There exists today a slavish devotion to conventional wisdom. We see it in our elected officials, main steam media, TV pundits, and unfortunately, our academic elites. Fortunately, the Internet provides a mostly uncensored medium through which an infinite stream of opinions, facts, and hypotheses can be presented, debated, supported or, discarded.
Here we take a devil's advocate position on monetary policy. That is, who dares to challenge the Federal Reserve's practice of charging the Federal Government interest on "fiat" money?
I re-post articles that challenge and indeed contradict received wisdom from government agencies, and other "self proclaimed authorities."
Please feel free to leave a comment in the Blog Section and even recommend articles that fit this site.
Thanks for spending a few moments examining the true side of the coin.
The first, What is Money?, was published in May 1913, and the follow-up, Credit Theory of Money, in December 1914. Mitchell-Innes was published eight years after Knapp’s book, but there is no indication that he was familiar with the German’s work. In the 1913 article Mitchell-Innes wrote:
One of the popular fallacies in connection with commerce is that in modern days a money-saving device has been introduced called credit and that, before this device was known, all, purchases were paid for in cash, in other words in coins. A careful investigation shows that the precise reverse is true…
Credit is the purchasing power so often mentioned in economic works as being one of the principal attributes of money, and, as I shall try to show, credit and credit alone is money. Credit and not gold or silver is the one property which all men seek, the acquisition of which is the aim and object of all commerce…
There is no question but that credit is far older than cash.
L. Randall Wray, in his 1998 book, Understanding Modern Money,was the first to link the state money approach of Knapp with the credit money approach of Mitchell-Innes. Modern money is a state token that represents a debt or IOU. The book is an introduction to MMT.
L. Randal Wray is a Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. These institutions are hotbeds of MMT research. Wray also writes for the MMT blog, New Economic Perspectives.
Finally, to finish the historical tour, here is how Abba Lerner’s Functional finance is described by Professor Wray:
Functional Finance rejects completely the traditional doctrines of ‘sound finance’ and the principle of trying to balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjustment of total spending (by everybody in the economy, including the government) in order to eliminate both unemployment and inflation, using government spending when total spending is too low and taxation when total spending is too high.
Given its mixed history it is not surprising that MMT has been given different labels. Some economists refer to MMT as a “post-Keynesian” economic theory. L. Randall Wray has used the term “neo-Chartalist”. Warren Mosler stated, “MMT might be more accurately called pre Keynesian.” Given that Georg Knapp’s work was cited by John Maynard Keynes, the use of “pre-Keynesian” does seem more appropriate than “post-Keynesian”.
But under any category, MMT has been considered fringe or heterodox economics by most mainstream economists. It therefore has been relegated to the equivalent of the economic minor leagues, somewhere below triple-A level. However, that perception is changing.
MMT is slowly seeping into the public policy debate. These days Warren Mosler and others with an MMT viewpoint are frequently being interviewed on business news channels. MMT articles are being published. Recently, Steve Liesman, CNBC’s senior economics reporter, used a Warren Mosler quote to make a point. Liesman said: “As Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan’.”
MMT is not easy to for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperity” according to its proponents.
The MMT counter argument is:
it [is] a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?
Emotions run hot in the current economic environment, especially on the internet. In some cases the energetic online promoting of MMT has turned into passive aggressive hectoring, hazing,name calling, badgering, and belittling. So be warned, if you write some economic analysis online that disagrees with MMT doctrine you might find yourself attacked and stung by a swarm of MMTers. If you are an economic “expert” and you do not understand monetary basics you may also get mounted on an MMT wall of shame.
A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.
Another school of economics feeling the heat from MMT are the Austrians. Austrian economist Robert Murphy recently wrote an article critical of MMT, calling it an “Upside-Down World“. MMTers lined up to disassemble and refute Murphy’s essay. Cullen Roach at the Pragmatic Capitalist blog shot back this broadside::
We now live in a purely fiat world and not the gold standard model in which Mises and many of the great Austrian economists generated their finest work. Therein lies the weakness of the Austrian model. It is based on a monetary system that is no longer applicable to modern fiat monetary systems such as the one that the USA exists in.
Does MMT really offer a path to prosperity? Or did the ancient Roman, Marcus Cicero (106 BC – 43 BC), have it right when he said: “Endless money forms the sinews of war.”? The debate will only intensify. If you value those green, money-thing, government IOU tokens in your wallet then it pays to learn what all the commotion is about.
A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government. This point is graphically described by Warren Mosler as follows:
What happens if you were to go to your local IRS office to pay [your taxes] with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.
Yes, it gets destroyed!
— The 7 Deadly Frauds of Economic Policy, page 14, Warren Mosler
The delinking of tax revenue from the budget is a critical element that allows MMT to go off the “balanced budget” reservation. In a fiat money world, a sovereign government’s budget should never be confused with a firm, household or a state budget. Firms, households and U.S. states must live within their means and their budgets must ultimately be balanced because they do not create their own currency. A sovereign government does create its own currency and money can never, involuntarily, go broke. There is no solvency risk.
MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings. This is a straightforward accounting identity in MMT, not a theory. Warren Mosler put it this way:
So here’s how it really
works, and it could not be simpler: Any $U.S. government deficit exactly EQUALS
the total net increase in the holdings ($U.S. financial assets) of the rest of
us – businesses and households, residents and non-residents – what is called
the “non-government” sector. In other words, government deficits equal
increased “monetary savings” for the rest of us, to the penny. Simply put,
government deficits ADD to our savings (to the penny).
— The 7 Deadly Frauds of Economic Policy, page 42, Warren Mosler
Therefore, Treasury bonds, bills and notes are not needed to support fiscal policy (pay for government). The U.S. government bond market is just a relic of the pre-1971 gold standard days. Treasury securities are primarily used by the Fed to regulate interest rates. Mosler simply calls U.S. Treasury securities a “savings account” at the Federal Reserve.
In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.
MMT the real problems for a government to address are ensuring growth, reducing
unemployment, and controlling inflation. Bill Mitchell noted that, “Full employment
and price stability is at the heart of MMT.” A Job Guarantee (JG) model, which
is central to MMT, is a key policy tool to help control both inflation and
unemployment. Therefore, given the right level of government spending and
taxes, combined with a Job Guarantee program; MMTers state emphatically that a
nation can achieve full employment along with price stability.
As some background to understand Modern Monetary Theory it is helpful to know a little about its predecessors: Chartalism and Functional Finance.
German economist and statistician Georg Friedrich Knapp published The State Theory of Moneyin 1905. It was translated into English in 1924. He proposed that we think of money as tokens of the state, and wrote:
Money is a creature of law. A theory of money must therefore deal with legal history… Perhaps the Latin word “Charta” can bear the sense of ticket or token, and we can form a new but intelligible adjective — “Chartal.” Our means of payment have this token or Chartal form. Among civilized peoples in our day, payments can only be made with pay-tickets or Chartal pieces.Alfred Mitchell-Innes only published two articles in the The Banking Law Journal. However, MMT economist L. Randall Wray called them the “best pair of articles on the nature of money written in the twentieth century”.