‘Neutral Money’

Going Forward Via a Forgotten Idea from a Century Ago

Stephen Yearwood
11 min readOct 20, 2023
Photo by micheile henderson on Unsplash

to use the creation of money to put an end to economic instability (recessions/depressions and inflation)

[Note: this really is economics without ideology; any guess based on ideology as to all outcomes for society entailed in this proposal will be incorrect.]

The economy is like a star, with some forces pushing for its expansion and others pressing for its contraction. The fate of stars is determined by their mass. Currently, the fate of any nation’s economy is in the hands of people in positions of authority who make decisions based on present, predicted, and preferred economic conditions. The proposal related in this essay would take the fate of any nation’s economy out of the hands of any human beings. It would become fully self-regulating, without recessions — much less a depression — or inflation. The creation of currency would be used to make the existing economic system utterly stable.

As many people reading this will be aware, ‘Austrian economics’ refers to an approach to the study of the economy that was developed by a group of economists who happened to be Austrians: primarily Ludwig von Mises and Frederick Hayek, along with a few lesser lights and many acolytes. That approach to economics is famous for its devotion to ‘the free market’. It is essentially the economic philosophy of ‘neoliberalism’.

Few people are aware, however, of the concept of ‘neutral money’. That was the idea around which von Mises and them had originally coalesced. [I was made aware of it when I was studying economics in graduate school.]

It was the 1920’s when they were considering the idea. So it was before the Great Depression had created the objective circumstances that led John Maynard Keynes to see exactly how and why ‘the free market’ cannot be an economic panacea, but that the economy can be managed to optimize its performance — within the constraints of human capabilities. It is worth noting that that Depression occurred in a world almost completely free of any governance of the economy by nations’ central authorities.

At any rate, the problem that consumed economists in the time between the mid-1800’s, when the industrial economy became dominant, and the Great Depression of 1929 was referred to as ‘the business cycle’. For some reason, this (then) new form of economy had this annoying penchant for instability. It would expand, with increasing price inflation, and then contract, expand then contract, expand then contract, etc. The Great Depression is called that because it was one of a series of serious depressions that had occurred in the economy (globally, even back in the 1800's), but was way worse than anything that had occurred before.

So instability had been problem number one for economists. Von Mises and his colleagues wondered whether the process of supplying money to the economy contributed to that cycle of booms and busts, and if so whether it could be possible to supply the economy with money in such a way that it would stabilize the economy, not contribute to instability. They referred to that conceptual possibility as ‘neutral money’.

All they had to work with back then was lending by banks; the creation of money by central governments/central banks was for various reasons simply outside the pale of even the most uninhibited imaginations. They concluded that if neutral money could be achieved, that could only be accomplished through a rigorous regulation of banking. Even then, they were unable to promulgate regulations that would get the job done.

To distinguish it from money created by banks in lending, money that is created for central banks or central governments to use — for whatever purposes they might have for it — can be called ‘currency’. Today, central banks and central governments together determine how much currency will be created at any time.

Before 2008 currency was only created for central banks to use to purchase newly issued debt of the central government. Since then, currency has been created to prop up banks and other financial enterprises as a result of the Great Default Crisis of 2008, and beyond, and to provide money directly to eligible businesses and individuals when the economic shutdown due to the Covid pandemic was incurred.

So creating currency for particular purposes is not some newfangled idea. The only technical difference would be that nowadays when currency is created assets (primarily in the form of securities of the central government) get shifted around between the central bank and other entities to balance the proverbial ‘books’, whereas with this proposal currency would be created without even that much of a tie to debt. It truly would be created as needed ‘out of thin air’. It would be completely cost-free money.

Another big difference, though, is that with this proposal there would be an absolute limit on how much currency would be created at any time, whereas at present for all intents and purposes there is no such limit. In this proposal “as needed” means the amount of money needed to fulfill specific, predetermined, absolutely limited obligations, not an amount needed to fund a further portion of the essentially infinite demand for money that exists in every nation, all the time, forever.

That money would be used to fund a guaranteed minimum income and to fund government — all government, from local to central, from now on at the current per capita rate of total government spending — rather than using taxes/public debt for that purpose. [If government anywhere wanted more money for any reason it would have to sell bonds on the open market like any other entity (no more ‘lender of last resort’) and reinstitute a tax of some kind to pay them off — but if that did happen at least taxes would be restarting at zero.]

Thus the amount of currency that would be created would be determined by demographics — and nothing else. It would be a bulletproof supply of money entering the economy in the form of spending by individuals and households and government.

It is the case that doing that would create an ongoing flood of currency into the economy. At present, once currency is created it is a permanent addition to the supply of money. A mechanism for returning money to the central bank, from whence that money would be flowing,* would be necessary. I have developed such a mechanism to collect money whereby individuals and businesses would be able to retain plentiful pools of money (based on income) and no money would be collected from any entity before it could be used for purchases/investment. The amount collected would not be under the control of any person, committee, or organization, but would be a result of whatever happened to happen in the economy (i.e., the process of producing/acquiring goods/services) as a whole.

Further details regarding the proposal can be obtained elsewhere.**

As was the case in the 1920’s and is now, other money would still be created by banks making loans, but that money is ‘automatically’ returned to its place of origin as a loan is repaid. Whether the amount of that money in the economy is increasing or decreasing depends on whether lending is exceeding repayments or repayments are exceeding lending. All of that is governed by extant economic conditions, which this proposed paradigm would stabilize. [To be clear, money created by lending by banks and money as currency get thoroughly comingled in the economy as money flows from one entity to another in the form of income — and getting ‘multiplied’ in the process: total income is always a multiple of the supply of money in the economy.]

The very idea of ‘neutral money’ was roundly rejected by most other economists. Keynes was downright disdainful in his dismissal of it.

Really, even for those Austrians the idea of neutral money was never much more than a question to be explored. All of them eventually renounced the idea (Hayek being the last to do so).

Apparently, being required to abandon that economic position did cause them to become rabidly antithetical to any form of regulation of the economy for the sake of stability. It is not uncommon for human beings who feel driven to abandon one position to embrace fanatically an opposite point of view. For von Mises et al. ‘the free market’ somehow went from an economic theory to an ideological totem.

When a way of achieving neutral money first occurred to this author, I had never heard of the concept. Neither was I enamored with the notion of an unfettered ‘free-market economy’. Indeed, I was sure that Keynes was right about the economy — with the key words being “within the constraints of human capabilities:” removing the possibility of human error, much less all-to-human motivations like promoting outcomes based on ideology/any other personal beliefs, would be an improvement over that.

I was only seeking a way of making the economy absolutely more just (i.e., solving the problems of unemployment and poverty without engaging in trade-offs).*** The paradigm I developed to achieve that goal turned out to achieve also the goal of neutral money. As an approach to supplying the economy with money (as currency), it would eliminate contractions from the economy with built-in protections against inflation.

One huge problem with Keynes’s solution for instability is that it brings politics into the process. It requires the ongoing implementation of particular policies by the central government, such as increasing deficit spending to ward off recessions and increasing taxes to prevent inflation. In the U.S., at least, opponents of Keynes’s ideas — ‘conservatives’ — have somehow managed to win politically when it comes to the economy. From the 1930’s into the 1960’s Keynesianism prevailed as an economic doctrine, even in the U.S. In the latter 1960’s opponents of Keynesianism were able politically to associate it— inaccurately — with ‘the welfare state’ and to make it politically impossible to raise taxes here for the sake of economic stability. (Keynes saw poverty as a moral issue; he was for alleviating it, understanding that doing so would require additional adjustments to governmental policy, but that would be outside the scope of his proposals pertaining to the economic system per se.) Unsurprisingly, the U.S. having abandoned by now almost all of Keynes’s recommended policies (though remnants remain in place, such as unemployment insurance), our economy continues to be unstable. Yet, opponents of Keynesianism insist that that ongoing instability somehow proves that he was wrong. (Even the partial retention of Keynes’s proposals reduces the cycle from boom/bust to expansion/recession.)

The economy has changed tremendously since the Great Depression. It has gone from industrial to ‘post-industrial’ to ‘service’ to ‘information’ to being on its way to ‘virtual’. Through it all, instability has remained.

The biggest problem is that the economy could still break the bounds in either direction — to depression or hyperinflation — despite the efforts of central governments and central banks to prevent that. When the Great Depression occurred those central authorities were uninvolved in the economy in the sense of regulating it as a system. They were therefore available to come to the rescue when it went in the ditch. Now, they are doing all they can all the time to prevent the economic worst from occurring, with the ongoing deficit spending of the central government keeping the economy from collapsing and the central bank trying to control inflation, repeatedly creating recessions in the process. If the economic worst were to happen anyway, there would be no body that could step in to do anything about it.

This proposal would make Keynes’s recommended policies unnecessary. It would achieve more in the way of economic stability than he ever hoped his policies would achieve, without requiring any ongoing ‘corrective’ intervention in the economy by the central government or the central bank. The economy would be completely self-regulating, with other good outcomes for society.

Like von Mises and the boys originally thought (all of them being men, the world being what it was back then), neutral money is the key to a solution. The way to achieve neutral money, I happened to find, is not the regulation of banking, however, but to take the creation of money (as currency) out of the control of central governments/central banks altogether.

Taking this proposed approach to supplying the economy with money as currency would not only make that supply of money wholly ‘neutral’, but would result in material outcomes that would be all good. As mentioned previously, there would be no unemployment or poverty (at any level of total output) and the funding of government would require neither taxes nor public debt (with the taxes needed to pay it off). That would put an end to the political imperative that currently exists in every nation to maximize total output in order to maximize employment, total income, and the collection of taxes. That would be the single most meaningful contribution to increasing environmental sustainability we could make. At the same time, barring some whopping big exogenous event, like war or famine or a pandemic, an economic contraction, i.e., a significant drop in the total output of the economy, would be an impossibility. There would also be built-in protections against inflation, beginning with that strict limit on how much currency would be created at any time and the regular return of currency to its place of origin.

Rather than contributing to instability, money (as currency) would make the existing economic system fully self-regulating. Rather than being as volatile as a star, the economy would become more like the surface of the Moon, where mere footprints in the dust can last forever.


*Creating a new Monetary Agency to administer this currency is another possibility. That would emphasize the independence of this currency from both government and the banking system.

**“Same Economy, Way Better Outcomes for Society” and “Paradigm Shift:” the former focuses on details regarding the implementation of the paradigm (with the U.S. as the illustrative example) while the latter relates the paradigm in a more technical but also more generic way: in a nutshell, the economy is unstable because all of the variables in it are too interdependent; by tying the creation of money, as currency, to demographics this paradigm makes that a fully ‘exogenous’ variable, i.e., one totally independent of the economy itself. The paradigm could also be used to achieve more income equality: “The Unnecessariness of Marxism” (for society to go where Marx foresaw).

***That income — sufficient for having a ‘decent’ life materially (an amount at least equal to the current median income) — would be ‘democratically’ distributed: it would not be paid to everyone, but it would be an income for which any adult citizen could become eligible. That would include for some citizens having a job that paid that income; so any (adult) citizen who wanted a job would be guaranteed having one. The other citizens paid that income would be adults too incapacitated to work and retirees. (So there would be no further need for, in the U.S., Social Security.) Instituting that income without using taxes for that purpose avoids that trade-off: all taxes always entail issues of injustice due to the inescapable arbitrariness associated with them. Moreover, no costs would be imposed on employers, nothing would have to be redistributed, and no limit on income/wealth would have to be imposed. Any such actions would also inevitably entail arbitrariness, and as John Locke recognized long ago (Two Treatises of Government, 1689), arbitrariness in human relations always raises issues of injustice.

For more on justice (an ethic for governing human conduct in the context of coexisting in a society) — as I understand it: “Alright, Already.” It is not ideological — or theological — in any way because no belief is involved in it at any point: ideologies are based on secular beliefs, just as theologies are based on sacral beliefs.

All linked articles are here in Medium, but not behind the paywall.

Final note: it is worth noting that this paradigm could be implemented in any nation ‘overnight’, with a single legislative Act, and could be adopted by groups of nations — to include all nations on the planet as a group — with a single monetary entity administering the money, without compromising in any way the sovereignty of any nation.



Stephen Yearwood

unaffiliated, non-ideological, unpaid: M.A. in political economy (where philosophy and economics intersect) with a focus in money/distributive justice