On Spending a Trillion Dollars

Kevin McCormick, January 2023

Harvard Law Professor Christine Desan has written an article that, in my view, provides a thorough and important argument in favor of reform of the United States monetary system. Proponents of monetary reform often lack scholarly support for their view that the status quo is basically unfair and fundamentally flawed. This article, How to Spend a Trillion Dollars, provides that support and also a wealth of references to historical scholarship. (also available at kmm2026.org, with permission)

The Federal Reserve monetary system is largely unchallenged in the United States. Yes, there are critics, but criticism expressed in the media is shallow, often self-serving, and often mistaken. When the important criticisms are made — environmental destruction, unsustainable exponential economic growth, gross inequality, pervasive anxiety, dominance of cartels and monopolies, and constant imperial warfare — they are not directed against the "money power". Yet these ills are very much the manifestations of the Federal Reserve monetary system. "To figure out . . . modern capitalism, we need to 'follow the money' — not to its ends, but its beginnings. We need to learn how money is created, allocated, and dispensed. Understanding the design enables us to see its consequences."

The extensive article begins with a chronicle of the financial response to the Covid pandemic crisis. While providing detail and supporting documentation, the author shows that the focus of the pandemic response was for the benefit of the banking and financial system. Why should this be the case? Not because it serves the public, but ". . . because it is the essential circuitry, the hardwiring, of economic exchange within our peculiar architecture."

Christine Desan describes in detail the "hardwiring" of the monetary system. "Dollars and financial assets . . . issue together and from the center of the system." Government issued bonds are exchanged for private credits (Federal Reserve Notes). Private commercial banks create and issue credit in exchange for individual (or business) promises to repay. "The design of the system . . . appoints [banks] to determine its distribution in money."

When people borrow "money" from a bank, the bank is actually providing them credit on the bank’s books in the shape of a deposit account, . . . When a borrower spends that credit, she is transferring the credit to someone else’s bank account.

This bank credit is unique because it is treated as legal tender and expands the money supply. The design of the system — the hardwiring — gives the commercial banks the power to determine to whom and for what purpose new credit money will be issued. "In short, banks . . . make inherently political decisions about credit allocation insofar as they wield the singular privilege to create money." This is a systemic source of inequality and is fundamentally inappropriate for our circumstances. People who are denied bank credit or who are over-indebted lose economically and in many other ways. Moreover, the public policy agenda is subjugated to the commercial banking cartel agenda.

This privileged position of the banking cartel developed opportunistically. "[T]heir story is not one rooted in their prowess in advancing capital or even allocating credit; it is rooted in their expedient rise as agents making currency and exploiting the opportunity that came with that role." Banks originated as issuers of bank-notes which represented metal currency. Private debt notes were circulated and acted as currency. Banks established payment systems to exchange and account for these notes, eventually developing securities markets to discount notes. Investors gained a charter as a national bank to issue notes to the government. The Federal Reserve system is a direct descendant of the Bank of England system.

The question is posed:

Should we restructure the current financial architecture given the banking system’s selective reach, the vast public investment required to maintain it, the escalating inequality associated with its operation, and the system’s apparent incapacity to nourish many individuals and households?"

Christine Desan makes the case that "direct-issue dollars" are the necessary remedy. The classic example, the "greenback" U.S. Note issued in the Civil War, is discussed as are many other examples. It is shown that direct-issue dollars will serve the public far better than the Federal Reserve Note has done.

A direct-issue dollar is radically transparent. It works without compounding public debt. It locates authority appropriately in hands democratically accountable, even as it makes use of central banking safeguards. It can target immediate needs. It could issue in ways that respond to private demands currently unmet. It could remedy the brittle dynamics of a design that puts money creation singularly in commercial banks. The experiment is well-worth the price.

This article is worth thorough reading and reflecting. While at times dense, it is a coherent and honest discussion of the monetary system which gives ample support for the essential arguments in favor of reforming our present monetary system.