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Abba Lerner (1943): "Functional Finance"


Abba Lerner (1943): "Functional Finance":

The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes….

In applying this first law of Functional Finance, the government may find itself collecting more in taxes than it is spending, or spending more than it collects…. [In] the latter case it would have to provide the difference by borrowing or printing money. In neither case should the government feel that there is anything especially good or bad about this result….

An interesting, and to many a shocking, corollary is that taxing is never to be undertaken merely because the government needs to make money payments…. Taxation should therefore be imposed only when it is desirable the taxpayers shall have less money to spend… [to avoid] inflation….

[The] government should borrow money only if it is desirable that the public should have less money and more government bonds…. This might be desirable if otherwise the rate of interest would be reduced too low… and induce too much investment, thus bringing about inflation….

The almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent….

Functional Finance rejects completely the traditional doctrines of "sound finance"…. [It] prescribes… the adjustment of total spending… to eliminate both unemployment and inflation… the adjustment of public holdings of money and of government bonds… to achieve the rate of interest which results in the most desirable level of investment… the printing, hoarding, or destruction of money as needed….

[The] result might be a continually increasing national debt…. [This] possibility presented no danger… so long as Functional Finance maintained the proper level of total demand for current output; and… there is an automatic tendency for the budget to be balanced in the long run as a result of the application of Functional Finance, even if there is no place for the principle of balancing the budget….

As long as the public is willing to keep on lending… there is no difficulty, no matter how many zeros are added to the national debt. If the public becomes reluctant to keep on lending… [and] the public hoards, the government can print the money to meet its interest and other obligations, and the only effect is that the public holds government currency instead of government bonds, and the government is saved the trouble of making interest payments. If the public spends, this will increase the rate of total spending so that it will not be necessary for the government to borrow… and if the rate of spending becomes too great, then is the time to tax to prevent inflation…. In every case Functional Finance provides a simple, quasi-automatic response.