Currency Sovereignty and the Possibility of Full Employment

Paper presented in Argentina at the 6to. Congres o Nacional de Estudios del Trabajo, La Asociacioacute;n de Especialistas en Estudios del Trabajo, 14 August 2003. Orthodox theory makes a fine distinction between fiscal and monetary policy. Monetary policy has to do with controlling the private creation of money through control over the quantity of bank reserves emitted. Fiscal policy has to do with government spending and taxing, and, if tax revenues prove insufficient, with quot;financingquot; government spending through borrowing. Both theory and policy reject with horror the possibility that fiscal and monetary operations might be combined for example, through government quot;financequot; of its spending by quot;printing moneyquot;. For this reason, central bank quot;independencequot; is maintained, to a greater or lesser degree, to prevent the hyperinflation that would surely result from confusion of fiscal and monetary policy operations.I argue that this orthodox view is useless for analyzing the operations of a nation operating with a quot;sovereign currencyquot; a nonconvertible, floating currency that is accepted by the government issuer in payment of taxes and other liabilities due the government and where the government issuer is able to impose tax liabilities that are denominated in the same currency. When Argentina operated with a currency board, it did not have a sovereign currency. Today it does. Orthodox theory may well have been useful for analyzing Argentina before it abandoned the currency board, but it is no longer useful. Unfortunately, economists and politicians are so accustomed to thinking of the operation of non-sovereign currencies (say, the gold standard) that they have great difficulty in understanding the economic possibilities of nations that operate with sovereign currencies. Any country with a sovereign currency can afford an ELR program with which it will achieve full employment. It is in this sense that I argue that a sovereign currency is a pre-requisite to ELR. This paper describes operation of fiscal policy in a nation with a sovereign currency, analyzes the monetary policy in such a nation, and concludes with some balance sheets to demonstrate the main points