I have not finished the Wray book on MMT [Modern Monetary Theory, or Modern Money Theory, depending on whom you ask] but I am more than 200 pages into it and ready to tell you what I have learned. My son, Patrick, who recommended Wray’s book, says it is not so much a theory [with models, predictions, evidence, and so forth] as an analysis, and I think he is right, but whatever it is, it is striking, surprising, counterintuitive, and – interestingly enough – not new, as Wray makes clear.
Here we go, the blind leading the sighted. Stop me if I bump into something.
Big, strong, no-nonsense nations issue their own currency and will take no other. They have sovereign currencies. That is what I shall be talking about. Wray dutifully spends a good many pages talking about all the weenie countries that are unable to issue sovereign currencies, and also about the rather odd case of the Euro, but that is not what he is really interested in, and neither am I. Furthermore, we are talking about floating currencies, not currencies tied to a pile of gold or silver or cowrie shells or whatever.
We can boil the entire book down to two propositions, the second of which follows from the first. They are simple propositions, and they are, once you think about it, obviously true, but the second in particular is these days utterly rejected by everyone, left, right, and center. The policy implications will be immediately obvious.
The first proposition is that in a country like the United States with a floating sovereign currency, the currency – say, a bag full of dollars – is a collection of IOUs issued by the government. IOU, recall, is short for I Owe You. It is a promise to pay, issued, for example, by someone who loses big at a friendly poker game and doesn’t have enough money to pay the debt, or by a heavy drinker who runs a bar tab. The issuer of the IOU has assumed a debt by issuing the IOU. The recipient of the IOU [the bar owner, say], by accepting the IOU, has acquired a credit. It is an obvious accounting truth that the sum total of all the debts assumed by IOU issuers and the credits acquired by IOU acceptors is 0. There is nothing deep or puzzling about this, it is just a trivial conclusion from the meaning of IOU. If the debtor pays the debt, the IOU is returned to him or her by the lender. The debtor is now in possession of the original IOU, which cancels out the debt. The little piece of paper on which is written “IOU $10” can now be crumpled up and thrown away. Bank loans are just like IOUs, except that they are kept track of nowadays with key strokes, not pieces of paper. A bank loan is an IOU issued by a borrower to the bank, by a home buyer, perhaps, or maybe a small business owner. A bank deposit is also an IOU, but this time it is an IOU issued by the bank to the depositor. When I have money on deposit at a bank, the bank owes me.
Now, in a country with a floating sovereign currency, all of the money circulating, whether in coins or bills or checks drawn on banks or whatever, consists of IOU’s issued by the government. Take out a dollar bill and look at it. On the front in the upper left, printed in small letters, are the words “This note is legal tender for all debts, public and private.” That means that both the government and private lenders must accept this dollar bill as payment of, or cancelling out, a one dollar debt.
So far, this is pretty simple and not at all controversial. That is what dollars are. But why should anyone want to have dollars, in whatever form? This is slightly trickier, so follow along. The simple and obvious answer is, “to buy stuff with.” But why should someone selling stuff be willing to give it to me for these pieces of paper [or keystrokes – it doesn’t matter]? The superficial answer is, “because with it he or she can buy from someone else something that he or she wants.” But that is really not any sort of answer, Wray suggests. It just kicks the can down the road. Au fond, as the French like to say, why does anyone in America want dollars?
And now Wray lays his big surprise on us [or at least on me -- maybe this was obvious to the rest of you.] Ultimately, Americans need dollars because the United States imposes taxes on us and, being sovereign, can get away with only accepting dollars in payment. Now dollars, as we have seen, are the government’s IOUs, and in order to pay our taxes we need these IOUs issued by the government. And the way we get the IOUs is by having the government put out these IOUs, which is to say by spending.
Which brings us to Wray’s second proposition, the real humdinger:
Governments do not tax in order to spend. They must spend in order to tax.
When a government taxes, it collects up IOUs it has already issued. How did the people paying the taxes get those IOUs with which they pay their taxes? Well, this is a nation with a floating sovereign currency, so nobody else is issuing IOUs which the government will accept, and there is nothing like gold that can serve as a substitute. Those IOUs are out there, available to pay taxes, only because the government has bought something, spent some money, and paid for it with an IOU!
And that is fundamentally the whole story. There is a lot of mind-numbing stuff about the Fed and the Treasury and the difference between them and the relationship between them, along with more detail than I can or want to absorb, but the whole story resides in those two propositions.
Does Wray think therefore that sovereign governments can spend without limit? Yes, they can, but it may not be wise to do so, because once you have hit full employment, more spending is simply inflationary. And so forth and so on. Does Wray think this analysis entails any particular social policy? No, but it does lay to rest certain objections to social policy proposals that seem now to be accepted by everyone [except Alexandria Ocasio-Cortes and friends, but that is another matter.]
Anyone who objects to government spending on the grounds that the government has run out of money simply does not understand what money is in a nation with a floating sovereign currency