(Note —the author is a financial markets veteran, a CPA, and a reformed owner of a degree in economics. His free book on our bad monetary system, how it drives inequality, and how to fix it can be downloaded at https://gumroad.com/l/iIZJM.)

The coronavirus pandemic has laid bare the flimsy nature of our system of money and finance, which has always existed. (We only seem to think about this stuff when times are bad and it’s an emergency, don’t we? Strange how that works…)

Right now, people don’t know if they’ll be receiving paychecks, meaning they also don’t know if they’ll be able to pay rent, or if they even should HAVE to pay it considering the extraordinary circumstances. People who require constant medical care or related therapies aren’t sure if they’ll be able to afford it for the next few months. Healthcare workers (of which doctors are only a small percentage) aren’t sure if they’ll be able to afford adequate childcare with someone they trust. The result is a sudden and debilitating economic anxiety.

This is a true national emergency, folks. In such a time, Congress must act.

Or rather, it seems we must force them to act. It’s why I’m asking everyone to #UBIYOURREP in Congress as soon as possible, or whatever other hashtag that works. (Or do we seriously trust them to get it right on their own?) This strange time of social isolation creates a unique opportunity for us all to put forth just a little bit of effort to create massive beneficial change. So let’s try it. I’m here to make clear all of the key economic and monetary theory behind a Universal Basic Income (UBI) for the layperson.

Calls for a UBI on a temporary basis have actually been numerous, already. Rep. Tulsi Gabbard introduced a bill, H.R. 897, to give all adult Americans $1,000 per month until the crisis subsides. Rep. Alexandria Ocasio-Cortez also spoke in support of the concept, too, as did Ilhan Omar. Lest you think this is purely partisan, even Mitt Romney suggested giving everyone $1,000. This isn’t a partisan issue, nor is it socialism as I’ll show you.

Andrew Yang obviously has been on top of this idea for a while, as well, approaching it from an automation of labor standpoint. While the automation angle and its effects are very real, I’d argue the UBI idea goes beyond that, too. We don’t necessarily need to fund a UBI with a value added tax (VAT) as he recommends, either. On the contrary, there are important monetary reasons for why we need a UBI ASAP during this crisis, and we can issue it without increasing taxes. Let’s use the basic facts of money as a starting point:

Basic Monetary Facts

There are 2 types of money in any economy:

1) Legal Money, which is created by a government/central bank

2) Privately created credit, created by private financial institutions, that functions like money, but ONLY when there’s confidence in the issuer

The interesting thing about #1 (physical US currency or digital credit created by the Government or the Fed) is that it will ALWAYS exist, because the government always exists.

The interesting thing about #2, private credit, is that it can function JUST LIKE legal money in our economy if there’s confidence in the issuer. When you pay for something with a debit card, or other electronic transfer, you’re paying in private bank credit, not US dollars created by the Government/central bank. Most transactions in the economy work this way. It actually makes up a majority of the “money supply” of US Dollars out there, even though it’s just private financial credit denominated in Dollars. They create more credits (claims on their wealth) than the actual amount of “legal money” they have to make good on those claims. That’s why it’s called a “fractional reserve” system. It allows private finance to create and destroy US-dollar based purchasing power on their own, even though the US Dollar is a legal concept and something of social value.

It sounds strange, but it’s true. The supply of money is purely up to the haphazard lending decisions of private, for-profit financial institutions. When they loan, we grow. Otherwise, we don’t. It works…until it doesn’t and there’s a crash.

It’s monetary anarchy.

Also, the banks charge interest on all of it, which is why high finance is perhaps the most lucrative profession that exists. There is significant arbitrary special privilege in the ability to create US Dollars out of thin air and charge interest on it.

We Need To Move Away From an Economy Based on Increasing Financial Leverage

So, in the midst of this pandemic, our financial markets are now tanking. Everyone wants cash (legal money,) not private credit. This is causing a sharp reduction in lending and credit creation in our financial sector. This credit, again, IS privately created money.

It means the majority of the effective “money supply” is basically disappearing. It’s the sad reality of any system in which there are 10 private claims to every unit of legal money. The downturns are extremely violent. It’s just math.

Lauchlin Currie, a Harvard PhD Economist at the US Treasury, wrote in 1934 of this system: “instead of operating as a maladjustment-compensating factor, it has, for the most part, operated as a maladjustment-intensifying factor.” What he means is that at the time we most need money, most of our effective “money” (really just private credit) vanishes.

This is why we seem to have a bad financial crisis every 10 years or so. Crisis is inevitable in a fractional reserve system where there is always too much debt compared to the amount of legal money available to settle all of those debts. Milton Friedman called it a system of “inherent instability.”

We have an economy that relies on constantly increasing financial debt for growth. It was true before 2008, and it’s been true after 2008. The ratio of private credit to actual, legal money created by the government/central bank is simply too high. If we had less private debt in our economy, and more money created by the government/central bank, which can never disappear, even in a time of crisis, we’d probably have more stability, and would be able to weather a crisis much better.

The Good News

Here’s the good part, though, and the part that might help us in this pandemic: All this risky, fragile private credit doesn’t NEED to exist. The problems of today have already been solved by economic theory, they just haven’t been implemented because they would remove an arbitrary special privilege of the financial sector, which makes the most political donations. The only reason privately created money dominates our economy is because the US Government (or the Fed) hasn’t created enough actual, legal US Dollars on its own, in the form of physical US currency or digital credits with the Treasury/central bank that can generally circulate. Congress never will do it on its own, either, until we the people force them to, because they like donations.

The Constitution says Congress can create money, and the US dollar and its value are legally the domains of Congress, but Congress fails to exercise its duty, leaving it up to Wall Street’s risky credit. In this case, we reap what we sow. The result is inequality and the instability that is currently ravaging the world, with perpetual bailouts.

However, the coronavirus crises actually offers us a novel way to improve the error of our ways and create an economy with a more sensible ratio of “legal money” to un-backed private credit. Here’s the monetary angle of the UBI argument:

Why UBI Makes Sense

In economics, there is this equation called MV=PQ. It’s a very useful equation for understanding the general trends of the financial system and economy.

M x V = P x Q. Let’s break it down:

M = The supply of Dollars out there (which, again, is mostly private credit)

V = The “velocity of money,” which measures how many transactions a newly created dollar will lead to in a year (V is lowering quickly as confidence in the economy disappears and people go out and spend less)

P= The total prices of all goods/services in the economy

Q= The total quantity of goods/services sold in the economy

Basically, the supply of money times the amount of times it’s flipped equals total economic output.

So, knowing these variables, let’s analyze what’s happening right now:

The supply of money (M) is decreasing rapidly since private lending is being curtailed, including in the important overnight funding markets that the global economy relies on to function. (Much of it is foreign dollar-denominated private credit, which is called the “Eurodollar” market. It’s the world’s true reserve currency.)

Also, money velocity (V) is decreasing as people are hunkering down for economic anxiety.

As a result of both M and V decreasing by significant magnitude, the P*Q component must decrease as well to balance the equation, and significantly also. It’s enough to tip the whole house of cards that is the fractional reserve monetary system over, creating a contagious, all-out crash. Again, this is the reality of a system based on leverage. This is why the stock market is crashing.

It’s time we stopped relying on constantly increasing financial debt (AKA leverage) for growth. Financial leverage tends to benefit mainly the top 10-15% in wealth in the economy, and thus it just worsens an already-bad inequality problem. We need to find new ways to introduce new money into the economy and generate growth that don’t involve pumping up financial leverage bubbles. After all, since money is a legal creature, the domain of Congress, don’t ALL people in the US have a claim to the benefits of money creation, not just the financial industry?

Enter UBI.

UBI, issued essentially as an equal dividend to all, is the most just way to distribute the financial benefits of creating new US Dollars. Instead of new money being tied to debt to a private bank, it can instead be what IMF economists Jaromir Benes and Michael Kumhof called in a 2012 paper “equity in the commonwealth.” It will ALWAYS be money, even in a financial crisis, promoting stability to shocks, and it will tackle inequality by spreading the benefits of money creation. As shareholders in country, we all have one vote, and therefore we should all participate in benefits of new emissions of purchasing power.

This is not socialism, folks. There’s a difference between wealth and money. Wealth is private, but money (the US Dollar unit of account) is legally the domain of the Government. In fact, legendary Yale economist Irving Fisher even viewed a “100% reserves” system, where nobody can lend beyond their invested capital and all US dollar creation originates with the Government responsible for the currency, as necessary to preserve capitalism in the long-run. This is because the stability it brought would help prevent reactionary movements such as communism. This was the argument of the 1930s “Chicago Plan” economists, led by Henry C. Simons and Irving Fisher. Unfortunately, World War II put their ideas on the backburner where they were forgotten until recently.

But What About Inflation?

This is often a concern about UBI, and government-issued money in general. Inflation. And I agree, we should be vigilant about it.

So let the math guide us: M * V=P * Q.

In a panic such as our current one, M is decreasing. The money issued by a UBI would fill the gap by giving M a much-needed boost. It would soften the blow considerably, and help support V as well. As a result, Prices and Quantities would not decrease so much, and people would be able to afford basic services during the crisis in an orderly fashion. In addition, people would feel less anxious about following public health guidelines, even if it threatens their paycheck.

In short, it wouldn’t create inflation, especially if only temporary. Instead, it would work to save us from a total crash!

If inflation eventually became a problem, we could solve that rather easily by raising reserve requirements on banks to an adequate level to accommodate for the higher ratio of “legal money.” This would cap the amount of privately created money in the system, putting the ratio of legal money to private money in a much healthier balance.

Another good thing about UBI is it puts the decisions in the hands of individuals everywhere, not just Congress. It respects people’s freedom of choice, which would seem to promote capitalism as opposed to spending by corruptible politicians or corporatist bailouts.

So how do we make it happen? Well, it just so happens millions of Americans just got some free time:

Change Can Only Come From US DEMANDING IT.

Call your rep and demand they co-sponsor H.R. 897 or something like it. Contact your family and friends and ask them to call, too. We need to take advantage of this period of social isolation. We can’t rely on the existing political parties to figure this out. Congress and the President will leave people out to dry. This has to be a bi-partisan effort at the grassroots based in direct democracy.

Whether #UBIYOURREP is the vehicle for it or something else, let’s make it happen. Do it for the family in your neighborhood whose lives may be under threat from this economic anxiety.