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William F. Hixson, A Matter of Interest: Reexamining Money, Debt, and Real Economic Growth. Foreword by John H. Hotson. New York: Praeger, 1991. $55.00 hardcover.

"The Casino Society" is the apt term that came to characterize the U.S. economy in the 1980s---the speculation driven free for all symbolized by three of the wealthiest convicted felons in history: Charles Keating of Lincoln Savings and Loan infamy, junk bond kingpin Michael Milken, and arbitrage operator Ivan Boesky.

Boesky captured the spirit of the period with his famous "greed is good" declaration as the 1986 University of California-Berkeley Commencement speaker. Some observers have attempted to explain the 1980s as simply due to an unprecedented and overzealous embrace ofBoeskyism. But could one seriously argue that there were significantly fewer greedy people in previous decades? Understanding the casino society of the 1980s rather demands that we search deeply toward an understanding of the contemporary financial system, and in particular that we explore the links between the contradictions in the financial sector and the broader structural problems of contemporary U.S. capitalism.

William F. Hixson's A Matter of Interest is a stimulating effort at providing an explanation for the economy's fundamental financial difficulties. It is also a serious attempt at advancing policy ideas for overcoming these problems. Hixson's analysis is notable for his creative use of simple statistical indicators to support his arguments.

In addition, an especially striking feature of both Hixson's theoretical and policy ideas is the way he has drawn fruitfully upon disparate intellectual influences in developing his line of thought. These influences range from MR editors Paul Sweezy and Harry Magdoff to John Maynard Keynes and the leading free-market "monetarist" Milton Friedman. Perhaps Hixson's greatest affinity is with Henry Simons, a University of Chicago economist of the generation preceding Milton Friedman.

According to Hixson, the basic problem with the U.S. economy is that, over the post-Second World War period, it has become increasingly dependent on debt to finance government. For example, Hixson shows that in the mid-1960s about 8 cents of every dollar of total national spending came from borrowed funds. By the mid 1980s, 16 cents of every dollar of spending came from borrowed funds. As Hixson shows, this rise in debt financing also means that interest payments as a share of total spending have increased dramatically. Observing these postwar trends, he writes that the only possible conclusion is that from 1947 to 1987 the economy was operated in a way in which there is no hope whatsoever that it can continue to operate for many more decades, and quite possibly for many more years. (p. 177).

What are the forces that have produced this unsustainable trend? Hixson cites two main factors. The first is the Federal Reserve's use of high interest rates as a policy tool for maintaining price stability--that is, its policy of raising interest rates for the purpose of slowing the economy's growth and thereby weakening inflationary pressures. The second factor is the increasing reliance on borrowed funds by the public and private sectors to finance both their long-term investments and their ongoing operating costs.

Hixson argues that the logic underlying each of these developments is seriously in error. In his view, using high interest rates to slow price inflation only produces higher interest payments and higher prices. This follows from the obvious point that higher interest payments must be absorbed by nonfinancial firms as a cost. When these firms' interest burdens rise, in Hixson's view, they will aim to mark up their prices to reflect their additional cost, just as they would want to mark up prices due to an increase in wages. Hence, the Federal Reserve's use of high interest rates as an anti-inflationary tool has the perverse effect of both increasing prices and maintaining interest rates at an excessively high level.

With respect to private debt financing, Hixson draws on the work of Henry Simons to argue that, to the maximum possible extent, corporations should be financed through equity rather than debt. Simons argued that debt financing creates a danger of "pervasive, synchronous, and cumulative maladjustments," while also providing excessive revenues to rentier bondholders. Simons thus favored "making a risk-taker and equity investor out of the rentier" and Hixson endorses the idea. Actually, Simons believed that corporations should be fully financed through equity funds. But recognizing the impracticality of this idea under modern circumstances, he proposed drastic simplifications in the types of debt and equity instruments that corporations could issue. As Hixson emphasizes, one crucial result of such a restructuring of corporate financing would be to substantially reduce the ratio of interest payments to national income.

Hixson's most dramatic and fully argued proposals concern government financing. Hixson contends that the federal government should not engage in deficit financing at all. Rather, governments should exercise the power they possess to be the sole creators of new money. In periods of high unemployment when the economy needs stimulus through government spending, the government should therefore finance its spending entirely through money creation rather than borrowing. This way, the return on government projects are essentially infinite: employment and income will increase at no cost, since the government has the power to create money costlessly through its central banking operations. Moreover, the government would be free of debt, and we the taxpayers would no longer be paying fifteen cents on every dollar of our federal taxes to cover interest payments on the debt.

There is an important corollary to this proposal, discussed at length by Hixson. This is that the private banking system should be completely stripped of the power it now has to create money. The way the banks create money is through the system of fractional reserve banking. In this system, banks accept private deposits with the understanding that depositors are able to get their money back when they want it. Therefore such "demand deposits" are as good as money, and in all standard measures, are counted as a portion of the money supply. However, under fractional reserve banking, the banks also have the right to lend out most of the deposit funds they have received. If they receive $10 in deposits, they can, for example, lend out $9 in loans. This increases the money supply from $10 to $19, since the loans can be spent by borrowers just like cash or a check of a depositor. The beneficiaries of this money growth are the banks, who receive interest on the loans they made.

Note that this whole system is premised on the idea that the original depositor is unlikely to come back to the bank and demand her $10, even though she has the fight to do so. Ira high proportion of depositors did, at the same time, decide they wanted to convert their deposits to cash, the bank would simply be unable to accommodate this demand, and financial panic would ensue. The Federal Deposit Insurance Corporation--deposit insurance that is government guaranteed and thus underwritten by taxpayers--was created in the 1930s precisely to avoid such panics, and thus maintain the viability of a fractional reserve system.

Under Hixson's proposal, banks would be obligated to maintain 100 percent of the deposits they receive in their vaults. In other words, they would no longer be lending institutions, and as such, they would no longer have the power to create money through privately profitable activity. This would also eliminate the need for taxpayer supported deposit insurance.

Lending institutions in Hixson's scenario--providing credit primarily for mortgages and small businesses-would make loans with the deposits they accept. But a substantial waiting period would then be required before depositors could withdraw their funds from these institutions. This would make deposits from these institutions essentially illiquid: they could not serve as a source of money or "near money" alternative to that supplied by the government.

Overall then, Hixson's proposals aim to promote far less reliance on debt, fewer opportunities for speculation, and, most broadly, drastic simplification of the U.S. financial system. These are obviously desirable ends. The question is whether Hixson's proposals are a viable vehicle for achieving them.