State Reserve Banks make deficit spending possible

Historically speaking, the economists who followed John Maynard Keynes can be grouped into two camps: fiscal Keynesians, who created a synthesis between Keynes and standard neoclassical microeconomics, and emphasized the power of aggregate spending and monetary policy, and social Keynesians, who emphasized the more heterodox elements of Keynes’ thinking, and argued that the government had to be a more dynamic actor in the economy. One of the chief arguments of the social Keynesians was that fiscal Keynesians, in their attempt to fit Keynes’ theories into the free market orthodoxy, had neglected the great man’s denunciation of the market as a tool for investment. Less well known than his arguments about aggregate demand, John Maynard Keynes had argued in the General Theory that the stock, bond, and money markets were terrible ways to distribute capital for investment, likening them to a giant casino, in which people made bets on what they thought other people would think the average man would think. Keynes argued that this process inevitably led to excesses of fear and exaltation that led at various times to over-investment, under-investment, maldistribution of capital, and general inefficiency – the government, he argued, would have to take over the investment function. And so the social Keynesians argued that it was insufficient merely to boost the level of Federal spending in recessions; the government had to use its spending power to invest counter-cyclically in those needed areas (infrastructure, for example) over the long run. So, what do we need in order to make sure that 50-State Keynesianism can handle both the short-term consumption function (boosting aggregate demand in recessions, dampening things down in bubbles) and the longer-term investment function? To begin with, as mentioned in part 2, the establishment of state reserve banks are a critical structure for developing a stable and counter-cyclical source of financing during recessions, both to fund the consumption function programs , and to provide the capital to keep necessary public investments running in times when the private credit markets have frozen up. However, it is only once “fractional reserve lending is combined with an agile use of the power to tax (as opposed to the 2/3rds rule in California) and a temporary suspension of balanced budget rules that individual states can muster enough financial muscle to be able to run counter-cyclically.