The Public Money Monopoly (Pt. I)

By Dan Kervick

Modern Monetary Theory (MMT) emphasizes the central role of governments in sovereign monetary systems.  MMT co-developer Warren Mosler has described the US dollar system, for example, as a “simple public monopoly.”    L. Randall Wray has written that, “In the United States, the dollar is our state money of account and high-powered money (HPM or coins, green paper money, and bank reserves) is our state monopolized currency.”   Sometimes this crucial MMT claim is expressed more broadly by saying the US government is the monopoly supplier of “net financial assets” to the non-governmental sectors of the dollar economy.

These claims continue to engender much confusion and resistance wherever MMT is discussed, and have been subject to several misconceptions – sometimes egregious misconceptions.  I want to defend the MMT claim that the US government is the monopoly supplier of the dollar, and is therefore ultimately responsible for any net increases or decreases in dollars and dollar-denominated financial assets in the non-governmental sector of the economy.   I will first describe the institutional and legal basis of this monopoly, and then turn to a discussion of what is and is not entailed by the claim that the US government runs a public monopoly over the dollar.

Of course, some people might have no problem at all in accepting the descriptive claim that there is a government-run public monopoly over the dollar, but might believe that the existence of this monopoly is a terrible travesty, a horrifying mutation of sound government into Big Government run amok.  But in my view, the existence of such monopolies in monetarily sovereign countries is on the whole a very good thing, at least when the country in question has democratic institutions.   Citizens of democratic countries should do everything in their power to achieve a democratically controlled currency monopoly if they don’t yet possess one, and should do everything in their power to preserve and improve their public currency monopoly if they are fortunate enough to have one.

Certainly, a public currency monopoly is not a panacea guaranteeing a healthy democratic society and a decent and prosperous life for all citizens.  Nobody needs to be reminded about the outrageous inequality and economic oppression present in the contemporary United States and elsewhere.   But a public monopoly over the dominant currency does give democratic citizens powers and political options they would not otherwise possess: powers to use their monetary system of behalf of public purpose and for the common good.   If a nation loses its public currency monopoly, then its people risk deeper subordination to centers of concentrated wealth beyond their control.

We are seeing this sad process unfold in Europe.  In order for a public currency monopoly to be fully effective, both monetary authority and spending authority need to be subject to democratic control, and should be married together in some degree so that they can be applied in a rational and coordinated manner toward the solution of public challenges.   The tragedy of contemporary Europe is that in pursuit of their idealistic ambition to create a common currency and unified continent, Europeans in the Eurozone have divorced their spending authorities from ultimate monetary authority, and relinquished a substantial degree of democratic control over their monetary system.  This is a backward step for democracy in Europe, and we are now seeing the ramifications.   Weakly accountable technocrats in league with the continent’s financial masters are using their privileged positions to subordinate several of the continent’s governments to unelected, external control.   They are using a brutal program of austerity to enforce this new system of undemocratic, centralized discipline; and their zeal to establish this new order is so great that they have plunged the continent into deeper mass unemployment and a second recession in the process.

The Consolidated Perspective

MMT writers frequently emphasize the distinction between currency issuers and currency users.  This distinction applies to any monetary system whatsoever.  Wherever there is a monetary system of any kind, there are some people or authorities with the power to issue new units of the currency, and others who simply use the currency that the currency issuers have brought into circulation.  So part of what MMT theorists mean when they say the government in US-style systems is a currency monopolist is that the government in such systems is the sole authorized issuer of the currency.

But to understand the MMT model of the government as a currency issuer or monopoly producer of the currency, with the exclusive power to increase the non-government sector’s supply of net financial assets, it is necessary to look at the entire consolidated governmental sector.   For the US system that means looking at the Treasury and Fed combined.   The MMT picture only makes sense when one considers the government sector as a whole.   If one focuses on just one part of the government, one will have a more difficult time understanding how the government can be a net creator of dollars.

The basic idea is that the government augments and diminishes the amount of money in circulation during some period of time whenever the monetary payments it makes to the non-governmental sectors of the economy exceed its monetary receipts from the non-governmental sectors of the economy.    But again, one must consider all of the monetary payments the government makes and all of the government’s monetary receipts.   Payments include spending by the US Treasury on goods and services, including payments to its employees.  Also included are payments the Treasury makes to service its debts.  But the Treasury is not the only part of the government that makes payments.  The Fed makes payments when it buys securities from the private sector and when it pays interest on bank reserves.   Similarly, both the Treasury and the Fed receive payments from non-governmental sector.  The Treasury receives tax payments, payments for some of the public goods and services it provides and payments of money used to purchase its debt securities.  The Fed also receives payments of various kinds: including payments for repurchases of securities, payments of interest on any debt securities it owns, interest payments for discount window borrowing, and penalty payments for reserve account overdrafts.

So how is this different from an individual, a household or a firm?  Can’t some person or business in the private sector also spend more than they receive?  Is this also money creation?

The situations are quite different.  A private sector economic agent, as a mere user of the currency, always has a finite stock of that currency.  If the agent’s payments exceed the agent’s receipts, that stock is diminished.  If the agent runs out of money completely, then in order to continue making monetary payments, the agent either has to raise more money by selling some non-monetary asset, or must obtain credit.   The credit might require a new application for a new loan, but it might come in the form of an automatic overdraft on a bank account or line of credit.   Either way it is credit.  The private sector firm or household, to the extent it conducts its business in dollars, is subject to a financing constraint.

The government isn’t like that.  As the issuer of the currency it does not possess any limited finite “stock” of money that imposes a financial constraint on its spending.  It can never be in a position in which it must obtain credit from some outside entity to make payments in excess of its receipts.  In effect, the government possesses a bottomless well of the nation’s currency, since it is the producer of that currency.  The government has no financial constraint.  The only constraints on how deeply it dips into this well are policy constraints: that is, its spending is constrained only by how effective the spending is in achieving the government’s various purposes.  Usually, one of those policy aims is price stability, and so a government will want to restrain the size of the gap between spending and receipts if it is concerned that too large a gap will destabilize prices.

Again, this difference between the government and agents in the non-government sector can be missed if one focuses only on one part of the government and not the whole government.  Current operational rules do require the US Treasury to behave something like a private sector household.   If its spending exceeds its tax revenues, the Treasury must plug the hole in its budget with borrowing from the private sector.  The Treasury is not permitted overdrafts on its account at the Fed and not permitted to borrow directly from the Fed.   So in effect a Treasury deficit triggers an overdraft on the private sector, i.e. more debt to the private sector.

However, much of the debt the Treasury issues to the private sector is subsequently purchased by the Fed, and thus becomes an intra-governmental debt, both an asset and liability of the unified government at the same time, which represents neither positive nor negative value and can be rolled over indefinitely as a bookkeeping operation.   As a result of this and other Fed operations, the combined actions of the Treasury and Fed together can result in a net injection of money to the non-governmental sector.  The Fed, of course, does not collect taxes.  Its purchases do not need to be financed by the collection of revenues from other sources.   Rather, it spends simply by crediting the appropriate bank accounts of the people or organizations receiving its payments.  The Fed does collect revenues since it owns financial assets that require people to make payments to the Fed, but its ability to spend is not constrained by the amount of revenue it has or will collect.

The government as a whole then, as currency issuer, can do something that currency users cannot do.  It can run what I will call a pure deficit – an excess of spending over receipts that does not diminish the spender’s monetary stocks and does require taking on new debt liabilities.   A pure deficit run by a currency issuer does not represent negative nominal value to that issuer, although it does represent positive nominal value to the totality of currency users in the broader economic world standing outside that currency issuer.   A pure deficit thus accomplishes a net creation of financial assets.   Currency users on the other hand can only run financial deficits: excesses of spending over receipts that diminish monetary stocks or add debt.   That means the positive nominal value flowing to the world external to the currency issuer by virtue of the financial deficit is entirely offset by the negative nominal value accumulated by the currency users running the deficit.

Some people criticize MMT for taking this consolidated view of the government sector.  They will point out that the Treasury and the Fed are not operationally integrated, but maintain a substantial degree of operational independence.   The point is well taken, and it is good to bear in mind that when one makes general statements about what the government can and cannot do.  The ability of the government to efficiently carry out in practice what it can do in principle depends on the nature of its institutions, and on how those institutions are organized and integrated.

But if our aim is to understand the role of the government as a whole in our economic system, the consolidated view is very fruitful.  We can think of the economic world as a collection of balance sheets.  Each household has its own balance sheet, but when we want to understand the household sector as a whole, we combine those balance sheets into one for the purposes of theoretical analysis.  Similarly, if our aim is to understand the economic role and capabilities of the government as a whole, we will want to combine all of the government’s balance sheets into one.

Money, Credit and Central Bank Liabilities

It is sometimes held that all money is just a form of credit (or debt, depending on whose side of the credit ledger one is considering), and that the currency issued by the government represents a debt or liability of the government.   Certainly, the money-as-debt view appears true when one considers certain forms of money.  Commercial bank demand deposit balances, for example, are clearly liabilities of the bank.  When you are in possession of such a deposit your bank owes you something, and you are then entitled to go to your bank and demand what is owed.

Every debt is a debt for something.   So we can ask with regard to any debt what is owed, and what sorts of things would constitute payment of the debt.   It is sometimes the case that a debt can be discharged in full with another credit instrument, after which the debtor no longer owes the creditor anything.  If you have a contract with some firm entitling you to receive some corporate bonds issued by that firm, then you have been paid once those bonds are delivered.  This is true even though the bonds themselves are a debt instrument.   But what lies at the foundation of all these credit instruments?

In the United States, the paper money we carry is called a “Federal Reserve note”, and is regarded under law as a liability of the Federal Reserve system, in the same way that a note from a commercial bank is a liability of that bank.  These notes are also, according to the Federal Reserve Act of 1913, supposed to be obligations of the US government, and “shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.”

If that statement is right, then the bearer of a Federal Reserve note holds a debt of the US government, and the government owes something to that bearer.  And that would suggest that there is no difference in principle between Federal Reserve notes – and perhaps bank reserve balances held at the Fed – and the demand deposit balances ordinary bank customers hold at their commercial banks.   Each is a debt: a liability of its respective bank of issue.   But if a Federal Reserve note is a liability of the Fed, what is it a liability for?   Is it a debt for some of the supposed “lawful money” referred to in the Federal Reserve Act?   What is that?   Isn’t the Federal Reserve note already lawful money?   And if there is some other kind of truly lawful money, and if money is always a credit instrument representing a debt of some kind, then what is that hypothetical lawful money itself a debt for – some even more awesomely lawful money?

The standard Fed line seems to agree with the view of money-as-liability.   The official balance sheet promulgated by the Federal Reserve counts currency in circulation, along with bank reserves, as liabilities of the central bank.   If the Fed purchases a Treasury security from a private dealer, the security is entered on the Fed balance sheet as an asset, and the money it paid for that security is entered as a liability.

But is this official stance economically accurate?  Is the circulating dollar a liability of the Fed?   If it is, it is a very peculiar kind of liability indeed.  A liability is something that is owed; and to possess a liability is to possess something that represents negative value; it represents negative value to the person who owns the liability because it is a promise of a future payment.  Ordinarily, the obligation to make a payment represents a future loss because the payment will diminish that person’s stock of wealth.  But when some person possesses a Federal Reserve note, what else does the government then owe that person?

With all due respect to the official Fed story, I think the money-as-liability picture is seriously misleading to say the least.  I want to argue that currency in circulation does not represent a liability of the government in any meaningful economic sense, and that registering it as such on the Fed’s balance sheet is merely an outdated accounting convention.

Imagine you are a breeder of milking cows.  But these cows are very special.   They are immortal.  They never get old and they never get sick.  Once fully grown, they produce the same amount of milk, every day, for as long as they live – which is effectively forever.    The cows are perfectly identical; no cow’s milk is any better or any worse than any other cow’s milk.   The cows are also very hard to breed, and unsurprisingly they are in very high demand.   You can breed five per year, and you sell each one for a very high price.  The sale of these cows accounts for virtually all of your income.

Now suppose you decide to build a new house, and decide to pay for the house with an IOU.  The IOU is for one cow from next year’s stock.   Once you have offered the IOU, and the builder has accepted it, the IOU becomes the builder’s asset and your liability.   You owe the builder something of value, a cow worth one fifth of your annual income.  When you deliver the cow, your stock of wealth has been diminished.  You are one cow poorer.  Hopefully, the house is worth it.

Now let’s suppose that with each cow sold, you generally issue to the purchaser a “certificate of substitution”.  These certificates bind you to a commitment:  If for any reason, the purchaser of the cow tires of the cow and wishes to trade the cow in for a new one, they are permitted to do so.  You will accept the old cow back as a trade-in and give the purchaser a new cow.

Do these certificates of substitution represent a liability for you?   Remember that we have assumed that these cows are perfectly identical.  The old cows don’t get worn out; they don’t get older; they don’t get lazier or more reluctant to produce milk.  Any one of the cows is just as good as another one.   If you receive a cow back as a trade-in for a substitute, the cow you receive back is just as good as the one you give up.  You can sell the trade-in again for as much money as you would get for selling any one of your other cows.

So no, the certificates of substitution that you have issued do not represent a liability; they do not represent negative value to you.   They do represent an obligation, because by issuing the certificates you have obliged yourself to carry out a cow exchange if a purchaser requests one.  But when you make such exchanges you do not end up any richer or any poorer than you were before you made the exchange.   So these obligations are not liabilities.

So right away, we see that commercial bank demand deposit balances – which are IOU’s of commercial banks – are very different from the currency and bank reserves issued by the Fed.  When you have a demand deposit, the bank actually owes you something, and if you demand payment of that thing, the bank’s assets are diminished when they make that payment.  And the thing the bank owes is something whose production the bank does not control.  Commercial banks are not permitted to print paper currency or mint US coinage.  They are not permitted to create their own reserves at the Fed.  They must acquire these things from the government, and to acquire them they must buy them.

But the government completely controls the manufacture of the currency.   It can produce paper and metal currency at a real cost that is always much, much lower than the current market value of the face-value quantity of the currency produced.  And it can produce bank reserves at virtually no cost, simply by marking up accounts on computer screens.  And the Fed can carry out these operations virtually any time it wishes, restrained only by its own monetary policy ends, and not by any inherent financial constraints.  The Fed has no finite stock of dollars.  When it issues some quantity of dollars, it hasn’t diminished its stock of dollars in any way.

There are other reasons that have been given for treating money as a liability of the government.   It is sometimes said that dollars are the government’s liability because of the tax obligations the government imposes.  The logic seems to be something like as follows:  Suppose Peter owes Paula a debt for $1000, but Paula also owes Peter a debt for $1000.  Suppose Paula’s debt to Peter is represented by a bond Paula has issued to Peter with a face value of $1000.  Peter can use the bond to pay the other debt, the debt he owes to Paula.  Having done so, both debts are discharged.  They cancel out.

Now suppose Paula is the government and Peter owes Paula $1000 in taxes.  He takes a $1000 bill to Paula, and the obligation is discharged.  Doesn’t the similarity between these two cases suggest that the $1000 bill is something like a $1000 bond – a debt that the government owed Peter – and that the $1000 bill cancels out the tax obligation in the same way the $1000 bond in the first example cancelled out Peter’s debt?

I don’t think this is the right way to look at the $1000 bill.   Consider another analogy: suppose you are a businessperson, the owner of a home and garden shop – and have been required by a court to deliver 100 bags of mulch to me.   I have the court’s order in my hand, and it represents to me an asset worth 100 bags of mulch (BOM).  Once the order has been issued by the court, I am better off.   When the mulch has been delivered, your obligation will be discharged.  But does that mean that the 100 bags of mulch you have in your possession before you deliver them represent a liability for me, because you can use them to cancel out your obligation?  No, of course not.  If they were my liability, then my 100 BOM asset represented by the court order would be offset by my possession of a 100 BOM liability of the same amount, with a net value for me of zero.

We can now see the difference between the first case – Peter’s debt to Paula – and the second case of the mulch owed by the store owner.   Suppose for whatever reason, Peter’s debt to Paula is canceled by a court, but Paula’s debt is left intact.  Then Paula still has a liability: she still owes something to Peter as represented by the bond Peter possesses.   But in the second case, if the store owner’s debt is cancelled, then I have simply lost an asset.  And I have no outstanding liability.  I don’t owe the store owner anything.

I think we should view tax obligations more like the mulch obligation than Peter’s debt to Paula.  The store owner possesses a debt owed to me, and he also possesses the means to discharge the debt.  But the fact that he possesses those means does not entail that those means represent some liability I have.  Similarly, if some citizen has a tax obligation to the government, and possesses the dollars needed to discharge that obligation, that does not entail that the dollars represent some liability of the government.  If they did, and if a dollar were a sort of bond issued by the government, then if some court were for whatever reason to cancel the citizen’s tax obligation, the government would still owe the citizen something.  But it doesn’t.  Once the tax obligation has been cancelled, the books are clear between the citizen and the government.

Another reason that has been given for saying that dollars represent a liability of the government is the suggestion that the government has a general obligation to support the market value of dollars, making each of those dollars a liability.  But this strikes me as a very ephemeral basis for attributing a liability to the government, since the obligation in this case is really nothing other than the government’s own voluntarily assumed policy choice.

And even if the obligation to support the value of the currency does represent a genuine liability of the government, it is worth noting that the cost of that liability is far, far less than the market value of the dollars in circulation.  By analogy, suppose you are the custodian of a museum which houses a collection of paintings that has been entrusted to your care.   Suppose the market value of the paintings is one billion dollars.  Suppose also you are legally obligated by the terms of your custodianship to care for, and preserve the market value of the paintings.   Each year on your books you enter the cost of preserving the paintings.  How much is it?   Certainly far less that $1 billion!   So even if the government possesses a genuine liability to preserve the value of the currency in circulation, that liability is nowhere close to the market value of that currency.   The government’s liability with respect to a single dollar in circulation is not one dollar, but a tiny fraction of one dollar.

So why does the Fed account for its dollars in this way?  Why does it register currency in circulation as a nominal liability equal to the face value of the currency?   I would suggest that Fed accounting practices are only outdated traditions that preserve the gold standard convertibility illusion of ye olden tymes by accounting for issued currency as a debt instrument or IOU of the Fed, just as it was in the pre-fiat days when government currency was only another bank credit promising redeemability for something else.   But in the post-convertibility days of true fiat money, that accounting practice is nothing but a hoary convention with no real basis in economic reality.  There is no meaningful sense in which the currency and reserves issued by the Fed represent claims on something that the Fed still owes the bearer of the currency.  Nor is there any economically meaningful sense in which a negative equity position at the Fed – with Fed liabilities exceeding its assets – represents a state of bankruptcy, as it could if issued currency were a true liability.   The Fed cannot go bankrupt.

41 responses to “The Public Money Monopoly (Pt. I)

  1. Excellent article. I like to think of the dollar as a unit of account, or a token. It therefore represents credit from the perspective of currency users, i.e. the private sector, but not really from the currency issuer’s perspective. You could call it a liability of the govt for accounting purposes, but since the govt can make dollars at will, this liability is quite easily extinguished 😉

    • Geoff, I think that is right on. There are probably equally good accounting conventions one can adopt. But trying to get clear about what our moral and political options are involves seeing through to the real economic value and disvalue that the accounting is attempting to measure.

      If I owe the government a million bucks, it is a huge deal to me, but of no matter at all to the government. And that’s not just because the government is so Bill Gates-rich it doesn’t care about such a piddly amount. It’s because the government might as well be thought of as an infinite well of money. It can pour as much down the well as it wants and pull as much out of the well as it wants, but the amount in the well never really changes. How much financial wealth you and I and everyone else has is a matter of great importance to the way the real economy goes. But how much the government “has” makes no difference when it can create and destroy money at will.

      • Right. I would even go so far as to say that Treasury bonds are not govt liabilities either. Dollars and t-bonds are equivalent, which is why QE was not really inflationary.

        • You’d only see inflation where sufficient dollars added to the system are chasing goods. QE did not do that, those dollars were used by banks in accounting maneuvers. The creation of new dollars by private banks and serializers did indeed throw sufficient new dollars at a good, housing, to cause inflation in price.

          Dollars are accounting tokens, but accounting tokens where the value as measured in purchasing power of any given good or service varies by the number of dollars in circulation that are chasing any given good or service.

          This is what freaks people out about printing money is that their lifelong accumulated stores of wealth are denominated in flexi-value tokens and their inclination is to constrain the range in which the token can fluctuate in value.

          Simiiarly, government policy can cause inflation without creating a single new dollar. The shift from defined benefit to defined contribution retirement with tax inducements effectively shifted inflation into equities. Add to this the QE sequences which did create new dollars, and we saw even more inflation in equities and commodities with the production of two trillion new dollars.

          • Pt. 2 should be up by tomorrow morning, which touches on these points. But for now I’ll just say that banks create IOUs, so the section here in Pt. 1 discussing the money-as-liability view leads up to a contrast between what government’s do and what banks do. Bank IOUs are ultimately IOU’s for the government’s money, since they can only get discharged by handing over physical currency or transferring reserves.

          • Marcos,

            If I sell, say, $1000 of t-bonds to the Fed in return for dollars, my net worth remains unchanged, and my purchasing power remains unchanged. Therefore, inflationary pressures remain unchanged.

  2. Since so many dollars are created by private sector banks or other entities that leverage against fractional reserves, is this viewed under Kervic’s interpretation of MMT as government licensing its monetary sovereignty, effectively delegating this public process to private banks?

    • I’m not an MMT expert, so take this with a grain of salt, but I would argue that the banks are not creating “dollars” but rather another type of “money”. Normally this would be called a deposit, which always has an associated liability and therefore nets to zero.

      • Those credit dollars do add to the money supply and can contribute to inflation and price instability. And the government appears willing to defend those dollars with the same vigor as it defends dollars it creates by itself.

        • marcos

          Dollars created through the credit circuit add to the money supply and repayments reduce the money supply by an equal amount. The net increase in financial asset accumulation is zero.

          Correspondingly, dollars created through the credit circuit increase aggregate demand when spent and decrease aggregate demand when repaid. The net increase in aggregate demand is zero. The issue here is that loans are spent very quickly, instantly increasing demand, but repayments occur over a relatively long time period so the effects of excessive credit expansion are not immediately felt, hence the term “bubble”, in this case credit bubble.

  3. hey thanks for writing about this Dan.

  4. Hi Dan,

    I just asked Randall these really basic questions and I’d like to get your take on them too, if you don’t mind.

    1. Do you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes? (I’m assuming that MMT would always involve some form of the ELR if it were to be fully implemented).

    2. Does MMT require a degree of nationalisation (i.e. of banks/ corporations) and strict regulation, or is it compatible with no nationalisation and a more hands-off approach to regulation?

    3. Would you say that MMT economists have different political and ideological positions, or are you all more or less the same?

    4. Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?


    • I don’t think MMT is ultimately compatible with small government. Here’s my argument:

      As I understand it, MMT is inseparable from Abba Lerner’s functional finance approach, which emphasizes full employment and price stability as its chief policy goals. The level of deficit spending is secondary to that primary goal. But here’s the rub: There’s a tradition in macro theory that sees money using economies as prone to ongoing stagnation, due to excess capacity generated by investment. Those that take growth dynamics seriously recognize the self-defeating nature of investment: investment creates demand, but it also creates capacity, which is likely to go unused. That excess capacity produces insufficient levels of effective demand, and so we have secular unemployment.

      In the face of that dynamic, which Harold Vatter and John Walker refer to as the problem of ‘secular stagnation,’ and supposing that we maintain full employment as a chief policy goal, then we need government spending to increase over time. Therefore, MMT is somewhat at odds with small government.

      Now, when we think of government expenditures, we typically think of large bureaucracy, stifling freedom, roads to serfdom, and all that. But, this is not necessarily the case. It’s possible to fund, in large volumes, many distributed, local programs that alleviate the stagnating effects of the growth dynamic produced by capitalist development. One example is the job guarantee promoted by MMT theorists, designed and administered at the most local levels.

  5. 1. Do you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes? (I’m assuming that MMT would always involve some form of the ELR if it were to be fully implemented).

    It seems to me that in principle MMT is compatible with various size governments. MMTers all seem to agree pretty much in thinking a government deficit is both the norm and desirable under most conditions. But you can have a $1 Trillion deficit with either a $2 Trillion government and $1 Trillion in taxes, or with a $10 Trillion government and $9 Trillion in taxes.

    I think a lot of progressives are naturally attracted to MMT because the MMT “How It All Works” instruction book for the economy gives you the knowledge to write a further kind of manual: “What Awesome Things You Can Do with a Fiat Currency Now That You’ve Learned The Austerians Are Wrong.” But it’s perfectly possible for someone to believe the instruction book is a completely accurate description of the fiat currency system, but not to have any interest in doing anything big and bold with that system because big bold government conflicts with other values. You could be like an Amish farmer who thinks the the the Owner’s Manual to one of Warren Mosler’s cars is very well-written, but who hates cars and wants to stick to horses and buggies.

    I personally fall into the Big(gger) Government camp, but I don’t think that is any kind of logical consequence of MMT. It’s just a reflection of my social values and feelings about how pressing the need is in 2012 for a more active public sector.

    2. Does MMT require a degree of nationalisation (i.e. of banks/ corporations) and strict regulation, or is it compatible with no nationalisation and a more hands-off approach to regulation?

    It doesn’t seem to me that it requires either one. It describes how the banking system works. People have all sorts of different ideas then about how to improve that system. A lot of MMTers are very influenced by Minsky’s financial instability hypothesis. I sure am. But I think there is some kind of consensus that that hypothesis is not part of the MMT “core”. Anyway, I think Minsky’s chief concern was not whether banks are private or public, but how big or small they are, how locally engaged, how well regulated and how well they promote the capital development of the country.

    3. Would you say that MMT economists have different political and ideological positions, or are you all more or less the same?

    I’m only a fake economist, so you will have to ask the real one 🙂 And I only participate in the MMT world from a distance from my home in New Hampshire. But from what I can see, the leading lights are not all the same, although they have many similar tendencies.

    4. Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?

    Probably yes. On the other hand it’s a little iffy to talk about MMT being “implemented”. MMT is above all a description of the system we actually have. So it is already implemented.

  6. Would love to see you all go to Greece and stare down the monster in its lair… 🙂

  7. Great job, Dan. I’d like to see Randy’s reply to your view that currency is not “debt.”

    I do think that this:

    “If its spending exceeds its tax revenues, the Treasury must plug the hole in its budget with borrowing from the private sector” is mistaken.

    As I’m sure you know the Executive Branch can use Proof Platinum Coin Seigniorage (PPCS) to close the gap between spending and tax revenues whenever it likes. It can even use PPCS to pay off the National Debt without removing NFA from the private sector. See, for example: one of many I’ve written popularizing and extending beowulf’s original notion.

    I think it’s damaging to say that the Treasury must plug the hole between spending and tax revenues by borrowing from the private sector, not only because it’s not true, even given the present legal constraints; but also because it perpetuates the system of providing welfare for those who want a risk free investment.

    • Yes, true enough Joe. I left out coin seigniorage as an option for the Treasury. And you’re right about the fact that the current standard operating procedure generates free money for private sector dealers who are acting as middle men between Treasury and the Fed for what should be a purely governmental operation.

      Coin seigniorage strikes me as a bit of a “workaround” and not a long term solution, since the treasury can only spend what it has been authorized to spend, and coin seigniorage would only be used to get up to that previously authorized level of spending if tax revenues are insufficient. I think we need the government to target an annual deficit appropriate to macroeconomic conditions, authorize taxes and spending amounts designed to hit that deficit target, and the then authorize the Fed to simply credit the estimated shortfall directly to Treasury’s account, without any bond issuance and without any intragovernmental debt. There should be no need for Treasury to rely on something like coin seigniorage, which is a bit of a stopgap gimmick.

      • “Coin seigniorage strikes me as a bit of a “workaround” and not a long term solution, since the treasury can only spend what it has been authorized to spend, and coin seigniorage would only be used to get up to that previously authorized level of spending if tax revenues are insufficient. . . . “

        Why label PPCS a “workaround”? It is an existing legal alternative to using debt instruments or increasing taxes to close the gap between estimated tax revenues and estimated spending. It is also an existing legal alternative to using surpluses to lower the level of debt subject to the limit or the debt-to-GDP ratio.

        Other arrangements we might make to remove constraints on the Executive’s use of the fiat currency system to spend Congressional appropriations would require new legislation, in a political system that is currently paralyzed when it comes to legislating big changes in how we do things. So, while PPCS may not be the ideal fix for silly constraints on the use of our fiat currency. It is, again, legal right now, so it is simply incorrect to say that the Executive is limited to taxing and borrowing in order to spend. We should never say that again, because it is not true, and it pays into the conservative framing of the situation, even if we think that talking about being limited to taxing or borrowing gives us a lead-in talking about the changes in Federal Law we would like to see to fully use our currency sovereignty.

        Consistent with MMT, I don’t think the level of the national debt, or the debt-to-GDP ratio have any economic or fiscal significance for a Government like the US which is sovereign in its own currency. However, these issues are politically significant, since they are the basis for deficit hysteria, when people won’t give up the Government is like a household analogy. So, insofar as using PPCS demonstrates that 1) whether we will or will not have debt is not inevitable but just a matter of choice, and 2) also that this choice is a very easy one because of our existing legal capability to generate fiat currency without issuing debt. PPCS completely plays into the MMT narrative, and I think all MMTers should mention it every chance they get, apart from trying to teach people the more general principle that Government sovereign in their own currencies have no solvency constraints.

        On the point that revenues from PPCS could only be used to close the gap between tax revenues and appropriated spending, that’s not quite the while story. First, again, PPCS revenues can be used to repay the debt subject to the limit. And second, it’s a good thing that PPCS revenues can only be spent to close the gap between spending and tax revenues, because that’s just separation of powers. That is, the Congress appropriates spending, and the Executive does the spending. We do not want a system in which the Executive can spend PPCS profits into the private sector without Congressional Appropriation of that spending.


        “I think we need the government to target an annual deficit appropriate to macroeconomic conditions, authorize taxes and spending amounts designed to hit that deficit target, and the then authorize the Fed to simply credit the estimated shortfall directly to Treasury’s account, without any bond issuance and without any intragovernmental debt. There should be no need for Treasury to rely on something like coin seigniorage, which is a bit of a stopgap gimmick.”

        I agree that PPCS is not the ideal solution. I think the ideal one is to nationalize the banking system, and place the Fed under the direct supervision of the Executive Branch. In my reading of the Constitution the Fed is clearly unconstitutional, since it is performing very important Executive functions and is now a fourth branch of Government, legislated without a Constitutional Amendment by “progressives” in 1913.

        On the question of needing ” . . . the government to target an annual deficit appropriate to macroeconomic conditions, authorize taxes and spending amounts designed to hit that deficit target . . . ” I don’t think this is consistent with the best MMT analysis. The MMT view is that deficits are in large part endogenous to the economic system, and that their size ought to be determined by private savings and import desires, with the last tempered by the desires of other nations to sell to US consumers and import US goods. The role of the Government is to accommodate those desires by targeting full employment at a living wage (FE) and price stability (PS) and by operating according to some deficit rule, even one that’s called a full employment deficit rule.

        The reason why we shouldn’t be doing the latter is because the same Government deficit levels can have very different effects on FE/PS, as you know. The effects will depend on whether Government spending is targeted on employment and effective demand rather than simply targeted on a particular level of the deficit. If the Government deficit spending is inefficient with respect to direct job creation and the level of fiscal multipliers with respect to other fiscal policies then it will take a much larger deficit to produce FE/PS. On the other hand, if the fiscal targeting specifically for FE/PS is done right, then the recession will end quickly and annual deficits will be much smaller.

        • Joe, I still think that coin seigniorage is a workaround because it is politically unsustainable. It would be seen as an underhanded attack on Congressional prerogatives, and my guess is that as a result Congress would likely move to shut it down rapidly. The power to coin money is granted by the US Constitution to the US Congress, and any powers the Executive branch has to mint money it only has because those powers have been delegated by Congress to the Mint . Congress also has “the power of the purse”. So, as stupid as the “debt ceiling” legislation is, that ceiling is the law. And any effort by the Treasury to use its existing coin-minting authorizations as a loophole to get around and over the debt limit, in a manner that is obviously contrary to Congressional intent would provoke a political crisis. The Executive branch can certainly assert its current legal right to use this loophole given existing Congressional coinage authorizations. But Congress would likely act quickly to reassert its prerogatives and close the loophole.

          I also think using coin seigniorage could have a very bad psychological effect, and give a political advantage to the hyperinflationistas. It’s hard enough explaining to people that the Fed’s QE isn’t some hyperinflation explosion of the money supply, but mostly just an asset swap. But the political spectacle of the Treasury secretary delivering a trillion dollar coin (or something like that) to the Fed for deposit might completely freak people out. It will be very hard to explain to lots of people that doesn’t mean that they have to carry around wheelbarrows full of dollars, that the coin will never be “spent”, and that the whole thing is just a sort of ritual to accomplish a Fed crediting of Treasury accounts.

          I don’t think we can say the deficit is endogenously determined. Obviously the exact size of the deficit is beyond Congressional control, because it is impossible to predict with precision the revenues that will be generated by current tax authorizations and the spending that will be carried out in accordance with existing spending authorizations. The deficit goes up and down depending on general macroeconomic conditions. But clearly the broad shape of the budget is a result of Congressional decisions about taxing and spending. My understanding of the MMT position is that deficits are not just some kind of endogenous accident of no particular concern, but that they are typically a good and necessary thing, and that surpluses in the United States are historically associated with subsequent recessions. It would be good to have enough automatic stabilizers in place to automatically offset demand leakages and accommodate saving desires. But I think we also want to move to a situation in which we are deliberately targeting deficits of the appropriate size. I look forward to a future in which Congress doesn’t spend its time debating whether and how to balance the budget, but instead argues only over how big the budget deficit should be.

          And I think it would probably also be good to move to a system in which anticipated budget deficits trigger direct credits by the Fed to Treasury accounts, without relying so much on the issue of Treasury debt. In the end it doesn’t matter that much operationally, so long as the Fed always stands ready to buy up a good part of the debt, and roll over the existing debt. But I believe the system of direct Fed credits would be more transparent and less confusing to the public, and give them a better understanding of the workings of their own monetary system.

          There is no Fed solution to our economic woes; there is no Treasury solution to our economic woes; there is no politics-free solution to our economic woes. The only solution is to get a much better and more popularly accountable Congress, and then to lean on that new Congress to do the right thing.

          • I agree with a good part of what you say, Dan. But PPCS doesn’t have to be sustainable. If the President uses it once to fill the public purse with say a $60 T coin then the money will be available to pay down the national debt and to cover all deficits appropriated by the Congress at least a decade and probably much more. Also, even if Congress then repeals the legislation behind PPCS, the truth about solvency and the power of the Government to always create the money it needs will have been demonstrated in no uncertain terms.

            That will change the politics of the deficit entirely. Moreover the President will be in a position to exact a price from Congress for not vetoing a repeal of the legislation allowing PPCS. The President will probably have enough support in his/her own party to sustain a veto and to force a compromise on the Congress. If the President triggers the PPCS crisis, proceeds to challenge the constitutionality of the Fed in the Supreme Court, and at the same time begins to pay off large amounts of the national debt, then the President may be able to turn the political situation to his advantage and get a compromise moving the Fed under the Executive Branch. I don’t know that this will happen, but a good populist political campaign critical of the Fed and Congress could change the present institutional arrangements quickly.

            In any case with $60 T sitting in the public purse the President would be in a very good position to advocate for productive “deficit” spending without debt issuance. That spending could include the full range of MMT stabilizers and also Medicare for All. It would be hard for either hawks or doves to resist the politics of this with the money already sitting there in the TGA.

            The main argument in opposition would be the fear of hyperinflation of course. But Scott Fullwiler and I have both already analyzed the likely impact of PPCS on inflation. it’s doubtful that repayment of debt already issued would trigger inflation and “deficit spending” covered by PPCS is unlikely to cause demand-pull inflation either, if it is targeted at creating FE/PS through the MMT proposals. Cost-push inflation would have to be fought, of course, and this would require both an active justice department restraining speculators and also perhaps commodity price controls in certain areas. But once psychological expectations change that will subside and there will be no serious cost-push inflation, either.

  8. Monster piece, Dan. It’s hard to keep track of all your comments scattered around MMT-related blogs, but I’m listening. At least to the extent possible. So it’s good to see you focus your efforts and compile your thoughts here on NEP.

    • Thanks Trixie. Usually when I write those comments I try to save the ones I think are “keepers” in a running Word doc, and then use them later for longer pieces like this – after I clean up all of the mistakes.

  9. “With all due respect to the official Fed story, I think the money-as-liability picture is seriously misleading to say the least.”

    Right on with this observation Dan. I just don’t see the “money as debt” view as applicable to our system as revealed thru MMT.

    This in one of the reasons I still haven’t been able to get thru David Graeber’s book “Debt….” ; even though the title of that book had “debt” in it, he spends a lot of words making a connection between debt and “money” and this has not been making a lot of sense to me knowing what I know thru MMT.

    I guess “money is debt” could apply to other systems/arrangements, but I don’t see the connection under our current system which is what I am most interested in.

    Great work, Resp,

    • Thanks Matt. I think the money-as-debt picture is an excellent model for money in the broader sense that includes what banks issue. And I think Innes is excellent in his refutation of the story of money evolving gradually from barter, and in defending the alternative that sees money as evolving from the operations of the state and legally supervised debt relations. But it seems to my that the capstone MMT contribution to this tradition of scholarship and improving understanding of money is the implicit recognition that in the fiat money era there is a form of money that is not a debt for anything else. It is instead the financial foundation and final means of payment for all other forms of debt. And the government just creates that form of money.

      The government does create tax obligations which generate demand for its money, and the obligation comes coupled with a corresponding government commitment not to penalize you legally so long as you fulfill the tax obligation by delivering some of the government’s money. But for the reasons I explained in the essay, I don’t think that means that the money that has been issued constitutes a debt or liability of the government. If I make you a potholder and give it to you, and then say: “Give me the potholder back or I’ll put you in a headlock,” that doesn’t mean the potholder is now a liability I have.

      Graeber’s book is very interesting. But in the end he hates the whole idea of debt, and the systems of legal obligations and sanctions upon which debt rests. Personally I don’t hate debt and the rule of law. I just hate inequality, economic oppression and plutocracy. I have no problem with a society of equals generating legally binding obligations under a democratic rule of law, and holding one another to those obligations with the help of legal sanctions.

  10. @Joe Firestone

    Under current arrangements, doesn’t the Treasury have to have credit in its account with the Fed before it can mint coins, and can only mint coins up to the value of the credit it already has in its account?

    The way the Treasury gets credit in its Fed account (under current arrangements is by taxing or ‘borrowing’. Isn’t this the case? If so then the Treasury can’t create coins of any value it chooses..

    • Under current arrangements, doesn’t the Treasury have to have credit in its account with the Fed before it can mint coins, and can only mint coins up to the value of the credit it already has in its account?

      No! The 1996 Legislation specifies no such limits. The Treasury’s ability to use PPCS to make profits for itself is unlimited. Those profits can be used to meet US debt obligations easily.

      There may be some dispute over whether the profits can be used by Treasury to do Congressional deficit spending. But that can be gotten around easily by issuing 3 month debt for such spending and then using the seigniorage profits to pay off debt as it comes due. That way, interest rates on the debt would always be near zero and the total debt outstanding would be limited to the amount of deficit spending over a 3 month period. Once the total national debt was paid down to nearly zero, the maximum Federal debt after that would never rise to a level greater than the deficit incurred in any quarterly period. So even if the annual deficit rose to 30% of annual GDP, the debt outstanding at any time would be around 7.5% of annual GDP and we could all forget about complaints asserting that we are running out of money.

      • I’d love to see the Brouhaha that would develop if a Treasury Sec actually went ahead and did this. If nothing else it would be a “teachable moment” for MMT.

  11. @ Dan Kervick

    How on earth did you come up with the idea of ‘immortal cows’? What process led you to that particular metaphor?

    • I have no idea Phil. I started out just thinking about trade-in guarantees, and then asked what would have to be different so that the trade-in guarantee is not a liability for the issuer of the guarantee.

      For some reason, I like the agrarian stories that the classical economists used. But I could have used Warren Mosler’s cars, and stipulated that they never rust or wear out.

  12. sorry, analogy.

  13. There is something else the government has a production monopoly over, and that could be seen as the “what government owes” underlying the value of their currency. That thing is socially sanctioned violence; the taking of property, the taking of liberty and the taking of lives, without the possibility redress or remuneration for the damage caused by such violence. And this could be the thing owed to the holder of that note: violence, not at the direction of the note-holder, but in general, and to the extent necessary to maintain the exchange value of that note. Because that violence is at the root of human society, at the root of every market. Follow our rules, or we’ll kill you and take your stuff.

    But, as you say about the other obligations, this obligation would be as tenuous as the obligation merely to maintain the value of the currency, and would still not represent an IOU to the note-holder, but would rather merely indicate the extent to which the note-holders depend upon the violence the government commits in order to maintain their real wealth: the more notes they hold, the greater their dependency. But government’s obligations are to its citizens as a whole, and are not increased or decreased in individual cases by the amount of its notes those individuals hold. In fact, I would go so far as to suggest that the view that dollars represent something the government owes to the holders of those dollars to be fundamentally fascistic, which is, of course, the only sort of government pure capitalism can tolerate.

    • There is something to what you say Nathan. But I find your picture too bleak and pessimistic. The organized use of coercion, sometimes violent coercion, is definitely is a core function of government. But it’s not just a feature of capitalist government or fascism. Almost all human societies in one way or another exist to provide their members with security and prosperity in a world filled with potentially hostile forces.

      For example, as Bill Black emphasizes in most of his posts, the financial sector has experienced a plague of regulatory deregulation, desupervision and decriminalization. And the laws that do still exist have not been well-enforced. As a result, many out-of-control financial practitioners told mountains of lies, robbed people blind, and plunged our society into a financial collapse. To reassert a secure and decent life we need to deter such people people from lying and stealing in the future. That means making stronger rules against lying and stealing, and then prosecuting and punishing people who break those rules – as well as punishing people for breaking the rules we already have.

      Now people don’t like to be prosecuted and punished. You sometimes have to lay hands upon them and arrest them. You have to compel them against their wills to make restitution. Sometimes you have to lock them up to keep them away from decent people – and locking people up is a violent and coercive act. And regrettably, there are other people who have not lied, stolen or killed yet, but would do so if not credibly threatened with punishment. These potential outlaws have to be vigilantly and constantly deterred by an organized society that sends the message that it means business about its rules.

      So maybe we’re all fascists because we have organized ourselves into societies and constituted governments to protect our enterprises, our accumulated goods, our enduring projects, our homes and our loved ones against human predators of all kinds, and to use coercive and sometimes violent means to repel, defeat or civilly subjugate these predators. But to me that just seems like a common sense and adult response of civilized and peace-seeking people to a world filled with aggressors.

      • “The organized use of coercion, sometimes violent coercion, is definitely is a core function of government.”

        It is, and not just in formal governments. It exists in traditional societies and in their villages, and in the primitive, hunting/gathering societies we know about also. There have been plenty of human social groupings without governments, but none without political systems, power, influence, and coercion that I’ve ever read about.

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  15. “Commercial banks are not permitted to print paper currency or mint US coinage. They are not permitted to create their own reserves at the Fed.”

    This is something I’ve been curious about. Is this really true, at least in aggregate?

    If the banking system needs more reserves it can make more loans, creating new deposits, which essentially forces the Fed to issue more reserves.

    In that sense are the banks “creating their own reserves”?

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  17. Dan,

    While I do like the ‘immortal cow’ analogy, I’m not sure I like the ‘base money is not a liability of g’ argument. The reason the cow owner gives you back the cow is not because he is tired of it, but because somewhere along the line he has incurred a liability to you, and you’ve previously agreed to accept the cows as payment. IMO, the tax liability line works way better: dollars are a tax credit, a liability of g which they have agreed to accept as payment. Likewise, money as ‘debt’ seems to be a longstanding argument of MMT’ers. Why try to change it?

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