed account holders including the US Treasury spending account.

Just as Congress created the Fed in 1913, and empowered it to create reserves by adding to account balances, it can order the Fed to add to the balances in the Treasury spending account. So, at the end of every bill ordering the Treasury to spend on the programs Congress approves, we’ll also order the Federal Reserve to immediately increase the balance in the Treasury spending account by the amount we’ve ordered the Treasury to spend; and we’ll also order the Federal Reserve to increase the same balance by enough for Treasury to pay back the portion of the national debt that will fall due during the period covered by our spending.

These orders in spending bills, called Overt Congressional Financing (OCF) will provide the reserves Treasury needs to pay for (1) all new spending without increasing the “national debt” (the debt-subject-to-the limit) and (2) also paying back parts of it as it falls due, until the national debt is eventually extinguished. OCF will end debt ceiling crises and due to repayment of a large portion of outstanding debt within 6 months will make it clear to the public that the unpopular national debt is not only not a real problem, but is also well on its way to extinction. It will also make it clear to the public that the spending programs I’m running on can easily be “paid for” by the Congress of the United States without disruption of the economy or raising Federal taxes to “pay for” Federal spending.

The language would look like this: “Upon passage of this appropriations bill, the Federal Reserve is directed to fill the Treasury’s spending account at the New York Federal Reserve with the addition to its Reserve Balance necessary to spend this appropriation. In addition, the Federal Reserve is directed to fill the Treasury spending account with the additions to the Treasury Reserve balances necessary to repay all outstanding debt instruments including principal and interest as they fall due for the fiscal year of this appropriation. “

Will OCF Cause More Inflation Than the Covert Congressional Financing (CCF) Method Used Now?

No, inflation doesn’t depend on whether Congress uses OCF, or the present method of CCF in which Congress relies on coordination between the Treasury and the Federal Reserve within the institutional framework created by Congress to drain money from the private sector prior to the Fed enabling spending by adding reserves to the Treasury spending account so it can spend appropriations.

Instead, it depends on the policies Congress passes to achieve price stability, in the context of the particular spending choices it makes. OCF is a simple transparent alternative method of finance. It brings us as close as possible in our modern context to the original intent of the Constitution that Congress coins the money. But, it doesn’t require Congress to spend any more than it otherwise should to create true full employment, or spend in such a way that inflation induced by such spending would occur.

So, no, inflation won’t increase just from using the new method of financing, alone.  As it does now, however, Congress will have to control inflation by taxing enough money away from the private sector (taxing those with annual incomes in excess of $500,000 including multi-national corporations) and by following other demand and supply management policies to avoid it. Taxing enough means not taking either more or less money out of the economy on an annual basis than is needed to create price stability while also enabling enough deficit spending to compensate for demand leakages from the economy due to private sector and foreign sector savings. Other inflation control policies include (1) hedging against deficit-spending induced inflation by strengthening the automatic stabilizers in fiscal policy, including legislating programs providing for automatic tax rate adjustments triggered by unexpected inflationary episodes, 2) wage and price controls, if necessary, and (3) heading off possible cost-push inflation in controlled or managed markets (such as oil in the late 1970s) by developing new sources of supply. The Federal Job Guarantee policy mentioned earlier in my platform is an effective automatic stabilizer because it operates counter-cyclically along with other safety net policies that increase federal deficit spending in times of slow down and decrease such spending when the economy is booming.

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More Information on “Modern Monetary Theory”

The principles described above are based on Modern Monetary Theory (MMT). MMT synthesizes ideas from the State Theory of Money of Georg Friedrich Knapp (also known as Chartalism) and Credit Theory of Money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner, Hyman Minsky’s views on the banking system and Wynne Godley’s Sectoral balances approach. Modern proponents include economists Warren Mosler, L. Randall Wray, Stephanie Kelton, Bill Mitchell and Pavlina R. Tcherneva.  For a summaries, refer to the website by Geoff Coventry at “Modern Money Basics” and to  “Modern Monetary Theory: A Response to Critics” (Fullwiler, Bell and Wray 2012).  See also

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The Basics of Modern Money

Learn how countries like the U.S.—which issue their own sovereign currency—can afford to use that currency to serve their citizens.

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Modern Monetary Theory (MMT), Deficits, Full Employment & Price Stability

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Bill Mitchell: Demystifying Modern Monetary Theory

In a challenge to conventional views on modern monetary and fiscal policy, Professor Bill Mitchell of Newcastle University in Australia has emerged as one of the foremost exponents of Modern Monetary Theory (MMT), a heterodox challenge to the prevailing paradigms which dominate how mainstream economics is taught and economic policy implemented. In his works, and the interview below, Mitchell presents a coherent analysis of how money is created, how it functions in global exchange rate regimes, and how the mystification of the nature of money has constrained governments, and prevented states from acting in the public interest.  

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Steve Keen: Does Modern Monetary Theory make sense?

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MMT: What Modern Money Theory is Not Saying

This video on Deficit Owl’s channel of Professor Randall Wray is important to understand, as it itemizes what MMT does and does not do.  MMT, for example, does not in itself lead to inflation, but it is also possible inflation and devaluation of the currency can occur under MMT — just like it does under other fiscal policies. If government spending is too high we can have inflation.  Therefore, implementing MMT, as with other fiscal policies, requires balancing to ensure we are not taxing and spending too much or too little.  The difference is MMT recognizes the detrimental impact of the national debt ceiling and recognizes the necessary function of “deficit spending” for countries that have sovereign currencies.