1. Modern Money Joshua Farley Community Development and Applied Economics
Gund Institute for Ecological Economics
University of Vermont

2. What is Money? Medium of exchange Store of value Unit of account
Island of Yap and Fort Knox
This is all inadequate. I’m still learning.
Many, many plausible theories

3. Modern Money Where does money come from? Why do we accept it?
Vertical money (government created)
Horizontal money (bank created)
Industrial economy
Financial/speculative economy
How do we design a sustainable monetary system?

4. $ $ $ $ Vertical money profits taxes
Gov’t forces us to pay taxes; we must accept money or go to jail
Our economic production backs money supply $ $
taxes
$ destruction $

5. Current System: Horizontal Money & Industrial Capitalism$
Current System: Horizontal Money & Industrial Capitalism
19$+i
19$+p
19x$
19x$
What if there’s a great lending opportunity, and bank has already lent 19$?
Where do i (interest) and p (profit) come from?
More loans or more vertical money required. ECONOMIC GROWTH
What if p<i?
Procyclical monetary system (positive feedback loops)
Inherently unstable

6. What do people invest in (USA)?
~$14 trillion in mortgages
Record margin debt poses risk for bull market
“The amount of money investors borrowed from Wall Street brokers to buy stocks rose for a seventh straight month in January to a record $451.3 billion”
The repurchase revolution
Companies have been gobbling up their own shares at an exceptional rate. There are good reasons to worry about this
Since interest paid on debt is tax-deductible, whereas interest earned on cash is taxable, by increasing its net debt to finance buy-backs or dividends, a firm cuts its tax bill.
Most money is borrowed to buy existing assets, not to create new wealth

7. Current System: Financial Capitalism and Asset Inflation$
19$+p + i
19$+i
19$+p
19$+p
19x$
19$+2p
HEADLINE: Despite Drop in Commodity Prices, Farmland Values Rise
Rising asset prices
Most loans for mortgages, stocks, other assets
Drains money from real economy
Companies buying back stocks
19$+2p

8. Interest Bearing Debt in US

9. updated

10. Growth and Inequality or Collapse
Debt is 360% of GDP and growing faster than GDP
Interest on total debt is likely to be 15% of GDP. Direct transfer to lenders
Credit market debt,
net of gov’t
Check out the similarity between the debt (previous slide) and the GDP share of the US financial industry

11. Current System: Financial Capitalism & Asset Inflation$
Current System: Financial Capitalism & Asset Inflation
19$+p + i
19$+i
19$+p
19x$
19$+p
19$+2p
19$+2p
Bubble busts, banks capture assets, stop issuing new money
Industrial economy must also collapse

12. Theory of Money in Mainstream Economics
Money facilitates barter, no other role
Evolved from mythical barter economy
Models banks as intermediary between lenders and borrowers
Basically neutral
Largely ignores debt

13. Goals for the Needed Monetary System
Ecological sustainability
Compatible with steady state throughput (can’t be based on exponential growth, or else interest payments must flow back to debtors)
Finance investments in ecosystems/green technology
Just distribution
Benefits of seigniorage must flow to public sector
Efficient allocation
Must not promote booms and busts (instability)
Appropriate balance between public and private goods

14. Sustainable System: Vertical money, 100% fractional reserve, green taxes$ $
Taxes, AEAs $

15. Characteristics of desired system:
Money Creation
Spent on public goods
Easy to target unemployment, misery, poverty
Central bank purchases state/municipal bonds
Decentralizes money creation, fiscal policies
Loaned into existence
Can be deposited in banks that service community, available for banks to lend
Money destruction
Auctioned Environmental Allowances set according to ecological constraints
Tax unearned income
May need net creation to cover currently unpriced transactions, or net destruction as we reduce throughput

16. Characteristics of desired system:
Countercyclical (negative feedback loops)
Society as a whole benefits from seigniorage
Not dependent on growth