By Martin Thomas
I think Barry Finger (Solidarity 226) exaggerates “the democratic openings made possible by fiat money”.
True, the current crisis reveals states held in hock to banks and other financial institutions permanently holding vast stocks of government IOUs (bonds). To release that stranglehold, we should call for the expropriation of the banks, insurance companies, pension funds, etc., and their replacement by a common publicly-owned service under democratic control. Coupon payments on most bonds could then be cancelled, or become only a matter of internal book-keeping within public finances.
However, Barry seems to counterpose an indefinite or almost indefinite expansion of fiat money (that is, cash in the form of bank notes, permanent and unrepayable IOUs from the government).
He sees a limit only “when demand expansion cannot induce any further capacity utilisation or increased output”.
There is a first problem here which is discussed in current debates between “Keynesians” and “monetarists”. Monetarists hold that pumping out enough cash is all that’s necessary to keep production at full tilt. They support “quantitative easing” (a way to pump out more cash), and say that public works are unnecessary. Keynesians say that the extra cash may just sit in the cash piles of wealthy people unwilling to push it into production, and call for direct state activity.
Barry, I think, calls for the government spending more cash directly on public projects, and not just for more injection of cash.
Then there is a second problem, and one which the Bolsheviks after 1917 fell foul of. There is no tidy moment when the government printing off more cash and spending it will elicit no further activity. Meanwhile, every currency note printed remains in circulation indefinitely and stokes up inflation. The inflation comes with a delay, but after a while catches up with and overwhelms the printing of new cash.
Even before October 1917, the Tsarist and then the Provisional Government, struggling with war finance, had gone beyond the limit at which printing more notes devalued the existing stock in circulation faster than it enabled the government to generate more economic activity.
The workers’ government at first saw no option but to continue the previous governments’ policy, and covered its spending by printing even more notes. As the volume of notes in circulation ballooned, their value dwindled faster. On 1 November 1917, the total currency in circulation was worth 2200 million rubles at 1914 prices; by 1 July 1921, it was worth only 29 million rubles.
For a while, illusions of “war communism” allowed some Bolsheviks to think that the result, where in the cities mostly you could only get food and other supplies by getting on the list for direct allocation by some office or factory, was a progressive move towards the withering-away of money.
By 1923-4 those illusions were thoroughly dismissed. The Bolshevik government noted that economic planning required a stable currency. It introduced a new “gold ruble” and withdrew the old notes.
It had already restarted selling bonds (on a smaller scale than under the old regime, to mobilise small savings rather than to build up a vast wall of obligations), after at first cancelling all bonds held abroad and converting bonds held within Russia into currency.