MMP #52 Conclusion: The Nature of Money

By L. Randall Wray

The Primer has run its course. I did not get to cover quite all of the topics I had planned. However, for those of you who want the whole Primer can read The Book: Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Pre-order your copy here.

As the marketers say, if you liked the Blog, you’ll love the Book. As we went along with the blogs, I tweaked the manuscript. I incorporated a Q&A section following many of the chapters, taking account of your responses. I added topics that seemed to interest you, but that I did not have time to address in the blog. It also has an index and bibliography. And I changed the order substantially in order to make the argument more coherent. The book is in printing now so I expect you can get it by August.

This week we will wrap up with a discussion of the “nature of money”. Really that is what we’ve been getting at for approximately 52 weeks. I think this is what distinguishes what we do here at NEP from other bloggers who understand much of the basics. It is not just that a sovereign government faces no financing constraint, other than constraints it self-imposes. It is not just that bond sales are a reserve drain. It is not just that a JG provides a wage anchor. In my view, MMT is an approach that allows us to understand the nature of money in the sort of economy we find ourselves. And since money is the most important economic institution in our economy, we really cannot understand what our economic system is all about if we get money wrong.

Warning: this final blog will be more theoretical—you could even say philosophical or existential—than what came earlier. If you’re like me, that can cause eyelids to droop. Unfortunately, when you get into the nature of things, there’s no alternative. You all remember that first year college class in philosophy: “who am I and why am I here?” “If a leaf drops in the forest, does it make a sound if nobody is there to hear it?” So, what is money and what is it all about?

Since this is a rather long blog, wait until you’ve got a free hour to read it. It is not the kind of thing you can skim over.

First a quick note on the comments to Blog #51. You note I did not respond. I found many of them distressing. I presume these were mostly by a vocal minority who’ve not paid much attention over the past 51 weeks of blogs. Many were ideologically-driven. I am puzzled that one who is absolutely ideologically opposed to MMT and the JG would waste his time reading and commenting on the blogs. I certainly would not go to their blogs, much less make comments on them.

In any case, I think I can make one useful comment that is closely related to this week’s concluding blog.

Our free-marketeer friends conjure up in their imaginations a particular kind of economy with quite specific tendencies. It is mostly based on the simplest model presented in the first year economics text: a perfectly competitive economy, with no money, and with “rational” (in the selfish sense) economic agents maximizing utility. There is an invisible hand that unerringly guides these homogenous globules of desire (Veblen’s term) toward an optimal, mutually beneficial state of bliss (“Pareto optimality” as it is proudly called by economics teacher).

As I discussed in the last blog, in this simple model, words like “productivity” and “efficiency” are reasonably well-defined, and we can imagine that the invisible hand rewards productive and efficient behavior and punishes their opposites. It does this with prices that provide wages and profits to the worthy and bankruptcy and unemployment to the unworthy.

Our free marketeers and their brethren apologists among the orthodox economists pose an imaginary economy that is viewed by some as a utopian version of our own, but one that operates without money. Then they choose one commodity to serve as a medium of exchange to grease the invisible hand.

To add a patina of realism, they then imagine a transactions-cost reducing evolution toward gold-backed notes or demand deposits. But an evil government comes along, drops gold, and adopts a fiat money standard. With nothing “real” standing behind money, the invisible hand gets fooled as nominal prices deviate from real prices causing us to move temporarily away from the blissful point of market-clearing general equilibrium. As government continues to “print money” we get accelerating inflation and then finally hyperinflation.

Fortunately you cannot fool the invisible hand over the long run, so no matter how rapidly nominal prices increase, we get back to equilibrium, albeit one that is less preferred because government saps precious bodily fluids like some evil Dr. Strangelove.

Hence, best to destroy or at least to contain government, and either go back to gold or at least operate the monetary system as if we were on a gold standard (as Greenspan claimed he did as Chairman).

The best government is the one that governs least, letting invisible market forces produce maximum efficiency and productivity while punishing the weak, lazy, and imprudent. That would take us back to the time “when the ice was melting…when the weather was delightful and the mind free to be fertile of new ideas—in the islands of the Hesperides or Atlantis or some Eden of Central Asia” as Keynes put it.

It’s a nice little imaginary world and we’d all (presumably) like to live in it. It bears no relation to any society that has ever existed, or that will ever exist. It is useless for developing an understanding of the world we actually live in; indeed, it is worse than useless as it is downright dangerous. Almost all the economic problems we face in our real world actually derive from the misapplication of this model to our world. I’d go further and say that most of the social problems we face (sexism, racism, ageism, and just downright nastiness) also derive from “framing” that comes out of a world view based (even unknowingly) on this model.

It is a weapon of mass destruction, and economists are shamefully implicated in unleashing it on our world.

What world do we actually live in? A world of Sabotage, as Veblen put it. But not just Veblen. Even the most mainstream texts teach this—albeit usually not until year 2 economics. But few students make it that far, after all the brain-deadening silliness taught in year 1. In year 2 we finally go beyond perfect competition.

The usual analysis of oligopolies and monopolies teaches that the business undertaker purposely restricts output and employment in order to increase profits. Veblen called it “sabotage of production” and he (correctly) predicted a coming great depression (1930s) that would result from the proclivities of the cartelized undertakers.

The “efficient” level of production for real world undertakers is always that which provides high monetary profits. No real world undertaker cares about “efficient” or “productive” undertakings in terms of “real” quantities produced—only money matters.

Likewise, in the hiring decision, no real world undertaker looks at the “real” productivity of labor power; the carpenter who can hang more doors per hour than anyone on earth is of no use to the homebuilder who cannot make money profits on the sale of finished homes.

And no real world undertaker will keep more workers employed (hanging doors or cleaning teeth) than absolutely necessary to produce the amount of goods and services that can be sold profitably.

All real world undertakers continually seek to get by with fewer workers. The “visible hand” of the undertaker is a job killer.

And here’s the final point. There are NO market forces that move the economy toward the state of bliss imagined by free marketeers. Indeed, reality is precisely the opposite. Market forces march the economy away from bliss.

Toward financial crises. Toward high unemployment. Toward low wages. Toward intolerable inequality, poverty, and suffering. Toward high crime rates and accompanying high rates of incarceration. Toward discrimination and other forms of invidious distinction.

Now, I know our free marketeers will claim that recognizing all this is “anti-capitalism”. Pointing out that our undertakers have a natural proclivity to kill jobs, not create them, is somehow anti-American. Probably Pinko!

Nay, it is Modern Money Theory; or call it Modern Money Realism if you like.

MMT is a description; it is a theory; it is an approach; and it leads to a set of policy propositions for the world in which we actually live.

It recognizes the problems and attempts to solve them. It does not condemn either capitalism or its undertakers. But whether you are for or against capitalism, MMTers believe you ought to at least understand it.

But MMT’s critics have something entirely different in mind. They want policy for a world that never existed, indeed, cannot exist. Their policy proposals are not formulated for reality, but rather for imaginary worlds. And that is true both on the right—those who want unemployment and poverty to discipline workers, especially, but also to incentivize our undertakers—and on the left—who willingly tolerate the disciplining influence of unemployment if only we will give some welfare handouts to make poverty somewhat less harsh. They formulate policy to solve imaginary problems, and impotent policy for real problems.

The Unemployed Want Jobs? Give them welfare—that is more efficient. Keep them unemployed, it builds character. Train and educate them to increase their productivity so that they might take jobs away from others.

Our Undertakers Lack Sales? Give undertakers more subsidies. Reduce undertaker regulations. Cut undertaker taxes. Encourage them to increase efficiency so that they might get by with fewer sales.

Our Economy Falters? Balance the budget. Slash trade barriers. Get the government off the backs of our undertakers. Cut wages and eliminate worker protection to destroy the market for the output of undertakers.

All that might make sense for some universe. But not for ours.

And the confusion mostly comes down to a misunderstanding of the nature of money.

What is money? What is “monetary production”? Let us close this blog and this Primer with an examination of three propositions. Certainly I do not mean to argue that these three propositions, alone, are sufficient. But you’ve had 51 weeks of blogs previously, so all we are trying to do here is to tie up some loose ends in the most “efficient” manner possible.

Introduction: What is Money?

In an important sense, our task throughout this year has been to develop a theory of the nature of money. When asked “what is money”, most people respond—quite reasonably—that money is used to buy something. This gets at money’s use as a medium of exchange, which is of course the most familiar use. If pressed further, most people would also say that money is something one can hold as a store of value. Indeed, economists recognize money as the safest and most liquid store of value available—at least outside situations with high inflation, when money’s value falls rapidly. Some people will also mention the use of money to pay-down debt, with money used as a means of payment, or means of final settlement of contractual obligations.

Finally, if we ask people “how much is that worth”—pointing to just about anything—a common response would be to evaluate worth in terms of money, this time acting as the unit of account used to measure wealth, debt, prices, economic value.

These answers take us quite far in understanding what is money, each focusing on a different but widely recognized function or use of money—identifying money with what money does. But we might try to dig deeper, and ask what is the nature of that “thing” that serves these functions?

When we go to the store, we might use cash or a bank check or a plastic credit card as our medium of exchange. When we file our tax return with the treasury, we might simply make an electronic payment. We can buy books or collectible Barbies over the internet using PayPal. But we can assess the value of a used car in terms of a purely representational unit of account—much as we can guess the weight of our neighbour in pounds, kilograms, or stones, units we cannot touch.

Is Money a Physical Thing?

Many people rather instinctively believe that money must have some real physical existence, or at least it must be “backed up” by hoards of precious metals kept safely in government vaults. Some who know that is not true fear that the money we use today is somehow illegitimate, a “false” money precisely because it is “worthless” pieces of paper or electronic entries down at the bank. That is a typical response by Austrian-leaning “goldbugs”, often followers of Ron Paul (a sometime US Presidential candidate and thorn in the side of the Fed).

What we have tried to do in this Primer is to present a careful and coherent exposition on the nature of money. We have consistently distinguished between the money of account (Dollar, Pound, Yen) and money things denominated in that money of account. We have argued that all those money things, in turn, are liabilities, obligations, IOUs, of their issuer. At the same time, they are assets of the holder. The nature of the obligation of the issuer is this: one must always accept one’s IOU in payment to oneself. The bank that issues demand deposits as its liabilities must accept its demand deposits in payments on the loans it holds as assets. The government that issues currency as IOUs in its payments must accept its currency in payment to itself (for fees, fines, and taxes).

So there really is something standing behind the money things: the promise of the issuer to take them back. Issuers commonly add another promise to increase acceptability: to convert their IOUs to the IOUs issued by some entity whose liabilities are even more acceptable. That led us to the notion of a debt pyramid. Liabilities of households and firms are converted to demand deposits of banks (one promises to deliver bank liabilities in redemption against one’s debts), and bank IOUs are convertible to government currency (cash and reserves–HPM).

The “goldbugs” have mostly got it backwards: it was not gold that gave money its value but rather, gold had money value because its price was pegged in terms of money by the government authorities. This was done by promising to redeem gold for currency at a fixed exchange rate.

In any case, let’s analyse the economy we’ve got, with the monetary system we actually have. And that is one that is based on a money of account chosen by government, and almost everywhere subject to the “one country, one currency” rule. The currency is issued by a sovereign government when it spends, and received by government in payment of taxes and other payments to the government. Even if the gold standard existed at one time, and even if it operated smoothly in the manner fantasized by the goldbugs, it no longer matters in any significant way.

Three Propositions on the Nature of Money

Let us close with the three propositions:

1. As Clower (1965) famously put it, money buys goods and goods buy money, but goods do not buy goods.

2. Money is always debt; it cannot be a commodity from the first proposition because if it were that would mean that a particular good is buying goods.

3. Default on debt is possible, which means that credit-worthiness matters. Not all money things are created equal.

These three propositions will provide sufficient structure to dig a bit deeper into our theory of money. The following discussion will be at a theoretical, mostly logical level. This will require some reference to alternative theories and stories about money. For that reason, it will require more familiarity with the typical exposition of textbooks. Readers might want to brush up a bit on their Samuelson textbook.

Goods Don’t Buy Goods. The typical textbook story of money’s origins is by now too well known to require much reflection: because of the inefficiencies of barter, traders choose one particular commodity to serve as the money commodity. Exchange is then facilitated by using that money commodity rather than bartering directly one good for another. A hypothetical evolutionary process runs through the discovery of a money multiplier (notes issued on the basis of reserves of the money commodity, such as gold) to government monopolization of the commodity reserve and finally to the substitution of commodity money by a fiat money that is not backed by a commodity.

However, if we begin with the proposition that goods cannot buy goods then we must look elsewhere for the nature of money since there could never have been a commodity money. And we cannot presume that markets come before money for the simple reason that until money exists there cannot be “exchanges” (sales). Further, money is not something that is produced—it is not a commodity that is produced by labor (otherwise it would be a “good buying a good”), nor is it something sought to directly satisfy the kinds of individual needs or desires that motivate production of commodities. At most, we can say that we seek money because it provides access to the commodities that satisfy those desires.

It is important that money is not directly produced by labor. Imagine that we could “grow money on trees” or in the ground like corn—something your mother understood to be impossible. Workers who lost their jobs could go harvest money from trees or from cornstalks, as self-employed money producers.

Those who have read Keynes’s General Theory will recall his argument that money “cannot be readily produced” so that “labour cannot be turned on at will by entrepreneurs to produce money”, and as well his argument that “Unemployment develops, that is to say, because people want the moon; –men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off.” While it might be nice if we could grow money in window pots, our economic world would look quite different than it does now if we could do so.

And if we could grow money on trees, just how could it maintain its value? Money leaves would be harvested from trees until the amount of effort required to produce money directly equalled the amount of money one could get indirectly from other production processes (in the form of wages and profits). Leaf collection would set a low standard, indeed. Maintaining relative scarcity of money keeps it valuable, but that at the same time means that it should not be something produced by labor.

But there is a more important point to be made. Elsewhere—especially in the drafts to the General Theory—Keynes explicitly presumed that the purpose of production in a monetary economy is to accumulate money. It is this desire to accumulate money but at the same time the inability to use labor to produce it that prevents labor from being diverted to its production. Hence, Clower’s argument that “goods do not buy goods”, that money is not a commodity produced by labor, must underlie Keynes’s view. And that is why unemployment develops when people want the “moon” (money), but cannot produce it with labor.

The claim that a capitalist economy is a “monetary production economy” was also adopted by Karl Marx and Thorstein Veblen and their followers. To put it simply, the purpose of production is to accumulate money—not to barter the produced commodities for other commodities. As Robert Heilbroner argues, this provides a “logic” to production that makes it possible to do economic analysis. Indeed, our previous analysis of sectoral balances and stock-flow consistency, and even GDP accounting, itself, all rely on this “logic”.

On one level, this is obvious. We need a unit for accounting purposes to aggregate heterogeneous items: wages, profits, rents; investment, consumption, government spending; apples, oranges, and widgets. As Keynes argued there are only two obvious units of account at hand—labor hours or the money wage unit. The Classical tradition (that followed Marx) focused on the first while most of Keynes’s followers focused exclusively on the second, although some like Dillard followed Keynes’s lead by using both.

But the Marx-Veblen-Keynes monetary theory of production means to say something more than that we need a handy universal money unit for accounting purposes. Money is the object of production—it is not merely the way we measure the value of output. It is because money does not take any particular commodity form that it can be the purpose of production of all particular commodities. It is the general representation of value—it buys all commodities and all commodities buy (or, at least attempt to buy) money.

Actually, if a commodity cannot buy money, it really is not a commodity—it has no market value. Commodities obtain their value—they become commodities–by exchanging for the universal representation of social value, money. By the same token, obtaining money allows us access to all commodities that are trying to buy money.

This presents the possibility of disappointment: the fruits of production enter the market but fail to buy money. There are consequences following on the failure to sell produced commodities including a decision to cease production. Labor power, itself, is a produced commodity (separate from the free laborer, of course, who cannot be bought or sold) that seeks to exchange for money but may find unemployment instead.

However, not only is the purpose of production to obtain money, but the production process itself is one of “production of commodities by means of commodities” as Sraffa put it. That is to say, one needs commodities in order to produce—one must buy raw materials, equipment, and labor power in order to produce output.

And those commodities (including labor power as well as other produced means of production) can only be purchased with money things (IOUs denominated in the money of account). In other words, the production process, itself, “begins with money” on the expectation of ending up with “more money” (M-C-C’-M’, as Marx put it—begin with money to purchase commodities as inputs, produce a different commodity, and then sell it for more money). Not only is production required to result in sales for money (things), but it must begin with money (things).

Production is thoroughly monetary, from beginning to end. It cannot begin with commodities, because the commodities must have been produced for sale for money (things). Analysis must also therefore begin with money.

Indeed it is the necessity of producing commodities and then selling them for money that underlies capitalism. If money can just be produced directly from flower pots, we would not need to market output—and most of the features of the economy we actually live in would be unnecessary.

We cannot begin with the barter paradigm. We cannot remove money from the analysis as if it were some veil hiding the true nature of production. We cannot imagine that in some hypothetical long run money will somehow become a neutral force, just as it supposedly was back in the days when Robinson Crusoe bartered with Friday. Beginning with barter sheds no light on production in a monetary production economy.

Indeed, if you think about it, if you exchange one commodity for another there is no need for money, even as a measuring unit. I’ve got coconuts and you’ve got fish; I’d rather have the fish and you want the coconuts, so we trade. We need to higgle and haggle to reach agreement on the exchange ratio—how many fish per coconut. That gives us a “relative price” measured in real things. We have no need for a unit of account. No doubt such exchanges occur all the time: I’ll wash the dishes if you cook the dinner; I’ll swap two Barry Bonds baseball cards for one Mickey Mantle.

Or two Mickeys if you’ll clean the toilet. We don’t need no stinking money!

So let us begin with a money of account in which we “price” the goods and services we buy and sell. And we use something that is denominated in that money of account—receiving it when we sell and surrendering it when we buy.

What is that “thing”? Is it a commodity, like gold denominated in Dollars? No!

Money Is Debt

Throughout this Primer, we have argued that money is not a commodity, rather it is a unit of account. A unit of measurement is not something that can ever be obtained through a sale. No one can touch or hold a centimeter of length or a centigrade of temperature. We might say that we buy money by selling commodities, but it is clear that if money is just a unit of account—the Dollar, the Euro, the Yen—that is impossible.

We can get somewhat closer if we recall our earlier analogy to the electronic scoreboard at a football game. As the game progresses, point totals are adjusted for each team. The points have no real physical presence other than as hyperactive electrons; they simply reflect a record of the performance of each team according to the rules of the game. Similarly, in the game we call the “economy”, sales of commodities for money lead to “points” credited to the “score” that is (mostly) kept by financial institutions.

While the game of life is a bit more complicated than the football game, the idea that record keeping in terms of money is a lot like record keeping in terms of points can help us to remember that money is not a “thing” but rather is a unit of account in which we keep track of all the debits and credits—or, “points”.

Recall that we said the “scores” on a bank’s balance sheet are liabilities—its IOUs are the points credited to players. We will have much more to say about the role played by financial institutions in the next section. Here we only want to focus on the “dual” debt nature of the money “scores”.

First, as discussed above, production must begin with money; and that money is a “score” that represents an IOU. Typically, it is a demand deposit liability of a bank. It is matched on the other side of the bank’s balance sheet by a loan, which represents the debt of the borrower in whose name the bank’s IOU is issued. In other words, one who wants to undertake production of commodities (by means of purchasing commodities) must issue an IOU to the bank (a “loan” held as the bank’s asset) and obtain in return a bank deposit (the bank’s liability).

The commodities to be used as means of production are then purchased by transferring the deposit (the bank debits the producer’s deposit and credits the deposits of the sellers of means of production). When the producer finishes the production process and sells the produced commodities, her deposit account is credited and the purchasers of the sold commodities have their deposit accounts debited.

At this point, if the producer desires, she can use her deposit account to “repay” the loan (the bank simultaneously debits the demand deposit and the loan). All of this can be done electronically and is rather like our scorekeeper who takes points off the scoreboard.

So we see that the debt of the producer is retired by selling the produced commodities (“realizing” the monetary value) and retiring the loan by surrendering its deposits accumulated through the sales. The bank cancels its debt (demand deposit) at the same time that it cancels the producer’s IOU (loan).

The second sense in which the producer is indebted is Schumpeterian (after the famous economist, Josef Schumpeter): the undertaker commands some of society’s means of production at the beginning of the production process before actually contributing to society. The producer’s IOU (held by the bank) represents a social promise that she will temporarily remove commodities on the condition that she will later supply commodities to society.

We can view all commodity production as social, beginning with commodities that were already socially produced in order to combine them in some manner to produce a (usually) different set of commodities. When those newly produced commodities find a market (buying money), the undertaker’s social debt is redeemed.

So, if successful, the undertaker’s debt is repaid—in both senses: The producer can retire her debt to the bank and to society as a whole. Undertaking is essentially a debit and credit affair, with the slate wiped clean if all goes as planned.

Money is debt (again!).

We conclude: money is debt. It need not have any physical existence other than as some form of record—mostly, an electrical entry on a computer. Money always involves at least two entries: debt of the issuer and asset of the creditor. Delivering an IOU back to the debtor results in its extinction: the debt is stricken, and so is the asset of the creditor.

In practice, creation of money usually requires four entries: a prospective producer issues an IOU to a bank and receives a demand deposit as an offsetting asset; the bank holds the producer’s IOU as its asset and issues the demand deposit as its liability. By convention we say that the producer is a “borrower” and the bank is a “lender”; we call the bank’s acceptance of the borrower’s IOU a “loan”, and the bank’s IOU “money”. However, that is rather arbitrary because both have borrowed and both have lent in the sense that both are debtors and both are creditors.

If money is debt, then as Minsky said, anyone can create money by issuing an IOU denominated in the social unit of account. The problem is to get it accepted, that is to get someone to hold one’s IOU. To become a debtor requires finding a creditor willing to hold the debt. But there are two sides to the equation: each must be willing to “create money” (issue an IOU) and each must be willing to “hold money” (hold the other’s IOU).

In the next section we address two issues related to willingness to hold money IOUs: liquidity and default. That will cover our third and final proposition about the nature of money: default on monetary commitments is possible.

Liquidity and Default Risks on Money IOUs

Goodhart argues that the reason that conventional economics cannot find an important role for money or for financial institutions in its rigorous (“general equilibrium”) models is because default is ruled out by assumption. All IOUs are presumed to be equally safe because all promises are always kept as all debts are always paid. (Indeed, many such models employ a representative agent who is both debtor and creditor and who quite rationally would never default on herself in a schizophrenic manner!)

This means that all can borrow at the risk-free interest rate and that any seller would accept a buyer’s IOU; there is no need for cash and never any liquidity constraint. Nor would we need any specialists such as banks to assess credit-worthiness, nor deposit insurance, nor a central bank to act as lender of last resort.

Obviously, almost all interesting questions about money, financial institutions, and monetary policy are left out if we ignore liquidity and default risk.

Let us return to the most fundamental question about debt, examined in detail earlier: just what is owed when an IOU is issued? All IOUs share one common requirement: the issuer must accept back her own IOU when it is presented. As we discussed above, the bank takes back its own IOU (demand deposit) when a debtor presents it to pay off a loan. Government takes back its own IOU in tax payments. If you issue an IOU to your neighbor for a cup of sugar, the neighbor can present it to you to obtain sugar. Refusing your own debt when submitted for payment is a default.

Another promise that many monetary IOUs carry is convertibility on demand (or on some specified condition such as a waiting period) to another monetary IOU or even to a commodity. For example, on a gold standard the government might promise to convert its currency (an IOU stamped on coin or paper) to so many ounces of precious metal. Or, a country on a fixed exchange rate might promise to convert its currency to so many units of a foreign currency. Banks promise to convert their demand deposit IOUs to domestic high powered money (currency or reserves at the central bank).

It is important to remember that a promise to convert is not fundamental to issue of an IOU—it is in a sense voluntary. For example, modern “fiat” sovereign currencies on floating exchange rates are accepted with no promise to convert. Many attribute this to legal tender laws, where sovereign governments have enacted legislation requiring their currencies to be accepted in payments. But there are (and have been) currencies that readily circulate without any legal tender laws as well as currencies that were shunned even with legal tender laws.

If currency cannot be exchanged for precious metal in many countries, and if legal tender laws are neither necessary nor sufficient to ensure acceptance of a currency, and if the government’s “promise to pay” really amounts to nothing (except exchanging its currency for its currency), then why would anyone accept a government’s currency?

As we have emphasized, it is because the sovereign government has the authority to levy and collect taxes (and other payments made to government including fees and fines). Tax obligations are levied in the national money of account—dollars in the US, Canada, and Australia.

Further, the sovereign government also determines what can be delivered to satisfy the tax obligation. In all modern nations, it is the government’s own currency that is accepted in payment of taxes. While taxpayers mostly write checks drawn on private banks to make tax payments, actually, when government receives these checks it debits the reserves of the private banks—reserves that are the central bank’s IOU.

Effectively, private banks intermediate between taxpayers and government, making payment in currency and reserves on behalf of the taxpayers. Once the banks have made these payments, the taxpayer has fulfilled her obligation, so the tax liability is eliminated.

We conclude that government’s “fiat” currency is accepted because it is the main thing (and usually the only thing) accepted by government in payment of taxes. It is true, of course, that government currency can be used for other purposes: currency can be used to make purchases, to settle debts, or to save in “piggy banks”. However, these other uses of currency are subsidiary, deriving from government’s willingness to accept its currency in tax payments.

Ultimately, it is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations.

We can conclude that taxes drive money.

The government first creates a money of account (the Dollar, the Pound, the Euro), and then imposes tax obligations in that national money of account. In all modern nations this is sufficient to ensure that many (indeed, most) debts, assets, and prices, will also be denominated in the national money of account. The government is then able to issue a currency that is also denominated in the same money of account, so long as it accepts its currency in tax payment.

Enforceability of monetary contracts in court is part of the reason nongovernment money IOUs are written in the state’s money of account. In addition, money IOUs are often made convertible to the state’s IOUs—high powered money. This can make them more acceptable.

Here’s the problem, however: merely agreeing to accept your own IOU in payment is a relatively easy promise to keep. But promising to convert your IOU to another entity’s IOU (especially on demand and at a fixed exchange rate—which is necessary for par clearing in a money of account) is more difficult. It requires that one either maintain a reserve of the other entity’s IOUs, or that it have easy access to those IOUs when required to do the conversion.

Failure to meet the promise of conversion is a default. Hence, there is additional default risk that arises from a promise to convert, to be weighed against the enhancement to an IOU’s general acceptability.

This gives rise to the concept of liquidity: how quickly can an asset be converted with little loss of value? Generally, the most liquid asset is the state’s own IOUs (the state promises to convert its IOUs to its own IOUs, and to accept those in all payments due to the state), so the conversion of other liabilities is often to HPM. Banks hold some HPM so that they can meet demands for conversion, but it is access to deposit insurance as well as to the central bank that makes the bank’s promise to convert secure.

Deposit insurance means the government, itself, will convert the bank liabilities to HPM at par; access to the central bank means that a bank can always borrow HPM as necessary to cover conversions.

Much earlier in the Primer we introduced the concept of a pyramid of liabilities—IOUs issued by other institutions and households are convertible to bank liabilities. These other entities then work out arrangements that make it more likely that they can meet demands for conversion, such as overdraft facilities. Everything is then pyramided on the state’s IOUs—we can think of that as a leveraging of HPM.

All promises are not equally valid, however—risk of default varies on the IOUs. There is another fundamental principle of debts: one cannot pay one’s debt using one’s own IOUs.

But the sovereign state is special. As discussed, when the sovereign is presented with its own IOU, it promises to exchange that IOU for another of its IOUs or it allows the presenter to “redeem” it in payment of taxes.

The state makes its own payments—including redeeming its debts—using its own IOUs. To be sure, the state can retire its liabilities—by running a budget surplus—but it does not have to pay them down by using another’s IOU. So the sovereign state really is special. All other entities must provide a second party or third party IOU to retire debt. For most purposes, it will be the liability of a bank that is used to make payments on one’s debt.

Default risk on a bank’s IOUs is small (and nonexistent in the case of government guaranteed deposits), hence bank liabilities are widely accepted. Banks specialize in underwriting (assessing credit-worthiness of) “borrowers”—those whose IOUs they hold. Not only do banks intermediate between government and its taxpayers but they also intermediate by accepting borrowers’ IOUs and issuing their own bank IOUs such as deposits.

The IOUs they hold generally have higher default risk (except in the case of government debt) and are less liquid than the IOUs they issue. For this service, they earn profits, in large part determined by their ability to charge a higher interest rate on the IOUs they hold than the rate they must pay on their own. Again, the image of a debt pyramid is useful—those lower in the pyramid use the IOUs issued by entities higher in the pyramid to make payments and to retire debt.

This leads us to the interest rate, which as Keynes said is a reward for parting with liquidity. Since government-issued currency (cash) is the most liquid asset, it does not have to pay interest; bank demand deposits can be just as liquid and for many purposes are even more convenient than cash, so they do not necessarily need to pay interest (in some cases banks charge fees for checking accounts; in others they do pay positive interest—this has to do with regulation and competition, issues we will not address here).

Other IOUs that are less liquid must pay interest to induce wealth-owners to hold them. In addition, interest compensates for default risk; this is in addition to the compensation for illiquidity of the asset.

Keynes goes on to explain how the desire for liquidity constrains effective demand and results in unemployment—topics beyond our scope today although they were touched on above (unemployment results because people want “the moon”).

We return to Goodhart’s argument that conventional economics has no room for money because there is no default risk in rigorous models. For Keynes, conventional economics lacks a plausible theory of money holding precisely because there is no fundamental uncertainty in the models, which is necessary to explain why liquidity has value. The two arguments are related, and explain why financial institutions are important: they issue liquid IOUs with little (or no) default risk. This is the reason why their IOUs are frequently classified as “money” while the money IOUs of others are not. Hence, as Minsky claimed “everyone can create money”; but he goes on: “the problem is to get it accepted” (ibid).

This brings us back to Clower’s dictum: money buys goods and goods buy money, but goods do not buy goods. That surprisingly insightful statement has led us on a long path through theory, institutions, and even a bit of monetary history and law.

To be sure, we just barely scraped the surface of many of the issues of what turns out to be a complex and contentious topic. Indeed, “money” is arguably the most difficult and controversial subject in macroeconomics—what is money, what role does it play, and what should policy do about it are the questions that have busied most macroeconomists from the very beginning.

The three basic propositions examined in this concluding blog have allowed us to construct the beginnings of answers to these questions.

This has been a long and difficult blog. You might need to read it twice. Or three times. And maybe you want to buy the book (which contains a longer discussion and as well a proper conclusion), to read through at your leisure.

Thanks to the many participants who (mostly) made this a fun endeavour. Sorry that I had to truncate the Primer by about six weeks—I had wanted to run it right up to the book’s publication date. We did not get to cover quite all of the topics I wanted to do. However, they are in the book.

Have a good summer. The Primer blogs will stay up, but I won’t be posting any new ones. You’ll see me back on NEP’s front page from time-to-time. And at Great Leap Forward.

76 Responses to MMP #52 Conclusion: The Nature of Money

  1. Glenn Ierley

    Many thanks for all the time and care you have put into the blog on MMT, it’s been by turns both inspirational and instructive.

  2. Believe it or not, you have confirmed the truth of Ayn Rand’s fundamental argument – “It’s philosophy that’s gotten us into this mess and it is only philosophy that will get us out”. The problem is in finding the “right” philosophy, and I personally, find the MMP a far more realistic and convincing philosophy than hers.

    • Ayn Rand was a vulgar Marxist with the values inverted.

      • Doesn’t matter what she was Vilhelmo, or whether you like her or dislike her, her statement about philosophy was spot on.
        Each of us, whether we know it or not, live our lives according to some form of philosophy. The reality is that it is philosophy which governs our Society, and it is therefore essential, that a nation’s Constitution should be the written expression of the philosophy, which we, as a Society of Individuals, wish to live our lives. All people of our Nation must be deemed to have the inalienable Rights to Life, Liberty and the pursuit of happiness. From these basic Rights stem all other Rights, but in truth, “rights” only exist if they can be sustained.
        People form a Society in the hope that it will provide them with the opportunity to live, work and cooperate together, on the basis of mutual convenience, mutual benefit and mutual respect. Through Society, each of us hopes we may more easily pursue our paths to individual happiness. People do not form a Society to seek misery – they do not form a Society to elect a Dictator and they do not form a Society to allow a Government to assume greater importance than the Society itself. “Good” Government therefore, is based on the Rights of each of the Individuals of its Society and no Nation of people can legitimately have an interest in a Government based on any other foundation. That’s the sort of philosophy i am talking about.

  3. Thanks Randy, It’s an elegant and very, clearly written piece, and the MMP is a wonderful reference, made still more valuable by all the great discussion, and your responses to them. I already find myself coming back to these again and again. So, thank you for sticking with it, and leaving us with this great contribution.

  4. …albeit one that is less preferred because government saps precious bodily fluids like some evil Dr. Strangelove.

    General Ripper was actually concerned that his precious bodily fluids were being stolen by international communism.

    Probably worth mentioning, since I can’t imagine the average neoliberal would consider Edward Teller evil.

  5. Keith Wilde

    This has been a wonderful work. I am looking forward to the book because other commitments have kept me from following the blog closely. Nonetheless, I hope it remains available for a few months because I would like to read some of the interesting (strange) reactions. I do make efforts to propagate and promote the rationale. And audiences are usually interested once their attention can be snared.

  6. I appreciate all of your hard work and thank you helping me and others to get a better understanding of economics.

  7. Dr. Wray,

    Thanks for all the time and effort you’ve put into the MMP. I hope your book is a #1 New York Times bestseller!

  8. I congratulate Randy for a whole lot of good work here, but I cannot agree with its conclusions.

    The basic choice that money is either a commodity or “debt” is a false choice, like that the Austrian view is the alternative. Neither is correct.
    The argument ignores first examining the fundamental functions of money, in search from which evolves its true “basic” function – to provide a means to exchange goods and services.
    Having a hundred years of experience with “money-AS-debt” masks the true nature of money, indeed.

    The monetary system of a national economy functions to provide the means of exchange of goods an services therein produced and consumed – as Soddy says, “the monetary system is the distributory mechanism” of the national wealth(The Role of Money; p 23).

    That an accounting construct must exist to make money’s ‘exchange’ function workable and efficient does not make the accounting system identity – the unit of account – the definition of money, or of what money “IS” in nature. The ultimate reliance on Innis in that regard results in money being founded in MMT on its accounting identity, as a “money unit of account”.

    Money is money – a legal, national socio-economic construct.
    Debt is debt – a construct of that which becomes owed between parties, something borrowed and lent, with rent aforethought.

    The creation of new state money into the national economy to serve as the “means” for distributing real wealth requires no transaction by the sovereign power – until it is issued as a payment into the system of accounts to purchase a good or a service.
    It can thus be provided debt-free by the state for “permanent” economic exchange – like Lincoln did with the Greenbacks.
    Once money enters an accounting relationship, it becomes equally credit and debt.
    But money is not debt, and when ANY loan-debt is created using debt-free money, after the transaction ends, the money is still there.

    All the good that MMT attempts to deliver is as a rational transformation of the modern political economy. Unfortunately, that transformation will not be enabled through accounting ‘identities’ and a related misplaced respect for money-management technology.

    I applaud Randy and MMTs efforts to reconstruct the system of money to serve a beneficial modern political economy in our future.
    And there is all the good reason to get it right.
    respectfully.

    • Thank you Joebhed for that explanation. I too believe we cannot talk about ‘money’ unless we recognise its fundamental purpose as a convenient and effective means of exchange. While it is true that money can be created as a debt, it is also true that it can be created as a credit. As for being an accounting entity, that is also true, but as you point out, the accounting is a necessary function in recording the mechanism of exchange in goods and services.
      While the so called “Austrian” school is indeed used as an alternative, virtually every aspect of that school is based on pre 1971 thinking and conditions. As MMT so correctly points out, the rules changed on that date, but the political world seems unable to grasp that fact, although I’m sure, the financial world is well aware and have exploited it through their Central Banking system do the utter detriment of the respective societies.

    • I really don’t know how anyone can deny that from an accounting perspective money (whether interest bearing or non-interest bearing) is debt. Granted it is a very special type of debt, the debt in which all others are denominated and which, unlike other debts, never has to or even should be paid down.
      I am familiar with the work of Soddy & Zarlenga and find their historical perspective to be very insightful. But I can’t understand the denial of basic accounting identities.
      It is easy to see how treasuries and other interest bearing obligations of the Federal Government are indeed an accounting debt. But for some reason people have a tuff time understanding that non-interest bearing notes (dollars) are also an accounting debt of the government and an asset of the holder. It is basic double entry accounting.

      • E.G. 'Gerry' Spaulding

        First, currency notes (FRN’s) are issued as interest-bearing debt.
        There is a ‘money’ costs to increasing the currency.
        All additions to the currency stock are collateralized at the issuing FRbanks.

        Second, one reason why money is not debt, in its nature and as a media for exchange, is because we have history, both in the Colonies and in the Greenback issuance, of money being issued not as debt but as equity.
        For some reason, folks with an (unit 0f account) accounting definition of money are incapable of learning that money that is permanently issued into the economy as direct government spending (colloquially, money printing) has the accounting identity of equity on the national balance sheet.
        Now, in a debt-based money system, as we now have, of course the accounting norm is that money BE debt by definition. But please do not confuse the necessary endogenous, debt-based money accounting norm of money as debt, with the real, natural fact that publicly-issued, debt-free media for exchange money can be issued as equity.
        Friedman himself called Fisher the greatest monetary-economist of the 20th century and the works of Fisher, based on Simons, were all further based on Soddy.
        If you’re familiar with and understand Soddy’s “The Role of Money”, then there is no way that it can be claimed that money, issued without debt for its proper role of “distributing”, rather than concentrating, national wealth must be debt. Actually, it MUST be equity.
        But that can only happen outside the debt-based money paradigm.

        • E.G. ‘Gerry’ Spaulding
          “For some reason, folks with an (unit 0f account) accounting definition of money are incapable of learning that money that is permanently issued into the economy as direct government spending (colloquially, money printing) has the accounting identity of equity on the national balance sheet.”

          Putting aside the fact that money already is issued directly into the economy by government spending, your claim that this represents equity is false.
          It is a liability to the Federal Government & an asset to the private sector.
          This is true by definition.

          In addition, Federal spending does not itself necessitate the issuance of interest bearing notes.
          Neither taxes nor interest bearing notes (treasuries, etc) fund government spending.
          The Federal Government spends by crediting bank accounts.

          E.G. ‘Gerry’ Spaulding
          “If you’re familiar with and understand Soddy’s “The Role of Money”, then there is no way that it can be claimed that money, issued without debt for its proper role of “distributing”, rather than concentrating, national wealth must be debt. Actually, it MUST be equity.”

          On the contrary. Although I find the work & perspective of Soddy to be of great value, I strongly disagree with the above statement.
          Money, itself, IS the debt.

          • joe bongiovanni

            With due respect, what is actually true by accounting definition is that equity is on the liability side of the balance sheet, No ? And it is you who are confused on these matters.
            Just like I said in my original comment.
            Wray says, based on Mitchell-Innes that “money IS debt”.
            So do you.
            Both wrong.

            To say that money that is created as equity IS actually debt because it is on the liability side is the essential error here.
            If you want to say that there can be no equity-based money, then say so, and we can discuss the accounting for Greenbacks.

            The whole question must and can only turn on money’s ‘creation and issuance’.
            Government spending created money is debt-free money. Greenbacks were government spent into the economy.
            When it hits ANY bank account it is somebody’s asset and liability because of the double-entry accounting norms for financial statements.
            But it changes nothing about the money itself.
            Is there no “equity” on the liability side of the government’s balance sheet?

            If you want me to post the GUV accounting workbooks, I will.
            But the result are there in black and white.
            Thanks.

        • Unlike you, I find the works of Soddy & Fisher to be not at all at odds with Modern Monetary Theory.
          Each perspective offers its own unique, but complementary, insights into the nature of money.

          • joe bongiovanni

            There are definite similarities among the various money schools.
            Each offers its own valid insights.
            But there are quite a few wide disparities in essential aspects between MMT and the Soddy school. (Fisher was a student of the Soddy school, as was Simons.)
            I will be glad to over them and I agree with virtually the complete evaluation of MMT done by the American Monetary Institute.
            MMT is founded in an identity of a sovereign fiat monetary system that should be working for the public good.
            Unfortunately, it’s implementation mechanisms are much more about preserving the monetary status quo.

            • Let’s take the Greenbacks.
              The government buys goods spending a $100 Greenback note into existence.
              The seller now has an asset in the form of a $100 Greenback.
              According to the rules of double entry accounting, for every asset there MUST be a corresponding liability of equal value.
              It appears on the governments balance sheet as a $100 liability.
              Credits = Debits
              Assets = Liabilities

              My IOU is your asset and my liability.
              If I issue a $100 IOU in exchange for goods, I would debit an asset account $100 and credit a liability account $100.
              Note that my equity is not affected by this transaction.
              The same is true of the government.

              You want to record this as equity. But as far as I know, and I admit my knowledge is extremely limited, this is a violation of the rules of double-entry accounting.

              All that is in dispute concerns how these transactions are recorded, analyzed & described according to the rules & standards of DOUBLE-ENTRY ACCOUNTIN

              • Gerry Spaulding

                VILHELMO
                There should be nothing in dispute, as what you described is perfectly fine – using D/E accounting.
                The ONLY problem is in “equating” a liability with a debt.
                Today, all money is issued by CREATING a debt – a financial obligation for repayment.
                There is a borrower”s signature on a loan document for every dollar created by the private bankers.
                Read the Greenback Statutes.
                No ‘debt’ was created.
                When no ‘debt’ is created with money creation, the money does not disappear…………EVER.
                It is permanently recirculating money.
                When permanent money is created, either Greenbacks or United States Money via Kucinich HR 2990, it IMMEDIATELY enters the banking system as an asset and a liability.
                But that has absolutely nothing to do with whether it is debt-based money or not.
                No debt instrument exists that has ANY relationship to that amount of money.
                As I have often said, MMT fails in its identity of “money as debt”.
                It was convenient for Mitchell-Innes and the bankers.
                It is convenient for Wray who seems incapable of escaping the error of his adopted tenet.
                Please have a listen to Lord Adair Turner’s explanation of Overt Permanent Money Finance that starts about 9:30 into this video.
                http://www.youtube.com/watch?v=ZhrY_coLK_k

                Soddy, Simons, Fisher, Friedman and many others have shown, as does Turner, that money without debt is eminently feasible.
                Thanks.

                • The Greenback was the debt!
                  It disappeared when received by the government in payment of taxes.

                  Every financial asset has a corresponding liability.

                  • joe bongiovanni

                    “Every financial asset has a corresponding liability.”
                    First, why repeat this?
                    That has been agreed as a GIVEN here.
                    It has nothing to do with determining whether ‘money’ is a debt.

                    Second
                    “The Greenback was the debt!”
                    A bold assertion, indeed.
                    But, again, a read of the Greenback Statutes, in all issuances, would show NO INCREASE in the debt of the U.S. related to the issuance.
                    So, how could the Greenback BE the debt?
                    The Greenback was the equity!

                    Finally.
                    “It disappeared when received by the government in payment of taxes.”
                    From where did you learn such a thing?
                    It is wrong on many facets.

                    I understand the MMT construct that government creates money when it spends and destroys money when it taxes – both equally and magnanimously wrong.
                    The reality is that the government “uses” the money created by private banks, by either taxing or borrowing it for use, then as government spends, it returns the money to the private bankers.
                    Where it remains in circulation and is not destroyed – because the government did not create any of it is a debt, the bankers did.

                    Having said that, Greenbacks were the opposite construct from today’s ‘modern money’ design.
                    Greenbacks WERE created by the government and issued into existence as payments, without debt or interest, and remained in existence for perpetuity.
                    They have thus never ‘disappeared”, except by being lost or destroyed, and remain on the Treasury’s BS.

                    From the Wiki “United States Notes” page –
                    “”Existing United States Notes remain valid currency in the United States. However, since no United States Notes have been issued since January 1971, they are vanishingly rare in circulation.”

                    “As of December 2012, the U.S. Treasury calculates that $239 million in United States notes are in circulation, and excludes this amount from the statutory debt limit of the United States. This amount excludes $25 million in United States Notes issued prior to July 1, 1929, determined pursuant to Act of June 30, 1961, 31 U.S.C. 5119, to have been destroyed or irretrievably lost.[30]“”

                    I don’t usually use Wiki as a reference, but sometimes MMT adherents stretch this “taxes destroy money” fallacy to places where it cannot possibly apply. Like Greenbacks.
                    Thanks.

            • joe bongiovanni
              – ” “Every financial asset has a corresponding liability.”
              First, why repeat this?
              That has been agreed as a GIVEN here.
              It has nothing to do with determining whether ‘money’ is a debt.”

              Then why do you deny it?
              If money is a financial asset, should it not then, as all other financial assets, have a corresponding liability?
              Either you deny the truth of a basic accounting identity, or you deny that money is a financial asset.

              joe bongiovanni
              – “Second
              “The Greenback was the debt!”
              A bold assertion, indeed.
              But, again, a read of the Greenback Statutes, in all issuances, would show NO INCREASE in the debt of the U.S. related to the issuance.
              So, how could the Greenback BE the debt?”

              The idiosyncrasies of US national debt accounting, what does and does not count towards a specific definition of national debt, is a different issue, totally irrelevant to our current discussion.

              Is a non-interest bearing note (Greenback), received from the government in payment of goods & services, not a financial asset of the seller?

              You do agree that, to the individual bearer, a Greenback represented a financial asset, no?
              If so, must it not then represent a liability?
              As a financial asset, should there not then exist a corresponding liability?

              joe bongiovanni
              – “The Greenback was the equity!”

              I don’t get this.
              The equity of an entity represents those liabilities owed to the owners, being equal to the difference between the entity’s assets & those liabilities owed to entities other than owners.

              If Greenbacks aren’t accounted in the same manner as other IOUs, how should they be?
              Saying they are equity doesn’t make sense.

              How can both parties hold the same note as an asset?
              How can a financial asset not have a corresponding liability?
              I mean, what good is a financial asset without a corresponding liability?

              With complete sincerity,

              William Joseph Toby Weston.

            • Vilhelmo said, “Every financial asset has a corresponding liability.”
              joe bongiovanni replied, “First, why repeat this? That has been agreed as a GIVEN here. It has nothing to do with determining whether ‘money’ is a debt.”

              On the contrary, it has everything to do with with determining whether ‘money’ is a debt.
              Money is a financial instrument & as such its creation therefore gives rise to the financial asset of one entity & the financial liability of the issuing entity.

              If money is a credit there must be a debt.
              Unless you hold that money is a real asset like a car or lump of gold, I don’t know how this can be denied.

    • Let’s say that your reforms are implemented and that the government through the Treasury simply spends money into the economy.
      From an accounting perspective, the act of spending creates an asset held by private sector seller.
      You don’t deny this, correct?
      Now according to the rules of accounting for every financial asset their MUST be a corresponding liability.
      Therefore, along with the creation of an asset, spending must also entail the creation of a corresponding liability for the government.
      I just don’t understand how this can be denied.

      • joe bongiovanni

        Your point is valid but has much more to do wit double-entry accounting as all financial accounts must be kept and balanced.
        So, the only difference between the two really is the ‘creation and issuance’ part.
        This is all consistent with Lord Adair Turners “Overt Permanent Money Finance” proposal.
        Hope you’ve seen that.
        He emphasizes that his proposal is based on the debt-free issuance plans of Simons, Fisher and Friedman.
        Friedman was the pre-eminent monetary economist and historian of the last part of the 20th Century – opined that Fisher was the greatest monetary economist of the entire century and Fisher acknowledged being overcome with the debt-free money logic of the original Chicago Plan pioneer Henry Simons. So, please, this is not my idea, this is old as the modern science of money.
        Money is either issued based upon loans i.e. debt-based money. Or it is issued as equity.
        Those are the counterparts: Debt and Equity.
        Greenbacks were equity-based money and circulated for a hundred years.
        Once they enter the bank account of a depositor, of course the bank’s books must balance and the depositor’s books must balance.
        But that fact changes nothing.
        Money issued according to Turner’s OPMF proposals would be equity-based , like Greenbacks, would circulate permanently in the e money system, like Greenbacks, and NEVER have any debt associated with them.
        Thanks.

        • I dispute is purely terminology.

          I would say that even in the Chicago Plan, money is an accounting debt of the government.

          • Gerry Spaulding

            VILHELMO.
            Sometimes these discussions end at ‘terminology’, or ‘semantics’ or ‘definitions’.
            We could again leave it at that.

            But for all modern monetary adherents who lack an understanding of these things, not having recourse to the distinction between a liability of the entity – in this case “the government” – and a “debt” of the entity is profoundly misleading. “Debt” is legally a liability. A liability is legally not a “debt”.
            For a legal definition of a ‘debt’ in relation to all financial transactions. See F.A. Mann’s “The Legal Aspect of Money”.

            With all financial statements, ‘equity’ is also entered on the ‘liability’ side of the balance sheet. Same with the GUV. Money issued without debt is equity-money. Surely, the issuance of Greenbacks does not meet that definition of money as debt. So, legally, money can be, and has been, issued without debt, and is thus, by definition, NOT debt. Money so issued never becomes debt on the GUV’s balance sheet.

            There is no reason why ALL money cannot be issued without debt. Were that so, would the construct that ‘the nature of money is debt’ still apply?

            The modern monetary construct that ‘the nature of money is debt’ is more than ‘profoundly misleading’. Beyond semantics, terminology and definitions, the nature of money is not debt. Since discussing its ‘nature’ necessarily implies a scientific rendering for what money is, may I suggest a read of Soddy’s “The Bearing of Physical Science Upon State Stewardship” for an understanding of what money “IS”.
            http://habitat.aq.upm.es/boletin/n37/afsod.en.html

            Thanks.

            • Gerry Spaulding
              ” GUV. Money issued without debt is equity-money. ”

              Are you saying that when dollars are spent directly into the economy by the federal government and are not accompanied by an equal & simultaneous issuance of interest bearing debt, that this represents “debt-free” money?

              If so, that which you call “debt-free” is, in accounting terms, a non-interest bearing liability (IOU) of the federal government.

              You make the mistake to assume that spending necessitates the simultaneous issuance of interest bearing notes, it does not.
              You seem to believe that all debts must bear interest and therefore any non-interest bearing debt cannot be debt.
              This is wrong.

              We agree that even in the case of Greenbacks, money issued by government spending directly into the economy creates a new asset for the seller.
              But you then want the government to record this as equity.
              You cannot do this.
              You cannot increase equity without increasing assets or decreasing liabilities otherwise the accounts won’t balance.
              Money cannot be both an asset to the bearer and an asset to the issuer.
              This is basic accounting stuff.
              Equity is a debt owed to oneself, liabilities are debts owed to others, big difference.

              An IOU is recorded in the same manner whether issued by me or by the government.

              Gerry Spaulding
              “Surely, the issuance of Greenbacks does not meet that definition of money as debt.”

              They do indeed.

              • Gerry Spaulding

                VILHELMO,
                Thanks.
                On the Accounting Weeds:
                Can I begin by stating that the accounting for money in any country must merely accord the accounting rules and standards in effect at any time. They change over time, and changes affect the financial presentation. What might be important here is only WHETHER the US government DID issue Greenback notes without any debt attached.
                How they did that according the accounting norms then in effect is really immaterial to our discussion here about the nature of money. Do you KNOW how they did it? If you did, that COULD prove or disprove the egregious finding of MMT that MONEY IS DEBT.
                Absent that presentation, everything is our and Randy Wray’s, interpretation of accounting things. It gets unnecessarily weedy and loses the more important aspect of a discussion of what IS money.

                V-O : “”Are you saying that when dollars are spent directly into the economy by the federal government and are not accompanied by an equal & simultaneous issuance of interest bearing debt, that this represents “debt-free” money?””
                Yes, except ‘interest-bearing’. Just without “issuance” of a debt instrument (IOU) would suffice. Money spent directly into the economy by the sovereign government without any concurrent debt-issuance is, by definition, permanent ‘debt-free’ money.
                The following section is provided for its live links to the Greenback Statutes and taken from 31 USC § 5119 – Redemption and cancellation of currency

                E) United States currency notes, including those issued under section 1 of the Act of February 25, 1862 (ch. 33, 12 Stat. 345), the Act of July 11, 1862 (ch. 142, 12 Stat. 532), the resolution of January 17, 1863 (P.R. 9; 12 Stat. 822), section 2 of the Act of March 3, 1863 (ch. 73, 12 Stat. 710), or section 5115 of this title.

                From reading each Greenback Statute linked therein, it can be plainly seen that:
                a. They were issued without any certificate of indebtedness, and importantly,
                b. They were convertible by the bearer INTO a certificate of indebtedness of the US upon presentation.
                One key difference between money and debt is that only ‘money’ (universally-accepted exchange media) can be used to both ‘fund’ a debt and in a repayment that extinguishes a debt. That’s one reason why money is not debt.

                V-O : “”If so, that which you call “debt-free” is, in accounting terms, a non-interest bearing liability (IOU) of the federal government.””
                Except for the obvious question of ‘What IOU ?”, that is CORRECT. The liability is the government’s equity.

                V-O : “”You make the mistake to assume that spending necessitates the simultaneous issuance of interest bearing notes, it does not.””
                Where do I make this claim and this mistake? I never have said so. I believe, and am saying, the opposite.

                V-O : “”You seem to believe that all debts must bear interest and therefore any non-interest bearing debt cannot be debt. This is wrong.””
                Again, as I showed above by the Greenback Statutes, that is obviously NOT what I believe, Vilhelmo.

                “Debt” in monetary science and law has many characteristics that may or may not include interest payments. It must include a written lending agreement (the IOU) between borrower and lender stating the amount borrowed, the denomination of the amount and ALL repayment terms(which may include interest payments or not),
                To be clear, I do not believe what you say I “seem to believe”.

                V-O : “”We agree that even in the case of Greenbacks, money issued by government spending directly into the economy creates a new asset for the seller. But you then want the government to record this as equity.
                You cannot do this. You cannot increase equity without increasing assets or decreasing liabilities otherwise the accounts won’t balance.”
                First, the new asset for the issuer, not the seller, is the currency itself – cash money in circulation.
                The liability increase is recording that money issued into circulation as the equity of the government. Why would that not always be the case?

                V-O : “”Money cannot be both an asset to the bearer and an asset to the issuer. This is basic accounting stuff.”

                Those are two different balance sheets. If by the ‘bearer’ you mean somebody holding a $5 Greenback note, then this is not an ‘accounting’ asset. It can only be on the ‘owner’s’ balance sheet as an asset if it is in the bank account of the owner. This is basic “account”-ing stuff.
                The liability side of the owner’s balance sheet is completely irrelevant.

                When a bank funds a loan, the bank records the loan as its asset, and funding the loan to the borrower as its liability. The borrower records the loan proceeds as its asset, and its PN as its debt-liability.
                One loan = 2 assets and 2 liabilities. Different parties.

                V-O : “”Equity is a debt owed to oneself, liabilities are debts owed to others, big difference.””
                SORRY. Big difference, and big error.
                Equity is a ‘liability’ owed to oneself – it is never a debt as a ‘debt’ is legally defined. Otherwise it would be “debt” on the balance sheet, and not equity. Equity is a non-debt liability.

                V-O : “”Debt is a liability owed to others.””
                Correct.

                V-O : “An IOU is recorded in the same manner whether issued by me or by the government.”
                Correct, BUT……Key point here is the absence of an IOU for Greenbacks so issued.

                Gerry Spaulding
                “Surely, the issuance of Greenbacks does not meet that definition of money as debt.”
                V-O : “”They do indeed”.
                Only when debt becomes, like beauty, that which IS in the eye of the beholder.
                Thanks, Vilhelmo.

                • Money spent directly into the economy by the sovereign government without any concurrent debt-issuance is, by definition, permanent ‘debt-free’ money.

                  Here lies the crux of our debate.
                  When I say money is debt I am not referring to any concurrent issuance of interest-bearing debt that may or may not accompany government spending but to the money itself.
                  Even money spent directly into the economy by the sovereign government without any concurrent issuance of interest-bearing debt, is itself a non-interest bearing debt of the government.

                  Money isn’t debt because the government exchanges non-interest bearing notes (dollars) for interest bearing notes, it’s a debt because it’s also an asset.

                  If money represents an asset to the bearer, it must be a liability of the issuer.
                  Every financial asset has a corresponding liability, by definition.

                  What you call debt-free is, from an accounting perspective, a debt.

                  Sincerely,

                  William

                  • Gerry Spaulding

                    William,
                    Thanks.
                    As you say, the crux of the debate has become not whether money is debt (interest, or non-interest-bearing), but whether money issued debt-free by the specific design of the government to NOT borrow the money (Greenbacks) must accommodate financial reporting rules(double-entry accounting).
                    And here, as I said before, there is really no debate.
                    Money issued debt-free by design of the government must conform to the accounting rules in play.
                    Debt-free Greenbacks so conformed.
                    They conforming to those government accounting rules as equity, on the liability side of the balance sheet.
                    What I don’t understand why the entire discussion cannot take place as the fact that even debt-free money is a liability on the government’s balance sheet, and leave it there rather than, thus it is the ‘debt’ of the government.
                    Thanks.

                • Gerry Spaulding said:
                  ” Those are two different balance sheets. If by the ‘bearer’ you mean somebody holding a $5 Greenback note, then this is not an ‘accounting’ asset. It can only be on the ‘owner’s’ balance sheet as an asset if it is in the bank account of the owner. This is basic “account”-ing stuff.
                  The liability side of the owner’s balance sheet is completely irrelevant.”

                  By “bearer” I mean the holder of the note.
                  A dollar note (Greenback or other) is an asset on the bearer’s balance sheet whether or not it has been deposited in a bank account.

                  • Gerry Spaulding

                    OK.
                    You may be right in what you’re thinking and saying.
                    I’m just saying that I have never seen a balance sheet that includes an asset account that is labeled “cash in pocket”.
                    Cash in pocket might get lost in the washing machine.
                    When you use it to buy a coupla beers, do you adjust the balance sheet?
                    Who knew?
                    That’s all.

                • When a bank funds a loan, the bank records the loan as its asset, and funding the loan to the borrower as its liability. The borrower records the loan proceeds as its asset, and its PN as its debt-liability.
                  One loan = 2 assets and 2 liabilities. Different parties.

                  When a bank makes a loan, it records the borrower’s IOU as an asset and the deposit in the name of the borrower created by the loan as a liability.
                  The borrower records the bank account as an asset and his IOU as a liability.

                  Is that what you’re saying?
                  And yes, I am that dumb.

                  • Gerry Spaulding

                    Yes, that is what I am saying.
                    And thanks for asking for a clarification of however I said it.
                    My answer may be dumb, but the question cannot be.

                • First, the new asset for the issuer, not the seller, is the currency itself – cash money in circulation.
                  The liability increase is recording that money issued into circulation as the equity of the government. Why would that not always be the case?

                  I interpret your first sentence to mean that when the seller of g&s to the government receives, in payment, money (newly spent into existence), that, to him, this does NOT represent an asset but it is instead an asset of the government?
                  I am misunderstanding you?

                  How can the dollars he now holds in his pocket not represent an asset?

                  When I receive a dollar bill in exchange for goods & service to the Federal Government, it represents an asset on my balance sheet.
                  My asset must be somebody’s liability, if not what good is a claim without an obligation?
                  In the case of every other IOU, the liability is that of the issuer while the asset is that of the bearer.
                  Why should it be any different in the case of government IOUs?

                  William

                  • Gerry Spaulding

                    Thanks.
                    If the money is in your pocket – it is in “velocity” mode – a complete “flow” and not anyone’s balance sheet component until it is deposited in their account, at which point there is no “flowing” money and only stock money.
                    If I come along and say – show me your assets…………………
                    The fiver will come out along with a pocket knife, a watch, a pen, a cell phone…….
                    They’re all your assets.
                    But you’ll find none of them on your balance sheet.
                    “Cash on hand” IS a banking and financial term, but loose-handedly it defines demand-money in a bank account.
                    All cash ‘in’ hand is already counted as currency in circulation.

                • V-O : “An IOU is recorded in the same manner whether issued by me or by the government.”
                  Correct, BUT……Key point here is the absence of an IOU for Greenbacks so issued.

                  What I’m saying is that the Greenback is an IOU itself.

                • Gerry Spaulding said:
                  ““Debt” in monetary science and law has many characteristics that may or may not include interest payments. It must include a written lending agreement (the IOU) between borrower and lender stating the amount borrowed, the denomination of the amount and ALL repayment terms(which may include interest payments or not)”

                  Not all of this is true all the time as in the case of transferable debts (ie: money)

                  • Gerry Spaulding

                    All of that is true always as the legal definition of a “debt”.
                    Not sure of the value of the discussion here, but “money” is not a transferrable “debt”.
                    Whatever that is in your mind, that debt which is legally ‘transferrable’ is as a condition of the lending – how; by whom; to whom.

                    Money’ is needed for a debt to exist and is used to establish a debt – the passage of which ‘money’, and not debt, from lender to borrower takes place in exchange for the debt agreement. Thus, a ‘debt’ requires an IOU to commemorate its existence. Otherwise, there is no “debt”.
                    Now we have a money-denominated “debt”.
                    Money is used to repay the debt.
                    Money is the media for exchange – for the creation and the destruction of the debt, of the IOU.
                    I thought you were over that “money is debt” thing.

                • I would just like to thank you for the cordial exchange, I really appreciate it.
                  You have given me much to think about and have helped highlight some of the many gaps in my knowledge.

                  The debate has been enjoyable.

                  With the utmost respect and sincerity,

                  William.

                  • Gerry Spaulding

                    As I would in kind to you.
                    I thank you.

                  • Gerry Spaulding – “Money’ is needed for a debt to exist and is used to establish a debt”

                    Debts & Credits existed long before money.
                    A debt can & probably has been denominated in almost anything one can imagine.

                • Gerry Spaulding:
                  “I’m just saying that I have never seen a balance sheet that includes an asset account that is labeled “cash in pocket”.”

                  That’s probably because most people don’t prepare their own balance sheets.

                  BTW,
                  Do NOT take my word for anything.
                  I am not an expert on anything, let alone accounting & economics.
                  I couldn’t even afford to finish my last year of college & am now a poor crazy nobody on disability.

              • Gerry Spaulding

                Sorry, just realized those Greenback Statutes did not live-link through posting my comment.
                From Cornell Law using Library of Congress link.

                http://www.law.cornell.edu/usc-cgi/get_external.cgi?type=statRef&target=date:nonech:33statnum:12_345

                • “Money is used to repay the debt.
                  Money is the media for exchange – for the creation and the destruction of the debt, of the IOU.
                  I thought you were over that “money is debt” thing.”

                  A debt can be repaid with another debt.
                  A medium of exchange is a function of money not its definition.
                  I still stick to my position that money is debt.

                • I think what we both want is for the Federal Government to spend by issuing new money directly into the economy, essentially by just crediting bank accounts and that its issuance of interest bearing debt should be severely restricted if not abolished.

                  We only disagree on the accounting and the sloganeering.

                  While the border between debt & equity has always been fuzzy, to record spending by the Federal Government & the debt/credit relationship it creates, as equity rather than debt, completely destroys it.

                  Plus, I just don’t see what one gains by doing so, except for the confusion it generates.

                  The only reason I can think of as to why one would want to disregard accounting norms & customs, is the desire to use the slogan “debt-free money” without having to face the term’s contradictory nature.
                  If all money is debt how then could “debt-free” money possibly exist?

                  It is only those people with a belief in “debt-free” money that have difficulty time understanding money from an accounting perspective.
                  I know what its like, it took me awhile to get past it.

                  If it didn’t prevent people from learning & understanding money from an accounting perspective, I wouldn’t have a problem with such sloganeering.

                  William

      • Let’s take the Greenbacks.
        The government buys goods spending a $100 Greenback note into existence.
        The seller now has an asset in the form of a $100 Greenback.
        According to the rules of double entry accounting, for every asset there MUST be a corresponding liability of equal value.
        It appears on the governments balance sheet as a $100 liability.
        Credits = Debits
        Assets = Liabilities

        My IOU is your asset and my liability.
        If I issue a $100 IOU in exchange for goods, I would debit an asset account $100 and credit a liability account $100.
        Note that my equity is not affected by this transaction.
        The same is true of the government.

        You want to record this as equity. But as far as I know, and I admit my knowledge is extremely limited, this is a violation of the rules of double-entry accounting.

        All that is in dispute concerns how these transactions are recorded, analyzed & described according to the rules & standards of DOUBLE-ENTRY ACCOUNTING.

  9. Thank you kindly for saying so.
    I feel that surely very few MMT-thinkers would agree.

    The issue, I believe, IS that the “financialists” have long ago figured out how the money system works and have re-shaped and honed it into our present predicament – as you say – to the utter detriment of our respective societies, not to mention the planet.
    The flow of wealth from the ninety-nine to the one is not an accident.

    I know that MMTers want to cure that ill.
    And that in the end we want the same economically democratic political construct.
    I just do not believe that this vehicle is capable of achieving that end.

    There MUST be legal, structural changes made to the basic system of money and government finance in order to fix the ‘self-imposed constraints’ that prevent MMT’s socio-economic goals movement from theory to operation.

    respectfully

    • I don’t know if you are aware of the work of C H Douglas, and in particular, his books, “Economic Democracy” and, “The Monopoly of Credit”, written in the 1920’s. He accurately predicted the inevitable outcome of the finacial system as we are witnessing today. Douglas explained his philosophy, which he said would need to be developed into a set of policies before being applied to a “legal and structural change” of a worthwhile and practical system. It seems to me the MM theory/philosophy is in the stage of developing the policies, which will allow it to be translated into a practical and workable system, As Douglas found out, he was challenging a huge and powerful establishment that were almost totally successful in obliterating any meaningful discussion of his concepts and ideas. BTW, Douglas was not an economist, but a successful practising Engineer in charge of much of Britain’s WW1 production effort.
      As you are obviously well aware, there will always be a significant educational component preceeding a major change, and until the works of the likes of L R Wray and Warren Mosler become standard reading for any study of economics, it will be an uphill battle.

      • joe bongiovanni

        Sorry I never saw this comment until now.
        Yes, it was Douglas’ practical engineering background that pointed out the mathematical impossibility of debt-based money.
        This is confirmed recently by the macro-economic modeling of both Dr. Kaoru Yamaguchi and the IMF’s Benes and Kumhof.
        As it was Soddy’s ‘physical-science’ background that drew him to the conclusion that what fractional-reserve banking amounts to is not a money-system, but a ‘confidence trick’.
        Douglas speech before Parliament, 1923 I believe, is one of the greatest efforts made to inform those responsible for the system of money of the perils of ‘misunderstanding money’.
        If either Douglas or Soddy had the internet, the uphill battle would be behind us now.
        Thanks..

        • Yes Joe, your comment about the Internet is very true. What a different world we might have had if Douglas and Soddy were better known. However, there is one little ‘anomaly’ that I’ve often wondered about – all the writers and economic thinkers of the pre 1970 era, always thought in terms of the gold standard – as so many of them still do. That includes Keynes, Milton, Freidman and von Hayek of course. Would the change have made any significant difference to Soddy or Douglas? In a sense, they seem to be a precursor to MMT, but it is an interesting supposition.
          In retrospect, Marx seems to have had a very clear idea of where capitalism was heading – big capitalism that is, in collusion with big finance and government lobbying/corruption.
          It seems to me, there is a ‘middle road’ where Government must take responsibility for the “public purpose” for which it is created, and leave the commercial field to private enterprise. Achieving the right mix seems to be the impossible dilemma for us humans.

          • joe bongiovanni

            Thanks, Guggzie

            A reading of Soddy’s “The Role of Money” shows his clear understanding of the nature of money, and of gold’s corruption of our evolution in monetary science.

            Writing in the New York Times on Soddy’s foundational work in the field of ecological economics, author Eric Zencey wrote:
            “”Soddy distilled his eccentric vision into five policy prescriptions, each of which was taken at the time as evidence that his theories were unworkable: The first four were to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort. All of these are now conventional practice.

            Soddy’s fifth proposal, the only one that remains outside the bounds of conventional wisdom, was to stop banks from creating money (and debt) out of nothing.””
            http://www.nytimes.com/2009/04/12/opinion/12zencey.html?pagewanted=all&_r=0

            It’s unfortunate that MMT fails to recognize Soddy’s scientific contribution, and tragic that it maintains the status-quo on this last remaining vestige of un-scientific money.
            Thanks.

            • Thank you too Joe, that article on Fredrick Soddy was very succinct and well written. Soddy is on the same vein as Douglas in many aspects. As far a real life practical economics are concerned, they both make a strong case for making practical experience in the real world, a prerequisite for studying economics. I found it rather remarkable that Soddy featured in the article written in 2009 – who is doing their research to dredge up ideas from the 1930’s.

              • Gerry Spaulding

                Guggzie
                Hang on to your hat.
                That article was written by Eric Zencey, obviously another closet-Soddyite out there, also golf-partner to a former colleague of mine from Vermont.
                I add the name Arian Forrest Nevin to this list, whose recent book titled “National Economy – The Way to Abundance” lays out Soddy’s philosophy and chronicles the relevance of Soddy’s work to solving today’s crisis. Please get a copy or visit Arian’s NationalEconomy website for more on Soddy.

                However, FAR MORE IMPORTANT to the situation today is the recent pronouncements of Brit Lord Adair Turner, whose speech at the INET Conference laid out a whole new fiscal-monetary paradigm that corrects for the mistakes of the worlds debt-based-money-centric central-bankers.
                His INET speech is here and starts about 8:30 in, with Soros’ intro of Turner.
                http://www.youtube.com/watch?v=ZhrY_coLK_k

                This is a truly fascinating turn of events because Turner acknowledges the need to “look back” in order to truly moe forward. Here ho brings up the Trilogy of Henry Simons, Irving Fisher and Milton Friedman as the Seers of what we call debt-free money and what he calls Overt Permanent Money Finance(OPMF).
                Suffice to say that the works of Simons (Friedman’s tutor at U-Chicago) on the Chicago Plan, of Fisher’s 100 Percent Money and of Friedman’s “Fiscal and Monetary Framework for Economic Stability ” – ALL have their foundation in the work of Frederick Soddy.
                With your help, Guggzie, we will soon prevail.
                Thanks.

  10. An alternative perspective, perhaps complementary in some ways: http://www.insofisma.com/wp2/what-is-money/

  11. Pingback: S'appuyant sur trois propositions fondamentales, à savoir

  12. Lewis MacKenzie

    Excellent last post Prof. Can I ask if there’s a Kindle version of the book planned? I seldom buy hard copies these days.

  13. Please allow me to add my thanks to you for doing this. Circumstances did not allow me to participate as much as I wanted to, but I will get through all of it as soon as I can.

    Cheers

  14. Thanks for the great work! I’m going to have to get that book to really get to grips with this. Now, all I need is some money first…

  15. L. Randall Wray

    Lewis: Not sure about Kindle; try the Palgrave website but I’ll talk to the editors to see if they will do an e-version.

    Phil: very nice, you’d make Senator McCarthy and Bill Buckley proud!

    Others: see the excellent post by Bill Mitchell today: http://bilbo.economicoutlook.net/blog/?p=20055#more-20055
    It explains what Phil and FiDO and the other minions are trying to do.
    Thanks all. Signing off the Primer now.

    • Dear Mr. Wray,

      I am just wondering about the distinction between money & credit.
      When does “credit” become “money”?

      Should the word “money” be restricted to refer only to those debts denominated in their own unit of account, as is the case with subway tokens, arcade tokens, USD, CAD, etc?

      Is it not, at least, useful to distinguish between those debts denominated in the national unit of account vs those denominated in their own unit of account?

      Why should some debts issued in the national unit of account (eg: bank credit) be called “money” while others (personal IOUs, etc) are called “credit”?

    • Dear Mr. Wray,

      I’m having trouble with the distinction between the unit of account & debts denominated in it.
      Isn’t the value of the USD – unit of account determined by (or is) the value of the USD – Federal debt?

      Sincerely,

      Vilhelmo.

  16. I’m new to this and only now finishing the 52 blogs. One thing I understand is the power of the words we use. We should stop using “deficit” spending and call it supplemental spending because that’s what it really is. We have to supplement whatever amount we fall short.

  17. It was a jaw-dropping moment – having just finished writing my anti austerity book ‘The Populist Manifesto’ (Amazon) – I switched on the TV, channel hopped and watched Professor Stephenie Kelton give a webcam interview for the ‘Capital Account’ program last week. All the things she was saying about wasted human resource and how the government has the power to productively employ everybody are the two key themes I lay out in the book!
    Up until that moment I had placed economists in the same category as the political establishment and therefore part of the problem rather than the solution. I had never heard of Modern Monetary Theory but now, having read many blogs and watched many more YouTube presentations, I am mesmerized! Within the book I develop a moral philosophy called Popular Moral Reasoning; on top of this rests the manifesto. Within the manifesto is a chapter titled ‘Populist Economics’ which I believe is an expression of MMT but derived from the moral principle.
    In the book I argue that money isn’t anything and that the only thing of real value and the only thing that can be spent is people. Money is people. Everything else is recyclable. I observe an obsession with money and a blasé attitude toward unemployment which I think is another example of the back to front nature of things.
    In a sense the idea that money is people is empowering because they, the elite, having nothing without us. If only we could unite and take our own power. The more we divide the more they rule.

  18. The economic problems facing our nation are not what they are made out to be.

    The problems are invariably cast in the context of taxation: Republicans say the solution requires spending cuts, the Democrats say the solution requires additional taxation.

    In fact, both Democrats and Republicans are pretending the national economy works in a way that it does not. And both parties know better. Or they are inordinately ignorant.

    Prior to 1970 the Federal government needed to levy taxes to have money to spend, after 1970 the government did not need to levy taxes to have money to spend. Simple as that.

    The event that changed the condition of how the national economy works occurred when President Nixon decided to sever the relationship that existed between the dollar and gold.

    In 1970 the nation’s economy was suffering from an inadequate supply of money, and the supply could not be expanded because the dollar had been tied legislatively to the value of gold. President Nixon broke the tie that bound the dollar to gold, and thereafter our government, through the Federal Reserve System, could create or manufacture as many dollars as it might wish. And they did. And the nation’s economy recovered and flourished as more and more dollars were put into circulation.

    In June of 1970 the nation had $265 in circulation per capita. By June of 2011 the supply had grown to $3,302 per capita, according to the U.S. Dept. of the Treasury.

    So, the economic problems facing our nation are not problems of taxation or spending.

    The problems facing our nation are about money management. Take, for example, the nation’s debt.

    The national debt is nothing more or less than a promise to pay dollars at some future date for dollars received previously.

    Our government, through the Federal Reserve System, creates dollars. Our government manufactures money. The quantity of money our government can create or manufacture is without limit.

    The people who manage the Federal Reserve System manufacture money simply by entering a number, or series of numbers, in a ledger. Just like that, out of thin air, no trees cut or cotton picked to make paper to print money, just an entry in a ledger, the money exists.

    To get the manufactured money into circulation, the Federal Reserve System loans the money to commercial banks at a modest rate of interest. The commercial banks loan the manufactured money to their customers and other varied interests at a somewhat higher interest rate, thereby making the bankers very happy. The banks may make loans to the government by buying Treasury bills at the prevailing rate of interest, again making the bankers very happy. Whatever the method used by the banks, the manufactured money is then circulating in the national economy.

    When the money supply is increased, the nation experiences prosperity. If the money supply is increased beyond what is needed to have a healthy economy, the nation experiences excessive inflation. If the money supply is not sufficient to accommodate the needs of business, the nation will experience recession, or even depression. Other factors, such as tax rates, may affect the condition of the national economy, but those factors are in the margin, not determinative in and of themselves. The money supply is the determining factor of the economy.

    In the course of business, our government has seen fit to borrow money it manufactured at a somewhat higher interest rate than what it charged the commercial banks for the same dollars, and doing so, our government created the national debt.

    The type of money manufactured by our government is called fiat money. Fiat money is backed by nothing but the good faith that we, the people, have for our government.

    Fiat money has a checkered history. In many circumstances where fiat money has been used by governments, it became worthless. Issuing governments had the mechanism to create the money, but they lacked a mechanism to control the amount of money in circulation, that is to say, they lacked the ability to tax the excessive supply of money out of existence. And the lack of control often resulted in excessive inflation to a point that the fiat money became worthless.

    Today, with sophisticated accounting methods, our government can control the supply of money in circulation and avoid unwanted inflation associated in the past with fiat money.

    Paying the national debt is as simple as having the Federal Reserve System manufacture the money needed, placing the money in an account suitable for issuing checks drawn on the account, and issuing checks to retire the debt.

    The problem in retiring the national debt, and it really is not much of a problem, given the way our national economy works today, is to control inflation by controlling the amount of money in circulation.

    To control the amount of money in circulation, our government needs to institute a monetary use tax or transfer tax that would apply to every monetary transaction, without exception, and our government needs to phase the new tax into operation as it phases the antiquated income tax system out of existence.

    The existing income tax scheme is a burden that sets one group of people, those who are working, against another group of people, those who are not working, and in doing so, it creates debilitating stress in the general population.

    Taxes are a necessity, if the nation is to function as a nation, but the rule should be that those who benefit by using the nation’s monetary system should pay for the benefit they receive from its use.

    Our government should reverse the process of tax and spend to a process of spend and tax. A spend and tax process might work something like this: Congress and the President would formulate a budget; the Federal Reserve System would fund the budget, eliminating the need to borrow money and eliminating the various taxing schemes now in existence; our government would spend the money in accordance with the budget, and, concurrently, tax the money, by way of a monetary use tax or transfer tax, back to the Federal Reserve System.

    Life would go on without the worry of recession, inflation, national debt, or personal income taxes at the Federal level.

    • “Prior to 1970 the Federal government needed to levy taxes to have money to spend, after 1970 the government did not need to levy taxes to have money to spend.”

      Is this true? What was Jennings Bryan and bimetalism about? A gold standard does not just declare that currency is convertible for gold, it also declares that gold is convertible for currency. Central bank money is more useful than gold for conducting transactions. If it wasn’t no one would ever bother exchanging the gold they dig out of the ground for currency. A bimetallic standard doesn’t just declare that currency is convertible to gold and silver, it also declares that gold and silver are convertible to currency. As long as people are converting their gold to currency, gov’t doesn’t need to tax in order to fund its operations.

      • ““Prior to 1970 the Federal government needed to levy taxes to have money to spend, after 1970 the government did not need to levy taxes to have money to spend.”;
        Is this true?”
        No, of course it is not true.
        What difference to the needs for taxation could the removal of the exchange basis “for current account balances” have on the internal operations of government finance?
        None.
        But it was a convenient ‘discovery date’ for MMT to learn about sovereign money – as if we were not sovereign before and after the gold exchange standard – and to imply that the benefits of a sovereign, autonomous and independent money system were newly up for grabs.
        We have always had monetary sovereignty and monetary autonomy.
        We gave up monetary independence with the passage of the Federal Reserve Act a hundred years ago, and now the private bank members of the FR system create all of the nation’s money as a debt.
        unfortunately, for some odd reason, MMT denies that the private Fed bankers create the nation’s money, and instead claim that SOMEHOW, the government NOW – ostensibly since that 1970s date – creates the nation’s money when it spends.
        Go figure.
        For the Money System Common.

    • Gordon Dalton:
      “Prior to 1970 the Federal government needed to levy taxes to have money to spend, after 1970 the government did not need to levy taxes to have money to spend. Simple as that”

      I think you misunderstand what the Gold Standard was pre 71. It applied only internationally not domestically. The US promised to exchange the dollars of foreign CB’s, on demand, for gold at a fixed price.
      This did not limit US domestic spending or its ability to run deficits.
      What it did do was put a limit on the trade deficit and consequently, because US foreign war spending accounted for the entire balance of payments deficit, limited the US ability to conduct foreign wars.
      That is until the GS ended.

  19. Even though I think MMT provides some good insights, it has also some fallacies:
    – goods can buy goods: Of course goods can buy goods, depending on their liquidity. Gold is undifferentiated spending power.
    – money is sweat and not a mere accounting entry: This is the ugly feeling I get when reading the theoretical MMT approach. MMT is missing out on that completely. One’s deficit is the other’s surplus. That may be true, but what gives accounting entry value as such?

  20. Just finished the primer! A fantastic read. After 2 year of university economics, my love for the subject had diminished. But this primer has rekindled in me the curiosity that made me choose economics in the first place. At this early stage in my economics education, I can’t be certain that I won’t agree or disagree with much of what is contained within MMT many years from now; however, I can say that this wonderfully written and accessible work has reignited my passion for the subject. A big Thank You!

  21. Philip Pilkington

    Eh… Keynes was pro-capitalist. So, does that mean that because Wray referenced a non-socialist author he is thus a non-socialist. But then, he DID reference Marx and Veblen and they were socialist. So, that means — by your ‘logic’, of course — that Wray must be a non-socialist socialist. Oh dear… does not compute… arrrgh!

    http://www.youtube.com/watch?v=HY-03vYYAjA

    Ugh! I dunno when all these libertarian types took over the comments section here but the above is clear evidence that, while they consider themselves the height of human rationality, almost none of their statements have any logical consistency.

  22. Trollkiller

    Hey FDO15, “entrepreneur” is the french word for undertaker, dumbass.

  23. :) … <3