Daily Archives: January 1, 2012

MMP Blog #30: What is Modern Money Theory?

By L. Randall Wray

Happy New Year to All. We are (I think) a bit over half-waythrough the Modern Money Primer. We should be able to finish it by sometimenext summer.

OK, you might be wondering: Isn’t this a strange point atwhich to raise the question, “what is modern money theory?” Yes, in someimportant ways, it is. However in the past week there have been some reallypretty extraordinary pieces in the popular media trumpeting MMT.

The Economist magazine featured a major story, Heterodox economics, Marginalrevolutionaries: The crisis and the blogosphere have opened mainstreameconomics up to new attack.Of the three heterodox approaches it discussed, one was the “neo-chartalist” or“modern money theory”. Warren Mosler as well as UMKC appeared in the story;indeed, there are two cartoon caricatures featuring Warren adorning the story.

In addition, John Carney at CNBC has been running a seriesof pieces that discusses MMT. This one is particularly good: MMT, NGDP, AndAustrian Economics: Alphabet Noodling!.And here is a link to his previous one: 

Further, the debates about MMT continue in the blogosphere,including over at Cullen Roche’s blog: THE FUNDAMENTAL DIFFERENCE BETWEENAUSTRIANS AND MMT’ERS .And a truly excellent piece on Bill Mitchell’s Billyblog: . Bill’spost led to a bit of a scuffle over what is actually in MMT—with Cullen arguingthat the Job Guarantee cannot be acomponent, while Bill insisted that it mustbe. Warren has sided with Bill and written very persuasive comments arguingthat we need the price anchor.

In this Primer we will eventually get to the Job Guarantee,so I do not want to discuss that today. But the arguments made by Cullen haveled to two questions: what is within the realm of MMT? And just where did thename “Modern Money Theory” come from? Indeed, Stephanie Kelton was asked thesecond question and did a bit of investigation. To be sure, we are not sure
My 1998 book was entitled “Understanding Modern Money”. WhenI was writing the book, it had a much more boring working title, and I askedMat Forstater and Warren to help think of something catchier. We threw around alot of ideas and rejected all of them. I had in the manuscript the quote I lovefrom Keynes that argues that the State names the money of account and chooseswhat can answer to that name, and has done so “for some four thousand years atleast”. And so I chose to use the term “modern money” to apply only to monetarysystems that have existed for the past “four thousand years at least”. Whatevertype of money that might have existed before that, we cannot be sure. But forthe past 4000 years, at least, we have had State Money—that is, Modern Money. Fromwhence came the book title.

I tended to call our approach the State Money approach inthe early years; perhaps I also used the term Chartalist. That derived from thework of Knapp, who was followed by Keynes in his Treatise on Money (1930). This has usually been misinterpreted,following Schumpeter, as a “legal tender law” approach—a position clearlyrejected by Knapp and Keynes. Both Keynes and Schumpeter knew that it had to bemore than legal tender laws. But that is a matter for another time.

Later, our approach was given the name“neo-Chartalist”—which I think was supposed to be somehow derogatory. After severalof us moved to UMKC, it began to be called “the Kansas City approach”. That ofcourse was misleading because our sister center was in Newcastle under BillMitchell’s direction, and it also ignored the work of Charles Goodhart in theUK; by that time there were already many other people working on the approach,spread around the country and even around the world.

In any event, somehow it got the name Modern Money Theory. Wethink the first time those exact words were used might have been in a commentto Bill’s blog in 2007; if anyone can find that comment or a previous use,please send it along. It also looks like Bill used the term “modern monetarytheory” in an academic paper in 2008.

I decided to look back over my own powerpoints to see how mypresentations of the approach evolved. I’ll provide three. Please bekind—looking at those early ones is a bit painful. But remember that ppt was anew technology back in 2005! And I am still no match for Steve Keen.

The first one is titled THE CREDIT MONEY, STATEMONEY, AND ENDOGENOUS MONEY APPROACHES, from a series of lectures I gave for ashort course at UNAM in Mexico City in May 2005.


As noted on the first slide,the lecture’s primary purpose was “to draw out the links among the state,credit, and endogenous money approaches, after first discussing the nature ofmoney via historical and sociological analysis”.  “The credit approach locates the origin ofmoney in credit and debt relations…” On the other hand, the state moneyapproach “Highlights the role played by “authorities” in the origins andevolution of money. The state imposes a liability in the form of a generalized,social, unit of account–a money–used for measuring the obligation. Once theauthorities can levy such obligations, they can name what fulfills thisobligation by denominating those things that can be delivered, in other words,by pricing them.” And, finally, the endogenous money approach consists of fourmain components. “1. Money is “endogenous”: loans create deposits, which arecredit money. 2. Reserves are “horizontal”, nondiscretionary. 3. Overnightinter-bank lending rates are “exogenously” set by policy. 4. Banking Schoolreflux principle: deposits return to banks to retire loans, destroying money.Similar to the “fundamental law of credit” of Innes: the creditor/issuer mustaccept its own liabilities to retire debt of the debtor. “Excess Money” is notpossible.”

The slideshow concludes with the attempted integration(sorry, a bit long): “The state choosesthe unit of account in which the various money things will be denominated. Inall modern economies, it does this when it chooses the unit in which taxes willbe denominated and names what is accepted in tax payments. Imposition of thetax liability is what makes these money things desirable in the first place.And those things will then become the (HPM) money-thing at the top of the“money pyramid” used for ultimate clearing. The state then issues HPM in itsown payments—in the modern economy by crediting bank reserves, and banks, inturn, credit accounts of their depositors. Most transactions that do notinvolve the government take place on the basis of credits and debits, that is,privately-issued credit money. This can be thought of as a leveraging of HPMused for ultimate clearing. In all modern monetary systems the central banktargets an overnight interest rate, supplying HPM on demand (“horizontally”) tothe banking sector (or withdrawing it from the banking sector when excessreserves exist) to hit its target. There is an important hierarchical relationin the debt/credit system, with power—especially in the form of command oversociety’s resources—underlying and deriving from the hierarchy. The ability toimpose liabilities, name the unit of account, and issue the money used to paydown these liabilities gives power to the authority that can be used to furtherthe social good. “Sovereignty” However, misunderstanding or mystification ofthe nature of money constrains government by the principles of “sound finance”.While it is commonly believed that taxes “pay for” government activity,actually obligations denominated in a unit of account create a demand for moneythat, in turn, allows society to organize social production, through a monetarysystem of nominal prices. Much of the public production is undertaken byemitting state money through government purchase. Much private sector activity,in turn, takes the form of  “monetaryproduction”, or M-C-M’ as Marx put it, that is, to realize “more money”. Thisis mostly financed by credits and debits—that is, “private” money creation.Because money is fundamental to these production processes, it cannot beneutral. Indeed, it contributes to the creation and evolution of a “logic” tothe operation of a capitalist system, largely “disembedding” the economy. Atthe same time, many of the social relations can be, and are, hidden behind aveil of money. This becomes most problematic with respect to misunderstandingabout government budgets, where the monetary veil conceals the potential to usethe monetary system in the public interest.”

Well, I think readers of this Primer will recognize manythemes we have already covered, and we will be going through those that areunfamiliar in coming weeks. Not much of anything in this passage that I’dchange.

The second ppt to be examined is titled MODERN MONEYAND FUNCTIONAL FINANCE, from a lecture (again) at UNAM in May 2007.


It has somesnazzy pictures I downloaded from the internet, and repeats much of the themefrom above. What I want to point to is the introductory slide:“The state moneyapproach is associated with Knapp, Keynes, and Lerner, while credit money isassociated with Innes and Schumpeter, and more loosely with the Circuit andendogenous money approaches. The functional finance approach is associated withLerner.

Modern Money =endogenous money + state money + credit money + functional finance”

This was the first slide I could find in which I wrote outan “equation” listing what I took to be the fundamental components of my“modern money” approach. There is a later slide that lists the various“heterodox” schools of thought from which my approach derives:

         Marx,Keynes, Veblen: M-C-M’; MTP; Theory of business enterprise
         Institutionalists:M is all bound up with power: to do good and bad; perhaps the most importantinstitution in CapEcon
         PostKeynesians: M and uncertainty; M and contracts; holding M
         Chartalists:State M, bound up with sovereignty
         FunctionalFinance: State M and Govt spending

Sorry for the abbreviations—I was learning to reduce theamount of writing put on each slide—but I think you can figure out what theystand for. (MTP refers to Keynes’s “monetary theory of production”, which isvery similar to Marx’s M-C-M’ formulation and to Veblen’s “theory of businessenterprise”. M, of course, stands for money. And CapEcon is a capitalisteconomy.)

The final presentation comes from a panel at the Associationfor Institutionalist Thought, April 2008, on “how to teach economics”. Mypresentation was: How to Teach Money


And what I want to point to is the addition I had made tothe slide just presented:
         Marx,Keynes, Veblen: M-C-M’; MTP; Theory of business enterprise
         Institutionalists:M is all bound up with power: to do good and bad; perhaps the most importantinstitution in CapEcon
         PostKeynesians: M and uncertainty; M and contracts; holding M
         Chartalists:State M, bound up with sovereignty
         FunctionalFinance: State M and Govt spending

In other words, my argument then—and now—is that the modernmoney approach integrates all ofthese approaches into a coherent theory of the way money “works” in the moderneconomy.

Much of the new ground explored by MMT has been focused onproviding an accurate description of what we call “monetaryoperations”—including the coordination between the central bank and treasury,with special focus on describing how “government really spends”. We have spentso much of our time on this for two reasons: first, almost no one understoodthis as recently as 2 or 3 years ago. Second, it is important, criticallyimportant, to formulating sensible policy.

And as an accurate description, this part of MMT should beaccepted by anyone, no matter what their theoretical, political, or ideologicalpersuasion. Ironically, it is the description that has been viciously attacked,even though no one, and I mean no one, has found any holes in the argument.
But MMT is much more, at least in my view.