I am not sure what others have made of the discussions on modern monetary theory (MMT) that have dominated this blog during the last week or so, but I have found them useful because it has considerably helped the development of my own thinking around MMT
I had already summarised some of that thinking in my publication of an explanation of what I think MMT says. There are, however, those who follow MMT who dispute that my interpretation is correct. That I acknowledge. I would say in response that an idea that cannot change and develop is not one worth having. What I am suggesting that MMT does need to change and develop.
To summarise the differences between what might be called Founder's MMT, as explained by Warren Mosler, and what I would call Reformed MMT (or RMMT, as a commentator described it), these are, again in my opinion, as follows, with headings to help identify the issues.
This summary will be added to my explanation of MMT in due course.
To make this post easier to read for some for whom the following table will be hard to follow on a web browser a PDF version is available here.
Founder's MMT | Reformed MMT |
What MMT does | |
MMT describes the role of money in the macroeconomy. It does so without recognising that there was any significant change in that role between the era of asset-backed currencies and the fiat currency era. | MMT describes the role of money in a macroeconomy where a fiat currency is in use, subject to the condition that:
a) The government of the jurisdiction in question has a central bank. b) That central bank issues the fiat currency that is in use as the only legal tender within that jurisdiction. c) The jurisdiction in question can borrow in its own currency and need not do so in any other currency. MMT does not, and is not intended to, provide a history of money or an explanation of its role in any circumstance other than those noted above. MMT is modern in the sense that the above conditions reflect relatively recent economic history |
Purpose of MMT | |
To provide a theoretical explanation of the role of money in the economy over time as a largely academic pursuit. | Tp provide an explanation of how money actually works in the economy now, largely as a guide to policy making. |
Summary of MMT | |
Founder's MMT says a government can fund its spending using the currency of its choice using money created for it by its central bank without needing the prior settlement of taxes or the taking of loans. | Reformed MMT says that a government can fund its spending using the currency of its choice using money created for it by its central bank without having to necessarily impose taxes take loans in advance of doing so |
Ordering of spend and tax and the creation of a valuable currency | |
Taxes are imposed but not paid before the government can spend because that imposition provides money with its value in exchange. Without having imposed a tax first a government could not spend in its own currency because that currency would not be accepted within the economy. | Taxes need not be imposed or paid before the government can spend. A government can always spend without raising a tax first by creating the money required to do.
A tax need not be imposed before a government spends in the currency it declares to be legal tender because it is that declaration and the requirement that all enforceable debts be denominated in it that provides money with its value. |
Founder's MMT says that a government will, to secure the use of its currency: | Reformed MMT says that a government will, to secure the use of its currency in an economy: |
a. Impose a tax on its population that must be paid using the currency that it creates. This will be a poll tax of some form, payable irrespective of the availability of income to make settlement. | a) Declare the money that it creates the sole legal tender of the jurisdiction in question. |
b. The government imposing the tax will offer employment to its population, forcing them out of their existing employment and into the employment of the government. | b) Refuse to uphold contracts in other currencies for domestic purposes, including (but far from exclusively) for the settlement of taxes. |
c. The government will make settlement of the liability due to those it has forced into its employment that they will then in turn use for transactions within the economy for which that government is responsible, meaning that the currency in question is widely available for settlement of the tax previously imposed. | c) Require that bankers use the currency in question for their domestic transactions, including their inter-bank settlements. |
d. Payment of the tax due can then take place. | d) Actually use this currency in the course of its own market interventions, and refuse any other, meaning it will only accept payment of tax in this currency. |
Following this logic, money secures its value by being imposed, violently if necessarily, on society. Money secures its value from the enforced payment of tax. | Following this logic, tax is imposed voluntarily on a society that has secured the benefit of government spending and is settled in the legal tender of the jurisdiction, which is used for all commercial transactions, from which it secures its value. |
To achieve this outcome, Founder's MMT says that taxes are imposed before government spending can take place within an economy. | As a result, Reformed MMT says that a government wishing to spend without having either imposed taxes or taken loans in advance of doing so is able to do so because it can secure loans in the currency it has created from its central bank because that currency is the only legally enforceable currency in which contracts might be concluded in the jurisdiction in question, meaning that those wishing to transact must use it if they are desirous of being paid.
It is not tax in that case, but commercial contract law, that puts a currency into circulation and which provides money with its value, having said which if the value of tax payments owing to a government is a significant part of national income those in the jurisdiction have little choice but to transact in that currency to avoid exchange rate risks and costs when making tax payment. In the view of Reformed MMT, tax is imposed by a legal government to uphold the rule of law, which rule of law is used with public consent as the basis for the reprimand of those refusing to comply with the communal requirement that they do so. There is a social contract in which tax plays a key role. |
Purpose of tax | |
a) The primary purpose of tax is to create unemployment so that people are forced to work for the government and so accept its currency which they need to settle the taxes it has imposed before providing any other means to make settlement. | a. Tax is primarily used to reclaim the money created by government spending from the economy to control inflation. |
b) By forcing people into employment with the government so that they can earn the money require to pay their tax liabilities it is suggested that tax provides the government created currency with its value. | b. By requiring payment of tax in the currency the government creates and, assuming such liabilities are sufficient in proportion to total income, the economy pragmatically adopts the government created currency for general use to avoid currency exchange risks that would otherwise arise when making tax payments. |
c) The payment of tax destroys the money created by government spending, but never funds that spending. | c. Tax is used to redistribute income and wealth, reprice market failure, to act as an instrument for the delivery of economic, fiscal and social policy and to promote democracy by representing the consideration in the social contract. |
d. The payment of tax destroys the money created by government spending, but never funds that spending. | |
The role of the central bank | |
a) To create the currency used by the government by lending it into existence for that government to spend. | a. To create the currency used by the government by lending it into existence for that government to spend. |
b) To administer the central bank reserve accounts through which the money created by the central bank for the government is injected into the economy via the commercial banks that have such accounts. | b. To administer the central bank reserve accounts through which the money created by the central bank for the government is injected into the economy via the commercial banks that have such accounts. |
c) To receive payment of tax from commercial banks via the central bank reserve accounts, using such funds to cancel the sums owed by the government to the central bank when money was created to facilitate its spending. | c. To receive payment of tax from commercial banks via the central bank reserve accounts, using such funds to cancel the sums owed by the government to the central bank when money was created to facilitate its spending. |
The money in which tax is paid | |
Tax is paid using government-created money. | Tax is paid using commercial bank-created money because government-created money does not circulate within the tax-paying economy that only has access to commercial banking facilities.
The commercial banks have the task of translating that commercial bank-created money used by their customers to pay tax into sums due for settlement via their central bank reserve accounts, which accounts have been pre-loaded with government-created money as a result of government spending preceding the payment of tax. |
The cause of unemployment | |
Unemployment is created by the government spending insufficiently to put to use the resources (people) it has made unemployed as a result of having imposed taxes on the economy.
|
Governments do not deliberately create unemployment, although they can tolerate a level of unemployment created as a consequence of the inefficiencies found within any economy because of failures to communicate and consequent timing differences in required actions arising between the state and private sectors, both of which sectors can as a consequence contribute to the creation of that unemployment as a result of the inevitably imperfect actions of each of them. |
The remedies for unemployment | |
The Job Guarantee prevents unemployment.
The guarantee of work to anyone who wants it is financed centrally and administered locally. The work is paid at a basic rate which is, however, intended to set a floor on the acceptable pay rate within markets below which employers cannot drop and still secure the services of employees. Since government action in taxing before spending necessarily created unemployment increasing spending by making payment to cover the cost of the Job Guarantee necessarily restores the full employment which it was assumed existed before any tax was imposed.
|
A government that can spend without necessarily having to tax can pursue a policy of full employment in the economy for which it is responsible.
If there are unemployed resources and people in that economy then full employment can be delivered without risk of inflation arising meaning that no additional taxation to match the spending made is required. If there are labour but not physical resources underemployed in the economy for which a government is responsible a government has to decide if the cost in terms of a declining exchange rate can be justified to deliver full employment. Central management and forecasting of the economy is essential to reduce the timing issues within economic cycles that can result in periodic unemployment because of failed market signals on supply and demand. A job guarantee might address the consequences of failed market signals. |
The cause of inflation | |
A currency itself is a public monopoly and monopolists are necessarily “price setters.”
As a consequence, the price level is necessarily a function of prices paid by the government's agents when it spends, or collateral demanded when it lends. The government is, therefore, solely responsible for the rate of inflation within the economy.
|
Inflation has multiple causes within a market-based economy without any necessary involvement of government, whether that is due to price speculation, excessive profit taking, the exploitation of monopoly power, deliberate disruption of supply chains, or imbalances of power within the marketplace, e.g. between monopsonist employers and employees denied union representation.
The government as a major employer and purchaser of resources can exaggerate these inflationary tendencies. The government can also fuel inflation by taxing insufficiently. Because the government is not a monopoly creator of credit, the majority of which is the result of commercial banking and trade transactions, it cannot be suggested that the government has sole control of a currency. As such it cannot be solely responsible for inflation. A government can tackle inflation. Taxation is the only effective tool available to it to do so. |
The role of government ‘borrowing' and government ‘debt' | |
Governments need not borrow. They are the sole creator of currency and as such cannot ever need to borrow it back from the economy into which they have injected it by taxing less than they have spent. | The government is not the sole creator of money since it can be created by commercial sector banks. This will always mean that the total money supply of a jurisdiction will be in excess of the net difference between cumulative government spending and taxation levied.
The government need never borrow since it can always create the funding it requires to fulfil its mandate. However, as a consequence of the historical legacy structure of the world's major financial markets governments need to: a) Issue bonds that can be used as security for lending within financial markets. b) Provide a long-term savings facility to pension funds and others who need it and wish for the implicit guarantee that saving with the government provides. c) Provide a savings facility to the public who also wish to avail themselves of a facility that has no risk regarding repayment. The provision of such a facility is a banking arrangement. It is not borrowing, although those who have deposited funds are creditors of the government. There is no need for a government to balance sums held on these deposit accounts with the cumulative difference between sums it has expended and tax charged (the inappropriately called ‘national debt'). The sum ion deposit may be less, equal to or more than that supposed debt. The difference will be reflected in balances with the central bank. The government can use this desire on the part of savers to deposit sums with the government to advantage. In the absence of markets providing any useful social purpose for savings by turning them into a source of capital for investment the government might do that instead. As such these savings could be used to deliver full employment within an economy though their use as financial capital that could stimulate full employment in times when that does not happen. |
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Richard,
One question, you talk about making use of a nations currency compulsory.
EG
b) Refuse to uphold contracts in other currencies for domestic purposes, including (but far from exclusively) for the settlement of taxes.
Clearly I can only settle my tax bill in sterling, even if I were to pay it with (say) a Euro denominated credit card but I have never seen a suggestion that UK law wont uphold a contract denominated in whatever consideration the parties propose to use. Indeed many markets are denominated in US Dollars.
Clearly a business takes an exchange rate risk if they undertake a contract denominated in something other than sterling but I cant see why except under exceptional circumstances such contracts should not be enforceable
I am playing the MMT game of going back 8n history here
Frankly, it does nit really matter
All I am really saying is, currency was introduced by enforcing its use, and nit just for tax
This cannot be equated to current circumstances any more than the founder’s claim can be
Richard I read your tweets regularly and honestly understand less than half. But this table is a great explanation (even on my phone). I might even get to 60% now. Thanks for this
Thanks
Tally sticks keep coming up. They were not used to require people to acquire the currency to pay the tax. They were used because; since government did not understand money (and still doesn’t), they needed money or work in advance of tax collection and there was insufficient currency in circulation. Notice, this means government seeks the transactions, rather than requiring people to engage. The government sought transactions first (not the other way round), and used commodity money because government expenditure was largely/primarily on war, typically foreign war requiring money that could travel. I have no idea how any of the issues can adequately be understood outside the history.
Please stop it already. Lots of those so called differences are not differences at all but hallow strawmanning. Stop foisting an apparent schism on a movement of idea of which you have gained, I would suppose, considerable insight. This is so unnecessary.
Wrong
It is is necessary
This is how ideas develop
In a Twitter response to you, Warren gave an invitation that he’d be happy to discuss these matters in a face to face setting. Have you responded to the courtesy?
Yes. I said I was happy to do so, in a public discussion. Nothing has been arranged. When the groundwork is done I will take it forward.
Watch tonight, I suggest.
Lovell
Richard has made a significant intervention IMHO in the developmental theory of QE.
What Mosler seemed to be proposing was that the state wants to grab taxes to create money to spend.
This is not a sustainable argument.
Tax is a consequence of a sovereign state doing something useful – creating and circulating for free, a fiat currency (pounds sterling) which also includes promissory notes to turbo charge exchange in order to develop its economy – even beyond its borders. This is part of what made this little country (the United Kingdom) one of the most powerful countries in the world at one stage – the state printed that power in the form of fiat money.
You can read all about this in Christine Desan’s ‘Making Money: Coin, Currency and the Coming of Capitalism’ (2017 Oxford University Press ISBN 978-0-19-870958-9).
All Richard is saying is that the state is both a benefactor and beneficiary of this money printing. OK? What is wrong with that?
And that – as Desan points out, the STATE helped create modern capitalism by doing this. It helped people become capitalists.
Mosler’s position is not only historically incorrect as far as the UK is concerned at least, (does Mosler confuse new world capitalist development with old world?) but it also falls prey to the neo-liberal narrative that the state is only ever an exercise in the abuse of power (something that neo-liberals are also happy to exploit to their own ends).
This defamation of the state then justifies more privatisation, more divestment of state power to capital and suggest less accountability as well as the possible privatisation of a sovereign currencies. Less democracy, less fairness, more exploitation.
Currency/money is a social good. A social utility created by the state. It’s not just a leveraging device for state power. But if we ignore history and insist on seeing it as such it won’t be long before it will be used in such a way such exclusively by capital.
And that’s world that I do not recommend to anyone.
The history of money might go the way of the history of another state funded invention – the internet – if these interventions are not made. And that’s a whole other story.
Hollow arguments? No way – no way at all Lovell.
Looks interesting, will take some digesting.
And am looking forward to seeing you on
Steve & Friends with Richard Murphy. Livestream #24 this afternoon at 5pm
https://www.youtube.com/watch?v=CLFhDrfEhNI
Great summary and comparison. Not sure if the wording of the left hand column is all theirs or yours but it does read as though the Founders MMT has quite a bit of political, anti establishment undertones to it rather than trying to develop a working model of the contemporary market and financial systems. I’m curious as to what their political leanings were?
My wordings based heavily on what has been said
I usually submit a comment with the name ‘MartinD’ but I notice someone else has started commenting with that name also. I assume it’s just a coincidence.
In future I will comment with name ‘MartinD09’ so there is no confusion.
I’m minded to think that the trying to define a creation myth for MMT is a tad moot – because it didn’t happen either way. Our monetary system evolved rather than being created in a big bang. Specifically we moved from “asset backed” to fiat currency. So the current was already established when we started using fiat currency.
Indeed the difference between asset backed and fiat currency seems smaller than sometimes imagined. With a gold standard you could still “create” new “money” by “creating” new gold (e.g. mining, or finding it in South America). It’s just that it is very awkward and inflexible to “create” new gold. So fiat currency makes much more sense practically.
It does seem to me that your narrative of value being created primarily through tax is the practical reality today. Yes, contracts denominated in the local currency may help but don’t seem to be the source of value.
I had always wondered why some MMT proponents we’re so adamant that a job guarantee was an intrinsic part of MMT. It seemed like a policy choice to me,and not a very practical one at that. Universal basic income, as nearly introduced by Nixon, seems a more practical policy. But you exposition that some folks, misguidedly in my opinion, think that MMT works through creating unemployment, makes at least some sense of the job guarantee. I can’t help feeling that if what is supposed to be a theory of how money actually works requires what seems like a specific policy,and one very seldom implemented, then there is something wrong with that theory.
Which leads me to conclude that your view is nearer the truth.
I am not claiming I have got this right yet
But I think money derives value from the broad economy as well as a very narrow tax function
“But I think money derives value from the broad economy as well as a very narrow tax function”.
Yes, very probably. But it does seem hard to define how the broader economy gives value to currency in a simple theoretical model.
I will be thinking more on this
I should have added, good summary -many thanks
Thanks
Mr Kent, you raise an in portant point. There does seem an element of ‘creation myth’ debate in the discussion between different interpretations of MMT. It reminds me a little of the creation myth about money that, in error Adam Smith became tangled in. Money creates an economy; it comes first in turning transactional possibilities into a functioning economy. The history describes how it was done; but not by people who fully understood what they were doing. It remains a stochastic process, and the muddle goes on (I claim no special insight).
The muddle does go on
Richard, this is a strange way of making an argument. If you are going to make such a table, shouldn’t you get someone who espouses the “Founder’s” MMT to write their column? Essentially you seem to be setting up a series of statements which you can then knock down. I have read plenty on MMT, and I don’t recognise a lot of what you call “Founder’s MMT”. Most of what I have read, from numerous sources, would come under the column “Reformed MMT”. Or, to put it as I would see it, Real MMT, as opposed to the Strawman MMT in the first column.
I look forward to your discussion with Steve Keen, although Steve is not an MMT purist so it isn’t clear to me where on your “Founder’s” vs “Reformed” spectrum he sits.
This is rather reminiscent of the schisms between the Free Church of Scotland and the Wee Frees. Critical to those involved, observed with a mixture of bemusement and amusement by outsiders.
I think your last para – indeed much of this comment – really does miss the point
And MMT really is not marginal now, which is why what it says has to be well defined
Richard, this is a strange way of making an argument. If you are going to make such a table, shouldn’t you get someone who espouses the “Founder’s” MMT to write their column? Essentially you seem to be setting up a series of statements which you can then knock down. I have read plenty on MMT, and I don’t recognise a lot of what you call “Founder’s MMT”. Most of what I have read, from numerous sources, would come under the column “Reformed MMT”. Or, to put it as I would see it, Real MMT, as opposed to the Strawman MMT in the first column.
I look forward to your discussion with Steve Keen, although Steve is not an MMT purist so it isn’t clear to me where on your “Founder’s” vs “Reformed” spectrum he sits.
The stuff I have written as Founder’s MMT is based straight on Mosler and Mitchell
I am expecting Steve to be reformed
I have read a lot of MMT – and yes it is reformed or real
So why do Mosler and Mitchell and MMT tourists argue as they do? I have really;y tried to reflect what they say
Fair enough Richard, my comment was ill judged. I withdraw it (or both of them as it appears twice for some reason). I had actually tried to remove the last bit about the Wee Frees so sorry about that.
I do wish MMT had a better name though.
I have watched Steve Keen and Friends and found it very interesting. I enjoyed the debate. I also enjoy reading your blog and sometimes disagreeing. However, I would like to say that mostly I find what you write helpful and enlightening. I don’t tend to comment when I agree, so it might appear that I only ever disagree! This would be very far from the truth.
Thanks – appreciated
Richard, why do you say government “Refuses to uphold contracts in other currencies for domestic purposes”? That’s just not true. The only purpose for which you are legally required to use GBP is tax. You are free to transact in any currency you like, and those transactions are enforceable.
This was a creation narrative
It is not a current account
Maybe the right answer is that no creatiuon narrative is required
Richard,
I have been trying to suggest that no ‘creation narrative’ (myth) is required. What we have is descriptions of what people ‘do’ (have done, are doing, might do). The past tells us most because we can trace the outcomes. Since it is not physics, we cannot safely or easliy experiment. Often what people ‘do’ (in monetary policy) does not work; often, they do not understand what they are doing; either the process, or especially the consequences (which becomes more challenging as the complexities and possibilities of exploitation grow exponentially); the point, surely is to discover what ‘works’ and why.
In examining the past we can, I think look for repeated patterns in what people ‘do’ that may characterise reliable insights into money as a powerful influence on human psychology (motivation, innovation, forms of innovation, repetition) ; such patterns may offer tools we can use to improve our limited capacity to predict (for example, I do not think the differences between the ideas for handling the calculative principles for handling the ‘time value of money’ in new and ingenious ways has changed between, say the extraordinary developments used in Exchange Alley in 1720 leading up to the South Sea Bubble, and the CDS developments leading up to the crash in 2007; quite as much as most people think. Both the essential principles of analysis, and the essential weakness of execution, I suspect remain enduringly consistent and perhaps could yield valuable lessons (to take but one example from history).
Thanks
I thought I had a moderate understanding of MMT after following this blog for a couple of years and reading around – until this week. All clarity has vanished.
It seems you have spent the last couple of days shooting down a straw man MMT in order to prove that MMT is in fact right. Even adding an “F” or an “R” to the letters MMT doesn’t help since I can’t relate the discussion to all the previous explanations (including the recent PDFs) which simply call it MMT.
And then you confuse things further by publishing two seemingly contradictory blogs today. The other (discussing QE) says increasing the money in the economy is not inflationary, this one says decreasing the money in the economy (taxation) successfully reduces inflation. I can’t make sense of both cases being true.
I just hope normal service will resume next week and I will be able to follow your arguments without my head hurting.
I think literally everything I have said is consistent
But you have to understand base and commercial bank money are not the same thing
But this stuff is head hurting – I accept that
I think tax (money supply decrease) being deflationary but spending (money supply increase) not inflationary does require some explanation.
I don’t think either are linked in a concrete way.
Taxation removes spending power directly from the taxed. Spending increases spending power to the recipient. The two aren’t necessarily the same, and don’t spend in the same way, and therefore don’t create inflation the same way.
Gov spending going under a huge mattress won’t cause inflation for instance. But giving money directly to people to spend above their subsistence levels can or will be inflationary.
Keep going Richard – this is an extremely important discussion and public discourse is essential if we are to understand money, where it comes from and how it should be used to create a fair and equitable society.
I always find reading Christine Desan hard going, but is this helpful? —
“So what was the revolution in money’s design that took off in the early modern period? The basic idea was to privatize, or putatively privatize, the elemental public authority to create a common medium of value. Improvised and maintained against a sovereign baseline, the new design placed initiative to expand the common medium in private hands and muted the background capacity of a polity to define (and redefine) that basic medium.
The strategy operated by recasting finance: it transformed banks from mercantile partners to retail money providers, agents that supplied both the government and the community with circulating credit that functioned as currency. The strategy worked because the government anchored the system as its central borrower, and a borrower that could ultimately redeem any bank promise by taxing in that credit. As a fiscal structure, channeling public debt through an outside lender was gratuitous; governments can always issue, retire, and make transferable credit denominated in their sovereign unit, including for their own use. But the new circuitry mattered in ways we have barely begun to explore. It broke down traditional barriers to money creation, an approach far more fertile than “accumulating” capital and arguably essential to the Industrial Revolution.[10] It elevated third-party creditors, sanctified their profit incentive as beneficial, and appointed their commercial judgment as both a crucial expertise and a constraint on government.“ https://lawandhistoryreview.org/article/forum-christine-desans-making-money-desans-response/
I think I need to revisit her writing on this – thank you
The recasting is key
And it is pointless to pretend it has not happened – more than once
And it might again if we go for direct central bank accounts
Richard – you might find the Desan’s ‘Introduction’ (pp.1-11) very helpful – it seems like an over view of the book. Then ‘Money Reinvented’ from p.11 to p.22 – but of course the whole book is full of insights.
I think that John Warren makes some interesting points. Did the those responsible for ‘unleashing the currency’ fully understand what they were doing? Was it just some cynical ploy done on the basis that tax would be easier to claim by the government? Was it done out of desperation? Was it a cunning plan? Or an experiment?
The other issue John seems to raise is the construct of money in our heads – we know for example that the pound is legal tender, but our understanding of where it comes from, who owns it and can control it is maybe too limited these days?
Desan alludes to this elegantly on page 22:
‘When the visibility of money as a political project faded, the way it had realigned the societies that authored it also disappeared from view. With that disappearance went compelling questions about the consequence of transformation – including the role of fiscal action in supporting the value of money , the distributive stakes in the modern arrangement and the alignment of rights and interests acted out in the ethics of capitalism. That absence , a void of history and theory, undermines the effort so urgent to our present moment to understand the political economy we inhabit.’
So to me, Desan sums up the battlefield where the original authors of money (the state) vies (somewhat badly these days) with the money plagiarists in the private sector. In other words the high level fiscal macro battle of our time is over who owns and controls money. These questions do not get answered enough or are not widely considered in the micro economy?
I think that one of those weapons in the state arsenal has been tax, and that tax has been undermined with negative redistributive and democratic consequences.
So my view is that it is good for you to question these matters as you are doing so because you are trying to understand the true political economy as it stands.
I have got it out to re-read
Thank you PSR; a well made point, in context and providing the source.
It is worth observing here that the first quasi-modern constitutional legal case of the struggle between ‘public’ and ‘private’ money (a legal challenge in Ireland against the Crown that sought to fix the standard commodity content of the coinage) was set out in the landmark ‘Case of Mixed Money’ (1605) by the Privy Council; which reinforced the sovereign’s absolute power to mint money according to Crown prerogative: which meant establish it, change it, or debase it at will.
In a beautiful Elizabethan/Jacobean turn of phrase the Privy Council declares the sovereign right to make the money: “inheres in the bones of princes”. Whatever the Privy Council thought they were doing, they were effectively establishing the sole authority of a public money (taken to its logical conclusion, even a fiat money, though I doubt they quite conceived it in this way).
Desan, ‘Making Money’ explores and discusses the case.
I got distracted by snooker last night …
I Like this. Two people who have been largely left out of this but are really important – Desan and Mehrling; both appraoch monetary economics from an analysis profoundly rooted in history.
Desan, ‘Making Money’
Mehrling, ‘The New Lombard Street’ and his paper ‘The Hierarchy of Money’ (he is a disciple of Minsky).
Just highlighting one item here to perhaps clarify a widespread difficulty i encounter in these MMT discussions:
“central bank issues the fiat currency that is in use as the only legal tender within that jurisdiction.”
This seems to be conflating two v diff meanings: 1. here, physical currency and 2. The Currency aka the unit of account.
The very next para uses “currency” in the #2 sense: “jurisdiction in question can borrow in its own currency.” Clearly it’s not borrowing physical currency.
In practice, checking-account deposits are (the great bulk of) legal tender, comprising 80%-90% of M2.
https://fred.stlouisfed.org/graph/?g=12XKa
And prior to 2008, at least, ~all M2 was issued by (Fed-chartered) commercial bank net new lending, not by the Fed. (It’s gotten more complicated since the QE sea-change.)
Thanks.
Mr Roth,
Money operates in a dynamic economy that now moves billions in nanoseconds in the digital age. What looks like money today may look like ropy credit tomorrow (see Mehrling). If you think this is rare, we experienced the problem less than three months ago. It is happening more and more frequently, not less. We are not better at at managing this; we are worse. Richard is battling to understand issues that are complex, ill-understood and driven by a monetary ‘conventional wisdom’ that is certainly conventional; but completely lacking in wisdom, or understanding. They seem to have stopped thinking with Hayek; who was hopeless on money.
I think the whole problem resides in the fact that money needs a “THEORY” although a system with strict rules can be tested and displayed that it works without fault parts of a system breakdown when things change or perhaps something in the system might not be suitable for purpose anymore as progress is made.
Money is however money and it has changed over time but no theory is really requited. The whole theory part is irrelevant In my opinion. it just comes across as another excuse to rip people off and nobody really understands anymore not even the people who suggested the system fully agree on what the system is. Now nobody understands what something is worth becasue the theory can change at anytime. And whilst they keep creating money they don’t have control over where it ends up unless you have a fully circular economy, on which I think these systems really are based….
Now they are proposing a CBDC somehow given the track record and an awful lot of credibiilty has been lost. I don’t think this has any chance what so ever of being implemented. They will have to go back to the drawing board and come up with something that people can trust.
As a non economist/accountant, though interested in the subject, that was clear enough, though it was at times difficult to get my head around. The only bit I didn’t understand was ‘The money in which tax is paid’. I still can’t get my head round that, though it may come in time. However, I do get the general gist, which as I understand it is as follows:
– Governments create money through a central bank which is distributed via government spending/services [NHS etc] and via deposits with commercial banks [QE]
– Governments ensure it’s the only acceptable currency within its jurisdiction
– Commercial banks create more money though lending at interest and paying interest on deposits
– Governments remove money through taxation to avoid inflation
– Taxation does not fund government spending
Those five points are very simplified, but seem to sum it up…unless I have misunderstood it.
As always, thank you for your blog and the information you provide.
In summary, that’s fine
This is incorrect –
“MMT describes the role of money in the macroeconomy. It does so without recognising that there was any significant change in that role between the era of asset-backed currencies and the fiat currency era.”
MMT academics have often employed their understanding of the monetary system to explain how the gold standard worked, what were the drawbacks, and how the fiat era can work so much better.
To give just one example, Professor L. Randall Wray explains here how a fixed exchange rate regime (such as a gold standard) reduces domestic policy space – https://www.youtube.com/watch?v=3OJFjzckZYM
So do I
But you will notice that Neil Wilson was doing the exact opposite here this week
And the creation myth of MMT used by Warren Mosler totally confuses this distinction
I personally feel – as I explained to Neil – that most of the explanations totally ignore the psychology of the issue
The foundations of ‘Money’ are entirely psychological; the psychology of the individual in a group. The ‘promise to pay’ is entirely dependent on the belief the individuals in group have in the strength of the security and trust they place in the value of the promise to pay (in sufficient numbers to be sustainable); and nothing more. The whole of monetary policy is a ritual dance with human psychology. There is nothing else ‘there’.
It seems to me that one of the prime fallacies of commodity money (typically gold or silver) – the approach to money that it has to be something of material “worth” rather than an intangible psychological phenomena, or epiphenomenon – was that commodity money was not based on trust, but something more secure (somehow deomonstrated by the functionless value of a scarce mineral).
Commodity money was, however essentially a historical function of the the fact that sovereign, competitive, trading nations required a common currency they could trust for trade between sovereign currencies; and since they did not trust each other they trusted the commonality of gold (or silver, as a measuring stick they could instictively trust at a basic level).
We then had the comedy of countries digging holes in third countries which actually had the appropriate geology (at great expense), to transfer the rubble and grains they dug up, turned them into easily transportable ingots (with no functional use), and transferred them to various capital cities; where they immediately re-buried the mineral ingots, and used the hole in the ground filled with buried gold, and an imposing, impregnable building over their hole in the ground; all supposedly to inspire international confidence in their currency.
There was, however never enough reburied gold to cover as backing the total level of currency they issued (you may think they might have ‘seen that one coming’). So what happened when the major economies had a gold ‘run’? They immediately suspended the gold standard. The implication, therefore was always there; that there was more to this problem than commodity backing. The ritual dance was not all it seemed. Only the psychology is unavoidable.
Well put
In summary, money has value because we believe it has
“But you will notice that Neil Wilson was doing the exact opposite here this week”
No. NeilW wasn’t.
The argument is that, historically, Govts have often moved on and off a metallic standard (gold or silver), sometimes without any immediate noticable difference in the functioning of the economy.
However, over a period of time, and as Prof Randall Wray explains, the effects of a reduced policy space have caused Govts insuperable problems. The requirements for nations to have fully functioning wartime economies, especially, have forced governments to temporarily abandon any notion of a standard. When the ‘standard’ has been restored it has usually been a different standard.
The pound, at one time, meant a pound of silver. It would buy less than a gram now. In principle we could define what a pound was in terms of an amount of silver and the economy would carry on as normal. However, we’d have to constantly change the amount, maybe even on a daily basis, to allow the government to have enough fiscal space to correctly regulate the economy.
Noted
And I still am not clear as to what it was / is you were / are arguing.
Sorry, but that’s where you have left me
Correction:
The pound actually buys about 1.5 gm of silver! So not quite as much of a change as I first wrote. I should have looked that up first. Sorry about that!
NeilW,
The problem of ‘money’, which is conceptually elusive and protean, I suggest is not improved by introducing limp, sieve-like terms like “policy space” or “fiscal space” that are flimsier, looser and unsatisfactory than the terms we already have (and are sufficiently problematic); and merely invite waffle.
Occam’s Razor applies.
@ John S Warren,
In a posting of 30/04/23 Richard rightly criticises Labour’s economic policy as being potentially too restrictive. They are unwilling to use a currency issuing government’s fiscal powers, to their full extent, to achieve desired social goals. It is as if they are planning to manage an economy which is still on a gold standard. Whereas we can both create and destroy fiat pounds, by spending them into the economy and destroy them by taxing them out of it, we can’t do this quite so easily if the pound is based on a fixed quantity of any real commodity.
This what we mean by unnecessarily limiting both our policy and fiscal spaces.
But busing jargon does not help if it can be avoided
Your use of “spaces” adds nothing to the argument. There is enough flimsy fluff in monetary economics – without adding to it: Occam’s Razor stands.
Hi Richard, thank you very much for the summary.
I thought the differences in views regarding export/import is crucial to include in the summary, no?
You are right
I should add that
Might it be the case that inflation is not a single entity but a set various degrees of inflation and deflation?
Might it be that appropriately varied taxation is a/the appropriate management tool?
Might a government’s approach to managing inflation depend upon where it is on a continuum between seeking an equitable society and one which advantages a group or groups in that society?
Spot on
Agreed – if you read Mattei there is ample evidence to suggest that fiscal management errs on the side of wealth and capital and has done for a longer time than any period claiming to be more balanced.
Agreed
I have been following your enlightening MMT posts with great interest. Thanks. Comments on today’s post below:
Tax destroys base money, it *never* funds spending. Gov receipts and spending go through the Consolidated Fund. Debits and Credits continuously every day. Sometimes the balance on the account will be positive (negative money creation), sometimes negative (positive money creation). So when a spending debit is made, new money creation to cover it will be between 0% (account excess positive balance) to 100% (account negative balance).
Base money does not circulate in the real economy. Yes, but as you have said, it’s real money twin does. For example the gov makes a batch state pension payment to Barclays with the encoded instruction to allocate the funds to pensioners with current accounts at Barclays. Furthermore, all money is created by debt. If the gov spending is independent of tax, then the originating debt is from what the gov owes the central bank. I some gov spending is funded by tax, then the originating debt belong to anyone (the gov, individuals, companies).
“Tax is paid using commercial bank-created money because government-created money does not circulate within the tax-paying economy that only has access to commercial banking facilities.”
We do have access. If any of us wants to swap bank created money for government money, we just put a cash card in anto an ATM and out it comes! We probably don’t do that as much as we could because it is probably less convenient. The banks don’t care either way except for the expense of keeping the ATMs running.
Consider, for a moment, that you’re HMRC and you’ve issued a tax demand to a commercial bank. Are you going to be happy if they try to pay it with their own created money? I don’t think you should be. You should be wanting government created money! You should be wanting a payment from the bank’s reserve account which you can hand over to the Treasury.
I banned you once from this site because of you indifference to tax abuse
Niw you are being facile
Try paying your tax bill in cash: you will find you can’t. It will have to go into a bank first.
And of course banks have reserve accounts. That hardly proves anything except that it is beginning to be quite hard to take you seriously
Either debate the issues of don’t bother, I suggest. No wonder some think the supporters of MMT bring it into disrepute.
“The banks don’t care either way except for the expense of keeping the ATMs running.”
Oh, they do care. They are slowly closing cash machines. It is calculated (I can think of a small town in which one major bank already has removed its last cash machines). The banking sector is pushing relentlessly to de-monetise ‘money’ (i.e., cash, not credit) and turn ‘money’ into bank credit, that requires the user to have a bank account (‘credit’ being the stuff that you find falls down the hierarchy of money very fast in a crisis – then you find it isn’t ‘money’). The price of privatisation of money in the digital age is the elimination of money, for credit; the ‘promise to pay the bearer’ when the promise is made by a commercial bank is simply not worth the promise of the sovereign issuer. This is smoke and mirrors.
After the 2008 Crash, the only reason to stay with any commercial bank is because there is a Government guarantee standing behind the bank when customer deposits money (up to £85,000, so enough for most people in everyday life). That guarantee is all that persuasively makes credit in a bank look like cash. Credit is just credit; credit that is money requires a 100% guarantee. Money is supposed to be the stuff that the promise to pay is always – repeat always – honoured. Only the sovereign issuer (and soeverign tax taker) can give that guarantee in the modern world (effectively over the last three hundred years that has been firmly established). Everything else that looks like money is merely provisional, and depends on circumstances.
Notice that the switch to bank credit makes life most difficult for the poorest. I am astonished that this seems un-noticed, and a subject of apparent indifference, even here.
It is not a matter of indifference to me
I meant in the commentary, below the line.
@ John S Warren,
All fiat money is credit including central bank money which is an IOU of the BoE. The difference is that only central bank credit is fully government supported. Governments can never go bankrupt in the way that a commercial bank can so lending to government is seen as safe as it possibly can be. The commercial bank can of course create its own IOUs which use the IOUs of the central bank as a measure. If the commercial bank is in good shape then the two IOUs are, for all practical purposes, equivalent to you and I.
However, they are equivalent but not the same. If they were the same there wouldn’t be any need for any government guarantees of £85k, or whatever, per account.
For this reason, Randall Wray refers to a Pyramid of Money. Central bank money is at the top of the pyramid. Commercial bank money would be lower down. The old fashioned cheques that you and I might write, our personal IOUs, would be still in the pyramid but lower down still. However, in a way, they would still be ‘money’ providing we didn’t default on our promise.
So, you now seem to agree that tax is paid with commercial bank money
Thank you
Well you may have fixed Richard’s problem, but you have not advanced the case on commercial bank money. How on earth to parse this circular argument, going nowhere? “However, they are equivalent but not the same. If they were the same there wouldn’t be any need for any government guarantees of £85k, or whatever, per account.”
They are not the same. The £85k stands, because it is solely the Government’s security the depositor can rely on in a crisis. The £85k remains the residue of a problem endemic in the commercial banking system. These are the facts. You are parroting my argument, and adding nothing informative to it. If you have a substantive point, I suggest you spell it out fully; with each step explained.
Better still, read Mehrling.
Agreed John
Neil simply ties himself in knots
And he has no need to do so
“All fiat money is credit”.
Banal truisms will advance nothing. All money is credit; but not all credit is money. The real problem is determining which is which. In a commercial banking system it is during crises that you find out which is which. Only the sovereign issuer can provide a 100% guarantee that its credit is also money.
Katherina Pistor beautifully describes the issues in Ch.4, ‘Minting Debt’ in “The Code of Capital” (p.77):
“The logic of a private economy is that you can sell only if you have a willing buyer, that is, a private buyer. If private buyers retreat, demand declines, and asset prices fall, investors who thought they had huge amounts of wealth at their fingertips might lose it in no time. To lock in past gains, investors will try to convert their private assets into state money, the only financial asset that is guaranteed to keep its nominal value”.
That is when you find out that commerical bank credit (the fingertip credit in a private economy), may not turn out to be state money, as good as tate money, or readily transferrable into state money; unless there is a guarantee; at least up to £85k.
I was a bit disappointed with the Steve a keen podcast, it was rather uneventful i thought.
They told me they were very pleased with it
What were you expecting?
I just watched the Steve Keen & Friends podcast. I was astonished to find that I was engaged until the absolute end. I am normally switched off by this kind of video engagement, but I felt this was actually a platform where Richard’s ideas and commitment to engagement came across extremely well. I was much less impressed by the livestream comments which were played along in parallel with the online debate; why do they allow this type of narcissistic engagement to take place? Well done, Richard. A great exposition of your thoughts, values and emerging philosophy.
Thanks Bill
Appreciated
I confess to being puzzled by the negative references to the term ‘policy space’. As I was the first to raise the topic, it seems there is a need to defend it’s use. Richard stated that MMT failed to recognise any significant change in the role of money between the era of asset-backed currencies and the fiat currency era. On the contrary, it’s clear that MMT recognises the importance of the difference.
The flexibility of the ‘policy space’ which can be exploited by government is key to the difference, and this is recognised within MMT’s macroeconomic analysis.
The term ‘policy space’ is widely recognised, not just in MMT-focussed publications. Examples –
“POLICY SPACE: WHAT, FOR WHAT, AND WHERE?” from UNCTAD –
“The paper examines how developing countries can use existing policy space, and enlarge it, without opting out of international commitments. It argues that: (i) a meaningful context for policy space must extend beyond trade policy and include macroeconomic and exchange-rate policies that will achieve developmental goals more effectively”
And from ‘Research in Globalization’ at Elsevier –
“The purpose of policy space for developing and developed countries in a changing global economic system”, where the author says –
“Discussions on policy space have increased in frequency since the 2000s, leading to renewed debates on its definition, objectives and necessity. While the concept of policy space is debated in this paper, it may be helpful to first understand policy space as the boundaries within which decision-makers can create policies. The notion of boundaries suggests that there are actors who designate boundaries and include or exclude certain features. This raises questions on, ‘who decides the boundaries of policy space’ and ‘what features are included or excluded?’.”
Here, which bears on points from the UNCTAD paper, MMT academic Dr. Fadhel Kaboub points out the relevance of fiscal policy space to the problems encountered by developing countries –
“Modern Monetary Theory: A Tool for the Global South?”
https://www.rosalux.de/en/news/id/41284/modern-monetary-theory-a-tool-for-the-global-south