Fiat money

A friend of mine insists that the fact that all money is, in essence, loaned into existence by banks and thus creates debt, is at the root of our economic problems, and that what we really need to do is switch over to "fiat money," like the "greenbacks" the US government printed in the Civil War, or the "Continentals" that were our nation's first currency. If you have already talked about this in one of your radio shows (which I only recently became aware of), could you please direct me to the appropriate radio show, and, if you haven't, could you please talk about this issue? Obviously, one drawback to it is that our current government would never implement it, but, beyond that, what are its pros and cons? Thank you!

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  • Sam Levey
    commented 2016-08-11 05:36:58 -0400
    Hi there Martin,

    A number of economists, particularly Post-Keynesians, would agree that this is indeed a source of trouble. I have seen two varieties of solutions proposed: 1) deficit spending by the government. Because the government issues its own currency, it does not need to issue debt in order to spend its currency into existence. But, even if it did choose to, a currency with a floating exchange rate can’t be forced to default on its debt; in other words, the debt is a meaningless number that never has to be reduced. For a lot more on that, check out Modern Monetary Theory.

    Or 2) a 100% reserve requirement, so that banks wouldn’t be allowed to make loans, and then only the government would be able to create currency. You might be interested in an organization that’s pushing for a proposal like this in the UK called Positive Money.
  • Martin Holsinger
    published this page in Ask Prof. Wolff 2016-08-03 15:56:03 -0400