So I’ve been thinking in recent weeks about better ways to create money than with debt. After all, there’s little use in pointing out a problem if you’re not willing to work on a solution. Many people such as libertarian Ron Paul believe the solution is to go back to using gold as money, but there are major problems with that. Gold is a finite resource so while the population grows and technology advances, the supply of mined gold may not keep up. In that case there are more people trying to use the same amount of gold and money becomes a commodity that people will hold instead of trade, hoping to make a profit. That’s deflationary and will quickly squelch any economic activity. There are other problems, like wealthy people attempting to corner the market on gold; we certainly do not want to be in a situation where one group gains control of all the money through a deft maneuver.
After looking at other suggestions I considered the possibility of something like a Monopoly money economy. That sounds terrible, but it has strong advantages in its favor. Currently money is created when public debt (Treasury bills, notes, bonds) held by banks is purchased by the central bank, which creates new money to make the purchase. So all money is based on government debt, and creating enough new money to enable repayment with interest leads to an exponential increase of the debt. A bad part of this is that interest is owed by the federal government, which is trapped in the same debt spiral everyone else is. The government cannot really run a balanced budget because there would not be a growing base of financial assets for the central bank to purchase to create money for a growing economy; balanced budgets run into much the same problem as using gold for currency. Eliminating public debt entirely is also impractical, because then there would be no assets for the central bank to purchase, or sell to reduce the money supply.
So we’re stuck with a system where the government needs to incur debt and pay interest both to run its operations and to provide a basis for the money supply. At the same time, a quasi-public institution (the Federal Reserve) is the entity charged to create money. Why not cut out the middle man, and allow the government to create money to run its operations without incurring debt? The government would “print” money and hand it out as budget expenditures, like the bank in a game of Monopoly that pays players $200 to go around the board. The government would never need to repay the amount, it would just create more money the next year as needed. It seems like the problem would become too much money in the economy, but what is created can be removed similarly. Instead of taxes being levied to spend on expenditures, they would be used to reduce the amount of money in the economy to regulate inflation. The government would create and destroy money as needed.
This idea confuses people, but it doesn’t seem to me any more confusing than the situation now, where the government ends up being in debt to the central bank. Why run a system where the government owes itself while bumping against debt ceilings, when the government can just create the money, spend it, and owe no one?
This may seem like something radical that has never been attempted, but I realized that this is a solution used in virtual economies. In massively multiplayer online games (MMOs) like World of Warcraft, game developers face the same problem of managing a monetary system and avoiding inflation and deflation that the real government faces. They create money as rewards for missions and loot taken from creatures, and eliminate it from the economy with fees for item repair and travel or by selling expensive items to players such as mounts. Developers are careful to balance the creation and elimination of game money to reflect growing player population and increasing levels of player ability. It has worked for tens of millions of MMO players over the last decade; why can’t it work in the real world? The current monetary system is hardly doing better lately.
It seems like a system that offers all the advantages of a flexible money supply to balance economic growth, without the debt that is currently threatening to drown the United States, EU, and Japan, never mind smaller nations. The idea is still very much a work-in-progress however, so I encourage you to respond with criticisms or observations.