Modern Monetary Theory (MMT)

[peterv]

At our meeting on Feb 24th, we had an interesting talk which included the idea that governments create money by running a deficit
positivemoneysheffield.pbworks.com/w/page/76045169/140224%20Richard%20%22National%20Debt%20-%20debt%20or%20delusion%22

One aspect of the talk left me a bit confused - I am familiar with the idea that commercial banks create money through issuing credit, but there seems to be two different accounts here of how money is created.

A bit of googling led me to MMT, and the idea of neo-chartalism (see the links I added at the end of the above link.

So I am left with some questions. Can anyone answer them?
1) Is MMT just a description of what COULD happen? I'm happy with that, it seems to describe the Positive Money proposals, after we remove the power of private banks to create money.
2) MMT is always described with ref to the US banking system. I know it differs in some respects to the UK system, so is it the case that govt. deficits create money in the US but not the UK?
3) If MMT applies today (in the US at least), how does this square with the notion of private banks creating money?

Help!

[richardb]

hello richard here

1)

I was borrowing some aspects from MMT however I don't claim running a deficit creates money.
Postive Money position of this is reallocates pre-existing.


2)

No in MMT definitions maybe different


3)

MMT positions that all money comes from the government the definitions are
slightly confusing at first. Credit and money are defined differently.


neweconomicperspectives.org/p/modern-monetary-theory-primer.html

may answer some of the questions.


rich

[shakerman]

Unfortunately, I help out at a volunteer project with young people on Monday evenings and find it very difficult to attend meetings but I am very interested to read of other's thoughts and opinions. One thing that I do notice is the complexity of language used when talking about money. I believe that John Kenneth Galbraith, a Harvard Economist, once rightly pointed out that complexity is used in monetary theory to hide rather than reveal the truth. I feel that too many understandably still fall into the trap of believing that the study of money is a complex subject and can only be explained using complex language.

On the contrary I personally believe that it is really very simple. It is true that money was once a commodity (based on precious metals) and had an intrinsic value but it is no longer the case. It is unfortunately still a product to be bought and sold but only because we allow private banks to create public money using the ancient practice of usury (renting it out for profit), which is inimical to its true purpose. In reality, MONEY IS SIMPLY A PROCESS.

This is how it works. I go to the shop with a £10 note to buy some food. The £10 note subsequently gets passed as change to another customer - perhaps as part of change for a £20 note. That customer then spends the £10 somewhere else on whatever it is they choose or need to buy. In turn, the same £10 note gets passed on by the same process and is spent somewhere else. Each process is called a transaction and the process continues indefinitely until the £10 note wears out after many thousands of transactions. A transaction is an instance of buying or selling something. When it wears out the £10 note is withdrawn and replaced by the Bank of England at minimal cost. By this process the £10 note that we are using is functioning as a token and is being used to facilitate progress.

Please note carefully and understand clearly the following facts.

• The same £10 note is being used in every transaction as a token to facilitate trade.

• The £10 note is being used merely as a token and has little or no intrinsic value in itself since it is only a printed paper promise and not made of a valuable commodity like silver or gold.

• The value of the £10 note or token does not diminish by being used, thus the same £10 note (token) can be used for 10 transactions and thereby would create £100 of economic activity and it could carry on being used for 100 transactions and then would create £1,000 of economic activity. Therefore, it is not limited in the amount of the economic activity that it can create and can carry on being used for the same purpose generating economic activity until it wears out.

• Economic activity means economic movement in relation to the economy.

• The 'economy' is a is a word used to describe the measure of the degree of advancement of a country or region in relation to the production and consumption of goods and services and the supply of money.

• We are really only using a token system to facilitate movement or improvement in the economy, because that is what is meant by the word activity (movement).

• In the example above, we are using a £10 note (token) in an economic process called trade.

• Trade is a movement process in itself that moves the ownership of the object being the traded and thus the possession of the actual object itself from person to person, business to business and country to country etc. This trade process facilitates an object's use elsewhere.

• Countries with more economic movement both within their own borders and across borders are considered to be more developed or advanced.

If I go into a shop and buy some bread to make a sandwich for my lunch, I move the ownership of the bread to myself and then move it out of the shop to make the sandwich, ostensibly to consume it elsewhere. If I trade with China as a business (import from China), I move the ownership of the Chinese goods to myself and I arrange to have the goods physically moved (transported) from China to England. Money is a process that uses a token system to promote action in the form of movement in essential goods and services through a process called trade.

It is similar to all the other processes that we use - for example speech. When I was a teacher, I created action meaning movement/progress through speech by giving my pupils assignments to do. Thus I might ask them to write an essay, draw a picture or complete so many mathematical sums etc. I also created movement/progress in their understanding of what I was teaching as well as in my understanding of them. I created movement/progress in their skill set and I created movement/progress in our relationship, which might be for good or for ill depending upon their willingness to co-operate in the learning process. All are different kinds of movement or progress created by speech.

[shakerman]

Further to my post above:

You should now understand that money is a process, which facilitates action, movement or progress through trade; just as speech is a process, which facilitates action, movement or progress through communication. Processes like these, which move things forward, serve to create benefit in the form of advantage or profit. They are the reason why we have moved on to our present comfortable life styles from that of once all being nomadic hunter-gatherers who dressed in skins and lived in tents and caves. Words are a readily available resource without limit and so in reality is money when used in the process it was created for. It is only limited when constrained by being designated a commodity or product, both states being inimical to the simple PROCESS of money. As Aristotle famously said: “The trade of the petty usurer is hated with most reason: it makes a profit from currency itself, instead of making it from the process which currency was meant to serve. Their common characteristic is obviously their sordid avarice.”

[peterv]

Hi shakerman

I think your description of a circulating £10 note is spot on - I like to think of money as a catalyst. But notes and coins only account for less than 3% of money. Bank-created money has the same catalytic effect, but is not permanent and only exists through being loaned at interest.

I understand the Positive Money explanation that money is created on demand by private banks, and I'm happy to accept the idea that this privately-created credit-money gets its validity by being accepted by the state for payment of taxes.

What I'm struggling with is the idea that - to quote the Wikipedia article - "money enters circulation through government spending", and also the idea that "govt deficit equals non-govt savings to the penny"

I plan to work my way through Rich's primer to see if I can make sense of it.

[shakerman]

What I'm struggling with is the idea that - to quote the Wikipedia article - "money enters circulation through government spending", and also the idea that "govt deficit equals non-govt savings to the penny"

Here are some of my thoughts.

“Of all the contrivances for cheating the labouring classes of mankind, none has been more effective than that which deludes them with paper money,” so said Daniel Webster, a leading American senator from Massachusetts during the period leading up to the American Civil War. Today such a statement would be even truer about digital money.

We now have a fiat currency, which derives its value solely from a government decree that defines its worth. The term originates from the Latin word “fiat,” which means “let it be done” or “it shall be.” How that gains acceptance and is made to work is explained by economists through the use of the “Chartalist” theory of money. This theory takes its name from the Latin word “Charta,” meaning in the sense of a token or ticket. Modern money is nothing more than a token.

It is not a new idea, Henry I introduced 'Tally Sticks' (pieces of wood with notches cut into them - find them on Google images) following the 'Edict of Expulsion' when Edward I expelled all Jews from the country in 1290 for the practice of usury. They lasted in use as 'money' for hundreds of years.

Fiat currencies exist by government decree and therefore it might be reasonable to assume that the source of such money is the government itself. After all, in a democracy the government is made up of representatives of the people who go under the title public servants. If public money derives its value and power from the government who consist of representatives of the people, then ultimately it derives its value and power from the people - which is why it is public money!

This became abundantly clear in the banking crash of 2008 when the government had to intervene to rescue British money through a process known as Quantative Easing. The private banks could not ease or repair the damage they had caused themselves - only the government.The government eased the quantity of debt by diluting it with debt free money (in banking terms increased the liquidity), which they created out of nothing just as private banks do.

All governments have the sovereign right to create their own money but in reality they rarely do so. In Britain today, some 97% of public money in circulation is created electronically by a cartel of 5 private banks and its creation, (almost beyond belief) is nothing to do with the British government. These banks, by virtue of being private, exist primarily to serve the interests of their owners and not to serve the public - either as individuals, communities or a nation state. Private Enterprise has never existed to serve public interest. It serves only shareholder and owner interest. It is why it exists - all other motives are null.

Few people really understand the reality that private bankers have succeeded in appointing themselves as “gatekeepers” who thereby control access to public money. This situation, almost certainly through collusion of our political classes, is never challenged. Furthermore, although we appear to be happy to accept worthless pieces of paper, metal or even mere numbers on a computer screen as money, simply because everyone else does, the reason for the general acceptance of fiat money in exchange is not immediately obvious. Particularly, and perhaps because, many people are still under the mistaken illusion that money is essentially concrete (has a physical existence), finite (limited in quantity) and valuable in its own right (a commodity). We now need to understand how this situation has come about.

In the case of the dollar and other long established currencies tied to it like the pound, the end of Gold Standard initially and later the Bretton Woods Agreement created no discernible change at grassroots level. It is important to remember that these currencies began as commodity currencies (either physically made of precious metals or legally exchangeable for precious metals), which were then surreptitiously changed into fiat currencies. There was no withdrawal and re-issue of currency to mark the changes and thus nothing that the average person, with a limited understanding of the creation of money, could relate to. The money in the streets looked and worked exactly the same as before and so everyone just carried on as usual.

Despite the fact that there had been a seismic shift in the nature of money and of its creation by the banks, the difference was not immediately visible and most people remained blissfully oblivious to the fact that any change had taken place at all. The implications had been deliberately played down so as not to create a crisis of confidence in money.

The above situation involving a surreptitious change to an established currency does not explain how a brand new fiat money can gain acceptance in the first place. How this can happen is explained by economists through the use of the “Chartalist” theory of money, This theory takes its name from the Latin word “Charta,” meaning in the sense of a token or ticket. The theory, as outlined below, is now almost universally adopted by modern monetary theorists to explain that a demand for fiat money and is based upon the idea that people are compelled by a government to pay taxes in it.

Imagine a nation that has just gained sovereignty and decides to issue a brand new fiat currency. In the past, its people may have been using a valuable commodity (gold or silver) or even a foreign currency for the purposes of exchange. One day, the government decides to introduce its own totally different fiat money. To ensure that the people accept it, the government imposes a tax on the community, a tax that is payable only in the new fiat money. In so doing, they ensure a demand for the new fiat currency.

Before people can pay the tax in the fiat money, they somehow have to get hold of it. They can only do this when it is put into circulation by the government, since they cannot spend it on tax, or anything else, if it is not available to them to spend in the first place. In order to put it into circulation and make it available to spend, it is first necessary for the government to use the new fiat money to buy some goods and services (which could include labour services) from the private sector. An alternative scenario might be for the government to lend some newly created fiat money to the private sector.

Either way will put some of the new money into circulation – create the new money – which can then be used by the population in exchange as well as for tax payments. Be perfectly clear what happens here, government expenditure or lending must occur to put the fiat money into circulation before taxes can be paid. This shows that, as a matter of first principles, government expenditure or lending are logically prior to taxation in a fiat-money system (or any state-money system). You can't spend it if you haven't got it!

Contrary to popular belief, taxes are not needed to fund government expenditure. Rather, it happens the other way round in that government expenditure creates money, which then cycles back in the form of tax payments. This is the reality - that government expenditure actually ‘finances’ tax payments and not the reverse as we are led to believe.

You should now understand that in a fiat money system, contrary to what most people believe, tax does not fund government expenditure. Furthermore, you should also now be able to understand that since a fiat currency is not based on the restriction of having limited reserves of valuable commodities like gold or silver it is in fact created at will out of nothing without any financial constraints.

The absence of a financial constraint on government expenditure does not mean that there are no other limits. It just means that the limits are resource or political constraints and not financial constraints. The government might want to expand health care but confront a shortage of doctors and nurses – a resource constraint. Alternatively, there might be enough doctors and nurses but strong opposition to the government’s plan – a political constraint.

Resource constraints are usually fairly visible and solvable. It is where the (usually hidden or disguised) political constraints come from that begs further investigation. Most of the political constraints in Britain today appear to be either based on tribal ideology or serving the wishes of (often hidden) vested interests. In terms of resources, the most valuable resource is usually people, which is why wages usually comprise the greatest expenditure in any organisation.

It is clear however, that the full implication of this is not widely understood. It is in the interests of a small minority to try to conceal the implication simply because fiscal austerity suits elite interests. It results in high unemployment, which suppresses real-wage growth. It also creates an impression that desirable social policies are “unaffordable”, legitimizing inequality and government inaction. Note well at this point that if the most important resource that a business or country has is people, structurally created unemployment for private profit is an appalling waste of resources.

It would be a powerful thing for us to wake up to the fact that, in a fiat-money system, we need not be constrained by the disciplines of capital and the profit motive to the extent we choose; that the only constraint is the availability of resources (and the most important of those is people); that we are free, as a society, to utilize these resources as we see fit.

It is in the nature of capitalists to capitalise on any given situation and the situation they appear to capitalise on most is disadvantage. If they can make such disadvantage systemic or structural, then it is greatly to their advantage. With such a clear realisation, no amount of mystification and propaganda could hide what is the obvious reality.

If the realisation ever hit, the elites might struggle to quell our demands for full-employment, fulfilling work, improved working conditions, more and higher quality leisure time, better services, public-goods production and environmentally sustainable living that would be likely to follow.

But as long as we remain in the dark, the greater likelihood is for savage attacks on wages, social services and general living conditions, as capitalists and capitalist governments take advantage of high unemployment and an irrational fear of public debt to continue a massive upward transfer of wealth to a small, but powerful, financial elite.

[shakerman]

It occurs to me that I ought to say a little more about commodities and the Bretton Woods agreement:

Money is no longer a commodity (meaning having any intrinsic value itself) since there is no longer any gold and silver coins in common circulation Thus it is no longer a store of value in the traditional sense that everyone has been taught to believe. It might also surprise some people to be told that there are no longer any bank vaults full of gold bullion to back up paper money as there once was. Fractional Reserve banking whereby banks could lend out up to ten times their resources (bullion) no longer exists.

The end of Bretton Woods Agreement in 1971 removed the idea of paper money being ‘pegged’ to gold. Under that agreement created in 1944 you could require a bank to exchange 35 American Dollars for 1 ounce of gold. All the other currencies were linked to the dollar at an agreed exchange rate, so you could change pounds into dollars and thence into gold.