Now let's consider some of the ideas
of Jeremy Bentham on government debt
but also on financial intermediation
and monetary policy.
Bentham was a famous British philosopher
and also a public figure and perhaps,
in the history of ideas,
he's most important for being
really the central figure of utilitarian thought.
He wrote on a wide variety of topics
including punishment, animal welfare,
law, abolition of slavery, women's rights,
free speech and many others.
And he also wrote a lot on economics.
It seems he was one of those people
who had an opinion on everything,
but to read Bentham on virtually anything
is really remarkably interesting and stimulating.
Because he was one of the most
brilliant men of his time.
By the way, here's a drawing of
what Bentham looked like.
His short work, "A Plan for the Augmentation of the Revenue"
was published in 1794 and 1795.
And it was his first work to outline
his thoughts on financial intermediation
and government debt.
And it's striking just how analytically
and institutionally advanced it was
for its time.
To translate Bentham's ideas into
modern terminology, I would say
he wanted the government to have
a greater role, both as a banker and
also a financial intermediary.
In essence, Bentham's plan was
for individuals to hold small denomination
government securities as a form of money.
To put this in more modern terminology,
imagine that instead of
just holding dollar bills, that you also
carried around some treasury securities.
In essence, Bentham wanted the government
to some extent, displace banks
as intermediaries.
Bentham argued that often the government
was sounder and more solvent than banks
and that the government was backed by
assets of more certain value.
Bentham thought that these circulating
notes could be more convenient.
You can think of Bentham as putting
forward a proposal, an earlier version,
for what we might now call
"money market mutual funds",
checkable ones, of course.
And this would be equivalent to
money market mutual funds backed
by government securities.
Except for Bentham, people would just hold
the government securities directly and
they wouldn't even need the mutual fund
as an intermediary.
Think of this proposal as reaping gains
from trade between the government and
depositors, or note-holders.
In essence, the government is lowering
its funding costs by funding itself
also by this issuance of money and
at the same time, individuals are
receiving more secure securities.
You can think of this proposal
in some regards as really blurring,
or blending together what is money
and what is credit.
In this world, credit,
credit of the government,
like treasury securities would begin to
circulate as money.
Bentham thought this would be
and improvement for both sides of
the transaction.
Bentham did understand there was
a potential danger of crowding out.
So you could ask, if people are holding
government securities rather than bank
securities, that means that there's less
capital for private banks to lend out
and in some margin, you have to ask,
well, why not displace all of private
capital and enterprise this way?
And have all intermediation centrally
go through the government.
Bentham thought that there was
a clear limit as to how far we should go
with this process, and here's
his explanation, and I quote:
[text on screen]
In other words, Bentham didn't really
want government to do everything,
or to control the entire supply of capital
He never actually gives us any detailed
analysis of where this point often stops.
He simply says we should take this as
far as we should take it.
Nonetheless, he was well-aware of this issue.
This wasn't just a one-off idea,
Bentham really did stick with
this proposal and continued to promote it.
In 1795-96, there was published another
writing called "Proposal for the
Circulation of a New Species of Paper
Currency." In this, Bentham was calling on
the payment of interest on bank notes,
ideally from a government bank, and using
complex tables for calculating how much
interest was due. One problem with
Bentham's general idea is that if you're
using treasury securities or government
securities for small transactions, how is
it that you calculate the interest due
each time a piece of paper is handed over?
Bentham came up with a rather complex
proposal to have, in essence, tables
calculating very small amounts of interest
being put on the circulating notes.
Arguably, this isn't exactly practical.
In modern times, it may work out because
we conduct so many transactions
electronically. Nonetheless, Bentham very
well understood the transactional
inconveniences of calculating interest on
circulating notes for small transactions
and he was very concerned to overcome
those inconveniences because he thought
that there would be very large practical
gains from shifting to this kind of system.
His longest work on this general
topic is called Abstract of Compressed
View of a Trace Intituled Circulating
Annuities that was published in 1800.
He spent a long time working on this.
It's a longer work, it's more complex than
the others, but again it's the same basic
idea. And here, he's suggesting that the
interest barrier insecurities can be
annuities, which pay you something
periodically over time, once you have put
up your initial money, think of this
again as blurring the difference between
money and credit by having annuities
circulate as currency.
It can be debated
whether Bentham's proposals, especially
for his time, were fully practical but to
me, it's just remarkable how far ahead of
his time he is, and how modern his
analysis is, and how well he understands
financial intermediation, the risks of
such intermediation, both the potential
gains and hazards of having government
guarantees, and if you look to later
discussions of similar topics, and whether
interest-bearing securities should
circulate as money, we find well in the
middle of the 20th century, Milton
Friedman writes on these topics,
but if you compare Friedman to Bentham,
Friedman is more advanced but actually,
Bentham's discussions stand up pretty
well as being consistent with a lot of
what Milton Friedman says. There is an
economist at the University of Minnesota,
Neil Wallace, he wrote a lot of these
topics on the 1980s and again, if you
compare Wallace and Bentham, Wallace
is like Friedman: more advanced, but what
Bentham wrote so early on actually again,
stands up remarkably well. It's a
testament to the very strong and
insightful intellect of Jeremy Bentham.
To read more on the economic ideas of
Jeremy Bentham, I would start by referring
you to the writings of William Stark, and
in particular on these specific ideas, his
introduction to Jeremy Bentham's
Economic Writings, volume 2, is
invaluable. The writings themselves by
Bentham are available through Google Books
online, but if you want the book version,
again, it's Jeremy Bentham's Economic
Writings, volume 2. For a comparison of
Bentham's works to some more recent ideas
in monetary economics, my book with
Randall Kroszner, Explorations in the New
Monetary Economics is, I suppose, the
place to go. And in general, just on
Jeremy Bentham, there is of course, a very
large amount - just get started with
Google.