Why doesn't the government create money, spend it for free without interest, and recollect it with taxes?

Question

I was thinking of a better monetary system, and here is what I came up with. I'd like to know if this would work, as I see if offers many advantages over our debt-based monetary system today.

A new monetary system:

All currency, should be created by the government. Governments will spend created currency into circulation through government jobs, such as teachers, construction workers, law enforcement officers, and firefighters. The currency can be spent interest-free, allowed to circulate permanently, for the benefit of the people.

Now you might be thinking of inflation. Well, governments can still tax us, but the tax will remove the currency from existence. This provides a very smart way to allow currency to keep its value, yet let our government spend money on things we as a society need in the 21st century without going into debt. A small inflation rate of 0.5% a year is ideal, and can be achieved by destroying a certain percentage of the money removed by circulation by tax (example, 95% of whatever is taxed is destroyed to allow inflation). The 0.5% inflation rate will always be predictable for people who seek to loan money. It will also simulate spending. Also, a 0.5% inflation rate allows savers to save again whereas we have a 2% interest rate today and money quickly loses value over years.

Providing credit is very important so people can purchase houses, create businesses, and "start" their life. Therefore, banks will no longer be for profit, and governments shall provide bank services that run as non-profit organizations. Loans may be created to people who have good and decent credit. These loans will only have a 0.5% interest rate to keep up with inflation. No collateral will be lost if the loan fails, however jail time can be faced. This is to prevent corruption, as no government would want to jail someone for the fun of it. To maintain price stability, the amount of money destroyed by tax will be to proportion of the loans given out that year. This "tax variable" allows the government to let the currency have value.

The key with this system is a balancing act, in which governments must balance the amount of money they create/spend into government jobs, how much money they can create with loans, and maintaining price stability by removing money from circulation with a "variable tax".

Should the economy fail in any way, only the government can be blamed. No multi-billion dollar bailouts at the expense of tax payers, and the system can be revised to see what went wrong.

Our current debt-based monetary system:

Our current monetary system is debt-based. 95% of our money is bank credit, created by loans. Private bankers charge interest on these loans, yet they do not create the future interest payments needed to repay the loans back. They only create the principle. Therefore, we can establish a couple things:

• Money is created as debt
• Interest is charged on money that does not exist.
• If everyone payed off there debt, there would be no money in circulation.
• Every time our bank system fails, multi-billion dollar bailouts are given to banks at the expense of taxpayers.
• Every dollar in existence has interest due on it.
• There will always be more debt than currency, which drives down spending.

Now, when a loan is repaid, the principal is destroyed. Many economists argue that interest is recycled, because banks need to pay employees, pay bills, etc. However this is not true. It is true that some interest is recycled, however many banks will always invest money for their own financial gain, and nowhere in the law is there a rule stating banks must recycle interest. Also, what happens if I loan 100,000 dollars to someone? There would be two interest payments on the same dollar making it impossible to extinguish the debt that the dollar carries. Nowhere is there a law that prevents a company, me, or you from loaning money and charging interest, money that came from a bank loan originally.

We can conclude this in a simple mathematical equation: p ≠ p + i

The result: Governments must steal prosperity out of the future to spend money into services by borrowing it and promising to pay back interest. The only way our current monetary system can sustain itself is if we go more into debt to pay back old loans. We can't keep going into debt forever, and that is why foreclosures are a guarantee with this system, and banks end up with most our assets which have real value, compared to the paper they print out of thin air.

Now, let's say everyone today stops borrowing from banks tomorrow and pays their bills. This is deflationary. When the money supply shrinks, paying off debts + interest due on them is much harder and spending dries out. Wages fall, businesses need to attract more sales but they can't do that without lowering prices. Our whole system goes in a deflationary collapse, leading to a financial crisis. When the system fails, the banks may take your property as you fail to pay loans, and they always get bailed out by our government at the expense of more tax, just so we can keep this monetary system.

Other interesting things to note:

• Our current inflation rate of 2% is a huge disadvantage to savers.
• Most our taxes go to pay off debt + interest.
• Most people don't even know such a system exists today.

So back to the question, can such a new monetary system be achieved, or is there something I haven't taken into consideration?

Answer 1

Why doesn't the government create money, spend it for free without interest, and recollect it with taxes, you ask. Well, it does. That's exactly what public investment & spending, and the taxation system, do. The government creates money, puts it out into the economy, and collects it back through taxation and other payments.

If it does that while putting more money into the economy than it takes back, then that causes growth of the money supply. If the money supply grows faster than the supply of goods and services, then inflation starts to accumulate, and will continue to rise and rise until something changes.

In order to prevent that, governments typically sell bonds, to stabilise the money supply. And as long as the market for those bonds is liquid enough, the yield on the bonds gives the government and central bank a useful additional macroeconomic indicator to inform policy-making.

There's even a paradigm describing the current monetary system that starts with the perspective that money is created when government spends, and is destroyed when government taxes: Modern Monetary Theory. It hasn't got much traction, largely because it doesn't seem to offer any additional insights or analytic power beyond the neo-classical view.

Answer 2

The government does this currently. They can essentially print money, put it into the real economy, and then borrow it back from individuals who buy bonds. The issue is when individuals do not want to buy bonds (for one reason or another). Then you end up with excess money in the money supply, leading to an inflation crisis. Currently, the US can get away with this because there is high demand for US treasuries, AND that also creates a scenario in which there is high foreign demand for US dollars. That demand raises the currencies value, and thus restricts inflation. When you think about the cycle of money however, a government prints money, spends it, you and I eventually see that money in some form, and then we are taxed or buy bonds.

An illustration of this is if a man named Sam (uncle Sam) goes up to Jane (a citizen) and offers to give her money. He does, and she spends it. Sam gave other people money, and they spend it, so Jane's wages can be a combination of what Sam gave her, and a combination of what Sam gave other people. When Sam needs more money he taxes her. This is essentially interest free. When Sam wants to spend more, he issues bonds, which in essence lowers the money supply in the economy until the money is injected back into the economy. Hopefully sams payments to Jane made her and others more productive, because the increase in the quantity of goods (supply) can offset the inflation (money supply expansion) that Sam has created.

Answer 3

Your idea was proposed more than 100 years ago by Silvio Gesell (https://en.wikipedia.org/wiki/Silvio_Gesell). He wanted to create a National Currency Office, in charge of money. No private banks. Money would be created in accordance with amount of wealth available. It would also depreciate, to make people spend it. Read his book "Natural Economic Order". It is online.

You might be interested also in Social Credit (https://en.wikipedia.org/wiki/Social_credit).

I am reading about this at the moment. Very interesting.