A Selection of Articles on Modern Monetary Theory by L. Randall Wray | neweconomicperspectives.org

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Reproduced from: http://neweconomicperspectives.org/about.html

This website offers policy advice and economic analysis from a group of professional economists, legal scholars, and financial market practitioners . We started this blog in order to weigh in on the serious challenges facing the global economy following the financial meltdown in 2007. We aim to provide an accurate description of the cause(s) of the current meltdown as well as some fresh ideas about how policymakers — here and abroad — should address to the continued weakness in their economies. Our approach, which has been dubbed “Modern Money Theory” or “The Kansas City Approach,” builds on the work of Abba P. Lerner, John Maynard Keynes, Hyman P. Minsky, Wynne Godley and other important figures of the past. Above all, we are careful to provide analyses and policy recommendations that are applicable under a modern, fiat money system.


Reproduced from: http://neweconomicperspectives.org/2014/06/modern-money-theory-basics.html

Posted on June 24, 2014
By L. Randall Wray

*I’ll return to my series on the role of taxes in MMT later this week. Meanwhile, here’s a short post on MMT.

Modern Money Theory (MMT) seems to confuse two groups of otherwise sympathetic economists. First there are those like Paul Krugman who are generally of the Keynesian persuasion and who like MMT’s “deficit owl” approach. I think Krugman would really like to stop worrying about the deficit so that he could advocate an “as much as it takes” approach to government spending. The problem is that he just cannot quite get a handle on the monetary operations that are required. Won’t government run out? What, is government going to create money “out of thin air”? Where will all the money come from?

He really doesn’t understand that “money” is key stroke records of debits and credits. He still thinks banks take in deposits and then lend them out. He starts to tear his hair out whenever someone tries to correct him on this. He’s wedded to the deposit multiplier idea he got from his Econ 101 textbook.

The other group that is otherwise sympathetic is the Post Keynesians. They understand banking. They know that “loans create deposits”. They know the “deposit multiplier” is actually a “divisor”, as “deposits create reserves”. (Not in any metaphysical sense but rather in the sense that an interest rate-targeting central bank always accommodates the demand for reserves.) However, they cannot understand how a sovereign government spends. Doesn’t it have to borrow the currency from private banks? Like Krugman, they argue that (given modern arrangements), government cannot spend by “keystrokes”.

So here’s an attempt to put the fears of Krugman and Post Keynesians to rest. There is a symmetry between bank lending and government spending.

I also hope to help clarify things for a third group—the “debt-free money” folks who want Uncle Sam to spend “debt-free money”. Short answer: depending on how you look at it, he either already does, or cannot ever do so.

Here we go with the basics of MMT.

For the past four thousand years (“at least”, as John Maynard Keynes put it—see note at bottom), our monetary system has been a “state money system”. To simplify, that is one in which the state chooses the money of account, imposes obligations denominated in that money unit, and issues a currency accepted in payment of those obligations. While a variety of types of obligations have been imposed (tribute, tithes, fines, and fees), today taxes are the most important monetary obligations payable to the state in its own currency.

There is an approach that begins its analysis of money from this perspective, now called Modern Money Theory (MMT). It is based on the work of Keynes, but also on others such as A. Mitchell Innes, Georg F. Knapp, Abba Lerner, Hyman Minsky, Wynne Godley, and many others—stretching back to Adam Smith and before. It “stands on the shoulders of giants”, as Minsky put it.

Its research has stretched across the sub-disciplines of economics, including history of thought, economic history, monetary theory, unemployment and poverty, finance and financial institutions, sectoral balances, cycles and crises, and monetary and fiscal policy. It has largely updated and synthesized various strands of theory, most of it heterodox—outside the mainstream.

Perhaps the most important original contribution of MMT has been the detailed study of the coordination of operations between the treasury and the central bank. The central bank is the treasury’s bank, making and receiving payments on behalf of the treasury. The procedures involved can obscure how the government “really spends”. While it was obvious two hundred years ago that the national treasury spent by issuing currency, and taxed by receiving its own currency in payment, that is no longer so obvious because the central bank stands between the treasury and recipients of government spending as well as between treasury and taxpayers making payments to government.

However, as MMT has shown, nothing of substance has changed—even though taxpayers today make payments from their private bank accounts, and banks make the tax payments to treasury for their depositors using reserves held at the central bank. And when treasury spends, its central bank credits reserve accounts of private banks, which credit deposit accounts of recipients of the government spending.

In spite of the greater complexity involved, we lose nothing of significance by saying that government spends currency into existence and taxpayers use that currency to pay their obligations to the state.

MMT reaches conclusions that are shocking to many who’ve been indoctrinated in the conventional wisdom. Most importantly, it challenges the orthodox views about government finance, monetary policy, the so-called Phillips Curve (inflation-unemployment) trade-off, the wisdom of fixed exchange rates, and the folly of striving for current account surpluses.

For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing.

When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.

MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, prevent overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.

You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.

So, much like the relation between taxes and spending—with tax collection coming after spending–we should think of bond sales as occurring after government has already spent the currency and reserves.

Most Americans are familiar with the phrase “raise a tally”, which referred to the use of notched “tally sticks” that served as the currency of European monarchs. The sticks were split (into a stock and stub) and matched by the exchequer on tax day. The crown’s obligation to accept his tally debt was “wiped clean” just as the taxpayer’s obligation to deliver the tally debt was fulfilled. Clearly, the taxpayer could not deliver tally sticks until they had been spent.

It surprises most people to hear that banks operate in a similar manner. They lend their own IOUs into existence and accept them in payment. A hundred years ago, a bank would issue its own banknotes when it made a loan. The debtor would repay loans by delivering bank notes. Banks had to create the notes before debtors could pay down debts using banknotes.

In the old days in the US, notes issued by various banks were not necessarily accepted at par—if you tried to pay down your loan from St. Louis Bank using notes issued by Chicago Bank, they might be worth only 75 cents on the dollar.

The Federal Reserve System was created in part to ensure par clearing. At the same time, we essentially taxed private bank notes out of existence. Banks switched to the use of deposits and cleared accounts among each other using the Fed’s IOUs, called reserves. The important point is that banks now create deposits when they make loans; debtors repay those loans using bank deposits. And what this means is that banks need to create the deposits first before borrowers can repay their loans.

Hence, there is a symmetry to the way the sovereign spends currency (or central bank reserves) into existence first, and then taxpayers use the currency (or central bank reserves) to pay taxes.

Sovereigns spend first, then tax. In that sense, they do not “need” tax revenue in order to spend. This does not mean that sovereigns can stop taxing, however. MMT says that one of the purposes of the tax system is to “drive” the currency. One of the reasons people will accept the sovereign’s currency is that taxes need to be paid in that currency. From inception of the currency, no one would take it unless the currency was needed to make a payment. Taxes and other obligations create a demand for the currency that can be used to make the obligatory payments.

Note that we can say something similar about banknotes and bank deposits. Part of the reason we will accept them in payment is because “we” (at least, many of us) have obligations that need to be paid using banknotes or bank deposits. We’ve got a mortgage debt, or a credit card debt or a car loan debt—all of which normally are paid by writing a check on our bank deposit account. We can fill-up that account by accepting checks drawn on other bank deposit accounts, and with the Fed ensuring par clearing, our bank will accept those checks.

While there is a symmetry between government currency issue and private bank issue of notes or deposit, there are also asymmetries.

Government imposes a tax obligation on (at least some) citizens. Private banks rely on customers voluntarily entering into an obligation (that is, they decide to become borrowers). We can all “choose” to refuse to become borrowers, but as they say, the only thing certain in life is “death and taxes”—these are much harder to avoid. Sovereign power is usually reserved to the state. This makes its own obligations—currency and reserves—almost universally acceptable within its jurisdiction.

Indeed, banks and others normally make their own obligations convertible into the state’s obligations. This is why we call bank checking accounts “demand deposits”: banks promise to exchange their own obligations to the state’s obligations on “demand”.

For this reason, MMT talks about a “money pyramid”, with the state’s own currency at the top. Bank “money” (notes and deposits) are below the state’s “money” (reserves and currency). We can think of other financial institution liabilities as below “bank money” in the pyramid, often payable in bank deposits. Lower still we find the liabilities of nonfinancial institutions. And at the bottom we might find the IOUs of households—again normally payable in the obligations of financial institutions.

A lot of people have great difficulty in getting their heads around all this “money creation” business. It sounds like alchemy or even fraud. Banks simply create deposits when they make loans? Government simply creates currency or central bank reserves when it spends? What is this, creation of money out of thin air?

Yes, indeed.

Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”. You must understand that “money” is by nature an IOU. You can create a dollar-denominated “money” by writing “IOU five dollars” on a slip of paper. Your problem is to get someone to accept it. Sovereign government has an easy time finding acceptors—in part because millions of us owe payments to government.

Bank of America has an easy time finding acceptors—in part because millions of us owe payments to Bank of America, in part because we know we can exchange deposits at the bank for cash, and in part because we know the Fed stands behind the bank to ensure par clearing with any other bank. However, very few people owe you, and we doubt your ability to convert your IOU to Uncle Sam’s IOU at par. You are low in that money pyramid.

Both Uncle Sam and Bank of America are constrained in their “money creation”, however. Uncle Sam is subject to the budget authority that is provided by Congress and the President. Occasionally he also bumps up against the crazy (yes, crazy!) Congressionally-imposed “debt limit”. Congress and the President could and should remove that debt limit, but we surely do want a budgeting process and we want to ensure that Uncle Sam is constrained by the approved budget.

Still, Uncle Sam ought to be spending more whenever we’ve got unemployment.

Bank of America is subjected to capital constraints and limits on the types of loans it can make (and types of other assets it can hold). Yes, we freed the banks from most regulations and supervision over the past couple of decades—to our regret. Those with the “magic porridge pot” do need to be constrained. Banks can, and frequently do, make too many (bad) loans—which can bubble up markets and create solvency problems for them and even for their customers. Prudent lending is a virtue that ought to be required.

The problem is not the “thin air” nature of the creation, but rather the quantities of “money” created and the purposes for which it was created. Government spending for the public purpose is beneficial, at least up to the point of full employment of the nation’s resources. Bank lending for public and private purposes that are beneficial publicly and privately is also generally desirable.

However, lending comes with risk and requires good underwriting (assessment of credit worthiness); unfortunately our biggest banks largely abandoned the underwriting process in the 1990s, with disastrous results. One can only hope that policy-makers will restore the good banking practices that were developed over the past half-millennium, shutting down the largest dozen global banks that have no interest in good banking.

Some have given up hope in our banking system. I’m sympathetic to their pessimistic views. Some want to go back to “greenbacks” or to the Chicago Plan’s “narrow banks”.

Some even want to eliminate private money creation! Have the government issue “debt-free money”! I’m sympathetic, but I don’t support the most extreme proposals even if I support the goals. Such proposals are based on a fundamental misunderstanding of our monetary system.

Our system is a state money system. Our currency is government’s liability, an IOU that is redeemable for tax obligations and other payments to the state. The phrase “debt-free money” is based on a misunderstanding. Remember, “anyone can create money”, the “problem is to get it accepted”. They are all IOUs. They are either spent or lent into existence. Their issuers must accept them in payment. They are accepted by those who will make payments, directly or indirectly, to the issuers.

In the developed nations we have thoroughly monetized the economies. Much (maybe most) of our economic activity requires money, and we need specialized institutions that can issue widely accepted monetary IOUs to enable that activity to get underway.

While our governments are large, they are not big enough to provide all the monetary IOUs we need for the scale of economic activity we desire. And we—at least we Americans—are skeptical of putting all monetized economic activity in the hands of a much bigger government. I cannot see any possibility of running a modern, monetized, capitalist economy without private financial institutions that create the monetary IOUs needed to initiate economic activity.

The answer, it seems to me, to our current financial calamities does not reside in elimination of our for-profit financial institutions, even if I do see a positive role to be played by new public financial institutions (maybe some national development banks and some state development banks and a revived postal saving system?).

We do, however, need fundamental reform—including downsizing (probably breaking up or closing) of the behemoths, greater oversight, more transparency, prosecution of financial fraud, and putting more of the “public” in our “public-private partnership” banking institutions.

Note: See L. Randall Wray, Understanding Modern Money: the key to full employment and price stability, Edward Elgar 1998; and Wray, Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Palgrave Macmillan, 2012.

♦ Taxes and the Public Purpose

Reproduced from: http://neweconomicperspectives.org/2014/05/taxes-public-purpose.html

Posted on May 29, 2014
By L. Randall Wray

In previous instalments we have established that “taxes drive money”. What we mean by that is that sovereign government chooses a money of account (Dollar in the USA), imposes obligations in that unit (taxes, fees, fines, tithes, tolls, or tribute), and issues the currency that can be used to “redeem” oneself in payments to the government. Currency is like the “Get Out of Jail Free” card in the game of Monopoly.

Taxes create a demand for “that which is necessary to pay taxes” (and other obligations to the state), which allows the government to purchase resources to pursue the public purpose by spending the currency.

Warren Mosler puts it this way: the purpose of the tax is to create unemployment. That might sound a bit strange, but if we define unemployment as a situation in which job seekers want to work for money wages, then government can hire them by offering its currency. The tax frees resources from private use so that government can employ them in public use.

To greatly simplify, money is a measuring unit, originally created by rulers to value the fees, fines, and taxes owed.

By putting the subjects or citizens into debt, real resources could be moved to serve the public purpose. Taxes drive money.

So, money was created to give government command over socially created resources.

As Warren puts it, taxes function first to create sellers of real goods and services, and have further consequences as well, including what falls under ‘social engineering’, which are political decisions—something we’ll discuss a bit more below.

This is why money is linked to sovereign power—the power to command resources. That power is rarely absolute. It is contested, with other sovereigns but often more important is the contest with domestic creditors. Too much debt to private creditors reduces sovereign power—it destroys the balance of power needed to govern.

We also know that money’s earliest origins are closely linked to debts and recordkeeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean,” and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin.” The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins”—or as Margaret Atwood says, “our sinful debts.”

Records of credits and debits were more akin to modern electronic entries—etched in clay rather than on computer tapes—than to what is erroneously called “commodity money” such as stamped gold coins. And all known early money units had names derived from measures of the principal grain foodstuff—how many bushels of barley equivalent were owed, owned, and paid.

All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity. Or, as we Chartalists say, money is a “token,” like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.

Indeed, the “pawn” in pawnshop comes from the word for “pledge,” as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves who pawn their stolen goods), while “Old Nick” refers to the devil (hence, the red suit and chimney soot—and “to nick” means to steal) to whom we pawn our souls.

The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) originally had nothing to do with sex and adultery but rather with receiving them as pawns for debt.

Somehow, the admonition “Don’t covet thy neighbor’s donkey” just doesn’t have the right ring to it today.

We all know Shakespeare’s admonition “neither a borrower nor a lender be”—and religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids (and four footed friends) into debt bondage as sinful—if not equally then at least simultaneously tainted, united in the awful bondage of debt.

And, as we know, Lucifer records the debts—of the souls he will collect. He’ll sell you a good time now, but your soul lies in the balance. You buy now, you pay forever. Sort of like Student Loans in America.

For most of humanity today the original sin/debt is to the tax collector, because as they say, the only things in life you cannot escape are death and taxes. Old Nick has a lock on both of those—the tax collector who calls at death.

It is said that only death can “wipe the slate clean” as “death pays all debts;” however, once your soul is sold, there is no escape because hell is the roach motel—you’ve checked in and you will never get out. But Christ is the redeemer—he’s a sin eater, repaying your debts to let you sinners get to heaven.

You can redeem your tax debts by delivering the sovereign’s own IOUs in payment. Widespread debts to the sovereign ensure widespread acceptance of the sovereign’s own IOUs. This means that many will work for the sovereign, or work to produce what the sovereign wants to buy. Even those without tax debts will work for the sovereign’s IOUs knowing that others need them.

This is now the most common way that sovereign government moves resources to the public sector: In recent centuries through taxes, although as we go back in time, other liabilities such as fines, fees, tithes, and tribute were more important.

Of course, there are other ways to move resources to the public sector. On one end of the spectrum of alternatives we have the military draft or eminent domain. On the other we have volunteerism—Peace Corps or VISTA.

For many purposes, however, “monetization” has proven to be more effective for a variety of reasons that need not detain us now. Monetization proceeds in two steps: the first is to impose a monetary tax and the second is to put a monetary price on the resources government wants.

(That leads to issues related to pricing power and hence inflation—topics for another day. As monopoly issuer of the currency that is required to “get out of jail free”, sovereign government potentially has a great deal of power to set prices that it pays, far more than it normally exercises. Not saying that it necessarily should exercise those powers, however, this is part of MMT’s answer to hyperinflation hyperventilators.)

From this vantage point, taxes do not “pay for” government spending. Indeed, no taxes can be collected until government has spent. Taxes create a demand for the government’s spending and logically precede that spending.

As we’ve argued, it is neither correct nor politically sensible to link “give to the poor” policy to “tax the rich” policy. The purpose of the tax is to free up resources to pursue the public purpose—including anti-poverty programs.

But our tax system is already doing a HECKUV A JOB creating unemployed resources. We can spend on the poor (and on a full range of other public policies) and thereby mobilize those unemployed resources. We do not need more taxes—now—to cause even more unemployment.

If Congress ever got hold of its senses (no, I’m not holding my breath), it would increase spending (or reduce taxes) to employ idle resources. At some point (probably later rather than sooner) we could come up against resource constraints. At that point we might need to curtail spending and/or raise taxes.

We can examine how to deal with the happy problem of chock-full employment later—we haven’t seen it in the US since WWII and it isn’t on any horizon at present.

Taxes can serve other purposes, too, as I’ve argued earlier in this series. We can use taxes to discourage “sins”—in which case the purpose of the tax is to eliminate “sin” so the optimal sizing of the tax would eliminate sin and hence raise no revenue at all.

Previously, I argued that we can view excessive riches as a sort of “sin” that we want to tax away. Some commentators have argued that high tax rates on high incomes in the early postwar period “worked” by discouraging corporations from paying high incomes to top executives. Exactly! That is how sin taxes are supposed to work. The goal is not to raise revenue but to reduce sin.

I have argued that “predistribution” rather than “redistribution” works better. Once you’ve let the rich become super rich, they have the incentive and the power to defeat the effort to tax them. In my view, those horses have already got out of the barn.

Warren Mosler puts it this way: it is better to tackle inequality at the source. You tackle inequality at the bottom by providing jobs. MMT supports the job guarantee.

You tackle it at the top by constraining the rewards. Warren agrees that high tax rates on the rich is a legitimate political decision, and falls under what he calls social engineering (not to raise revenue but to change behavior). However, he’s proposed what might be more effective measures, such as eliminating treasury securities (that provide interest income to rentiers), banning stock ownership by pension funds backed by the federal government (PBGC), and regulations to constrain and narrow permitted banking activities–all of which remove most of the highest incomes in question at the source.

I’d add limits on executive pay packages at corporations.

We’ve already hinted that a broad-based tax makes sense if the goal is to move resources to the public sector. However, we need to also look at issues of fairness and incentives.

This series will continue with a look at which taxes make the most sense from a public policy perspective.


Reproduced from: http://neweconomicperspectives.org/2014/06/creationism-versus-redemptionism-money-issuer-really-lends-spends.html

Posted on June 10, 2014
By L. Randall Wray

MMT has emphasized that there is a close relation between sovereign power to issue a currency and its power to impose tax liabilities. For shorthand, we say “Taxes Drive Money”. I’ve dealt with that topic in the previous instalments of this series on MMT’s view of taxes.

We’ve also demonstrated (as if it needed demonstration!) that sovereign governments do not “need” tax revenue in order to spend. As Beardsley Ruml put it, once we abandoned gold, federal taxes became “obsolete” for revenue purposes. I’ll have more to say about good old Beardsley in the next instalment.

In today’s instalment I want to step back a bit to ask a more fundamental question: does the issuer of a money-denominated liability need to obtain some of those liabilities before spending or lending them?

In this instalment I will examine three analogous questions (each of which has the same answer):

1. Does the government need to receive tax revenue before it can spend?
2. Does the central bank need to receive reserve deposits before it can lend?
3. Do private banks need to receive demand deposits before they can lend?

If you’ve already answered “Of course not!”, you are probably up to speed on this topic. If you answered yes (to one or more), or if you haven’t a clue what the questions means, read on.

As we’ll see, these are reducible to the question: which comes first, Creation or Redemption?

First, an apology for delays in posting blogs and dealing with comments over the past couple of weeks. I’m in China for an extended stay and don’t always have access to the internet.

Second, an apology for the somewhat theoretical, academic–even esoteric?—exposition that follows. I’m going to assume that at least some readers are not familiar with the MMT literature on what we might call “the nature of money”. So let me begin with the familiar ground of orthodoxy.

The Nature of Money

What I’ve been trying to do in my own work on money (and interest rates) is to provide an alternative to the orthodox money supply and money demand approach. Recall that orthodoxy has a money supply that is fixed by the authorities and a money demand function that is determined by three presumed motives for holding money (Keynes’s transactions, precautionary, and speculative demands), with the intersection determining “the” interest rate, if you are a Keynesian-type, or “the” price level if you are a Monetarist-type.

Post Keynesians turned this on its head, making the money supply “horizontal” at “the” interest rate determined by the central bank. The central bank accommodates the bank demand for reserves, and banks accommodate the demand for loans. The money supply is “endogenous”, interest rates are “exogenous”.

While this is an improvement, it is not very satisfying. I won’t go into my critique of Horizontalism.[i] Instead, I want to begin with the Institutionalist view that money is an institution; Dudley Dillard argued that it might be the most important institution in the capitalist economy. (See also my post some weeks ago on Fagg Foster’s views, which I will draw upon for a few paragraphs here.)

What is the nature of the institution that we call money? What do the things that many people call money have in common? Most economists identify money as something we use in exchange. That, too, might move our understanding forward a bit, but it simply tells us “money is what money does”. (Sort of like defining a human as something that watches TV, with occasional trips to the fridge.)

In The Treatise, Keynes began with the money of account, the unit in which we denominate debts and credits, and, yes, prices. He also says something about the nature of the money of account: following Knapp he argues that for the past 4000 years, at least, the money of account has been chosen by the state authorities. Units of measurement are necessarily social constructions. I can choose my own idiosyncratic measuring units for time, space, and value, but they must be socially sanctioned to become widely adopted.

So, one commonality is that all monies are measured in a money of account. All those things economists declare to be money are denominated in the money of account. But the nature of money must amount to more than that if money is an institution.

As mentioned, many economists identify money as that which is used to intermediate market exchange. But that seems to reduce money to a thing we agree to use to intermediate exchange in the institution that we call a market—rather than an institution in its own right.

What is the institutional nature of those money things? The most obvious shared characteristic of some of them is that they are evidence of debt: coins and treasury or central bank notes are government debts; bank notes or deposits are bank debts; and we can expand our definition of money things to include shares of money market mutual funds, and so on, which are also debts of their issuers.

If we go back through time, we find wooden tally sticks issued by European monarchs and others as evidence of debt (notches recorded money amounts). Clearly it does not matter what material substance is used to record the debt–the tally sticks are just tokens, records of the relation between creditor and debtor. The monarch promises to redeem his tally IOU, following prescriptions that govern redemption. A taxpayer cannot bring any notched hazelwood stick—the stock and stub must match exactly, tested by the exchequer or his representative.

Modern Money[ii]

What we have, then, is a socially created and generally accepted money of account, with debts that are denominated in that money of account. Within a modern nation, socially sanctioned money-denominated debts are typically denominated in the nation’s money of account. In the US it is the dollar. Some kinds of money-denominated debts “circulate”, used in exchange and other payments (ie paying down one’s own debts).

The best examples are currency (debt of treasury and central bank) and demand deposits (debt of banks). Why do we accept these in payment?

It has long been believed that we accept currency because it is either made of precious metal or redeemable for same—we accept it for its “thing-ness”. In truth, coined precious metal almost always circulated well beyond the value of embodied metal (at least domestically); and redeemability of currency for gold at a fixed rate has been the exception not the rule. Hence, most economists recognize that currency is today (and often was in the past) “fiat”.

Further, and importantly, law going back to Roman times has typically adopted a “nominalist” perspective: the legal value of coins was determined by nominal value. For example, if one deposited coins with a bank one could expect only to receive on withdrawal currency of the same nominal value.[iii] In other words, even if the currency consisted of stamped gold coins, they were still “fiat” in the sense that their legal value would be set nominally.[iv]

The argument of Adam Smith, Knapp, Innes, Keynes, Grierson, and Lerner is that currency will be accepted if there is an enforceable obligation to make payments to its issuer in that same currency.[v] Hence, MMT has adopted the phrase “taxes drive money” in the sense that the state can impose tax liabilities and issue the means of paying those liabilities in the form of its own liabilities.

Here there is an institution, or a set of institutions, that we can identify as “sovereignty”.[vi]As Keynes said, the sovereign has the power to declare what will be the unit of account—the Dollar, the Lira, the Pound, the Yen. The sovereign also has the power to impose fees, fines, and taxes, and to name what it will accept in payment. When the fees, fines, and taxes are paid, the currency is “redeemed”—accepted by the sovereign.

While sovereigns also sometimes agree to “redeem” their currency for precious metal or for foreign currency, that is not necessary. The agreement to “redeem” currency in payment of taxes, fees, tithes and fines is sufficient to “drive” the currency—that is to create a demand for it.[vii]

Note we also do not need an infinite regress argument. While it could be true that I am more willing to accept the state’s IOUs if I know I can dupe some dope, I will definitely accept it if I have a tax liability and know I must pay that liability with the state’s currency. This is the sense in which MMT claims “taxes are sufficient to create a demand for the currency”. It is not necessary for everyone to have such an obligation—so long as the tax base is broad, the currency will be widely accepted.

There are other reasons to accept a currency—maybe I can exchange it for gold or foreign currency, maybe I can hold it as a store of value. These supplement taxes—or, better, derive from the obligations that need to be settled using currency (such as taxes, fees, tithes, and fines).

The Fundamental “Law” of Credit: Redeemability

Innes posed a fundamental “law” of credit: the issuer of an IOU must accept it back for payment.

We can call this the principle of redeemability: the holder of an IOU can present it to the issuer for payment. Note that the holder need not be the person who originally received the IOU—it can be a third party. If that third party owes the issuer, the IOU can be returned to cancel the third party’s debt; indeed, the clearing cancels both debts (the issuer’s debt and the third party’s debt).

If one reasonably expects that she will need to make payments to some entity, she will want to obtain the IOUs of that entity. This goes part way to explaining why the IOUs of nonsovereign issuers can be widely accepted: as Minsky said, part of the reason that bank demand deposits are accepted is because we—at least, a lot of us—have liabilities to the banks, payable in bank deposits.

In modern banking systems that have a central bank to clear accounts among banks at par, one can deliver any bank’s deposit IOU to cancel a debt with any other bank.

Acceptability can be increased by promising to convert on demand one’s IOUs to more widely accepted IOUs. The most widely accepted IOUs within a society are those issued by the sovereign (or, at least, by some sovereign—perhaps by a foreign sovereign of a more economically important nation). In that case, the issuer must either hold or have easy access to the sovereign’s IOUs to ensure conversion. In the financial literature, this is called leveraging and while it sounds similar to the notion of a deposit multiplier there is no simple, fixed ratio of leverage.

Stephanie Bell/Kelton, Duncan Foley, and Minsky have all used the metaphor of a pyramid of liabilities, with those lower in the pyramid leveraging those higher in the pyramid, and with the sovereign’s liabilities at the apex. Monetary contracts for future delivery of “money” typically designate whose liabilities are acceptable, usually either commercial bank demand deposits or the sovereign’s liabilities. As the government’s backstop of chartered banks has increased, the need to use sovereign liabilities for settlement has been reduced to clearing among banks, to foreign exchanges, and to illegal activities.

In any event, whatever final payment courts of law enforce can be used as final payment. From Roman times, courts have interpreted money contracts in nominal terms requiring payment in “lawful money” which is always in the form of designated liabilities denominated in an identified money of account. That is to say, the contracts are not enforceable in terms of things if they are written in money terms.

Redemptionism or Creationism?

In the introduction we raised three analogous questions:

1. Does the government need to receive tax revenue before it can spend?
2. Does the central bank need to receive reserve deposits before it can lend?
3. Do private banks need to receive demand deposits before they can lend?

It should be clear that the answer to each is “No!”. Indeed, the logic must run from CREATION to REDEMPTION. One cannot redeem oneself from sin or debt unless that sin or debt has been created.

The King issues his tally stick or his stamped coin in payment. That puts him in the position of a sinful debtor. He redeems himself when he accepts back his own IOU.

The central bank issues its reserve deposit as its sinful debt—normally when it makes a loan to private banks, or when it purchases treasury debts in the open market. (These reserve deposits can always be exchanged on demand for central bank notes—which keeps the central bank indebted.) The central bank redeems itself when it accepts its notes and reserve deposits in payment.

The private bank issues its demand deposit as its sinful debt—normally when it makes a loan to a private firm or household. The bank redeems itself when it accepts a check written on its demand deposit in payment.

Note that we’ve looked at two sides of one balance sheet (the “money issuer”) in each of these cases, but there is another sinful debtor in every case.

Before the sovereign can issue tallies or coins, he must put taxpayers in sinful debt by imposing a tax obligation payable in his tally stick or coin. This creates a demand for his tally or coin.

When the central bank lends reserves to a private bank, it puts that bank in sinful debt, crediting its account at the central bank with reserves, but the bank simultaneously issues a liability to the central bank.

When the private bank lends demand deposits to the borrower, it credits the deposit account but the borrower records a liability to the bank.

So each “redemption” simultaneously wipes out the sinful debt of both parties. The slate is wiped clean. Hallelujah!

You see, folks, it’s all debits and credits. Keystrokes. That record bonds of indebtedness, with both parties united in the awful sinfulness.

Until Redemption Day, when the IOUs find their ways back to the issuers.

Those who think a sovereign must first get tax revenue before spending;

Those who believe a central bank must first obtain reserves before lending them;

And those who believe a private bank must first obtain deposits before lending them

Have all confused Redemption with Creation.

Receipt of taxes, receipt of reserve deposits, and receipt of demand deposits are all Acts of Redemption.

Creation must precede Redemption.


[i] This began with a review of Moore’s Horizontalists and Verticalists (1988)as well as my own book, Money and Credit (1990).

[ii] The term “modern money” comes from a quote of Keynes, who argued that the Chartalist or State Money approach—that provides the foundation for MMT—applies to the last 4000 years, “at least”. So, in short, MMT applies to the use of money since the rise of civilization.

[iii] In Roman law, an exception was made if one deposited coins for safe-keeping in a sealed sack; in that case, the bank must return the sack still sealed.

[iv] However, Gresham’s Law dynamics would not allow nominal value to fall much below the bullion value since coins would be taken out of circulation.

[v] See Wray 1998, 2004, and 2012.

[vi] Note that different forms of government have different forms of sovereignty, and sovereign power goes well beyond ability to choose a money of account and to impose and enforce obligations. While some critics have scapegoated MMT as applying only to dictatorships, it is obvious that all modern democracies have representative governments with vast sovereign powers, including these specific powers. In the case of the US, the Constitution specifically gives these powers to Congress.

[vii] MMT does not claim that taxes and other obligations are necessary to drive a currency. It is difficult to find exceptions—that is, cases in which currency (defined here as government-issued “current” IOUs) circulated without taxes, fees, fines, tithes, or tribute requiring its use in payment. If we broaden the definition of currency to include nongovernment-issued current means of payment, then Bitcoins might qualify as a counter-example.

♦ Tax Bads, Not Goods

Reproduced from: http://neweconomicperspectives.org/2014/06/tax-bads-goods.html

Posted on June 17, 2014
By L. Randall Wray

This is another instalment in the series on the MMT view of taxes. I’m back from China, participating in the annual Hyman P. Minsky Summer Seminar at the Levy Economics Institute. Yesterday my colleague, Mat Forstater, gave a talk on the job guarantee and “green jobs”. Along the way he made two particularly insightful comments on MMT and taxes that I’ll use to introduce this instalment.

First, he discussed the MMT view of “modern money”—that is to say, the money that has existed “for the past 4000 years, at least, as Keynes put it in his Treatise on Money. The money of account is chosen by the sovereign and used to denominate debts, prices, and other nominal values. It is the Dollar in the US.

It is like the inch, the pound, the meter, the kilogram, the acre or the hectare—a unit of measure.

Mat put it this way: the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds”. We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them.

You cannot run out of a unit of measure!

The “dollar” is the measuring unit in which we keep our monetary records. We cannot run out.

Second, and more relevantly for our story today, Mat said that a guiding principle for choosing what to tax should be “tax bads, not goods”.

We’ve previously established that “taxes drive money”. We’ve also established that from the perspective of the sovereign that creates the money, the purpose of the monetary system is to move resources to the public sector.

Clearly we do not want to move all resources to the public sector; we want to leave some for the “private purpose”. Further, we want some “efficiency” (I’ll leave the definition of that vague for now) in this process, in the sense that while we want to move some resources to the public sector we do not want to discourage useful private sector activity.

It would be even better if this process of taxing to move resources to the public purpose actually encouraged more activity that was beneficial for pursuit of both public and private purposes.

So we need to think about what kind of tax can “drive” a currency, without diminishing private initiative.

For example: what if we taxed paid work at a rate of 15% in an effort to “drive the currency”?

Let us begin with a nonmonetized economy (say, Tribal or Feudal). The newly formed sovereign state wants to move resources to itself by imposing a wage tax of 15%, spending its dollar-denominated currency to hire labor.

From inception of our monetary system, we could not “drive” the currency because no one would work for pay. The Tribal or Feudal society members would go about their activities raising their crops and hunting their deer, with the shares of output distributed as prescribed by custom.

No one would need to work for money wages, so they could refuse the offer of currency for work. And they could avoid the tax by refusing the paid work. The optimal strategy is to avoid monetization.

The new state would offer its currency, and find no takers. It would have to resort to obvious force—send in the troops—to get resources for the public purpose.

A tax on monetary income will not “drive” a currency unless the economy is already monetized.

This is precisely what the European colonial powers found when they tried to monetize Africa.

You need a reasonably broad-based tax that is hard to avoid. It is easy to avoid a tax on money income if people can live without money income.

So what the colonizers did was to impose either a head or hut tax. Everyone has a head and a hut. From inception, that kind of tax works well to drive a currency.

(Critics please note: I am in no way advocating colonization of Africa or anywhere else. This is an historic example used to make a point. Oh, I know the trolls are going to accuse me anyway.)

Now, once you’ve monetized an economy such that a large portion of the members must work for money incomes in order to buy the necessities of life that are largely available only for monetary purchase, then you can move to other kinds of taxes.

It is very common to use wage taxes, sales taxes, profits taxes, income taxes, and wealth taxes in highly monetized economies. These will “work” once you’ve monetized the economy, although they would not “work” in an economy that was not yet monetized.

Still, are they the best way to drive the currency?

Supply Siders like George Gilder and Art Laffer had a point during the era of Reaganomics when they argued that these sorts of taxes introduce a “wedge” that discourages work effort (or sales effort). If we tax wage income at a 15% rate (think FICA tax in the US), then “on the margin” we’ve made “wage slavery” less remunerating than leisure.

(Note that the wage tax is particularly pernicious because only human labor gets taxed, while the robots get off scott-free.)

I think the Reaganites grossly overstated the effect, but beyond some point it does seem reasonable to argue that a tax on wages and other nominal income will reduce the “work effort”. In my own case, I have on occasion turned down extra paid work because the 50% or higher marginal tax rate (including all federal, state, social security, and city taxes) made leisure much more appealing.

“Work effort” from the social perspective is not normally a “bad”. Through work we can serve both the public interest and the private interest.

(Yes, people can and sometimes do work too much. But this is a problem that can be better treated in other ways. For example, requiring employers to pay time-and-a-half or double-time wages is a good way to discourage excessive—involuntary–overtime work.)

Apparently, the favorite tax among progressives is the corporate income tax. I read virtually every day another call to raise the corporate tax rate.

Given all the attention it gets, this topic deserves a separate treatment, so I’ll save that for another instalment. Meantime think about this: are corporate profits an “evil” that we want to banish? This is not obvious to me.

So. Tax bads, not goods.

We’ve long taxed various sins. While some confuse the purpose of sin taxes, it should be clear that the purpose of taxing bads is not to “raise revenue” but to “reduce sin”. We want to reduce the sin of smoking. Of polluting. Of high-speed trading.

I’m always surprised when my progressive friends see the “Tobin Tax” (financial transactions tax) as a potentially great source of tax revenue to “pay for” all the goodies they’d like government to provide.

No, the purpose of a Tobin Tax is to reduce turnover and it would have achieved complete success in eliminating the sin of high speed turnover if it raised no revenue at all. Ditto the cigarette tax. Ditto the carbon tax.

Admittedly, perfection is very hard to achieve—we’ve still got smokers and we’ll still have carbon polluters for a very long time.

Can we think of a tax on bads that can also “drive” a currency?

Clearly if a cigarette tax was nearly successful, reducing smoking to just a handful of addicted abusers, it would not be a very good “driver” of the currency. Only the addicts would need the currency to pay the tax, and while a few of us nonsmokers would still want to get the currency (knowing we can induce the addicts to work for us to get their means of tax settlement), most people would have no need for the currency.

But what about the “hut tax”? Almost all of us need our “hut” to live in. It is an exceedingly broad-based tax. It would drive the currency.

Where’s the “sin” in hut-living? The environmental “foot print”—the land that is cleared, the construction materials, the furnishings, and—most relevantly—the energy used to heat and cool our hut.

For that reason, a “square-foot-of-living-space” tax on huts would base the “sin tax” on a pretty good proxy for the “sin” of hut-living.

Note we’ve already got property taxes, but these are generally based on nominal value of the property. That might be a proxy for environmental “sins”, but not necessarily a good proxy. A tiny flat in Manhattan will have a nominal property value greater than a 10,000 square foot spread in the wilds of Montana.

Of course, the nominal property value tax also hits a proxy for “ability to pay”—it is a somewhat progressive tax because higher income people live in more valuable property. Thus, the property tax also assesses the sin of excessive riches.

However, the “square-foot-of-living-space” tax on huts will also tax the sinfulness of high wealth and income, since richer people tend to have bigger spreads. It is perhaps as good as the nominal property tax in taxing the sin of wealth. Worth considering, anyway.

I have long advocated a more progressive hut tax: a “cubic-foot-of-living-space” tax. It will also tax the sinfulness of environmental impact (since there is a bigger volume to heat and cool). And from casual observation, what I’ve noticed is that rich folks like really high ceilings—30 foot high in the case of entry ways.

The cubic foot tax would be highly progressive—that 10,000 square foot spread becomes 150,000 cubic feet if it has high ceilings. There’d be a strong disincentive to building the monstrosities.

We can tinker with the tax, encouraging more outdoor living if that seems to be in the public interest—more open porches equipped with rocking chairs. Or giving a break for enclosed space that is not air-conditioned.

To reward energy efficiency, there should be adjustments for going solar, wind-driven, and geothermal.

We probably also need to think about different tax rates for different parts of the country. If we want people to live in—say—Chicago, we might want to provide a lower tax rate there than in San Diego or other places with moderate climates. It depends on how environmental we want to go—I’m not sure we should have humans living in places where humans probably should not be living, but that is a matter for public discussion. We can have a higher rate in Chicago to encourage smaller spaces that need to be heated in winter and cooled in summer–but I suppose it’s already hard enough to get people to live in the cold/hot places as it is.

Note that the sin tax on huts will reduce the sin of living in high cubic foot dwellings, but it does not suffer from the eventual elimination of tax receipts that a cigarette or financial turn-over tax will face.

We can live in smaller dwellings but as long as humans have more than a virtual existence, we’ve got to live somewhere.

It is, thus, a tax that will continue to “drive” the currency. I’m not saying that we should move to a “single tax”, but Henry George was sort of headed in the right direction. Once we understand what taxes are “for”, we can start to think about what kinds of taxes make sense.

More next time.


Reproduced from: http://neweconomicperspectives.org/2014/07/debt-free-money-non-sequitur-search-policy.html

Posted on July 1, 2014
By L. Randall Wray

While we are on the topic of monetary cranks, I thought it might be useful to quickly address a cranky idea that often comes up in comments to my blogs and also during Q&A after presentations: so-called “debt-free money”.

The first time I heard it, my immediate reaction was “Say what?”, and the second was puzzlement at the non-sequitur.

I am not sure exactly which of the crank approaches explicitly adopt the notion, but it seems common to a lot of them. I’m not going to address any particular approach but instead will address only the idea that we can have a “money” that is not a “debt”.

But first I want to tie up a loose end from my last blog, Something is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke, which was carried at GLF, NEP, and Naked Capitalism.

Most of the comments to that piece were about a particular (“crank”, in the endearing sense) approach called Positive Money (PM). I did not directly comment on that approach in any kind of detail; I borrowed a quote from Ann Pettifor and directed my comments only to one particular aspect: a centralized committee that is to control “thin air money creation”. I provided my objections to that one aspect.

First, I don’t like centralized committees and I certainly don’t like centralized committees headquartered at the thoroughly undemocratic and inflation-obsessed central banks. Second, I like highly decentralized and mostly small, heavily regulated and supervised, community lenders making decisions over how much lending and whom to originate loans for. I also wondered about the apparent loanable funds framework PM appears to adopt—but I’m not sure if that is indeed the framework.

I’m prepared to be dissuaded from those positions. And I do not hold a general position on PM. I’m surprised that so many of the comments were about PM, while my piece only briefly mentioned it.

I said I do like the idea of carving out a small part of the financial system—the payments system—which is what Narrow Banking is all about (at least, in most of its versions, dating back to Fisher, and more recently with Phillips and Minsky). I suggested a Postal Saving System (PSS) achieves that goal and until I’m persuaded that Narrow Banking is better, I choose PSS.

Yes, I’ll probably do a blog related to that topic and will tangentially address public banking. I don’t have anything against the general idea. Just as I’m not against the narrow banking proposal, in general.

OK, with that preface, let’s look at the problem with “debt-free money”.

The Cloakroom Debt Token

In discussing money, G.F. Knapp (one of the developers of the State Money Approach, adopted by Keynes and by MMT) made a useful analogy with the cloakroom token. When you drop off your coat at the cloakroom, the attendant offers you a token, usually with an identification number. The token is evidence of the debt of the cloakroom, which owes you a coat.

Some hours later you return with the token. The attendant returns your coat. If you feel generous, you tip the attendant for the service.

By accepting the token and meeting the obligation to return your coat, the attendant has “redeemed” herself or himself. The slate is wiped clean. The debt is destroyed.

At this point the token is simply warehoused, put back on an empty coat-hanger, waiting to be reused.

When the token is in the cloakroom, it is not a debt. It is a circular piece of cardboard, perhaps enclosed in a metal ring.

Or maybe it is a square chunk of plastic.

Or a shiny brass coin.

Some cloakrooms instead use paper tickets, split into stock and stub at the time a coat is deposited. On your return to the cloakroom, the stock and stub are matched, the coat is returned to the rightful owner, and the stock and stub are thrown away.

It makes no difference what form the token takes—it is just evidence of a debt, a “coat debt” that is redeemed by return of the coat.

Note that you could pass the token to your spouse or even to a stranger, with instruction to fetch your coat from the cloakroom.

If coats were homogenous, the tokens would be valuable to anyone who might want your coat. They could become a sort of currency passing from hand-to-hand at the value of a coat debt, so Knapp’s analogy is not so far-fetched as it might first appear.

However, coats are not uniform, and the attendant cannot simply return “a coat”, but must return “your coat” in redemption for the token.

Dry cleaners also use tokens, but they make an additional promise. Not only will they return your coat, but they also will clean it. They cannot redeem their debts simply by returning your dirty coat.

Ditto the seamstress, who redeems her token debt by returning your coat with sleeves shortened.

The point here is that the token is representative of debt, with the specific obligation spelled out by custom or contract and enforced if necessary in the courts.

Money as a Token of Debt

Let us begin with the closest analogue to the cloakroom token: the tally stick. Tally sticks were commonly issued for hundreds of years in Western Europe—by Kings but also by others (my 2004 book cover shows a photo I took of tallies that were used on private estates in Agrigento, Sicily in 1905) as records of debt. The sticks were split into stock and stub, matched at the time of redemption and then destroyed.

In the case of the King’s tallies, Redemption Day was tax day when the King’s representative (the exchequer) arrived in the village, spread cloth on the ground, and matched stock and stub. Hallelujah, the tax was paid.

The tally stick had value because it could be used to “redeem” oneself on Redemption Day. You owed the king his taxes, and he owed you the right to deliver evidence of his debt (recorded on the stick) to pay your taxes. The sticks circulated because this debt was “homogenous”, unlike the debt redeemed by the cloakroom that took the form of your specific coat. Anyone with a debt to the King needed a tally stick (any tally stick so long as it was issued by that King) to pay taxes.

A.M. Innes explained the significance of tallies, quoted in my 2004 book:

For many centuries, how many we do not know, the principal instrument of commerce was neither the coin nor the private token, but the tally, (Lat. talea. Fr. taille. Ger. Kerbholz), a stick of squared hazel-wood, notched in a certain manner to indicate the amount of the purchase or debt. The name of the debtor and the date of the transaction were written on two opposite sides of the stick, which was then split down the middle in such a way that the notches were cut in half, and the name and date appeared on both pieces of the tally. The split was stopped by a cross-cut about an inch from the base of the stick, so that one of the pieces was shorter than the other. One piece, called the ‘stock,’ was issued to the seller or creditor, while the other, called the ‘stub’ or ‘counter-stock,’ was kept by the buyer or debtor.

Both halves were thus a complete record of the credit and debt and the debtor was protected by his stub from the fraudulent imitation of or tampering with his tally.

The labours of modern archaeologists have brought to light numbers of objects of extreme antiquity, which may with confidence be pronounced to be ancient tallies, or instruments of a precisely similar nature; so that we can hardly doubt that commerce from the most primitive times was carried on by means of credit, and not with any ‘medium of exchange.’ (See Wray, “Credit and State Theories of Money”, Edward Elgar, 2004.)

Now, what were coins? As Innes emphasizes, coins were never very important—in spite of all the ink spilled in writing about them. They are bright shiny tallies that can last a long time and still garner interest when discovered centuries after being lost and forgotten. Collectors love them. By contrast, tally sticks are burned or simply rot away; ditto papyrus or paper evidences of debts. But coins were typically a nearly insignificant part of the “money supply”, and most tax collections brought in far more hazelwood tally sticks than coins.

Economists focus on coins only because they outlasted the sovereigns that issued them and many of them contained bright shiny metal that blinds reason. If bovine droppings had been stamped, instead, they would have served perfectly well as coins but no one would be interested in them after the demise of the empires that issued them.

Coins were evidence of debt that solved the problem of counterfeiting not through splitting a notched stick but rather through the technology of stamping or, later, milling coins. High quality craftwork and then milling the edges made “fraudulent imitation” more difficult. In addition, the use of precious metals (which were more easily monopolized by the sovereign) made counterfeiting more difficult and more expensive. (I won’t go further into the history of coinage here—and all the myths about value being determined by embodied precious metal—as I already did that in my 2012 book, Modern Money Theory.)

The sovereign spent coins into circulation, then accepted them alongside tallies in tax payment. Coins circulated more freely than tally stocks because the coin by itself contained all the evidence of the crown’s debt (in the case of a tally stick one needed both the stock and the stub).

In addition to promising to take back coin token debts, the sovereign issuer could also promise to exchange them for foreign currency or for precious metal on demand. This is an additional promise added to the promise to accept the coin in payment of taxes. It is similar to the additional promise made by the dry cleaner or seamstress: not only do you get your coat back, but you also get it cleaned and stitched. In the case of the coin, the sovereign not only promises to accept in taxes, but also might promise to exchange it for gold, and might also impose a legal tender law that proclaims the coin is good for private payments, too.

Paper Money Token Debts

Paper money has been around for a long time, but became common in the west only in the past few centuries. Most of it was issued by private banks, in the form of bank notes. You did not owe your bank taxes. So what debt was evidenced by the bank note?

The bank issued notes when it made loans. It held your “note” (the IOU you signed; we still use the term to refer to the documents associated with loans) as evidence of your debt to the bank. It issued its own “note” as evidence of the debt of the bank. You could spend the note, passing it to a third party. That third party could present it to the issuing bank to pay down debts owed to that bank.

With a clearing system, you could repay your debt to Bank A by presenting for “Redemption” notes issued by Bank B. The bank notes were circulating private “tallies”. The system clearer would return notes to the issuers as banks cleared debts with one another.

Like the cloakroom tickets, the notes might be destroyed by their issuers when they were returned. Or they could be stockpiled in bank warehouses for use later (just as the cloakroom’s token might be warehoused on empty coat hangers).

Eventually government central banks would do much of the clearing, originally issuing their own notes. The first central banks were explicitly created to issue notes to finance government spending, with the notes collected in tax payment.

Not liking competition, governments taxed private bank notes out of existence. Banks moved to deposit-based banking (rather than note-based banking). And, eventually, we got to the present day when it is mostly keystroke entries of debits and credits.

But, folks, it is all “debt money”.

“Bank Money” is an electronic entry on the liability side of the bank’s balance sheet, and an electronic entry on the asset side of the depositor’s balance sheet. (Called double entry book-keeping, the “keystroking” of deposits when a bank makes a loan means there will be four entries—the “note” of the borrower is the bank’s asset, and the bank’s “deposit” is its liability; the deposit is the borrower’s asset, and the note is the borrower’s liability.) Depositors can write checks on these deposits to pay down their own debts, including debts to banks.

“Central Bank Money” is generally comprised of two forms: paper notes and electronic reserves. The paper notes are the central bank’s liability and the asset of the holder. FRNotes are mostly used outside the USA, and are mostly used for illegal activities. (To increase the circulation of FRNotes, we need to raise the denomination of the largest denomination notes—the almighty dollar is being replaced by larger denomination Euro notes as the preferred medium of exchange by global drug dealers, although Bitcoins are making a dent—see below.)

FRReserves are keystroke entries, representing the Fed’s liability and the asset of depositors. Unless you are a bank, a foreign central bank, or some other special entity, you cannot hold these. In theory, the government should accept its central bank notes in tax payment. In practice, US taxpayers make tax payments using their banks—either with checks or direct withdrawal. The Fed then debits the private bank’s reserve deposits. So whether taxes are paid with FRNotes or FRReserves, in either case, the Fed’s liabilities to the US private sector are reduced. (There is also internal accounting involving the Fed’s and the Treasury’s balance sheets—the Fed credit’s the Treasury’s deposit account at the Fed. As I’ve said, this is like the husband owing the wife some dishwashing.)

“Treasury Money” is now mostly coins; in the past treasuries issued notes (and some still do). What is a coin? Stamped evidence of the Treasury’s debt. Some have pointed out that the US Treasury records coins as “equity”. Equity, of course, is on the liability side of the balance sheet. In theory, one should be able to pay taxes by returning the King’s coins. In practice, hardly anyone does that. I used to think that the IRS would not accept coins in payment of taxes, but apparently Tea Baggers are doing just that. According to a news report one of them delivers, each year, a bag full of coins in payment of taxes, with the stated intention of wrecking the day of some IRS agent, who presumably has to spend a few hours stacking and counting (tallying?) the coins.

So it is apparently possible to push a wheelbarrow to the IRS steps to pay your taxes in coins. In any event, most US taxes are paid as described above. You can certainly deposit coins (and FRNotes) at your bank and write a check to the IRS—Redeeming yourself in the eyes of Uncle Sam without pissing off IRS agents.

Debt-Free Tokens?

Now, with that background let us try to make sense of the call for “debt-free money”.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the tokens discussed above, but they are not debts. You can return them to the cloakroom, but you don’t get a coat.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper.

Imagine a sovereign that issues “debt-free” tallies. They look like the tallies discussed above, but when you return them to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt, but rather as a stick—perhaps fuel for a fire, but not a means of Redemption.

What is a debt-free tally? It is a hazelwood stick.

Why would you want the debt-free cloakroom token? Why would you want the debt-free tally stock?

As MMT says, “taxes drive money”.

(I’m not going through that again here. See the series that begins with this post. Note, however, that “TDM” is short-hand for “obligations to the sovereign drive money”. You can pay fees, fines, tribute, tithes and taxes owed to the sovereign by delivering back his debt tokens (tallies, notes, coins, electronic records of liabilities). Note also that we claim that taxes are sufficient to drive a currency; we do not say they are necessary. Some commentators note that there are a few sovereigns (typically noted are oil-producing nations in which the sovereign monopolizes ownership of oil) that don’t impose taxes but still issue currency. But as we have long pointed out, if the sovereign can monopolize necessities of life, the sovereign can name what must be delivered to get the necessities. The Chicago water monopolist can designate what you must pay to quench your thirst; the heroin pusher can dictate what you need to get your fix. Maybe Bitcoins?)

If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk.

I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money.

I don’t think our debt-free money cranks want government to “issue” bananas. I think they want a “money” that is a record. But a record of what?

From what I gather, they want government to issue notes (many love to refer to Lincoln’s Greenbacks) or electronic “money”. But what are notes or electronic entries? They are records of indebtedness—debts that can be redeemed in payments to the issuers. They are debt tokens.

A Non Sequitur in Search of a Policy

When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks seem to hate payment of interest by government.

I’m not sure, but I think what they really want to do is to prohibit government payment of interest.

That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds.

We don’t need a non sequitur in search of a policy.

Debt-free money advocates also hate debt. Fine, in many religions, debt is sinful—for both creditor and debtor. Monetary cranks (rightly) attribute our current economic predicament to excessive private sector debt. I agree.

Some also fear public debt—which has no basis if we are talking about sovereign currency-issuing government.

However, there are some advocates of debt-free money who understand MMT’s point about sovereign government. Some of these even recognize that the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our net financial (dollar) wealth.

But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding.

Hence the idea is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat.

While I’m sympathetic to the view of political realities, the operational realities are quite different from what is imagined.

Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds, we will have already achieved what our “debt-free money” champions want.

However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins).

There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.

For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds. I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent.

Again, we don’t need a non sequitur in search of a policy.

♦ Why Money Matters

Reproduced from: http://neweconomicperspectives.org/2014/08/money-matters.html

Posted on August 7, 2014
By L. Randall Wray*

Our Mission Oriented Finance conference explores how to direct funding toward what Hyman Minsky called “the capital development of the economy”, broadly defined to include private investment, public infrastructure, and human development. (See more here.)

But to understand how, we need to understand what money is and why it matters. After all, finance is the process of getting money into the hands of those who will spend it.

The dominant narrative is that money “greases” the wheels of commerce. Sure, you could run the commercial machine without money, but it runs better with lubricant.

In that story, money was created as a medium of exchange: instead of trading your banana for her fish, you agree to use cowry shells to intermediate trade. Over time, money’s evolution increased efficiency by selecting in succession unworked precious metals, stamped precious metal coins, precious metal-backed paper money, and, finally, fiat money comprised of base metal coins, paper notes, and electronic entries.

However, that never changed the nature of money, which facilitates trade in goods and services. As Milton Friedman famously proclaimed, in spite of the complexity of our modern economy, all of the important economic processes are revealed in the simple Robinson Crusoe barter-based economy.

Money is a “veil” that obscures the simple reality; in the conventional lexicon, money can be ignored as “neutral”. (For those well-versed in economics, we need only refer to the Modigliani-Miller theorem and the efficient markets hypothesis that proved finance doesn’t matter.)

We only worry about money when there’s too much of it: Friedman’s other famous claim is that “inflation is always and everywhere a monetary phenomenon”—too much money causes prices to rise. Hence, all the worry about the Fed’s Quantitative Easing, which has quadrupled the “Fed money” (reserves) and by all rights should be causing massive inflation.

This post will provide a different narrative, drawing on Joseph Schumpeter’s notion that the banker is the ephor of capitalism.

Looking at money from the perspective of exchange is highly misleading for understanding capitalism.

In the Robinson Crusoe story, I’ve got a banana and you’ve got a fish. But how did we get them? In the real world, bananas and fish have to be produced—production that has to be financed.

Production begins with money to purchase inputs, which creates monetary income used to buy outputs.

As mom insisted, “money doesn’t grow on trees”. How did producers get money in the first place? Maybe by selling output? Logically, that is an infinite regress argument—a chicken and egg problem. The first dollar spent (by producer or consumer) had to come from somewhere.

lrw7There’s another problem. Even if we could imagine that humanity inherited “manna from heaven” to get the monetary economy going—say, an initial endowment of a million dollars—how do we explain profits, interest, and growth?

If I’m a producer who inherited $1000 of manna, spending it on inputs, I’m not going to be happy if sales are only $1000. I want a return—maybe 20%, so I need $1200. If I’m a money lender, I lend $1000 but want $1200, too. And all of us want a growing pie. How can that initial million manna do double and triple duty?

Here’s where Schumpeter’s “ephor” comes in. An ephor is “one who oversees”, and Schumpeter applied this term to the banker. We do not need to imagine money as manna, but rather as the creation of purchasing power controlled by the banker.

A producer wanting to hire resources submits a prospectus to the banker. While the banker looks at past performance as well as wealth pledged as collateral, most important is the likelihood that the producer’s prospects are good–called “underwriting”. If so, the ephor advances a loan.

More technically, the banker accepts the IOU of the producer and makes payments to resource suppliers (including labor) by crediting their deposit accounts. The producer’s IOU is the banker’s asset; the bank’s deposits are its liabilities but are the assets of the deposit holders (resource suppliers).

This is how “money” really gets into the economy—not via manna from heaven nor Friedman’s “helicopter drops” by central bankers.

When depositors spend (perhaps on consumption goods, perhaps to purchase inputs for their own production processes), their accounts are debited, and the accounts of recipients are credited.

lrw8Today, most “money” consists of keystroked electronic entries on bank balance sheets.

Because we live in a many bank environment, payments often involve at least two banks. Banks clear accounts by debiting claims against one another; or by using deposits in correspondent banks. However, net clearing among banks is usually done on the central bank’s balance sheet.


Like any banker, the Fed or the Bank of England “keystrokes” money into existence. Central bank money takes the form of reserves or notes, created to make payments for customers (banks or the national treasury) or to make purchases for its own account (treasury securities or mortgage backed securities).

Bank and central bank money creation is limited by rules of thumb, underwriting standards, capital ratios and other imposed constraints. After abandoning the gold standard, there are no physical limits to money creation. We cannot run out of keystroke entries on bank balance sheets

lrw10This recognition is fundamental to issues surrounding finance. It is also scary.

The good thing about Schumpeter’s ephor is that sufficient finance can always be supplied to fully utilize all available resources to support the capital development of the economy. We can keystroke our way to full employment.

The bad thing about Schumpeter’s ephor is that we can create more funding than we can reasonably use. Further, our ephors might make bad choices about which activities ought to get keystroked finance.

It is difficult to find examples of excessive money creation to finance productive uses. Rather, the main problem is that much or even most finance created to fuel asset price bubbles. And that includes finance created both by our private banking ephors and our central banking ephors.

The biggest challenge facing us today is not the lack of finance, but rather how to push finance to promote both the private and the public interest—through the capital development of our country.

That is the main topic of our Mission Oriented Finance conference.

*Cross posted from FT’s Alphaville

♦ MODERN MONEY THEORY: How I came to MMT and what I include in MMT

Reproduced from: http://neweconomicperspectives.org/2018/10/modern-money-theory-how-i-came-to-mmt-and-what-i-include-in-mmt.html

Posted on October 1, 2018

My remarks for the 2018 MMT Conference September 28-30, NYC


I was asked to give a short presentation at the MMT conference. What follows is the text version of my remarks, some of which I had to skip over in the interests of time. Many readers might want to skip to the bullet points near the end, which summarize what I include in MMT.

I’d also like to quickly respond to some comments that were made at the very last session of the conference—having to do with “approachability” of the “original” creators of MMT. Like Bill Mitchell, I am uncomfortable with any discussion of “rockstars” or “heroes”. I find this quite embarrassing. As Bill said, we’re just doing our job. We are happy (or, more accurately pleasantly surprised) that so many people have found our work interesting and useful. I’m happy (even if uncomfortable) to sign books and to answer questions at such events. I don’t mind emailed questions, however please understand that I receive hundreds of emails every day, and the vast majority of the questions I get have been answered hundreds, thousands, even tens of thousands of times by the developers of MMT. A quick reading of my Primer or search of NEP (and Bill’s blog and Warren’s blogs) will reveal answers to most questions. So please do some homework first. I receive a lot of “questions” that are really just a thinly disguised pretense to argue with MMT—I don’t have much patience with those. Almost every day I also receive a 2000+ word email laying out the writer’s original thesis on how the economy works and asking me to defend MMT against that alternative vision. I am not going to engage in a debate via email. If you have an alternative, gather together a small group and work for 25 years to produce scholarly articles, popular blogs, and media attention—as we have done for MMT—and then I’ll pay attention. That said, here you go: wrayr@umkc.edu.


As an undergraduate I studied psychology and social sciences—but no economics, which probably gave me an advantage when I finally did come to economics. I began my economics career in my late 20’s studying mostly Institutionalist and Marxist approaches while working for the local government in Sacramento. However, I did carefully read Keynes’s General Theory at Sacramento State and one of my professors—John Henry—pushed me to go to St. Louis to study with Hyman Minsky, the greatest Post Keynesian economist.

I wrote my dissertation in Bologna under Minsky’s direction, focusing on private banking and the rise of what we called “nonbank banks” and “off-balance sheet operations” (now called shadow banking). While in Bologna, I met Otto Steiger—who had an alternative to the barter story of money that was based on his theory of property. I found it intriguing because it was consistent with some of Keynes’s Treatise on Money that I was reading at the time. Also, I had found Knapp’s State Theory of Money—cited in both Steiger and Keynes–so I speculated on money’s origins (in spite of Minsky’s warning that he didn’t want me to write Genesis) and the role of the state in my dissertation that became a book in 1990—Money and Credit in Capitalist Economies— that helped to develop the Post Keynesian endogenous money approach.

What was lacking in that literature was an adequate treatment of the role of the state–which played a passive role—supplying reserves as demanded by private bankers—that is the Post Keynesian accommodationist or Horzontalist approach. There was no discussion of the relation of money to fiscal policy at that time. As I continued to read about the history of money, I became more convinced that we need to put the state at the center. Fortunately I ran into two people that helped me to see how to do it.

First there was Warren Mosler, who I met online in the PKT discussion group; he insisted on viewing money as a tax-driven government monopoly. Second, I met Michael Hudson at a seminar at the Levy Institute, who provided the key to help unlock what Keynes had called his “Babylonian Madness” period—when he was driven crazy trying to understand early money. Hudson argued that money was an invention of the authorities used for accounting purposes. So over the next decade I worked with a handful of people to put the state into monetary theory.

As we all know, the mainstream wants a small government, with a central bank that follows a rule (initially, a money growth rate but now some version of inflation targeting). The fiscal branch of government is treated like a household that faces a budget constraint. But this conflicts with Institutionalist theory as well as Keynes’s own theory. As the great Institutionalist Fagg Foster—who preceded me at the University of Denver–put it: whatever is technically feasible is financially feasible. How can we square that with the belief that sovereign government is financially constrained? And if private banks can create money endogenously—without limit—why is government constrained?

My second book, in 1998, provided a different view of sovereign spending. I also revisited the origins of money. By this time I had discovered the two best articles ever written on the nature of money—by Mitchell Innes. Like Warren, Innes insisted that the dollar’s value is derived from the tax that drives it. And he argued this has always been the case. This was also consistent with what Keynes claimed in the Treatise, where he said that money has been a state money for the past four thousand years, at least. I called this “modern money” with intentional irony—and titled my 1998 book Understanding Modern Money as an inside joke. It only applies to the past 4000 years.

Surprisingly, this work was more controversial than the earlier endogenous money research. In my view it was a natural extension—or more correctly, it was the prerequisite to a study of privately created money. You need the state’s money before you can have private money. Eventually our work found acceptance outside economics—especially in law schools, among historians, and with anthropologists.

For the most part, our fellow economists, including the heterodox ones, attacked us as crazy.

I benefited greatly by participating in law school seminars (in Tel Aviv, Cambridge, and Harvard) on the legal history of money—that is where I met Chris Desan and later Farley Grubb, and eventually Rohan Grey. Those who knew the legal history of money had no problem in adopting MMT view—unlike economists.

I remember one of the Harvard seminars when a prominent Post Keynesian monetary theorist tried to argue against the taxes drive money view. He said he never thinks about taxes when he accepts money—he accepts currency because he believes he can fob it off on Buffy Sue. The audience full of legal historians broke out in an explosion of laughter—yelling “it’s the taxes, stupid”. All he could do in response was to mumble that he might have to think more about it.

Another prominent Post Keynesian claimed we had two things wrong. First, government debt isn’t special—debt is debt. Second, he argued we don’t need double entry book-keeping—his model has only single entry book-keeping. Years later he agreed that private debt is more dangerous than sovereign debt, and he’s finally learned double-entry accounting. But of course whenever you are accounting for money you have to use quadruple entry book-keeping. Maybe in another dozen years he’ll figure that out.

As a student I had read a lot of anthropology—as most Institutionalists do. So I knew that money could not have come out of tribal economies based on barter exchange. As you all know, David Graeber’s book insisted that anthropologists have never found any evidence of barter-based markets. Money preceded market exchange.

Studying history also confirmed our story, but you have to carefully read between the lines. Most historians adopt monetarism because the only economics they know is Friedman–who claims that money causes inflation. Almost all of them also adopt a commodity money view—gold was good money and fiat paper money causes inflation. If you ignore those biases, you can learn a lot about the nature of money from historians.

Farley Grubb—the foremost authority on Colonial currency—proved that the American colonists understood perfectly well that taxes drive money. Every Act that authorized the issue of paper money imposed a Redemption Tax. The colonies burned all their tax revenue. Again, history shows that this has always been true. All money must be redeemed—that is, accepted by its issuer in payment. As Innes said, that is the fundamental nature of credit. It is written right there in the early acts by the American colonies. Even a gold coin is the issuer’s IOU, redeemed in payment of taxes. Once you understand that, you understand the nature of money.

So we were winning the academic debates, across a variety of disciplines. But we had a hard time making progress in economics or in policy circles. Bill, Warren, Mat Forstater and I used to meet up every year or so to count the number of economists who understood what we were talking about. It took over decade before we got up to a dozen. I can remember telling Pavlina Tcherneva back around 2005 that I was about ready to give it up.

But in 2007, Warren, Bill and I met to discuss writing an MMT textbook. Bill and I knew the odds were against us—it would be for a small market, consisting mostly of our former students. Still, we decided to go for it. Here we are—another dozen years later—and the textbook is going to be published. MMT is everywhere. It was even featured in a New Yorker crossword puzzle in August. You cannot get more mainstream than that.

We originally titled our textbook Modern Money Theory, but recently decided to just call it Macroeconomics. There’s no need to modify that with a subtitle. What we do is Macroeconomics. There is no coherent alternative to MMT.

A couple of years ago Charles Goodhart told me: “You won. Declare victory but be magnanimous about it.” After so many years of fighting, both of those are hard to do. We won. Be nice.

Let me finish with 10 bullet points of what I include in MMT:

1. What is money: An IOU denominated in a socially sanctioned money of account. In almost all known cases, it is the authority—the state—that chooses the money of account. This comes from Knapp, Innes, Keynes, Geoff Ingham, and Minsky.

2. Taxes or other obligations (fees, fines, tribute, tithes) drive the currency. The ability to impose such obligations is an important aspect of sovereignty; today states alone monopolize this power. This comes from Knapp, Innes, Minsky, and Mosler.

3. Anyone can issue money; the problem is to get it accepted. Anyone can write an IOU denominated in the recognized money of account; but acceptance can be hard to get unless you have the state backing you up. This is Minsky.

4. The word “redemption” is used in two ways—accepting your own IOUs in payment and promising to convert your IOUs to something else (such as gold, foreign currency, or the state’s IOUs).

The first is fundamental and true of all IOUs. All our gold bugs mistakenly focus on the second meaning—which does not apply to the currencies issued by most modern nations, and indeed does not apply to most of the currencies issued throughout history. This comes from Innes and Knapp, and is reinforced by Hudson’s and Grubb’s work, as well as by  Margaret Atwood’s great book: Payback: Debt and the shadow side of wealth.

5. Sovereign debt is different. There is no chance of involuntary default so long as the state only promises to accept its currency in payment. It could voluntarily repudiate its debt, but this is rare and has not been done by any modern sovereign nation.

6. Functional Finance: finance should be “functional” (to achieve the public purpose), not “sound” (to achieve some arbitrary “balance” between spending and revenues). Most importantly, monetary and fiscal policy should be formulated to achieve full employment with price stability. This is credited to Abba Lerner, who was introduced into MMT by Mat Forstater.

In its original formulation it is too simplistic, summarized as two principles: increase government spending (or reduce taxes) and increase the money supply if there is unemployment (do the reverse if there is inflation). The first of these is fiscal policy and the second is monetary policy. A steering wheel metaphor is often invoked, using policy to keep the economy on course. A modern economy is far too complex to steer as if you were driving a car. If unemployment exists it is not enough to say that you can just reduce the interest rate, raise government spending, or reduce taxes. The first might even increase unemployment. The second two could cause unacceptable inflation, increase inequality, or induce financial instability long before they solved the unemployment problem. I agree that government can always afford to spend more. But the spending has to be carefully targeted to achieve the desired result. I’d credit all my Institutionalist influences for that, including Minsky.

7. For that reason, the JG is a critical component of MMT. It anchors the currency and ensures that achieving full employment will enhance both price and financial stability. This comes from Minsky’s earliest work on the ELR, from Bill Mitchell’s work on bufferstocks and Warren Mosler’s work on monopoly price setting.

8. And also for that reason, we need Minsky’s analysis of financial instability. Here I don’t really mean the financial instability hypothesis. I mean his whole body of work and especially the research line that began with his dissertation written under Schumpeter up through his work on Money Manager Capitalism at the Levy Institute before he died.

9. The government’s debt is our financial asset. This follows from the sectoral balances approach of Wynne Godley. We have to get our macro accounting correct. Minsky always used to tell students: go home and do the balances sheets because what you are saying is nonsense. Fortunately, I had learned T-accounts from John Ranlett in Sacramento (who also taught Stephanie Kelton from his own, great, money and banking textbook—it is all there, including the impact of budget deficits on bank reserves). Godley taught us about stock-flow consistency and he insisted that all mainstream macroeconomics is incoherent.

10. Rejection of the typical view of the central bank as independent and potent. Monetary policy is weak and its impact is at best uncertain—it might even be mistaking the brake pedal for the gas pedal. The central bank is the government’s bank so can never be independent. Its main independence is limited to setting the overnight rate target, and it is probably a mistake to let it do even that. Permanent Zirp (zero interest rate policy) is probably a better policy since it reduces the compounding of debt and the tendency for the rentier class to take over more of the economy. I credit Keynes, Minsky, Hudson, Mosler, Eric Tymoigne, and Scott Fullwiler for much of the work on this.

That is my short list of what MMT ought to include. Some of these traditions have a very long history in economics. Some were long lost until we brought them back into discussion. We’ve integrated them into a coherent approach to Macro. In my view, none of these can be dropped if you want a macroeconomics that is applicable to the modern economy. There are many other issues that can be (often are) included, most importantly environmental concerns and inequality, gender and race/ethnicity. I have no problem with that.

♦ An MMT View of the Twin Deficits Debate

Reproduced from: http://neweconomicperspectives.org/2018/11/an-mmt-view-of-the-twin-deficits-debate.html

Posted on November 14, 2018
by L. Randall Wray

Invited Presentation by L. Randall Wray at the UBS European Conference, London, Tuesday 13 November 2018

Q: These questions about deficits are usually cast as problems to be solved. You come from a different way of framing the issue, often referred to as MMT, which—at the risk of oversimplifying—says that we worry far too much about debt issuance. Can you help us understand where fears may be misplaced?

Wray: First let me say that I think the twin deficits argument is based on flawed logic.

It runs something like this: the government decides to spend too much, causing a budget deficit that competes with private borrowers, driving interest rates up. That appreciates the currency and causes a trade deficit.

The budget and trade deficits are unsustainable as both the private sector and the government sector rely on the supply of dollars lent by foreigners. At some point the Chinese and others will demand payment and/or sell out of dollars causing US rates to rise and the dollar to crash.

While that’s a simplified summary, I think it captures the main arguments.

Here’s the way I see it:

  1. Overnight rates are set by the central bank; deficits raise them only if the central bank reacts to deficits by raising them.
  2. Budget deficits result in net credits to bank reserves and hence put downward (not upward) pressure on overnight rates that is relieved by bond sales by the Fed and Treasury—or by paying interest on reserves. In other words, there’s no crowding out effect on rates. (Inaction lets rates fall.)
  3. Budget deficits result from the nongovernment sector’s desire to net save government liabilities. So long as the nongovernment sector wants to net save government debt, the deficit is sustainable.
  4. Current account deficits result from the ROW’s desire to net save US dollar assets. So long as the ROW wants to accumulate dollars, the US trade deficit is sustainable. So there is a symmetry to the two deficits, but not the one usually supposed.
  5. The US government does not borrow dollars from China. China’s net exports lead to accumulation of dollar reserves that are exchanged for higher earning Treasuries. If China did not run current account surpluses, she would not accumulate many Treasuries. All the dollars China has came from the US.
  6. If the US did not run current account deficits, the Chinese and other foreigners would not accumulate many Treasuries. This shows that accumulation of Treasuries abroad has more to do with the trade deficit than with Uncle Sam’s borrowing. (Compare the US with Japan—where virtually all the treasuries are held domestically.)
  7. A sovereign government cannot run out of its own liabilities. All modern governments make and receive payments through their central banks. Government spending takes the form of a credit by the central bank to a private bank’s reserves, and a credit by the receiving bank to the account of the recipient. You cannot run out of balance sheet entries.
  8. Affordability is not the question. The problem with too much government spending is that it diverts too many of the nation’s resources to the public sector—which causes inflation and leaves the private sector with too few resources.
  9. So, no, I don’t worry about sovereign government debt if it is issued in domestic currency—although I do worry about inflation and as well about excessive private sector debt as well as nonsovereign government debt.
  10. To conclude: We’ve reversed the twin deficit logic and emphasized quantity adjustments. The twin deficits are the residuals that accommodate the desired net saving of the domestic private sector and the ROW, respectively.
  11. Usually the domestic non-government sectors want to accumulate dollars so the only sector left to inject dollars is the US government. This means Uncle Sam runs a deficit because others want to accumulate dollars. The government also accommodates the portfolio desires of the non- government by swapping dollar reserves and bonds on demand.
  12. Finally if the ROW does not want dollars anymore, it can buy goods and services in the US. That will reduce the external deficit, stimulate domestic demand, and thereby reduce the fiscal deficit.

♦ A Conspiracy Against MMT? Chicago Booth’s Polling and Trolling

Reproduced from: http://neweconomicperspectives.org/2019/03/a-conspiracy-against-mmt-chicago-booths-polling-and-trolling.html

Posted on March 18, 2019
By L. Randall Wray

MMT continues to inflame hysterical attacks. Who would have thought that it would take MMT to bring together everyone from the crazy right to the insular left to unite in common cause against an obscure theory of money and government finance? The attacks seem to be so concerted and coordinated that one starts to think there just might be a conspiracy behind them. But why?

Bill Black’s recent column The Day Orthodox Economists Lost Their Minds and Integrity exposes the dishonesty of MMT’s critics on shocking display in a newly released poll of mainstreamer economists on two questions that supposedly are based on MMT’s teachings.

The poll was put together by the Chicago Booth School of Business whose motto goes like this: “Since 1898, we have produced ideas and leaders that shape the world of business. Today, we empower bold thinkers and inquisitive minds to dig deeper, discover more, and shape the future.”

No they don’t. They design surveys to quash “bold thinkers” and “inquisitive minds”. Their poll is just plain troll.

Here’s how they decided to take a troll poll:

“We decided to put the ideas to our US panel of economic experts by asking them whether they agreed or disagreed with the following statements, and if so how strongly and with what degree of confidence:

(a) Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.

(b) Countries that borrow in their own currency can finance as much real government spending as they want by creating money.”

As Bill argued in his piece, you will not find an economist anywhere on the planet who would agree with these statements. The MMT position, in fact, is precisely the opposite to what has been posed by Booth.

Given the questions, the results were a foregone conclusion:

“Of our 42 experts, 38 participated in this survey. On the first statement, only 1expressed no opinion, 15 disagreed and 22 strongly disagreed. On the second statement, 3 expressed no opinion, 11 disagreed and 24 strongly disagreed.”

Now, to be sure, these “experts” consist mostly of a rogue’s gallery of the clueless. Still, surprisingly, many who disagreed with the statements offered commentary that any MMTer would agree with, or at least be sympathetic with. These responses were not featured in the highlighted results, but it is worthwhile to take a quick look at them.

Thaler on Q2: I don’t like this question. I guess it is true in some sense, but surely inflation looms at some point.

Shimmer on Q1: The real value of the money supply is bounded above. At some point, this must create inflation.

Samuelson on Q1: Deficits can be financed by creating money, but still have disadvantages as well as advantages that should be carefully considered.

And on Q2: Creating money can finance a great deal of spending, but incidents of hyperinflation, collapse and other crises indicate there are limits.

Nordhaus on Q1: Obviously, they should worry. However, the open economy issues are less pressing, particularly with flexible exchange rates.

And on Q2: At some point hyperinflation would break it all apart. However, this is an irrelevant question in an open world.

Maskin on Q1: Printing money causes its own problems, e.g., the risk of inflation

And on Q2: There will come a point where the currency is so debased that further spending becomes difficult if not impossible.

Kashyap on Q1: Money financing yields some seigniorage, but also inflation and the inflation has costs and there are limits to seigniorage capacity

Judd on Q2: Friedman wrote a book “There’s No Such Thing As a Free Lunch.” He also meant road or bridge or army or school or ANYTHING!

Hart on Q1: This kind of behavior can quickly lead to inflation or even hyperinflation once the economy is close to full capacity.

Fair on Q1: Surely inflation might be a problem.

Eichengreen on Q1: The “not worry” phrase in the question is a bit vague admittedly.

Edlin on Q1: Less worry is not the same as no worry

And on Q2: There are limits to capacity and no limits to wants.

Duffle on Q2: If this were true, each such country could finance the purchase of all of the world’s output, which is obviously impossible.

You will note that this substantial subset of the surveyed mainstreamers explain that they disagree with the questions on the basis that unbridled spending would exhaust the supply of available resources and thus cause inflation. This has always been MMT’s point, too. Their disagreement is not with MMT but rather with a proposal to spend without limit—which has never been an MMT proposal.

It is also interesting that Nordhaus agrees with the MMT position that floating the currency increases policy space, while Judd goes on a tear about free lunches (ignoring the fact that employing previously unemployed capacity is indeed a free lunch).

So if the questions had been stated correctly it looks like many of the mainstreamers would have agreed with the MMT position.

As Bill argues, the poll was designed merely to smear MMT, not to actually survey opinions on what MMT actually says. This was recognized even by St. Louis Federal Reserve Bank Vice President Adolfatto, who wrote:

Was any MMT proponent included in the survey? Don’t be ridiculous, of course not (there were a couple from MIT though–perhaps they thought this was close enough). How would a typical MMT proponent have answered these two questions? I am sure that most would have answered in the exact same way as other economists. If this is the case, then why does Chicago Booth preface the survey with MMT? There are many possibilities, none of which are attractive for Chicago Booth.

Digging a little deeper, it is quite interesting that the Booth school credited the assistance of someone named Steve Klenow at Stanford University, who helped provide links to critics of MMT. And credited the London School of Economics for providing expert PR assistance from a Mr Romesh VAITILINGAM, Press and Public Relations – Support, http://cep.lse.ac.uk/_new/staff/person.asp?id=2359.

Wait. They hired a PR assistant? Stanford and LSE? A Northern Atlantic Alliance to attack MMT?

So there is real money in this campaign to discredit MMT? I had wondered why, after 25 years of laboring in the wilderness, suddenly all the knives have come out. Krugman cannot talk about anything else but MMT. Everyone from Summers to Powell, from Henwood to Epstein, has to join ranks to attack a theory created by half a dozen economists?

And they’ve all adopted the Trump tactic of lies, lies, and more lies? A sheer coincidence? Or a carefully coordinated strategy?

Make no mistake about it, as Bernie would say. This isn’t about MMT. And it isn’t, mostly, about Bernie, either. They are after Alexandria Ocasio-Cortez.

Just look at every report in the media on MMT—it will include her name. Google her name and you get MMT. She’s the real danger, not us. She must be stopped. They will spare no expense, use any lie, go to any extreme.

For decades the neoliberals have used the threat of taxes to stop any progressive movement in its tracks. “How you gonna pay for it?” killed every proposal that came from the left.

It is a foregone conclusion that if you link anything that would benefit the public to a tax hike, it will never make it out of committee. The official left uses this tactic as a “go away and leave me alone” strategy: see, we’ve really been working hard for progressive policy but we just can’t get those rich people to line up and tax themselves to pay for it. Selfish bastards. But money grows on rich people and they don’t want to pay for all the goodies we’d like to get to help the poor. So they’ll just have to stay poor a bit longer. Uncle Sam is broke.

But tax cuts for the rich? Oh, sure, why not. Something might trickle down. Campaign contributions, probably. Keep those coming.

AOC has cut through all that. We don’t need their stinking money. We’ve got MMT.

But let’s tax them anyway. They are too rich.

A double whammy against the comfortably privileged. We don’t need you. We’re passing the Green New Deal. We’re saving the environment. Jobs for All. Raising incomes of most people. And reducing yours. We don’t need the rich so we’re taking away your riches. We’ve got Uncle Sam’s purse.

AOC brought the right and the official left together. Make no mistake about it. They’ll spend billions, even hundreds of billions to stop all this “nonsense”, this “garbage”, this “crazy” theory.

Last time around the DNC decided they preferred Trump over Bernie. This time they’re going to put their money on Biden and Beto.

Better Trump than Red remains the DNC strategy.

Old serial loser Uncle Joe with his checkered past and petroleum lubed Beto who cannot stake out a position on Coke vs Pepsi out of fear of offending someone. Trump’s going to chew up and spit out Biden, then use Boy Toy Beto to wipe up the mess on his mouth.

Humanity cannot afford another 4 years of Trump. Nor 4 years of Biden. Delaying the Green New Deal by four more years virtually assures failure to reverse the worst effects of climate change.

The attitude of elites has always been Apres Moi Le Deluge. If they cannot have it all, bring on the deluge.

Make no mistake about it—this is not just a Koch attitude. Even Buffet—who never misses an opportunity to beg for a larger tax liability (knowing it ain’t going to happen, of course)—prefers the deluge and joined the attack on MMT. I mean AOC.

We have to approach this Green New Deal as the real MEOW. (As opposed to Jimmy Carter’s baby kitten meow.) Roosevelt’s New Deal was only a half measure. Even its best innovation—Social Security—is weighed down by the ball and chain of a payroll tax. Much of the rest of the New Deal didn’t even survive for a generation. “Paying for it” was a big part of the problem. Fear of offending the sensibilities of Southern Democrats was another. Opposition of the AMA to universal healthcare was a third.

It was only WWII that freed the government’s budget on the necessary scale. This was justified on the basis that there was no alternative—global subjugation to Nazis, or spending on an unprecedented scale. We chose survival. We learned that “taxes for revenue are obsolete” (as Ruml put it). And we came out of WWII stronger and richer than ever before.

The task ahead of us is bigger. The stakes are bigger. The future of humanity lies in the balance. Half measures will not do. It will take all of our available resources—and then some—to win this battle. The experts (and I’m not one of them) say we’ve got most of the technology we need. We’ve got unused resources to put to use. We can shift others from destructive uses to be engaged in constructive endeavors. We can mobilize the population for greater effort with the promise of greater equality and a shared but sustainable prosperity.

First we have to shake off the neoliberals who’ve been destroying our country and our world for more than two generations. They began in 1974 with the argument that an overspending government caused inflation. Too much regulation and coddling of unions caused unemployment and slow growth. In reality, OPEC caused both of our high inflation periods (early and late 1970s), and the adoption of austerity to fight oil price hikes slowed growth and led to unemployment.

The correct policy then—and now—is conservation and conversion to alternative energy sources. Instead we got then—and now—austerity and ramped-up dependence on climate-killing carbon.

Neoliberals want to continue with the same-old same-old. More austerity. More reliance on markets (carbon trading—that is, using the price system to try to resolve a problem created by the price system). More half measures. More meow.

MMT teaches that we can afford the real MEOW. If we tackle climate change as the moral equivalent of war, and if this really does take us to and beyond full employment of resources, we can adopt measures to counter inflation pressure. No one has a vested interest in high inflation—in spite of what the inflation worriers want you to believe. We can work together—as we did in WWII—to put all our resources into the effort without stoking inflation.

Affordability is not the question. MMT shows how to pay for it. There is some danger of inflation—not because of the manner in which the GND will be financed but because of potential pressure on resources. Knowing that that is the real danger, we can formulate a strategy to prevent it.

I saw in some commentary a plea for a simple statement of the main principles of MMT. Let’s try this.

The great J. Fagg Foster said “Whatever is technologically possible is financially feasible”—a line I’ve often used.

If you think about it, there’s really no other reason to have a financial system. If you know how to build houses but your financial system can’t find a way to make them affordable, then you have to replace it with one that will.

MMT claims that we’ve got all the financial wherewithal we need already in the hands of our sovereign government to afford whatever is technologically possible.

We don’t need to go hat-in-hand to rich folks to get them to pay for it.

We don’t have to beggar our grandkids to pay for it.

We don’t have to borrow from China to pay for it.

We don’t have to get the Fed to “print money” to pay for it.

All we need to do is to remove the self-imposed constraints, the myths, and the misplaced morality.

Then budget for it. Approve the budget. And spend.

No new spending process is required. Follow the normal procedures that the Fed and Treasury have developed.

That’s how you pay for it.

♦ A Must Read: Why does everyone hate MMT?

Reproduced from: http://neweconomicperspectives.org/2019/03/a-must-read-why-does-everyone-hate-mmt.html

Posted on March 26, 2019
By L.Randall Wray

The attacks on MMT continue full steam ahead. Janet Yellen (former Fed chair, but clueless on money and banking)—a centrist–has joined the fray. Jerry Epstein—on the official left–has ramped up his ridiculous claims, now associating MMT with “America First” and fascism (you knew that was coming—it has always been the refuge of critics who couldn’t come up with valid critiques).

But there are some rays of light. Bloomberg published a more balanced assessment (https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide). The authors of that piece actually took the time to go through our new textbook (Macroeconomics, by Mitchell, Wray and Watts—now available for purchase in the USA : And in Australia).

However, here is the best response to the critics I’ve seen:

WHY DOES EVERYONE HATE MMT? Groupthink In Economics, by James Montier, March 2019,

Not only does he take down prominent critics like Summers and Rogoff, he also provides a very useful 400 word summary of MMT. Some of you have asked for a concise statement, and this is as good as you’re likely to find.

  1. Money is a creature of the state. Money is effectively an IOU. Anyone can issue money; the trouble is getting it accepted. The ability to impose taxes (or other obligations) makes a country’s ‘money’ valuable.
  1. Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating currency can be thought of as being monetarily sovereign. This means it cannot be forced to default on its debt (i.e. the U.S., Japan, and the UK, but not the Eurozone or most emerging markets).
  1. An operational description of the monetary system is critical. Understanding that loans create deposits (which in turn create reserves, aka endogenous deposits create loans. For example, knowing that government deficit spending creates reserves and drives down interest rates is vital to understanding Japan’s bond market.
  1. Functional finance, not sound finance. Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation (rather than, say, achieving a balanced budget position). A Job Guarantee scheme is an example of a useful policy option to effect this outcome (acting like a buffer stock in a commodity market) in the eyes of MMT.
  1. Limits are real resource and ecological limits. If any sector of the economy pushes it beyond the limits of capacity, then inflation will result. If a government spends too much or taxes too little, it can create inflation, but there is nothing unique about the government sector in this regard. These are the limits that matter – people, machines, factories – not ‘financing’ constraints.
  1. Private debt matters. Even in a monetarily sovereign state, private debt matters. The private sector cannot print money to repay its debts. As such, it has the potential to create a systemic vulnerability. Think Minsky’s financial instability hypothesis: stability begets instability.
  1. Macro accounting (Godley style) keeps us honest. One sector’s debt is another’s asset. So, the government’s debt is the private sector’s asset. Understanding how one sector relates to another using a sectoral balance framework is very helpful, as is understanding the Kalecki profits equation, or the way reserves work in a financial system. Accounting isn’t glamourous and identities shouldn’t be taken as behaviours, but they can help us spot unsustainable situations.

I urge you to read the rest of his piece. It is spot-on.


Reproduced from: http://neweconomicperspectives.org/2019/05/how-to-pay-for-the-war.html

Posted on March 26, 2019
By L.Randall Wray

Remarks by L. Randall Wray at “The Treaty of Versailles at 100: The Consequences of the Peace”, a conference at the Levy Economics Institute, Bard College, May 3, 2019.

I’m going to talk about war, not peace, in relation to our work on the Green New Deal—which I argue is the big MEOW—moral equivalent of war—and how we are going to pay for it. So I’m going to focus on Keynes’s 1940 book— How To Pay for the War—the war that followed the Economic Consequences of the Peace.

Our analysis (and the MMT approach in general) is in line with JM Keynes’s approach. Keynes rightly believed that war planning is not a financial challenge, but a real resource problem.

The issue was not how the British would pay for the war, but rather whether the country could produce enough output for the war effort while leaving enough production to satisfy civilian consumption.

To estimate the amount left for consumption we need to determine the maximum current output we can produce domestically, how much we can net import and how much we need for the war.

My argument is that this is precisely how we prepare for the Green New Deal. “Paying for” the GND is not a problem—the only question is: do we have the resources and technological know-how to rise to the challenge.

While in normal times we operate with significant underutilization of capacity, during war, Keynes argued, we move from the “age of plenty” to the “age of scarcity” since what is available for consumption is relatively fixed.

At the same time, more output produced for military use means more income, which, if spent on consumption would push up prices. Hence, some of the purchasing power must be withdrawn to prevent inflation. Thus, Keynes rightly viewed taxes as a tool for withdrawing demand, not paying for government spending.

He thought taxes could be used to withdraw half of the added demand. The other half would have to come through savings, voluntary or “forced”.

Voluntary savings would only work if everyone saved enough, which can’t be guaranteed. If households don’t save enough, they bid up prices while consuming the same amount of resources, but paying more. The business ”profiteers” would get a windfall income, some saved and the rest taxed away (so businesses would effectively act as tax collectors for the Treasury — the extra consumer demand facing a relatively fixed supply of consumption goods would generate extra tax revenues on profits).

Thus voluntary saving plus taxes would still withdraw demand, but on the backs of workers and to the benefit of profiteers. If workers demanded and got higher wages, the process would simply repeat itself with wages constantly playing catch-up to price increases as workers consumed the same amount of real resources.

Keynes’s preferred solution was deferred consumption. Instead of taxing away workers’ income, which would prevent them from enjoying the fruits of their labor forever (and possibly reduce support for the war effort), he proposed to defer their consumption by depositing a portion of their wages in “blocked” interest-earning deposits.

This solution would avoid inflation, while at the same time more evenly distribute financial wealth toward workers.

Furthermore, this would solve the problem of the slump that would likely follow the war, as workers could increase consumption after the war at a measured pace, spending out of their deferred income.

Keynes recognized that it is not easy for a “free community” to organize for war. It would be necessary to adapt the distributive system of a free community to the limitations of war, when the size of the “cake” would be fixed.

One could neither expect the rich to make all of the necessary sacrifice, nor put too much of the burden on those of low means. Simply taking income away from the rich would not free up a sufficient quantity of resources to move toward the war effort—their propensity to consume is relatively low and they have the ways and means to avoid or evade taxes.

But taking too much income away from those with too little would cause excessive suffering—especially in light of the possibility they’d face rising prices on necessities.

To avoid a wage-price spiral, labor would have to agree to moderate wage demands. This would be easier to obtain if a promise were made that workers would not be permanently deprived of the benefits of working harder now.

In other words, the choice facing workers is to forego increased consumption altogether, or to defer it. In return for working more now, they would be paid more later—accumulating financial wealth in the meantime.

He recommended three principles to guide war planning:

1) use deferred compensation to reward workers;

2) tax higher incomes while exempting the poor; and

3) maintain adequate minimum standards for those with lower incomes such that they would be better off, not worse off, during the war.

The deferred compensation would be released in installments, timed with the slump that would follow the war. The system would be “self-liquidating both in terms of real resources and of finance” — as resources were withdrawn from the military they could turn to civilian production, with the deferred compensation providing the income needed to buy that output.

While Keynes argued that “some measure of rationing and price control should play a part” he argued that these should be secondary to taxes and deferred compensation. Rationing impinges on consumer choice and inevitably has differential impacts across individuals. Price controls can create shortages.

In any case, he argued that an effective program of deferred income will make rationing and price controls easier to implement.

What Keynes wanted to avoid was the UK experience of WWI when the cost of living rose an average of 20-25% annually over the course of the war, and wage hikes tended to match price hikes, but with about a one year lag.

This allowed sufficient but permanent loss of consumption by workers to shift resources to the war.

By contrast, both the US and the UK managed to contain inflation pressures much more successfully in WWII—the UK hit double digit inflation only in 1940 and 1941, and had remarkably low inflation during the remainder of the war; the US barely reached above 10% only in 1942 and in other years inflation ranged from 1.7% to 8%.

Both of them adopted a variety of anti-inflation policies that approximated Keynes’s policy. Given the circumstances, the policies were remarkably effective.

Note that in the US, government spending rose to nearly half of GDP — with the budget deficit rising to 15% of GDP and the national debt climbing to 100% of GDP. In light of that massive mobilization, it is amazing how low inflation was.

I think this will also happen as the GND is phased in — the growth rate will accelerate sharply and the government’s share of GDP will grow from the current 25% or so toward 35% of GDP. At the same time, there will be reduction of private spending on healthcare so we end up with maybe an overall boost of GDP of maybe 2.5%.

If desired, we can reduce the stimulus through deferred consumption—perhaps through a surcharge on payrolls that will be returned through more generous benefits after the GND “war” cools down. Me? I’m an optimist. I believe the GND boost will put us on a sustained higher growth path, without inflation, that will generate the additional resources required.

If we compare that to the WWII build up, all of this seems quite manageable. And the inflation effect will be much lower — in part because we are not producing stuff to blow things up and in part because we face strong deflationary pressures from the east — a couple of billion workers have joined the global production force to keep inflation down.

And some of this shift toward the GND will be reversed quickly once the new infrastructure is in place and we have greened our economy. We will release the deferred compensation and we might end up with a government that is permanently bigger but not by that much—say a third of the economy instead of a quarter. Again, that is no big deal.

We long ago became a post-agricultural society. Since WWII we’ve transitioned to a post industrial society. It makes sense that we are going to have a bigger government since most provisioning already is, and will increasingly be, coming from the service sector—an area where public service Trumps private service—in education, care services—aged and young, healthcare, the arts, and many forms of environmentally-friendly recreation. More parks, less shopping.

In another important contribution — Economic Possibilities for our Grandchildren — written in 1930, Keynes speculated about our future – a time when “for the first time since his creation man will be faced with his real, his permanent problem — how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

By Keynes’s timeline, this should have been reached by 2030. We’ve timed our GND to be completed by 2030. We have 10 years to make Keynes’s vision become reality. The alternative is annihilation.

Some (both heterodox and orthodox alike) argue we just cannot “afford” survival. It is cheaper to just keep doing what we’ve been doing and hope for a different result. That is not only the definition of insanity, but it is—as Keynes would say—unnecessarily defeatist.

The challenge is big; the alternative is unacceptable.

(*Our report, How to Pay for the Green New Deal, by Yeva Nersisyan and L. Randall Wray, will be published soon at the Levy  Economics Institute.)

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