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Workings of A Public Money System

of Open Macroeconomies
Modeling the American Monetary Act Completed
(A Revised Version)
Kaoru Yamaguchi

Doshisha University
Kyoto 602-8580, Japan
E-mail: kaoyamag@mail.doshisha.ac.jp
Abstract
Being intensied by the recent nancial crisis in 2008, debt crises seem
to be looming ahead among many OECD countries due to the runaway
accumulation of government debts. This paper rst explores them as a
systemic failure of the current debt money system. Secondly, with an
introduction of open macroeconomies, it examines how the current sys-
tem can cope with the liquidation of government debt, and obtains that
the liquidation of debts triggers recessions, unemployment and foreign
economic recessions contagiously. Thirdly, it explores the workings of a
public money system proposed by the American Monetary Act and nds
that the liquidation under this alternative system can be put into eect
without causing recessions, unemployment and ination as well as for-
eign recessions. Finally, public money policies that incorporate balancing
feedback loops such as anti-recession and anti-ination are introduced for
curbing GDP gap and ination. They are posed to be simpler and more
eective than the complicated Keynesian policies.
1 Introduction: Public vs Debt Money
I have explored in the paper [16]
1
how accumulating government debts could
be liquidated under two dierent macroeconomic systems; that is, a current

The original paper was presented at the 29th International Conference of the System
Dynamics Society, Washington D.C., USA, July 25, 2011. On the following day, July 26, it
was presented at the US Congressional Brieng, Cannon 402, sponsored by the Congressman
Dennis Kucinich. Then, it is moderately revised by adding comparative analyses of liquidation
policies under a debt money system, and presented with the same title at the 7th Annual AMI
Monetary Reform Conference in Chicago, USA, Sept. 30, 2011.
1
With its modest revision, the paper was presented at the monetary reform conf. in
Chicago, organized by the American Monetary Institute, on Oct. 1, 2010, for which the
1
macroeconomic system of money as debt, and a debt-free macroeconomic system
advocated by the American Monetary Act. What I have found is that the
liquidation of government debt under the current macroeconomic system of
money as debt is very costly; that is, it triggers economic recessions, while
the liquidation process under a debt-free money system can be accomplished
without causing recessions and inations. The results are, however, obtained in
a simplied closed macroeconomic system in which no labor market exists.
Accordingly, the purpose of this paper is to expand the previous simple
macroeconomic system to complete open macroeconomies in which labor mar-
ket and foreign exchange market exist, and analyze if similar results could be
obtained in the open macroeconomies for a system of money as debt and a
debt-free money system. For the examination, I have felt a strong necessity
to briey redene money and its system in this introductory section to avoid
further confusions caused by dierent usage of terminologies. In the previous
paper, a system of money as debt was used to describe the current monetary
system, and a debt-free money system was used as a system that is proposed by
the American Monetary Act. Let us redene these terminologies in a uniform
fashion as follows.
Public Money
From early days in history money has been in circulation as a legal tender as
Aristotle (384-322 BC) phrased that Money exists not by nature but by law
[17]. Hence, money has been by denition a at money as legal tender. Money
thus created, whether it could be tangible or intangible, has to have the following
three features as explained by many economics textbooks.
Medium of Exchange
Unit of Account
Store of Value
Money
Commodity
Receipts Payments
Sales Purchases
Figure 1: Public Money
Using system dynamics con-
cept of stock and ow, these
functions of money may be
uniformly illustrated in Figure
1 in which ows of money such
as receipts and payments ac-
complish counter-transactions
of sales and purchases of com-
modity (means of exchange)
according to a uniform scale
(unit of account), and the
following award was given; Advancement of Monetary Science and Reform Award to Prof.
Kaoru Yamaguchi, Kyoto, Japan, For his advanced work in modeling the eects on national
debt of the American Monetary Act.
2
Fiat Money as Legal Tender
Public Money Debt Money
Non-metal Shell, Cloth (Silk)
Commodities Woods, Stones, etc
Metal Non-precious Metals
Coinage Copper, Silver, Gold
Paper Sovereign Notes Gold(smith) Certicates
Notes Government Notes (Central)Bank Notes
Intangible Deposits
Numbers (Credit by Loan)
Digits Electronic Substitutes Electronic Substitutes
Table 1: Public vs Debt Money
amount of money thus circulated is stored as a stock of money as a result
of these transactions (store of value). In system dynamics stocks of money and
commodity can be said to co-ow all the time in an opposite direction.
Money, having the above three features as a legal tender, could take a form
of commodities such as shell, silk (cloth) and stone, of precious metals such as
copper, silver and gold, of paper such as Goldsmith and gold certicates and
bank notes, and of intangible numbers and electronic digits such as deposits
and credits. In short, any form that performs three features has been generally
accepted as money that has a purchasing power.
Among these various forms of money, let us dene public money here as the
one that is a at money of legal tender and issued only by the government and
sovereignty as public utility for transactions. Examples of public money are
summarized in Table 1.
Debt Money
Tangible money currently in use are coinage and bank notes. Coins are minted
by the government as subsidiary currency. Hence, it is public money by def-
inition. On the other hand, bank notes are issued by central banks that are
independent of the government and privately owned in many countries. For in-
stance, Federal Reserve System, the central bank in the United States, is 100%
privately owned [2] and Bank of Japan is 45% privately owned. Hence, govern-
ments are obliged to borrow from central banks and in this sense bank notes
are regarded as a part of debt money.
Theoretically, the issuance of money by the private organizations can be pos-
sible only when government or sovereignty legally allow them to create money,
since money exists by law as pointed out above. Historically this occurred
when Bank of England was founded in 1694 and endowed with the right to is-
sue money as its bank notes. In the United States, this was instituted by the
Federal Reserve Act in 1913.
In addition to the tangible money such as bank notes and coinage, bank
3
deposits or credits created as loans by commercial banks also play a role of
money, though intangible, because they can be withdrawn any time, at request,
for transactions. This process of credit creation is made possible by the so-called
a fractional reserve banking system. For detailed analysis see [10].
In sum, under the current nancial system, currency in circulation such as
bank notes and coinage and bank deposits play a role of money. The amount
of money that is available at a certain point of time is called money supply or
stock, which is thus dened as
Money Supply = Currency in Circulation + Deposits (1)
Commodity
Sales
Purchases
Money
(Currency in
Circulation)
Deposits
Loan
Money Supply
Receipts (MS) Payments (MS)
Figure 2: Debt Money
In system dynamics ter-
minology, it is nothing but
a money stock as illus-
trated in Figure 2. To dis-
tinguish this type of money
from public money, let us
call it debt money, be-
cause money of this type
is only created when gov-
ernment and commercial
banks come to borrow
from central banks (high-
powered money), and pro-
ducers and consumers come
to borrow from commercial banks (bank deposits and credits are called low-
powered money). In my previous paper [16], this system is called system of
money as debt. Almost all of macroeconomic textbooks in use such as [4], [5],
[6], [3] justify the current macroeconomic system of debt money without men-
tioning an alternative system, if any, such as the money system proposed by the
American Monetary Act to be explained below.
The American Monetary Act
After the Great Depression in 1929, two banking reforms were proposed to avoid
further serious recessions; that is, the Banking Act of 1933 known as the Glass-
Steagall Act and the Chicago Plan. The Glass-Steagall Act was intended to sep-
arate banking activities between Wall Street investment banks and depository
banks. The act was unfortunately repealed in 1999 by the Gramm-Leach-Bliley
Act. This repeal was criticized as having triggered the recent nancial crisis of
subprime mortgage loans, following the collapse of Lehman Brothers in 2008.
On-going movement of nancial reforms in the US is an attempt to bring back
stricter banking regulations in the spirit of the Glass-Steagal Act.
The other reform was simultaneously proclaimed by the great economists in
1930s such as Henry Simons and Paul Douglas of Chicago, Irving Fisher of Yale,
Frank Graham and Charles Whittlesley of Princeton, Earl Hamilton of Duke,
4
and Willford King, etc. [18], who had seen a debt money system as a root
cause of the Great Depression. Their solution for avoiding a possible Great
Depression in the future is called the Chicago Plan. For instance, Irving Fisher,
a great monetary economist in those days, was active in establishing a monetary
reform to stabilize the economy out of recessions such as the Great Depression.
His own plan is known as 100% Money Plan
I have come to believe that the plan, properly worked out and
applied, is incomparably the best proposal ever oered for speedily
and permanently solving the problem of depressions; for it would
remove the chief cause of both booms and depressions, namely the
instability of demand deposits, tied as they are now, to bank loans.
[1, p. 8]
In contrast with the Glass-Steagal Act, the Chicago Plan has failed to be im-
plemented.
The American Monetary Act
2
endeavors to restore the proposal of the
Chicago Plan or 100% Money Plan by replacing the Federal Reserve Act of
1913. In our terminology above, it is nothing but the restoration of a public
money system from a debt money system. Specically, the Act tries to incor-
porate the following three features. For details see [16] and [17, 18].
Governmental control over the issue of money
Abolishment of credit creation with full reserve ratio of 100%
Constant inow of money to sustain economic growth and welfare
When full reserve system is implemented by the Act, bank reserves become
equal to deposits so that we have
Money Supply = Currency in Circulation + Deposits
= Currency in Circulation + Reserves
= High-Powered Money (2)
Accordingly, under the public money system, money is created only by the
government, and money supply becomes public money only
3
.
As a system dynamics researcher, I have become interested in the system
design of macroeconomics proposed by the American Monetary Act, and posed a
2
On Dec. 17, 2010, a bill based on the American Monetary Act was introduced to the
US House Committee on Financial Services by the congressman Dennis Kucinich. This bill is
called H.R. 6550 National Emergency Employment Defense Act of 2010 (NEED). A similar
proposal Towards A Twenty-First Century Banking And Monetary System was recently
submitted jointly by PositiveMoney, nef(the new economics foundation), and Prof. Richard
Werner of the Univ. of Southampton, to the Independent Commission on Banking, UK.
3
Money supply is also dened in terms of high-powered money as
Money Supply = m High-Powered Money (3)
where mis a money multiplier. Under a full reserve system, money multiplier becomes unitary,
m = 1, so that money can no longer be created by commercial banks.
5
question whether this public money system of macroeconomy can solve the most
imminent problem our economy is facing; that it, accumulation of government
debt. My previous work [16] positively answered the question under a simple
modeling framework. Before exploring it under the complete model of open
macroeconomies here, let us probe how serious our current issue of accumulating
debt is.
2 Debt Crises As A Systemic Failure
Debt Crises Looming Ahead
Being intensied by the recent nancial crisis following the collapse of Lehman
Brothers in 2008, severe crisis of sovereign or government debts seems to be
looming ahead. Let us explore how serious accumulating national debts are.
Table 2 shows that, among 33 OECD countries, 18 countries are suering from
higher debt-to-GDP ratios of more than 50% in 2010. Average ratio of these 33
countries is 66.7%, while world average ratio of 131 countries is 58.3%
4
. This
implies that developed countries are facing debt crises more seriously than many
developing countries. .
Country Ratio(%) Country Ratio(%)
Japan 196.4 Israel 77.3
Greece 144.0 Germany 74.8
Iceland 123.8 Hungary 72.1
Italy 118.1 Austria 68.6
Belgium 102.5 United Kingdom 68.1
Ireland 98.5 Netherlands 64.6
United States 96.4 Spain 63.4
France 83.5 Poland 50.5
Portugal 83.2 OECD 66.7
Canada 82.9 World 58.3
Table 2: Public Debt-GDP Ratio(%) of OECD Countries in 2010
Let us now take a look at the US national debt. Following the Lehman shock
in 2008, US government is forced to bail out troubled banks and corporations
with taxpayerss money, and the Fed continued printing money to purchase poi-
soned subprime and related securities. In fact, according to the Federal Reserve
Statistical Release H.4.1 the Fed assets jumped more than doubles in a year
from $905 billion, Sept. 3, 2008, to $2,086 billion on Sept. 2, 2009. This un-
usual yearly increase was mainly caused by the abnormal purchase of federal
4
Data of 131 countries for 2010 are taken from CIA Factbook at
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
except USA Data, which is taken from US National Debt Clock Real Time on Feb. 12, 2011
at http://www.usdebtclock.org/
6
agency debt securities ($119 billion) and mortgage-backed securities ($625 bil-
lion). In addition, US government is obliged to spend more budget on war in
Middle East. These factors contributed to accumulate US national debt beyond
14 trillion dollars as of Feb. 2011, more than 4 trillion dollars increase since
Lehman shock in Sept. 2008. Figure 3 (line 2) illustrates how fast US national
debt has been accumulating almost exponentially
5
. From a simple calibration
US National Debt
32,000
24,000
16,000
8,000
0
2 2
2
2
2
2
2
2
2
2
2
1 1
1 1
1
1
1
1
1
1
1
1
1
1
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Time (Year)
B
i
l
l
i
o
n

D
o
l
l
a
r
s
US Debt : Forecasted Debt 1 1 1 1 1 1 1 1
US Debt : US National Debt 2 2 2 2 2 2 2 2
Figure 3: U.S. National Debt and its Forecast: 1970 - 2020
of data between 1970 through 2011 , the best t of their exponential growth
rate is calculated to be 9% !, which in turn implies that a doubling time of
accumulating debt is 7.7 years. If the current US national debt continues to
grow at this rate, this means that the doubling year of the 14 trillion dollars
debt in 2011 will be 2019. In fact, our debt forecast of that year becomes 29
trillion dollars. Moreover, in 2020, the US national debt will become higher
than 31 trillion dollars, while US GDP in 2020 is estimated to be 24 trillion
dollars according to the Budget of the U.S. Government, Fiscal Year 2011; that
is, the debt-to-GDP ratio in the US will be 129%!.
Can such an exponentially increasing debt be sustained. From system dy-
namics point of view, it is absolutely impossible. In fact, following the nancial
crisis of 2008, sovereign debt crisis hit Greece in 2009, then Ireland, and now
Portugal is said to be facing her debt crisis. Debt crises are indeed looming
ahead among OECD countries.
A Systemic Failure of Debt Money
From the quantity theory of money MV = PT, where M is money supply, V
is its velocity, P is a price level and T is the amount of annual transactions, it
5
Data illustrated in the Figure are obtained from TreasuryDirect Web page,
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
7
can be easily foreseen that transactions of a constantly growing economy PT
demand for more money M being incessantly put into circulation. Under the
current debt money system this increasing demand for money has been met by
the following monetary standards.
Gold Standard Failed (1930s) Historically speaking gold standard originated
from the transactions of goldsmith certicates, which eventually developed
into convertible bank notes with gold. Due to the limitation of the sup-
ply of gold, this gold standard system of providing money supply was
abandoned in 1930s, following the Great Depression.
Gold-Dollar Standard Failed (1971) Gold standard system was replaced
with the Bretton Woods system of monetary management in 1944. Under
the system, convertibility with gold is maintained indirectly through US
dollar as a key currency, and accordingly called the gold-dollar standard.
Due to the increasing demand for gold from European countries, US pres-
ident Richard Nixon was forced to suspend gold-dollar convertibility in
1971, and the so-called Nixon Shock hit the world economy.
Dollar Standard Collapsing (2010s?) Following the Nixon shock, exible
foreign exchange rates were introduced, and US dollar began to be used
as a world-wide key currency without being supported by gold. As a
result, central banks acquired a free hand of printing money without being
constrained by the amount of gold. Due to the exponentially accumulating
debt of the US government as observed above, US dollar is now under a
pressure of devaluation, and the dollar standard system of the last 40 years
is destined to collapse sooner or later.
As briey assessed above, we are now facing the third major systemic failures
of debt money, following the failures of gold standard and gold-dollar standard
systems. Specically, our current debt money system seems to be heading to-
ward three impasses: defaults, nancial meltdown and hyper-ination. By using
causal loop diagram of Figure 4, let us now explore a conceivable systemic failure
of the current debt money system.
Defaults
A core loop of the systemic failure is the debt crisis loop. This is a typical
reinforcing loop in which debts increase exponentially, which in turn increases
interest payment, which contributes to accumulate government decit into debt.
In fact, interest payment is approximately as high as one third of tax revenues
in the US and one fourth in Japan. Eventually, governments may get con-
fronted with more diculties to continue borrowing for debt reimbursements,
and eventually be forced to declare defaults.
8
Debt
Borrowing
Interest
Payment
Interest
Rate
Budget
Deficit
Tax
Revenues
Government
Expenditures
+
-
+
+
+
+
Debt Crisis
+
+
Government
Security
Prices
-
Bank/ Corporate
Collapses
-
Bailout / Stimulus
Packages
+
+
Money
Supply
-
Housing
Bubbles
-
Financial Crisis
Hyper-
Inflation
+
Spending
+
Defaults
Financial
Meltdown
+
+
ForcedMoney
Supply
Figure 4: Impasses of Defaults, Financial Meltdown and Hyper-Ination
Financial Meltdown
6
Exponential growth of debt eventually leads to the second loop of nancial crisis.
To be specic, a runaway accumulation of government debt may cause nominal
interest rate to increase eventually, because government would be forced to keep
borrowing by paying higher interests
7
. Higher interest rates in turn will surely
trigger a drop of government security prices, deteriorating values of nancial
assets among banks, producers and consumers. Devaluation of nancial assets
thus set o may force some banks and producers to go bankrupt in due course.
Under such circumstances, government would be forced to bail out or intro-
duce another stimulus packages, increasing decit as ow and piling up debt as
stock. This nancial crisis loop will sooner or later lead our economy toward
6
This section name was originally Meltdown in the paper submitted in the morning of
March 11, 2011, when eastern part of Japan was hit by historical earthquake and tsunami
in the afternoon of the day, followed by the meltdown of the Fukushima Dai-ichi nuclear
power plants in a day or so. To distinguish it from the nuclear meltdown, it is revised as
Financial Meltdown. We are indeed at a turning point of history revolved by these two
major meltdowns.
7
This feedback loop from the accumulating debt to the higher interest rate is not yet fully
incorporated in our model below.
9
a second impasse which is in this paper called nancial meltdown, following
[8]. Recent nancial crisis following the burst of housing bubbles, however, is
nothing but a side attack in this nancial crisis loop, though reinforcing the
debts crisis. Tougher nancial regulations being considered in the aftermath
of nancial crisis might reduce this side attack. Yet they do not vanquish the
nancial crisis loop originating from the debts crisis loop in Figure 4.
Hyper-Ination
To avoid higher interest rate caused by two reinforcing crisis loops, central
banks would be forced to increase money supply (balancing loop), which in-
evitably leads to a third impasse of hyper-ination. Incidentally, this possibility
of hyper-ination in the US may be augmented by the aftermath behaviors of
the Fed following the Lehman Shock of 2008. In fact, as seen above mone-
tary base or high-powered money doubled from $905 billion, Sept. 3, 2008, to
$1,801 billion, Sept. 2, 2009, within a year (FRB: H.3 Release). Thanks to the
drastic credit crunch, however, this doubling increase in monetary base didnt
trigger ination so far. In other words, M1 consisting of currency in circulation,
travelers checks, demand deposits, and other checkable deposits, only increased
from $1,461 billion in Sept. 2008 to $1,665 billion in Sept. 2009 (FRB: H.6
Release), which implies that money multiplier dropped from 1.61 to 0.92. As of
Feb. 2011, it is 0.91. In short, traditional monetary expansion policy by the Fed
didnt work to restore the US economy so far. Yet, these tremendous increase
in monetary base will, as a monetary bomb, force the US dollars to be devalued
sooner or later. Once it gets burst, hyper-ination will attack world economy
in the foreseeable future. One of the main subject of G20 meetings last year in
Seoul, Korea was how to avoid currency wars being led by the devaluation of
dollar.
As discussed above in this way, current economies built on a debt money
system seems to be getting trapped into one of three impasses, and government
may be eventually destined to collapse due to a heavy burden of debts. These
are hotly debated scenarios about the consequences of the rapidly accumulating
debt in Japan, whose debt-GDP ratio in 2009 was 196.4% as observed above; the
highest among OECD countries! Greece has almost experienced this impasse in
2009.
After all, current macroeconomic system has been structurally fabricated by
the Keynesian macroeconomic policy framework in which it is proposed that
the additional government expenditure can rescue the troubled economy from
recession. Yet, it fails to analyze why this scal policy is destined to accumulate
government debt as mentioned above. In fact, even though GDP gap is very huge
in Japan, yet due to the fear of runaway accumulation of debt, the Japanese
government is very reluctant to stimulate the economy and, in this sense, it
seems to have totally lost its discretion of public policies for the welfare of
people even though production capacities and workers have been sitting idle
and ready to be called in service. In other words, Keynesian scal policy cannot
10
be applied to the troubled Keynesian macroeconomy. With zero interest rate,
its monetary policy has already lost its discretion as well. Isnt this an irony of
the Keynesian theory? Current debt money system of macroeconomy seems to
have fallen into the dead-end trap.
With these preparatory analysis of the current economic situations in mind,
we are now in a position to expand our previous model to a complete model
of open macroeconomics, and examine how government debt can be liquidated
under two dierent money systems; that is, debt money system and public
money system.
3 Modeling A Debt Money System
Since 2004 I have been working step-by-step on constructing macroeconomic
models in [10], [11], [12] and [13] based on the method of accounting system dy-
namics developed in [9]. This series of macroeconomic modeling was completed
in [14] with a follow-up analytical renement method of price adjustment mech-
anism in [15]. The model of open macroeconomies in this paper is mostly based
on the model in [14].
For the convenience of the reader, main transactions of the open macroe-
conomies by producers, consumers, government, banks and the central bank are
replicated here.
Producers
Main transactions of producers, which are illustrated in Figure 33 in the ap-
pendix, are summarized as follows.
Out of the GDP revenues producers pay excise tax, deduct the amount of
depreciation, and pay wages to workers (consumers) and interests to the
banks. The remaining revenues become prots before tax.
They pay corporate tax to the government out of the prots before tax.
The remaining prots after tax are paid to the owners (that is, consumers)
as dividends, including dividends abroad. However, a small portion of
prots is allowed to be held as retained earnings.
Producers are thus constantly in a state of cash ow decits. To make
new investment, therefore, they have to borrow money from banks and
pay interest to the banks.
Producers imports goods and services according to their economic activi-
ties, the amount of which is assumed to be a portion of GDP in our model,
though actual imports are also assumed to be aected by their demand
curves.
11
Similarly, their exports are determined by the economic activities of a
foreign economy, the amount of which is also assumed to be a portion of
foreign GDP.
Produces are also allowed to make direct investment abroad as a portion
of their investment. Investment income from these investment abroad are
paid by foreign producers as dividends directly to consumers as owners
of assets abroad. Meanwhile, producers are required to pay foreign in-
vestment income (returns) as dividends to foreign investors (consumers)
according to their foreign nancial liabilities.
Foreign producers are assumed to behave in a similar fashion as a mirror
image of domestic producers
Consumers
Main transactions of consumers, which are illustrated in Figure 34 in the ap-
pendix, are summarized as follows.
Sources of consumers income are their labor supply, nancial assets they
hold such as bank deposits, shares (including direct assets abroad), and
deposits abroad. Hence, consumers receive wages and dividends from
producers, interest from banks and government, and direct and nancial
investment income from abroad.
Financial assets of consumers consist of bank deposits and government
securities, against which they receive nancial income of interests from
banks and government.
In addition to the income such as wages, interests, and dividends, con-
sumers receive cash whenever previous securities are partly redeemed an-
nually by the government.
Out of these cash income as a whole, consumers pay income taxes, and
the remaining income becomes their disposal income.
Out of their disposable income, they spend on consumption. The remain-
ing amount is either spent to purchase government securities or saved.
Consumers are now allowed to make nancial investment abroad out of
their nancial assets consisting of stocks, bonds and cash. For simplicity,
however, their nancial investment are assumed to be a portion out of
their deposits . Hence, returns from nancial investment are uniformly
evaluated in terms of deposit returns.
Consumers now receive direct and nancial investment income. Similar
investment income are paid to foreign investors by producers and banks.
The dierence between receipt and payment of those investment income
12
is called income balance. When this amount is added to the GDP rev-
enues, GNP (Gross National Product) is calculated. If capital depreciation
is further deducted, the remaining amount is called NNP (Net National
Product).
NNP thus obtained is completely paid out to consumers, consisting of
workers and shareholders, as wages to workers and dividends to share-
holders, including foreign shareholders.
Foreign consumers are assumed to behave in a similar fashion as a mirror
image of domestic consumers.
Government
Transactions of the government are illustrated in Figure 35 in the appendix,
some of which are summarized as follows.
Government receives, as tax revenues, income taxes from consumers and
corporate taxes from producers.
Government spending consists of government expenditures and payments
to the consumers for its partial debt redemption and interests against its
securities.
Government expenditures are assumed to be endogenously determined
by either the growth-dependent expenditures or tax revenue-dependent
expenditures.
If spending exceeds tax revenues, government has to borrow cash from
consumers and banks by newly issuing government securities.
Foreign government is assumed to behave in a similar fashion as a mirror
image of domestic government.
Banks
Main transactions of banks, which are illustrated in Figure 36 in the appendix,
are summarized as follows.
Banks receive deposits from consumers and consumers abroad as foreign
investors, against which they pay interests.
They are obliged to deposit a portion of the deposits as the required
reserves with the central bank.
Out of the remaining deposits, loans are made to producers and banks
receive interests to which a prime rate is applied.
If loanable fund is not enough, banks can borrow from the central bank
to which discount rate is applied.
13
Their retained earnings thus become interest receipts from producers less
interest payment to consumers and to the central bank. Positive earnings
will be distributed among bank workers as consumers.
Banks buy and sell foreign exchange at the request of producers, con-
sumers and the central bank.
Their foreign exchange are held as bank reserves and evaluated in terms
of book value. In other words, foreign exchange reserves are not deposited
with foreign banks. Thus net gains realized by the changes in foreign
exchange rate become part of their retained earnings (or losses).
Foreign currency (dollars in our model) is assumed to play a role of key
currency or vehicle currency. Accordingly foreign banks need not set up
foreign exchange account. This is a point where a mirror image of open
macroeconomic symmetry breaks down.
Central Bank
Main transactions of the central bank, which are illustrated in Figure 37 in the
appendix, are summarized as follows.
The central bank issues currencies against the gold deposited by the public.
It can also issue currency by accepting government securities through open
market operation, specically by purchasing government securities from
the public (consumers) and banks. Moreover, it can issue currency by
making credit loans to commercial banks. (These activities are sometimes
called money out of nothing.)
It can similarly withdraw currencies by selling government securities to the
public (consumers) and banks, and through debt redemption by banks.
Banks are required by law to reserve a certain amount of deposits with
the central bank. By controlling this required reserve ratio, the central
bank can control the monetary base directly.
The central bank can additionally control the amount of money supply
through monetary policies such as open market operations and discount
rate.
Another powerful but hidden control method is through its direct inuence
over the amount of credit loans to banks (known as window guidance in
Japan.)
The central bank is allowed to intervene foreign exchange market; that is,
it can buy and sell foreign exchange to keep a foreign exchange ratio stable
(though this intervention is actually exerted by the Ministry of Finance in
Japan, it is regarded as a part of policy by the central bank in our model).
14
Foreign exchange reserves held by the central bank is usually reinvested
with foreign deposits and foreign government securities, which are, how-
ever, not assumed here as inessential.
4 Behaviors of A Debt Money System
Mostly Equilibria in the Real Sector
Our open macroeconomic model is now completely presented. It is a generic
model, out of which diverse macroeconomic behaviors are generated, depending
on the purpose of simulations. In this paper let us focus on an equilibrium
growth path as a benchmark for our analysis to follow. An equilibrium state is
called a full capacity aggregate demand equilibrium if the following three output
and demand levels are met:
Full Capacity GDP = Desired Output = Aggregate Demand (4)
If the economy is not in the equilibrium state, then actual GDP is determined
by
GDP = MIN (Full Capacity GDP, Desired Output ) (5)
In other words, if desired output is greater than full capacity GDP, then actual
GDP is constrained by the production capacity, meanwhile in the opposite case,
GDP is determined by the amount of desired output which producers wish to
produce, leaving the capacity idle, and workers being laid o.
Even though full capacity GDP is attained, full employment may not be
realized unless the following equation is not met;
Potential GDP = Full Capacity GDP. (6)
Does the equilibrium state, then, exist in the sense of full capacity GDP and full
employment? To answer these questions, let us dene GDP gap as a dierence
between potential GDP and actual GDP, and its ratio to the potential GDP as
GDP Gap Ratio =
Potential GDP - GDP
Potential GDP
(7)
By trial and error, mostly equilibrium states are attained when price elastic-
ity e is 3, together with all other adjusted parameters, as illustrated in Figure
5.
Our open macrodynamic model has more than 900 variables that are in-
terrelated one another, among which, as benchmark variables for comparative
analyses in this paper, we mainly focus on two variables: GDP gap ratio and
unemployment rate. Figure 6 illustrates these two gures at the mostly equi-
librium states. GDP gap ratios are maintained below 1% after the year 6, and
unemployment ratios are less than 0.65% at their highest around the year 6, ap-
proaching to zero; that is, full employment. The reader may wonder why these
are a state of mostly equilibria, because some uctuations are being observed.
15
Potential GDP, GDP and Aggregate Demand
560
420
280
140
0
5
5
5
5
5
5
5
5
4
4 4
4
4
4
4
4
4
3
3
3
3
3
3
3
3
3
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Y
e
n
R
e
a
l
/
Y
e
a
r
Potential GDP : Equilibrium (Debt) 1 1 1 1 1 1
"GDP (real)" : Equilibrium (Debt) 2 2 2 2 2 2
"Aggregate Demand (real)" : Equilibrium (Debt) 3 3 3 3 3
"Consumption (real)" : Equilibrium (Debt) 4 4 4 4 4 4
"Investment (real)" : Equilibrium (Debt) 5 5 5 5 5 5
Figure 5: Mostly Equilibrium States
Economic activities are alive like human bodies, whose heart pulse rates, even
of healthy persons, uctuate between 60 and 70 per minute in average. Yet,
they are a normal state. In a similar fashion, it is reasonable to consider these
uctuations as normal equilibrium states.
GDP Gap Ratio
0.02
0.015
0.01
0.005
0
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
D
m
n
l
GDP Gap Ratio : Equilibrium (Debt)
Unemployment rate
0.008
0.006
0.004
0.002
0
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
D
m
n
l
Unemployment rate : Equilibrium (Debt)
Figure 6: GDP Gap and Unemployment Rate of Mostly Equilibrium States
Money out of Nothing
For the attainment of mostly equilibria, enough amount of money has to be
put into circulation to avoid recessions caused by credit crunch as analyzed in
[12]. Demand for money mainly comes from banks and producers. Banks are
assumed to make loans to producers as much as desired so long as their vault
cash is available. Thus, they are persistently in a state of shortage of cash as
well as producers. In the case of producers, they could borrow enough fund from
banks. From whom, then, should the banks borrow in case of cash shortage?
16
In a closed economic system, money has to be issued or created within the
system. Under the current nancial system of debt money, only the central bank
is endowed with a power to issue money within the system, and make loans
to the commercial banks directly and to the government indirectly through
the open market operations. Commercial banks then create credits under a
fractional reserve banking system by making loans to producers and consumers.
These credits constitute a great portion of money supply. In this way, money
and credits are only crated when commercial banks and government as well as
producers and consumers come to borrow at interest. Under such circumstances,
if all debts are repaid, money ceases to exist. This is an essence of a debt money
system. The process of creating money is known as money out of nothing.
Figure 7 indicates unconditional amount of annual discount loans and its
growth rate by the central bank at the request of desired borrowing by banks.
In other words, money has to be incessantly created and put into circulation in
order to sustain an economic growth under mostly equilibrium states. Roughly
speaking, a growth rate of credit creation by the central bank has to be in
average equal to or slightly greater than the economic growth rate as suggested
by the right hand diagram of Figure 7, in which line 1 is a growth rate of credit
Lending (Central Bank)
200
150
100
50
0
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Y
e
n
/Y
e
a
r
"Lending (Central Bank)" : Equilibrium (Debt)
Growth Rate of Credit
0.6
0.3
0
-0.3
-0.6
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
1
1
1
1
1
1
1
1
1
1 1 1
1
1 1
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
D
m
n
l
Growth Rate of Credit : Equilibrium(Debt) 1 1 1 1 1 1 1 1
Growth Rate : Equilibrium(Debt) 2 2 2 2 2 2 2 2 2 2
Figure 7: Lending by the Central Bank and its Growth Rate
and line 2 is an economic growth rate. In this way, the central bank begins to
exert an enormous power over the economy through its credit control.
Accumulation of Government Debt
So long as the mostly equilibria are realized in the economy, through monetary
and scal policies in the days of recession, no macroeconomic problem seems
to exist. This is a positive side of the Keynesian macroeconomic theory. Yet
behind the full capacity aggregate demand growth path in Figure 5 govern-
ment debt continues to accumulate as the line 1 in the left diagram of Figure 8
illustrates. This is a negative side of the Keynesian theory. Yet most macroe-
conomic textbooks neglect or less emphasize this negative side, partly because
their macroeconomic frameworks cannot handle this negative side of the debt
money system.
In the model here primary balance ratio is initially set to be one and balanced
17
budget is assumed to the eect that government expenditure is set to be equal
to tax revenues, and no decit arises. Why, then, does the government continue
to accumulate debt? Government decit is precisely dened as
Debt (Government)
800
600
400
200
0
3
3 3 3 3 3 3 3 3 3 3 3 3 3
2
2 2 2 2 2 2 2 2 2 2 2 2 2 1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Y
e
n
"Debt (Government)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1 1
"Debt (Government)" : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
"Debt (Government)" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Debt-GDP ratio
2
1.5
1
0.5
0
3
3 3 3
3 3
3 3
3 3 3 3
3 3
2
2 2 2
2 2
2 2 2 2
2 2
2 2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Y
e
a
r
"Debt-GDP ratio" : Equilibrium (Debt) 1 1 1 1 1 1 1
"Debt-GDP ratio" : Primary Balance(=90%) 2 2 2 2 2 2
"Debt-GDP ratio" : Excise Tax (5+5%) 3 3 3 3 3 3 3
Figure 8: Accumulation of Government Debt and Debt-GDP Ratio
Decit = Tax Revenues - Expenditure - Debt Redemption - Interest (8)
Therefore, even if balanced budget is maintained, government still has to keep
paying its debt redemption and interest. This is why it has to keep borrowing
and accumulating its debt; that is to say, it is not balanced in an expanded sense
of budget. Initial GDP in the model is attained to be 300, while government
debt is initially set to be 200. Hence, the initial debt-GDP ratio is around 0.667
year. Yet, the ratio continues to increase to 1.473 year at the year 50 in the
model as illustrated by the line 1 in the right diagram of Figure 8. This implies
the government debt becomes 1.473 years as high as the annual level of GDP.
Remarks: Even if a debt crisis due to the runaway accumulation of debt fails
to be observed in the near future, still there exit some ethical reasons to stop
accumulating debts. First, it continues to create unfair income distribution in
favor of creditors, that is, bankers and nancial elite, causing inecient allo-
cation of resources and economic performances, and eventually social turmoils
among the poor. Secondly, obligatory payment of interest forces the indebted
producers to drive incessant economic growth to the limit of environmental car-
rying capacity, which eventually leads to the collapse of environment. In short,
a debt money system is unsustainable as a macroeconomic system.
Liquidation Policies of Government Debt
Let us now consider how we could avoid such a debt crisis under the current
debt money system. At the face of the debt crisis as discussed above, suppose
that government is forced to reduce its debt-GDP ratio to less than 0.6 by the
year 50, as currently required to all EU members by the Maastricht treaty.
To attain this goal, though, only two policies are available to the government;
that is, to spend less or to tax more. Let us consider them, respectively.
18
Policy A: Spend Less
This policy assumes that the government spend 10% less than its equilibrium
tax revenues, so that a primary balance ratio is reduced to 0.9 in our economy.
In other words, the government has to make a strong commitment to repay its
debt annually by the amount of 10 % of its tax revenues. Let us assume that
this reduction is put into action at the year 6. Line 2 of the left diagram of
Figure 9 illustrates this reduction of spending.
Under such a radical nancial reform, debt-GDP ratio will begin to get
reduced to around 0.65 at the year 25, as illustrated by line 3 of the same
diagram, and to around 0.44 at the year 50, as illustrated by line 2 in the right
diagram of Figure 8. Accordingly, the accumulation of debt will be eventually
curved as shown byline 2 in the left diagram of Figure 8.
Government Budget and Debt (Policy A)
120 Yen/Year
400 Yen
80 Yen/Year
200 Yen
40 Yen/Year
0 Yen
3
3
3 3 3 3 3 3 3 3 3 3 3
2 2 2
2 2
2
2 2
2 2
2 2
2
1 1
1 1
1 1
1 1
1 1
1 1
1 1
0 5 10 15 20 25
Time (Year)
TaxRevenues : Primary Balance(=90%) Yen/Year 1 1 1 1 1 1 1 1
Government Expenditure : Primary Balance(=90%) Yen/Year 2 2 2 2 2 2
"Debt (Government)" : Primary Balance(=90%) Yen 3 3 3 3 3 3 3 3
Government Budget and Debt (Policy B)
120 Yen/Year
400 Yen
80 Yen/Year
200 Yen
40 Yen/Year
0 Yen
3
3
3 3 3 3 3 3 3 3 3 3 3
2 2
2
2 2
2
2 2
2 2 2
2
2
1 1
1
1 1
1
1
1 1 1 1
1
1 1
0 5 10 15 20 25
Time (Year)
Tax Revenues : Excise Tax (5+5%) Yen/Year 1 1 1 1 1 1 1
Government Expenditure : Excise Tax (5+5%) Yen/Year 2 2 2 2 2
"Debt (Government)" : Excise Tax (5+5%) Yen 3 3 3 3 3 3
Figure 9: Liquidation Policies: Spend Less and Tax More
Policy B: Tax More (and Spend More)
Among various sources of taxes to be levied by the government such as income
tax, excise tax, and corporate tax, let us assume here that excise tax is increased,
partly because an increase in consumption (or excise) tax has become a hot
political issue recently in Japan. Specically the excise tax is assumed to be
increased to 10% from the initial value of 5% in our model; that is, 5% increase.
Line 1 of the right diagram of Figure 9 illustrates the increased tax revenues.
Out of these increased tax revenues, spending is now reduced by 8.5% to
repay the accumulated debt. Though spending is reduced in the sense of primary
balance, it has indeed increased in the absolute amount, compared with the
original equilibrium spending level, as illustrated by line 2 of the same right
diagram of Figure 9. Accordingly the government needs not be forced to reduce
the equilibrium level of budget.
As a result this policy can also successfully reduces debt as illustrated by
line 3 of the same diagram up to the year 25, and further up to the year 50 as
illustrated by line 3 in the left diagram of Figure 8.
19
Triggered Recession and Unemployment
These liquidation policies seem to be working well as debt begins to get reduced.
However, the implementation of these policies turns out to be very costly to the
government and its people as well.
Let us examine the policy A in detail. At the next year of the implementation
of 10 % reduction of a primary balance ratio, growth rate is forced to drop to
minus 2 %, and the economy fails to sustain its full capacity aggregate demand
equilibrium of line 1 as illustrated by line 2 in Figure 10. Compared with the
mostly equilibrium path of line 1, debt-reducing path of line 2 brings about
business cycles. Similarly, line 3 indicates another business cycle triggered by
Policy B.
GDP (real)
380
355
330
305
280
3
3
3
3 3
3
3
3
3
3
3 3
3
3
2
2
2 2
2
2
2
2 2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
R
e
a
l
/
Y
e
a
r
"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1
"GDP (real)" : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
"GDP (real)" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Figure 10: Recessions triggered by Debt Liquidation
Figure 11 (lines 2) shows how this policy of debt liquidation triggers GDP
gap and unemployment. GDP gap jumps from 0.3% to 3.9% at the year 7, an
increase of 13 times. Unemployment jumps from 0.5% to 4.8% at the year 7,
more than 9 times. In similar fashion, lines 3 indicate another gaps triggered
by Policy B.
In the previous paper [16], unemployment was left unanalyzed. In this sense,
the result here is a new nding on the eect of debt liquidation under the current
debt money system. The reader should understand that the absolute number is
not essential here, because our analysis is based on arbitrary numerical values.
Instead, comparative changes in factors need be paid more attention.
Figure 12 illustrates how fast wage rate plummets (line 2 in the left diagram)
- another nding in this paper. Concurrently ination rate plunges to -0.98%
from -0.16%, close to 6 times drop, that is, the economy becomes deationary
(line 2 in the right diagram). Lines 3, likewise, indicate another behaviors
20
GDP Gap Ratio
0.04
0.03
0.02
0.01
0
3
3
3
3
3
3
3
3
3
3
3
3
3
3
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1 1 1 1 1
1 1
1
1
1
0 5 10 15 20 25
Time (Year)
D
m
n
l
GDP Gap Ratio : Equilibrium (Debt) 1 1 1 1 1 1 1 1
GDP Gap Ratio : Primary Balance(=90%) 2 2 2 2 2 2 2
GDP Gap Ratio : Excise Tax (5+5%) 3 3 3 3 3 3 3 3
Unemployment rate
0.08
0.06
0.04
0.02
0
3
3
3
3
3
3
3
3
3
3
3
3 3
3
2
2
2
2
2
2
2
2
2
2
2
2 2 2 1 1
1
1
1
1 1 1 1 1 1 1 1 1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
Unemployment rate : Equilibrium (Debt) 1 1 1 1 1 1 1
Unemployment rate : Primary Balance(=90%) 2 2 2 2 2 2
Unemployment rate : Excise Tax (5+5%) 3 3 3 3 3 3 3
Figure 11: GDP Gap and Unemployment
triggered by Policy B.
Wage Rate
2.4
2.25
2.1
1.95
1.8
3 3
3
3
3
3
3 3 3 3
3 3
3 3
2 2
2 2
2
2
2 2 2
2
2 2
2
2 2
1
1 1 1 1
1
1
1 1 1 1 1 1 1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
/
(
Y
e
a
r
*
P
e
r
s
o
n
)
Wage Rate : Equilibrium(Debt) 1 1 1 1 1 1 1 1 1 1
Wage Rate : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
Wage Rate : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Inflation Rate
0.02
0.01
0
-0.01
-0.02
3
3
3
3
3
3
3
3
3
3
3
3
3
3
2
2
2
2
2
2
2
2
2
2
2
2 2
2
1
1
1
1
1 1 1
1
1
1
1 1 1 1 1
0 5 10 15 20 25
Time (Year)
1
/
Y
e
a
r
Inflation Rate : Equilibrium(Debt) 1 1 1 1 1 1 1 1 1
Inflation Rate : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
Inflation Rate : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Figure 12: Wage Rate and Ination
These recessionary eects triggered by the liquidation of debt turn out to
cross over a national border and become contagious to foreign countries. Figure
13 illustrates how GDP gap and unemployment in a foreign country get worsened
by the domestic liquidation policy A (lines 2) and policy B (lines 3). These
contagious eects under open macroeconomies are observed for the rst time in
our expanded macroeconomic model - the third nding in this paper. In this
sense, in a global world economy, no country can be free from a contagious eect
of recessions caused by the debt liquidation policy in other country.
GDP Gap Ratio.f
0.02
0.015
0.01
0.005
0
3 3
3
3
3 3
3
3
3
3
3
3
3 3
2
2
2 2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1 1 1 1 1 1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
D
m
n
l
"GDP Gap Ratio.f" : Equilibrium(Debt) 1 1 1 1 1 1 1 1
"GDP Gap Ratio.f" : Primary Balance(=90%) 2 2 2 2 2 2 2
"GDP Gap Ratio.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3
Unemployment rate.f
0.01
0.0075
0.005
0.0025
0
3
3
3
3
3
3 3 3
3
3
3
3
3 2
2
2
2
2
2
2
2
2
2
2
2
2
2 1 1
1
1
1
1 1 1 1 1 1 1 1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
"Unemployment rate.f" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1
"Unemployment rate.f" : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
"Unemployment rate.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Figure 13: Foreign Recessions Contagiously Triggered
21
Liquidation Traps of Government Debt
Under a debt money system, liquidation policy of government dept will be
eventually captured into a liquidation trap as follows. The liquidation policy
is only implemented with the reduction of budget decit by spending less or
levying tax; that is; policy A or B in our case. Whichever policy is taken, it
causes an economic recession as analyzed above.
Tax Revenues (Policy A)
65
61.25
57.5
53.75
50
2
2
2
2
2 2
2
2
2
2
2
2
2
2
1
1
1 1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
/
Y
e
a
r
Tax Revenues : Equilibrium(Debt) 1 1 1 1 1 1 1 1 1
Tax Revenues : Primary Balance(=90%) 2 2 2 2 2 2 2 2
Tax Revenues (Policy B)
80
72.5
65
57.5
50
2
2
2
2
2
2
2
2
2
2 2
2
2
2 2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
/
Y
e
a
r
Tax Revenues : Excise Tax (5+5%) Only 1 1 1 1 1 1 1 1
Tax Revenues : Excise Tax (5+5%) 2 2 2 2 2 2 2 2 2
Figure 14: Liquidation Traps of Debt
The immediate eects of recession either by policy A or B are the reduction of
tax revenues as illustrated by lines 2 in Figure 14. Eventually revenue reduction
will worsen budget decit. In other words, policies to reduce decit result in an
increase in decit. This constitutes a typical balancing feedback loop, which is
illustrated as Revenues Crisis loop in Figure 15.
The other eect of recession will be a forced bailout/stimulus package by
the government, which in turn increases government expenditures, worsening
budget decit again. This adds up a second balancing feedback loop, which is
illustrated as Spending Crisis loop in Figure 15.
Budget
Deficit
Tax
Revenues
Government
Expenditures
-
+
Bailout /
Stimulus
Packages
+
Normal
Spending
+
Recession
-
+
-
Revenues Crisis
Spending Crisis
Figure 15: Causal Loop Diagram of Liquidation Traps of Debt
In this way the liquidation policies of government debt are retarded by two
22
balancing feedback loops of revenues crisis and spending crisis, making up liq-
uidation traps of government debt. This indicates that the debt money system
combined with the traditional Keynesian scal policy becomes a dead end as a
macroeconomic monetary system.
5 Modeling A Public Money System
We are now in a position to implement the alternative macroeconomic system
discussed in the introduction, as proposed by the American Monetary Act, in
which central bank is incorporated into a branch of government and a fractional
reserve banking system is abolished. Let us call this new system a public money
system of open macroeconomies. Money issued under this new system plays a
role of public utility of medium of exchange. Hence the newly incorporated in-
stitution may be appropriately called the Public Money Administration (PMA)
in this paper.
Under the new system, transactions of only government, commercial banks
and the public money administration (formally the central bank) need be revised
slightly. All domestic models of a public money system of open macroeconomies
as well as foreign exchange and balance of payment are supplemented to the ap-
pendix of this paper. Let us start with the description of the revised transactions
of the government.
Government
Balanced budget is assumed to be maintained; that is, a primary balance
ratio is unitary. Yet the government may still incur decit due to the debt
redemption and interest payment.
Government now has the right to newly issue money whenever its decit
needs to be funded. The newly issued money becomes seigniorage inow
of the government into its equity or retained earnings account.
The newly issued money is simultaneously deposited with the reserve ac-
count of the Public Money Administration. It is also booked to its deposits
account of the government assets.
Government could further issue money to ll in GDP gap.
Revised transaction of the government is illustrated in Figure 35 in the appendix,
where green stock box of deposits is newly added to the assets.
Banks
Revised transactions of commercial banks are summarized as follows.
Banks are now obliged to deposit a 100% fraction of the deposits as the
required reserves with the public money administration. Time deposits
are excluded from this obligation.
23
When the amount of time deposits is not enough to meet the demand
for loans from producers, banks are allowed to borrow from the public
money administration free of interest; that is, former discount rate is now
zero. Allocation of loans to the banks will be prioritized according to
the public policies of the government. (This constitutes a market-oriented
issue of new money. Alternatively, the government can also issue new
money directly through its public policies to ll in GDP gap as already
discussed above.)
Required Reserve Ratio
1
0.75
0.5
0.25
0
4 4
4
4
4
4
4 4 4 4
3 3 3
3
3 3 3 3 3 3 3
2 2 2
2 2 2 2 2 2 2 2
1 1 1 1 1 1 1 1 1 1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
Required Reserve Ratio : Equilibrium (Debt) 1 1 1 1 1 1 1
Required Reserve Ratio : Public Money (100% 1 Yr) 2 2 2 2 2 2 2
Required Reserve Ratio : Public Money (100% 5 Yr) 3 3 3 3 3 3
Required Reserve Ratio : Public Money (100% 10 Yr) 4 4 4 4 4 4
Figure 16: Required Reserve Ratios
Line 1 in Figure 16 illustrates the
initial required reserve ratio of 5%
in our model. We have here as-
sumed three dierent ways of abolish-
ing a fractional reserve banking sys-
tem. Line 2 shows that a 100% frac-
tion is immediately attained in the
following year of its implementation,
while line 3 illustrates it is attained
in 5 years. Line 4 indicates it is grad-
ually attained in 10 years, starting
from the year 6. In our analysis be-
low, 100% fraction will be assumed to
be attained in 5 years as a represen-
tative illustration of fractional behaviors.
Public Money Administration (Formerly Central Bank)
The central bank is now incorporated as one of the governmental organizations
which is here called the Public Money Administration (PMA). Its revised trans-
actions become as follows.
The PMA accepts newly issued money of the government as seigniorage
assets and enter the same amount into the government reserve account.
Under this transaction, the government needs not print hard currency,
instead it only sends digital gures of the new money to the PMA.
When the government want to withdraw money from their reserve ac-
counts at the PMA, the PMA could issue new money according to the
requested amount. In this way, for a time being, former central bank
notes and government money coexist in the market.
With the new issue of money the PMA meets the demand for money by
commercial banks, free of interest, according to the guideline set by the
government public policies.
Under the revised transactions, open market operations of sales and pur-
chases of government securities become ineective, simply because government
24
debt gradually diminishes to zero. Furthermore, discount loan is replaced with
interest-free loan. This lending procedure becomes a sort of open and public
window guidance, which once led to the rapid economic growth after world war
II in Japan [7]. Accordingly, interest incomes from discount loans and govern-
ment securities are reduced to be zero eventually. Transactions of the public
money administration are illustrated in Figure 37 in the appendix, with green
stock boxes of seigniorage assets and government reserves being added.
6 Behaviors of A Public Money System
Liquidation of Government Debt
Under the public money system of open macroeconomies, the accumulated debt
of the government gets gradually liquidated as demonstrated by line 4 in the
left diagram of Figure 17, which is the same as the left diagram of Figure 8
except the line 4. Recollect that line 1 is a benchmark debt accumulation of
Debt (Government)
800
600
400
200
0
4
4
4
4
4
4
4 4 4 4
3
3 3 3 3 3 3 3 3 3
3
2
2 2 2 2 2 2 2 2
2 2
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Y
e
n
"Debt (Government)" : Equilibrium (Debt) 1 1 1 1 1 1 1
"Debt (Government)" : Primary Balance(=90%) 2 2 2 2 2 2 2
"Debt (Government)" : Excise Tax (5+5%) 3 3 3 3 3 3 3
"Debt (Government)" : Public Money (100% 5 Yr) 4 4 4 4 4 4
Debt-GDP ratio
2
1.5
1
0.5
0
4
4
4
4
4
4
4 4 4 4
3
3 3
3
3 3
3
3
3
3
3
2
2 2
2 2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Y
e
a
r
"Debt-GDP ratio" : Equilibrium (Debt) 1 1 1 1 1 1 1 1
"Debt-GDP ratio" : Primary Balance(=90%) 2 2 2 2 2 2 2 2
"Debt-GDP ratio" : Excise Tax (5+5%) 3 3 3 3 3 3 3
"Debt-GDP ratio" : Public Money (100% 5 Yr) 4 4 4 4 4 4 4
Figure 17: Liquidation of Government Debt and Debt-GDP Ratio
the mostly equilibria under the debt money system, while lines 2 and 3 are the
decreasing debt lines when debt-ratio are reduced under the same system. Now
newly added line 4 indicates that the government debt continues to decline when
a 100% fraction ratio is applied in 5 years, starting at the year 6. The other
two cases of attaining the 100% fractional reserve discussed above, that is, in a
year or 10 years, reduce the debts exactly in a similar fashion. This means that
the abolishment period of a fractional level does not aect the liquidation of the
government debt, because banks are allowed to ll in the sucient amount of
cash shortage by borrowing from the PMA in the model.
It is shown in Figure 18 that the liquidation of government debt (line 4) is
performed without triggering economic recession contrary to the case of debt
money system (lines 2 and 3). To observe these comparisons in detail, let us
illustrate GDP gap ratios and unemployment rates in Figure 19, in which the
same line numbers apply as in the above gures. The liquidation of govern-
ment debt under the public money system (line 4) can be said to be far better
performed than the current debt system because of its accomplishment without
recession and unemployment.
25
GDP (real)
380
355
330
305
280
4
4
4
4
4
4
4
4
4
4
4
3
3
3 3
3
3
3
3 3
3
3
2
2
2
2
2
2 2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
R
e
a
l
/
Y
e
a
r
"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1 1
"GDP (real)" : Primary Balance(=90%) 2 2 2 2 2 2 2
"GDP (real)" : Excise Tax (5+5%) 3 3 3 3 3 3 3
"GDP (real)" : Public Money (100% 5 Yr) 4 4 4 4 4 4
Figure 18: No Recessions Triggered by A Public Money System
GDP Gap Ratio
0.04
0.03
0.02
0.01
0
4
4
4
4
4
4
4
4
4
4
3
3
3
3
3
3
3
3
3
3
3
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1 1 1 1
1
1
1
0 5 10 15 20 25
Time (Year)
D
m
n
l
GDP Gap Ratio : Equilibrium (Debt) 1 1 1 1 1 1
GDP Gap Ratio : Primary Balance(=90%) 2 2 2 2 2
GDP Gap Ratio : Excise Tax (5+5%) 3 3 3 3 3 3
GDP Gap Ratio : Public Money (100% 5 Yr) 4 4 4 4 4
Unemployment rate
0.08
0.06
0.04
0.02
0
4
4
4
4 4 4 4 4 4 4 3
3
3
3
3
3
3
3
3 3
3
2
2
2
2
2
2 2
2
2
2 2 1
1
1
1
1 1 1 1 1 1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
Unemployment rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1
Unemployment rate : Primary Balance(=90%) 2 2 2 2 2 2 2
Unemployment rate : Excise Tax (5+5%) 3 3 3 3 3 3 3
Unemployment rate : Public Money (100% 5 Yr) 4 4 4 4 4 4 4
Figure 19: GDP Gap and Unemployment
Wage Rate
2.4
2.25
2.1
1.95
1.8
4
4 4
4 4 4 4 4 4 4 4
3 3 3
3
3
3 3
3 3
3 3
2 2 2
2
2
2 2
2 2
2
2
1 1
1 1
1
1 1
1 1 1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
/
(
Y
e
a
r
*
P
e
r
s
o
n
)
Wage Rate : Equilibrium(Debt) 1 1 1 1 1 1 1
Wage Rate : Primary Balance(=90%) 2 2 2 2 2 2 2
Wage Rate : Excise Tax (5+5%) 3 3 3 3 3 3 3
Wage Rate : Public Money (100% 5 Yr) 4 4 4 4 4 4
Inflation Rate
0.02
0.01
0
-0.01
-0.02
4
4
4
4
4
4 4 4 4 4 3
3
3
3
3
3
3
3
3
3
2
2
2
2
2
2
2
2
2 2 2
1
1
1 1 1
1
1 1
1 1 1
0 5 10 15 20 25
Time (Year)
1
/
Y
e
a
r
Inflation Rate : Equilibrium (Debt) 1 1 1 1 1 1
Inflation Rate : Primary Balance(=90%) 2 2 2 2 2
Inflation Rate : Excise Tax (5+5%) 3 3 3 3 3 3
Inflation Rate : Public Money (100% 5 Yr) 4 4 4 4 4
Figure 20: Wage Rate and Ination
Moreover, Figure 20 illustrates that wage rate and ination rates (lines 4)
stay closer to the rates of mostly equilibria. Accordingly, the liquidation of debt
under the public money system can be said to be attained without reducing
26
wage rate and setting o ination.
Furthermore, the liquidation of debt under the public money system is not
contagious to foreign countries as illustrated by lines 4 in Figure 21. That is,
GDP gap and unemployment in a foreign country (lines 4) remain closer to their
almost equilibria states (lines 1).
GDP Gap Ratio.f
0.02
0.015
0.01
0.005
0
4
4
4
4 4 4
4
4
4
4
3
3 3
3
3
3
3
3
3
3
2 2
2
2
2
2
2
2
2
2
2
1
1
1
1
1 1 1 1
1
1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
"GDP Gap Ratio.f" : Equilibrium (Debt) 1 1 1 1 1 1 1 1
"GDP Gap Ratio.f" : Primary Balance(=90%) 2 2 2 2 2 2 2
"GDP Gap Ratio.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3
"GDP Gap Ratio.f" : Public Money (100% 5 Yr) 4 4 4 4 4 4 4
Unemployment rate.f
0.01
0.0075
0.005
0.0025
0
4
4
4
4 4 4 4 4 4 4 3
3
3
3
3 3
3
3
3
3 2
2
2
2
2
2
2
2
2
2
1
1
1
1
1 1 1 1 1 1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
"Unemployment rate.f" : Equilibrium (Debt) 1 1 1 1 1 1 1
"Unemployment rate.f" : Primary Balance(=90%) 2 2 2 2 2 2 2
"Unemployment rate.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3
"Unemployment rate.f" : Public Money (100% 5 Yr) 4 4 4 4 4 4
Figure 21: Foreign Recessions are Not Triggered
Debt Crises can be Subdued!
In sum, the pubic money system is, from the results of the above analyses,
demonstrated as a superior alternative system for liquidating government debt
in a sense that its implementation does not trigger recessions and unemployment
both in domestic and foreign economies. In other words, looming debt crises
caused by the accumulation of government debt under a current debt money
system can be thoroughly subdued without causing recessions, unemployment,
ination, and contagious recessions in a foreign economy.
7 Public Money Policies
The role of a newly established public money administration under a public
money system is to maintain a monetary value, similar to the role assigned to
the central banks under the debt money system. Keynesian monetary policy
under the debt money system controls money supply indirectly through the ma-
nipulation of required reserve ratio, discount ratio, and open market operations.
Accordingly its eect is after all limited, as demonstrated by a failure of stim-
ulating the prolonged recessions in Japan during 1990s through 2000s with the
adjustment of the interest rates, specically with zero interest rate policies.
Compared with these ineective Keynesian monetary and scal policies, pub-
lic money policies we have introduced here are simpler and more direct; that is,
they are made up of the management of the amount of public money in circula-
tion through governmental spending and tax policies. Interest rate is no longer
used by the public money administration as a policy instrument and left to be
determined in the market.
27
Inflation
Step down of
the PMA Head
Anti-Inflation Policy
Maximal
Inflation
Tolerable
Gap
+
-
Public
Money
+
Budgetary
Restructure
-
+
-
+
Step Down
Potential
GDP
GDP
GDP
Gap
-
+
+
+
Anti-Recession Policy
Figure 22: Public Money Policies
More specically, our public money policies consist of three balancing feed-
back loops as shown in Figure 22. Anti-recession policy is taken in the case of
economic recession to ll in a GDP gap; that is, government spends more than
tax revenues by newly issuing public money. On the other hand, in the case of
inationary state, anti-ination policy of managing public money is conducted
such that public money in circulation is sucked back by raising taxes or cutting
government spending. As a supplement to this policy in the case of an unusu-
ally higher ination rate that is overshooting a maximum tolerable level, a step
down policy of budgetary restructure will be carried out so that a head of the
public monetary administration is forced to resign for his or her mismanagement
of holding a value of public money.
Recession
Let us now examine in detail how anti-recession policy help restore the economy.
For this purpose a recession or GDP gap is purposefully produced by changing
the value of Normal Inventory Coverage from 0.1 to 0.5 months and Output
Ratio Elasticity (Eect on Price) from 3 to 1, as illustrated in the left diagram
of Figure 23.
To ll a GDP gap under such a recessionary situation, let us continue to
newly issue public money by the amount of 5 annually for 20 years, starting
at t=7. The right diagram of Figure 23 conrms that the GDP gap now gets
completely lled in. More specically, Figure 24 demonstrates how GDP gap
ratio and unemployment rate caused by this recession (lines 1) are recovered by
the public money policy as illustrated by lines 2.
28
GDP Gap
380
360
340
320
300 2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
R
e
a
l
/
Y
e
a
r
Potential GDP : GDP Gap 1 1 1 1 1 1 1 1 1 1 1
"GDP (real)" : GDP Gap 2 2 2 2 2 2 2 2 2 2 2
GDP Gap
380
360
340
320
300 2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
R
e
a
l
/
Y
e
a
r
Potential GDP : Public Money Policy 1 1 1 1 1 1 1 1 1
"GDP (real)" : Public Money Policy 2 2 2 2 2 2 2 2 2
Figure 23: GDP Gap and Its Public Money Policy
GDP Gap Ratio
0.04
0.03
0.02
0.01
0
2
2
2
2
2
2 2 2 2 2
2
2
2
2 1 1
1
1
1
1
1
1
1
1 1
1
1
1
1
0 5 10 15 20 25
Time (Year)
D
m
n
l
GDP Gap Ratio : GDP Gap 1 1 1 1 1 1 1 1
GDP Gap Ratio : Public Money Policy 2 2 2 2 2 2
Unemployment rate
0.04
0.03
0.02
0.01
0
2
2
2
2
2
2 2 2 2 2
2
2
2
2 1 1
1
1
1
1
1
1
1
1 1
1
1
1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
Unemployment rate : GDP Gap 1 1 1 1 1 1 1 1 1 1
Unemployment rate : Public Money Policy 2 2 2 2 2 2
Figure 24: GDP Gap and Unemployment Recovered
Ination
As shown above, so long as a GDP gap exists, an increase in the government
expenditure by newly issuing public money can restore the equilibrium by stim-
ulating the economic growth. Yet, this money policy does not trigger a price
hike and ination as illustrated by lines 2 in Figure 25 in comparison with lines
1 of GDP gap.
Yet, ination could occur if government happens to mismanage the amount
of public money. To examine the case, let us take a benchmark equilibrium
state attained by the public money policy as above (lines 2), then assume that
the government overly increases public money to 15 instead of 5 at t=7 for
25 years in the above case. This corresponds to a continual inow of money
into circulation. Under such situations, Figure 25 shows how price goes up and
ination rate jumps to 1.3% (line 3) from the level of 0.3% attained by the
public money policy (line 2), 4 times hike, at the year 9.
The ination thus caused by the excessive supply of money also triggers a
GDP gap of 5% at the year 12 (or -3.1% of economic growth or recession), and
an unemployment rate of 7.7% at the year 13 as illustrated by lines 3 in Figure
26.
Persistent objection to the public money system has been that government,
once a free-hand power of issuing money is being endowed, tends to issue more
money than necessary, which tends to bring about ination eventually, though
29
Price
1.048
1.034
1.020
1.006
0.9916
3
3
3
3
3
3
3
3
3
3 3
3 3
2
2
2
2
2
2
2
2
2
2
2 2 2 2
1
1
1 1 1
1
1
1 1 1 1
1 1 1
0 5 10 15 20 25
Time (Year)
Y
e
n
/
Y
e
n
R
e
a
l
Price : GDP Gap 1 1 1 1 1 1 1 1 1 1
Price : Public Money Policy 2 2 2 2 2 2 2 2
Price : Inflation 3 3 3 3 3 3 3 3 3 3 3
Inflation Rate
0.02
0.014
0.008
0.002
-0.004
3
3
3
3
3
3
3
3
3
3
3
3 3
2
2
2
2
2
2
2 2 2
2
2
2 2 2
1 1
1
1
1
1
1
1
1
1
1 1
1 1
0 5 10 15 20 25
Time (Year)
1
/
Y
e
a
r
Inflation Rate : GDP Gap 1 1 1 1 1 1 1 1
Inflation Rate : Public Money Policy 2 2 2 2 2 2
Inflation Rate : Inflation 3 3 3 3 3 3 3 3
Figure 25: Price and Ination Rate
GDP Gap Ratio
0.06
0.045
0.03
0.015
0
3
3
3
3
3
3
3
3
3
3
3 3
3
3 2
2
2
2
2 2 2 2 2 2
2
2
2 2 1 1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
D
m
n
l
GDP Gap Ratio : GDP Gap 1 1 1 1 1 1 1 1
GDP Gap Ratio : Public Money Policy 2 2 2 2 2 2
GDP Gap Ratio : Inflation 3 3 3 3 3 3 3 3 3
Unemployment rate
0.08
0.06
0.04
0.02
0
3
3
3
3
3
3
3
3
3
3
3
3
3 3 2
2
2
2
2
2 2 2 2 2
2
2
2
2 1 1
1
1
1
1
1
1
1
1 1
1
1
1 1
0 5 10 15 20 25
Time (Year)
D
m
n
l
Unemployment rate : GDP Gap 1 1 1 1 1 1 1 1 1 1
Unemployment rate : Public Money Policy 2 2 2 2 2 2
Unemployment rate : Inflation 3 3 3 3 3 3 3 3 3
Figure 26: GDP Gap and Unemployment
history shows the opposite [17]. The above case could be unfortunately one
such example. With the introduction of anti-inationary policy, however, this
type of ination can be easily curbed by the decrease in public money. Let
us dene maximal ination as a maximum tolerable ination rate set by the
government. For instance, it was set to be 8% in [16], as suggested by the
American Monetary Act. Then, anti-inationary policy works such that if an
ination rate approaches to the maximal level and a tolerable gap decreases to
zero, the amount of public money will be reduced to curb the ination through
the decrease in government spendings and/or the increase in taxes.
Step Down
What will happen if the tolerable gap becomes negative; that is, current in-
ation rate becomes higher than the maximal ination? This could occur, for
instance, when the incumbent government tries to cling to the power by unnec-
essarily stimulating the economy in the years of election as history demonstrates.
Business cycle thus spawned is called political business cycle. There is some
evidence that such a political business cycle exits in the United States, and the
Federal Reserve under the control of Congress or the president might make the
cycle even more pronounced [6, p.353]. Indeed Figure 27, obtained from the
above analysis of ination, shows how business cycles could be caused by the
mismanagement of the increase in public money (line 3) when no GDP gap ex-
30
ists (line 2). This could be a serious moral hazard lying under the public money
system.
GDP (real)
364
348
332
316
300
3
3
3
3
3
3
3
3
3 3
3
3
3
3
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Y
e
n
R
e
a
l
/
Y
e
a
r
"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1
"GDP (real)" : Public Money Policy 2 2 2 2 2 2 2 2 2
"GDP (real)" : Inflation 3 3 3 3 3 3 3 3 3 3 3
Figure 27: Business Cycles caused by Ination under No GDP Gap
Proponents of the central bank may take advantage of this cycle as an excuse
for establishing the independence of the central bank from the intervention by
the government. How can we avoid the political business cycle, then, without
resorting to the independence of the central bank? As a system dynamics re-
searcher, I suggest an introduction of the third balancing feedback loop of Step
Down as illustrated in Figure 22. This loop forces, by law, a head of the Public
Money Administration to step down in case a tolerable gap becomes negative;
that is, an ination rate gets higher than its maximum tolerable rate. Then a
newly appointed head is obliged to restructure a budgetary spending policy to
stabilize a monetary value. The stability of a public money system depends on
the legalization of a forced step down of the head of the public money adminis-
tration.
Conclusion
Money is, by Aristotle (384 - 322 BC), at money as legal tender and has been
historically created either as public money or debt money. Current macroe-
conomies in many countries are built on a debt money system, which, however,
failed to create enough amount of money to meet an increasing demand for
growing transactions. Gold standard failed in 1930s and was replaced with
gold-dollar standard after World War II, which alas failed in 1971. Then cur-
rent dollar standard was established, allowing free hand of creating money by
central banks, from which, unfortunately, current runaway government debt has
31
been derived. The accumulation of debt will sooner or later lead to impasses
of defaults, nancial meltdown or hyper-ination; in other words current debt
money system is facing its systemic failure.
Under such circumstances it is shown that it becomes very costly to save the
current debt money system by reducing government debt and debt-GDP ratio;
that is, a liquidation process of debt inevitably triggers economic recessions and
unemployment of both domestic and foreign economies.
An alternative system, then, is presented as a public money system of open
macroeconomies as proposed by the American Monetary Act in which only
government can issue money with a full reserve banking system. It is shown
that under the public money system government debt can be liquidated without
triggering recession, unemployment and ination.
Finally, in place of the current Keynesian monetary and scal policies, public
money policies are introduced, consisting of three balancing feedback loops of
anti-recession policy, anti-ination policy and restructuring policy of step down
of a head of PMA (Public Money Administration). Public money policies thus
become simpler and can aect directly to the workings of the economy.
Accordingly, from a viewpoint of system design, a public money system
of macroeconomies as proposed by the American Monetary Act seems to be
worth being implemented if we wish to avoid impasses such as defaults, nancial
meltdown and hyper-ination.
8
.
8
This implementation might bring about fortunate by-products. A debt money system of
the current macroeconomy has been pointed out to constitute a root cause of unfair income
distribution between haves and haves-not, wars due to recessions, and environmental destruc-
tion due to a forced economic growth to pay interest on debt. Accordingly, a public money
system remove the root cause of these problems and could be panacea for solving them. Due
to the limited space, further examination will be left to the reader
32
Appendix: MacroDynamics 2.5 Illustrated
9
Overview
GDP
Producer
Consumer
Banks
GDP
Simulation
Interest, Price
& Wage
Government
Fiscal Policy
Monetary
Policy
Public Money
Administration
(Central Bank)
Population
Labor Force
(C) Prof. Kaoru
Yamaguchi, Ph.D.
Doshisha Business School
Kyoto, Japan
Currency
Circulation
B/S
Check
GDP.f
Producer.f
Consumer.f
Banks.f
GDP
Simulation.f
Interest, Price
& Wage.f
Government.f
Fiscal Policy.f
Monetary
Policy.f
Public Money
Administration.f
(Central Bank.f)
B/S C
heck.f
Population
Labor Force.f
Currency
Circulation.f
Foreign
Exchange Rate
Balance of
Payments
Trade & Investment Abroad
Simulation
Title
Economic
Indicators
Economic
Indicators.f
Macroeconomic Dynamics Model
of A Public Money System
- Accounting System Dynamics Approach -
Porf. Kaoru Yamaguchi, Ph.D.
Doshisha Business School
Doshisha University
Kyoto, Japan
kaoyamag@mail.doshisha.ac.jp
(c) All Rights Reserved, June 2011
< MacroDynamics 2.5 >
This model provides a generic system on which
various schools of economic thoughts can be built.
Your comments and suggestions are most welcome.
Figure 28: Title Page of the MacroDynamics Model
9
In this illustrated section of the model, only domestic macroeconomy is presented. The
model called MacroDynamics version 2.5 is available through the author.
33
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itle
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P
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ly
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ire
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d
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in
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n
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In
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e
n
t A
b
ro
a
d
Figure 29: Model Overview
34
P
o
p
u
l
a
t
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o
n
0

T
o

1
4
d
e
a
t
h
s
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5

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4
4
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4
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4
4
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p
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Figure 30: Population and Labor Force
35
A
g
g
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t
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m
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n
d

(
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Figure 31: GDP Determination
36
I
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t
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t

R
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R
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Figure 32: Interest Rate, Price and Wage Rate
37
I
n
v
e
n
to
r
y
C
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h
(
P
r
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Figure 33: Transactions of Producers
38
C
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s
h
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Figure 34: Transactions of Consumers
39
C
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40
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42
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Figure 40: Simulation Panel of GDP
45
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Figure 41: Simulation Panel of Trade and Investment Abroad
46
References
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[2] Edward G. Grin. The Creature from Jekyll Island - A Second Look at the
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[3] E. Robert Hall and B. John Taylor. Macroeconomics. W.W. Norton &
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[4] N. Gregory Mankiw. Macroeconomics. Worth Publishers, New York, 5th
edition, 2003.
[5] Campbell R. McConnell and Stanley L. Bruce. Macroeconomics - Princi-
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edition, 2008.
[6] Frederic S. Mishkin. The Economics of Money, Banking, and Financial
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[7] Richard A. Werner. Princes of the Yen: Japans Central Bankers and the
Transformation of the Economy. M.E. Sharpe, New York, 2003.
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