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Whenever I say that we should print money to improve the economy, people immediately ask whether I want to cause hyperinflation or say that it is madness. But I do not think so. I am not a Keynesian and therefore differ somewhat in my view from Professor Haruki Niwa of the Kwansei Gakuin University Graduate School, but I think his argument is very helpful. So, first, let us review Professor Niwa’s article, “If There Is No Money, Print It,” in the May 1998 issue of Shokun!.

The claim that “money for economic stimulus comes from the printing press” is not new. For example, the first chapter of Lerner’s Economics of Employment must have said: “Where does the money for government spending to stimulate the economy come from? It should come from the printing press! (omitted) It does not come from taxes or government bonds. Taxes and government bonds are merely means of adjusting total expenditure (aggregate demand).” As a prescription for the current economic situation, the most basic teaching of Keynesian economics is to issue government notes and use them as the funding source for large-scale fiscal stimulus; this is the only effective policy currently available.

Some people may feel that issuing new notes in addition to Bank of Japan notes is tantamount to making “counterfeit money,” but in a monetary economy all money is essentially nothing more than an object endowed with credit. In the first place, coins are not issued by the Bank of Japan; they are government currency issued by the government.

The reason a large issuance of government notes would not cause hyperinflation is that those notes are backed by the spare productive capacity of the economy as a whole—the deflationary gap. In Japan today, compared with the end of the high-growth era, corporate capital equipment has increased to about 6 and a half times its former level, while GDP is only about 2 and a half times as large and industrial production is only about double, leaving a considerable amount of capital equipment idle. The same is true of labor: not only has unemployment risen, but when reduced overtime and in-company unemployment are included, a considerable amount of labor can be said to be idle. Even conservatively, this deflationary gap amounts to 30 to 40% of GDP. In other words, an enormous potential annual GDP of 200 to ¥300 trillion is being needlessly lost without being realized. As long as a deflationary gap exists, demand-pull inflation will not occur. If any inflation were to occur, it would be cost-push inflation, but there are currently no such signs worldwide. Therefore, issuing government notes within the scope of the deflationary gap would not cause inflation.

Historically, the issuance of government notes was also carried out in Japan, and there is an example in which it saved public finances and the national economy. It was the issuance of the Dajokan-satsu, later the Ministry of Civil Affairs notes, carried out on the advice of Kosei Yuri at the time of the Meiji Restoration. Japan at the time of the Restoration had a deflationary gap. The government therefore issued government notes and steadily made government expenditures for modernization, succeeding in building a rich country and a strong military. It is noteworthy that no inflation occurred in the meantime, through Meiji 10. Incidentally, opponents of issuing government notes commonly point out that the Matsukata Deflation was necessary to deal with inflation after the Satsuma Rebellion. In fact, however, it is clear that the Matsukata Deflation was unnecessary, because inflation had already subsided during the earlier period when Shigenobu Okuma was finance minister.

Another similar example is the so-called Takahashi fiscal policy. Newly issued government bonds were taken up directly by the Bank of Japan, and the resulting funds were used for a major domestic-demand expansion policy. This was not the issuance of government notes, but it was a very similar policy.

Issuing government notes has another benefit: it does not cause the crowding-out effect or the Mundell-Fleming effect. These effects can also be prevented by having the Bank of Japan directly take up government bonds, or by having it purchase government bonds absorbed by the market and provide payment through purchase operations. With government notes, however, there is no such concern in the first place.

If the government issues bonds and exchanges them with the private sector, it must eventually pay interest and repay principal. Government notes, however, require neither repayment nor interest payments. Issuing government notes backed by an annual deflationary gap of ¥300 trillion is truly a magic mallet.

Next is how to use this magic mallet. Japan could spend the money on still-inadequate social infrastructure and social security, but there is no time now to formulate such a plan, nor is there any guarantee that such a plan would be efficient. The orthodox approach here is to leave it to the market: namely, give each individual ¥400,000 as a lump sum. This may cause some market failures, but there would be far fewer mismatches than under an arbitrary plan. The basis for ¥400,000 is that, assuming a multiplier effect of about 2.5 times, the expansion effect would be ¥100 trillion, which would fit well within the deflationary gap. This economic expansion would dramatically increase government revenue, and public finances would comfortably move into surplus.

That is roughly Professor Niwa’s argument. He also writes about how to prevent yen appreciation. That is quite interesting too, so I will summarize it sometime.

I also suspect that a shortage of money may be occurring, but I do not have time now to gather the statistical materials. Setting that aside for the moment, Professor Niwa’s argument alone seems sufficient reason to issue government notes. It is probably impossible under the current law, but if that is the case, the law should be amended quickly and the policy implemented; otherwise, we will truly end up in a great depression!

1998.9.7 (Natsuhiko Sakimura)

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