Medieval ink on a medieval budget

By Sara Charles

Originally published at Teaching Manuscripts, a site that hopes to inform and educate about making medieval manuscripts. Explore the site to learn about the different processes of manuscript production.

As autumn is the season for collecting oak galls, now seems a good time to consider how to make ink without access to the standard ingredients of oak galls, ferrous sulphate and gum arabic. Perhaps you are in an early medieval monastery in a remote part of Britain or Ireland and are desperate to write the word of God on some parchment. Or perhaps you are an itinerant cleric, who has just woken up to find the cat has knocked your jar of ink off the shelf and your yet-to-be-copied documents are due in the next few days.

British Library, Royal MS 13 B VIII, fol. 22r

So – you need some ink quickly, using what sources you have on hand. Of course, carbon ink made from soot is always a cheap and readily available alternative, but you would really prefer the superior oak ink. If you were a resourceful medieval scribe, what alternatives could you use?

First of all, you need a source of tannin. The galls that are found on oak trees are the easiest way to get hold of some – but alas, your stock is depleted. Perhaps the finest Lombardi marble galls sold at the market are out of your price range, or not easily shipped in to your remote island. Perhaps even the locally sourced apple galls were in short supply this year. Fortunately, as long as you have access to an oak tree, you can simply use bark chippings. Just scrape some off an oak log from the stack of chopped firewood, or get some chips from the local tanner.

Now you have a handful of oak bark chips, you need to soak them in rainwater – preferably over a bit of heat. An hour or so should do the trick, to make sure that the tannic acid from the bark leaches into the water. Strain the mixture through some linen cloth.

The liquid will be a rich brown colour, but you want the deep black that lasts permanently – so you need to add some iron. Ferrous sulphate was manufactured from natural deposits of iron pyrite in the medieval period, but again our stocks have run dry and we need to find easily available materials. Chucking a few rusty iron nails in a jar with vinegar poured over them will provide the same effect as ferrous sulphate. Being a medieval, you are not so bothered about the potential danger of this. You might even reclaim the iron nails from the vinegar once their purpose has been served.

Leave the nails to soak for a few days. It will start to look very toxic, so handle with extreme care. The iron and vinegar should give the solution enough oomph to create a chemical reaction when combined with tannic acid, immediately turning the mixture black. Only two drops are needed to visibly change the colour, as you can see in the video below. You can add more, but the downside is the iron solution may be too strong and start to corrode the paper or parchment after a few years. But this is a quick fix and we are deliberately not getting hung up on the perfect recipe or ingredients.

The final ingredient is the gum arabic, which acts as a binder and helps the ink flow from the quill to the parchment and adhere to it. But gum arabic comes from faraway lands, harvested from the sticky sap of the acacia tree. Surely there must be a local, native alternative? Luckily, there is – the sap from a cherry tree. This may not be as highly prized as gum arabic, but it will do the job. Hopefully you will have a few chunks of cherry tree gum laying around, which you can grind up into a fine powder. Once that’s done, you can add the powder to the mixture, creating a silky texture to the dark liquid.

The ink is technically looking like an ink should, so now it’s time to test your product. All right, so it hasn’t been made with the finest of ingredients, and it is definitely not as deep black or easy to write with as iron gall ink – but it still works. If you were in a hurry and needed an oak ink, you have here a choice of three different substitutes for the main ingredients, bark chips for galls, rusty nails soaked in vinegar for ferrous sulphate and cherry tree gum for gum arabic – hopefully you would only need one or two of these substitutes.

There is still a lot of mystery around how exactly British and Irish medieval scribes made their ink – did they use marble galls or local apple galls? Would they have used the green crystals of manufactured ferrous sulphate, or made do with some iron nails? And would gum arabic have been sought after when local plant gums served the same purpose? Surviving medieval ink recipes seldom elaborate on alternatives and besides, we do not know how strictly they were adhered to in the first place. Like many medieval processes, the connection to the natural world was assumed to be too fundamental to have to write down – most artisans and scribes would have absorbed a basic knowledge of how to use their local landscape to suit their needs. And fortunately for iron gall ink, there were cheaper alternatives that could be sourced closer to home, so hopefully there was a recipe to suit all medieval budgets and situations.

On Merger Policy and Labor

By Sanjukta Paul

What’s a merger? A merger is a specific method of expanding the scope of a particular form of economic coordination that has been authorized by law. There is nothing natural or necessary about firms as a form of economic coordination or organization. All throughout history, people have been innovating and creating and trading in all sorts of organizational forms and economic institutions—through craft guilds, through mercantile guilds. There’s nothing compulsory or natural about the specific form of the modern firm—shareholder-driven and organized in the particular way that it is, with workers largely divorced from decision-making. 

Now, I’m not suggesting that we go back to the guild system. I’m asking us to take a step back and think about what a firm is and what we’re doing when we say that the presumption should be that, in essence, firms have the right to combine into still-larger and more powerful firms.

Because I want to propose a shift in our thinking about merger policy. I suggest we think about merger policy not just from the perspective of a specific merger’s effect on market concentration and on wages. We should also think about the rules we adopt in terms of their systemic effects on labor, on labor unions, on workers. And that means thinking about antitrust rules not just in terms of how we would apply a given set of rules in a given adjudication, but also in terms of how they function prophylactically to create, or not create, the sorts of markets we want to see.

What is the effect of a permissive merger policy versus a quite stringent merger policy on the competitive and business strategies that executives and boards are looking at, and that they may even be compelled into when everyone else is also pursuing them? What competitive strategies are open to firm controllers given a particular set of legal rules? In the context of a strict merger policy, what would happen to business strategy? I’m just going to ask the question as a thought experiment: If we take mergers more or less off the table as a competitive or business strategy, if we make them the exception and not the rule, what would happen? What would be the implications for markets in general and for labor in particular? I’m not going to answer those questions exhaustively, but I’m going to suggest that we think about them.

The firm is specifically an antitrust exception. It is a suspension of competition. You can say that it’s crazy to think about not allowing firm-based coordination; how would we produce? Well, there are actually all kinds of ways. At the simplest level, if you were truly trying to maximize competition, you could take the output of a firm and divide it—you keep all the operational integration, but you could just divide control rights over that output among everyone who works for that firm and let them individually price their share of the output. That would be a more competitive outcome, potentially replicating the level of competition that the modern business firm displaced. It’s fine that we don’t do that, but I think we need to notice what is actually happening here. I’m not the first one to have this insight: Ronald Coase, most famously, talked about the firm as a suspension of competition and market exchange.

So that is what a merger is: expanding this particular way of suspending competition. We need to be very clear about what we are actually doing and how we treat that form differently from other suspensions of competition—including labor unions, cooperatives, and even looser horizontal coordination in the form of things like trade associations. 

Mergers are an expansion of the scope of what is already the biggest and strongest antitrust exemption we have: the firm. That’s one thing I want us to notice about mergers. The second point I want to make is about “efficiencies.” When we talk about efficiencies that may be realized by a given merger, we need to consider two things. Which of them, first of all, actually are efficiencies versus something else? And secondly, could any genuine efficiencies potentially be achieved through forms of coordination other than the expansion of the firm? How?

Now, taking the second point first, this idea of thinking about economic coordination broadly is not just an academic point. What could we do right now in terms of other forms of coordination that could realize some of the putative efficiencies that specific mergers may accomplish?

For instance, could some of those genuine efficiencies be achieved through industry-wide standards in various situations? Could they be achieved by a trade association? We have trade associations that do marketing for various industries. You’ve all seen the milk ads. Or maybe you remember the California Raisins. Is there coordination through those types of mechanisms that could actually preserve more independent decision-making throughout the economy? That, by the way, is one of the goals of antitrust under settled law: dispersed decision-making. So, should we be considering those alternative forms of coordination? And indeed, in any new merger guidelines, should we be considering a safe harbor for some of these alternative forms of coordination—potentially through dispersed coordination, through trade associations or industry-wide standards—that could achieve some of those genuine efficiencies without the consolidation, and specifically without the consolidation in the form of the shareholder-driven firm that mergers currently signify? 

And on the first point about efficiencies: We also have to ask, how many of these putative efficiencies are actually intensified forms of extraction versus actual efficiencies? And here, it’s important to first get conceptually clear about what we mean by “efficiency.” Do we mean allocative efficiency? I don’t find that concept terribly useful myself, but to the extent that we are adopting it, obviously a merger decreases allocative efficiency. Everyone, Robert Bork, Oliver Williamson, has actually agreed on that. Somehow, though, we sometimes seem to forget this simple point.

So, allocative efficiency certainly isn’t an efficiency that’s contributed by a merger. It has to be a production efficiency. Then the question becomes: When are there true production efficiencies that are contributed by a given merger? In some cases, what we call a productive efficiency may actually be a form of extraction. I’m not saying they all are; I think there are genuine efficiencies. But sometimes, specifically when we’re looking at price as an index of production efficiency—which is obviously a shorthand we use all the time—we mistake extraction, or just a transfer of benefits from one group to another, for efficiency. In other words, low prices are often not an indication of production efficiencies; they’re an indication of extraction. And I don’t mean that in just a moralizing, pejorative way; this has to be acknowledged regardless of your ultimate normative views.

Let me break it down. What is a production efficiency? A technical efficiency means you get more output for the same input. It is technical innovation. We have seen so much such technical innovation in history. We live in a time in which we’re benefiting from it tremendously. But consider the difference between a machine that allows two workers to produce more (at the same quality) with the same effort, versus a new institutional or organizational arrangement that pays those two workers less to produce the same amount—or has them put in more effort for the same amount. Those are not the same thing. The second thing simply is not a technical efficiency. I’m not taking a normative position on that, right now. You can, I suppose, have the position that that’s a good thing and that we should drive wages down to subsistence levels. I do not think that—I do not think many people would admit that they think that even if they do—but I want us right now to notice that, conceptually, there is a difference.

And the same thing applies when a merger leads to greater bargaining power with respect to other firms that are input suppliers or distributors or whatever—firms in adjacent markets that you’re bargaining with. If you ultimately get lower prices—which we know we often don’t because instead those savings go up to shareholders—to what extent is it coming from superior bargaining power with respect to suppliers, distributors, and other trading partners versus true productive efficiencies? Imagine you now have more bargaining power with respect to trading partners in adjacent markets—very plausible if you’re now a bigger firm and you have a larger market share. So, again, we need to distinguish between true technical efficiency and extraction, both on the labor side and on the smaller-firm side.

And by the way, that’s not mainly because we just care about small firms and we romanticize them. Those small firms have workers themselves. So we need to look very carefully at even the supposed wage premium of large firms, because to what extent is that a wealth transfer from the workers of other firms to the workers of large firms (to the extent there even is a wage premium)? Notably, aside from current harms, you don’t even maintain that benefit if you just get rid of small firms to extract from.

These are all things we need to think about when we think about merger policy and workers. It’s more than a matter of efficiencies, too. For instance, permissive merger policy might entail a direct transfer from the productive arms of the firm to its nonproductive arms, and therefore ultimately from workers to shareholders and dealmakers. We often talk about this process as a function of the greed of individuals, like executives or the members of the board, but if we consider it systemically, we see how everyone, including those executives and boards, are actually constrained by this.

Many social scientists and researchers have been talking about share buybacks as a form of this type of transfer from workers and from production in general to the financial and household sectors. Josh Mason, an economist whom antitrust folks should pay more attention to, has a nice essay thinking about M&A itself as this same type of transfer. And he says:

[W]hen acquisitions are paid in stock, the total volume of shares doesn’t change. But when they are paid in cash, it does. In the aggregate, when publicly traded company A pays $1 billion to acquire publicly traded company B, that is just a payment from the corporate sector to the household sector of $1 billion, just as if the corporation were buying back its own stock.

Again, we are transferring from producers to savers at a systemic level. And again, you can have different views on the utility of that, but that is exactly what has been critiqued with respect to share buybacks. And whatever your opinion about it, it certainly isn’t a productive efficiency!

If you’ve taught business associations, as I have, then you’ve read all kinds of cases with your students in which the board doesn’t actually want to do the deal—even beyond the deals actually classified as hostile takeovers. No one who’s actually running the company wants it to happen. But their hands are tied by the pressure exerted by this set of rules, or at least their hands are strongly guided toward doing deals that very few people actually want. And this is especially stark when we consider that their primary job is to be stewards and managers of certain productive assets. That’s the point of the firm: making the best use of productive assets. We’ve decided, as a society, that giving this job over to managers and CEOs and boards is the way we want to do that. So if that’s the goal, we must ask, with respect to merger policy: Wouldn’t it be useful to have prophylactic rules that actually channel decision-makers’ activity toward doing precisely that, rather than impelling them toward deals that often benefit very few people?

* This is an edited transcription of a presentation delivered at the “Antitrust and Competition Conference: Beyond the Consumer Welfare Standard?” (University of Chicago, April 20-21, 2023).

Internationalism in Name Only: The Left’s Realist Turn

By Jane Ball

The Russian invasion of Ukraine in February 2022 touched a dormant but significant fault line on the left. On the one hand, much of the left was outraged by the invasion, believing it to be an illegal and genocidal land grab. On the other hand, a cadre of the left, especially in the US and the UK, took the opposing position. They blame the US for NATO’s eastward expansion for provoking Russia’s invasion to defend its “legitimate security interests.” This second group, given voice by Noam Chomsky and by the Democratic Socialists of America (DSA), has consistently demanded Ukrainian capitulation to Putin’s demands. These voices combine an economistic definition of capitalism with the offensive realist IR theory (mainly John Mearsheimer‘s) of international relations as driven by the politics of power projection. Thus, they attribute Ukrainian unwillingness to capitulate to an American capitalist Realpolitik that perpetually threatens Russian security and not as an authentic defense of their nation. 

However, this argument suffers from a poverty of theory. It views the world as a mechanistic body driven solely by predetermined (capitalist) instincts and denies human agency to affect the world. It also suffers from acute ahistoricism. Mearsheimer’s formulation of an anarchic “security competition” is a tautology that self-consciously excludes factors that contradict his theories as outside the scope of international relations. He does not explain how this anarchy developed, what specific social property relations it expresses, or how those social relations evolved. Thus, while it is necessary to question NATO’s continued relevance in the 21st century, the critiques by Chomsky and the DSA rely on a theory of international relations that is divorced from the material realities of the actual historical process. A leftist IR theory must be firmly rooted in the specificities of history and must account for the development of the social relations buttressing the international order. If Western capitalism is to be blamed for the war, then capitalism should be defined. The theory must also understand the evolution of internationalism as a complex and sometimes contradictory ideology, which implies a complete understanding of its revolutionary origins. Finally, a left IR theory must consider how militant worker action impacts the creation of world systems and their tensions.

The Head and the Heart

The DSA position is that the US is uniformly responsible for capitalist expansion and exploitation. It is easy to dismiss this as typical left-reactionary anti-Americanism, but this proposition is critical to DSA’s analysis of capitalism. For example, its original NATO statement argues that provocation from NATO’s expansion is the sole reason for Russia’s militarization. The International Committee’s opening statement proceeds from the organization’s 2021 platform, which states “DSA operates in the heart of a global capitalist empire” and later says, “as socialists living in the heart of the American empire.” The conflation of the US with the totality of an empire of Capital suggests that they view the two as indistinguishable. It is not just a rhetorical posture; it is a philosophical disposition.

From a moral standpoint, the DSA statement is correct. As the sole remaining superpower, the US is responsible for many atrocities and horrors, disproportionately targeting people of color and developing nations. These horrors have been committed – sometimes justified – as necessary actions to spread democratic values, protect human rights, and above all, capitalist social relations. The DSA is right to call out these hypocrisies, and they stand on firm moral ground. However, as a critique of the current imperial order and an analysis of the specific social relations that comprise the existing order, they present a reductive and mechanistic theory of history that ultimately undermines their moral capital.

Consider DSA’s description of an individual’s relationship to the system of Capital. The system is a body, the US, the body’s heart. Humans living “within the heart” are individualistic cells encoded by DNA for specific functions. Cells have no agency – they can only do what they were programmed to do. A single cell cannot change the direction the body moves and does not exist apart from the body. The body is intrinsic to the cell’s identity and existence. Not only do people have agency that goes beyond the orchestrations of a univocal political “body”, but this agency is social and linked to other relations of affiliation and dependence. 

Likewise, analogizing the US as the “heart of empire” has problematic implications. The heart pumps blood, distributing blood and oxygen to the rest of the body. Without it, the body could not function. This reasonably analogizes the US’s function in the imperial system. As the prime hegemonic power, the US economy and military have an unprecedented ability to exert their influence directly and indirectly to maintain the imperial order. However, this is where the analogy breaks down. DSA presents the body—capitalism—as a totality, defined and driven entirely by a mechanistic heart. There is no agency here, let alone the heterogeneous institutions and stakeholders that actually make things move. The inevitable march of capitalism flattens everything. 

These notions of inevitability are at odds with the historical process. By imagining people as individualized cells within a mechanistic body, the DSA theory denies the working classes of the past the agency and the ability to effect positive change in the world that inspires them to organize today. It collapses the last five hundred years of human history into an inevitable, perpetual, and all-consuming system called “capitalism.” In doing so, the DSA theory merely inverts the Whig narrative of historical progress rather than changing them. It does not analyze the structure of the current imperial order, its origins, or what specific property relations they reflect. They see that the US pumps capitalism’s blood but ignores the mind controlling the body. The US acts in “service to Capital.” Still, DSA does not precisely define what capital is. Capital is everything and exists a priori and apart from the human experience. The US may be the “heart of empire,” but the heart does not direct the body’s actions. It does not create the logic through which the body engages with the world. By centering the mechanical heart and not the dynamic mind, DSA conflates the guarantor of the imperial order with the imperial order itself. This mistake renders their geopolitical posture incoherent; there’s no specificity to the social relations guiding the imperial international system. The United States’ actions are definitionally imperialistic, regardless of the actual social and political context. 

The Left’s Realist Turn

There is no better demonstration of this tautology than a portion of the left’s critique of NATO and response to the Russian invasion of Ukraine. For instance, here is how Noam Chomsky summarizes the crisis

There are some simple facts that aren’t really controversial. There are two ways for a war to end: One way is for one side or the other to be basically destroyed. And the Russians are not going to be destroyed. So that means one way is for Ukraine to be destroyed. The other way is some negotiated settlement. If there’s a third way, no one’s ever figured it out. So what we should be doing is devoting all the things you mentioned, if properly shaped, but primarily moving towards a possible negotiated settlement that will save Ukrainians from further disaster. That should be the prime focus…We can, however, look at the United States, and we can see that our explicit policy — explicit — is rejection of any form of negotiations. The explicit policy goes way back, but it was given a definitive form in September 2021 in the September 1st joint policy statement that was then reiterated and expanded in the November 10th charter of agreement.

According to Chomsky, the outcome of the war is a foregone conclusion; Russia will inevitably “destroy” Ukraine, and the only way for Ukraine to avoid destruction is to negotiate with Russia, having accepted this inevitability from the start. Since this outcome is obvious, it is irrational for Ukrainian officials not to accept this reality. Therefore, the refusal to accept Russian demands must come from an external force – the U.S. Rather than Zelensky’s refusal to capitulate reflecting Ukrainian rejection of Russia’s terms, it is caused by the US not allowing him to negotiate. The US is forcing the Ukrainian military to continue to fight to weaken Russia, thus confirming that the US and NATO are actively antagonizing Russia via NATO expansion and justifying Putin’s “legitimate security concerns.” Even now, a year into the war, Chomsky downplays Putin’s responsibility for the war in favor of placing blame on the United States while continuing to hint at Ukraine’s inevitable destruction:

Let’s return to the current topic: how policy is being designed to bring about “much worse” by escalating the conflict. The official reason remains as before: to severely weaken Russia. The liberal commentariat, however, offers more humane reasons: We must ensure that Ukraine is in a stronger position for eventual negotiations. Or in a weaker position, an alternative that does not enter into consideration, though it is hardly unrealistic.

On the topic of NATO’s expansion, the Chomsky argument weds itself to the statements made by proponents of the offensive realist school of foreign policy – John Mearsheimer in particular. In a New Yorker interview in March 2022, Mearsheimer makes a similar version of this argument:

Nevertheless, what has happened with the passage of time is that we have moved forward to include Ukraine in the West to make Ukraine a Western bulwark on Russia’s border. Of course, this includes more than just NATO expansion. NATO expansion is the heart of the strategy, but it includes EU expansion as well, and it includes turning Ukraine into a pro-American liberal democracy, and, from a Russian perspective, this is an existential threat.   

Mearsheimer, like Chomsky, depicts the United States as the prime mover in the story of NATO’s expansion. NATO’s expansion is something the US did to push a “Western bulwark” further east, closer to Russia’s borders. In both accounts, the US is the only country with agency; everyone else is just along for the ride. Both deny Putin’s imperial desires and believe Russia is only reacting rationally to the security threat the US is perpetrating. However divergent their intellectual paths to this moment may have been, Chomsky and Mearsheimer are in complete alignment in arguing that the US has stretched the limits of unipolarity and is facing the natural, inevitable, almost mechanical reaction from its adversaries. This convergence is not new; for instance, Chomsky has long argued that NATO intervention in Kosovo was an imperial act of aggression by the US against Serbia. Nor is it just a rhetorical convenience; it betrays that both Chomsky and Mearsheimer share a highly deterministic view of capitalism and empire that, at its base, rejects the importance of diverse human agencies in the historical process. Nothing is contestable.

The left should be wary of aligning itself with offensive realists like Mearsheimer and, more recently, Henry Kissinger. In the first place, Mearsheimer’s worldview is highly simplistic and self-reinforcing. He defines his worldview on his website: “I believe that the great powers dominate the international system, and they constantly engage in security competition with each other, which sometimes leads to war.” This statement reveals that Mearsheimer believes that competition is every state’s historical default security posture and that international relations can only be defined as the sum of this competition, with the most powerful states monopolizing this competition. Only the Great Powers can express agency; minor nations are along for the ride, and the heterogeneous agencies of a state’s populace receive no consideration in his analysis. The reification of the nation-state and the naturalization of competition as a universal law of politics is antithetical to any leftist project that believes that collective action by the working classes can positively transform society. 

Second, leftists who would invoke realist foreign policy should know why Mearsheimer is so critical of the US’s focus on Russia. He is not advocating for dismantling American imperialism; he believes the US is distracted by a weakened Russia and is not doing enough to engage in Great Power politics with China, which he views as the true global rival. In his words: 

We do face a serious threat in the international system. We face a peer competitor. And that’s China. Our policy in Eastern Europe is undermining our ability to deal with the most dangerous threat that we face today.

Contrary to the left’s goal of preventing a new Cold War between the US and China, Mearsheimer is advocating for such a Cold War. 

Finally, neorealism self-consciously lacks historical explanations for international relations and state behavior variations. The theory declares a universal and transhistorical motivation for state behavior – specifically “security competition” – and only concerns itself with factors affirming the view. Aspects that contradict the theory are externalized; these are forces outside the narrowly delineated sphere of international relations beyond the scope of consideration. Mearsheimer presents another mechanistic world where complex social relations are relegated to a series of If/Then loops with narrowly defined parameters. Outcomes are predetermined, and reactions are instinctual and predictable. 

Ignoring the social complexity of history’s unfolding, Mearsheimer reduces inter-state politics to competition for security dominated by the most powerful states. Each state, like each individual “under capitalism,” has objective “interests” that are defined a priori: a zero-sum game of security flatly mediated by the invisible hand of power. Chomsky’s theory of international relations is nearly identical to Mearsheimer’s, with the difference that Chomsky incorporates a vulgar Marxist specter of Capital to position the US as the invisible hand moving all international relations. It assumes that if a Russia-Ukraine war were against the US’s interests, the US would prevent or stop it. Therefore, the conflict continues because the US wants it to continue. The US is one “actor”; the heart beats, the body responds. 

Internationalism in Name Only

DSA claims its anti-NATO position is principled internationalism. However, carefully reading their statements undercuts both claims of internationalism and the arguments made to justify the DSA stance. In the preamble of the June 11th, 2021, “No to NATO” statement, DSA calls for an immediate and unilateral withdrawal from the alliance. Regardless of NATO’s continued relevance in the 21st century, such a unilateral move by the US would be viewed – rightly – as an act of betrayal by our allies and would seriously hinder possibilities for future international cooperation. Further, immediate withdrawal would create a defense vacuum, as the defense umbrella European countries have planned their entire economies around for decades will suddenly evaporate. The vacuum would cause a rapid intensification of defense spending, well beyond the 2% of GDP requirement, leading to increased instability domestically and internationally. Domestically, intensifying defense spending would divert essential resources from the civilian sectors. Internationally, unilateral withdrawal makes the concept of “common defense” across Europe moot. The sudden vacuum of the American defense umbrella would spur a flurry of regional defense pacts among factions with diverging – and sometimes competing – security interests. Instability on both fronts is likely to be exacerbated by the fact that many of the NATO countries are also part of the Eurozone, whose monetary policy is effectively controlled by the German central bank. Far from undoing American imperialism, a unilateral withdrawal of the US from NATO is a continuation of Bush-era foreign policy and displays utter contempt for international institutions. 

Additionally, the language of the first bullet point in the “No to NATO” statement is inherently nationalist, not internationalist. The bullet point reads: 

Article 5 of the founding document that binds NATO members stipulates that “an attack on one is an attack on all.” A hypothetical attack on small Baltic nations that border Russia, although all the way across the Atlantic from the US, would force Americans to fight on European soil.

This statement is explicitly isolationist, arguing that the Baltics are too distant and insignificant for Americans’ concern. The phrasing of “European soil” also naturalizes the arbitrarily delineated borders of the nation-state.

Likewise, the fifth bullet point in the No to NATO statement is ostensibly a critique of the hypocrisies of liberal internationalist humanitarianism. However, in practice, it does more to cast doubt on the legitimacy of humanitarian concerns rather than the methods used to affect humanitarianism. The statement doesn’t argue for a better way to address humanitarian concerns; it dismisses any humanitarian justification as a pretext used to manufacture consent. Strikingly, though, the most potent example of the US using humanitarianism as a pretext for naked American aggression – Iraq – receives the least attention. Most of the critique is directed at the NATO intervention in Serbia, where the humanitarian situation was unambiguous. This position is consistent with Noam Chomsky’s overt denial of Serbian ethnic cleansing and genocide of Bosniaks and Kosovars as part of his criticism of the intervention., The Chomsky-DSA foreign policy may be anti-imperialist, but it is not internationalist. An approach that calls for the unilateral withdrawal of the US from its defense commitments combines all the arrogance of Bush unilateralism with all the fatalistic bleakness of Kissingerism. The denial of the genocides that precipitated NATO’s interventions in the Balkans and, more recently, the dismissal of Ukrainian sovereignty perpetuates fascist propaganda propagated throughout Europe and Russia. The defense vacuum created by the abrupt withdrawal advocated for by DSA would further destabilize Europe during its second refugee crisis in a decade. The lack of an American presence will drive European military spending, not decrease it. DSA’s No to NATO statement demonstrates this fact. 

On the one hand, to support its claims that NATO encourages European militarization, the statement points to an increase in France’s defense spending in 2018. On the other hand, it notes that the US and France’s chief executives have recently questioned the relevancy of NATO, with Trump nearly withdrawing the US from the alliance. The specter of a NATO without the US increased French military spending. Realizing such a withdrawal will encourage more militarization across the entire continent. With decades of austerity policies and multiple refugee crises, widespread militarization increases the threat of reactionary and fascist movements. The Chomsky/DSA position is reactionary anti-imperialism and is a dead end as a leftist vision of international relations. 

What Must Be Done

DSA’s adoption of neorealism comes at the most inopportune time. Now is a time for questioning the continued relevance and future of NATO. If the left is to have a voice in this conversation, it must be able to speak coherently with other political factions in this country. A left critique of the current state of IR cannot resort to polemics and sloganeering. It is not enough to say, “the US acts in service of capital.” This statement has no explanatory value. A critique of American foreign policy cannot assume that historical “forces” – capitalism, imperialism, or liberalism – are self-motivating, nor can it be guided by purely economistic theories of history that adopt conservative premises and assumptions of international relations. 

Missing from both left and right neorealism is any social content. Both ascribe the movement of history to large and impersonal forces impervious to human input, a riderless locomotive charging through a desolate landscape. “The US is the heart of the imperial project and acts in service to capital.” This is a description, not an explanation. It treats imperialism and capitalism as interchangeable words rather than distinct phenomena that interact with each other. For example, while NATO’s intervention in Kosovo certainly qualifies as an imperial projection of power, it’s unclear how such an intervention served the interests of capital. These words need grounding to a materiality that clearly defines them as social relations and is tied to the specificities of history. Capitalism isn’t a thing. It is the name used for a set of social relations defined by market dependency to meet basic needs. These social relations are not a transhistorical force; they developed in a particular place under specific circumstances. Moreover, the constitutive relations of “capitalism” are not constant over time. They are contestable across and within classes and often adapted ad hoc to crises and changing circumstances.  

Likewise, there must be an explanation of the origins of the imperial state system, from the seniority rankings of European monarchs below the Papacy to its evolution into today’s liberal internationalist rules-based system. Much of the imperial system’s history predates the global dominance of capitalist relations; the political and social character of early modern imperial disputes must be understood on their terms, not as subordinate parts of capitalism. Imperial competition in the 17th and 18th centuries was motivated by dynastic rivalries and the secularization of the Reformation into disputes over political rights and legal jurisdiction. It was not until after the Congress of Vienna in 1815 that capitalist relations became integral to imperial power competition. What precipitated these reconfigurations, what social tensions did they mediate, and how did states respond? 

Additionally, we must make distinctions among different iterations of the imperial system and the purpose of each. Differences must be enumerated. For example, the Congress of Berlin system is qualitatively different from the post-war liberal internationalist system. The Congress of Berlin self-consciously triggered an imperial competition for resources as the European powers rushed to industrialize to catch up to Britain. On the other hand, the post-war liberal international system saw itself as the ultimate triumph of the ideals of the French Revolution; the Declaration of the Rights of Man heavily influenced the UN’s Universal Declaration of Human Rights. At the very least, a Left IR theory should use these principles as our comparison point; how has the US, the other western powers, and the international institutions they created undermined these goals? It should then attempt to answer how to articulate better and realize the UDHR’s principles. We should not, as realists do, reject their importance as superfluous or merely as a cynical excuse. 

Finally, a Left IR theory must recognize heterogeneous working-class agencies and their ability to affect the trajectory of history, including in international relations, for both better and worse. Mass movements over the past two centuries have profoundly impacted the foreign policies of imperial nations. For instance, during the negotiations for the Treaty of Paris in 1814, the British government considered recognizing Haiti as a French possession to increase the legitimacy of the newly restored Bourbon monarchy. However, the British public, building off over two decades of grassroots agitation against the slave trade, vocally rejected this concession. A massive protest campaign organized by the African Institute sent 800 petitions with 750,000 signatures to Parliament. The outrage forced the British government to back away from the proposal and ultimately to insist the Congress of Vienna include an international repudiation of the slave trade. Returning Haiti to France was essential to the British government’s geopolitical interests- it would have provided the Bourbon monarchy financial self-sufficiency while still leaving them beholden to British sea power to protect French trade, neutralizing them as a threat on the continent. Public agitation intervened to change the treaty’s terms decisively, forced the British government into an anti-slavery position, and committed the resources of the British Navy to enforce the ban on the slave trade. 

However, just as these mass movements forced human rights concessions from the ruling class, they have also been co-opted by the ruling class to further the imperial mission. As anti-slavery sentiment grew in mainstream society in the middle of the 19th century, it coalesced in the “Free Soil, free Labour” ideology. Historian Eric Foner argues that the Republican Party formed as a coalition among certain aspects of the Capital class, artisans, professionals, and radical worker elements espousing this ideology to counter the political influence of the Slave Power. By the end of the century, the abolition of slavery was a primary justification for colonial intervention in Africa; Germany, France, the UK, and King Leopold of Belgium used the suppression of the slave trade to justify carving Africa amongst themselves at the Berlin Conference in 1884-1885. On the one hand, this represented the ultimate success of abolition over the planter classes. On the other hand, it represented the ultimate betrayal of the radical ideals of the abolitionist movement. 

Similarly, the international institutions and world order created by the United States and the Soviet Union represented the ultimate success of many revolutionary ideals espoused since the English Civil War. In his 1941 State of the Union address, FDR outlined four universal freedoms that became the justification for the Allied war effort: freedom of speech, freedom of worship, freedom from want, and freedom from fear. Roosevelt later expanded on these four freedoms in his 1944 State of the Union speech when he argued for a Second Bill of Rights that guaranteed economic and social rights such as guaranteed employment, a basic income, decent housing, adequate healthcare, and education. In many ways, the Second Bill of Rights echoes some of the most radical revolutionary demands from the 1800s; the Soviet Constitution of 1936 likewise contains similar provisions. The four freedoms became the basis of the Allied war goals and formed the ideological underpinning for the United Nations. Though there were deep ideological divides between the Allies, each manifested a society shaped by similar revolutionary ideals. The post-war international institutions were designed to extend these ideals worldwide. 

Despite these lofty goals, and although much of the world’s population did see a significant overall increase in living standards, the reality of the post-war consensus was a betrayal of many revolutionary ideals. The post-war “peace” was predicated on preventing another land war in Europe and domestic politics hostile to labor militancy in Europe and the US. The transition from coal to oil as the primary energy source after WWII allowed for the extension of middle-class prosperity to more people spatially dispersed across a wider area. Replacing coal with oil also altered the social relations of energy production and consumption. Coal mining was labor intensive, required high concentrations of largely autonomous workers to extract and transport to sites of consumption, and was done by workers within Europe and the United States. By comparison, oil requires far less labor to extract and transport, and reserves were primarily in formerly colonized countries. This change in production requirements and locations further cemented the control of capitalists over energy planning, undercutting worker movements in industrialized nations by shifting the nature of work while reinforcing the economic power of former colonial states in the newly independent states of the Middle East and North Africa. With coal, labor could exert significant control over energy production and, thus, the entire economy, whereas, with oil, workers were too few and spatially dispersed to exercise political power similarly. The change in geographic location outsourced the violence and instability necessary to maintain worker discipline from urban centers in both the NATO and Warsaw Pact countries to newly independent nations in the MENA. The post-war attempt at securing political, economic, and social rights for the middle classes of the industrialized nations came at the cost of undermining those same rights for people living in oil-rich countries. 

One year into the conflict and contrary to Chomsky’s prediction, Russia has not destroyed Ukraine. While it is undoubtedly true that NATO’s military and financial support has been invaluable to the Ukrainian war effort, the failure of the Russian invasion is a testament to the Ukrainian people’s will to maintain their independence from Moscow. Despite ongoing resistance from Ukrainians, the Chomsky Left continues to view the war through a lens of brute economistic offensive realism. They rely on vague assertions that NATO’s goal is to destroy Russia and “expand capital.” However, their arguments lack specificity and are unmoored from the historical process. They adopt a mechanistic view of history that assumes that capitalism is natural and inevitable. They claim the mantle of internationalism while utilizing isolationist rhetoric to advocate for unilateral treaty withdrawals. Further, by aligning with offensive realists, they dismiss the possibility of cooperative institutions at the international level, rejecting the left’s first attempt at ending imperialism during the first world war. Finally, by characterizing capitalism as a totality, they deny working class agencies in affecting history, including international affairs. 

If the Left is to articulate a coherent anti-imperialism for the 21st century, it cannot adopt conservative theories about the construction of the international system. The historical specificities around the development of capitalist social relations and the imperial order must ground our critiques. Likewise, it cannot hold itself hostage to the ideological battles of the Cold War nor be guided by a rote opposition to anything the United States supports. The Chomsky-DSA reaction to the Russian invasion of Ukraine failed on all accounts. As a result, they’ve squandered an opportunity to offer a coherent alternative to the current international order that deals with the challenges of the 21st century – particularly climate change and the rise of authoritarianism both at home and abroad. By joining with neorealists such as Mearsheimer, they eschew a material analysis of the imperial system for one that treats the system as constant and inevitable – a mechanistic progression of history – rather than constitutively polyvalent and contested. More than strange bedfellows, such a marriage is a death knell for international solidarity in the 21st century.

Bank of the People: History for Money’s Future

By Dan Rohde

Who would’ve guessed that the sudden failure of a state-chartered, regional bank would’ve inspired fundamental reckonings with the nature of money and banking? Yet, this is exactly what we see today. The failure of Silicon Valley Bank (“SVB”) and its $200 billion of mostly-uninsured deposits has spurred renewed debates about not only whether and when banks should be allowed to fail, but what role they play, or ought to play, in modern society.

The ongoing SVB episode has laid bare two fundamentally opposed views of banks. First, there are those who regard banks primarily as private businesses. This orthodox camp largely (though not entirely) opposes the present rescue efforts, insisting that the market be allowed to discipline banking enterprises. Poorly run banks, they argue, should generally be allowed to fail, unless their size and systemic importance dictate otherwise. This business approach to banking lies behind the current design of deposit insurance, which only insures deposits up to $250,000 per account on the presumption that only small account holders should be protected; holders of larger accounts are presumed capable of monitoring their bank and moving money to a safer institution if necessary. The market should thereby privilege safer banking institutions. Such thinking similarly underpins much of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which attempts to isolate banks that are “too big to fail,” while leaving smaller institutions more to the discipline of so-called “market forces.”

But, as the events of this weekend underline, this is an increasingly strained perspective. SVB’s largest depositors plainly did not adequately supervise its practices, and this is not particularly surprising. And, in spite of being a regional, state-chartered bank not identified as systemically important under Dodd-Frank, within 72 hours of the panic beginning, Treasury, the Fed and the FDIC, through some creative and surprising legislative maneuvering, pooled their resources to engineer a rescue of all SVB’s deposits – both insured and uninsured.

Such apparent failures and exceptions from the orthodox perspective are much less surprising to those who understand banks to be public institutions. As laid out in a recent editorial by Morgan Ricks and Lev Menand calling to remove the cap on deposit insurance altogether, this position holds that banks are best understood as privately-owned entities charged with a fundamental public function: issuing the vast majority of the deposits we use as money. Eliciting language from Saule Omarova and Robert Hockett, they describe a bank charter as “an outsourcing arrangement, a franchise, to issue money on behalf of the government.” Eliminating the cap on deposit insurance “would underscore the fact that banks exist to serve the public interest, not to privatize gains and socialize losses.”

To gain greater perspective on the present debate, it’s useful to consider the historical foundations of modern banking – both in the US and elsewhere. My forthcoming paper in the Osgoode Hall Law Journal offers one example. There, I explore the introduction of banks into Canada – a period when, even if privately owned, banks were openly and explicitly conceived as public institutions. (Accordingly, they also marked a central site of political contestation.) Elite monetary engineering on behalf of one partisan camp was met with opposition from another, followed by direct, democratic contestation. Returning to this past can help us in at least two ways. First, it helps clarify the role that banks were meant to serve and still serve today in our monetary system, foregrounding the actions of the state in creating and backing them. Second, narratives like this can help us conceptually to imagine and work toward creating a more democratic monetary architecture, both today and in the future. 

The Chaos of Canadian Colonial Money

Money in colonial British North America was a mess. And the colonies were in a tight spot trying to fix it. The law generally forbid colonies from issuing their own money, either through establishing their own mints or issuing bills of credit. Further, as of the 1820s, the British government required that all colonial accounts be denominated in sterling. All the while, continuous growth and a trade balance favoring England constantly tapped the money supply, leading to near constant calls for more liquidity.

The colonies responded to this with legislative ingenuity. With jurisdiction over their own revenue and courts, they would declare coinage of various nations “current” within their borders, meaning that such designated coins would both satisfy debts to the colony and count as legal tender. They would then “rate” those varieties of coin under their own unit of account – granting each a domestic value that differed from (and typically exceeded) either its face value or what value it would acquire in foreign markets. While the official unit of account was English, many goods were priced in dollars, and most actual coins in people’s pockets were Spanish. This process, known as “overrating” coinage, fomented a currency mélange throughout the colonies that immensely complicated even basic everyday transactions.

Still, the colonies enjoyed a brief reprieve from this complexity during the war of 1812. To fund that conflict, the British forces issued legal-tender “Army Bills” directly to soldiers and suppliers.

These bills not only serviced the war effort but also were widely adopted and appreciated by the settler population at large. Typically denominated in both dollars and pounds, they greatly simplified everyday exchange, offering settlers a paper currency that was, more or less, worth the value listed on its face. Significantly, the bills were issued in good supply, reaching a peak of £1.5 million in 1814. The result granted the colonies a level of liquidity they would not know again until for decades. Exposed to their first paper money in good supply, the colonists thus experienced previously unparalleled liquidity through public money–even if a money, of course, issued for military conflict.

Enter the Banks 

In spite of such achievements, the British fully redeemed the Army Bills after the war. Retiring the bills led to a deep and profound monetary contraction. And it was this specific moment that directly inspired the chartering of Canada’s earliest banks. First was the Bank of Montreal in 1817, followed by the Bank of Quebec in 1818, the Bank of Upper Canada at Kingston in 1819, the Bank of New Brunswick in 1820, and, as will be discussed below, the Bank of Upper Canada founded in the town of York (later incorporated as Toronto) in 1821.

The first Canadian banks were universally run by wealthy, politically connected and conservative individuals, often with direct ties to England. And they were chartered to offer a public service. They could store varieties of legal tender coinage and issue notes that, like the Army Bills, listed their value on their face. While not legal tender, these banknotes could thereby replace legal tender coin for much everyday exchange. Banks could additionally issue more notes than the amount of coin they kept in reserve, thereby directly increasing the money supply for the still liquidity-starved colonies. Thus while certainly commercial enterprises driven by private profits and interests, the early Canadian banks (as with many chartered corporations at that time) were not merely commercial institutions, but expressly political ones. They were individually chartered and empowered by statute, run by politically-connected colonial elites, and specifically charged with a public service in simplifying and augmenting the money supply.

Crucially, such elite banks “of issue, discount and deposit” were not primarily held out as savings institutions or mere intermediaries, but money issuers. Generally, they built their reserve of specie by selling shares rather than attracting depositors, and their primary purpose was to clean up the colonial money supply and expand monetary circulation. Banknotes almost immediately became the predominant currency for everyday use in the colonies.

Where government had receded, government-supported for-profit enterprises were called in. But private bank money came with very new terms. Whereas Army Bills offered payment to individuals, banknotes were issued through loans, meaning that they came at a cost and with a commitment. To many, this new money felt less a monetary expansion, than a shift of obligations – away from the state and towards these new, undemocratic corporations.

The Bank and the Government

In Toronto and much of Upper Canada, nearly all banknotes were issued by one especially partisan institution, the Bank of Upper Canada. The first chartered bank in the Canadian colonies, the Bank of Upper Canada was founded by Anglican archdeacon John Strachan and his followers in the “Family Compact” – a close-knit conservative political faction that wielded an outsized influence in the colony. Indeed, the bank inscribed its ruling position directly on its notes. The notes proudly announced that the bank was “chartered by parliament.” They bore images of St. George and Britannia, unabashedly mimicking iconography from the Bank of England.

While it never took on exactly the role that ‘The Old Lady’ played in England, the Bank of Upper Canada was explicitly established to represent elite interests and, for a considerable period, it was the only bank chartered in the region. During that period, anyone who needed money would have to either borrow from that bank (in which case they owed it a debt) or work for someone who had previously borrowed from that institution. In either case, money was issued in Upper Canada with lines of obligation running directly to a single, unapologetically anti-egalitarian institution.

This bank’s anti-egalitarian activities were particularly egregious to Upper Canada’s “Reformers”  – a political movement directly opposed to the Family Compact that advocated to make the colonial government more responsive to the electorate. To Reformers, banking institutions like the Bank of Upper Canada benefitted from public legitimacy and support, but lacked democratic accountability. If banks were in a fundamental sense government agents, then their control was a political cause. The interest on their loans, furthermore, was akin to taxation, only not paid into public coffers. With this, banking reform became a central plank in the Reform movement.

The Reformers began by attempting to make the Bank of Upper Canada more accountable, and then by proposing alternate public monetary bodies. Failing in this, a group of Reformers then established their own (unchartered) institution in 1835 named the “Bank of the People.” As with the Bank of Upper Canada, the Bank of the People was erected overtly as a political institution. Its board was made up exclusively of established Reformers, and the bank issued money largely to communities excluded by the Bank of Upper Canada. (Indeed, one of its first loans was to future leader of the Upper Canada Rebellion, William Lyon Mackenzie, to establish his newspaper, the Constitution.) In house, too, the bank joined the politics of credit issuance to the politics of publicity by hosting a newsroom on its premises featuring “the leading liberal Journals.”

Bank of the People notes differed starkly from the Bank of Upper Canada’s, reflecting the different political community to which the bank spoke and the alternative values it sought to express. In the place of British monarchial imagery, its notes feature bustling cityscapes and ports, alongside generic symbols of industry, such as Vulcan and Demeter.

Despite its judicious management, the Bank of the People did not last long. We know it was well run, because it managed to be both profitable and to be the only bank in British North America to not suspend payments during the banking panic of 1837. Still, the Bank lost many of its supporters after the failed Upper Canada Rebellion, and competition with the Bank of Upper Canada led its founders to sell to the Bank of Montreal in 1840.

From the Bank of the People to Banks Today

Obviously, the Bank of the People was established in a very different era from the present moment. There were few banks then, and they carried their association with government on the face of their notes. But much is also the same, as the discourse around SVB’s collapse makes evident. Privately-owned, for-profit banks are still tasked with issuing the vast majority of our money, and this remains, in many regards, a very public mandate.

Banks today are critical public infrastructure, which stand upon a massive edifice of government infrastructure and support. Because we use bank credits as money, when they fail, the consequences can lead to massive economic fallout with a very real, human cost. They also act as a primary vector through which government intervenes in a crisis. (This includes even our recent global health crisis that did not originate in the financial sector.) No wonder they are among the quickest institutions to receive government support when under threat. No wonder also that, in the wake of SVB’s collapse, explicit government support has been offered not only to “too big to fail” banks, but to smaller banks as well – an experience Canada also went through in 1985.

The monetary system that the Bank of the People actively contested is now the norm, but, all the while, its public nature has become less visible to us. Revisiting such democratizing efforts reminds us of the indelibly public role that banks play, and that they were intended to play, since their very introduction into North America. The Reformers movement equally reminds us that monetary systems that appear resistant to change, may yet be subject to contestation. Faced with the legal inability to make the existing monetary order more accountable, the Reformers turned to establishing their own institution. While short-lived and little-known today, the Bank’s example and influence lived on through its participants to influence Canada’s future monetary order. Similarly, today, current public banking efforts (in, for example, CaliforniaNew YorkMassachusetts, & Pennsylvania) remind us that, regardless of how hard it might be to see at times, there is always the possibility of alternatives to elite, private, and for-profit means of issuing money. Times like this, looking to the past may help us to more clearly see our present, and to imagine our future.

Rising Tides Sink All Boats

By David M. Fields

So, what is the Fed’s deal? Has Jerome Powell fallen prey to inflationary paranoia and hysteria for all the wrong reasons? Or is a “strong’ dollar a manifestation of a particular response to a policy choice that is more calculated and direct? By facilitating aggressive monetary austerity, the Federal Reserve is ensuring the US dollar is a safety asset to insulate the global rentier from cost-push-markup inflationary unpredictability.

The US dollar is surging to new heights. For instance, the US Dollar Index, which values the greenback against a basket of currencies, has advanced considerably. One of the burning questions is whether this will last? For now, I think, yes, it will, simply because there is no alternative for global trade invoicing and financial accounting. Aggressive monetary austerity policy from the Federal Reserve, a project aimed at using unemployment to tame cost-push-markup inflation, is pushing rival currencies lower, particularly in emerging market economies that suffer from balance of payments constraints, as investors from around the globe rush to purchase US Treasuries for security in the face of world-systemic economic uncertainty.

This scenario is vastly different than the monetary policy from only a year ago or so. Then, to cope with the Covid-19 pandemic, central banks around the world cut interest rates sharply — to near 0 — and governments deployed aggressive fiscal support of their economies. As a result, Federal Reserve actions were important in stabilizing world financial markets, specifically with respect to Fed swap lines and the establishment of the Foreign and International Monetary Authorities (FIMA) Repo Facility, which ensured a “buyer of last resort” for foreign central banks desiring to sell U.S. dollar reserves. Capital flowed throughout the world and the dollar fell sharply. In a sense, this was to be expected, and was seen as temporary. Eventually, the dollar was bound to bounce back up. And now it is. And the post-pandemic world paved the way.

Indeed, as the world economy reopened from pandemic lockdowns, supply chain bottlenecks arosecoupled with pandemic profiteering, generating worldwide upsurges in inflation. The response from the Fed, as mentioned, has been to raise the federal funds rate, which has translated into a sharp dollar appreciation as a result of global capital inflows, as the US dollar is a reserve asset to cope with worldwide economic uncertainty.

Yet, is this influential role of the dollar in the world economy an indication of the United States’ core commitment to internal price stability and external cooperation for the deliverance of efficient world capital markets and global trade links? Or acute deposition of the monetary power of the United States? In my view, the answer is the latter.

Here’s why.

The Fed is the world economy’s central bank, which acts as the safety valve for mass amounts of international liquidity. The role of the US dollar in international markets, and the advantages that come with it, are the spoils of its monetary hegemony. The provision of this asset allows the United States to become the source of global demand, and to insulate itself from fluctuations and contradictions of perilous cumulative disequilibria that may arise in the world economy, like the adverse price effects of supply chain bottlenecks and financial contagion that stem from foreign currency devaluations. The US dollar is the numeraire currency in international markets, which is not emblematic of credible macroeconomic performance that fosters confidence, but an arbiter of authority that regulates and dictates the flows of international financial commitments for global economic activity.

Given the current state of world economic dynamics, along with the foreseeable future, there does not seem to be a direct challenge to the dollar’s preeminence, in the same vein as the Euro was not a likely contender given its fallout from the Great Recession. There is not any indication of the greenback’s fall from grace as the dominant international currency. This does not preclude, nevertheless, eventual dollar dethroning, just confirms that the process is (very) long-term.

Despite hysterical contestations of inflationary fragility, the US dollar insulates the United States from global fluctuations and contradictions that may arise. This provides the country the effective means by which the world economy can be stabilized with global demand expansion, without spurring assumed demand-pull inflationary spirals. So, what is the Fed’s deal? Has Jerome Powell fallen prey to inflationary paranoia and hysteria for all the wrong reasons? Or is a “strong’ dollar a manifestation of a particular response to a policy choice that is more calculated and direct? By facilitating aggressive monetary austerity, the Federal Reserve is ensuring the US dollar is a safety asset to insulate the global rentier from cost-push-markup inflationary unpredictability. As such, expectations of future dollar depreciation arising from a return to loose monetary policy is, unfortunately, unlikely.

I hope I am wrong.

***Republished from the Monetary Policy Institute Blog***

Austin Credits with Jonathan Wilson (White Paper and Podcast Interview)

For this special episode of Superstructure,  cohosts Will Beaman (@agoingaccount) and Andrés Bernal (@andresintheory) are joined by Jonathan Wilson (@DeficitOwl24601) to discuss his new white paper, “Proposal for a Local Currency Issued by the City of Austin,” which proposes a complementary currency for the city of Austin called Austin Credits.

Jonathan’s proposal contributes to a developing conversation in the Austin City Council, which was tasked by recent legislation with exploring possibilities for new public banking and payments structures by a resolution. The conversation delves into the proposal’s legal design and implementation strategy, while also contextualizing its political meaning and stakes for progressive politics. 

Proposal for a Local Currency Issued by the City of Austin: A White Paper by Jonathan Wilson

In 2022, the need and desire for alternative visions of economic organization is higher than it has ever been. Undemocratic national governments and international crises have taken agency and power away from local communities and diminished their ability to protect and nurture their citizens as they see fit. In the United States, the prevailing economic ideology at the national level has committed to trading quality of life for nominal price stability, pursuing policies which deliberately exacerbate unemployment and refusing to make robust use of programs to provide liquidity to local governments. The time to develop local alternatives to this system is now, and this white paper will explain one such vision. In addition to providing a basic means of funding and payments for local governments and their citizens, this proposal aims to provide a new lens for how people view cooperation and interdependence. By illustrating how valuable assets can originate from negotiated credit relationships, this white paper shows how communities can express their values among themselves and between each other, opening up new possibilities for local and global solidarity.

Resolution 20220324-057, passed by the Austin City Council on March 24, 2022, directs the City Manager to explore how financial innovations can improve government processes and better serve Austinites, through (among other things) public payments platforms, public banks, and local complementary currencies. This proposal outlines how  the City can (i) increase income and employment for Austinites, (ii) increase financial inclusion by providing a privacy respecting method of electronic payment for the unbanked and maintaining an affordable means of financing and emergency liquidity for low income Austinites, and (iii) allow the City to fund public works. One way to accomplish these goals is to issue a valuable electronic financial instrument called the Austin Credit or “AC”. In order for Austin Credits to be valuable enough to supplement incomes, allow the City to create employment, and serve as a vehicle for financial inclusion, the City must ensure that they are in demand and marketable. To ensure that Austin Credits increase financial privacy, the City will provide an option to load Austin Credits onto an anonymous stored value card. Finally, in order for Austin Credits to serve as a source of financing and emergency liquidity, the City itself will serve as a lender of first resort for Austin Credits.

Of all these requirements, the most important is that Austin Credits are demanded by members of the public. The primary demand for Austin Credits will stem from the fact that the city will accept Austin Credits for all payments to the city, including utilities, public transport, local taxes, fines, and fees for any city-sponsored events on a one-to-one basis with the dollar (moving forward, I will use the term “City Bills” to refer to these payments and “City Services” to refer to actions by the City that people are paying for). To further encourage use and widespread acceptability of the Austin Credit, the city will offer a small discount of 5% for paying City Bills in Austin Credits rather than in dollars. Historically, there is precedent for a credit towards taxes or government services at a local level retaining its value so as to become a fungible, money-like object. In the 1930s, American cities which were  short on dollars circulated tax anticipation scrip which could be used to make any payment to the city. Additionally, during the Civil War, until the government stopped them, individuals used United States Postal Service stamps as a replacement currency, knowing the stamps would always have some real value so long as the post office accepted them.

To give Austin Credits value beyond paying for City Bills, the City needs to encourage acceptability of Austin Credits by businesses. The easiest way to do that is by offering businesses which agree to accept Austin Credits a small discount on their City Bills. For example, a grocery store that agreed to accept Austin Credits as payment would register with the city and receive a 5% discount on their City Bills. Additionally, businesses that agree to pass any part of this savings onto their customers would receive an additional discount on their City Bills. For example, a store that offered its customers a 2.5% discount when they pay in Austin Credits would receive an additional 2.5% discount, for a total discount on City Bills of 7.5%. Additionally, Austin Credits would be free to transfer within the Austin Credit system, meaning stores would save money whenever someone paid in Austin Credits instead of credit or debit cards. This not only gives the grocery store an incentive to accept Austin Credits but it gives their customers an incentive to acquire Austin Credits and save them.

To respond to this incentive for Austin Credits, residents would be able to buy Austin Credits directly from the City, but Austin Credits would also exist on a web and app based platform that would allow users to request and transfer from one another, similar to pre-existing payment apps, like Venmo, Paypal, and Square. Users would have the option of connecting their bank accounts or credit cards, and there would also be a market function in the app and website called the Austin Credit Online Marketplace where users could buy and sell Austin Credits with dollars, similar to a foreign exchange market. Just like with Venmo and Paypal, users would pay no fees for transfers within the AC system, and if users wanted to take money out of the AC system by transferring it back to their bank accounts, they could do so for free if they the standard option which goes uses the Automated Clearing House and settles in three days, or they could make instant transfers for a small fee. The purpose of this market is to give the recipients of Austin Credit a way to convert to dollars if they need to, which enhances the liquidity and desirability of the Austin Credit. Additionally, several public buildings in the City would have indoor and outdoor machines that dispensed stored value cards carrying Austin Credits in various denominations.

Once Austin Credits become widely accepted in the City and their demand and value is established, the City can begin offering personal loans in Austin Credit, providing an affordable source of financing for Austinites. Because the purpose of these loans would be to enhance the purchasing power of Austinites, the terms of these loans do not need to be structured with the goal of maximizing revenue. Rather, the terms should be geared towards encouraging Austinites to demand and save Austin Credits. To those ends, Austin Credit loans should have three essential features. First, the rate of interest should be zero. Keeping this rate at zero ensures that consumers will prefer to borrow Austin Credit. Because legal tender laws would require the City to accept dollars in payment for public debt, to incentivize people to pay loans in AC, the zero-interest rule would be contingent on people paying the loans back in AC. Second, instead of charging interest, to encourage frugal use of this credit facility, the City can simply charge small late fees for missed payments. Third, all loans in Austin Credit issued by the City must be collateralized by surrendering Austin Credit in an amount equal to 10% of the loan value prior to the loan being issued.

For example, if someone wanted to borrow 200 AC, he would have to surrender collateral of 20 AC and would receive the loan at 0% interest. Because the loan would carry no interest, he would prefer this loan over a payday loan, and because he needs to keep at least 20 AC on hand to qualify for the loan, he is encouraged to save at least some of the Austin Credits he receives. This feature of Austin Credit loans capitalizes on people’s natural tendency towards precautionary saving. To prevent the potential for abusing this loan facility, each resident would only be allowed to have one of these loans outstanding at any given time. In this way, residents who take out these loans will be encouraged to pay them off, not only to receive their collateral back, but also so they can qualify for another loan. Additionally, although anyone would be able to set up an AC account, only permanent residents of Austin would be able to access these loan facilities.

The value of personal loans would be capped at 5,000 AC, but eventually, the goal should be for the City to offer secured loans to allow residents to finance the purchase of large items, such as cars and homes. For these consumer loans, there would be a much higher maximum loan value, but there would be a minimum down payment amount of 35%, and the loan would be secured by the asset being purchased. Because saving for large purchases is empirically the second most important reason people save money, incentivizing Austinites to save Austins Credit by offering them a 0% loan in exchange for a large down payment will be a very powerful way to bolster demand for Austin Credits.

Once this system of acceptability, transferability, and loans has been established, leading a private sector demand to hold and save Austin Credits, the City can start using Austin Credits to supplement income and create employment. The City should establish a system that allows residents to vote on new public works projects which will pay workers in Austin Credits. As the Austin Credit system gains adoption, the City can gradually increase the amount of projects offered until it can guarantee a job paying in Austin Credits for all Austinites who want such a job. The revolutionary potential of allowing local residents to vote on spending projects that are not tied to direct and immediate taxation or borrowing cannot be understated. As long as there is idle labor and the demand for AC is not exceeded, such a program would create a means for residents to democratically participate in non-zero-sum development, motivated by the needs of communities and not merely the profit motive, strengthening the City’s economic environment and its sense of community. Moreover, the Austin Credit can be used to recognize work that is already being done but is currently undervalued or uncompensated by issuing AC to community service organizations. Additionally, the City can issue Austin Credits to the elderly, the disabled, and parents of minor children to supplement their income.

The structure of the Austin Credit system should allow people who receive income from the City in Austin Credits (either from public works jobs or from supplemental payments) to sell them for dollars if they wish. Because Austin Credits grant residents a discount on their City Bills of 5% and a discount at participating businesses of 2.5%, if enough people are using Austin Credits, they should trade in the Austin Credit Online Marketplace for around $1.00. The logic here is that if I have 100 Austin Credits, I should be able to use it to buy products valued at $105 from the City and at $102.50 from participating businesses. If I want to buy something from outside Austin, I may want to sell my Austin Credits for dollars, but unless there is an emergency, I will avoid selling my Austin Credits for significantly less than the value I transferred to pay (either in dollars or in labor) for them. Let us assume that I offer to sell 100 AC for $101. If Austin Credits have not been over-issued, other Austinites who want to buy something from the City or from a business who accepts AC should accept the offer to buy 100 AC for $101 for two reasons. First, 100 AC will allow them to buy products valued at $102.50, so they have essentially gained $1.50 in value simply by doing the transaction if they spend their Austin Credits in Austin. Second, the $101 price I offered is less than the $102 ($100 plus $2 transaction fee) they would have to pay the City if they purchased the 100 AC directly from the City. The only people who will insist on paying less than $1.00 to buy 1 AC in the secondary market will be people who do not have an immediate need to buy something from the City or from a business  that accepts AC. For this reason, encouraging private sector adoption is key because the more places people have to spend AC, the less need there will be to sell AC at a discount. 

The promise of redemption from the city will guarantee that Austin Credits have some value, but to protect this value, the City must avoid issuing too many Austin Credits. If the private sector has a net desire to save 1,000 AC, and the City net issues 1,200 (net issuance being the remaining outstanding Austin Credits after redemption), then residents will begin selling Austin Credits at a discount for dollars. If this happens, the first person to sell his Austin Credit–the person who receives the 1,001st AC–will receive a good price for it, but the last person to sell his Austin Credit–the person who received the 1,200st AC–will suffer a significant loss. That first seller might be able to sell his Austin Credit for 99 cents, but the last seller might only get 80 cents. Consequently, if the private sector has a net desire to redeem and save 1,000 AC, and the City Issues no more than 1,000 AC, each recipient of an Austin Credit will have a financial asset valued at approximately one dollar. However, if the City issues more than this net redemption and savings desire, then at least some recipients of Austin Credits will find themselves holding a financial asset valued at less than what they exchanged for it. Either they will have bought Austin Credits directly from the City that are now worth significantly less than one dollar, or they will have provided labor to the city that is now worth less than the value they placed on that labor. For example, if the City pays workers 20 AC per hour but issues too many AC, causing the value of the AC to drop by 25%, those workers might have valued their labor at around $20 per hour, but they now hold a financial asset worth only $16.

Similarly, in order for this value creation not be a net loss for the City or an indirect transfer from some citizens of the City to others, the private sector must save a number of Austin Credits that is greater than the discount given to those who pay City Bills in Austin Credits. For example, imagine the citizens in total have a City Bill of $100, and the city issues 95 AC in exchange for $95 of goods and services and offers a 5% discount on City Bill payments. If the citizens redeem all 95 of their Austin Credits to pay their $100 City Bill, then the City has essentially foregone $5 in value. In this scenario, if the city had simply never issued the Austin Credits, they could have simply accepted $100 to pay off the $100 City Bill, paid the same $95 for the goods and services, and had $5 left over. Avoiding the problem of foregone revenue is important for the City because it still has bills and liabilities denominated in USD (for example, it must pay payroll tax to the US Federal Government, and it must purchase garbage trucks from Waste Management, Inc., which is headquartered in Houston, Texas and will likely not accept AC in payment). On the other hand, if the City issues 100 AC, and the private sector redeems only 90 AC at the standard 5% discount, then the City has effectively gained about $5 in value. A City Bill of about $95 would require 90 AC to pay at a 5% discount. If the City pays for $100 of goods and services with Austin Credits, then provides $95 of City Services, which the private sector purchases using 90 AC, then the difference between the value received by the City (the $100 of goods and services) and the value given by the City (the $95 of City Services) results in a net gain by the City of $5. Because the City and its citizens benefit if not all of the Austin Credits are redeemed, some of the value from the Austin Credit System can be thought of as partially analogous to breakage revenue, the profits businesses recognize when their gift cards are purchased but not redeemed.

Therefore, to protect the financial health of the City and to maximize the value of the financial assets given to Austin residents, the City must structure the economy of the Austin Credit  to maximize the desire to save Austin Credits. As stated above, there will be a basic underlying precautionary motive to save Austin Credits because they will allow residents to benefit from a small discount on their City Bills. Additionally, residents who want to take out loans in Austin Credits will be incentivized to save Austin Credits to surrender as collateral to allow them to qualify for larger loans. In addition to these precautionary and financing motives, the City should encourage saving Austin Credits by only selling Austin Credits in predetermined amounts with a small, fixed transaction fee of $2. At any point, a member of the public should be able to buy Austin Credits at the price of one Austin Credit per dollar, but if they can always buy the exact number of Austin Credits they need for every transaction, they will never need to save any. To remedy this, the City should only sell Austin Credits through its online platform or at its stored-value card dispensing machines in moderate but equitably sized lots. To illustrate, let’s assume the lot size is 50 Austin Credits for the sake of simplicity. In that case, if a person has a monthly City Bill of $25, they will have to purchase 50 Austin Credits at once by spending $52 dollars. After paying 23.75 AC to extinguish their City Bill (leaving them with 26.25 AC), this person will have about 1.25 more Austin Credits than they need to pay their next City Bill. They could spend those AC on something else, but this would mean that the following month they would need to purchase additional Austin Credits and pay another $2 fee. 

Additionally, any one person or common enterprise will only be able to use USD to purchase a maximum of 1,000 AC directly from the City using its online platform in any given month. This minimizes arbitrage opportunities and limits people’s ability to buy AC immediately before redeeming them in payment of City Bills, which would otherwise diminish any need to save AC. Together, these elements form a structure that incentivizes residents to save at least some of their Austin Credits or to seek Austin Credits from sources other than the City, which means they will request Austin Credits in payment from other members of the public, further fueling the demand for Austin Credits.

The aforementioned fixed-lot issuance, loan policy, AC purchase limit and transaction fees are best described as non-interest monetary policy, meaning they influence the volume of Austin Credit financial transactions without primarily relying on charging interest to borrow money or paying interest to those who already have money. However, the City must also have rules for fiscal policy, meaning it must have a rigorous system to decide how many net Austin Credits it will issue in any given period. Because the measurement of value created by the City and held by its residents will be the residents’ desire to save Austin Credits and value them at or near the price paid for them, the City will know that it has issued too many Austin Credits if the number of Net Austin Credits Saved, or “NACS”, does not increase from one period to the next. NACS will be defined as the number of Austin Credits issued by the City minus the amount of Austin Credits accepted in payment by the City, and if this number is positive, it is multiplied by the fair market value of the Austin Credit as a percentage of a USD, as determined by sales on the Austin Credit Online Marketplace.

Now that I have defined what I mean by Net Austin Credits Saved, I will explain how the city will adjust its number of Net Austin Credits issued (Austin Credits issued excluding loans given) in response. The process is very simple: in any given period, the City may issue an additional number of Net Austin Credits equal to the change in Net Austin Credits Saved in the previous period. To illustrate, consider the following example. In Year Zero, before any Austin Credits exist, NACS is zero by definition. If in Year 1 (the first year of the Austin Credit program) the City issues 400 AC, people spend 300 AC and AC are traded on the Austin Credit Online Marketplace for $.95 each, then the NACS for Year 1 is 95 (400 minus 300, all multiplied by .95). The difference between NACS for Year 1 (95) and NACS for Year Zero (0) is 95; this means that the City can safely increase the number of Austin Credits it issued by 95 in Year 2. If in Year 2, the City follows this advice and issues 495 AC, and the NACS for Year 2 is 180, then the net change in NACS will be 75 (180 minus 95 equals 75), and the City can increase spending by 75 in Year 3. If the City issues an additional 75 AC in Year 3 (for a total of 575), but NACS for Year 3 remains at 175, then the net change in NACS is zero, and the City should not increase the rate of Austin Credit issuance in Year 4. 

The purpose of adjusting the total issuance of Austin Credits in this way is to ensure that issuance of AC increases when the citizens desire to save AC increases and that issuance of AC decreases when the desire to save AC decreases. It is impossible to perfectly predict the net desire to save Austin Credits going into each new year, but aligning the additional issuance with the actual saving desire of the previous period should be an acceptable proxy. Initially, the net issuance of AC needs to reflect the availability of real resources which can be purchased with AC and grow gradually. The City should start by limiting AC issuance to some small fraction—perhaps 5%—of the combined revenue of the City and the businesses that agree to accept AC. This would ensure that even if no one wanted to save AC at the outset, the supply of AC would not exceed the supply of things one can buy with AC, so people can become accustomed to viewing the AC as a stable unit of account. As the use of AC grows among the population, this formula will allow the supply of AC to naturally grow around the same pace as the people’s desire to hold it.

Because the goal of this project is to increase income for Austinites, if the change in NACS is ever negative from one period to the next, the City should not immediately reduce the number of Austin Credits it issues in the next period. It should first adjust non-interest monetary policy for at least 1 year. For example, if in Year 4, NACS declines from 175 to 140, instead of reducing Austin Credit Issuance by 35 in Year 5, the City should increase the collateral requirement for Austin Credit Personal Loans and the down payment requirement for Austin Credit Consumer Loans to encourage more saving. These increases should be proportionate to the negative change in NACS. For example, if NACS declines from 175 to 140 from Year 3 to Year 4, this reflects a decrease of 20%. Consequently, in Year 5, the City should increase the collateral requirement and the down payment requirement by 20%. For example, the collateral requirement might rise from 10% to 12%, and the down payment requirement might rise from 35% to 42% (each a 20% increase from baseline). Only if this does not work in Year 5 should the City be allowed to reduce the number of Austin Credits it issues in Year 6. Once the change in NACS resumed being positive, the down payment and collateral requirements would revert to their original values.

In addition to protecting the value of the Austin Credit, the City must ensure that the AC system benefits low income people and increases financial inclusion by giving access to financial services to those who do not already have it. The primary reason people are unbanked is a lack of income; public jobs programs and supplemental income paid in AC will help address this concern. Another reason some people remain unbanked is the combined effect of having no permanent addresses and no identifying documents. To address this concern, the City should partner with shelters and other facilities that service the unhoused to verify resident-status for people who want to open AC accounts with permanent resident privileges. Another reason that people are unbanked is physical distance from a bank, and a distrust of traditional financial institutions. To address this concern, the City should maintain manned or automated kiosks where people can purchase AC stored value cards and troubleshoot problems with their AC account at every City building that is open to the public.

As well as increasing financial inclusion at the local level, the City can use the Austin Credit to create economic solidarity with other cities or organizations. As this form of local complementary currency becomes more popular, the City can make agreements with other currency issuers. These could come in the form of swap lines, some form of reciprocal receivability of their currencies, direct exchange of surplus resources, or other forms of cooperation. Such agreements between two local communities could strengthen both and emphasize the interdependence of their residents.

If the City takes these steps in the correct order (establishing the value of the AC, protecting the demand for it, then slowly expanding issuance to meet that demand), it can create a financial instrument that enriches the population of Austin and increases financial inclusion. The combined result of all these measures will be an economy where use, exchange, and value of the Austin Credit gradually increases over time, allowing the City to increase income, employment, and credit access for Austinites while reducing its own costs, fulfilling the vision set out by the City Council when they passed Resolution 20220324-057.

Appendix: Is any of this legal?

Federal Constitutional Issues

Article I, Section 10, Clause 1 of the U.S. Constitution forbids states from issuing “bills of credit.” This is sometimes referred to as the clause which prevents states and localities from issuing their own money. However, the term bill of credit does not simply refer to any note or debt-like instrument, or indeed any instrument which circulates between individuals. The Supreme Court, in Briscoe v. The Bank of the Commonwealth of Kentucky, 36 U.S. (11 Pet.) 257, 314 (1837), held that a bill of credit is “a paper issued by the sovereign power, containing a pledge of its faith, and designed to circulate as money.” This definition contains three parts, (a) issued by the state, (b) containing a pledge of the state’s faith, and (c) designed to circulate as money, and an instrument must meet all three to be considered a bill of credit. The simplest way for the Austin Credit to be constitutional will be if it avoids meeting the second and third part of the definition.

We will begin by examining part (b) of the definition; Briscoe goes into great detail on what is meant by a pledge of the state’s faith. Id. at 320. One issue before the court was whether the notes issued by the Bank of the Commonwealth of Kentucky, of which the state of Kentucky was the sole shareholder and provider of capital, were issued on the faith of the state. Id. The Court held that the capital of the bank, even though it was in part derived from the state, had its own income stream, and together with the contributions of the state “constituted a fund to which holders of the notes could look for payment, and which could be made legally responsible” for redemption of the notes. Id. The fund was in possession of the bank and under the control of its president and directors, not under the control of the state. Id. Most importantly for the purposes of the Austin Credit, the Court held that “whether the fund was adequate to the redemption of the notes issued, or not; is immaterial to the present inquiry. It is enough that the fund existed, independent of the state, and was sufficient to give some degree of credit to the paper of the bank” (emphasis added). Id. at 321. Additionally, every holder of the bank’s notes had the legal right to sue the bank to enforce payment. Id. For these reasons, even though the state of Kentucky accepted the notes of the bank in payment of taxes, and in discharge of all debt to the state, the notes were not bills of credit. Id.

From Briscoe, we can derive the general rule that an instrument is not a pledge of a state’s faith if there exists some fund which is legally distinct from the state, which has any source of income independent of the state, and which holders of the instrument can sue to redeem the notes. To conform to the requirements of Briscoe, the City, through statute, will establish a permanent, charitable trust called the Austin Credit Trust whose stated purpose is to aid in the economic development of the City of Austin by redeeming Austin Credits for U.S. Dollars forty years after the date of their issuance. In Texas, under Brazos County Appraisal Dist. v. Bryan-College Station Reg’l Ass’n of Realtors, 419 S.W.3d 462 465, “providing services to aid in economic development for a local community” is that a valid purpose for a charitable trust. The trustee will not be authorized to make payments to the City. The terms of the trust will also state that holders of Austin Credit are persons with a special interest in the enforcement of the charitable trust and will have the right to bring suit to enforce the trust by redeeming the notes. The City, in a separate statute, will be required to place money in the trust every year, but, the trustee will be directed to invest the money in the trust in U.S. Treasury Bonds, so that the trust will have its own stream of income, independent of the City. Because the trust will be a separate legal entity with its own stream of income from investments which cannot be sued and from which the City cannot withdraw funds, the Austin Credit will not be a pledge of the faith of the City of Austin. Instead, it will be a pledge of the faith of the Austin Credit Trust.

We now turn to part (c) of the definition, which requires that an alleged bill of credit be designed to circulate as money. The case preceding Briscoe, Craig v. Missouri, 29 U.S. 4 Pet. 410, 432 (1830), which Briscoe relied upon without overruling, explained that an instrument which circulates as money is one which is “intended to circulate between individuals, and between government and individuals, for the ordinary purposes of society” (emphasis added). Additionally, a later case, Houston & Texas Central Railroad. Company. v. Texas, 177 U.S. 66, 89 (1900), holding that a warrant issued by the state of Texas was not designed to circulate as money, relied partially on the fact that “when the warrants once came back to the treasurer of the state, they were not to be reissued.” From these two cases, we can derive the general rule that an instrument cannot be described as intending to circulate as money if there is no circulation between government and individuals because the instrument is redeemed without being reissued. Austin Credits will be extinguished once used for payment, therefore they cannot be reissued and will consequently not circulate between government and individuals. Thus, Austin Credits are not designed to circulate as money.

Because the Austin Credit will neither be a pledge of the city’s faith nor designed to circulate as money in the specific context of the constitutional prohibition on bills of credit, the Austin Credit will not violate the United States Constitution. Requiring the existence of a separate fund which will pay out in dollars will require the Austin Credit Trust to have some dollars on hand, but this will not eliminate spending flexibility for two reasons. First, Austin Credits are designed with various incentives to save them built-in. Second, the City could make the face value of AC significantly below the purchase price for AC. For example, the City could sell AC for $1 that had a cash redemption value of $0.05 while still accepting AC at $1.05 when tendered in payment of City Bills. Because they would be accepted by the City at the $1.05 price in payment of City Bills, AC would trade with a fair market value much higher than $0.05, but the chance of a cash-run on AC would be virtually eliminated.

State Constitutional Issues

The City of Austin is a “home rule” city, meaning it is authorized by the State of Texas to do anything which Texas law does not prevent it from doing. Because Austin Credits will carry some legal obligation by the state, they will be classified as “public securities,” which are defined by Texas Government Code § 1201.002 as “an instrument, including a bond, certificate, note, or other type of obligation authorized to be issued by an issuer under a statute, a municipal home-rule charter, or the constitution of this state.” Because they are public securities, Austin Credits must conform to the requirements of the Texas Government Code.

There are certain types of public security which the Texas Government Code authorizes all local governments–even ones that do not have home rule powers– to issue, under certain limitations. For example, Section 1431.002 of the Texas Government Code authorizes municipalities to issue anticipation notes. However, this statute places restrictions on anticipation notes that make it not the best means of issuing the Austin Credit. Fortunately, because Austin is a home-rule city, it does not have to rely on Section 1431.002’s anticipation note authorization. Instead, it can rely on Section 1201.002’s authorization to grant an instrument authorized under a municipal home-rule charter. Article I, Section 3 of the Austin City Charter is incredibly broad and grants it the ability to “pass ordinances and enact such regulations as may be expedient for the maintenance of the good government, order, and peace of the city and the welfare, health, morals, comfort, safety, and convenience of its inhabitants.” The Austin City Charter regulates the issuance of bonds, but nothing within it governs the issuance of notes, so there are no city-level prohibitions on the Austin Credit in the Austin City Charter. If there were, the charter would need to be amended by a majority vote before the Austin Credit program could be established.

At the Texas State level, the relevant statute is Texas Government Code § 1202.003, which requires the issuer of a public security to submit a proposal to the Texas Attorney General, who must confirm that the public security was issued in conformity with the law before it can be issued. Many of the legal requirements surrounding public securities govern the calculation of interest. However, since Austin Credits will not pay interest, these regulations are inapplicable. The one that is applicable is Texas Government Code § 1202.021, which requires that the public security authorization designate a registrar who will keep records of the public security. This statute states that “a home-rule municipality with a population of more than 100,000” can be the registrar of its own security, so this will not be an issue. The City merely has to designate itself as registrar for the Austin Credit.

Texas State Law grants immense discretion as to the terms of a public security. Tex. Gov’t Code § 1201.021 and 1201.022 read as follows:

§ 1201.021

“A public security may:

(1) be issued in any denomination;

(2) bear no interest or bear interest at one or more specified rates;

(3) be issued with one or more interest coupons or without a coupon;

(4) be issued as redeemable before maturity at one or more specified times; and

(5) be payable:

(A) at one or more times;

(B) in installments or a specified amount or amounts;

(C) at a specified place or places;

(D) under specified terms; and

(E) in a specified form or manner.

§ 1201.022

(a) A public security may be:

(1) issued singly or in a series;

(2) made payable in a specified amount or amounts or installments to:

(A) the bearer;

(B) a registered or named person;

(C) the order of a registered or named person; or

(D) a successor or assign of a registered or named person;

(3) issued to be sold:

(A) at a public or private sale; and

(B) under the terms determined by the governing body of the issuer to be in the issuer’s best interests; and

(4) issued with other specified characteristics, on additional specified terms, or in a specified manner.

(b) The governing body of a county or municipality that issues bonds that are to be paid from ad valorem taxes may provide that the bonds are to mature serially over a specified number of years, not to exceed 40.”

These sections grant a great deal of flexibility to the issuer of a public security. Particularly, the fact that public securities may be payable under specified terms and in a specified form or manner necessarily means that the city can limit their redemption to credits against City Bills. This section also implies that a public security must have some maturity period and redemption, which out of an abundance of caution, we interpret to mean that there must be some way for holders of the public security to get cash, but there is no maximum statutory maturity period that applies to all forms of public security. At the longer end, maturity dates for bonds tend to be 40 years, which is why 40 years is the period at which Austin Credits may be redeemed for cash from the Austin Credit Trust. Although the Austin Credit is not a bond, the 40 year maturity provides a failsafe in the event that the Texas Attorney General does decide that Austin Credits are a type of bond secured by the ad valorem taxes of the municipality. However, because Austin Credits are ultimately payable from the Austin Credit Trust, it’s not clear that the regulations surrounding bonds apply. Most likely, because Austin Credits are not direct promises by the City to pay money, they are public securities which do not fall into any statutorily defined subcategory, but the 40-year maturity is intended as a show of good faith that should bring them into general compliance without causing them to be restricted by provisions which are more specific to certain types of public security. In the worst-case scenario, we would use the authorization to issue Anticipation Notes. However, since Austin Credits would be used for general operating expenses, under Tex. Gov’t Code § 1431.009, they would need to mature within one year of receiving approval by the Texas Attorney General. This would limit flexibility, but would not be fatal. As described in the section above, dealing with Federal Constitutional issues, Austin Credits are designed with various incentives to save them built-in, and the City could make the cash redemption value of AC significantly the City Bill redemption value. For example, people could buy 1 AC for $1, but the cash value would be $0.05, although the City would accept them at $1.05 when people paid their City Bills. This would effectively make them anticipation notes with a negative 95% base interest rate and a conditional 5% interest rate; the relevant statutes only define a maximum interest rate, not a minimum one. Because they would be accepted by the City at the $1.05 price in payment of City Bills, AC would trade with a fair market value higher than $0.05, but neither the City nor the Austin Credit Trust would ever need to worry about a cash run on AC, and the AC would qualify under the anticipation note provision.

Monetary Austerity as Social Conflict

By David M. Fields

Monetary austerity, like fiscal austerity, is a top-down offensive. A monetary assault on working people is being waged in the name of fighting inflation. In similar fashion to the demagoguery that surrounds government expenditure cuts that lead to significant losses in social provisioning, a political climate of inflation hysteria has engulfed the US Federal Reserve, engendering a reactionary policy stance of protecting the wealthy at the social cost of maintaining a precarious working class.

The Fed has concluded that inflation is now its biggest challenge, but admits having no control over the actual factors underlying the current inflationary surge. Nonetheless, it defends raising interest rates as necessary “preemptive strike” to excessive price distortion, whereby severe “market imperfections” in the long run could undermine the dual mandate of price stability and maximum sustainable employment. In central bank jargon, such so-called forward-looking acumen conveys the message that anchoring inflationary expectations is the primary means to ensure market confidence or “credibility” for effective macroeconomic balancing.

The notion of an independent and knowledgeable technocratic Fed constitutes naïve faith. Monetary policy choices support some interests over–even against–others. So, contrary to what we are told, contractionary monetary policy is NOT a conventional tool to soothe market confidence in light of unpredictable inflationary expectations; it is an embodiment of social conflict, a coordinated attack on the working class to protect and maintain profit extraction. Raising interest rates, thus, is not “sound” policy in the truest sense of the term; it reduces consumer spending and economic activity at the behest of the rentier to insulate this social group from any possible unsavory transgression that may arise from economic uncertainty.

I am sure this seems like heresy to many, but let me try to convince you. The economy, as determined by the need to expand output depends on banking; the capacity for firms to purchase necessary amounts of labor and material inputs necessary for satisfying expectations of profit and for workers to receive wages is assigned by the availability of credit. Without banking, economic growth comes to a halt, since business investment expenditures stem from the need to borrow in excess of any pre-existing amount of financial resources. Credit provides deferred payment, which allows firms to manage sales, and, thus, facilitate long-run operational expansion. If there is a restriction on credit, as a matter of course, any attempts for increased production are futile.

Credit allows firms to pay out money for materials and wages to keep production and distribution going in advance of receiving profits from expected sales of goods. The implication is that firms will have to deduct interest payments from profits, which will be relegated to the banking sector. The cost of available credit from the banking sector is set by the rate of interest, which is determined by the Fed; this, by definition, determines the parameters of firm profit. A high rate of interest, for instance, would induce firms to forgo productive investment because access to credit is expensive. This would encourage firms to suppress wages, e.g. layoffs, which triggers recessionary pressures resulting from decreased production — this raises the level of unemployment, which is antithetical to working-class interests.

The decision by the Federal Reserve to raise interest rates by the largest percentage point since 1994 is, therefore, quite treacherous for working people. US Economic growth is well below full employment. The economy confronts headwinds from developments that constitute cost-push-markup inflationary processes, so we are not seeing the manifestations of so-called demand-pull inflation, that is, too much money chasing too goods, or too much wage growth, resulting from an overheating economy or overspending for which monetary austerity is requisite. There is an economically destructive rationale at play, wherein interest rates are hiked to the point that they depress wages to compensate for causes outside of the direct reach of the Federal Reserve, to put a stop to workers from taking advantage of unique historically-specific social circumstances to effectively bargain for receiving their fair share.

***This post is heavily drawn from my entry on ‘Credit Money” in the soon to be published Encyclopedia of Post-Keynesian Economics, edited by Loui-Phillipe Rochon and Sergio Rossi, see here.***

***Republished from the Monetary Policy Institute Blog***