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Friday, May 3, 2019


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


howard b said...

would that work historically, for pre capitalist economies too?

Dean said...

It appears Wray has published distinct books, not merely variant editions, using both titles. For instance, Modern money theory : a primer on macroeconomics for sovereign monetary systems ( and Modern monetary theory and practice : an introductory text ( The former is just over 300 pages, the latter approaching 400.

Robert Paul Wolff said...

The first is the one I have.

Paul said...

"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[.]"

What are the real practical consequences of the change in basic analysis? Nothing, really. Before, we said "the government can't pay for medicare for all because taxes would need to be raised to pay for it." Now, we say, "the government is best off not paying for medicare for all without raising taxes because if they did so then inflation would rise to unacceptable levels." So here's the trouble: (a) if that's all that MMT is saying, then that's fine, but it doesn't seem to help us much. Worse, it seems to hurt us, insofar as it adds a whole bunch of arcane conceptual footwork to explain the same basic issue: namely, we must engage in a class structure to take back resources from the rich if we are to attain a just society. The MMT version of that analysis at best seems to just obfuscate that truth behind an unnecessary layer of theoretical maneuvers. (b) Some claim that MMT theorists, however, do have something more to tell us. Namely: we should just go ahead and pay for medicare for all without worrying about taxes! Now the problem is: (i) this claim simply seems implausible; and (ii) it *really* obscures the issue of our needing to engage in class struggle to win a just world.

All in all, it's hard to see why some on the left think MMT is some sort of magic bullet for capitalist exploitation and inequality.

Tom Hickey said...

@ howard b

MMT is basically institutional analysis of monetary production economies. There are different types of monetary regime and this is independent of economic systems. Different monetary regimes result in different policy spaces. Since the world is now on a floating rate regime since Nixon shut the gold window in August 1971, MMT focuses on the current monetary system in terms of the policy space it offers. The "holy grail" of macroeconomics is harmonizing growth, full employment and price stability. MMT addresses that in terms of policy space available under the current arrangements.

@ Dean

Those are two different books.

1. Modern money theory : a primer on macroeconomics for sovereign monetary systems is a primer written by Wray. A draft was published initially on the New Economic Perspectives blog in serial form. It is still available to read here. The blog posts were subsequently refined and subsequently published by Palgrave MacMillan. This is a primer aimed at non-economists that want an introduction to MMT that is accessible but not superficial. I have read it and recommend it highly.

While at NEP check out Eric Tymoigne's draft text on <money & banking from the MMT POV. This is important for understanding MMT's foundations of MMT.

Both the primer and the M&B text are in the navigation bar at the top of the NEP home page.

2. Modern monetary theory and practice : an introductory text is a new textbook on macroeconomics for undergraduates and beginning grad students. It is the first academic textbook on MMT, available through the links here. I have not yet obtained a copy, but Bill Mitchell serialized it on his blog (billyblog) while it was in development, so I am familiar with its development. It is a standard text for academic use written not only by Wray but also Bill Mitchell and Martin Watts.

The primer will be a more suitable introduction than the text for most, since the text deals with macroeconomics along with MMT.

Even more basic than Wray's primer is Warren Mosler's Seven Deadly Innocent Frauds. It is an easy read aimed at the layperson. Printed and Kindle versions are available at Amazon, and there is also a freely downloadable PDF at Mosler's blog site here .

Warren Mosler came up with the original idea for MMT in terms of a currency sovereign having a monopoly on its currency and all this implies in Soft Currency Economics (1993) and then Mosler, Wray and Mitchell developed it. They were later joined by others — Pavlina Tcherneva, Stephanie Kelton and Scott Fulwiller in particular. A revised version of Soft Currency Economics is available at Amazon here.

For those who prefer watching to reading, I suggest Stephanie Kelton's videos on YouTube. Just search on "stephanie kelton modern monetary theory." Wray, Mitchell and others also have introductions to MMT on YouTube.

For those who want to get into the nitty gritty, there's a raft of working papers available for free download at the Levy Insititute. Just search on the names above.

Tom Hickey said...

Oops. Correction: "While at NEP check out Eric Tymoigne's draft text on <money & banking from the MMT POV. This is important for understanding MMT's foundations of MMT," should read, "While at NEP check out Eric Tymoigne's draft text on <money & banking from the MMT POV. This is important for understanding MMT's foundations IN FINANCE."

This is what sets MMT as a macro theory apart from most conventional economic analysis.

Keynes had already accepted Chartalism as a theory of state money, on which MMT is partially based. Post Keynesian economists had also developed this analysis, but MMT took this development a step further by bringing accounting, money & banking, finance, and institutional analysis into economic theory and analysis. There are actually few original ideas in the MMT contribution. What is original is the organization and drawing out of implications.

David Palmeter said...

I’m pretty close to being an economic illiterate, so bear with me if you will. What little I know (or think I know) about economics is that if government keeps pumping money into the system, so that more monetary units are available to pay for the goods and services people want to buy, the price of the goods and services will go up, i.e., the value of the money will go down. Why won’t that happen if the government pays for, say, Medicare for all, by simple fiat rather than collect the needed IOUs to pay for it? Why not reduce inequality by giving everyone a few million dollars?

Robert Paul Wolff said...

David Palmeter, pumping money into the system will not cause inflation until there is full employment, or so the MMT folks say. Keep in mind, so long as prices are stable, the larger the government deficit, the larger the private sector surplus. They are two sides of the same coin. Reducing inequality is a separate matter, one that I did not address. From the point of view of the wellbeing of the society, it obviously matters what the government buys with its IOUs: health care, roads, bridges, or weapons.

s. wallerstein said...

It sounds a little bit like the "calories don't count" school of economics, but what do I know? Maybe calories don't count.

Still it's hard to believe that mainstream economists are so narrow-minded that they have never noticed such a basic technical point. They may not want to talk about exploitation under capitalism, to be so sure, but that's another point, more ethical than technical.

As my father used to say, if it's too good to be true, it's not true. Still, I'll try to keep an open-mind on this subject.

David Palmeter said...

Does the fact that we’re not a closed, self-contained economy, but rather one that buys, sells and borrows globally make a difference?

Robert Paul Wolff said...

David Palmeter, no it does not.

Tom Hickey said...

@ David Palmeter

"Does the fact that we’re not a closed, self-contained economy, but rather one that buys, sells and borrows globally make a difference?"

Absolutely. All contemporary economies are open economies to the degree they engage in trade and this must be taken into account in macroeconomics, although not necessarily in micro. The global economy is the only closed economy on this planet, which is important since for a comprehensive picture the global economy must be taken into account as the overarching system in which the rest of the world's economies are embedded. This, of course, has social and political consequences in addition to economic.

The income-expenditure model initiated by Keynes in the General Theory is the basis of macroeconomics as the study of national economies:

Y (GDP) = C (household consumption expenditure) + I (firm investment) + G (net government fiscal balance) and (X-I), which is exports minus imports).

This leads to the sectoral balance identity:

Private domestic sector + government sector + external sector = zero

This implies that a government's fiscal deficit corresponds to a nongovernment surplus (domestic private sector plus external sector). So the national debt is the aggregate net financial assets of nongovernment (the financial assets of nongovernment alone sum to zero).

These are accounting identities, hence, tautologies.

This is the economic aspect, which includes the trade balance by taking the external sector into account. The external sector is trade with the rest of the world (ROW).

See Peter Cooper, Short & Simple 15 – The Sectoral Balances Identity, at heteconomist. Peter is a Marxist economist who has integrated Marxian economics with MMT. His blog is an excellent resource.

The financial aspect is reflected in the exchange rate. In a floating rate system, exchange rates are left to float unless a country chooses to peg it currency to another currency. Then that countries has a fixed rate instead of a floating rate. Countries that don't float their exchange rate are not currency sovereigns and have limited policy space relative to currency sovereigns since their policy is constrained by fluctuation of the exchange.

The countries that adopted the euro as their currency gave up currency sovereignty to the ECB as the issuer of the euro. MMT economists have written extensively on the effect of this, for example.

Tom Hickey said...

"Robert Paul Wolff said...
David Palmeter, no it does not."

This is true regarding the general case as described by MMT, which focuses on macroeconomics, therefore, a national economy in the abstract. But the general case is an idealized model, not too different from the neoclassical model in this regard. In the ideal model exchange rate fluctuation smooth out the aggregate trade balance in the world economy as a closed system.

But in reality, this doesn't happen. MMT economists know this is an empirical fact, of course, and they account for it based on special cases. I won't get into that since it would be getting into the weeds. Suffice it to say, this a an area of huge controversy in economics and the dust has far from settled.

In the real world, each country presents a special case. This also has to be taken into account in dealing with actual policy formulation. In the real world, all countries don't just let their currencies float, even those that are considered to do so. National currencies are issued by the nation's central bank and central banks have tools to influence the exchange rate. Monetary policy alone (setting the interest rate) affects the exchange rate. A strong currency inhibits exports while making imports more expensive, so many central banks seek to manage the exchange rate as they do the inflation rate by changing the interest rate.

All countries are constrained by the availability of real resources (which differs among nations) and also by institutional arrangements, which are legal, political, etc, and influenced culturally.

What this means is that different countries will have different policy spaces in which to make choices. For many countries, the external sector is a significant factor in this, e.g., net exporter or net importers, since very few countries run balanced trade and the trade balance of the global economy must sum to zero as an accounting identity.

This explains a great regarding imperialism/neo-imperialism, colonialism/neocolonialism, as well as neoliberalism as political theory based on liberal economics ("free markets, "free trade, free capital flows"). See John Foster Bellamy, Absolute Capitalism. Well worth a read.

Tom Hickey said...

@ s. wallerstein said...

Conventional economists are heavily invested in their careers. There is also a huge amount of cognitive bias. Historically, this all began in reaction to the effect of Karl Marx and Henry George, who emphasized economic rent, a subject that the classical economists had taken up. See Michael Hudson on this. John Bates Clarke was at the tip of the spear on this. BTW, this is not just contra MMT, but also Keynes and Keynesianism, which in the neoliberal/neoclassical view leads to incipient socialism.

I used to say to our audiences: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
Upton Sinclair, I, Candidate for Governor: And How I Got Licked (1935), ISBN 0-520-08198-6; repr. University of California Press, 1994, p. 109. (source)

Krugman to Lietaer: "Never touch the money system!" BTW, in the video that this short clip is taken from, Bernard Lietaer, a central banker, says that MMT is correct.

On the other hand, in reading a lot of the recent opposition to MMT from both the economic and financial community a have been gob smacked at the level of clueless among so-called experts. I guess they don't know that Ian Haztius, chief economist at Goldman, uses the same type of analysis as MMT to excellent effect. Moreover, their record of forecasting is abysmal and that of MMT economists has been excellent in comparison.

So as unbelievable as it may seem, we are ruled by morons and they are advised by morons.

Tom Hickey said...

Here's another one, this by Paul Samuelson on a need for the noble lie.

Paul Samuelson: The balanced budget myth

Tom Hickey said...

Alan Greenspan, on the other hand, tells Paul Ryan the truth.

Greenspan: "There is nothing to prevent the government from creating as much money as it wants."

Greenspan goes on to explain, exactly as MMT does, that the only constraint is the availability of real resources to meet demand, not the availability of "money."

If demand increases in excess of supply, inflation will result. Adding funds will bring idle resources on line first and then spur investment to increase supply as long as it is profitable to do so. But when supply can no longer be increased, which happens theoretically at full employment, then prices will rise. However, the reality is that in an open economy, increasing demand will also increase imports to satisfy some it. So the labor will be drawn from abroad. This is very fluid — it's about flows, after all — and it is difficult to impossible to construct a model that fits, or even to anticipate contingencies.

s. wallerstein said...

Tom Hickey,

Thanks for going to such lengths to explain MMT.

As I said above, I will try to keep an open-mind on this subject.

Tom Hickey said...

I am passionate about this since it looks to me like MMT has the potential to break the back of neoliberalism, hopefully before it destroys us.

I am not saying that MMT is the answer. After all, it is developed within the framework of capitalism, which is the real problem.

But the challenge now is not primarily either criticizing the system or developing a utopian alternative to it, but rather proposing a socially, political and economically feasible way of getting from where we are now to a better place by confronting the existing and emerging challenges we face. MMT gets the ball rolling.

Another key element of MMT is the MMT version of a government guarantee of a job at a living compensation (wage, benefits and protections) for all willing and able to work. This is a voluntary program, not workfare. The program would match jobs to applicants rather than trying to match applicants to jobs. In other words, jobs would be created as necessary to employ all who wish to work.

The fixed wage anchors the value of the currency to a unit of unskilled labor, that is, a wage denominated in currency units to an hour of work like "dollars per hour." The current proposal is $15 p hr with benefits such as health care. This would address the imbalance between capital (represented by management) and labor, potentially eliminating "the reserve army of the potentially destitute that capitalism uses to "discipline" labor.

Couple that with the ability of government to self-fund a Green New Deal, including universal health care and tuition-free education, and the neoliberal choke hold is broken at least domestically. The fall of neoliberalism is a sine qua non of ending neo-imperialism and neocolonialism worldwide.

LFC said...

I'm sure I'm probably missing the point, but the notion that a bag of dollars is a collection of IOUs issued by the government *may* be true, but it is not, I think, "obviously true" as the post says. It is not even very intuitive.

To simplify things, let's boil matters down to one dollar. The Treasury Department prints out one dollar. According to the post, the government has thereby incurred a debt; it has issued an IOU, a promise to pay. But a promise to pay *what*? What exactly has the government promised to pay and *to whom*? It's not as if someone with a dollar in his or her wallet can call the Treasury Dept. and say "I have a dollar, I have an IOU issued by you [the government]. So you owe me! Pay up!" If someone called the Treasury Dept and said that, the person at the other end of the line would presumably start wondering about the caller's mental health. So in what sense is a dollar bill a *promise to pay* by the government (as opposed to a piece of paper that, by accepted social convention, can be exchanged for something of value, though admittedly these days a single dollar bill can't be exchanged for much)?

I'm not necessarily saying what the post says on this point is wrong, I'm saying it's not intuitive, at least not for me.

Tom Hickey said...


The government obligates itself to accept its own IOUs (debt obligations) in satisfaction of obligations it imposes (tax obligations, fees, fines and tariffs). In the US the government establishes the unit of account as the US dollar, over the issuance of which it has a monopoly. Dollar are liabilities on the government's books and assets on the books of nongovernment holders of dollars. Tax settlement occurs in terms of the government's books. Government liabilities that were created by government expenditure get extinguished by tax payments. The national debt is simply tax payments that have not yet been redeemed since government seldom taxes back more than it spends and rarely runs a balanced budget. Of course, government can reduce the unredeemed tax credits by increasing taxes, but why? A government that issues its currency doesn't need to obtain it since it creates it. There is no issue in government servicing its debt in perpetuity or "paying it off" immediately through issuance. This is a pseudo-problem and all the handwringing over it is either crocodile tears or due to ignorance of what is really going on.

Government uses its liabilities (dollars) in markets to transfer private goods to public use and also issue transfer payments such as social security. This adds to the spendable funds in domestic banks. To control for inflation government withdraws some of the funds it has injected, chiefly through taxation, which imposes an obligation (liability) on taxpayers. Taxpayers satisfy that tax obligation by exchanging the government's liabilities in the form of dollars. This means that they have to obtain dollars and the government is the monopoly provider of its currency. All the dollars that are taxed back come initially from government since there is no other source.

What about borrowing money from the bank to pay taxes? That just means that the bank pays government in the government's liabilities, and the borrower reimburses the bank plus interest over time.

It is true that banks can and do create liabilities denominated in the government's currency when they issue loans and create a corresponding deposit. But this is not issuing currency and tax obligations finally settle in the government payments system in liabilities on the government's books.


Tom Hickey said...


BTW, don't confuse "money" with "money things" as tokens. "Money" is a double entry on different parties books. When the Fed creates a USD it enters a liability on its spreadsheet and credits the account of a recipient. This occurs in the payments system that the Fed operates for final settlement of accounts. Only members of the Federal Reserve System have accounts at Federal Reserve banks. The members are commercial banks (for the most part).

When the government spends it does so through a government agency acting on the authority of a congressional appropriation. The US Treasury directs the Fed as the government's fiscal agent to settle the account. The Fed credits the account of the appropriate commercial bank in the payments system, which is a Fed (government) liability and a bank (nongovernment) asset on the government's books. The bank then credits the appropriate customer account on its books, e.g., a social security account. Thus, the bank asset on the Fed's books is offset by a corresponding liability on the bank's books, which is a spendable customer asset.

If the customer writes a check on the account, the account is settled either by interbank netting or, if final payment, in the Fed's payment system, e.g., via Fedwire. No money tokens are involved. It's all electronic now.

If the customer wants cash, the bank takes the amount out of its vault cash (bank asset) to settle its liability to the customer at the window. The customer's account (bank liability, customer asset) is marked down when the customer receives the money token throuigh the window, gaining an asset in a different form.

Where does the bank get its vault cash? From the Fed. The bank exchanges assets it holds in its deposit account at the Fed for the desired cash, which gets shipped by armored car to the bank's vault. From there it is distributed based on window demand.

This may should somewhat complicated in summary. If you want to understand the operations further and see the various T-accounts, look at Eric Tymoigne's M&B book cited above. It is quite transparent when one sees how it actually works.


Jerry Brown said...

LFC, you are just starting one step too late in the MMT story. The government imposes taxes that people have to pay or risk loss of property or liberty- that is the first step. Tax is a 'You owe me- or else', rather than an 'I owe you' and it comes first. Then the government provides the means to pay those taxes in the form of its currency but it wants real things in exchange. The IOU that is the US government's dollar bill is the promise to accept it as the way you can pay the debt imposed on you. Because lots of other people also need them to pay their taxes, you can find people willing to exchange real goods and services for these fiat dollar bills, which gives them value aside from your tax debt to the government.

If you call the Treasury and ask them to pay up they might well say go ahead bring in the dollar and we will reduce your tax obligation for next year. That is how they pay up. Death and taxes really are the only sure thing.

David Palmeter said...

I'm having intuitive problems too, and am hampered by the fact that I can't follow much of the technical discussion. We're talking about money as currency, but most money in the economy is not currency--it's just a promise. If a bank lends money, it may not (and probably does not) even have the currency needed to make the loan. It just credits the borrower's checking account. The borrower then writes checks on that. Someone else will deposit that check and in turn right a check on that. The government has done nothing in any of this except set an interest rate that affects the rate at which someone can borrow, and told the bank how much it must keep in reserve, after which the bank is free to lend as much as it likes, and thereby increase the money supply, but not the currency supply. They're two different things,and it's only the currency that the government issues and promises whatever it promises to do. (Dollars used to be called "silver certificates" and were redeemable in silver, but that's been done away with.)

Tom Hickey said...

@ David Palmeter

This is the difference between state money and credit money. Banks are granted the privilege of being able to denominate their credit in the state's unit of account ("currency"), and they alone have access to the central bank to obtain currency directly from the government as the sole issuer of it. Most of the transactions in a contemporary financial system take place in credit. Not only banks create credit but also finance companies, like the automobile manufacturers finance companies. But only banks clear their transactions in the government's payments system, where the central bank is that lender of last resort ensuring that all transactions always clear. For this privilege, banks agree to submit to regulation and oversight. (Warren Mosler, founder of MMT, once owned a small bank and knows firsthand how this works.)

Commercial credit depends on repayment of loans. This results in a feature/bug in the monetary production system characteristic of capitalism, especially in a monetary system in which the currency is not convertible by the issuer into a real good on demand, traditionally gold or silver.

Why not go back to a fixed rate convertible system like the previous gold standard? Because greater stability results in a much narrower policy space, for one thing, and secondly, credit become much more difficult to obtain, cramping commerce. In other words, there are tradeoffs. Economics is based on opportunity cost, which is based on tradeoffs. Every choice rules some things in and others out. What is ruled out by the choice is the opportunity cost. This leads to cost/benefit analysis and risk/reward ratio, for instance.

The feature is that credit is more widely available than if holders of state money were the only one lending, facilitating commerce. The downside is that borrowed funds must be repaid and this creates a systemic risk for the financial system, ergo, the cycle of financial crises, which Hyman Minsky explained in the financial instability hypothesis. Wray studied under Minsky and is considered one of the primary interpreters of Minsky's work. It is central to MMT.

As I said above, this is rather complicated and in some ways non-intuitive. This is why MMT is so important at this juncture, where misunderstanding is leading to disaster. One really needs to research this to begin to get the breadth and depth of it. See references cited above. I got into MMT by reading a comment in which references were provided. I thought the theory somewhat farfetched at the time but I followed up and realized that, yes, the experts actually were badly confused and it was leading to dysfunction.

This is all treated in theory of money, and MMT is based on an institutional view of the combined use of state and credit money, in particular in contemporary monetary production economies. But MMT also investigates the history, too. A lot of the problems in economics and finance result from incorrect assumptions about the institutional foundations of economics and finance. Much of this misunderstanding is based on "common sense" and "intuition" that doesn't fit the facts, in part because it is rule-based and institutional arrangements that set rules shift. For example, even though the world is no longer on a gold standard, a lot of thinking on economics and finance, even by experts, assumes it is. This may be due to cognitive bias, since they believe it ought to be in order to reduce risk and to prevent volatility of monetary value.

Tom Hickey said...

BTW, here is a recent post by Bill Mitchell addressing Marxist critiques of MMT for those interested in this angle.

Marxists getting all tied up on MMT

marcel proust said...

I am an economist, not a monetary economist and haven't thought much about monetary issues for over 20 years; nevertheless, a couple of quick thoughts about MMT, at least as portrayed here. I have not read any of this on my own.

1/2) "Ultimately, Americans need dollars because the United States imposes taxes on us and, being sovereign, can get away with only accepting dollars in payment."

This statement is similar to another that economists make concerning money which is that if we know that at some time in the future, a particular currency (like the US dollar) will not have value, then it should not have value today. Why, by backwards induction. Pick any date that you are very confident the US dollar will have no value: e.g., 1/1/2500. Then on 12/31/2499, no one with any sense would accept dollars in exchange for anything, because they will not be able to use them the following day. But then... this is essentially where the tax-based argument comes from, because it short-circuits this logic: one will still be able to use dollars on 1/1/2500 to pay taxes, therefore... It is an argument that makes logical sense without being of any practical use.

Like much of economics, MMT's analysis is wildly ahistorical. This is a problem for understanding the development of social & economic institutions (like money). People use money for exchange because it reduces the cost of exchange, it makes exchange much more convenient. Why do people, especially in the USA, use Federal Reserve Notes for money? For much the same reason that any individual is on Facebook rather than another social network; because (almost) everyone else is.

How did this situation come to be? Until the establishment of the Federal Reserve System, the US dollar was an abstraction, existing only as a platonic ideal that was approximated by bank issued currency (I am excepting the issuance and slow retirement of greenbacks during and after the Civil War). That is, paper currency was issued by banks and legally exchangeable for fixed amounts precious metals (at different times, various, legally defined, amounts of gold &/or silver). Other than precious metals, I do not believe that there was any legally prescribed thing which which any and all debts could be extinguished. A quick reading of the text of the Tariff Act of 1789, the first act of Congress (text downloadable specifies a whole lot of tariffs, but not what can be used to pay them: this was before the existence of paper money supplied by the federal government. I believe at the time that there were state supplied paper currencies, not sure if they were tied to precious metals, and there was also a variety of coins in circulation (gold and silver typically).

On the western frontier of PA, there was a huge dearth of money, and because it was easily marketable, IIRC, whiskey was a commonly used medium of exchange. This was one of the reasons both for taxing it and for outrage at the tax. The feeling there was that if the eastern bankers were not so greedy and extortionate, there would be more money in circulation and enough would make its way to the frontier that they could engage in exchange much like people did back east, i.e., with coins and various types of paper currency. That they couldn't meant that the region was unusually vulnerable to taxes that did not fall on other regions.

In short, to understand why people use $US dollars for money it makes much more sense to examine the history of that particular kind of money and how and why it came to be widely accepted than to say "It is the only thing that can be used to pay taxes." By the time the US went off the gold (exchange) standard in 1971, US dollars were firmly a part of the institutional structure of the US economy, everyone was accepting them, and there was no particular reason not to continue using them in the same way as before. Being able to use them for taxes was merely gravy.

marcel proust said...


2/2) "Governments do not tax in order to spend. They must spend in order to tax." Sounds neat, but not well aligned with recent history of the money supply. IIRC correctly, Krugman in recent blog posts or columns against Steven Moore and his corrupt forecasts and policy suggestions has included graphs of the money supply (& inflation) since the financial crisis. A huge part of the money supply, if not most, is due to the Fed's purchases of assets (quantitative easing) since 2008, not its response to budget deficits. At least since 2012, say, it is clear that the government has not had to spend in order to tax, but it continues to do so. Furthermore, unless one agrees with Saez and Zucman about the benefits of high and steeply progressive taxes (spoiler alert: I do), why would the government bother to tax unless it wanted to spend?

My impression from this account: MMT is basically a lot of hand waving to justify massive spending, much like supply side economics is a lot of hand waving to justify massive tax cuts for the wealth.

Anonymous said...

@marcel proust

I am more charitable to MMT, but I am not an economist.

The "tax drives money" thing is something I have spent some time pondering about. (Note that MMTers are talking about fiat money, not commodity money). For one, MMTers advance the case of colonial Africa as evidence that taxes do drive money. (Noah Smith wrote about that not long ago). In the case of Africa, actual monetary capitalist economies were created from scratch by the imposition of taxes.

In that case, then the tax drives money thing is not merely a Gedanken experiment.

On the other hand, as you point out, in general commodity did predate fiat money. People were already using money and did not require any additional inducament to keep using money.

The conclusion I reach is that taxes may be a sufficient condition, but maybe not a necessary one.

Yet Another AnonyMouse

LFC said...

Am not an economist (and don't really have a view on MMT b.c I don't feel competent to have one).

That said, I think m. proust is right to bring up history in this context. I've recently been reading a history of the 19th-cent. U.S. so I was aware of the separate bank-issued currencies that he mentions. As he also points out, the U.S. was levying tariffs (taxes on imports and I guess taxes on certain domestic transactions also) long before there were Fed. Reserve notes.

As for "govt must spend in order to tax," I don't find the original post's explanation v. satisfactory. Surely the govt can print dollars and put them into circulation without *spending*, i.e. buying goods and/or services via congressional authorization/appropriation. I understand the point that dollars have to be "out there" in order for people to use them to pay taxes, but I don't understand why govt has to *spend* (i.e., buy things) in order to put dollars "out there." Govt spending does provide one justification or reason for "creating" dollars, perhaps a major reason, but I don't think the only one. Perhaps one of the economists in the thread can clarify...

And speaking of history (and this is my last point), it might be worth looking at the history of taxation (broadly defined) and its connection with, e.g., state formation in Europe. Maybe today govt "spends in order to tax", but e.g. in late-medieval and early-modern Europe it was definitely the other way around. Governments were often desperate for resources (and money), and tried to extract them from the pop. in various ways (this was before uniform national 'fiat' paper currencies, obviously, but still might have some relevance).

LFC said...

I guess M. Proust already addressed part of my point, inasmuch as the Fed's purchases of Treasury bills etc. is one way of increasing the money supply (effectively putting more dollars into circulation) without spending on goods/services. Another way, presumably, is simply to print more dollars (either by literally printing more or doing something electronically that has similar economic effects).

M. Proust also asks why, unless the govt were committed to sharp redistribution through taxation, the government would tax unless it wanted to spend. One might also ask why the government borrows (i.e., issues Treasury bills). Do the MMT people think that unnecessary under most circumstances? (I think I'd better stop here before confusing myself further.)

marcel proust said...

Another way to think about fiat paper currency is that, so long as it functions reasonably well as a medium of exchange -- first that people will accept it in exchange for other things of value -- cars, houses, food, etc. and second, inflation is not especially severe (I am thinking of the situations like the post WW1 hyper inflations) -- as long as a particular fiat currency functions reasonably well as a medium of exchange, then it is a reasonably decentralized accounting device indicating how much an individual may claim of the social stock of goods and services. As long as everyone else is willing to respect these claims in general, there is no good reason for any individual not to accept fiat currency in exchange for whatever goods & services (s)he wishes to sell. It is a social convention, like driving on the right, or being on facebook, etc., etc.

Danny said...

My addendum to the post is 'pretty good? And heck, even Smith, or Keynes, would not be considered rigour par excellence by the exacting standards of today's Economics.'

Jerry Brown said...

Why would the government borrow if it can just create currency? When a currency is on fixed exchange rate to say gold, then the government does have to borrow if it wishes to defend that currency exchange rate valuation. A floating exchange rate removes that necessity. And the US dollar was fixed to gold (at least in part) until 1971. In some sense the laws requiring the Federal government to issue debt for expenses over taxation are a relic of prior gold standard policy. Like you ask- MMT considers it economically unnecessary under most circumstances for the issuer of a currency like the US Dollar to issue bonds in order to deficit spend.