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Bernanke understands Milton Friedman's helicopter drop of money. He has studied Friedman, but he was not, like I was, an actual student of Friedman's.

Friedman argued that if helicopters flew over and dropped money for all to grab, after the necessary time for a new general equilibrium to be reached, prices will have risen in proportion to the additional quantity of money dropped. The quantity theory of money equation, MV= PT, would reflect the higher prices and the larger money supply. Real, non-monetary variables would ultimately be unchanged.

While Bernanke still thinks in these terms, he also realizes that under modern monetary theory, a new bank "loan," for example, simply consists of a new and positive entry in a borrower's demand deposit account. That is how new money is in fact created. It is destroyed when the "loan" is paid back. Substantively, nothing more is involved except for the "loan" documentation paperwork. But Bernanke does not connect and relate the two ideas. He mistakenly continues to think the government cannot directly and substantially increase spending in the economy unless it engages in deficit spending or cuts taxes. Printing currency in large quantities, he realizes, is not something modern governments do to get more money for government expenditures.

What does not occur to Bernanke is he could combine these two ideas -- a helicopter drop of money and how new money is created by banks -- so as to have a helicopter drop of "demand deposit accounting entries," as it were, bolstering everyone's checking account by the same amount, thereby quite directly and substantially increasing consumer spending and aggregate demand, without more deficit spending or taxes cuts. A negative non-income tax, if you will.This could be done by an order from the Fed to all member banks directing them to make such equal deposit accounting entries for all demand deposit accounts and then providing each bank with the reserve account deposits at the Fed to do so.

Now the Friedmanites at this point, with Bernanke wondering, would argue that prices will rise proportionately by doing that, generating inflation. But will that happen? And did Friedman really believe that personally? I thnk not and here is why:

Look at the present situation. The rich and corporations are sitting on tremendous money or cash hoards -- some $2 trillion dollars plus --that they have pulled from circulation in the economy; plant and equipment are sitting idle in substantial quantities; and we have almost enough of our working age population not employed to start a new economy of about the same size as ours. So the prospect of monetary inflation is not exactly breathing down our necks. If the economy where fully employed, yes, inflation could be a problem, but not with the economy in its present doldrums. In fact, deflation is the more worrisome prospect now, with so much money being horded from circulation and so many idle resources at hand, including so many people who are not working.

However, if such inflation were to raise its ugly head, the solution is simple and easy. Forget efforts to mop up excess reserves as Bernanke has talked about, by increasing banks' reserve requirements or having large Fed bond sales from the Fed's New York open window. The government could simply reverse its effort (or "helicopter 'deposits' drop") and impose an equal and positive non-income tax on all deposit accounts and then not spend or destroy the proceeds. This is a quick and effective means to check such inflationary pressures. Of course, the Fed would have to coordinate with the Treasury, but technically that should not be difficult.

Bernanke and too many economists simply don't get this. They don't really understand money and modern monetary theory. Even back then, Friedman implicitly understood the suggestion here, but kept quiet about it because it was too inconsistent with his personal politics. But he said enough privately and taught enough in classes, looking back, to persuade me that he did understand. Bernanke missed those lectures and comments. He does not understand the possibility suggested here on how to directly and powerfully increase aggregate demand without cutting taxes or increasing deficit spending.

Source: What Bernanke Doesn't Quite Understand That's Important