Nationalized Banking and a Basic Income or Social Dividend

In the previous post, it was argued that there is good reason for unearned income of landlords, rentiers and capitalists to be redistributed at least partially to all citizens. In this post, I want to consider briefly the way in which the establishment of a nationalized bank could facilitate such a policy. The political viability of this institutional change no doubt varies from country to country, but does not seem out of the question. In Australia, for instance, where strongly neoliberal policies are pursued, there is some survey evidence indicating that a strong majority of voters would be in favor of the establishment of a government-owned bank and that less than a quarter would oppose such a move.

Consider the following straightforward governmental and monetary setup, which obviously differs in some respects from the current one:

  • The central bank lends at zero interest directly to Treasury for the conduct of fiscal policy / Alternatively, and equivalently, the central bank is disbanded and the Treasury simply spends and taxes through direct crediting and debiting of bank accounts.
  • Reserves mount or deplete in response to net spending.
  • The central bank or Treasury sets the interest rate on reserves, preferably to zero.
  • Government, as now, sets the regulatory framework and incentive structure for private enterprise.
  • A nationalized bank is established to grant: (a) interest-free loans for democratically approved purposes; and (b) loans strictly for productive purposes to private enterprise at positive interest above the rate on reserves after deliberation by an independent but democratically appointed loans-assessment board.

Here, I will focus only on the scope the establishment of a nationalized bank opens up for meeting various social objectives.

As stated, the nationalized bank could extend both interest-free loans for democratically approved purposes and positive-interest loans for commercial purposes. Approved purposes of interest-free loans might include not-for-profit production of public infrastructure, small business activity meeting specified conditions and mortgages for low-cost housing. Positive-interest lending to for-profit enterprises would be evaluated by the assessment board along commercial lines, necessarily taking into account the incentive structure put in place by the democratically elected government.

A benefit of this setup would be that the interest paid on loans extended by the nationalized bank would be turned over to the Treasury (extinguished) rather than being captured by financial rentiers as is presently the case. The interest charge would therefore function as a tax. This would be in addition to taxes on profit, since enterprises already pay both interest and taxes on profit. The only difference is that the interest component, like the taxed-profit component, would both be captured by the Treasury.

If desired, this tax could then be at least partially offset by a cash transfer to citizens as a social dividend or basic income. In this way, society as a whole would share in income that would otherwise have been extracted by rentiers for no other reason than that they already have a lot of financial wealth.

Since interest is not a payment for productive activity, but a transfer (see the previous post), it makes sense that the community would share equally in any transfer that was designed partly to offset the interest payments of corporations captured by the Treasury. To the extent positive interest was paid on reserves, or private banking continued to play a role, this equality would not be achieved with respect to all interest income, but at least it would apply to interest paid to the nationalized bank. Taxing interest on reserves and private forms of interest would enable these forms of interest income also to be factored in to the equal transfer to all citizens. This approach would be similar to associating a social dividend or basic income with the economic rents from natural-resource exploitation except that it would not create adverse incentives toward environmental degradation.

Tying a basic income or social dividend partly or wholly to interest receipts of the nationalized bank and taxes on profit and land would also be a partial safeguard against cronyism, since citizens, and therefore democratically accountable governments, would have a stake in seeing that loans to for-profit enterprises were going to the most viable projects. This would exert discipline on the loan-assessment process, enhancing the probability that loans would be extended to enterprises most likely to meet their debt obligations and generate taxable income.

At the same time, the monetarily sovereign government, being responsible for sound macroeconomic management, would be disciplined by the same community expectations of an enhanced basic income or social dividend to deliver strong demand conditions that gave private enterprises every chance to meet their interest obligations to the nationalized bank and, for given tax rates, maximized tax credits extinguished by the Treasury.

Similar considerations apply to housing. Low-cost housing could be provided free of charge through the Treasury’s fiscal policy or at interest-free loans administered by the nationalized bank on payment schedules reflecting the income of the loan recipient. Housing at a price above some threshold level could be purchased on loans at positive rates of interest granted by the nationalized bank.

The amount paid in interest on housing loans would function as a tax, just as with loans to for-profit private enterprise, and could be factored in to the calculation of the social dividend or basic income paid to citizens.

4 thoughts on “Nationalized Banking and a Basic Income or Social Dividend

  1. You/re way ahead of me. With all the recent fines and lawsuits, I’ve been grappling with the current system, and I can’t see a way to stop banks from mutating in ways that aren’t destructive. Without at least some form of nationalization.

  2. You make the central bank the main stakeholder in the commercial banks – as Minsky and Wray have written about extensively.

    And you do that by allowing them to run an unlimited overdraft at the central bank and regulating those who wish to use that particular carrot.

    That way you get the effect of a nationalised bank without all the control structure issues you get with centralised planning – because the central authority becomes the biggest creditor and can therefore dictate terms.

    I wrote about it here: http://www.3spoken.co.uk/2013/05/making-banks-work.html

    There are issues with the approach over complete ownership – as the bail out of the commercial banks recently have shown. There the governments have put vast sums of money into the banks but have refused to yank chains to get the banks into line. And that’s because they believe that commercial managers must know better.

  3. You should look up “The Chicago Plan Revisited” by Michael Kumhof of the IMF, I’d like to know your thoughts on it.

    It’s a variation on a full-reserve banking system that separates monetary and credit functions of the banking system. I don’t know how to explain it simply, but end results are elimination of national debt (and much private debt), elimination of boom-bust cycles, and very little effect on inflation.

    It was first proposed by theorists after the great depression, and in wake of the ’08 recession, Kumholf and colleagues at the IMF ran it through modern modelling techniques to determine that it would produce the above benefits and more.

    If you google it, he has several presentations on it on YouTube, and you can find the original paper as well as a few news articles.

  4. Ryan,
    Thanks for the reference to Kumhof’s “Chicago Plan Revisted”. Kumhof has it exactly right, because his work is based on the work of the truly scientific economists. The fact that Frederick Soddy supported the original Chicago Plan is the clincher, and perhaps I can return the favor by suggesting that you read his _Wealth, Virtual Wealth & Debt_ which was subtitled, “The Solution to the Economic Paradox”. Kumhof’s updating of the monetary solution of the Chicago Plan is brilliant, and it may be able to gather some political momentum, as it seems the American Monetary Institute backs him now. This is a far more sensible solution than the strategy of nationalizing banks, which relies on all sorts of “socialized” decision-making to determine who get what benefits. The Chicago Plan implements through the U.S. Treasury what is in effect a simple, scientific algorithm for managing the economy in way that cannot be manipulated by political factions. My complaint is that the Chicago Plan Revisted, while ending the corruption resulting from the ability of private banks to manipulate the economy through the creation of money, still fails to address the crucial problem of the relationship of employment to income in the automated world of the 21st century. This can easily be solved along the lines suggested by Milton Friedman, which has evolved into the universal, unconditional basic income guarantee (BIG). The idea is catching fire in Europe, especially since the Swiss passed a referendum demanding that the government conduct a vote on establishing a basic income guaranteed at a decent level. Coupled with Kumhof’s Chicago Plan, we could find the world transformed by 2015 if the new ideas could be adopted by Americans through the 28th Amendment to the Constitution.

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