Written by Derryl Hermanutz

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Debt-Free Helicopter Money

Ben Franklin's Pennsylvania colony issued its own debt-free scrip money. The colonial government simply printed paper scrip and spent it paying for whatever the government needed. People and businesses who sold stuff to the government were paid the new money, which provided the private sector economy with a supply of debt-free government-issued money to use.

Nobody owed the money "back" to anybody else, because the money wasn't issued as loans, so it was not owed back to the money issuer as payment of borrowers' debts. The scrip circulated as debt-free, non-repayable payments money, which the colonists could spend, invest, or save. Saving - holding the money out of circulation - did not starve debtors of debt repayment money. Because banks didn't create the money as loans debtors didn't owe the money supply back to banks as payment for loan account debts.

The money-issuing government did not debt-financed its spending by issuing bond debts to borrow money that is created by banks (which saddles taxpayers with never-ending bond interest payments on their government's ever-growing debts). The government did not tax-fund its spending by taking money from its citizens and businesses. The government money-funded its spending by creating the money it spent. 

"The scrip circulated as debt-free, non-repayable payments money"

The colony's buy-sell economy flourished with its sufficient - but not excessive - supply of government-issued debt-free "helicopter money".

Civil War Money

Abraham Lincoln's Civil War government printed and spent $450 million of United States Notes - greenbacks: legal tender paper currency issued by the US Treasury. This prevented adding $450 million to the US National Debt which would have occurred if Lincoln had issued $450 million of US Treasury debt and sold it to commercial banks. Thus was reduced the borrowing of bank-issued money to fund the North's Civil War spending.

The South printed their own debt-free graybacks for the same reason: to avoid paying the banks' ruinous 24-36% interest for loans of bank deposits ("check-book money"). This bank money was created by printing numbers in accounting ledgers; and banknotes (paper cash money) that commercial banks used to print themselves. {Central banks now issue all the paper banknotes.}

$450 million was a lot of money and would have been a lot of additional debt in the 1860s. Total US Treasury debt before the Civil War was only $90 million. Even though Lincoln issued $450 million of debt-free "helicopter money" to fund some of the North's Civil War spending, total US Treasury debt after the Civil war was $2.7 billion. This was a 30X increase in US "public debt" over the 4 years of the Civil War (April 12, 1861 to May 9, 1865).

The debt is never paid down.

A permanent 5-10X increase in total "public debt" is typical of bond debt-financed War spending.

Total US Treasury debt has increased from $0 in 1835 when Andrew Jackson paid off the National Debt, to $90 million before the Civil War and $2.7 billion after the Civil War, to $24 billion during WWI, to $259 billion during WWII, to $1 trillion by 1981, to $9.5 trillion in 2006, to $19 trillion by 2017, to $22 trillion today in 2019. Total US Treasury debt has more than doubled in just the last 13 years.

If you had told Teddy Roosevelt in 1909 - after US Treasury debt had remained fairly stable at $2.7 billion since 1865 - that total US government bond debt would grow more than 8,000 times bigger over the next 110 years (from $2.7 billion in 1909 to $22 trillion in 2019): Roosevelt would have laughed you out of the Oval Office.

Yet, here we are.

And total US private sector debt has grown more than 10,000 times bigger over the same period.

"[Teddy] Roosevelt would have laughed you out of the Oval Office."

Trillions of government and private sector debt created trillions of deposit account money, which payees now have in our bank accounts. Paying down the loan account and bond debts un-creates the deposit account money.

Governments don't pay down their total bond debts.

Governments roll over their debts. When bonds mature and governments have to repay the bond face value amount to bondholders, the government doesn't tax-fund its debt payouts by taking money from people and businesses. The government debt-finances its bond redemption payouts.

The government gets the bond redemption money by selling new bonds to commercial banks who create new deposit account money to purchase the government's new interest-bearing debts. Every year the government issues more new bonds than it pays out old bonds, so the National Debt continues increasing year after year, decade after decade, century after century.

Government bond debt increases from $0 to millions to billions to trillions. ...then quadrillions, quintillions, sextillions...

"National Debt continues increasing year after year, decade after decade, century after century."

Payees have been paid and still have all those millions and billions and trillions of bank deposit account balances that debtors owe back to their banks.

For payees to have more money, debtors have to owe more debts.

For debtors to owe less debts, payees have to have less money.

Exponential increase in debt growth

Within the present central-commercial bank monetary system, there is no mechanism to stop the exponential increase in debt growth, other than mass debtor defaults, banking system failure, and writing off payees' deposit account credit balances to restore solvency to the bankrupt commercial banking system by relieving the banks of their unpayable deposit liability debt balances.

The private sector as a whole doesn't pay down its total loan account debt, just like the government doesn't paydown its total bond debt.

Some loan account debtors are always earning money out of the economy and extinguishing the deposit account money balances to reduce their loan account debt balances. But at the same time, new debtors are borrowing and spending new bank account money into circulation. When credit-debt growth slows or stalls, not enough new money is being spent into circulation, so old debtors can't earn enough new money to make their bank loan payments. Then debtors default en masse, which creates a financial crisis in the banks' debt-based money supply creation (and un-creation) system.

Economic Growth

The physical world does not need never-ending economic growth: that is impossible on a finite planet.

The financial world needs never-ending credit-debit growth to prevent mass debtor defaults, banking system failure, and monetary system Collapse. Never-ending credit-debit growth is possible by banks typing evermore new pairs of numbers in debtors' bank deposit accounts and bank loan accounts. 

"there is no mechanism to stopthe exponential increase in debt growth"

The need for never-ending debt growth could be ended if governments issued debt-free money.

How to create debt-free money

Franklin and Lincoln issued their own debt-free money.

Governments today could - but don't - issue their own debt-free, interest-free money. Instead, they issue interest-bearing repayable bond debts to borrow money that is created by commercial banks.

The same governments who passed the money and banking laws that legalized the central-commercial banks' monopoly over national money issuance, can change those laws to enable governments to issue their own money.

But actually no changes to the laws are necessary. All that is required is for the government to create - what would effectively be debt-free, interest-free deposit account money - within the existing monetary system - by issuing zero-interest perpetual bonds.

Perpetual bonds have no maturity date, so the loan principal amount never comes due for payment. At zero interest, there is no interest cost to the bond issuer, ever. Debts that impose no interest cost on the borrower, and that never have to be paid back, are not "real" debts. They are accounting formalities.

Here's how it would work:

The government would issue zero interest perpetual bonds and sell them to commercial banks, who pay for their asset purchases in the usual way: by typing spendable Credits into the government's commercial bank deposit accounts. This creates the new spendable money. Then the commercial banks would sell the new bonds to the central bank, who would pay for its asset purchases in the usual way: by typing Credits into the bond-selling banks' reserve accounts. This creates 100% reserve-backing for the new deposit account money. The central bank would hold the perpetual bonds on its own balance sheet forever. That is forever, as in perpetuity.

That's it.

New debt-free, interest-free, non-repayable, 100% reserve-backed money has been created in the government's commercial bank deposit accounts. The government can then transfer the balances into its central bank account, or spend the balances directly out of its commercial bank accounts.

A money-funded debt reduction program

Governments could use the new debt-free money to fund a private sector debt reduction program, which would permanently prevent the mass debtor defaults that cause financial crisis and failure of the banks' debt-based money system. 

"The central bank would hold the perpetual bonds on its own balance sheet forever."

 The government pays the new money into every citizen's bank deposit account as a monthly un-earned Money Income. The government's bank debits the government's account balance, and the payees' banks credit the payees' account balances, with the Money Income deposits.

Using the US money system as an example: I suggest the deposits be $1000 per month, credited into the bank account of every citizen 18 years old or over.

A condition of this money-funded debt paydown program is that debtors have to use the new money to paydown their debts before they can spend, save or invest any of their Money Income.

We do not have direct administrative access to debit and credit our own bank account balances. Banks control their customers' paying money out of our accounts.

The Money Income deposits would be credited into every citizen's bank deposit account, every month. Most loan payments are payable monthly, so the new money matches the old loan payment schedule.

Debtors' banks would simply debit loan payments out of the debtors' bank deposit account balances, and credit the payments against the debtors' loan account balances. The new money (deposit account balance) and the old debt (loan account balance) are canceled out of existence.

This part of the Money Income deposits is simply extinguished: debited out of existence. Money that does not exist cannot contribute to any kind of spending-driven price inflation.

Up to 1/3 of all student loan debts and car loan debts are delinquent (behind on payments), defaulting, or already defaulted. The debtors can't pay their debts because their earned incomes are barely sufficient to pay their very frugal monthly cost of living spending. Once they pay rent and utilities and buy food, they have no money left to make their loan payments.

Adding $1000/month into these debtors' bank deposit accounts would make all these unpayable debts payable. Debtors could pay their debts, and their banks could collect their interest-earning assets.

At $1000/month, it would take 50 months for a student debtor to pay off a $50,000 student loan debt, with their Money Income.

Over a period of months and years, people could pay off their high-interest credit card balances and bank overdrafts.

Millions of US households are still struggling to make their mortgage payments on the inflated prices they paid for houses during the mortgage loan-inflated 2000s real estate price bubble. A 2 adult household would receive $2000 per month of un-earned Money Income deposits, which - added to their household earned incomes - is enough to make most of these unpayable mortgage debts, payable.

Over a period of 5 years, a 2 adult household would receive a total of $120,000 of Money Income, all of which would be paid against their mortgage loans.

The program could be continued as long as required, to enable private-sector debt paydown to realistic and affordable levels.

Would the program cause inflation?

People who don't owe debts could spend, invest, or save their new $1000/month Money Income deposit account balances.

Wealthy people owe little or no debt, already own personal assets like houses and cars, and already earn enough money to pay their cost of living spending. So these people would likely save their Money Income deposits to add to their money wealth and financial security: emergency funds, retirement savings, and money to leave as their kids' inheritances. Money that is being saved is not being spent or invested, so it cannot contribute to any kind of spending-driven price inflation.

And these people would likely transfer balances into their brokerage accounts to invest the money buying financial assets. Which would further inflate the buy-sell prices, and conversely reduce the yields, of stocks and bonds whose prices are already inflated to historic highs by the trillions of new money that was created to debt-finance the 2000s real estate price bubble.

People who sold price-inflated real estate to the mortgage debtors were paid all those new deposit account balances, which they ("we") still have, in bank accounts (savings) and brokerage accounts (investible capital). The mortgage debtors owe all those trillions back to their banks. But the debtors can't earn back and pay back the money because the payees aren't re-spending the money. We are keeping it, as our savings and investible capital.

Saving doesn't fund anything. It just adds to dormant numbers in bank savings accounts.

Transferring savings into the savings-funded capital markets (to buy financial assets) adds demand-spending which enables asset owners to ask higher prices to sell their stocks and bonds, which savers pay with our part of "the global savings glut". Low returns on stocks and bonds are better than no returns on bank savings account balances.

And "everybody" would be receiving $1000/month Money Income deposits; $2000/month for a 2 adult household. The Money Income deposits would be tax-free.

$2000/month = $24,000/year, which is the equivalent of earning 6% net after-tax income on $400,000 of invested household savings.

The Money Incomes that are spent buying consumer goods and services might add to CPI price inflation, which erodes the purchasing power of people's already existing money savings.

If this Money Income program adds 1% to CPI inflation, then the purchasing power of people's existing savings account balances is being reduced by 1% per year by the program.

If you have $1.2 million in your savings accounts, you lose $12,000 per year purchasing power, at 1% CPI inflation. But you get $12,000 per year Money Income deposits in your bank account, so you break even. 

"It was Milton Friedman who, in 1969, originated the helicopter money idea."

Everyone who has more than $1.2 million of "money in the bank" loses more purchasing power than they gain by this program. Everyone who has less than $1.2 million of money savings gains more than they lose. Almost everybody - including most wealthy people - has less than $1.2 million of money savings. So almost everybody gains more than they lose by this program. 

69% of Americans have less than $1000 of "money in the bank".

34% of Americans have $0 savings.

An additional 35% have $1 - $999 of savings.

11% have $1000 - $4999 of savings.

5% have $5000 - $9999 of savings.

Only 15% of Americans have $10,000 or more of "money in the bank".

$10,000 of savings might pay a household's debt payments, bill payments, and other cost of living spending, for 4 months. Then the people have no money.

Almost everybody depends on "having incomes", not on "having money". Only very rich people have a lot of liquid money: bank account balances and cash in safes. Only very rich people would lose purchasing power, by a monetary-fiscal program that equally adds to everybody's incomes but causes a 1% decrease in the purchasing power of money.

Do rich people actually feel it, actually care, if the price of a bag of Taco chips increases from $2.00 to $2.02? Very rich people spend a significant amount of their money on very expensive luxury goods; but spend a tiny fraction of their money on "everyday" consumer goods and services, so CPI inflation barely affects this tiny fraction of a percentage of the population who are very rich in money. 

Poor people tend to spend most of the money they receive, paying their very modest cost of living spending.

The new Money Incomes that are spent would be paid to the local businesses and landlords who sell goods and services to consumers. Consumers get the housing, food and other necessities that they need. Businesses and landlords get the money.

This was Milton Friedman's rationale for his money-funded automatic stabilizer program (presented in his 1948 paper, A Monetary and Fiscal Framework for Economic Stability); and for his tax-funded negative income tax (presented in his 1962 book, Capitalism and Freedom).

Friedman understood that in a buy-sell for money economy, the money flows "up" to producers/sellers as the goods and services flow down to consumers/buyers.

It was Milton Friedman who, in 1969, originated the helicopter money idea. Friedman only half-jokingly quipped that a determined central bank could always end a deflationary Depression by printing money and dropping it out of helicopters. People would pick up the "free money" and spend the moribund economy back to work producing stuff for sale to earn consumers' renewed money-spending.

When consumers have more money to spend, the businesses who sell stuff to consumers earn more money.

The increased consumer spending becomes equally increased business sales revenues and landlord rent collections; which would motivate business investment in the production of more goods and services to sell into the newly demand-rich consumer market; which would motivate the hiring of more workers, and the paying of more earned incomes to workers and suppliers, in a virtuous cycle.

All of these benefits suddenly become possible, simply by government issuance of zero interest perpetual bonds to money fund the "helicopter money" program.

The inflation risk is minimal.

Banks' uncollectable interest-earning assets become collectible, because debtors' unpayable loan account debts become payable, which prevents debtor defaults, financial crisis, banking system failure, and monetary system Collapse.

$1000 per month is not "excessive"

There are about 210 million adult (over 18) US citizens, and each would receive $12,000 per year of Money Income deposits: which totals about $2.5 trillion per year.

About half of the new deposits would be extinguished paying down loan account debts, which leaves $1.25 trillion per year.

About half of that would be saved, or invested in the capital markets buying financial assets, which leaves a little more than $600 billion per year available to be spent on consumption. This is about a 3% increase in consumer spending/producer earning, based on 2019 US GDP of $20.5 trillion.

3% is a significant, but not excessive, amount of fiscal stimulus: a 3% increase in consumer spending that becomes a 3% increase in business sales revenues and landlord rent collections. 

"About half of the new deposits would be extinguished paying down loan account debts"

Private sector debts are paid down and solvency is restored to banks' balance sheets; consumers have more money to spend buying stuff so businesses earn more money producing and selling the stuff; people can add to their savings and investible capital, and there is no future repayment cost or interest cost to anybody, ever, because the government money-funded rather than debt-financed the Money Income program.

What's not to like?

Conclusion

That concludes the basic description of how banks create money and why governments should too.

But I have introduced some terminology - like "deposit liabilities" - without explaining what the terms mean.