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Climbing Out of Recession, Helicopter Money and Full Reserve Banking

February 14, 2013

This is a reaction to to the paper by Paul McCulley and Zoltan Pozsar entitled, ‘Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation’, found at,

The authors describe the situation facing fiscal and monetary authorities in a situation of private sector deleveraging (i.e. recession or near recession). Base interest rates have been reduced as far as possible; Quantitative Easing (QE) has been tried (several times) with questionable results. Something else is needed. QE involves the central bank issuing new money to purchase bonds (mainly from commercial banks). The main objective has not been to help banks with liquidity but to drive up the price of bonds; hence pushing down the yield and reducing the price of credit. This is not costless to the Treasury because when things get better and the central bank starts selling the bonds, the price will fall and the central bank will make a loss. As (in Britain at least) the central bank is owned by the government, this flows through as reduced dividends. This might seem a small price to pay if the result was to get the economy going, but in Britain at least, this is not happening.

The authors argue that this is because although QE can reduce the price of credit, it cannot increase demand for credit, and the private sector is on balance saving; there is a lack of willing borrowers. Therefore some fiscal stimulus is required. But fiscal stimulus on its own is politically difficult, it implies greater deficits leading to the danger of high interest rates and higher taxes later. Therefore the authors conclude that there must be fiscal monetary co-operation in the form of fiscal stimulus funded by new money – ‘helicopter money’.

How can ‘helicopter money’ be provided in a way that there is no direct cost to the public purse? There are two ways. The first is for the treasury to issue money by fiat, just as the US treasury issued ‘Greenbacks’ during the American Civil War; the authors do not consider this possibility. Instead they envisage the central bank would issue money to government in exchange for a non transferable loan. As they point out there is no point in a central bank charging interest on such a loan because it would come back to the treasury in the form of profits.

What is the downside? Some claim that it would lead to high inflation; others including Bernanke argue that this is not a danger in a recession.

So much for the theory; what is the practice? Some would argue that there is unsatisfied demand for credit in the UK; businesses cannot borrow. That seems to be true for SMEs but that is partly because the big banks cannot be bothered to build relationships with them. The answer to this is more competition and local banks, but lack of demand for credit is probably the main problem. Houses are not selling; people are drawing in their horns; and the government’s claims that more real jobs are being created is at best tendentious. But has ‘helicopter money’ been tried? Yes it has; in 2008 the Australian government acted decisively on the advice of Treasury Secretary Ken Henry – “Go early, Go hard, Go households” ( According to Prof. Steve Keen of the University of Western Sydney, $960 was sent to every Australian over 18 who had a tax return for the previous year. Keen commented, “Though many other factors differentiate these two countries—notably Australia’s position as a commodity producing supplier to China—the outcomes on unemployment imply that the Australian measures more successful than the American “money multiplier” approach.”

Of course any government in receipt of ‘helicopter money’ has options other than handouts to tax payers; for example, support for infrastructure projects, including green technologies. These also should stimulate demand.

But when demand is restored won’t the ‘helicopter money’ cause runaway inflation? It need not if monetary policy works. At present the main instrument of monetary policy in a leveraging environment is interest rates. Those who are fearful of runaway inflation forget that 97% of our money has been created by commercial banks in the act of extending a loan. Banks have not used this power responsibly; they could be prevented from doing so, thus making them the financial intermediaries that most people assume they are. Money creation could be left to the central bank.

The way this would work is that current (chequeing) accounts, which are currently on commercial banks’ balance sheets would be transferred to the central bank’s balance sheet, but would be operated by the commercial banks. That way transaction money flows always involve money moving from one central bank account to another and only the central bank could create or destroy money. This is Full Reserve banking British style. It has many other benefits, see:


And the downside? Investment banks would not make so much profit, but does this matter except to their shareholders? What do they contribute to the economy? Has the treasury looked at this?

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