Resolved: Economic Democracy and Visionary Public Purpose

By Dan Kervick

According to their website, the Alternative Banking Working Group is “a group of concerned citizens, activists, and financial professionals with two goals: the first is to explore and, if possible, establish alternative banking systems that might replace the current system. The second goal is to broadly understand and educate people about the current financial system, as well as come up with short and long term plans to improve it.”

A member of the working group, Chris Wroth, recently posted a call for a proposal to be presented to the Occupy Wall Street General Assembly, with the aim of achieving a consensus on “an effective fiscal/monetary policy for addressing the problems of wealth inequality and economic injustice.”  Sensibly, Wroth called for a proposal that is “short, simple, and sweet.”  He suggested that “to reach consensus a proposal will have to be boiled down to a few clear sentences.  (Something that can be read and understood in less than a minute?).”

But Wroth made a further suggestion that I found perplexing:

“So, to offer a starting point: Can we discuss the possibility of making the proposal about the federal budget and federal fiscal/monetary policy – ignoring the private banking/investment sector? If we focus on the money that is held in common and owned by the people, then we are focusing on the money that is legally held in common, not held by individuals. By law, government (public) money is the only money that MUST be used for public purpose. (Private money can be voluntarily offered for public purpose, but not expropriated without an eminent domain ruling or some other court action.)”

The notion that private money can only be “expropriated by an eminent domain ruling or other court action” seems strange.  There are perfectly ordinary and straightforward methods for converting privately held funds into public funds and for converting public funds into private funds: these are the methods of taxing and spending.  Every time the US Congress or some other legislative body passes a tax law and collects taxes, the government expropriates privately held money and transfers it to the public treasury.   And every time the government spends money out of the public treasury by making a payment to someone in the private sector, it converts publicly held money into privately held money.  These are routine, core process of democratic government.

So while it might be true, narrowly speaking, that only public money must be used for public purpose, it is also true that it is the public that ultimately must decide where the line between public and private will fall.  Furthermore, the dollar system is fundamentally a public utility.  Every additional dollar in our system is in one way or another created under the public’s monetary authority.  Whether a dollar ends up being privately or publicly held is always a question of public policy and public choice.  It does not reflect any deep distinction between the kinds of dollars involved.

Similarly, the private banking system is a network of institutions that are charter members of the Federal Reserve System. The Federal Reserve System is a public institution created by Congress under the monetary authority granted to Congress by the US Constitution. Its governors are appointed by political leaders in Washington, and it is required to report to Congress on its actions.   It is currently the central institutional framework through which the United States government implements its monetary policies.  Given the social importance of that framework, it seems forced and unnatural to attempt to divorce resolutions about the future of the federal budget, fiscal policy and monetary policy from questions about the future of the private banking and investment sector.

So why leave the monetary system and the private banking system off the table?  We all want a healthy balance between private initiative and public action, and some protective boundaries between the private and public sphere.  But we shouldn’t presuppose that the exiting balance is healthy or that the existing boundaries should be granted undue deference.  I would be surprised to learn that the Occupy movement is so captive to conservative, laissez faire notions about the inviolable sanctity of private property and the independence of private banks that it can’t achieve any resolution about our country’s economic future unless these questions are shunted aside.

And so what would I propose if I were the one offering a resolution?  Mine would go something like this:


1.  The dollar is the American people’s national currency, and the dollar system exists to serve public purpose.  Monetary policy must be subject to effective democratic oversight and direction.   It is time to end central bank independence in its current form, and replace the outmoded and poorly accountable banker’s technocracy known as the Federal Reserve System with a more democratic and accountable system.

2.  The wealth and prosperity of the nation depend on the engaged commitment of its people, and on their willingness to act as democratic stewards of the nation’s real resources, and to invest those resources as necessary to create the country they will bequeath to posterity.  We call for an end to the fatalistic passivity of neoliberalism and laissez faire economics, and call for a second New Deal era of activist government and public engagement in building our economic future.  The second New Deal will organize public investment in projects whose vision and ambition is equal to the spirit of an industrious, ambitious and hopeful people.  These projects should include lifelong public education of all of our people; a determined effort to save our environment from the ravages of climate disorder; and the pursuit of bold and visionary transformations of our energy system and infrastructure.

3.  Democracy cannot survive in an environment of profound economic inequality.  We must take firm and deliberate steps to restore social justice and broad prosperity, to build social solidarity based on democratic equality, and to end the grotesque exploitation, inequality and economic hierarchies that have poisoned our democracy and destroyed security and prosperity for millions of Americans.   The American people did not ask for class war, but they we will fight back in the war that has been taken to them by a plutocracy that has captured and subverted American democracy and destroyed public morale and the social fabric.

4.  Social solidarity in a democratic society is based on a contract of mutual obligation among that society’s citizens.  The contract is based on a willingness of all citizens to dedicate their own talents and industry to others for the good of their society, and a corresponding commitment to provide each of its citizens with the means and opportunity to participate with their labor in the pursuit of the common good.   The United States must therefore commit itself to a national policy of true full employment, anchored in a guaranteed job for each American able and willing to work, and a guaranteed level of income commensurate with the dignity of equal citizenship.

56 Responses to Resolved: Economic Democracy and Visionary Public Purpose

  1. What would Mitt say?

  2. I suspect that in order for Mr Wurth and/or other members of the Alternative Banking Working Group to comprehend your proposal, they would have to undergo a steep learning curve. It is for that reason that efforts should be undertaken to attempt to condense MMT concepts/principles in such a manner that they could be presented in an easily understood manner using audio/visual techniques which might be displayed via YouTube and with the aid of animation/cartoon/comic strip techniques.
    All MMT enthusiasts should view the 2009 video of Dr B Lietaer’s talk in which he explains several impasses which have to be overcome by any argument to reform the banking system:
    Bernard A. Lietaer on Monetary blind spots and structural solutions 3v5

    Dr Lietaer, who has a background in engineering and economics played a role in developing some aspects of the euro back in the 1980s ; his bio:
    gives some indication of the diversity of background.

  3. Dan, are you changing the way MMT describes the monetary system?

    “Every time the US Congress or some other legislative body passes a tax law and collects taxes, the government expropriates privately held money and transfers it to the public treasury. And every time the government spends money out of the public treasury by making a payment to someone in the private sector, it converts publicly held money into privately held money. These are routine, core process of democratic government.”

    This is no MMT. What happened to spend first and tax second as operational reality?

    • Dan Kervick

      I don’t follow you Peter. How is that statement inconsistent with MMT? I thought I was just describing an obvious legal fact.

      • Dan Kervick

        FDO15, it doesn’t matter what proportion of business is transacted in cash. If we went to a cashless, purely electronic system, the fundamental relationship would be the same. Commercial bank deposit balances would still be IOUs for a form of money that is not issued by the bank itself, but by the government. Interbank payments could only occur because commercial banks possess assets in that form. And the government would only accept a check or other payment order on a commercial bank deposit account in payment of taxes because those accounts represent promises to make payments from reserve accounts to a treasury account.

        It also doesn’t matter whether there is a positive reserve requirement – such as 10% – only that these payments are settled and cleared through a reserve account held with the Fed. If there was no 10% reserve requirement, and a 0% requirement instead, that would only change the floor threshold at which the Fed charged a penalty rate for making a payment. Some banks might on occasion have insufficient funds to make their payments. When a payment was then order from that bank to another bank, the Fed would, just as it does now, debit the paying bank’s account and credit the account of the bank being paid. But if that meant the paying bank had a negative balance, the Fed would charge a penalty by debiting the account further. The 10% requirement only means that the penalty is currently charged when the balance goes below 10% of the banks deposits.

        Banks don’t just “find” reserves. They acquire them. They usually acquire them from other banks in the interbank market by borrowing them. But those other banks only have reserve balances in the aggregate because they have been supplied by the Fed. A commercial bank’s reserve account balance is, by its very legal and accounting nature, a credit relationship between that bank and the US government. There is no external source for balances in reserve accounts – no source external to the reserve system itself. These reserve balances can move around from bank to bank as the banks transact business among themselves. But the total volume of reserves can only grow if the Fed supplies additional reserves, and it can only shrink if the Fed drains reserves.

    • Dan Kervick

      If a monetary balance exists in a private sector account, that money is privately held. If a monetary balance exists in a treasury account, it is publicly held. Taxing and spending alter the the quantities of money that are publicly held vs. privately held.

      This all seems true to me, even if it is also true that a government can’t tax money balances in the private sector unless it has first spent that money into the private sector.

  4. “Is it not clear to all watching that MMT is a fraud run by people with a political agenda and nothing more?”

    I think it is clear to all watching that you are a troll, who has taken the minimum and least nuanced understanding of the institutional arguments presented over at MMR, and believes himself to be dissuading readers on NEP of the false prophecies of MMT. You are no hero, but a troll.

    Cullen himself has said that you should end this pointless antagonism. You add nothing to any discussions. As I’ve said before, you will never have an original thought in your entire life.

  5. “They settle between banks and banks find reserves if they don’t have them.”

    Wait, I thought that the banks themselves create reserves when a loan is created?

  6. Robert Rice


    Some individuals within the MMT camp seem to deny money can be recycled by currency issuers. These individuals reject the notion that previously created government money can be removed from the non-government sector via taxes and subsequently reused in spending. Rather, they believe taxed money simply vanishes. They further believe the government always uses freshly created money for its spending. The implication is money cannot be spent by the government more than once.

    I find the above as a description of current reality entirely mistaken. As an alternative, I believe we should all recognize the government is not only a currency issuer, but also a currency recycler. Upon creating money and then spending it into the non-government sector (NGS), the NGS utilizes the money in trade amongst itself. Eventually some portion of this money will be taxed by the government sector (GS) whereupon the money returns to the GS be reused to fund at least some of the spending the GS is interested in. This is the nature of the majority of fiscal operations at this time.

    Reusing previously created money is a policy choice, not a necessity. The government could delete money and create money every time it taxed and spent, but it doesn’t have to. It can also create and then recycle until adjustments to the total money in existence need to be made, at which point it can create or destroy.

    There is a good argument to be had over whether issuing and then recycling or issuing only is a better policy choice for a fiat monetary system–I can see pros and cons with either route–but we can’t seem to have that conversation since people are hung up on whether all government spending occurs from freshly created money or whether the government reuses some of what it previously created.


    • Tim Geithner thinks he’s using revenue to conduct spending, but he’s not. The federal government neither has nor doesn’t have any amount of money.

      Tim Geithner uses his authority as Secretary of the Treasury to pay bills, not revenue. Revenue is only a stat to show how much cash Uncle Sam took out of the economy.

  7. Dan Kervick

    I find the above as a description of current reality entirely mistaken. As an alternative, I believe we should all recognize the government is not only a currency issuer, but also a currency recycler.

    Robert, it seems to me that this is a distinction without a difference. Without further substantive specification, it’s not even really a policy choice. It’s just a choice between accounting conventions.

    Imagine the legislature of government A tells its treasurer: “This year, you are authorized to destroy $X in private sector account balances from such-and-such accounts, and you are also authorized to create $Y in account balances from so-and-so accounts.”

    Now imagine the legislature of government B tells its treasurer: “This year, you are authorized to transfer $X in private sector account balances from such-and-such accounts to government account Q, and you are also authorized to transfer $Y in account balances from government account Q into so-and-so private sector accounts.”

    These are just two different ways of doing the government’s bookkeeping and keeping track of its authorizations and public impact, but they correspond to exactly the same the same functional results. Nothing important in the real world depends on which one we pick.

    Here’s an analogy: In the history of philosophy, there are a number of metaphysical disputes about the nature of motion. On some accounts, what we call the motion of a massive point-particle from point A to point B consists in the annihilation of the particle at point A and the subsequent creation of a numerically distinct but qualitatively identical particle at point B. On other accounts, the numerically identical particle ceases to exist at point A and comes to exist at point B. On other accounts, there is nothing distinct from the spatial points and their qualitative properties at all. Point A starts off with the property of being “mass-qualified” and then ceases to have that property as point B comes to have that property. But as entertaining as these disputes are, the choice among them makes no observable difference to the empirical world and how it behaves.

    I feel like all of the discussion in this thread is somehow blasting off into the stratosphere of small differences between MMT, circuitism and similar schools of thought and is smothering a fairly common-sense point I was making in a language that was designed to be neutral with respect to grand monetary theory. My comment was directed to Chris Wroth’s suggestion that privately held money could only be “expropriated” for public purpose via an eminent domain ruling or other court action. I was just observing that this is surely false, and that governments tax and spend all the time without special rulings or eminent domain seizures. Whether you think the way to describe taxing and spending is as money extinction followed by money creation, as some MMT writers do, or as money recycling instead, the choice makes no significant difference to that point about taxing and spending.

    Nor are those issues connected in any important way with the MMT thesis that spending “precedes” taxes. A person who thinks that a government must spend some money into existence before it can tax, could still hold that when the government taxes on Monday and spends on Tuesday it is “recycling” money. Or they can hold it is destroying and creating money. These are logically distinct issues. Similarly, even someone who disagrees with MMT and thinks some taxes must “precede” any government spending could still hold that when the government taxes it destroys money and when its spends it creates money.

    All this grand theory stuff about the true nature of money and whether taxes precede spending or vice versa, in this context, seems like a pointless. I guess nobody was really interested in talking about what I wrote about – the future of US economic policy and society – and people want to get into all kinds of other theoretical weeds.

    Don’t turn MMT is not some kind of theology or metaphysics of money. It’s a framework for thinking about the real world economy and the effects of economic policy and behavior on real people.

  8. Reserves are assets not balanced by a corresponding obligation. If you take all the financial assets in the private sector, and subtract from them all the financial obligations in the private sector, what you have left are the financial reserves of that sector. By creating loans, banks create financial obligations and financial assets. The financial obligations they create are greater than the financial assets they create, and so, by lending, banks destroy financial reserves.

    Bankruptcy removes financial obligations, but the financial assets have already been created. It is only through default that private banks can create net new reserves. The central bank creates net new reserves, not by lending reserves when the banks can’t find them elsewhere, but by purchasing some of the obligations held by banks, swapping one asset for another, and discharging the obligation either by writing it down or by writing it off altogether. Lending can never create net new reserves unless there is default. Don’t mistake reserves, which are usually just identified with assets, with net reserves, which are assets minus obligations.

    • Assets minus obligations is equity.

      • No, equity is when the value of real resources denominated in currency at the borrower’s command is more than they owe. You have equity in a home when the value of that home if you sold it is more than the cost of paying off the mortgage. That doesn’t mean the house is for sale. Not all assets are created equally. A financial asset is created every time an obligation to pay is created through the common sense of double-entry accounting. A real asset is created through the application of work. Financial reserves are financial assets in excess of financial obligations. Real reserves are real resources not consumed.

  9. Interesting discussion. Please join the NYC Alternative Banking WG and offer any and all input. Consensus from a GA in a large participatory democracy group is hard to reach. If it is to be done at all it takes contributions from many sources. I appreciate Dan Kervick’s comments very much, especially his seeming acceptance that a proposal should be short, simple, and sweet. And I like very much his suggested proposal. (Job guarantee is my favorite thing.) Full disclosure: I don’t know jack about economics and have only read a little about MMT. I will say dumb things and get stuff wrong. That can also help. For example, I am not clever enough to understand how a bunch of loan contracts (credit money) can be called money. Seems like a bunch of loans to me. I have heard the argument that credit money is like fiat base money for all “intents and purposes”. WTF? Whatever my intent or purpose, I would rather have base money than credit money – which is really a charge against money I hope to acquire later. (With base money I could be like the federal reserve and borrow without paying back any of the principal – just interest. Beats the heck out of the credit money deal the bank gave me on my home mortgage. I have to pay back interest AND principal. I’m jealous.) I think it is not a little thing that the federal budget is the only money that is commons by law. It is a very BIG thing to try to take back private money from the money owner. The rich will sometimes contribute willingly. Otherwise, gotta go through the judge. Instead, “kill the head and the snake will die”. The head of this snake is simply the lie that the government “printing press” can’t print enough money to push up productive capacity without causing hyperinflation. Narrow the focus to an area where the law is on the people’s side (the common base fiat money), and the task is simpler and chance for success is greater. The private banking/investment sector will naturally improve as competition from public banking, credit unions, coops, esop’s, permaculture/transition/ local currency, etc. continues to offer better ways and draw away big bank customers. But, if you know of some way to easily get private money away from money owners in large enough amounts to actually accomplish something – write it up. Until them, my federal reserve can create an infinite amount of public base currency for the commons. If experience since 1971 has shown that inflation in a modern fiat system can be controlled through monetary/fiscal/tax policy – then it is a BIG LIE to assert that the federal government hasn’t enough money to fix anything. The truth is that there is more than enough money to fix everything – way more.

  10. Dan Kervick

    Thanks for stopping by Chris. More on this later today since I am off to work now, but here are some initial comments.

    I think it is not a little thing that the federal budget is the only money that is commons by law. It is a very BIG thing to try to take back private money from the money owner. The rich will sometimes contribute willingly. Otherwise, gotta go through the judge..

    This is the main thing I was trying to rebut Chris. You don’t need a court order to take back private money – just a regular law. You pass a a tax bill in the legislature and then collect the taxes. Judges and law enforcement might be involved in the case of tax resistors. But most people pay their taxes willingly.

    But, if you know of some way to easily get private money away from money owners in large enough amounts to actually accomplish something – write it up.

    It’s never easy to pass tax legislation. But it can be done. Nor is it even easy to pass spending legislation that doesn’t call for new revenues. Passing laws is hard work. But if you are calling for spending more than is spent now, and are worried about the inflationary effects of printing money, then it seems to me that what you are calling for is some offsetting taxes as well. I personally am not as much worried about inflation in the current economic environment, and don’t think hyperinflation is at all likely. So I would point here to the MMT model of the operational independence of spending and taxation. We can expand the deficit, and spend more than we do now without calling for new taxes.

    I certainly agree that there are also much better and more efficient and useful ways of spending the money that we currently spend. But I am skeptical that we can get to full employment just by spending what we currently spend differently. Also, those changes will be very challenging politically, even more challenging than new taxes in some cases. For example, it will be very hard politically to slash the amount we spend on the military in order to boost spending in other areas. That doesn’t mean we should aim for that goal, just that it is a mistake to think that it will be any easier than passing new taxes.

    Of course, there are other reasons to tax besides the purely economic reasons. Part of the core OWS message, as I understand it, is a critique of the role of money in politics. But I personally don’t think it will ever be possible to create an effective wall between wealth and political power. So if you interested in a more equal distribution of power, you should be considering what can be done to create a more equal distribution of wealth. Taxation probably plays at least some of the role there.

  11. Dan Kervick

    Chris, I frankly am having trouble following the things you are saying about credit money, base money, and fiat money. But maybe a few distinctions would be useful. It seems to me there is a lot of potential confusion that surrounds some of money and “bank credit”.

    1. You have a deposit account at your bank. For the bank, that is a liability account – it is a statement of what the bank owes you. Thus if the account balance is positive – say +$10,000 – then the bank owes you $10,000. If the balance is negative – say – %10,000 – then you owe the bank $10,000.

    2. Suppose you have $10,000 in cash, and go into a bank and open a deposit account. You surrender your $10,000 of cash to the bank, and in return they create a deposit account with a positive $10,000 balance. That balance is effectively an IOU from the bank. It is the bank’s statement, “We owe Chris Wroth $10,000″

    3. When the bank creates that balance in exchange for your cash, we would say they have “credited $10,000″ to your account. However, at this point, we would not say that the bank has “extended you credit” or become your “creditor”. In any debt relation, the creditor is the party who is owed and the debtor is the party who owes. So in this case, it is you who are the creditor and the bank that is the debtor. By being willing to accept a mere IOU in exchange for your $10,000 in cash, it is you who has extended credit to the bank.

    4. However, you can obtain a deposit account at a bank with a positive balance – or increase the balance in your existing account – in another way. You can go into the bank without any money, and offer to pay them a certain amount of money in the future in exchange for such an account. If they accept your offer, they will create an account for you with a certain positive balance. Usually this goes in a demand deposit account. In exchange, you give them an IOU. So for example, the bank might create a demand deposit account for you with a positive $10,000. You give them a promise to pay them – let’s say, $10,500 – by a certain date in the future. They have made you a loan. Your promise is held by the bank and is recorded in an asset account at the bank, which means that a positive balance in that account represent something that you owe the bank.

    5. The demand deposit balance of $10,000 represents a sum that the bank owes you, in this case on demand. Thus that balance alone represents a relationship in which the bank is the debtor and you are the creditor. The balance of $10,500 in the bank’s asset account, on the other hand, represents a relationship in which you are the debtor and the bank is the creditor. Because your debt to the bank is greater than the bank’s debt to you, we usually say in this situation that the bank has “extended you credit”. It is actually an exchange of credit for credit. The bank still owes you $10,000 and you owe the bank $10,500.

    6. It is always possible that when the loan is transacted, the bank does not give you a demand deposit account, but gives you $10,000 in cash on the spot. In that case, it would be even more obvious that the bank has extended you credit. You have been given $10,000 outright by the bank, and the no longer bank owes you anything. But you owe the bank $10,500. All the debt is on your side and all the credit is on the bank’s side.

    7. Why do we want these bank deposit balances? Well, we might ultimately want to obtain the quantity of physical cash they represent. But more likely we will only demand some small portion of that cash that the bank owes, and instead simply exchange the balances themselves with other people. If you and I have a deposit account at the same bank, and I want to buy a car from you at a mutually agreed price of $5000, then you surrender to me the car, and in exchange I can direct my bank to debit $5000 from my account and credit $5000 to your account. The bank now owes me $5000 less than it did before, but it owes you $5000 more than it did before.

    8. Since these exchange transactions using deposit account balances are just as convenient in most cases as transactions using physical cash, and are in many cases even more convenient, it has been customary to regard the balances themselves as money. There are different ways in which economists and government accountants measure the quantity of money in existence. But the broadest of them count the deposit balances themselves as money.

    9. When I buy the car from you, it is entirely possible that I do not know whether you and I have the same bank. And in practice, I don’t really explicitly direct my bank to credit your account. What I indirectly direct them to do is make sure you get paid somehow by offering you some kind of instrument you are willing to accept as a means of securing that payment, and that empowers you to make a claim on my bank. If you and I have different banks, the payment process will be more complicated. In the end, my bank will debit $5000 from my account, and you your bank will credit $5000 to your account.

    10. But of course, your bank is not going to be willing to add $5000 to your account for free. It is going to have to be paid by my bank. Both of our banks have deposit accounts of their own at a Federal reserve branch. A payment will be made from my bank’s account to your bank’s account: the Fed debits $5000 from my bank’s account and credits $5000 to your bank’s account.

    11. Just as we are willing to describe the deposit balances in my commercial bank account as a form of money, it is also customary to regard my commercial bank’s deposit balances in its account at the Fed branch as a form of money. Those balances are part of the bank’s total reserves – the other part is any physical cash those banks have in their vaults . When we talk about “base money”, we are talking about money in the narrow sense that includes only (i) commercial bank and US treasury reserve balances in their accounts at the Fed and (ii) physical cash in circulation.

    12. Transactions among non-government economic agents can alter the distribution of base money in existence. But the total quantity of base money can only increase as a result of actions of the government. Only the government can print physical cash or augment the total quantity of reserve account balances.

    13. Notice that the system of debt obligations and payment systems exists in a hierarchy. I am able to pay you for the car by drawing on my bank’s total debt to me – my deposit balance – in a way that results in my bank having less debt to me and your bank having a greater debt to you. My bank is able to pay your bank in the same way, by drawing on its account at the Fed, which is the Fed’s debt to my bank.

    14. Notice that the question of who creates a particular form of money is not the same as the question of who holds that form of money, or whose asset it is . My bank creates a deposit balance for me. But that money is mine. It is my asset. If my bank were to debit that account in a way that we hadn’t agreed on, it would have robbed me. Similarly, although the Fed creates reserve account balances, those balances represent assets of the banks whose accounts they reside it. The Fed created them, but they belong to the banks who have the accounts.

    15. The government is the agent of the public, but the issue of what money is held by the public is not the same as the question of what money was created by the public. The public has treasuries: a national one, 50 state ones, and thousands of local ones. These treasuries might hold some physical cash, but also numerous other assets, including accounts at a variety of banks, including the Fed. The money the public holds consists in the sum of those quantities. But private firms hold money that was created by the public, but does not currently belong to the public.

    16. The public can always, if it chooses, lay hold of some of that privately held money by taxing it back.

    17. But the US public, uniquely, always has the option of creating base money and giving it to itself. It can thus create money and credit it to the account of its own treasury. It can thus spend a sum of money beyond what it currently has in its own national treasury account without first taxing existing money back from people who currently hold it.

  12. Hi Dan ~ When I first suggested that the Alternative Banking WG consider trying to build a position statement that could reach consensus in the larger #Occupy NYC GA, I hoped for this kind of discussion. Kinda wish it was happening at their site though. I am an uneducated novice when it comes to economics, and can only speak from that perspective. Which puts me right in the middle of the Occupy movement, angry about the status quo and looking for solutions. So, from that perspective, I will try to give feedback to your 17 points. 1) Thank you. Although I confess I don’t think of it as a loan. I think of it as my money that I let them hold because I don’t have a safe. 2-7) I get it, and it is all true. Only thing is, to a novice like myself it all becomes a complicated morass of possible back and forth borrowing and lending transactions. Every transaction creates a lawful contract and ownership claims on the “money”. I know we need to regulate and track all the credit/debt money to be able to manage the national economy – but do we need to call it real money when it is so different from fiat base money? It confuses people like me, and it really confuses the Austrians. 8) How can I change a custom? OK, I will group credit/debt money with base money and comply with the textbooks. But I better get an A for that because it doesn’t feel right. 9-16) All true, I think. 17) By far my favorite. Dan, you describe very well how complicated it becomes once the money created by the fed goes vertically to private sector banks instead of horizontally to state treasuries. The easiest intervention point to get money for public purpose is before that happens. Point #17 sums it up perfectly. The people can increase the size of the federal budget and grow the economy without raising taxes. I think we should. To draft a successful position paper, the WG will have to keep a focus narrow enough to be accepted by all. My question is: Is there a catalyst that is feasible now and potentially capable of creating a paradigm shift? Feasible now means something that could actually be done by the#OWS movement, and be a seed that grows into a paradigm shift. How about a carefully worded Economic Policy Resolution that educates (whereas, whereas, etc.) and urges immediate action (be it resolved, be it resolved, etc.). A Resolution is easier to get done than legislation, and could be a catalyst for legislation? Another way to say it, “Could a brief resolution be written that would simultaneously educate the reader about the ease and safety of a large federal budget increase without any tax revenue increase, and also be the seed of a larger societal realization that inflation fears are greatly exaggerated. Just brainstorming now. But if such a resolution did emerge and was accepted through GA consensus, then it could be demanded of political “leaders”, and at the very least be a good educational tool. Peace.

  13. You could shorten number 3 to “Concentrated wealth destroys democracies”. It’s the same thing Adam Smith warned us about a long time ago.

  14. I was going to post a response to FDO15′s comments but then realised that there was little to be gained from engaging with a (insert appropriate derogatory description here).

  15. WHERAS the federal government belongs to all the people, and WHERAS the federal government creates all of the dollar currency used by all the people, and WHERAS all of the dollar currency so created belongs to the public commons until it is deposited in a commercial bank, and WHERAS the federal government can provide funding to employ the unemployed in productive work, and WHERAS all the people benefit from being gainfully employed in a highly productive economy, and WHERAS the federal government can control currency inflation by raising federal taxes if needed; BE IT THEREFORE RESOLVED, that the federal government will create for deposit in state treasuries the amount of public commons currency dollars needed to fully support state job programs that provide productive employment at a living wage to all citizens willing and able to work, and BE IT FURTHER RESOLVED that said federal job program will be utilized whenever the national unemployment rate is over 5%, and BE IT FURTHER RESOLVED that whenever the national consumer price index (CPI) rises above 5%, a 1% surtax on adjusted gross income will be paid by all citizens until the CPI returns to 5% or less.

  16. what does “wheras” mean?

  17. It means that Chris Wroth is not good at spelling.

  18. Robert, it seems to me that this is a distinction without a difference. Without further substantive specification, it’s not even really a policy choice. It’s just a choice between accounting conventions.

    These are just two different ways of doing the government’s bookkeeping and keeping track of its authorizations and public impact, but they correspond to exactly the same the same functional results. Nothing important in the real world depends on which one we pick.

    Dan, sorry for the tardy reply, but I wanted to follow up. As a description of reality, deleting money out of existence is not the samething as transferring it, nor is creating new money the same as reusing existing money. Description was the issue. Hence, the distinction was warranted. Currency issuers are also currency recyclers. Issuers could stop recycling money if they wanted, but it isn’t how the goose is cooked at this time.

    As an aside, I wanted to mention; I appreciate your articles as well as your comments here, even if we end up talking about tangential issues loosely related to the article’s content. I hope you do not infer people are disinterested in what you’ve written about. Controversial comments tend to draw out dissenting views however, which can at times overshadow an article’s intended subject. The articles you’re writing are nevertheless interesting in their own right.

  19. I kinda wish I picked up on this discussion months ago when it actually occurred. The Fed does not “create” these new reserves in the sense of an addition of net financial assets in the private sector. Only treasury spending can do this. The fed loans reserves through the discount window, or issues them in return for other financial assets (purchasing private banks holdings of bonds).

  20. Dan Kervick

    A government that issues the currency can’t tax unless it has issued the money it will tax.

    But what in the world does this have to do with the stuff I wrote about in this post? I don’t understand what tree you and Perter are barking up.

  21. Dan Kervick

    The money that banks “create” consists of IOUs for the currency issued by the government. As I am sure you know, if you have a demand deposit balance at a commercial bank, you can go into that bank at any time and demand that they give you a sum of physical currency from their vault equal. By law they are required to give it to you. Every single bill and coin of that vault cash was directly issued by the government. Commercial banks don’t create it. What they create are IOUs that are redeemable by law for something that they don’t create and don’t control.

    Similarly, if you write a check on that demand deposit balance to pay your taxes, that payment will be settled and cleared by the Fed. In order for that payment to occur, the Fed will debit your bank’s account by the necessary amount, and credit that amount to a government account. So you are only able to pay your taxes by preventing a commercial bank payment order on a commercial bank deposit because those deposits represent IOUs for reserves. Every dollar of reserves that is in existence is an asset of a bank that and a corresponding liability of the Fed, and has come into existence because the Fed generated it. Commercial banks can also acquire reserves via transfers from other banks, but that just means that the reserves must have gotten in that other bank’s accounts somehow via earlier central bank action.

    There has been some awfully loose talk going around lately about commercial banks “creating” money, but I think a lot of confusion remains about what that process entails. Banks can create IOU’s in response to customer demand for them, but they don’t create the stuff that those IOU’s are IOUs for.

    The Fed necessarily follows an accommodative policy in supplying additional bank reserves to the extent that it must supply them if it is determined to maintain its interest rate target. But that doesn’t change the fact that the central bank must supply those reserves in order for the payment system to function, and for all those IOUs to preserve their integrity.

  22. “Further, the central bank does not supply reserves.”

    Who supplies the reserves, then?

  23. “Loans create deposits and reserves as a matter of accounting.”

    No, loans create deposits. Reserves are not created as a matter of accounting.

    “The banks create loans independent of government spending or reserve positions.”

    This is literally one of the first things I learned when reading up on MMT. The claim that MMT does not understand this is ludicrous. And it’s entirely irrelevant to the discussion at hand.

    “This creation of new deposits creates reserves.”

    Banks create loans, banks create deposits. They do not “create” reserves. Reserves are supplied by the central bank, at the central bank’s discretion. Currently the system is designed such that the central bank always accommodates the bank’s desire for reserves. This need not be the case. Banks do not create reserves.

  24. You misunderstand Warren. Those reserves are supplied by the central bank. When a loan is created, there are two entries made: loan, deposit. They balance. *Later*, the bank seeks reserves to meet reserve requirements. It can find these reserves in many places. One of these places is the central bank, which provides the banks the necessary reserves it cannot find elsewhere. But reserves are not created by a “matter of accounting.” Reserves are allowed to be created at the discretion of the central bank. Currently the position of the central bank is that the reserves are created automatically.

    Again, where do the reserves come from? Who supplies the reserves? The central bank. They are not created endogenously within the banking system.

    Why do you say this:

    “The private banking system forces the central bank to ensure there are enough reserves in circulation to meet the standards set by the central bank. Saying that the central bank is issuing reserves is like saying that a man with a gun to his head willingly does what wants.”


    So it has nothing to do with a “matter of accounting.” Nothing in that statement has to do with balancing the books internally.

  25. Do you believe that the three accounting entries we are discussing: reserves, loans, and deposits, balance themselves internally? Do you know what balances the reserves the banks need? Everything must balance, FD015.

  26. Would you care to answer any of the other points I brought up? Do you understand accounting? Loans balance deposits; what balances reserves?

    And believe me, I leave no tracks. My shoes are squeaky clean.

  27. Again, what entity is capable of supplying reserves? Where do they come from?

  28. But wait. If MMT stops “contradicting” each other, doesn’t that make them one big group-think project?


  29. As I said earlier, you are misunderstanding Warren, and refusing to address any questions people raise to you.

    Again, FD015, what entity provides the reserves? Where do banks get the reserves from? What balances reserves?

  30. Dan Kervick

    Warren’s statement clearly says that reserve balances are supplied by the Fed and are credits from the central bank. No matter how rapidly bank loans and deposit balances are increasing, aggregate reserve balances will not change one cent unless the central bank conducts some monetary operations. These monetary operations are typically automatic in the sense that the central bank always performs them in a floating fx regime to uphold its own self-selected interest rate target and to ensure the smooth functioning of the payments system. But they still have to be performed. The reserves are not “created” by the commercial bank. They are created by the central bank in response to commercial bank activity.

  31. Dan Kervick


    That’s obviously not what Warren meant. Nobody who understands the way our monetary and banking system functions would make such a stupid comment, and Warren is an expert with long, real-world experience in that system. Inhe very quote you cited Warren says that the additional reserves the banking system acquires are credits from the Fed. That logically entails that the commercial banks do not create their own reserves.

    You really need to read whole articles instead of writing down disconnected and out-of-context quotes on index cards, and read the quotes you have assembled more carefully.

  32. Dan Kervick


    I have used the language of “accommodation” over and over, and have said many times that the commercial banks drive the process. If you have read the many, many comments I have written on the monetarist blogs, for example, you know that I have harped incessantly on their misguided “hot potato” notion that the Fed can itself somehow boost lending at the zero bound by supplying the banking system with additional reserves. The demand for loans drives lending, and the Fed’s role is limited to the price it sets for additional reserves.

    But saying that the Fed generally accommodates commercial bank lending by supplying additional reserves as demanded by the banking system is not the same thing as saying that commercial banks “create” their own reserves. That would only be true in a banking system in which there was no central bank at all.

    I really don’t understand where you acquired the giant stick up your ass about MMT. It’s kind of weird. It all seems to come down to the fact that MMTers want the government to hire people that the private sector wont.

  33. “You don’t know your a$$ from your elbow here and you’re only multiplying the problems MMT already has with its “operational” understanding.”

    “You’re poisoning people’s minds with misinformation.”

    The whole problem is that you’re pretending to be an expert in something you know very little about. Your understanding of the actual operations is weak. But we’re supposed to consider your solutions knowing that you’re a book publisher highlighting as a monetary expert in some horrible dream world?”

    Adults, eh?

    Commercial banking drone. Makes sense that MMT upsets you so.

  34. “The Fed just accommodates what we do and what we want. When we make loans the Fed has no choice in making sure the reserves exist.”

    Certainly they do. They’re just not stupid enough to not provide the reserves.

    Again FD015, loans balance deposits. What balances reserves?

  35. “I hope your shoes are comfortable because you’re running in circles pretty fast now.”

    Please explain this analogy. Also don’t bite my style.

  36. Dan Kervick

    I’m not a book publisher.

    And I think you meant “moonlighting”.

  37. “The whole problem is that you’re pretending to be an expert in something you know very little about. Your understanding of the actual operations is weak.”

    It seems the only “[mis]understanding” that you’re attributing to Dan is whether or not banks can create reserves. Banks cannot create reserves, only the Fed can. This is a simple fact.

    What other misunderstandings has Dan exhibited, oh commercial banking expert?

  38. Sheesh! :)

    This disagreement over who creates Reserves is just semantics.

    1) Both sides agree that Reserves come from the Fed
    2) Both sides agree that the non-government sector drives the demand


    When Dan says “create” he is referring to the entity ‘from which they originate’ (the Fed)
    When FDO says “create” he is referring to the entity ‘that drives the demand for Reserves (the non-government)

    The funny thing is, on these fundamental points, neither side disagrees with the other.

    A not perfect analogy:

    I Drop A Tennis Ball

    1) The ball fell because my hand opened up
    2) The ball fell because I decided to open my hand

    Sure, my decision “drives” the action, but the ball fell “because” my hand opened

    Semantics, no?

  39. Dan,

    Am I missing something?

  40. Dan Kervick

    JK, I earlier said, “But the total volume of reserves can only grow if the Fed supplies additional reserves.”

    And FDO15 explicitly said that was wrong. So I don’t think it is true that both sides in our little debate believe that reserves originate or come from the Fed. FDO15 is apparently not just saying that commercial bank lending drives the demand for reserves, but is asserting something stronger about where the reserves come from, and believes the total volume of reserves can grow even if the Fed does not supply them.

  41. I see what you’re saying. Actually I had that impression also when he kept saying that loans create deposits which create Reserves.

    Let me try to clarify with mechanism. Let’s assume all else is equal and unchanged in the entire economy. If a random commercial bank issues a loan to be to buy a house, and therefore creates a deposit… before ANY other action has occured between banks or between my bank and the Fed…

    Has the amount of Reserves in the banking system changed?

  42. Dan Kervick


  43. Alright Dan, thanks! Would you mind playing along with me here?

    Ok. So in this hypothetical, all else held constant so far, my bank has created my deposit by issuing me a loan.

    I think the next question is…

    Again all else held constant, with the creation of this deposit, is the banking system now in exess or in short of Reserves? (my understanding says it’s short)

    Would I be correct to say that by issuing this loan (thereby creating my deposit), my bank now needs to obtain “X” amount of Reserves to cover the by law required percentage of the deposit it just created?

    And again all else held constant (i.e. the need to buy or sell Reserves has not changed for any other financial institution in the economy.. it’s in “equilibrium”), does my bank’s need for Reserves, in order to be in accordance with the law, “drive” interest rates upward without Fed action? (That is, my bank will attempt to borrow Reserves from other banks and this puts upward pressure on the FFR?)

    And so in order for the Fed to maintain it’s target FFR rate, it would then preform open market operations, e.g. buying Treasury securities from my bank, in order to shift the necessary amount (of money?) from my bank’s T-security account at the Fed, to it’s Reserve account at the Fed?

  44. Dan Kervick

    Again all else held constant, with the creation of this deposit, is the banking system now in exess or in short of Reserves? (my understanding says it’s short)

    We need to distinguish two questions, JK:

    1. Is the bank that made the loan short of reserves?

    2. Is the banking system short of reserves?

    We can’t answer either of them a priori. If the bank previously had no excess reserves, then it will be temporarily short of reserves and might need to obtain some. It can bid for them in the FF market. Unless the loan was of extraordinarily large size then it doesn’t seem to me that in itself would exert much pressure on the FF rate. But of the other question then is whether the banking system as a whole is short of reserves. Right now the banking system is carrying a massive quantity of excess reserves, so the bank would presumably be able to acquire any needed reserves easily in the FF market and I wouldn’t think the Fed would have to adjust its open market operations to inject additional reserves to accommodate the bank’s need. If large numbers of banks started making loans and reducing the excess of aggregate reserves, then the Fed would have to do something.

    Just my understanding.

  45. Thanks for taking the time to respond.

    So all else equal and held constant (no bank, including my own, is either short of or in excess of Reserves)….Is it accurate to say, if my Bank makes a sufficently large loan to me, let’s say several hundred million…

    Before anything else happens, are the follow statements true…

    1) In order to be in accordance with U.S. law, my bank will need to obtain Reserves.
    2) The only means by which “new” Reserves can enter the banking system is through open market operations?

    I think all of this gets back to the semantics. Who “creates” Reserves? If we’re talking about “from where they originate” then it’s the Fed. If we’re talking about “the actors that drive the demand” then it’s the non-government.

    FDO15, if you’re still reading… is there anything you disagree with here? Can we all agree on these operatonal details?

  46. Dan Kervick


    The situation you are describing – no bank has excess reserves or deficient reserves; the banking sector as a whole has no excess reserves or deficient reserves – seems so unlikely and unrealistic that it doesn’t seem to add clarity to focus on it.

    I don’t think this is a meaningless semantic question. We are talking about different conceptions of the real causal mechanisms here, not just meaningless semantic labels. No matter how you parse it, “create” does not mean the same thing as “does something that initiates a causal sequence that eventually causes something else to happen.” In many cases, the additional loan will not cause any additional reserves to come into the system at all. And even in your extreme example where the reserve balances are all on some kind of perfect balance with deposits, the loan will only initiate a process that results in the Fed adding more reserves.

    If I am a butcher who sells five pounds of beef, and I previously had a quantity of beef in stock that was just right , then my sale will induce be to obtain more beef from the beef wholesale market. But there is no meaningful sense in which I create beef stocks.

  47. The reason I’m trying to create a fictional/hypothetical equilibrium is to more clearly demonstrate the transmission mechanisms. I understand what you’re saying, but clearly the way you are saying it is not convincing enough. So I’ve been trying to hold a few variables constant to more clearly depict the causal realtionships.

    Once people can agree on the causal relationships, then we can discuss what we mean by “create” in a more informed manner.

    Just trying to help :)

  48. Dan Kervick

    Thanks for trying to help JK. But in the case of FDO15 its pointless. He’s a well-known, extremely hostile and obstreperous troll of MMT sites whose aim is only to sow conflict and hate. There exists no verbal formulation which he will suddenly find convincing. If it’s on an MMT site, he will find a reason to oppose it, and will mix his opposition in with a stream of ad hominem nastiness just for good measure. I only engage him so that other people who might be reading along are not mislead by the things he says. Beyond that, he may continue to stew in his own bitterness.