Towards an Exogenous Supply of Money for the Economy

because that one thing can make any nation way, way better as a society

Photo by Jason Leung on Unsplash

In economics, “exogenous” means outside what is under consideration. It might refer to some set of variables that an economist is studying for their affects on one another or it might refer to the economic system a whole. An “exogenous supply of money for the economy” means that the size of the supply of money would not be influenced by anything within the economic system; it would be determined by something outside the economic system.

The economic system is the set of institutions within which goods and services are produced and acquired. Those institutions can change and their roles in the economy can evolve over time, but they are relatively stable.

The functioning of the economic system involves variables, i.e. identifiable elements within the system that invariably vary in whatever measure is applied to them — level, size, rate, value, etc. There are output variables, input variables, and linking variables.

Output variables are elements, the measures of which are determined by the functioning of the system. Total output, i.e., the total amount of goods and services produced in a nation’s economy (called the Gross Domestic Product— GDP), is obviously the most important output variable for the economy as a whole. Employment/unemployment are output variables that are determined by total output.

Input variables are variables that determine what the levels, sizes, etc. of the output variables will be. Interest rates and the size of the supply of money are easily the most important input variables. Money is the ‘fuel’ of the economy. Interest rates influence how much fuel there will be as well as how much of that fuel will be used at any particular time. The size of the supply of money in turn influences what interest rates will be.

Linking variables are variables through which input and output variables influence one another. Prices are the most important linking variable, to include the price of labor (in the form of wages, salaries, and benefits) and the price of money (in the form of interest rates).

Interest rates are the most important single variable in the economic system because they are both an input variable and a linking variable. They are an input variable because the central bank can decide what the interest rate will be on money it lends to individual banks and the money they loan to one another. Yet, that interest rate is itself a linking variable because that rate influences all interest rates. Those other interest rates rates influence the demand for loans used for investment and consumption, which gets us back to total output — and through it employment/unemployment.

Interest rates also influence, as mentioned, the size of the money supply. It is increased by borrowing from banks (as explained here). The lower interest rates are, the more money will tend to be borrowed, so the larger the money supply will be; the higher interest rates are the less borrowing occurs and the less money is created.

Once money is created by a loan taken out for a specific purchase, it remains in the economy forever. It can be spent or invested in another country, or it can sit in an account or be put under a mattress and thus be out of circulation for any period of time, but it is still in existence and can come back into circulation in the economy at any time. That is why creating money can create the threat of inflation at some unpredictable point in the future.

It is easy to see how ‘managing’ the economy is so difficult. Indeed, it is even more difficult than just indicated because the output variables also influence input variables and linking variables. In short, every variable in the economy influences and is influenced in turn by all other variables.

The technical term for that is ‘interdependence’. A system in which all of the variables in it are interdependent is the technical definition of a ‘chaotic’ system. So the existing economy — every existing economy — is an intrinsically chaotic system.

Chaotic systems are inherently unstable. It is impossible for a chaotic system to stabilize unless it is constrained by influences outside the system — i.e., exogenous influences.

That by itself is reason enough to make the supply of money for the economy exogenous: it would make the economy stable. The size of the supply of money would be determined by something outside the economy. All of the other variables would be determined, directly or indirectly, passively but effectively, by that one variable.

“Stable” does not mean ‘static’. The GDP could still grow or even shrink. Interest rates could go up or down. Prices of individual goods and services could go up or down (though the overall level of prices — inflation — would not occur, as taken up below). There would be definite limits, however, on the extent to which those variables could vary. They would be constrained — changes in them would be limited — by the supply of money, which would be determined by something outside the economic system.

How could that be accomplished?

One way would be to have the size of the supply of money be dependent on demographics — and nothing else. That is, it would depend on perturbations in the population of the nation.

How could that be achieved?

One way to achieve that would be to have an income that would be paid to eligible citizens and would form the supply of money for the economy. The requirements for eligibility and the amount of the income would be fixed. The number of people being paid the income, and therefore the supply of money, would vary (by small incremental amounts) over time due to changes in the number of citizens that were eligible for the income (and chose to accept being paid it — which presumably would be all but a very, very few of them).

That same process could also be used to fund government (all government, from central to local) instead of using taxes/public debt for that purpose. The amount of money available for government would also be determined by demographics — the total number of citizens. That money, too, would become part of the supply of money for the economy.

Obviously, even without funding government that way there would be a lot of of money constantly flooding into the economy. To prevent inflation some money would have to be returned to its point of origin. However, people and businesses would be allowed to retain plenty of money (based on income) and no money would be collected from any person or business before it could be used for investing (including speculation, such as buying stocks) or (other) purchases.

The amount of money that could be retained would be set at a level that would ensure that individuals, including owners of small to medium businesses, would not have any money collected. Any money that was collected would come from big corporations — after all costs (including all remuneration of all employees) and any chosen investments had been funded out of the business’s revenues and the (generous) allowable amount of ‘pure’ profits retained in a bank.

There are two ways that income for individuals/funding of government could be accomplished. It could be implemented by the existing central bank (though the part about it directly funding government would require a change in the laws governing the central bank). It could also be accomplished by creating a new Monetary Agency that would be separate from and independent of both government and the banking system. It would have no discretionary authority of any kind, but would merely administer the supply of money, sending money to eligible citizens and to government based on criteria given to it, not developed by it. (In the U.S. the Social Security Administration, which already sends money to citizens, could be extracted from government to become that Agency.) [For more details, see, respectively, “A Call for a (Further) Central Bank Revolution;” “A Cure for the Ills of Capitalism,” both here in Medium.]

How would making the supply of money exogenous that way “transform society?”

The functional details are provided elsewhere, but here I can say that . . .

The existing economy — any nation’s existing economy — would become fully self-regulating. It would not have to be ‘managed’ by the central government (using ‘fiscal policies’) or by the central bank (using ‘monetary policies’). In fact, the means for implementing any such policies would not exist.

There would be no unemployment or poverty — at any level of total output.

There would be no taxes of any kind or any public debt incurred at any level of government.

Sustainability would be increased — even without any additional regulations or any changes in behavior on the part of individuals.

At present, the economy is like a star. There are forces pushing for it to expand (inflation) and there are forces pressing for it to shrink (deflation). It is all too possible for either of those two sets of forces to gain the upper hand, resulting in hyper-inflation or collapse (which would also eventually follow a bout of hyper-inflation — the equivalent of the economy ‘going nova’). Making the size of the supply of money for the economy exogenous (and using the same process to fund government) would make it as stable as the Moon, where mere footprints in the dust can last forever.