Why MMT is Right and the Dreamers are Wrong: Kaldor Versus the Kaldorians

By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil

Dreaming, I was only dreaming
I wake and I find you asleep

– Billie Holiday “Gloomy Sunday

The criticisms of Modern Monetary Theory (MMT) on the internet and in academia can be placed into three categories: the cranks; the nit-pickers; and the Kaldorians. The cranks make up by far the largest group. These are the people that simply have not bothered to understand the theory. These, which include some prominent academics, say things like: “The MMTers say that deficits don’t matter; they forgot about hyperinflation!” These people can usually be safely ignored as they are not arguing in good faith.

The nit-pickers are a smaller group, but perhaps more vocal. They do understand the theory to a large extent but they try to pick holes on minor points. “Taxes,” they might say, “aren’t the only thing driving money; money is also ingrained in the legal system because it can be used to settle legal contracts and this gives it value.” In this the nit-pickers don’t appreciate the difference between a general theory and an additional consideration that might be included as an afterthought. Apart from this, the nit-pickers often misrepresent their “opponents” (mentors?) by cribbing throwaway comments from blogs and insisting that MMT explain itself (over and over again) when MMT has proponents have already developed a considerable literature that does just that.

The Kaldorians are an altogether different breed. Where the others simply constitute noise in the blogosphere crowding out debate, the Kaldorians’ argument is rigorous, academic and extremely relevant to the potential success of certain policy approaches advocated not just by MMTers, but also more mainstream New Keynesians like Paul Krugman. This is not just an academic debate. It has very real implications for what policies we might suggest to get us out of the present crisis.

However, there are two serious problems with the Kaldorian approach – both of which are inextricably linked to one another. First of all, the Kaldorians are utopians in their politics and have a fairly airy grasp of what we can and cannot potentially achieve given the international political scene today. Secondly, they seem at odds with their own mentor, the British economist Nicholas Kaldor, on their understanding of current economic problems.

What follows may at times feel a bit “he said, she said” and it’s all a bit long, but I would ask the reader to follow through. The implications of the following argument and the understanding of our current problems they contain are extremely important to where we are today.

Kaldor Versus the Kaldorians

Nicholas Kaldor was one of the most famous economists of the 20th century. He was considered by many to be the direct heir to John Maynard Keynes as he was not only an extremely accomplished theoretical economist but also played a key role in the construction of British economic policy after World War II and was an all-round politically savvy individual – he ended his life, like Keynes, with a Lordship.

We mention this because if you read his writings you note that there were really two Kaldors. One was the Kaldor of the halls of Cambridge University. This was the Kaldor of abstract mathematical models of how capitalist economies function (some of the finest ever produced, mind you). The other Kaldor was the Kaldor that actually analysed economic problems and proposed solutions – while keeping firmly in mind the political situation of whatever time he was giving advice.

The Kaldorians, following the British economist Anthony Thirlwall, have picked up the first Kaldor and left the second to rot on the shelf. They have attempted to turn Kaldor into an economic model that immediately and fully explains the real world economy. The difference here between them and Kaldor is key to understand: Kaldor would have never applied a model directly to understand the world, for him it could only guide you in investigating problems from all angles – economic, social, political and so on. But for the Kaldorians this does not appear to be the case.

Their gripe with MMT is that it ignores that government spending policies will cause trade deficits to widen and this will… well… something bad will happen. In this they reference what they call “Thirlwall’s Law”. The Law itself seems to be set up only with very strict conditions in mind, but some of the Kaldorians apply it to everything they see in every economy at every time. This is the problem with confusing an economic model for a perfect description of the world: in the same manner as a recent religious convert, you start to see the Holy One everywhere you turn.

The annoying thing is that the problems that the Kaldorians raise are actually very important – in specific contexts. As most MMTers acknowledge, for example, it is probably not advisable for developing countries to run high trade deficits for too long as this may result in currency crises and all sorts of other economic nasties. So, the Kaldorian argument, in some ways, has a lot of merit – it led me, for example, to discuss policies that developing countries might use to avoid such crises while maintaining full employment.

However, the problems the Kaldorians raise probably do not apply to many advanced Western countries. Countries like the US have been running trade deficits for literally decades and this has not led to crisis. When the Kaldorians are asked what the crisis they think will happen is they either start muttering rather vaguely or they say that the Chinese and others are going to crash the value of the US dollar. The latter is, of course, the same argument put forward by many Austrian doomsayers who use it to flog gold to punters. It is also extremely unlikely – such a move would be suicidal for the Chinese in just about every way imaginable. The US dollar may gradually depreciate over the coming years – and then again, it may not – but the likelihood of it crashing is extremely miniscule; unless China and the US went to war, but then the exchange rate would be the least of our problems.

The reason for this is that the world today – indeed, the world since World War II – is completely dependent on the dollar to function. The Kaldorians simply do not recognise this political reality. This is because, as we said above, unlike Kaldor, they think purely in terms of models and cannot properly understand politics and aspects of political economy. So, let us turn now to how Kaldor himself thought that the system functioned.

The US Dollar as the Fuel of Worldwide Growth

In the last of a series of phenomenal lectures that Kaldor gave in Italy in 1984 entitled “Causes of Growth and Stagnation in the World Economy,” he posed himself a complicated and crucial question: why, between 1945 and 1973, had the world economy grown at rates never seen before in human history but then after this it had fallen into stagnation? And Kaldor gives an answer that, I think, would resonate with the advocates of MMT today – and, it should be added, grate on the ears of the Kaldorian modelling crowd.

Kaldor gives many reasons why the world economy boomed for thirty years and then went into a slump, but only one was given central importance. This was the inflation of the 1970s. Kaldor notes that the inflation started in the late 1960s when the US ramped up deficit spending to fund Vietnam – an already unpopular war that the government didn’t want to pay for out of taxes. But the inflation really began to have serious effects on growth when OPEC raised its price in 1973 thus setting in motion an enormous inflationary surge which then led to a wage-price spiral.

So far, so familiar – right? Well, Kaldor gave another reason too and while it interests us for the purposes of our argument he thought it minor. This peripheral argument was that in the post-war era the US government had been flooding the world with dollars – mainly through Foreign Direct Investment (which was mostly probably Cold War spending either in the form of aid, development funds or military spending). Since these economies had their currencies pegged to the dollar they were then able to run trade deficits and government deficits with impunity, thus boosting growth. Here’s how Kaldor explains it and who, for the sake of his disciples, we shall quote in full:

I would attribute primary importance to the role of the United States dollar which, after the adoption of the Bretton Woods arrangement concerning currencies, became de facto the international reserve currency, so that America had, in fact, an unlimited borrowing power – she was able to borrow automatically by incurring deficits on “basic transactions” (on current and capital accounts taken together) and thereby provide other countries with additional reserves, thus enabling them to expand their economic activities without running into a balance of payments constraint.

Moreover, the balance of payments of the United States, after the large-scale currency realignments of 1949, turned into a deficit on “basic transactions” (i.e. on current and capital account) , and remained in deficit in almost every single year until 1971. At first this was due to net foreign investment (public and private) exceeding her current account surplus. Later, in the 1960s, it was supplemented by a growing deficit on current account. Deficits of both kinds implied an addition to the demand for goods and services in the world outside. They implied an increase in world investment which had much the same international “multiplier” effects as if the annual production of gold had increased by an equivalent amount. For the rest of the world, it meant increasing reserves (in the form of ever rising dollar balances) earned through rising exports or externally financed domestic investment. (P. 77-78)

According to Kaldor, then, the capitalist world economy was ticking over in the post-war years because the US was flooding the world with dollars. These dollars were then entering countries and circulating within the economy – while also allowing these countries to buy US produced goods and services. The US dollar was literally the lifeblood of the world economy in this era and it was this political dimension that allowed countries, Kaldor writes, “to expand their economic activities without running into a balance of payments constraint”.

So, what happened? Well, certain countries – especially France, who was a rather more assertive power in that era than she is today – got sick of the arrangement and crashed the system by calling in their debts in gold thus forcing the US off the Bretton Woods system. We’ll quote Kaldor again:

At the beginning, the world was hungry for dollars and was delighted to accumulate dollar reserves, which yielded interest, in preference to gold, which did not. But as countries had more and more dollars, and as the U.S. official liabilities began to exceed several times the total value of gold in their possession (at the official price, which until March 1968 corresponded also to the market price), the willingness to accept dollars was progressively impaired – especially when the U.S. deficit assumed larger dimensions during the Vietnam War. France demanded to be paid in gold; Germany revalued her currency repeatedly in a vain attempt to stem the speculative flight from the dollar into the Deutschmark, and in the end the whole Bretton Woods system collapsed in August 1971 with America’s formal abandonment of convertibility coupled with a demand for a large-scale readjustment of currency parities. (P. 78)

Well, this is all sounding a bit MMT isn’t it? The US was running deficits with the rest of the world – just as they are now – and this was supporting world economic growth. Now, the Kaldorian must surely assume that Kaldor himself should turn around and jump us with the consequences of these irresponsible actions. Surely when the Bretton Woods system collapsed there was some direct, dire consequence for the US and everyone else. Well… not really. Instead Kaldor shrugs it off and points to the real culprit for the stagnation: the oil shocks and the resulting inflation. He does mention that exchange-rates fluctuated and this was a problem but he indicates that it was far from fundamental:

Since that time, large-scale and unpredictable variations in exchange rates – between the dollar and the EEC currencies, and for some years also between the dollar and the yen – continued, which must have been one of the factors preventing economic recovery, though it is impossible to assess its precise importance. (P. 78)

What an anti-climax, eh? The good Kaldorian would expect some sort of explosion. But the Bretton Woods system of world growth ended with a whimper, not a bang. Kaldor himself says that the fluctuations in the exchange rate that followed were “impossible to assess” in terms of their importance for the stagnation of the 1970s. And indeed, if you read the rest of the lecture you’ll see clearly that they play a very small part, if any, in his story which is mainly focused on the oil shocks, the inflation and the idiotic monetarist policy response. This is not the Kaldor of the models, to be sure! This is Kaldor the political economist – and what a better analyst he is to the “dollar crash” scaremongers!

What Happened Next?

As we have said, Kaldor’s lecture was given in 1984. He died two years later. So, what happened next? Well, basically when the inflation stabilised and the oil prices came down the US started pumping more dollars into the world economy – the whole system reset. Growth resumed for a long time as the US ran persistent trade deficits with the rest of the world. The growth was never quite the same as it was in the post-war era – mainly because idiots were managing the world economy – but growth did resume; and it resumed precisely because the flow of dollars began once more.

Financial inflows into Wall Street propped the dollar up where trade surpluses combined with gold backing did in the post-war era. As Yanis Varoufakis and Michael Hudson have pointed out numerous times before: during and after the Reagan era, dollars flowed into the world economy, buttressing economic growth, while foreign money circulated back to Wall Street to buy up financial assets. This is how the system maintained a fairly steady rate of growth through dollar issuance. But when the 2008 crisis hit, the US economy slowed and fewer dollars flowed into the world – this was mainly because US consumers were broke and couldn’t buy foreign goods. The unfortunate fact of the matter is that many of these dollars, especially during the Clinton budget surplus years, were being issued by private banks and this turned into a giant Ponzi mess that was sure to topple when a strong wind hit.

So, this is where we stand today. The world economy is grinding along slower than it should be for want of dollars. Related to this the US consumer is spending less than he wants to also for want of dollars. And smart economists have their eyes peeled for signs that another debt bubble might begin to inflate thus risking another financial crisis because, you guessed it, US consumers want those damn dollars. What an absolutely ridiculous situation! The US government issues dollars – and everyone and their mother wants dollars. The US government can thus start issuing dollars to people who want employment and higher consumption in return for labour. Since the US government has no default risk there is no problem. The real risk comes when the private sector starts borrowing these dollars, not when the government issues them to hire people and bring down the unemployment rate.

“But, but, but,” says the dollar crash fantasist, “What if the world spits these dollars back at us and the currency collapse?” Well, I’ve got news for you: the world isn’t going to suddenly reject these dollars. The world craves these dollars. They have been the lifeblood of the world economy since the end of World War II and now that they have dried up the world economy looks pale and anaemic. But this need not be the case if the US government got its act together and started enacting some good macroeconomic policy.

Is This Wrong?

One question here, however, is whether this is a good state of affairs or not. Should the US government have this level of control over the world economy? Do US consumers have the right to consume more than they produce? After all, the Bretton Woods system was imposed by force. After World War II Keynes and the British wanted to put an international currency, the bancor, in place to ensure that trade imbalances were rebalanced through reinvestment in the poorer countries but the Americans decided that they wanted control over the whole system. Isn’t this a tad unfair?

Yes, it most certainly is. This world of ours would have a lot fewer problems today had Keynes’ bancor plan gone through and replaced the dollar standard we now basically live with. And it is this bancor plan that the modern day Kaldorians push for today. But again we must play Kaldor against the Kaldorians. Did Kaldor constantly harp on about the bancor in his writings? No, of course not. Why? Because he knew it wasn’t on the table when he was working and writing. It was on the table at Bretton Woods in 1945, but the Americans won and Keynes lost. Kaldor knew that there was no point in crying over spilt milk. He knew that we just had to get on with it and work with what we had.

Well, the Kaldorians would do well to learn this lesson today. Look, if the bancor plan is ever truly put on the table again I’ll be the first to support it. But it is such a distant possibility that it seems absurdly unrealistic to champion today. Every day we watch the Eurozone falling further into chaos due to national squabbles and mismanagement and then we’re to assume that all world leaders are tomorrow going to come together, hold hands and put the bancor plan in place? Yeah right. Indeed this appears more so a fantasy to hide from the terrible economic problems we face today than anything else. Faced with the very real problems of today it must be nice to have The One True Model that explains all – but in reality it’s just a fantasy and it’s not coming true any time soon.

This is not to say that getting the US government to start pumping dollars back into their own economy – and thus the world economy – in order to promote recovery is going to be an easy task. But at least we can see to whom or what we have to appeal: that is, to the US government. With the bancor plan we don’t even have an institution to appeal to – the appeals process then becomes like something out of a Kafka novel. At least with the MMT proposals we have somewhere to aim. It’s not perfect, no. But then, if we lived in a perfect world you wouldn’t be reading this article, would you?

Gloomy Sunday, a lyric from which we opened this piece, is a pretty bleak song. But that’s not why I opened with it. It’s the lyrical mixing of the themes of sleep and death and suicide that is relevant to this dilemma. Because the Kaldorians – in a spirit totally alien to Kaldor himself – want to put themselves to sleep with their Model of Perfection and Balance so that they can hold the grim political and economic realities of today’s world at bay. But to do this – to insist on a proposal like the bancor that is not even remotely realistic – is to suicide yourself. In putting yourself to sleep, to dream sweet dreams, you simply die to the real world. What good is that going to do for anyone?

298 Responses to Why MMT is Right and the Dreamers are Wrong: Kaldor Versus the Kaldorians

  1. After the opening salvo of straw man fallacies, why read further? You people continue to fail to make the MMT case in plain English. Calling us “cranks” it tiresomely sophomoric. But, continue with your mutually congratulatory intellectual circle jerk.

    • “continue with your mutually congratulatory intellectual circle jerk.”

      Talk about straw men…!

  2. Prediction. This “theory,” whatever its putative merits, will not accrue any substantive political traction with people like you leading the charge, son.

  3. I know of no sane person that would identify as one of the cranks, it’s not as if he called YOU a crank my friend, though I suppose if that’s the message you’re trying to send us then fine, whatever. Phil is not creating straw men, his goal was to bring to a close a discussion he’s had with a Kaldorian named Ramanan for years now. The rest is just a narrative for our enjoyment/pleasure.

  4. I’m not convinced that MMT is as ‘cranky’ as it may seem at first glance. I work in the world of community and dual currencies where we are developing a system that rewards unemployed people for giving their time to local communities. The rewards are delivered in the form of a digital electronic currency – reward points – that double up as a kind of ‘CV of good’ so that the individual feels valued for the contribution they make, and the rest of the world has an independent assessment on one persons attempts to contribute to the woes of society.

    In parallel, we are developing an electronic web-based marketplace that will allow vendors to accept these reward points in lieu of a cash discount. The idea is that such a platform would reduce transaction costs (marketing) and not devalue the brand since in effect by accepting the points instead of cash, they are ‘sponsoring’ community contribution by linking contribution to entitlement.

    The issuance of this currency is different to money in that money is only ever lent into existence whereas our points are only ever earned into existence (by producing goods and services that are of benefit to the community). The points earned can be ‘burned’ in the marketplace by vendors wishing to shift excess inventory or spare capacity that is perishable and wasted.

    Businesses all over the world need to find new ways to turn waste streams into revenue, otherwise they won’t be survive for much longer in a world short of money and locked in debt (denominated ultimately in the dollar), and giving them the means to make their pricing more dynamic and personalised would enable them to ‘speed’ up their business so that it responds faster to changes in consumer demand.

    Seen as a whole, our communities are full of underused resources like unemployed labour, empty shops, seats on public transport, community halls and so on. How wasteful? But seen as a whole, our communities are also full of unmet needs like work for the unemployed, an affordable place to try out a new business idea, cheaper transport for kids, an space to celebrate one’s cultural heritage and so on. Matching these underused resources with these unmet needs is possible with a currency that is issued and accepted by the community and a marketplace that brings these buyers and sellers together around a common cause.

    If local authorities can be persuaded to accept the community’s currency to pay down rent arrears, then the local authority might find tenants in social housing willing to look after their front gardens, pay their rent on time or carry out community work that reduces the council’s cost burden.

    I’m not an economist so don’t ‘get’ the nuanced arguments that Tweeder talks about, but do believe that there is a real need to provide liquidity to people and small businesses that need to do more with less. There simply isn’t enough money in the world to pay down the debts that exist. For me it’s more a question of solving common problems in the real world as opposed to endless theoretical debates about QE2 or austerity.

    @mikeriddell62

  5. Would also be correct to say that the smaller nations, prior to the Euro, post 70’s, were also interested in maintaining exports and so smaller deficits for their respective budgets? A strong US dollar helped European nations maintain their exports. So it was in the interest of them, and later China to maintain the strength of the dollar as the reserve currency of the world to keep their products moving to the US consumers.

  6. Or…. The Federal Government could simply assert its sovereign authority and bypass the private banking system altogether, including the FRB (yes, it IS), and produce debt-free United States Notes. That would meet the need for dollars that “everyone and their mother” (and Mike Riddell) wants, wouldn’t it? We had U.S. Notes in circulation, albeit in woefully little amounts, from 1862-1996, and Congress could issue them again via Treasury, in any amount, at any time, for any reason.
    For that matter, an argument could be made, and has, by me, http://www.opednews.com/articles/Debt-No-More-How-Obama-ca-by-Scott-Baker-130122-872.html, that U.S. Notes could be used to eliminate the next round of debt-ceiling shoot-ourselves-in-the-foot threats as well.
    Perhaps this is too simple?

    • I don’t know if the finance industry’s vested interests would block the issuance of debt-free US notes or not, but the most important issue is even broader than that for me, and that’s valuation. I believe we have a crisis of valuation on our hands. GDP measures growth of the unsustainable kind and doesn’t discourage businesses from polluting our rivers or poisoning our minds by inducing consumerist desires.

      A currency that values contribution to the common good would be a currency backed by values that everyone everywhere would understand, and if measured in man-hours would be a universal unit of accounting.

      We need to reward giving not taking – that’s all I’m saying that an alternative to the dollar should do.

      Kind regards, Mike.

      • Ah, well, that is a different, but complimentary matter.
        What we need in that case is to tax takings not makings. Aka a Land Value Tax, which also includes a tax on prime locations, including Pigovian taxes on pollution. If we did all of this correctly, it would amount to about 1/3 of GDP, according to most economists who study rent-seeking behavior.
        That would provide government with enough revenue to operate, particularly if it stopped spending to steal other people’s resources and just paid them instead.

    • “Perhaps this is too simple?”

      Hi Scott, I think a better answer is that it’s not really necessary? “Debt-free” has plenty of political appeal to some, but current Fed and Treasury liabilities aren’t “debt” in the typical sense, and either type of system can get you to similar outcomes.

      As Warren Mosler has pointed out, banks can simply be thought of as analogous to utilities in a public-private partnership with a monetarily sovereign govt. (I believe he does advocate short-term-only Treasury issuance though.)

      • I think the “debt-free” terminology tends to cause some confusion, because there are four ways in which our current monetary system is associated with the creation of debt.

        1. The money issued by the Fed is officially regarded as a “liability” of the US government and is entered as such on the Fed’s balance sheet. That makes a certain amount of loose sense because you can use this money to cancel off tax obligations, and those tax obligations can be thought of as “assets” of the government. But the terminology is a very misleading, since the tax obligations and tax revenues aren’t really assets. The government doesn’t need its own money, and it’s capacities aren’t enhanced when it receives the money. Fed-issued money is not in any real sense a debt of the government.

        2. The second way in which our monetary system is associated with debt is that much of the money that is used in most everyday commerce outside the banking system consists in commercial bank deposit balances, and these balances are genuine liabilities of those banks. A deposit balance represents the bank’s debt to the depositor. The depositor is entitled by law to demand the amount that is in the account in the form of Federal reserve notes, which are clearly not issued by the bank itself. The depositor is also entitled to issue an order to the bank to make payment to depositors at other banks, which the bank will usually have to carry out with Fed-issued money unless that other bank owes the first bank an equal or greater amount.

        3. The third sense in which our current monetary system is associated with debt has to do with the way in which deposit balances are created in the banking system. An individual depositor can acquire a deposit balance by exchanging some good or service for a portion of someone else’s deposit balance. But this doesn’t increase the net quantity of deposits. A net increase in deposit balances only occurs when new deposits are created via an exchange of debt for debt when a bank makes a loan. The bank creates an account for the depositor, and credits it with a certain amount, which is a debt of the bank. In exchange, the bank receives a promissory note from the depositor, which is a debt of the depositor. The value of the promissory note is greater than the value of the deposit, so this is how the bank profits. In order that borrowers are able to pay off their notes without the result being a net decrease in circulating money, banks must continually create additional deposit balances via lending. And since the greater the amount of deposit balances in existence, the greater the need for redemptions and interbank payments, the Fed must continually accommodate the expansion in bank deposit balances by expanding the provision of Fed-issued money to banks. That’s our system.

        4. A fourth way in which the current monetary system is associated with debt has to do with government spending. The US government has currently imposed a voluntary budget constraint on itself. This means that when it spends in excess of tax revenues, it issues and sells bonds at a total price equal to the shortfall. The bonds are exchanged for existing monetary balances, and the government has a debt to the purchaser to replenish those balances over time, along with some additional amount of interest.

        When the defenders of debt-free money speak of the association of money with debt, I believe they are usually focusing on the third and fourth of the four points listed above. They correctly point out that an additional way of increasing the amount of broad money in circulation is by having the government spend it into the non-banking private sector directly – either by simply giving it to people, or by giving it to people in exchange for goods and services – without issuing bonds. Bank lending would then be restricted so that deposits created for borrowers never increase the net amount of money in circulation, but only re-allocate money from existing accounts to other accounts. Bank lending then only intermediates the lending of existing money, without driving the processes that create additional money.

        I think the idea of direct government provision of money to the non-banking sector without issuing bonds is a very good one. (I think I would also end the current experiment with interest on reserves, which produces the same effect as bond sales.) But I am skeptical about employing that system as a total replacement for the current system in which bank lending participates in the net creation of money. I believe the debt-for-debt system plays a useful role in encouraging and disciplining entrepreneurial activity. However, I think we should explore ways of modifying the system to move banks further into the public utility model, without the stockholder -based system we have now. Get rid of the interbank market, get rid of interest on reserves, get rid of open market operations. Use the discount window only as the tool for providing additional funds to the banking system.

        • This is wrong on several levels, especially #1. But frankly, I’m tired of re-explaining it on these boards.
          I’ll let the head of England’s Financial Services Authority, Adair Turner, explain it better than I can, here: A Mainstream Economist goes off the reservation and calls for direct money issuance into the real economy
          http://www.opednews.com/articles/A-Mainstream-Economist-foe-by-Scott-Baker-130210-350.html

          Please get back to me when we can we can stop paying money to the FRB for money we could simply create ourselves, thereby saving 20% of every tax dollar. I know we can do this, because you said “Fed-issued money is not in any real sense a debt of the government.” I can hardly wait :)

          • Scott: see my discussion with John in the comments section on the recent ‘modern money and public purpose video’ post.

            • Scott,

              You don’t seem to be aware of the fact that MMT economists want “direct money issuance into the real economy” – just like you.

              • Actually, I am aware of that, but I want it done without debt at all. Why should we pay ANYONE for sovereign money?

                • Do you think that if the money is issued by some government agency they are going to just give it all away for free?

                  • Well, that depends. If they are beholden to the corporations as they are now, then no. But if we change the rules, or at least go back to the rules under Lincoln, then yes, the government will spend new money on things it wants that – HOPEFULLY – will finally approximate what the people who elected them want too (you could look at any number of polls over the last 10 years to see that what the government is spending money on has an almost inverse relationship to what voters actually want it to spend money on).
                    Taking back the sovereign right and DUTY, to “coin Money” as it says in the constitution, would defang the Money Power of the banks (which is why they have been behind most of the assassinations or attempts to assassinate presidents who have tried this, including Jackson and Lincoln).
                    There really is no other way. New laws and regulations won’t do that. MMT maintains the status quo but makes it OK by saying “don’t worry, we can always create more money” without saying who “we” really is. Austerity will lead to depression. What else is there?

                  • Even if some central government money-issuing office directly issues all of the money that is circulated in the economy, there are a variety of methods of getting it into circulation. The most likely is that the government will use it to buy things. So people acquire the money in exchange for some good they hand over or some labor they provide. The government could also loan it into circulation: give it to people in an exchange for a binding promise to return back some or all of the same quantity of money at some point in the future. And then finally, the government could just grant it into circulation – give it to people. I rather doubt the public interest is best served by relying on the last method alone. It would only be one of several channels.

                    Frankly, my eyes glaze over when people start talking about the government’s “right” to coin money in this area, and lean on that as though it is an important an argument. Sure the government has that right. It also has the right to set up a banking system that works something like the system we have now, which relies on private sector-driven deposit expansion. Which of various possible systems we should use and how they should be set up and regulated should be addressed, it seems to me, in terms of what would work better. We need to look at the whole system of public and private finance and investment, and think about how best to achieve the results we would like.

            • I meant Joe Bongiovanni, not John

          • How is anything Adair Turner wrote inconsistent with what I wrote. Read my last paragraph.

        • @Dan Kervick 1. The money issued by the Fed is officially regarded as a “liability” of the US government and is entered as such on the Fed’s balance sheet.

          Since you’ve said “officially regarded” and place “liability” in quotes, would you mind providing an “official” cite, and linking to a US Government balance sheet where reserve notes are reckoned? I’ll bet you can’t. Reserve notes are liabilities of privately-owned Federal Reserve Banks and obligations of the US Government; reserve accounts are liabilities of the regional Banks backed by their assets, which include US Treasury Bills and coins. When a regional Federal Reserve Bank buys or sells a Treasury for/from its own account, it has no effect on US debt. Because the bank isn’t the government, and can’t finance the government.

          • EconCCX,

            18 USC § 8 – Obligation or other security of the United States defined:

            “The term “obligation or other security of the United States” includes all bonds, certificates of indebtedness, national bank currency, Federal Reserve notes, Federal Reserve bank notes, coupons, United States notes, Treasury notes, gold certificates, silver certificates, fractional notes, certificates of deposit, bills, checks, or drafts for money, drawn by or upon authorized officers of the United States, stamps and other representatives of value, of whatever denomination, issued under any Act of Congress, and canceled United States stamps.”

            http://www.law.cornell.edu/uscode/text/18/8

            USC § 411 – Issuance to reserve banks; nature of obligation; redemption:

            “Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.”

            http://www.law.cornell.edu/uscode/text/12/411

            • Thanks, y. This supports my point to Dan. The US Government has the obligation to accept these notes in exchange. USG will return them to a regional Federal Reserve Bank for credit to the Treasury General Account. Whereas outstanding notes are liabilities of the Reserve Banks. You can see on the Banks’ balance sheet:

              http://www.federalreserve.gov/releases/h41/current/h41.htm
              (section 8)

              that the regional Banks’ assets include coins and Treasury bills; their liabilities include outstanding reserve notes, reserve balances, and the Treasury general account. Their own held notes are neither assets nor liabilities. They would have to be assets, just as coins and TBills are, if those notes were liabilities of the USG rather than obligations.

              • No shades intended. Link was to:

                http://www.federalreserve.gov/releases/h41/current/h41.htm
                Section Eight : 8. Consolidated Statement of Condition of All Federal Reserve Banks

              • “The US Government has the obligation to accept these notes in exchange.”

                In exchange for what? It seems to me that all I can get for government-issued money. I can also use them to offset my tax obligation, which is an obligation to deliver to the government some … government-issued money!

                http://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm

                The major items on the liability side of the Federal Reserve balance sheet are Federal Reserve notes (U.S. paper currency) and the deposits that thousands of depository institutions, the U.S. Treasury, and others hold in accounts at the Federal Reserve Banks. These items, as well as the Federal Reserve’s other liabilities, can be seen in tables 1, 8, and 9 of the H.4.1 statistical release.

                The expansion of Federal Reserve assets that has resulted from the aggressive response to the current financial crisis has been matched by an expansion of the Federal Reserve’s liabilities, particularly the deposits of depository institutions.

                • @ Dan Kervick In exchange for what? It seems to me that all I can get for government-issued money. I can also use them to offset my tax obligation, which is an obligation to deliver to the government some … government-issued money!

                  Taxes, publications, park admissions, mineral or grazing rights. The obligation is a duty to accept, as opposed to a liability, which is a duty to pay. T-Bills are USG liabilities. There’s no exchange; USG owes the bondholder the maturity value. Reserve notes are the hand-to-hand component of the reserve balances of depository institutions. Neither those reserve balances nor the notes are part of the national debt; they’re central bank debt. The Treasury General Account is a US Government asset; note that it appears as a liability on the Federal Reserve Banks’ balance sheet. And we see that vault cash is definitely an asset on the Treasury’s balance sheet.

                  http://www.fms.treas.gov/fr/12frusg/12stmt.pdf (page 45 )

                  Where vault cash is neither asset nor liability to a Reserve Bank, per the linked Federal Reserve balance sheet, which specifies as a liability “Federal Reserve notes, net of F.R. Bank holdings.” Once issued (sold to commercial banks in exchange for a reduction in their reserve balances) the reserve notes are liabilities of the bank, assets to whoever else lawfully owns them…including the USG.

                  • Sorry I don’t follow you. What duty to accept are you talking about? If I have a Federal Reserve note, the Fed is not obligated to exchange that note for some good or service. Nor even, with few exceptions, are private sector vendors required to accept that note for some good or service. The only thing that note legally entitles you to is more government-issued money.

                    Legally, a debt is one kind of obligation. When a company issues a bond, the bond is a liability of the company and an asset of whomever holds the bond. The company has a debt. It also has an obligation. They are the same thing. A debt is a legally binding obligation to make a payment.

                    The fact that cash held by Treasury and Treasury deposit accounts at the Fed are classified as assets of the the Treasury and liabilities of the Fed shows how loopy and misleading the entire classification scheme is. If the notes or balances are liabilities of the Fed, what exactly are they liabilities for? It’s all just an intra-governmental bookkeeping convention. Similarly, when the Social Security Trust Fund holds a Treasury bond, we can say the bond is a liability of the Treasury general fund and an asset of the Social Security Trust Fund. But these are just two different government accounts.

                    In the case of Treasury balances at the Fed and Federal Reserve notes, the bookkeeping classification is even more empty. If the Treasury has a $100 Federal reserve note, the Fed does not still owe the Treasury anything. So it is rather goofy to say that the Fed has a “liability” to the Treasury for $100.

                  • EconCCX,

                    Notice that in the first quote from the US Code Federal Reserve notes are equated with government bonds, Treasury notes and United States notes. They are all obligations of the United States.

                    The second quote states that Federal Reserve notes can be “redeemed in lawful money”. This could mean different things, including that the notes can be redeemed for coin, which is treated as government equity rather than debt. In this sense the are a government promise to pay as well as a government promise to accept.

                  • From http://www.treasury.gov/about/education/Pages/distribution.aspx

                    “Every summer, the currency departments at each of the 12 Federal Reserve banks make recommendations about future currency needs. The banks then place orders with the Comptroller of the Currency. After reviewing the requests, the Comptroller forwards them to the Bureau of Engraving and Printing. It then produces the appropriate denominations of currency notes bearing the seal of the Federal Reserve bank placing the order. The Federal Reserve bank pays only the cost of producing the notes. These Federal Reserve notes are claims on the assets of the issuing Federal Reserve bank and liabilities of the United States Government.

                    The law requires that each Federal Reserve bank hold collateral that equals at least 100 percent of the value of the currency it issues.”

                    Thanks to Joe B for the link.

        • Dan, how is it that deposits created for borrowers never increase the money supply as you say? Don’t borrowers then have more money to spend just as now?

          I’ve got a second question. How can it be that any instrument issued by the federal government and purporting to be money is not debt?

          • Sorry Jonf, I’m not getting you on the first question. In the existing system the banks do – or at least can – increase the money supply when they create deposit balances. But they wouldn’t under the debt-free money proposal as I understand it. Instead they would only loan out existing money that they already have in their possession.

            On the second question, suppose you have a $20 Federal Reserve Note in your pocket. And suppose you have paid all your taxes. Does the government owe you anything? And if not, how is that note a debt instrument?

            • You mean the banks would print it up as they need it? I’m not getting this?

              I think on the second one the government is obligated to take it back in payment of any future taxes. The obligation never expires.,

              • What if you don’t have any more tax obligations? If a Federal Reserve Note represented a genuine debt of the government, then if I have such a note in my possession after my debts to the government have been discharged, the government still owes me something. But what is that? What does it owe me? Zilch.

                If the court orders me to hand over a cow to the government, then I have a debt. The government is obligated to accept one cow to discharge the debt. Suppose I have three cows. The fact that I can discharge my debt with one of the cows doesn’t mean that the cow was a debt instrument of the government. And it certainly doesn’t mean every cow in existence is a liability of the government. Even if the government had previously bred the cows and given them away, that wouldn’t make the cows debt instruments.

                I’m just asking people to look at this with common sense. If a dollar bill is a debt of the government, then what is it a debt for? There can’t be such a thing as owing without there being something owed.

                On the first question: the “debt-free money” proposal, as I understand it, is that there would still be banks, and they would still lend, but they would lend the same way you and I can lend. New money would all be created by the Federal government and spent into the economy. Banks would only be able to lend out government-issued money that they already had in their possession, and that they had acquired from some other source. And a bank could only create a demand deposit balance for a customer if the new total value of the bank’s deposit balances does not exceed the amount of government-issued money they have in their possession on reserve.

                • On the second part, you are restricting the bank’s abilty to lend based on deposits. Today they lend based on profitability and get the reserves later. Would you suppose this will result in fewer dollars lent out or about the same? Still not sure what this has to do with debt free money. You could do it today, I suppose with a change in the regs.

                  The dollar is only in use because someone needs it for taxes. It is a tax credit that the government is obligated to take back in payment of taxes and fees. Even if there were a market in widgets you better be careful next time a tax come about as you may have to pay more to acquire dollars than you sold them for and who knows what widgets will be worth. Truth be told you can sell out or spend all your dollars today but you don’t since you need them every day for a tax of one sort or another, even on gas.

            • @ Dan Kervick And if not, how is that note a debt instrument?

              It’s central bank debt. Any Federal Reserve Bank must surrender assets — US government coins or T-Bills, which the bank cannot create and which appear as assets on the bank’s book, per the prior link — in exchange for an instrument that is neither asset nor liability in the bank’s vault, the bank’s own debt.

              A note is always an acknowledgment of a debt; whereas coins are positive money to whoever possesses them. Hence the call for trillion dollar coins to eradicate the Federal debt. That’s also why textbooks make clear that newly printed reserve notes are of no monetary significance until issued by Federal Reserve Banks. They’re liabilities of a private bank consortium, not the US Government. For the government to spend them from the Bureau of E&P would be a fraud against the banking system.

              • The Fed is not obligated to give you T-bills in exchange for your notes. But suppose it is. So you have a T-bill which is a debt of the Treasury. The Treasury then discharges its debt to you by paying you. And what does it pay you with? Federal Reserve notes! Or it pays you with a check that is a draft on its account, the result of which is that a deposit balance at the Fed is transferred from a Treasury account to your bank’s reserve account, and your bank gives you a reserve balance which is a bank debt to you payable in …. Federal Reserve notes!

                Or suppose as you say all of these notes are genuine debt instruments because they are redeemable in coin. Fine. Once you have the coins, does the government then have a debt to you? No. The government has made final payment on its debt to you.

                In any real-world system of credit instruments and payment instruments, there must be some ultimate means of payment such that, once it is used to discharge the debt, no more debts remain.

            • @Dan, we had a similar discussion at NC, and we agreed that reserve balances are debt. No disputing that a regional Federal Reserve Bank owes more to banks with higher reserve balances than it does to smaller institutions. Reserve Notes are the interchangeable hand-to-hand acknowledgment of that same liability, for those customers of commercial banks who demand some folding green. These notes are debited from commercial banks’ reserve balances. Upon their return to commercial banks by merchants, and to Reserve Banks by commercial banks, these notes are added to the depository institutions’ reserve balances, i.e. the reserve bank’s debt.

              • Yes, Federal Reserve notes and reserve account balances are interchangeable, and the notes, when held by a bank as vault cash, are part of the bank’s total reserves.

                The question is, if these balances and notes are debt instruments, what are they debts for? My claim is that the classification of these instruments as liabilities of the central bank is a purely honorific classification.

                Suppose the Fed quintupled the quantity of reserves in the banking system – balances and notes combined. Do you think someone at the Fed should be holding his head and saying, “Oh my God, how are we going to pay of all this debt!” Pay off how? All you can really get for your notes and balances are equivalent quantities of notes and balances – or you can get nickles and dimes I guess, which are also issued by the government.” If Fed notes were genuine debts and genuine liabilities, then their issuance would be pressure on the solvency of the Fed. But they don’t. The Fed only cares about the number of these so-called liabilities in circulation because of their potential effects on interest rates and prices, aspects of monetary policy.

                • This statement “If Fed notes were genuine debts and genuine liabilities, then their issuance would be pressure on the solvency of the Fed. But they don’t. The Fed only cares about the number of these so-called liabilities in circulation because of their potential effects on interest rates and prices, aspects of monetary policy.” is not quite true.
                  Many people, including those at the Fed itself, ARE worried about the burgeoning size of the Fed’s balance sheet. See here:
                  http://uk.reuters.com/article/2012/12/18/uk-usa-fed-fisher-balancesheet-idUKBRE8BH14N20121218
                  Reuters) – The Federal Reserve’s latest round of bond-buying, expected to swell the U.S. central bank’s balance sheet to more than $3 trillion (1.84 trillion pounds), could ultimately compromise the Fed’s independence, Dallas Fed President Richard Fisher said on Tuesday.
                  …and here: http://www.foxbusiness.com/news/2013/01/05/fed-plosser-how-to-unwind-balance-sheet-real-concern/
                  Fed’s Plosser: how to unwind balance sheet a “real” concern
                  …and Warren Buffet’s concern here: http://money.cnn.com/2013/03/04/investing/buffett-federal-reserve/index.html
                  Investor Warren Buffett said his biggest worry about the Federal Reserve’s policy of buying assets is how the markets will react once the central bank starts selling its holdings.
                  …and a longer article explaining the problem here: http://wallstreetpit.com/99078-fed-balance-sheet-risks/
                  “Conclusions
                  No one knows for sure which of the two theories of inflation above is the better approximation for our current reality. Central bankers are charged with the task of evaluating the risk of their policies under different theoretical scenarios. If the monetarist view is correct, then continued expansion of the Fed’s balance sheet exposes the economy to ever higher inflation risk. Of course, this is not to say that the risk is not worth taking. Policymakers just need to be aware of the risk and make provisions for it.
                  It is interesting to note, however, that independent of one’s theory of inflation, the large and growing balance sheet may expose the Fed to a certain type of political risk. If tightening needs to happen in the future, the Fed will have to raise interest rates (IOR) and/or sell off its assets. IOR may be made to look like Fed Reserve (instead of Treasury) transfers to the banking sector, at taxpayer expense. Capital losses on asset sales would similarly reduce remittances to the Treasury. It’s not going to look very pretty.”

                  I have another concern beyond even these expressed above (just a fraction of what you get when you Bing “worries about the fed balance sheet”) and that’s whether the Fed will even be able to sell the toxic assets at all, or at some significant fraction of what it’s been paying for them. I think they will be lucky to get pennies on the dollar for mortgage-backed securities of the type that nearly sunk all the banks (including its own member banks). In that case, its $3 trillion portfolio might someday be worth only $.5 trillion, or less. Then, not only will the Fed stop remitting “profits” to Treasury, but it will be in the hole itself and need to cover its losses. Since it can’t tax, it will have to create money to do that, which will lead to inflation.
                  Once again, the fact is that the Fed is NOT a part of governemnt has dire consequences for the governemnt and the public, who will then have to either A) bail out the Fed (very unlikely), or B) endure inflation (very likely).
                  The solution to this is direct issuance of money from Treasury, not the private (yes, it is) Central Bank, directly into the economy, to pay for vital goods and services the government must produce anyway. As long as we are getting something for this money, we won’t have inflation (bad), but we will have more goods and services (good) and jobs (also good).

                  • What they are worried about is inflation, not their ability to pay the supposed “debt” that these so-called “liabilities” consist in. In other words, they are just worried about standard monetary policy issues.

                    Suppose, the standard accounting didn’t treat Fed keystrokes as the creation of Fed liabilities that affected the Fed’s balance sheet, and just treated the keystrokes as electronic greenbacks that happened to be issued by the Fed not the Treasury. How would the result be functionally different from the current system> I don’t think it would be.

                  • It would be different in several ways:
                    1. We wouldn’t have to spend 20% of each tax dollar supporting an idle class of rent-seekers here and abroad.
                    2. Those rent-seekers would not be able to turn around and buy politicians to keep this corrupt system afloat.
                    3. Money would be put into the People’s needs, not the Bankers’ greeds (see #2 above).
                    4. People would be closer to the actual results of governemnt spending, instead of once removed through the banking system whenever the Congress decides to do some bailing out (e.g. why couldn’t government have just ordered a bunch of G.M. cars instead of providing loan guarantees? Because the banks would not have made money on that).
                    5. The banking sector would contract to a manageable size.
                    6. Silly nonsense like the “debt ceiling” and having “government function like the family budget” would go away. OK, you say MMT would do that too, but I think it would be easier with Greenbacks. We agree to disagree.
                    I’m sure there are other things I haven’t thought of.

                  • “whether the Fed will even be able to sell the toxic assets at all, or at some significant fraction of what it’s been paying for them. I think they will be lucky to get pennies on the dollar for mortgage-backed securities of the type that nearly sunk all the banks (including its own member banks). In that case, its $3 trillion portfolio might someday be worth only $.5 trillion, or less. Then, not only will the Fed stop remitting “profits” to Treasury, but it will be in the hole itself and need to cover its losses. Since it can’t tax, it will have to create money to do that, which will lead to inflation.
                    Once again, the fact is that the Fed is NOT a part of governemnt has dire consequences for the governemnt and the public, who will then have to either A) bail out the Fed (very unlikely), or B) endure inflation (very likely).”

                    Good grief, Man. Beyond the fact that you are hysterically overstating the valuation issue re the Fed’s non-Treasury holdings, the Fed can absorb almost infinite losses. The only interesting scenario I can imagine is one where the Fed has to start self-financing, rather than clipping coupons on a tiny proportion of the securities it holds. And the probability of that happening is almost zero.

                    And how the heck is inflation a public good???

                • Trying to turn them off here

                  Did that work?

                • on off

                • Maybe we should say it this way. If Macy’s gives you a credit, that is a debt Macy’s is obligated to accept. A dollar is a credit that may be used against any tax. It is a debt the government is obligated to accept.

                  A platinum coin is an obligation of the treasury and an asset of the fed. So are other coins.

    • I don’t think U.S. notes are debt free. When they are deposited at bank they lead to a reserve add. Basic MMT is that then US. government had no choice than sell bonds to drain excess reserves, otherwise it would be impossible for the fed to hit it’s overnight interest rate target. Bond sales are not financing operation, they are interest rate maintenange operation, says MMT.

      • In emailed responses to me, both Warren Mosler and Randall Wray admit that Treasuries are obsolete and do not need to be issued any longer. That is, money could simply be issued, without taking on debt at all; i.e. Greenbacking. Now, there’s certainly a political aspect to this, but I wonder if it isn’t harder to convince people to support an idle class of 1% billionaires off our interest payments, than to convince them that Congress can just “coin Money” as it says in the Constitution (Art. 1, Sec. 8. Clause 5), as Lincoln did, as SCOTUS affirmed 8-1 (Julliard v. Greenman), as both Representative later Transportation Secretary Ray Lahood and Rep. Dennis Kucinich tried to do after the last of the U.S. Notes were removed from circulation in 1996.
        Granted, this Congress is determined to wreck America, both Democrats and Republicans to satisfy the false austerity Gods of Wall Street.
        Our problem – whether you follow MMT or Greenbacking – is not economic, it’s political and to a lessening extent, educational. Mostly, it’s just greed and media saturation by the self-serving elites.

    • If you mean by debt free that it can be issued with no taxes or bonds needed to issue the notes,,congress could allow the fed or treasury to do that at any time. In fact, good idea. But if you think there is something,else inherent in U.S. notes that make them debt free, please explain., I’m not getting that.

      • Technically, it requires a change in the double-entry accounting rules. Stephen Zarlenga has a section on the AMI site that explains this better. But yes, you can issue money without debt as simply money, deliberately inflationary, but with no need to claw it back in taxes or as payments to a private lender. Obviously, you have to watch inflation.

        • joe bongiovanni

          Scott,
          Not meaning to butt in here, but(t)..
          The question seemed to be about US Notes – I thought as opposed to FRNs or money generally.
          Not sure about that.
          But more important, please, the Kucinich Bill is not only NOT “purposely inflationary”, it is not inflationary in any way, even by VonMises definition.
          Money is only spent as budgeted and only on purposeful public projects and services.
          Please don’t say that these expenses, which today would, of course, be anti-DEflationary are in any way inflationary. They are intended to expand aggregate demand in the economy WITHOUT any general price increase.
          Thanks.

          • Sorry for the confusion. I was talking about a plan like Adair Turner’s to simply pump more money into the public’s hands, without using it as payment for jobs. Some of this money would make it into productive activities it is true, but the overall effect would be to dilute the money supply unless it is either absorbed by new goods and services or taxed back again.
            Still, even this would be preferable at this point to a system which funnels all money to the top 1%, if just to balance out the last 40 years of trickle-up economics.

        • Good luck with changing the accounting. But beyond that if the U. S. notes can be used to pay taxes then they are by definition tax credits and therefore debt instruments. If they cannot be used to pay taxes then you have introduced a competing currency. N.G.

          • See this table from the end of the Treasury’s Public Debt report (2012). Note the first item (in millions) United States Notes (still $239 million in circulation! Available on eBAY!). All of these items are specifically excluded form being counted as part of the national debt, meaning they CANNOT be used to pay off the debt. Yes, they can be collected in taxes, but that, under new accounting rules, could simply be money, not repayment of debt. Big difference:
            Other Debt:
            Not Subject to the Statutory Debt Limit:
            United States Notes……………………………………………………………………………………………….239
            National and Federal Reserve Bank Notes assumed by the United States on deposit of lawful money for their retirement .. 65
            Silver Certificates (Act of June 24, 1967)……………………………………………………………….. 171
            Other………………………………………………………………………………………………………………………. 11
            Total Not Subject to the Statutory Debt Limit…………………………………………………………… 486
            Subject to the Statutory Debt Limit:
            Mortgage Guaranty Insurance Company Tax and Loss Bonds………………………………………. 40
            Other……………………………………………………………………………………………………………………… 780
            Total Subject to the Statutory Debt Limit……………………………………………………………………………………………………………………….. 820
            Total Other Debt…………………………………………………………………………………………………….. 1,306
            Total Nonmarketable…………………………………………………………………………………………. 5,379,528
            Total Public Debt Outstanding …………………………………………………………………………… 16,432,730

            • No big deal. Same thing with same stroke of the pen. Just eliminate the need to issue treasuries. end of story. Treasury can issue warrants to fed or a platinum coin. Same thing.

              Taxes are a debt we have. I begin to think we are torturing words here.

              • Charles Fasola

                I agree with your assessment and have been attempting to argue that exact point. We argue semantics and trivia among ourselves instead of arguing with the purveyors of the lies that cause the citizens of this nation to believe in notions that lead to their own economic destruction. Spending more time attacking the academics who misinform the students they teach, especially in today’s Departments of Economics and the garbage spewed by Koch and Peterson funded quacks would be time much better spent.

                • Charles, I have been the archcriminal on obsessing on these semantic points. My plea is that they could not be more important. They are the key to everything. Unfortunately, Dan Kervick (following Hume – wrongheaded, but great for rousing out of dogmatic slumbers), Joe Bongiovanni, Scott Baker, Michael Hoexter et al unconsciously perform baroque gymnastics with the definition, the ordinary usage of a simple word “debt” and its application to the word “money” to make things much more complicated than they really are. On the other hand, Jonf, PZ, golfer1john, EconCCX & Y do get MMT. Debt=liability=obligation= treasury bonds = dollar bills = reserves. And these are the most ordinary, most usual, most genuine, most common-sense meaning of the word “debt”, and sovereign debt is exactly the same (not-)”thing” as private debt. And who cares what the US codes says? What counts is what is done, how it fits into philosophy, “semantics”, linguistic universals, not what is said. What even some longtime MMTers call arbitrary “accounting conventions” or “honorific classification” are as “arbitrary” and “honorific” as 2 + -2 = 0. Knowledge of mathematics and its history shows, that even to the present day, the interesting thing is how economics and accounting have applied to, guided mathematics. Not so much vice versa, which is child’s play. My favorite book on this is Salomon Bochner’s classic, where he comes to this view in the only scientific way – kicking and screaming. Mary Poovey’s more recent work is outstanding too.

                  With a mild concussion sidelining me for a few days, I thought I would have the time to finish my replies, e.g. to Dan’s “debt for” theory some posts ago. Financial debts, money debts are never “debt for” anything, “debt for” is an unusual and overcomplicated, unnecessary grammatical construction that hides the whole point of MMT. That just brings us back to the commodity theory, and was how grosso modo, the human race went from knowing and using MMT in 1940-50 to today’s abject confusion imposing poverty amidst plenty.

                  Dan: There can’t be such a thing as owing without there being something owed. Completely wrong. There is ALWAYS “such a thing”. That statement just ain’t how human beans use their words, their concepts “debt” or “owe”. The fundamental meaning, the way everybody uses the word, the concept of “debt” is NEVER to have “someTHING owed”. It cannot be.

                  Unfortunately, I don’t have the energy, because of a mild concussion sidelining me for a few days. :-) So all I can say at the moment is to repeat my tenuous arguments from authority. Read MMT. Read Mitchell-Innes. Read the Mitchell-Innes volume. Read Geoffreys Ingham & Gardiner. Read closely, they refute all the bad ideas, the blind alleys. And then the penny might drop, and people can see how simple it all is.

            • >>“All of these items are specifically excluded form being counted as part of the national debt, meaning they CANNOT be used to pay off the debt.”<<

              Backwards. If the government were to come into possession of some of these, they surely COULD be used to redeem treasury securities, that is, "pay off the debt" subject to the limit. They are

              "Other Debt:
              Not Subject to the Statutory Debt Limit:"

              You "debt-free money" people are hard enough to understand even when you say things correctly.

              • No, you have it backwards. From the original inscription on the first U.S. Note:
                During the 1860s the so-called second obligation on the reverse of the notes stated:[1]

                This Note is Legal Tender for All Debts Public and Private Except Duties On Imports And Interest On The Public Debt; And Is Redeemable In Payment Of All Loans Made To The United States.
                The immediate source for this is Wikipedia (http://en.wikipedia.org/wiki/United_States_Note#Comparison_to_Federal_Reserve_Notes), but the footnote refers to:
                1^ Friedberg, Arthur L. and Ira S., 2006, Paper Money of the United States, 18th Edition, Clifton, NJ, The Coin & Currency Institute, Inc. ISBN 0-87184-518-0
                Wiki goes on to say:
                “The difference between a United States Note and a Federal Reserve Note is that a United States Note represented a “bill of credit” and was inserted by the Treasury directly into circulation free of interest. Federal Reserve Notes are backed by debt purchased by the Federal Reserve, and thus generate seigniorage, or interest, for the Federal Reserve System, which serves as a lending parent to the Treasury and the public.”
                So, a ‘”bill of credit” was issued by the Treasury directly into circulation free of interest’ This is a very different thing from a debt-based Federal Reserve Note. Now, nit-pickers will point out that the Fed reimburses its profits to the government anyway, and claim that it is *operationally* no different, but:
                1. There are loopholes in that, which I’ve pointed out before.
                2. If interest rates rise, there’s a good chance there will be no profits to plow back into government, by the Fed’s own admission. In other words, the Central Banks profits come first, over government need for revenues. Does that sound like a branch of government producing sovereign money to you? Not to me it doesn’t. And this is why the MMT folks have a fundamental flaw in their argument, even though they and Greenbackers may have the same progressive goals to infuse the economy with necessary money.

                • You don’t seem to understand that MMT economists want the government to spend by issuing money into circulation free of interest.

                  • Not exactly. Mosler and Wray have both communicated to me in emails that they want Treasury bonds to be 0% interest indefinitely, it is true, but there is no mechanism in MMT to guarantee that and they don’t seem to emphasize that very much in their writing (that’s why I had to tease it out of them). These two facts from the founders of MMT make me VERY nervous, because historically Treasury Bonds DO go up and down in interest rates, as controlled by the Fed’s target rate. In fact, that is a “feature” of how the Fed supposedly controls inflation (for why the Fed’s raising rates actually creates inflation, read some of their other articles, and some other stuff I don’t have time to look up right now).

                  • Listen, the preferred policy of Mosler, Wray Mitchell and others is a zero interest rate on government money. Period.

                • Debt free could mean simply that those notes were not backed by gold, except on a voluntary basis. The FRN are no longer,backed by gold either. Congress in its wisdom has decided that a deficit must be funded by treasury bonds. Congress could change that. In such a case then FRN can be issued directly I.e treasury could spend in a deficit,without first,selling a bond. Or….. We could bypass the congress and just issue a platinum coin.

                  • No, by definition a Federal Reserve note (FRN) comes from, well, the Federal Reserve. The seigniorage difference is exactly night vs. day. One accrues to the Federal Reserve, the other to the Government. This was the whole reason Stephen Zarlanga/Dennis Kucinich’s bill HR2990, was to put the Federal Reserve under Treasury, making it a government agency for the first time. Then, all money was to become United States notes – or their electronic equivalent. If it was possible to do this differently, they would have done it already.
                    Of course, the banks do not WANT it done differently. For a good summary of why, read my colleague’s excellent new article on Central Banks here: http://www.opednews.com/articles/The-Central-Role-of-Centra-by-Richard-Clark-130321-345.html

                  • joe bongiovanni

                    Scott,
                    Thanks for reminding us that the legal tender nature of Greenbacks limited their use in repayment of government debt.
                    But did you let it slip by that Greenbacks WERE convertible into gold?
                    And the bankers thus tried to destroy them?
                    Covered quite extensively by Zarlenga, Ch 17, pgs. 458 – 466.
                    Also covered was the difference between the Greenbacks and Confederate paper money, which was also gold-convertible – for a while.
                    Thanks.

                  • I let it slip because the convertibility period was so limited in time.
                    Though most people just think of the Greenbacks as existing during the Civil War and maybe a little beyond, in fact they were our longest-lasting currency, produced in 14 series until 1971 (when the U.S. went off the gold standard internationally; FDR had taken us off the domestic gold standard in the 1930s), and in official circulation until 1996. However, you can still find the occasional U.S. Note on eBay etc.
                    The first issuances of Greenbacks scared people and so Congress made them officially convertible in gold for 1862-1863, but they never actually WERE converted into gold, and that idea was soon dropped as people became used to them and the legal tender cases of SCOTUS were decided in their favor (though with the incorrect interpretation that they were only covered by the borrowing clause of the constitution, IMO), and the Greenback Party was formed specifically to promote this Public Money over the private money of the banks.
                    Gold-backed money, as most of us agree, is a terrible idea, one guaranteed to deflate the economy and put yet more money in the hands of those who have the most gold – the bankers again.

                  • Auburn Parks

                    Jonf and Y
                    I think you two are closer to the reality than Scott Baker and Joe Bon….with regard to debt-free money and FRN vs USN.
                    Firstly, UST’s are not debt in any conventional sense. They are nothing but liabilities to the Fed and assets (deposits) to the UST holders. For example, if I were to go to Chase bank and purchase a CD for 6 months, can anyone rationally declare that I just forced Chase to borrow my money in order to fund its operations?
                    Yes, Chase is obligated to give my money back to me with interest when the CD matures and Chase can use that money in the meantime for other purposes (because as currency users, they need my money to operate), but my CD is certainly not “debt” for Chase.
                    This example is perfectly analogous to the Govt and the Fed except in one important distinction. Because the Fed does not need my money to operate, conceptually, my money can be understood to have never “left” my UST account. All deficit spending by the Treasury\Fed is just newly created money and subsequently, the amount of that additional deficit spending is simply the structure for determining how many additional savings bonds the Fed is willing to offer the public.
                    Seen from this POV, determining the availability of federal savings bonds made available to the public by way of deficit spending is truly strange and should be ended. Of course, the real reason the Fed operates like this is A. not changing its methods after the end of the gold standard and B. to manipulate the federal funds rate in such a way as it seems like the “market” determines the rates instead of the Fed simply declaring the interest rate by fiat.

                    Secondly, there is no necessary reason that we would have to change the system to use USN instead FRNs. FRNs are not debt money, as I described above, but n order to truly make “debt-free” money from the POV of the public, this would simply mean not offering USTs in equivalent amounts to federal deficit spending. We would only need to repeal the statutes that prevents the Treasury from overdrafting at the Fed and mandating that Treasury issue bonds dollar for dollar with deficit spending. This way the govt spending would be whatever it is and the national so-called “debt” (amount of USTs outstanding) would not increase.
                    This is clearly why these distinctions and worry about “govt debt” are pretty much meaningless.
                    Joe and Scott,
                    If you both think that the federal govt shouldn’t offer interest bearing, risk free savings bonds, or you think that we should use a different methodology for determining how many of these bonds the Govt issues (This is where I agree that the current system is retarded) thats fine but then you should say that and not continue to think that FRNs are debt issued. They are not in any meaningful sense.

                    http://en.wikipedia.org/wiki/Primary_dealers
                    http://www.federalreserve.gov/aboutthefed/section14.htm

                  • First, the CD IS debt. It is a liability on the banks’ books, just like deposits of any other kind. A loan, in the upside-down world of the banks, is an asset, something that will be paid back, with interest, to the bank (hopefully – risk analysis is another subject and a worthy one).
                    Treasuries, from the Central Bank’s perspective, are assets too – a loan of dollars to to gov’t that must be paid back, with interest (even if it is rolled over, that is the ultimate aim…someday).
                    You say “Secondly, there is no necessary reason that we would have to change the system to use USN instead FRNs. FRNs are not debt money, as I described above.” Well, as you re-described, they still are debt-money. We have a debt-money system. Even MMT does not deny this, they just pretend it is all internal accounting and we don’t have to worry about it (“pay no attention to the man behind the curtain”).
                    The primary dealers are ANOTHER middleman that needs to be cut out (they can then use their big brains for more socially useful functions). Why should we pay someone to pass along our request to borrow money we don’t even need to borrow!! <- 2 exclamation points for 2 wrongs!
                    you say " agree that the current system is retarded." Yeah, me too!

                  • joe bongiovanni

                    Auburn,
                    With all due respect, occasionally I think you got it.
                    Alas…
                    I can’t answer for Scott in any way, but…

                    The government should not be obliged to and should not issue any debt obligation at all. It should not borrow or need to borrow the national circulating media – which it would never have to do – IF it issued the national circulating media. That’s what the Kucinich Bill says and does – it ends the government requirement for issuing debt. And it has the government issue all of the nation’s money.

                    That is not the same as a Savings Bond – which COULD be issued in response to a request of a saver who felt there was too much risk investing in a CD like yours. But it would be done with a view of being responsive to public need and not because the government could not issue its own money, all in place of today’s requirement that it borrow from private banks.

                    “and not continue to think that FRNs are debt issued. They are not in any meaningful sense.”
                    Um, excuse me? Meaningful, as in ????
                    Do FRN’s require collateralization in order to circulate?
                    Is this collateral what is required to secure a loan?
                    Is a loan a debt?
                    Sorry, FRN’s are debt-issued.
                    Meaning, or not, is in the eye of the beholder.

                    Speaking of a debt – and you obviously have a unique view here.
                    1. USTs are a debt in every conventional sense of the term. Debts are written, legal, inter-party obligations FROM the issuer of the debt to its purchaser/holder. They are term-defined. They are denominated in and payable, as to principal and interest, by a specific form of currency. They include every specific provision of what makes a debt legally enforceable. And they are not merely liabilities to the Fed. The Fed only becomes the holder of a UST by virtue of a purchase, just like you or me.

                    2. You will find all of those and other provisions(default) etc. in your Certificate of Deposit Agreement with Chase. Your CD is a debt and a liability of Chase. Check out their financial statement. It is your asset.

                    3. I don’t get the matter of ‘force’. Does it relate to the government being forced to borrow its non-tax funded budget balances? This provision of the law on Treasury operations has been around since the Treasury – having nothing to do with ‘over-draft’ Rules. They allow the government to borrow, and they prevent the government from spending money they don’t have. Again, the Kucinich Bill changes all of that.

                    4. In fact, without confirming or denying your POV, everything that you say we “just need to” do, is already in the Kucinich Bill. Rather than try to square your POV with present reality, why do you, and the many NEP subscribers, not endorse the Kucinich Bill as the vehicle for doing what we ‘just NEED to’ do?

                    http://www.govtrack.us/congress/bills/112/hr2990/text

                    Thanks.

                  • “a Federal Reserve note (FRN) comes from, well, the Federal Reserve”

                    Mine are printed by the Treasury Department, I think. They’re signed by the Secretary of the Treasury, and the Treasurer of the US, and have the seal of the Treasury Department on them.

                    Girl Scout cookies don’t come from Girl Scouts, either. They come from a bakery.

                    When the Federal Reserve issues them, I think it is only to banks in exchange for electronic reserves in the same amount. No seigniorage. I don’t know what the arrangements are for transferring them from the Bureau of Engraving and Printing to the Fed, except to exchange worn bills for new. The amount is small in comparison to total revenues, so if there is seigniorage for the Treasury involved, like for coins, it isn’t significant. You can buy uncut sheets of bills directly from Treasury, $61 for a sheet of 32 $1 bills. That sounds like seigniorage for the Treasury department, not for the Fed.

                  • No, look more closely at your FRN – preferably a $1 note (I’ll explain this in a minute). That’s OK…I’ll wait till you take one out. Got it? Good.
                    Now, look on the left side, at the black circle with a letter inside it. That letter represents which part of the 12 banks of the Federal Reserve system the bill came from. The inner circle of the two black circles ought to say which bank of the 12 it came from – Mine says “The Bank of San Francisco.”
                    Now, the situation is very different on a United States note. These have a RED seal on the right side of the picture on the front, and instead of the Green Seal. These bills are TRULY issued by Treasury. Note there is no bank seal on the left, and the newer ones just says something like (this keeps changing over the years, suspiciously), “This Note is Legal Tender For all Debts, Public and Private” – well, not really since they can’t be used to pay the national debt, but let’s ignore that for now; it’s unconstitutional, for reasons already explained earlier.
                    Now, NEWSFLASH!
                    Apparently the new $10 bill says something different on the left side seal now: There is just a generic seal that says “United States. The Federal Reserve System.” There is no more identifying bank! While technically correct, it’s interesting they should genericize the FRN with its anti-counterfeit remake of a few years back, isn’t it? Perhaps they don’t want us to associate FRNs with a member bank but just to think the notes come from the “United States.” Fortunately, we are too smart to be fooled like that…aren’t we?

                  • Auburn,

                    “UST’s are not debt in any conventional sense. They are nothing but liabilities to the Fed ”

                    They are liabilities of the Treasury, not the Fed. In the conventional sense, they are debt. That the debt of a monetary sovereign is different from debt in the conventional sense is a rather unconventional idea.

                    You didn’t force Chase to do anything, they offered to do it and you took them up on it, on their terms. When they take your money, they owe it back to you, with interest. That is their debt in every sense.

                • How is it “Redeemable In Payment Of All Loans Made To The United States”

                  and not able to be used to pay off a debt of the United States? In your money world, is a loan not a debt?

                  • Auburn Parks

                    Golferjohn
                    you would be right that the treasury (more specifically, some department in the Treasury) is responsible for actually printing the physical currency. But the nominal amount of dollars in the ecosystem (as we know, mostly on the computer) is determined by the amount of horizontal money created (credit money from private banks) + the amount of vertical money created (new money issued through federal deficit spending) and ultimately, all of this is backstopped by the Fed.
                    When banks create money through making loans, they necessarily create a need for more reserve cash. In the aggregate, this continuously expanded need for more reserves to backstop the newly created credit money cannot be met by the existing money in the system, and so at the end of the day, this is why the Fed is the sole issuer of “new” net financial assets, of which, dollars are included

                  • Auburn Parks

                    (G1J) “They are liabilities of the Treasury, not the Fed. In the conventional sense, they are debt. That the debt of a monetary sovereign is different from debt in the conventional sense is a rather unconventional idea.”

                    I don’t think this is an accurate representation. You are correct that in a technical accounting sense, USTs are financial liabilities of the Treasury. But the Treasury doesn’t pay USTs when they come due….The Fed is the entity that shifts the money from the UST holder’s savings=securities account back to their reserve=checking account. The Treasury plays no role when USTs mature. The money never left the UST purchasers account, so the only additional funds required to service the maturing bond are the interest dollars and those come from the Fed’s money machine (yes, I know they are accounted for in the federal budget, but this is a distinction without relevance). I know its a difficult concept to get past, but the federal govt doesn’t borrow money. It creates money.

                    (G1J) “You didn’t force Chase to do anything, they offered to do it and you took them up on it, on their terms. When they take your money, they owe it back to you, with interest. That is their debt in every sense.”

                    Fine, we can disagree over how we classify debts and financial liabilities. But at the end of the day, Chase needs my money to operate and the Federal govt does not. This is all the difference in the world and as such, this is why sovereign debt is wholly misunderstood.

                  • Auburn,

                    I thought the discussion was about the differences between two types of currency, Federal Reserve Notes and US Notes. All that you said is true, most of our money is electronic, and because of our “retarded” (you do a disservice to the mentally disabled – the system is cleverly designed to conceal its true operation) system the net electronic balances increase when the Fed buys assets or lends reserves, although their true source is Treasury deficit spending.

                  • Auburn Parks

                    Scott and GolferJohn……..we are out of reply space
                    So let us carry on below…I am going to post a new comment at the bottom so we can start fresh

                  • Auburn Parks

                    G1J
                    Please, don’t misconstrue my use of the word retarded as some sort of slight to the mentally handicapped. As a progressive, atheist and humanist, I don’t discriminate against anyone and I appreciate humans , even with all their faults, more than you can imagine.

                  • Auburn,

                    OK, I get your point about Chase now. They are in the business of borrowing and lending, so yes, they need to be borrowing from somewhere in order to lend at a higher rate and make their profits. It’s what they do. For government, the whole T-bill thing is a side nuisance, not their core business, and only necessary because of obsolete laws.

                    Whatever you and I do to classify debts and liabilities doesn’t matter. There are accounting rules. When you give Chase your money, they owe it back to you. You don’t get to classify it, the accountants do.

                    When a T-bill comes due, I think the Fed takes money out of Treasury’s (bank’s reserve) account and puts it into the bill’s owner’s (bank’s reserve) account. If it worked like you said, that the Fed simply paid off the borrower, there would be no need for Treasury to roll them over, they would just “go away” from Treasury’s books at maturity, and the “debt subject to the limit” would go down. But it doesn’t. It has to be rolled over, because Treasury needs to (is required by law to) issue a new one in order to acquire a bank balance with which to pay off the old one.

                    To say that the money never left the buyer’s account is wrong. Then he would have a T-bill AND a bank balance, and he does not. I like the MMT view that his money was destroyed when he purchased the bill, and created when it was redeemed.

                    I don’t think we differ in our acceptance of MMT. The terminology is important, though. We must speak in terms that others understand and know to be factually correct.

                  • Auburn Parks

                    Hey fellas,
                    I am more than comfortable in admitting that I got out in front of my skis a little bit with some of the verbiage and especially the Chase comparison, but because this part of the comment board has been replied to so many times, it is not practical to continue this discussion at this location. If you would like to carry on, we should take this up at the bottom of the page.

                  • Auburn Parks

                    No one has addressed the fact that the statutory rule(s) that dictate(s) that the Treasury cannot overdraft at the Fed and thus must issue USTs dollar for dollar with its deficit spending is\are the mechanism(s) for determining how many USTs to offer the public each year. And that this mechanism can be altered at any time thereby effecting the rate at which US “debt” changes over time.
                    And if US “debt” levels can be changed in such an arbitrary manner, how can USTs be considered “debt” in any conventional sense?
                    Since I believe all three of you have used that conventional sense term in quotes, I will define it as an entity needing to borrow money in order to spend at a level higher than its income over a given time period.

  7. As a non-economist I would note simply that given the critical need to have a workable set of acceptable identities with which to construct realistic economic policy alternatives MMT has the stronger hand. The theoretical foundation is, when read in its entirety, Wray, for instances, translatable to a real world environment. I don’t see this is any other economic school of thought that would instantly embrace practical issues and political policy preferences in support of creating net financial assets in the private sector.

    • joe bongiovanni

      Robert,
      Of course, this ignores the school of Soddy, Simons, Fisher, Knight, Douglas, etc, even conservative Milton Friedman, all embodied in proposed legislation in the Kucinich Bill that was entered into two sessions of Congress.
      http://www.govtrack.us/congress/bills/112/hr2990/text

      A read of that Bill shows the workability of a debt-free money solution.
      Yet, alas, it is systemically totally indifferent to creating private monetary assets, seeing that as a completely private function to be determined by commerce and the interests of savers.
      Creating new money creates the media through which monetary assets can be created.
      That’s all the government needs to do.
      Creating monetary assets can only be seen as a governmental function in a debt-based money system.
      Thanks.

  8. Great article and at least for me this style of taking the reader a little back in history and holding our hands to the present is a superb way of enlightening and giving us tools to dialogue others with.

    • I thoroughly enjoyed reading it on Naked Capitalism, Phil.

      I agree with this 100%: “this style of taking the reader a little back in history and holding our hands to the present is a superb way of enlightening and giving us tools to dialogue others with.”

      Who knew Godley was a Kaldorian? I didn’t even know there was such a thing.

  9. Philip, great commentary, thank you.

    Re “certain countries – especially France, who was a rather more assertive power in that era than she is today – got sick of the arrangement and crashed the system by calling in their debts in gold thus forcing the US off the Bretton Woods system. ”

    This was an echo of what the Bank of France did circa 1930-32, and the Fed to a lesser extent, both under new leadership who didn’t seem to realize all the skilled fudging that had gone on since 1914 and 1921. By forcing the world back onto 1914 parity, they plunged everyone into depression. I highly recommend H. Clark Johnston’s book Gold, France and the Great Depression.

    Funny thing is the Germans are now playing that role. They remember Weimar well, but seem to have no recollection of how it eventually turned out for France. Or perhaps they just don’t worry about a blitzkrieg originating in Mediterranean nations…?!?

    • Yes, there is a thread in this article which points out the effects of the US Federal Reserve within the neo-colonialism of the Bretton Woods conclave then agreement. Yes, the Bundesbank is playing that role within the EMU. Also this “macro-ethic” also shows up via the bail out of several non-US banks by the US Fed/Treasury in the AIG melt down.

      Pointing how the existing institutions operate can point the way to how it could operate without the subversion. IE the BIS acts primarily as a clearing function and to a degree as an auditor of sovereign banking standards. A Bancor without a global central bank, ie NOT THE World Bank, which is really just a front organization for the western neo-colonial interests. That the Bundesbank is operating very much like the US Federal Reserve as a semi-privatized institution of centralized banking is no mistake. This too is a bit of bank-ism, and to put it in these terms the use of the specific wording of “capital-ism” remains apt. Both operate to stifle public oriented fiscal policies.

      Having the BIS operate to coordinate and support national fiscal objectives ends being equally pernicious to the bank-ism/capital-ism currently in place. Though having the BIS evaluate the functionality of national fiscal objectives could be a positive, if it was based upon standards of living, education, healthcare and the like over the levels of exterior based debt. The Mercosor model stands as a better model even for the EMU.

  10. joe bongiovanni

    Nit-picking crank here, I believe.
    Partly because by your definition, my problem with MMT is to perhaps nit-pick that it just doesn’t get ‘money’ right.
    And partly because, as an advocate of the Soddy school of money and social science, we have always been relegated to the status of monetary cranks. Please don’t do our lot a disservice by including us with the neo-classicals and NKs.

    Trying to place the core of MMT’s so-called internet difficulties as a Kaldorian ‘choice’ is somewhat self-serving and unnecessarily wonkish.

    The Soddy-ists at the American Monetary Institute(AMI), here lay out their evaluation of MMT as a monetary science phenomenon.
    http://www.monetary.org/wp-content/uploads/2012/10/AMI-Evaluation-of-MMT.pdf

    It’s much more about things like what is money, who creates money today, what is the proper role of government in a sovereign fiat monetary economy, etc.

    It is much less about who has the perfect insight into how to integrate sectoral finance with post-Bretton Woods economic exchange.

    On the issue here of who it is that are the dreamers, and who is right about modern money, the real dialogue is just coming to the fore.

    For the Money System Common

    • I am trying to understand this argument a little better, and the source you cited I have read before, albeit several years ago, but it seems more of hair splitting with definitions. What I meant is Sephen Zarlenga seems to be using his own definitions and the political constraints of the system, which Wray and other have pointed out and is using these constraints as proof that the economic theory of MMTers is false. Am I completely misguided here? Because I don’t really see a refutation of the economic theory of MMT just a difference of definitions and highlighting of what current laws stipulates regarding political choices such as issuing bonds prior to actual spending occurs, etc. Thanks for the hlep.

      • joe bongiovanni

        I’m glad that you have taken the time to read the AMI evaluation of MMT, but I believe it was only recently done by AMI – in fact it being dated as exactly one year ago today. I was only aware of it about six months ago.
        I wouldn’t agree that the definitions are what is at issue – rather the substance of public policy that stems from the monetary understandings that are articulated.
        For instance, MMT bases its entire construct on a definition of money BEING debt. Whereas, AMI is founded upon money being a legal, social construct that can obviously become debt (as today) or not be debt, with the latter the natural preference.
        Reformists believe there is nothing in the sovereign, fiat, state-money construct that defines the money system as being based upon debt.
        For a better understanding that avoids any associations with money’s definitions, I suggest a read of Frederick Soddy’s “The Role of Money”.
        http://ia700306.us.archive.org/15/items/roleofmoney032861mbp/roleofmoney032861mbp.pdf

        The public policy question that is before us, and on which we might agree, is the proper role of money, however defined, in a modern monetary economy.
        And I don’t think that there is a claim that MMT’s construct is ‘false’. Suffice to say that it sees several of MMT’s building blocks as simply mis-diagnosed, which leads to a lot of unnecessary confusion, and potential policy errors.

        The lack of agreement over any definition merely masks the larger issues of who does and who should issue the nation’s money, why and how. The AMI position is fully articulated in the Kucinich proposal as HR 2990. MMT remains an unwoven fabric that needs a comparative form. MMT’s reform proposals are not comprehensive enough to compare at this time. So I agree that the AMI evaluation is not meant to be a refutation of the economic theory of MMT, but rather an effort to see MMT’s economic theory more clearly spelled out.

        My position is that we need to clarify and sort out the different perspectives, mainly because I think we all agree that money is too important a subject to be left to the economists.
        Thanks.

        • Sorry should have been more specific, I was first introduced to Sephen Zarlenga around 2007 or 2008, I appreciate the feedback, this is all well outside of what I do for a living, but I’ve been trying to follow it for the last 4 years or so.

  11. This is interesting, but the story doesn’t seem to match the data.

    Kaldor says that in the 1950’s America was able to

    “borrow automatically by incurring deficits on “basic transactions” (on current and capital accounts taken together) and thereby provide other countries with additional reserves”

    The sectoral balance chart often displayed in MMT blog postings (you can see one at http://neweconomicperspectives.org/2013/02/the-spinning-top-economy.html )
    shows that the foreign sector had a deficit with America during the 1950’s. That is, there was a net flow of financial assets to the US, not from it to the rest of the world.

    The language is different, though, so maybe there is an explanation. Is “current and capital accounts taken together” equivalent to the net flow of financial assets? If not, then the difference should be explained, and data provided to show something other than what the sectoral balance shows, and some theoretical basis for it, and not the sectoral balance, being the significant factor. No doubt the Marshall Plan and other foreign aid did help the world economy, but there is no data showing that it resulted in a net flow of financial assets as seems to be claimed.

    There is a time warp problem, too, in that you claim that Kaldor blames the stagnation of the 1970’s partly on an “idiotic monetarist policy”. The monetarists did not come into control of monetary policy until 1979, and could not have caused any stagnation prior to that time. You can argue that their theory is wrong, and their policies misguided, but not that they caused something that happened before they got there.

    • Good points John. Hope we get an answer.

    • (1) Kaldor’s point — and I think that I highlighted this — was that the US were engaged in Foreign Direct Investment and this was increasing the supply of dollars abroad. As he says:

      “At first this was due to net foreign investment (public and private) exceeding her current account surplus. Later, in the 1960s, it was supplemented by a growing deficit on current account.”

      What seems to have been happening was that US corporations together with the US government were investing abroad — I’d say a lot of this spending was military-related — and this was exceeding the inflow of other currencies into the US due to her trade surplus. When the current account went into deficit due to Vietnam war spending this increased the flow of dollars substantially.

      This all shows up on a country’s NIIP which is the measure that Ramanan and other Kaldorians are always going on about. They take this to be a sign of an unsustainable build-up of foreign debt that will result in a crisis. Whereas Kaldor in the above lecture seems to indicate that a deficit on the US NIIP after WWII was necessary for world growth in that era. Hence why the Kaldorians seem at odds with Kaldor.

      http://en.wikipedia.org/wiki/Net_international_investment_position

      (2) I didn’t say that he explained the stagnation of the 1970s by way of the monetarist shocks. I said that these played a major part in “his story” — he’s discussing the slowdown of the economy from 1973 until when the lecture is being given (1984). Kaldor dates the monetarist shocks at 1978,

      Hope that clears everything up.

      • Perhaps we need some input from MMT, then, perhaps Stephanie. It seems Kaldor is saying that the foreign sector had a surplus in the 1950’s, due to this direct investment, which is somehow not accounted for in the sectoral balances. Seems to me it should be. Do the numbers need to be revised?

        • No, the NIIP and the Current Account do not need to overlap. They sometimes show some correlation as they are related in some very important ways. But they can be substantially different from one another. Here’s the US’s NIIP and its CA from 1984 till 2002.

          http://www.econbrowser.com/archives/2006/05/tille.png

          Note that the sectoral balances uses the Current Account, so it simply doesn’t take into account the NIIP. The NIIP is the measure that Ramanan and the Kaldorians are always going on about.

          • I didn’t mean that they should agree, if they are measuring different things. I was wondering which one is the relevant measure. Sounds like NIIP is more comprehensive, and a more accurate measure of financial asset flows. Except that the sectoral balances do balance, using the current account. Where is the offsetting measurement in the other sectors of the flows that NIIP includes and CA does not?

            • NIIP measures asset revaluations. So, if US citizens hold 1000 yen worth of Japanese stocks and Japanese citizens hold $1000 worth of American stocks and the American stock market goes down devaluing the Japanese held stocks by, say, $200 then the NIIP of the US will increase.

              • You’re not saying that revaluations were the thing that brought growth to the world in the 1950’s, are you?

                With more reading, I’ve discovered that NIIP is a stock, whereas CA is a flow. And that the change in NIIP is equal to the CA over the same period (except for revaluations).

                Now I don’t see what point Kaldor is making, by talking about NIIP changes being somehow different from CA. Unless there is some other flow not accounted for in CA.

                • No, no, not revaluations. Apparently the US was running deficits on its “basic transactions” according to Kaldor. It’s all very hazy because the external sector was measured very differently back in those days and there was no agreed upon way of putting the accounts together.

                  • So, no way to tell what he meant or whether he was right.

                  • Check the historical data if you can track it down. I seriously doubt Kaldor was just making stuff up — especially given that what he’s saying is at odds with what he was saying just a few years before. I think his interpretation is highly plausible especially in light of Michael Hudson’s detailed empirical work in “Superimperialism”.

              • Philip,
                Can we say that net international investment position corresponds, in part, to profits earned in another country but not repatriated. For example, if a U.S. company sold something overseas but left the profit there and invested it there that would be a niip? It certainly would not be part of this country’s GDP since it had nothing at all to do with employment or economic activity here (beyond management perhaps.)

                It is said that U.S. corporations have well over a trillion dollars in foreign countries held in banks there. It is held there since to repatriate it would result in a tax. My further question would be is that money part of niip? My guess is it is not since it has not been invested.

                After WW 2 there was significant investment overseas starting with the Marshall Plan. None of that I surmise) was part of gdp here so it was not part of the sectoral balances and that would answer John’s question?? It would also support Kaldor’s argument.

                I would add that revaluation seems to be the smaller part of niip. Is there any breakdown of what makes it up? It would also suggest that niip would track world gdp in some fashion. ie correlate.

                • I’d guess that for a multinational company, their holdings in a bank would be denominated in the bank’s local currency, and only translated to dollars for the purpose of reporting their financial position to a US audience. IBM builds computers in Germany, pays their employees there in Euros, sells the computers in Germany for Euros, and puts the profits in a German bank. In Euros. I can’t think why they would trade those Euros for dollars when they had no intention of sending them back to the US.

                  I don’t doubt that the Marshall Plan was enormously helpful to the world economy, I’m just wondering why Kaldor and Pilkington think it is not reflected in the sectoral balance. If ROW was accumulating dollars, they should have a surplus in the sectoral balance graph, and they have a deficit. The Marshall Plan surely contributed to the government’s portion of the sectoral balance. If the sum of the three sectors is zero, and from the graph it appears that the sum is zero, then the Marshall Plan must also be included in the foreign sector’s balance.

                  GDP calculation is not as simple as C + I + G + (X-M) makes it seem. When government spends overseas, like for the Marshall Plan, I think it has to count in both G and M, so it offsets itself. It’s not part of production here, but since it is part of G we have to make it go away when adding up GDP. Else government could increase “GDP” to any desired level by loading a rocket with $100 bills and shooting them into space.

                  Sectoral balances are financial. GDP is real. GDP is calculated by adding up financial events, but that’s just because real things are harder to measure and don’t have a common unit of account. Some of the things in the sectoral balance (e.g., domestic savings and foreign aid given in dollars, not goods) are not part of GDP.

                  • Holdings overseas could well be in euros or the subsidiary could convert them and put it in a bank here. I’ve read there is a lot right here in US banks. That doesn’t necessarily mean they pay taxes on them since a foreign sub may have the account.

                    To the extent the Marshall Plan sent goods and services to Europe that is GDP. But what if it was just financial aid? We recently bailed out banks to the tune of trillions of dollars and they are not in GDP so far as I know.

                    But I would like to hear from Phil how these transactions enter GDP, if they all do. I suspect the financial ones do not. I suppose we could go read the national accounts summaries but better to have a expert straighten us out.

                    The whole thing gets complicated rather quickly. Like, for instance, is the profit from the foreign sub included in our GDP and if so does someone impute the tax here on it.

                  • Yes, let’s hear form an expert. In the meantime, I’ll throw this out:

                    I don’t think a foreign entity opening a US bank account affects either GDP or sectoral balances.

                    Foreign cash aid is government spending, thus part of the government deficit/surplus, and part of the sectoral balance. It also would count in GDP as government spending, but also as imports, because it does nothing in itself for US GDP. It might cause the recipient to buy US goods, increasing exports. Or not. In the case of Marshall Plan, it apparently resulted in purchases of US products, (perhaps with some multiplier effect) because the foreign sector had a negative balance in those days.

                    Foreign aid in kind, presumably in US-made goods, is US GDP: G. It must be treated as consumed by government, because anything else would either double count or cancel out. Also part of the sectoral balance, as government deficit/surplus.

                    I’ve never heard of imputed tax, in this context. Sounds unlikely. The foreign sub’s profit is not the issue, for GDP. It is its purchases of US goods and services, or sales to US customers that would be included in the calculation of GDP. It doesn’t matter if the foreign entity is a subsidiary of a US company or a separate foreign company, whatever it does in its business is treated the same either way, as far as US GDP effects.

        • Here’s a good overview of the US NIIP from the early 1980s onwards (Read Chapters 1.3 to 1.6):

          http://www.columbia.edu/~mu2166/UIM/notes.pdf

          Although we cannot say much about the era Kaldor was dealing with from this, we should highlight this as it is relevant to MMT today:

          “An alternative explanation for the paradoxical combination of positive NII
          and negative NIIP is that there is no dark matter, but that the United States
          earns a higher interest rate on its foreign asset holdings than foreigners earn
          on their U.S. asset holdings. The rationale behind this explanation is the
          observation that the U.S. international assets and liabilities are composed
          of different types of financial instruments. Specifically, the data show that
          foreign investors typically hold low-risk U.S. assets, such as Treasury Bills.
          These assets carry a low interest rate. At the same time, American investors
          tend to purchase more risky foreign assets, such as foreign stocks, which earn
          relatively high returns.” (Pp21-22)

          As we can see: other countries are using the US dollar as a “safe-haven”. They are accepting huge amount of dollar assets that have far lower yields than the non-dollar assets that institutions in the US hold. This indicates that the US dollar (and T-bills) has a “value” that cannot be accounted for by its profitability alone. What is that value? Well, certainly it can be used as a reserve currency. But also, countries like China run mercantilist policies vis-a-vis the US. They are not accumulating T-bills to earn money, They are accumulating them to ensure that they have high levels of employment. The same was true of Japan in the 1980s.

          I assume that something similar was going on in the era that Kaldor was referring to.

        • One more link for peoples’ consideration:

          http://www.stlouisfed.org/newsroom/displayNews.cfm?article=380

          “Poole said a point that is not widely understood is that in the U.S., unlike almost all other countries, a hard landing process is inherently self-limiting. U.S. assets owned by international investors are mainly denominated in dollars, and a large fraction of U.S. assets held abroad are denominated in foreign currencies, he said. Dollar depreciation, should it occur in a hard-landing process, will be self-limiting because the dollar value of U.S. assets abroad will rise, thus improving the U.S. net international investment position. Market participants, knowing this fact, are therefore unlikely to drive down the foreign currency value of the dollar in a rapid and disruptive fashion.”

  12. balh blah blah
    the more they write the less they say. Just watch Europe to see what will work and what is failing in accelerating ways.
    If printing more paper and digital zeros works so well then why do they even have to charge citizens tax at all?

    • “Just watch Europe to see what will work and what is failing in accelerating ways. If printing more paper and digital zeros works so well then why do they even have to charge citizens tax at all?”

      Seriously? You don’t seem to have much of a grasp of what’s happening there.

  13. RolloMartins

    “The real risk comes when the private sector starts borrowing these dollars.” I wish you had explained this better. Please expand.

  14. –if the bancor plan is ever truly put on the table again I’ll be the first to support it. But it is such a distant possibility –Philip Pilkington

    Only future will tell that bancor – that new invention – how and when will be acceptable to the world. However one thing seems to be sure that the Chinese currency is already striking at the door of US dollar, asking for the space in the world economy. No doubt that confidence level for US dollar is still quite high.

    • Never heard of Bancor, and looked it up on Wikipedia. Sounds like a world-wide Euro on a gold standard. I don’t see anything attractive about that.

      • The Bancor would be the Euro disaster, only global. If we ever give up monetary sovereignty to that extent, we will be completely enslaved, and you can probably kiss this blog goodbye, along with all our other dwindling freedoms.
        Gold supplies are, have been, and always will be, mostly controlled by the 1% elite, like every other scare, or artificially scarce (in the case of fiat money), resource. A gold-backed currency will lead to deflation and ruin.

        • You guys DO NOT understand the bancor. It has nothing to do with the gold standard. It simply recycles trade surpluses to deficit countries in the form of investment.

          • Well, then please explain it. I would never be the first to cite Wikipedia as an authority, but it does say

            “The bancor was to be backed by barter and its value expressed in weight of gold.”

            Are you saying its value would float against gold? And if so, why involve gold at all?

            And how is a universal currency any different in practice from separate currencies and floating exchange rates?

            • Here’s the proposal summed up well:

              http://en.wikipedia.org/wiki/International_Clearing_Union

              Basically you tax countries for running trade surpluses. The bancor would have been tied to gold, but this was not necessary. I think Keynes and Schumacher proposed this because the gold standard was popular at the time.

              As you can see there was also a mechanism in place to automatically devalue a country’s currency if it were running a trade deficit.

              • Seems obsolete in today’s world of floating rates, which (if allowed to) automatically adjust in response to trade balances. Why have a bureaucracy to adjust fixed exchange rates when we can more efficiently adjust them automatically, continuously, and with infinite granularity? And absent a gold standard, what is the problem with trade surpluses anyway? It only hurts the mercantilists who manipulate their own currencies downward.

                The idea that ” this would encourage nations with surpluses to buy other nations’ exports” is bizarre. It’s mostly not nations that buy things from other nations, it’s people. People are encouraged to buy other nations’ exports by price or quality or just availability, not by a tax on their government.

                And why do you think China would go along with this scheme today?

                • (1) Floating exchange rate regimes do NOT automatically adjust to trade imbalances as can be seen from a cursory glance at the data:

                  http://www.american.com/graphics/2009/US%20Current-account.JPG
                  http://research.stlouisfed.org/fred2/data/DTWEXM_Max_630_378.png

                  (2) Your statement about incentives is not correct. The idea was that nations would structure their economic policy according to their current account. There are any number of different ways to do this. Keynes was not a fool.

                  (3) I clearly say in the piece that the bancor is not a realistic proposal today. But your China comment is way off politically:

                  http://en.wikipedia.org/wiki/Bancor

                  “In a speech delivered in March 2009 entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People’s Bank of China called Keynes’s bancor approach “farsighted” and proposed the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency as a response to the financial crisis of 2007–2010.”

                  • (1) In the real world, exchange rates are called a “dirty float”. Mercantilist countries hoard dollars in order to prop up their value. That’s not a bad thing for us, so we don’t object except to pretend that we don’t like it. It improves the real terms of trade for us. Absent the manipulation, true floating exchange rates would tend to reduce surpluses and deficits.

                    (2) Name some ways to do it, that would not cause harm or trade wars. According to the sectoral balance, government fiscal policy to reduce the trade deficit would be to reduce the budget deficit. Unless inflation were raging, that would tend to reduce GDP and raise unemployment, not an attractive result. Non-fiscal policy initiatives might include tariffs on imports, subsidies for exports, or straight-out bans or caps on selected imports, all of which would invite retaliation by trading partners and reduce trade and GDP in all nations. Also not an attractive result. Government could subsidize industries that were dominated by imports, which is mostly a waste of real resources (except maybe when done as a part of military strategy). What were some of Keynes’ brilliant alternatives?

                    (3) you said in the piece “if the bancor plan is ever truly put on the table again I’ll be the first to support it.”

                    As for China, I can imagine that they might like fixed exchange rates, so that they could maintain their mercantilist strategy without having to accumulate so many dollars. They would love for something – anything – other than the dollar to become the world reserve currency. But do you really think that quote means that China would be willing to give up its policy of trade surplus? If they want balanced trade, then why don’t they simply do it, bancor or no? All they need to do is sell dollars for Yuan on the forex market. Instead they are avoiding doing anything that bancor would try to force them to do, or penalize them for not doing.

                  • (1) First of all, I disagree entirely. Capital flows into countries with large financial sectors, like the UK, keep the deficits open just as well as out-and-out currency manipulation. MMT takes account of this when it says that “They want pounds in exchange for real goods and services”. Secondly, what the charts I have shown you indicate is that trade deficits do not respond properly to devaluation. Between 2000 and 2008 the dollar declined and yet the current account went FURTHER INTO DEFICIT. This indicates that in some countries — Western countries mainly — trade imbalances do not respond strongly to currency revaluations. I could show you similar data for the UK and a few other countries.

                    (2) Keynes assumed that there would be multilateral protectionist policies put in place. The “rules of the game” would be that if you accumulated a trade surplus you would be taxed and the surplus would be reinvested in the deficit country. Thus you would plan your economy and negotiate with your neighbour in such a way that you would ensure that surpluses would not happen. So, you might strike deals with them to reinvest in their country so that they could produce goods that you wanted to purchase. It is something like this that the Kaldorians want. Again, I DO NOT think this is politically realistic today, but had it been put in place in 1945 it probably would have worked.

                    (3) That is a good question. China talks out of two sides of its mouth. On the one hand they call for the bancor, on the other they accumulate dollars. Under the bancor they would be taxed for their surpluses, but they would also get far more of a say in trade diplomacy worldwide. I guess that the latter outweighs the former for them. It’s not surprising really. As Michael Hudson has convincingly showed, the Bretton Woods and post-Bretton Woods dollar-standard has ensured that the US retain dominance in world trade diplomacy. That’s what the “Washington Consensus” is all about. From my perspective I think we’re better off with the US pumping dollars into the system than what we have now.

                  • (1) Correlation is not causation, especially in real-world economic data, and more especially over longer periods of time, like several years. Many other things were changing in the world besides the dollar exchange rate. 2000-2008 saw LOTS of “globalization”, US companies opening plants in other countries and shipping the goods back to the US. It is impossible to say from the data what would have happened if nothing but the dollar exchange rate had changed. For that, we have only theory. By what theory does a country’s trade deficit expand because its currency devalues? Why does the Bancor system force a devaluation on a country that has a trade deficit, and revaluation upward on one with a surplus? The obvious answer to this observation is that the dollar depreciation was too small, the natural forces being restricted by manipulation, which was successful in expanding the US trade deficit in spite of the depreciating dollar.

                    I don’t understand this part:

                    ” Capital flows into countries with large financial sectors, like the UK, keep the deficits open just as well as out-and-out currency manipulation. MMT takes account of this when it says that “They want pounds in exchange for real goods and services”.”

                    By capital inflows, you mean direct investment in the UK by foreigners? Isn’t that part of the current account calculation? By “keep the deficits open” you mean causing the UK to have a CA deficit? Not if the capital flows are included in the CA. They would tend to cause a surplus, not a deficit. It’s the CA deficit that matters, right, not just trade? I couldn’t find that quote on the web, and on its face it seems tautological in that anyone selling something for a living obviously wants money in exchange for goods and services. I don’t know what meaning to assign to it in this context.

                    (2) Trade restrictions are never good. People only trade when both parties benefit from the trade. If there is benefit to be had, there is no need for it to be forced on people. They will do it themselves, out of self-interest, unless governments prohibit it. If Keynes’ answer to trade imbalances was trade restrictions and Soviet-style planning, maybe he wasn’t as smart as you say. In the wake of the Great Depression, though, perhaps he could be excused.

                  • (1) Yes, “globalisation” is one of the main causes. It gets rid of the link between currency value and the trade balance. That relationship was nice while it lasted, but it no longer exists in many countries. Devaluations only have short-term, not long-term effects.

                    (2) Capital inflows are mainly people buying financial assets in Wall Street, the City etc. This tends to strengthen the dollar, the pound etc. despite the trade deficits.

                    (3) “Trade restrictions are never good. People only trade when both parties benefit from the trade.” That’s your opinion — and its a very near-sighted in my opinion. Most advanced countries (Britain, the US etc.) developed BECAUSE of trade restrictions (ever hear of Mercantalism or Alexander Hamilton’s “Infant Industry Argument”?). It was only after they finished developing that they started to push free trade.

                    And before you start shouting “Soviet Union” and looking for reds under the bed, I suggest you read up on US history:

                    http://www.huffingtonpost.com/ian-fletcher/america-was-founded-as-a_b_713521.html

    • If Phillip supports the Bancorp and that is something backed by gold, I am pretty sure his whole Kaldor defense,is similar nonsense. He still,has not answered golfer johns questions.

  15. italics gone?

  16. I don’t know that this is the same as a gold standard: “The bancor was to be backed by barter and its value expressed in weight of gold.”

    I’m also not sure that the idea of *not using a particular nation’s currency as a (the) global reserve currency* is the same that nation giving up its monetary sovereignty.

    I could be wrong about both, but I’m at least right in that I’m not sure.

  17. Auburn Parks

    Scott and G1J
    First, I cannot continue to argue against the financial liabilities vs debt for Chase since I am not an accountant and don’t wish to make technically inaccurate statements, so I will take your word for it that on the Bank’s books’ its Debts and financial liabilities are equivalent until someone can prove otherwise…if possible.

    However, neither of you commented on what I said about why the Treasury issues USTs and how if they stopped issuing USTs according to the nominal dollar amount of federal deficit spending, this would cause the national debt to stop increasing…..and as such, this is all the conceptual proof we need that UST’s are not debt, but are instead savings bonds at the Fed bank.
    For example, lets assume that the rules regarding UST issuance are changed. The Fed declares the interest rate, Treasury just overdrafts at the Fed, and Congress decides allow the Treasury to issue USTs at whatever demand there is in the public market place.
    Now, If I buy a UST, my money is deposited into a securities account at the FED, that money just sits there. The Fed does not need my money to spend=create new dollars, and neither does the Treasury. Is my UST a debt of the Treasury? The answer to this question is no. The Fed would be responsible (as the Treasury’s bank) for holding my money and transferring it back to my reserve account plus the newly created interest money.
    This example is how it essentially works today, with the only difference being in determining how many UST’s are offered to the public each year

    • Sure, I agree conceptually with all of that, but the terminology is sloppy. A T-bill is an obligation of the Treasury department, issued by them and redeemable by them. To say it is an obligation of the Fed is incorrect. MMT says that to understand the system correctly you must think of Fed and Treasury together as “government”, and that it really doesn’t matter which government agency took your money and which will pay you back.

      Treasuries function exactly as a savings account at the Fed, particularly for foreign central banks, which have Fed accounts. Not so much for the American public, which do not have Fed accounts. When owned by people, they should be called “Savings Bonds”, because that’s how they function, and people understand savings bonds. Nobody would get excited about there being too many savings bonds outstanding, just as nobody gets excited about their bank having too many deposits.

      In accounting, “debt” is associated with bond issues or loans from banks or other creditors. It’s a subset of “liabilities”, because there are other types of liabilities that are not called debt. Examples are accrued interest, accounts payable, and in the case of a bank, deposits. OTOH, as used in economics, debt has meaning beyond its use in accounting. Economists would lump accrued interest, accounts payable, and deposits all together as obligations (debts), even though accountants would put them in separate buckets. But the accountants understand.

      Economists can consider government-issued currency to be “debt”, because of the obligation of the government to extinguish a tax liability when presented with it. In the next breath, they can also say that T-bills are not debt in the same way that your mortgage is, because the monetarily sovereign government can create money at will to pay them off. IMO, the “debt-free money” people are making a big deal out of a small semantic difference of opinion.

      • Auburn Parks

        Golferjohn
        I could kiss you for this reply, since not only does it address many of my questions about the difference between the conceptual and the technical (when referring to debts\obligations\liabilities etc) but it also says fairly accurately what I have been thinking.
        Especially this line…..”IMO, the “debt-free money” people are making a big deal out of a small semantic difference of opinion.”
        This is the entire point of my example here, why do we need to reinvent the monetary system wheel when simply changing the rules regarding the issuance of USTs and the Treasury overdrafting at the Fed would more easily reform the system. The only reason people visualize the number of outstanding USTs as the govts debt is because they rise in direct relation to the Govt’s deficit. If this were no longer the case…..neoliberal economics and gold standard thinking would turned completely upside down.

        P.S. I agree 100% that my terminology is sloppy and I am constantly trying to improve in that area as I am not an economist…So thank you for that.

        • Yes, but the only change really needed is to recognize that the amount of government debt is unimportant to a monetary sovereign. Then we could even keep the debt ceiling law, stupid as it is, just raise the ceiling whenever needed to accommodate Congressional appropriations, spend what is needed to fund government, and tax only as necessary to regulate demand. We could still issue Treasuries in the amount of the deficit, and the Fed could continue to buy as many of them as needed to maintain their interest rate target. No reforms, just realization.

          From there, it is easier to say “Let’s change the law. Let’s stop doing this and that, because they are not necessary, and let’s do the other thing this way, because it’s better. And let’s start doing this and that, which we always wanted to do, but thought we couldn’t afford.”

          Eliminating the fretting over the debt is 90% of the battle. After that, the rest is easy.

          • Auburn Parks

            (G1J) “Yes, but the only change really needed is to recognize that the amount of government debt is unimportant to a monetary sovereign”

            This is a true statement. My point is that it would be much easier to convince people that the US “debt” is a myth if the total amount of USTs outstanding did not increase by the dollar size of the Govt deficit. Yes, academics and very interested observers (like everyone in the MMT community) can come to the conclusion that the US is not in debt.

            But for lay people, I just believe that it would be easier to convince them that the govt doesn’t borrow the US dollar if it didn’t look like the govt borrows US dollars. Can’t you at least agree with this last statement?

            I am not a girl, and that line made me laugh out loud.

            • “But for lay people, I just believe that it would be easier to convince them that the govt doesn’t borrow the US dollar if it didn’t look like the govt borrows US dollars. Can’t you at least agree with this last statement?”

              More than that, nobody would think it was happening if it didn’t look like it was happening. No convincing would be necessary.

              But changing that would first require convincing people that what they think they see is not really true. Very difficult, but unnecessary.

              You just have to show them that monetarily sovereign governments can sustain any level of debt without any ill effects. When they say the US will have inflation because its debt is approaching 90% of GDP, just talk to them about Japan, where the debt now exceeds 200% of GDP, and deflation still prevails after over 20 years. Ask them why the US in supposed to be in danger of inflation at 90% when Japan suffers deflation at 200%? And then tell them that the size of the debt has nothing to do with inflation.

          • Oh, BTW, the debt ceiling is probably in violation of both Article 6 and the 14th amendment to the constitution. I know, I know, the president and Congress violate the constitution all the time, so no biggie, but if you want to read more, I wrote an article about it here:
            http://www.opednews.com/articles/Debt-No-More-How-Obama-ca-by-Scott-Baker-130122-872.html
            Cheers!

        • I hope you’re a girl. I’ve never been kissed by a progressive atheist humanist before :)

        • joe bongiovanni

          Auburn and Golfer,
          Apologies for busting in here, but…..
          …..”IMO, the “debt-free money” people are making a big deal out of a small semantic difference of opinion.”;
          I know I should ask what small semantic difference of opinion that would be, but I would rather observe that y’all are so far off the mark with this ‘ 0 % USTs’ and “Fed overdraft Rule’ repair as the solution to the modern money system problem that, well, you just haven’t thought it through.
          First, the problem of debt-based money has NOTHING to do with either interest payments on Federal debt issuance or the Overdraft Rule.
          While the periphery of the Overdraft discussion IMPLIES that its replacement would be ‘like’ debt-free money, I have never seen an MMT proposal for that. If there were no Fed, there would be no Overdraft Rule, but that wouldn’t change a thing about government borrowing its deficit balances and needing to have money before it could spend. That has been a limitation on Treasury forever.
          But the more substantive matter lies in this reality. When you fund the Treasury expenditure with any borrowing – and overdraft implies being temporarily overdrawn requiring a borrowing fix – then ALL money is still created by a debt.
          There remain two issues. One is government borrowing. One is debt-based money. If you believe that the socio-economic problems that stem from creating $12 Trillion in debt-based money by the private bankers out of nothing is a semantic difference of opinion, then that’s fine. But don’t pretend that this is not the case, and that the only problem we have is with government spending.
          The very real fact is that the government is the user and not the issuer of the money in our private debt-based money system. I can never understand how, if once understood, all self-proclaimed progressives (Golfer excepted here) tolerate this fact and ignore it in the call for reform.
          If people educated themselves about the progressive monetary history in this country, they really might be embarrassed by this position. The Chicago Plan proposal made to FDR in 1933 aimed to repair the boom-bust cycle caused by the cyclicality inherent in a debt-based money system – the stuff that caused the Depression. It proposed to end the need for Treasury borrowing and it enabled the government to create all of the nation’s money debt-free. Same as the Kucinich Bill.
          MMT’s major advancement is government borrowing at no interest, and only the Platinum coin solution for only the government’s debt-free money. If MMTers understand that, and claim that the difference between reformers and ‘modern money’ theorists is a small semantic difference of opinion, then we definitely NEED to re-define some terms.

          • If the Treasury could run a permanent overdraft at the Fed to fund deficit spending, then that is functionally equivalent to the Treasury being able to print money.

            Also, the the Treasury could borrow directly from the Fed, and always roll over all existing debts to the Fed with more borrowing, then that is also functionally equivalent to the Treasury being able to print money.

            The big questions come down to who makes the decisions. Where are the veto points.

            • Auburn Parks

              Hey Dan,
              Excellent of you to join the dialogue…hope you are having a nice saturday.

            • Auburn Parks

              I’m not sure if you remember a discussion that you, me, and SunflowerBio were having last week about the private sector needing the infusion of new money from the Treasury’s deficit spending to offset rising interest costs? You were not quite certain what Sunflower and I were referring to……here is an example from Prof Michael Hudson just last week on this site:
              http://neweconomicperspectives.org/2013/03/government-debt-and-deficits-are-not-the-problem-private-debt-is.html#more-4969

              My personal hypothesis was that there would be no way for the private sector to find equilibrium with compounding interest costs without new money being injected into the system. On this hypothesis about equilibrium, Prof Steve Keen seems to show that a debt based private banking system economy (without a govt) can reach equilibrium. However, I would like to see some further exploration of the subject because the models he used were rather simple. But I asked the Prof on twitter and he assured me that he has shown it to be simply a misunderstanding of stocks and flows….if there is anyone who you can trust to get the math right….its Steve Keen. Here is a very interesting presentation he gave on the subject that I bookmarked….If you would like to see it, this is the link:

            • Auburn Parks

              whoops, didn’t realize the video would post to the board….my apologies everyone……by the way, there are 3 parts….

            • joe bongiovanni

              Dan,

              “The big questions come down to who makes the decisions.”
              Now you’re talking.

              Like for instance who makes the decision that it is OK to have something called ‘functionally
              equivalent’ to public money creation, if you could have public money creation?

              How do we get something ‘functionally equivalent’ to public money creation?

              What you’re calling the overdraft problem is really that the Treasury needs to borrow its untaxed budget balances., and that it also needs to have the money in its account before it can spend. When you find the spot in the law that needs to be changed so that Treasury does not need to borrow these balances, there is still the matter that it needs to have the money to spend. So why not just ask permission to create the money that is needed, without debt, rather than ask to be perennially overdrawn on its account..
              I think it would be a better seller.

              “”Also, the Treasury could borrow directly from the Fed, and always roll over all existing debts to the Fed with more borrowing, then that is also functionally equivalent to the Treasury being able to print money. “”

              Trying to ignore the ‘functionally-equivalent’ pitch again, but this is the same thing. In order for the Treasury to borrow from the Fed, the law would need to change. So, why are we changing the law so that the Treasury can borrow from the Fed (avoiding the issue of whether the government would be borrowing from a private corporation) ?
              The answer is to provide some monetary independence to the Treasury. It is to acknowledge that the Treasury needs the ability to acquire its funding without going into the capital markets – or something like that.
              We’re told this is functionally equivalent to the Treasury being able to print money.
              If that is true, and the law needs to be changed to be functionally equivalent, then why not change the law to grant the Treasury the power to create and issue this money, and avoid the issuance of $Trillion of claims on the future American economy.
              Here’s the thing. Money does not have to be created by issuing a debt in the first place.
              So, functionally-equivalent, equivalence via government borrowing, or printing the money, debt-free?
              Who decides?

              • I assume that no matter what, Congress is the one that would get to decide how and through what mechanisms the Treasury would spend.

                You guys have read my posts. You know I wrote a long post on public finance in which I proposed a several modifications of the existing system, despite all the erroneous claims to the effect that I favor the status quo. But you are fixated on the dogmatic principle that banks should play no role in the monetary system, and that money should never be introduced via a process that incurs debt. I have no idea why.

                • joe bongiovanni

                  Dan,
                  First, I’m not sure what you mean by ‘public finance’ or what post you are referring to. And I don’t recall your proposals for reform anywhere.
                  Second, I do recall that a while back in a comment dialogue you said that you were going to post something on debt-free money. I never saw that post if you did so.
                  Third, I’m again disappointed that you resort to language like “yous guys are fixated on dogmatic principles” and then follow that with something that is not the slightest bit true.
                  “”that banks should play no role in the monetary system””.

                  These kinds of statements are why I avoid your comments, unless they are directed at me.
                  Which this is, and so I respond to the second part, which I believe is true –
                  “that money should never be introduced via a process that incurs debt. . I have no idea why”.

                  There is no reason for money to be created and issued through debts, unless you’re a debt-merchant and want to control the national economy to the betterment of yourself and those to whom you lend money. It’s a pity that MMT lacks interest in the history of the evolution of fractional-reserve banking by the privileged aristocracy, which name(frb) is just a slogan that masks the reality of private creation of a nation’s money by issuing debts to the people that actually OWN the money system.
                  The first thing that MMT seems to want to do after ‘discovering’ monetary sovereignty is to make sure that the money powers never is never restored to the sovereign.
                  Compound interest has entered the dialogue here, and its understanding provides another rationale for eliminating debt-based money. I ask readers to take in Dr. Senf’s exposition of the problems CAUSED by debt-based money and compounding interest here.
                  http://blip.tv/file/4111596
                  Or Google The Deeper Roots of the World Financial Crisis – Senf.
                  For some reason, to progressive-leaning folks here at NEP, having a system that perpetuates the trickling upward of real, labor-produced wealth into the ‘percent of the one percent’ – which debt-based money does – is not something to worry about. And the political, social, environmental and human costs of that debt-based system, as identified by Dr. Senf, seem to become acceptable to MMTers for the benefit of creating more private monetary assets – the rationale for which is to fix the interest-cost flaw that debt-based money creates in the first place.

                  So, when we look for reasons FROM the NEP bloggers for creating money out of debt when it is not necessary, we get is that we have been doing it for a hundred years – being endogenous and all – which is kind of like protecting the Status Quo. And my position, to be clear, is to agree with the sentiment I found on a sign at the OCCUPY demonstration in Chicago in 2011: The Status is not Quo.
                  If you try to understand Dr. Senf’s work, I don’t see how you can come to any other conclusion. If you really understand the socio-economic outcomes that are a result of debt-based money, and still don’t understand why it needs to be avoided, we must have a differing foundation of political economics.

                  Finally, this errant notion, also expressed here by others, that I oppose the workings of the banks in the money system, is without any basis whatever. If you read the work of all the reformers throughout the ages it is that the bankers should create all the credit, should make all the loans, should take deposits and intermediate between savers, investors and borrowers – all the stuff that people think they do now.
                  They should neither create nor issue the circulating media of exchange by issuing debts for the simple reason that the media they create does not circulate, bank-credit dies with loan repayment, perpetuating the need for compounding interest.
                  Banks should do banking. Money-creation and issuance is a sovereign governmental function.
                  Thanks.

                  • Joe, You’re attacking strawmen as usual.

                    MMTers agree with you: private debt should be sustainable, serve productive purposes, not exacerbate inequality, etc. Banking needs to be reformed, rentier capitalism needs to be abolished, the economy should work for all, not just for a tiny minority.

                    (Presumably you don’t think all private debt should be eliminated.

                    The only real difference between us is that you want full-reserve banking. That’s it.

                    You think all of the above can only be achieved if we have full reserve banking. Others disagree.

                    Ok?

                  • joe bongiovanni

                    Please read the following aloud, try to let it sink in.
                    I do not want full reserve banking.
                    I know you think you understand the money system and proposals for reform, but full-reserve banking was proposed mostly to replace the gold-reserve backing of the currency. It made a lot of sense back in the ’30s , and we have been stuck to the reserve-based money paradigm.
                    The Kucinich and AMI proposals do NOT propose full-reserve banking.
                    And if they did, the major issue of monetary reform is not how the banking system works, but how the money system works.
                    What reformers propose is to restore to the government the power to issue the nation’s money, without debt.
                    And for the people to benefit therefrom.
                    And to have the bankers enabled with the power to create all of the nation’s credit, but not to create money.
                    Why is that so difficult to understand?

                    “(Presumably you don’t think all private debt should be eliminated.”
                    y – I have to guess you have never taken the time to read the Kucinich Bill, or you would know how ignorant that statement really is – though granted it is repeated here by others being equally less well informed.

                    “Joe, You’re attacking strawmen as usual.”
                    If instead, you would say what the straw man is, maybe we would get beyond inane rhetoric, which serves no purpose.

                    “You think all of the above can only be achieved if we have full reserve banking. Others disagree.”

                    All of the above can only be achieved by ending the private creation of debt-based money(no need for reserves of any kind), by having the government issue all the nation’s money debt-free, and by directing the first use of the money supply towards a public purpose. So, the bankers get back to banking.
                    Please read the Kucinich Bill to understand HOW.
                    OK?

                  • Alright, so you don’t want to call full reserve banking “full reserve banking”. Fine, call it what you want. Call it “restoring to the government the power to issue the nation’s money, without debt” if you prefer. The point is still the same: you want what everyone but you calls “full reserve banking” – that is, you don’t want bank liabilities to be money, or in other words you don’t want banks to create any money.

                    That is the only real difference, of any substance, between you and MMTers.

                    (In fact a few MMTers are in favour of full reserve banking, but most apparently aren’t).

                    Some of the straw men arguments that you’ve been coming up with are:

                    1. MMTers are in favour of “the trickling upward of real, labor-produced wealth into the ‘percent of the one percent”.

                    No, MMTers are not in favour of that. MMTers just tend not to be in favour of full reserve banking.

                    2. MMTers want to defend the status quo.

                    No, MMTers do not want to do that. MMTers just tend not to be in favour of full reserve banking.

                    3. MMTers don’t care about the political, social, environmental and human costs of the current economic system.

                    No, MMTers do care. MMTers just tend not to be in favour of full reserve banking.

                    4. MMTers don’t want full monetary powers to be restored to the Treasury.

                    No, MMTers do want that. MMTers just tend not to be in favour of full reserve banking.

                    5. MMTers are in favour of unsustainable debt and boom bust cycles. .

                    No, MMTers are not in favour of that. MMTers just tend not to be in favour of full reserve banking.

                    Do you see? MMTers are not evil because they don’t all believe in your pet project. They just happen to tend to disagree with one of your policy proposals. That’s all.

                    Personally I’m undecided on the issue. What I find completely pointless is your overblown rhetoric and attempts to paint MMTers as being regressive, just because they don’t agree with absolutely EVERYTHING that you believe, and don’t use EXACTLY the same words and phrases as you.

          • Auburn Parks

            Joe
            First, are you the guy that makes the “coffee with Joe” youtube videos?

            Let us get to the crux of the dispute…..I feel that we are talking past each other. We disagree about something foundational, you think the Govt borrows its own currency and I think this notion is false,

            (Joe) “The very real fact is that the government is the user and not the issuer of the money in our private debt-based money system.”
            I don’t accept this statement as true.
            The govt is the ultimate issuer of the currency. Banks could not keep adding reserves to balance their loans without the Fed creating new reserve money for them. And the Treasury creates new money anytime it deficit spends. If this statement is false then by all means enlighten me by answer this specific statement directly.

            (Joe) “But the more substantive matter lies in this reality. When you fund the Treasury expenditure with any borrowing – and overdraft implies being temporarily overdrawn requiring a borrowing fix – then ALL money is still created by a debt.”
            The govt doesn’t borrow money. It only looks like it does because of the accounting gymnastics that are forced upon it.
            I believe my statement is true because of the overdraft example at the Fed. There is no reason why the Treasury would have to pay back its overdraft at the Fed. Congress could remove the statutes that forces Treasury to issue USTs and the Fed would still clear of all Treasury’s checks. The overdraft number would just continue to go up indefinitely but the Fed can never run out of money, so it is irrelevant what the overdraft dollar amount is. Treasury would continue to deficit spend, new USTs would not be offered commensurate with the deficit spending, thus the amount of outstanding USTs (or govt “debt’ as you seem to describe it) would not increase. All of this is proof that the govt does not borrow money and this is because the Govt is the US dollar issuer.

            Feel free to answer either of these two claims.

            • joe bongiovanni

              To Auburn Parks.
              “First, are you the guy that makes the “coffee with Joe” youtube videos?”
              Yes. Haven’t made any in a long while.
              “The govt is the ultimate issuer of the currency. Banks could not keep adding reserves to balance their loans without the Fed creating new reserve money for them. And the Treasury creates new money anytime it deficit spends. If this statement is false then by all means enlighten me by answer this specific statement directly.”

              Sure and thanks for asking. I can only respond to this one as I am going out for dinner.
              If you understand endogenous money, more or less an adjunct among MMT tenets, money is both created and issued in the private credit market by the banks. Of course, this must be true. The question MAY become, but do the banks create ALL the money – or does the government create any? Answer, except for coins the private banks create all the money in the private market for credit. The only proof I have is that if you search back for the source of all of the money in the money supply, it was created by the banks by issuing loans to borrowers. None was created by Treasury, except maybe a few Greenback notes still circulating.

              Now, you’re correct that the FRBNY, a private bankcorporation that we refer to as “the Fed’, is tasked with crediting the accounts of these banks with ‘reserve credits’ in order to accommodate the accounting required to facilitate the lending. Exactly how and why all this happens is best spelled out in the Fed’s publication titled Modern Money Mechanics.

              If this is true, that all money is created by the private banks, endogenously, in the credit markets, then it cannot also be true that the Treasury creates any money when it spends. And it is not true. The Treasury never creates any money when it spends. If you look at those balances in the money supply that all came from the banks, those numbers do not change as a result of Treasury spending.

              I tried to explain earlier that the restriction on government(Treasury) spending is as old as the Treasury itself. The Treasury could never spend money that it did not have in its account, and it cannot do so today according to the government’s financial management rules.

              There is no more graphic showing of this truth than the Treasury needing to have the Greenback laws enacted in the Civil War. If the government created money when it spends, there was no need for the Greenback laws. The soldiers needed to be paid, or we would have acquiesced to the demands of the Confederacy. There were also brief accommodations of unfunded Treasury spending during WW II.
              The rule is that today Treasury never creates money when it spends.

              More later.
              Thanks.

              • The Greenback laws had to be passed to provide for what amount, and when, the dollars would be produced, but not to the actual ability of Congress to “coin Money.” That phrase and ability has always been in the constitution as Art. 1 Sec. 8. It took the genius, or perhaps desperation, of Lincoln to do it.
                Oh, and we are in desperate times again.

              • MMT calls it horizontal money, the kind created by banks when they lend. That type of money creation also creates a matching financial liability, so that no NET financial assets are created by bank lending. The private sector cannot increase its financial assets that way, only transfer them (bit by bit, via interest) from borrowers to lenders, and the lenders are mostly banks, which are mostly publicly traded corporations.

                MMT knows that there is a lot more bank money than what they call vertical money, which comes from government. The issue is not who creates more money, it is that government money creation adds financial assets to the private sector without an offsetting financial liability in the private sector. The private sector gives up real goods and services, not financial assets, to the government in exchange for money. Different from a bank loan, where no real goods and services are involved, just an exchange of financial assets.

                I know you guys don’t like the fact that banks are privately owned, like other businesses. But that doesn’t mean that the government isn’t creating money, whether one thinks it happens by spending, as MMT says, or by “monetizing the debt” or “printing money”, as the media refers to it.

                • joe bongiovanni

                  Golfer,
                  If what you think you know is that “ you guys don’t like the fact that banks are privately owned, like other businesses.”, then, sorry but you have no idea what ‘you guys’ like or don’t like. And how did you come to think you know that?
                  I love the fact that banks are privately owned like other businesses, who unfortunately do not to create their product out of thin air, and rent it to the Restofus.

                  As I just pointed out to Dan,
                  If you read the work of all the reformers through the ages, it is that the bankers should create all the credit, should make all the loans, should take deposits and intermediate between savers, investors and borrowers – all the stuff that people think they do now.
                  They should neither create nor issue the circulating media of exchange for the national economy by issuing debts for the simple reason that the media they create does not perpetually circulate in the economy, as real money should. Bank-credit dies with loan repayment, perpetuating the need for more loans and more compounding interest.
                  Banks should do banking. Money-creation and issuance is a sovereign governmental function.

                  Now, golfer, I hope you understand that I understand what MMT believes about governmental (vertical) money. In truth, the only money issued by the government in that vertical pillar is coinage.
                  Government does not issue the paper currency. Private banks issue the paper currency, through collateralized borrowing at the Reserve banks. It is thus that currency is debt-based into circulation, and that the private banks issue that paper currency.

                  The other component of the debt-based money system in the vertical pillar is reserves, which are not money.

                  So, while it’s true that government finance adds net financial assets to the private sector, it is the opposite of being due to the government creating/issuing money, rather it is due to the government NOT creating money, and creating public debt –a marketable private financial asset – instead.

                  MMT’s fixation on private sector net financial asset creation kind of flies in the face of understanding who owns a sovereign money system and what needs to be done so that, as Lincoln proclaimed: “The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity.”

                  Sorry, but the issue IS who creates and issues the money. That is the issue that has ‘come down through the ages’. And here we are. You cannot proclaim it away.
                  For the Money System Common.

                  • The only think banks create out of thin air is IOUs. IOUs are always created out of thin air, no matter who issues them. If the IOUs are negotiable then other people will be willing to accept them in exchange them in exchange for goods and services.

                  • joe bongiovanni

                    Not sure what you’re saying here, Dan, but…
                    ALL Money is always created out of thin air – as this is what ‘the creation’ concept is all about. Money does not exist. Then money exists – by creation, debt or no debt. IOU or no IOU. The money power is clearly more about issuance into national commercial circulation, where it becomes purchasing power, than creation.
                    If you want to see what banks create is an IOU that’s fine, but to me what banks create out of thin air is a YOU OWE ME – a securitized promise, on the part of the borrower, to pay. And the amount of the You-Owe-Me is ‘greater (P+I) than what I issue for you (P) in terms of purchasing power – which is what money is, and what is created in the bank-lending-debt-money-creation process.
                    Again, not sure what your point is here.

                  • Private banks issue the paper currency, through collateralized borrowing at the Reserve banks.

                    If the banks in the aggregate have to borrow the paper currency, then clearly they are not issuing it.

                  • Joe, the banks don’t create a UOMe. Unlike governments which have the power to impose legally binding tax obligations, when a bank makes a loan it usually creates an IOU and exchanges it for the depositor’s IOU. A bank deposit balance is an IOU. That’s not just a figurative description. If you have a deposit account at a bank with $10,000 in it, that represents the fact that the bank owes you $10,000. You can go then to the bank and demand that they give you $10,000. You can also order the bank to pay some third party some or all of of the $10,000.

                    Since that $10,000 is an IOU of the bank – a liability of the bank, a claim against the bank’s assets – they obviously are not going to give it away for free. What they do instead is exchange it for your IOU – your promise to pay them a certain amount of money buy such and such a date.

                    Most banks are solvent, and so people trust their IOUs. That’s why they are willing to accept those IOUs for almost every kind of exchange, which is what makes us think of them as money.

                    Sometimes, of course, lending banks don’t give the borrower an IOU for the borrower’s promissory note. They give them actual cash. They go into their safe and take out $10,000 cash, and hand it to the borrower. That cash was a part of their assets, and so they just lost $10,000 in assets. But they are compensated for that loss, and probably profit from it, because your promissory note is a new asset to them worth more than the assets they just handed over.

                  • joe bongiovanni

                    “Joe, the banks don’t create a UOMe ….What they do instead is exchange (it) for your IOU.”
                    potahto, potato…
                    That might leave us trying to determine who ‘creates’ the real IOU, which is done exclusively by the bank, as a You-Owe-Me”. Or we have no exchange media. And people get hungry.

                    These considerations not equal. As to form, one is creditor and one debtor. The creditor possesses only the money-power privilege. It creates from nothing the amount of its liability to the borrower, in return for the borrower’s securitized promise to pay. The borrower brings the asset to be secured. Twould be fine if the bank did not possess that power and instead used its depositor’s money, under contract, to rent the money to the borrower. That’s what people think they do now.

                    As to content, the transaction amounts to the bank renting out something that is not in its possession. I know the bank has the obligation to manage its loan liabilities, but the banking system in whole is guaranteed to provide for that liability management. The amount obligated to the debtor – the bank’s UOMe – is greater than the amount provided by the bank. In return for what? Privilege.

                    We create no money for economic exchange except as issued by these privileged merchants of interest-bearing debt. It does not need to be that way and economic modeling proves we would be better off with another system.

                    Unfortunately, folks who learn the money system through the MMT unit-of-account identity have a complete focus on the bookkeeping entries when discussing the mechanics of the money system and the national political economy.
                    It’s not about the accounting. It’s about power and privilege within our national economy.
                    The banks merchant all the nation’s money needed for economic exchange as personal debts.
                    And, it’s the people’s money system.

              • Auburn Parks

                Joe
                (JB) “If you understand endogenous money, more or less an adjunct among MMT tenets, money is both created and issued in the private credit market by the banks. Of course, this must be true.”
                I agree, except for the issuing part. The private banks can create credit money all day, but they could never issue a single dollar unless the Fed creates those dollars for them to issue.

                (JB) “The question MAY become, but do the banks create ALL the money – or does the government create any? Answer, except for coins the private banks create all the money in the private market for credit.”
                I don’t see anything inherently wrong with letting the banks (re:market) determine how much new money the system needs. As long as we get a better handle on limiting the amount so that private debt doesn’t grow to 300% of GDP and cause another Great Recession\Depression. The converse is centrally planning the amount of new dollars to inject into the system…..central planning < market planning….in most, but certainly not all instances.

                (JB) "Now, you’re correct that the FRBNY, a private bankcorporation that we refer to as “the Fed’, is tasked with crediting the accounts of these banks with ‘reserve credits’ in order to accommodate the accounting required to facilitate the lending."
                The Fed is not a private bank corporation. Its created and controlled by congress, its chair is appointed by the president and confirmed by congress, it remits all profits to the Treasury…..No matter what you say, the Fed is nominally a Govt body. And so yes, this confirms my initial statement that all Dollars ultimately come from the Fed. The private banks are simply the mechanism we have structured to determine how many new dollars are appropriate.

                (JB) "If this is true, that all money is created by the private banks, endogenously, in the credit markets, then it cannot also be true that the Treasury creates any money when it spends. And it is not true. The Treasury never creates any money when it spends.
                I don't accept the premise that all money is created by private banks because the Treasury injects all new net financial assets into the system (as seen in the sectoral balances), I don't understand how you can disagree with this statement. The private sector cannot create new net FAs.

                (JB) "If you look at those balances in the money supply that all came from the banks, those numbers do not change as a result of Treasury spending."
                I don't know which measure of the money supply you are referring to here.

                (JB) "There is no more graphic showing of this truth than the Treasury needing to have the Greenback laws enacted in the Civil War. If the government created money when it spends, there was no need for the Greenback laws. The soldiers needed to be paid, or we would have acquiesced to the demands of the Confederacy.
                Our modern system is not perfectly analogous to the civil war monetary system and I am not a historian. As a layman, I am not sure how this statement is relevant to our current discussion.

                Hope you had a nice dinner last night. Always good to spend some quality time with friends and\or family.

                • joe bongiovanni

                  Auburn,
                  Thanks.

                  ‘I agree, except for the issuing part. The private banks can create credit money all day, but they could never issue a single dollar unless the Fed creates those dollars for them to issue.’
                  Why do you distinguish between the bank credit money and dollars? Dollar ($US) is the denomination of our national system of money. When the bank creates the credit -money it can only do so in $US denomination. Bank-credit money is/are dollars.
                  The private banks create and issue the $US-denominated ‘bank-credit’ money by making loans which are deposited to the borrower’s checking account, the foundation of the nation’s M-1 money supply. Banks create and issue $US denominated bank credit money into circulation, and by that act increase the M-1 money supply. Are you talking about paper currency?

                  “”I don’t see anything inherently wrong with letting the banks (re:market) determine how much new money the system needs. As long as we get a better handle on limiting the amount so that private debt doesn’t grow to 300% of GDP and cause another Great Recession\Depression. The converse is centrally planning the amount of new dollars to inject into the system…..central planning < market planning….in most, but certainly not all instances.””
                  Very progressive of you to disagree with Lincoln, etc. about whether private capital marketeers or government should issue the nation’s money, and why. : “The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity.” Lincoln.
                  Please let me know when you figure out whether the pro-cyclicality of debt-based money is the cause or the result of the Bubbles and Crashes.
                  Central planning – OMG ! But it’s a national economy. And, it’s a national monetary system – a sovereign national money system owned by the people, but for some reason operated by…….by…….by…..the invisible hand – which is answerable to the invisible people.
                  'There's a bailout coming but it's not for you
                  It's for all those creeps hiding what they do.'
                  Neil Young: There’s a Fork in the Road Ahead.
                  Anybody answerable for the Bubble? Anybody answerable for the crash? Should there be? Free Markets are great when there is a level playing field. You DO know, Auburn, that free-market capitalist champion Milton Friedman supported just exactly the type of money system reform I’m talking about? As he put it –“to end the creation and destruction of capital” – i.e., a permanent money system.
                  You really need to get down to understanding what will work – how and why.

                  “The Fed is not a private bank corporation.”
                  Please call the FRBNY and ask them if they are not a private bank corporation – are they not registered in NYC and NYS as a private banking corporation. Of course they are, as are ALL federal reserve banks.
                  “”Its created and controlled by congress, its chair is appointed by the president and confirmed by congress, it remits all profits to the Treasury…..No matter what you say, the Fed is nominally a Govt body.””
                  Privatizing a sovereign money system is a complicated process indeed.
                  ‘nominally’ – as – ‘in name only’?
                  I hope you understand that in remitting its net-income to the Treasury, it is merely returning to the Treasury what the Treasury has paid to the FRB on its Treasury holdings. What happens when it suffers losses from these unprecedented, extraordinary financial ‘facilities’ it has created. Who pays for that?

                  “”And so yes, this confirms my initial statement that all Dollars ultimately come from the Fed.””
                  Huh?

                  “”I don't accept the premise that all money is created by private banks because the Treasury injects all new net financial assets into the system (as seen in the sectoral balances), I don't understand how you can disagree with this statement. The private sector cannot create new net FAs.””
                  Auburn, please, with all due respect again. First, sectoral balance accounting has nothing to do with MONEY creation and issuance. Second, the net financial assets that are created by government BORROWING, and not spending, have nothing to do with MONEY creation and issuance. Unfortunately, the magicians are running the play here. Keep your eye on sectoral balance accounting and net financial ASSET creation, and, to paraphrase – “I care not who creates the nation’s money.”.
                  Do I agree that Treasury borrowing increases marketable assets, of course. That’s why it is desirable – almost necessary – FOR THE BANKERS who issue the money as interest-bearing debt – to have government continue to borrow. Nice work if you can get it. Again you are really confusing the cause of the problem with its solution. (I am glad to have this conversation off screen, BTW)

                  “I don't know which measure of the money supply you are referring to here.”
                  M-1 and/or M-2 .

                  “”Our modern system is not perfectly analogous to the civil war monetary system and I am not a historian. As a layman, I am not sure how this statement is relevant to our current discussion.””
                  The major question of whether government creates money when it spends or not certainly needs a long, hard look at its foundation and its footing. It has never been factually, legally or empirically shown or proven within MMT except by negative inference – in the nuanced weeds of reserve accounting. Surely you can agree that had Lincoln the power to create money via spending – he would have simply done so, and not need to go to Congress to pass the “Greenback” laws in order to issue the paper currency to pay the soldiers.
                  So, please consider, if Lincoln did not have the power to create money by spending, then when, where and how did that power come into existence.
                  Shall we?
                  Thanks.

                  • Auburn Parks

                    Oh boy, we can go around and around forever. I am happy to admit that you make some valid points and that there are times when my assertions are technically wrong.
                    However, I am more than comfortable with leaving our disagreement to rest on this foundational point.
                    The Fed can create an unlimited supply of money and the Fed is part of the Govt.

                    Where did the Fed get the $3T to do QE?
                    http://research.stlouisfed.org/fred2/series/BASE

                    No private business has ever been created by an act of Congress FRA of 1913 and the major amendment that created the open market committee in 1930

                    And finally how are all these quotes wrong?
                    “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default” said Greenspan on NBC’s Meet the Press

                    in 2009, Bernanke told CBS’s Pelley the following: “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”

                    “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (by virtue of never facing insolvency and paying interest rates over the inflation rate,” St louis Fed

                    So either, all these people and this reality are wrong….or you are. We can quibble about technical details all we want. I know you really love the Kucinich bill, but it doesn’t change the fact the the Federal govt is the ultimate issuer of the US dollar.

                  • joe bongiovanni

                    Thanks, Auburn
                    So, to discuss, THAT:
                    “”The Fed can create an unlimited supply of money and the Fed is part of the Govt.””

                    None of us come to study the money system outside of our personal relation to the larger political economy –where we all live and work and play. What our lives need are employment, health, education, environment and maybe, peace – the things that matter.
                    In discussing who creates and issues the money, we are talking about the national exchange media, the purchasing power of the national economy that we use to bring us those things we need. So to me, if there’s no purchasing power, if there’s no exchange media, if there is no ‘job creator’ and nothing created to transmit economic betterment, even if they are money ‘things’, then they are not money.

                    “”Where did the Fed get the $3T to do QE?””
                    To ask where the ‘Fed’ got the $3T to do QE is to imply that there was $3T of ‘money’ created for that purpose. Obviously, there was not $3T of money created or the money supply would have increased by that $3T. There would have been an additional $3T in economic demand and purchasing power added to the economy. There was none of that, because the FRBNY did not create money.
                    The Fed has the power to create infinite reserve balances for its DIs, and FRBNY did create reserve balances. It did not create ‘money’.
                    These reserves are accounting balances in the CB – DI interface, used by the Fed reserve bank to encumber its own balance sheet with liabilities that were formerly held by the party receiving the reserve balances.
                    If there be any purpose to having MORE reserves in the banking system, it is to settle the payments system. The money system did not require any reserve balances in order to meet the needs of the financial economy or the monetary system. Most banks were already in possession of sufficient cash balances to meet their payments requirements. So, increasing excess reserves by $3 Trillion does WHAT for the real economy – again where we live and work? Nothing.
                    But for the financial economy, it boosts confidence and pumps up private investment in financial instruments like stocks, bonds and commodities, driving up their prices. But it is not the reserves that are created by the Fed that buys the stocks and bonds. As Bernanke says: “they just sit there” in the reserve accounts of the DIs, and the liabilities of the Fed just sit there, hopefully maintaining value so that the Fed can withdraw those reserves if the real economy ever gets going again.
                    Reserves are not money. The Fed did not create $3T in new money. The Fed itself has no monetary transmission mechanism to the real economy. That is what the bankers do.

                    ‘‘No private business has ever been created by an act of Congress FRA of 1913 and the major amendment that created the open market committee in 1930.’’
                    I never said that the FRA created any private business. I said that FRBNY is a private corporation, and it operates for the benefit of its shareholder-Members.
                    On ALL of the Federal Reserve Banks – from the FRA:
                    “the banks so designated shall, under their seals, make an organization certificate which shall specifically state the name of such Federal reserve bank,……. the amount of capital stock and the number of shares into which the same is divided,…”
                    “The board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are prescribed by law.”
                    Upon the filing of such certificate with the Comptroller of the Currency as aforesaid, the said Federal reserve bank shall become a body corporate and as such, and in the name designated in such organization certificate, shall have power —
                    To adopt and use a corporate seal.
                    To make contracts
                    To sue and be sued, complain and defend, in any court of law or equity.
                    To exercise by its board of directors,……. all such incidental powers as shall be necessary to carry on the business of banking…. END
                    Each federal reserve bank is a private capital stock corporation. It can sue and be sued. The Federal Reserve Banks are private banking corporations, operating on behalf of their stockholders.

                    And finally how are all these quotes wrong?
                    “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default” said Greenspan on NBC’s Meet the Press
                    Later.
                    ‘in 2009, Bernanke told CBS’s Pelley the following: “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”
                    In response to a question of from where did the Fed get the money to buy all these assets – were they tax dollars? No, we just mark up the account they have with us – more akin to money printing – than it is to borrowing.
                    The nature of the transaction, as I said, is a swap of increased reserve balances – which are the accounts that the DIs have with the Fed, for some asinine asset of the DI. Have any of those banks ‘spent’ those reserves from their reserve accounts?
                    Didn’t I post the Bernank’s speech at Princeton – about exactly these same balances. “They are not in circulation. They just sit there.” So the question becomes whether we’re talking about money as the media of exchange that creates jobs, feeds people and reduces economic suffering, or do we stay in these weeds of reserve accounting. This is where MMT fails. It is attempting to prove that the government is creating the nation’s money by using these arcane constructs of internal central bank accounting. Why?
                    Show me the money. And I will show you who issues it into circulation. It will not be the government. Except the coins.

                    “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (by virtue of never facing insolvency and paying interest rates over the inflation rate,” St louis Fed

                    I take this statement to simply mean that as the sovereign issuer of a fiat money system that maintains monetary autonomy (debts in national currency and free exchange) always has the power to issue the money needed to pay its debts and ensure against insolvency. Of course this is true. That’s why we want to change the law to not only accommodate sovereignty and autonomy in money, but also the independence of that same government as the ISSUER of the currency, which it is not today.
                    The same is pretty much true of Greenspan, although I hate to interpret the master dissembler.

                    So, I’m not saying they’re wrong. If anything IS wrong, it is to interpret the potential of the sovereign governmental monetary power, which is what Greenspan and FRBSL are saying, as being in operation by the government today. And your Bernank interpretation again doesn’t square with actual money creation.
                    I am way behind on reading comments. But I am willing to just disagree. My purpose here is to educate, because at some point, all of these questions must be answered.
                    Thanks.

                  • “Why do you distinguish between the bank credit money and dollars?”

                    Because, if you have bank credit money (a balance in your account) and the bank goes broke, you have no more money (except for your FDIC insurance). OTOH, if you have dollars in your pocket, you are not dependent on the solvency of a bank. The monetarily sovereign government that issued those dollars cannot become (involuntarily) insolvent.

                    Bank money is an IOU from a corporation, safer than most non-bank corporations, but not the same as dollars. The fact that bank money is denominated in dollars and exchanges at par with dollars does not make them identical.

                  • joe bongiovanni

                    Golfer,
                    First, I wasn’t sure Auburn Parks meant paper money, which, under the laws governing the money system has the same ‘dollar’ quality as bank credit.
                    I never meant to imply anything about the risk of the holding of either.
                    Anyway, like the 99+ percent, I have no need to worry about having anything beyond the FDIC’s $250,000 (?) in extra paper money. That will just about cover each of my many accounts.
                    I somehow didn’t think that the distinction being made had to do with insolvency.
                    But I am way behind on comments.
                    If it did, then, fine.

                  • Joe,

                    Whether it’s paper money or other government obligations doesn’t matter. You could deliberately have income tax over-withheld from your paycheck, and it is electronic government money, and it is as safe from insolvency as bills in your pocket.

                    That is the distinction between government money and bank money: the solvency risk. Because of FDIC insurance, and the fact that almost all bank deposits are in accounts small enough to be covered, bank money trades at par with government money. But they are not the same.

                  • joe bongiovanni

                    golfer.
                    Sorry, I must have lost the point we were making.
                    I have not been thinking in terms of solvency risk.
                    Just who creates and issues the money.

                  • And the fact that they are different proves that banks do not issue ALL money except coins. You can have government money that is not coins, and is not bank money.

                  • joe bongiovanni

                    Oh.
                    Now really sorry but exactly how does different solvency risk among bank accounts and cash, or not cash, or who owns the bank account relate to, or prove, who issued anything?

                  • joe bongiovanni

                    golfer
                    “And the fact that they are different proves that banks do not issue ALL money except coins. You can have government money that is not coins, and is not bank money”.
                    I missed this but commented elsewhere that being different proves nothing.
                    Paper currency is issued by private Member banks of private FRB bank corporations.
                    Private banks issue the paper currency.
                    Thanks.

                  • Whoever issued it has the liability for it on their books. The issuer is responsible to make good on their debt. Monetarily sovereign governments can always make good on their debts denominated in their own currency. Banks cannot always. Banks cannot issue government money, only bank money. Only government can issue government money. And it does. Coins. Bills. Electronic. Banks can only issue bank balances.

                    Maybe I’m lumping you in with people who disagree with you, but I see a lot on these blogs from you (I think) and others who say that banks issue all the money in our system, and government none. It’s just not true.

                  • Help me out here and share your view on the following statements:

                    * The supply of money is determined endougensly by the level of GDP.
                    * The creation of new money by the financing of new Goverment debt withprivate bank credit expansion is the eat Fiat money had operated.

                  • joe bongiovanni

                    Hmmmm. Except for the fact that the private banks issue the FRN’s, you’re right. As you said, “Whoever issued it has the liability for it on their books.”

                    The FRNs are issued THROUGH the FRBs (themselves legally private bank corporations) and into circulation BY the Member banks of the FRB whose name is on the Bill when issued.
                    It is the Member bank that collateralizes and then issues the FRNs.
                    So that part is completely true in principle.

                    But this is not true: “Banks cannot issue government money, only bank money. Only government can issue government money.”
                    Please explain from where you learned this principle.

                    A line of law and contract between the Treasury and Fed sees FRNs printed BY Treasury and ‘shipped’ to the private FRBs where they are held until collateralized BY a Member bank and issued into circulation, where they become money.
                    Those are the facts.
                    Private banks issue the paper currency into circulation.
                    Private banks issue all the money (credits and currency) into circulation, coins excepted.
                    Again, I invite you to show otherwise.
                    Thanks.

                  • New thread below, Joe

            • joe bongiovanni

              Auburn Parks,
              On this : “The govt doesn’t borrow money. It only looks like it does because of the accounting gymnastics that are forced upon it.”

              I have watched over the years the development of various MMT ‘memes’ that were designed to replace the complex and boring reality of things like government finance and money creation. Those memes include that the government doesn’t REALLY borrow, and that those aren’t REALLY debts. Nice work if you can get it.
              I earlier explained the nature of a debt. What the government MUST do, in order to non-tax fund its spending, is to borrow – it is obligated by its enabling statute to do so. And the government does so by issuing a debt instrument in the debt-instrument market for capital. – using a bonafide and binding (marketable) certificate of indebtedness that includes a promise by the government to pay principal and interest. Etc., etc.
              Please understand that I explain all this with the view that the government SHOULD NOT need to borrow, ever. But I also must recognize that it was Hamilton who won the fight to limit the role of government in the national money system. Which is why we still NEED to change the laws. I have said many times, the government was $6 million in debt before it issued any form of coinage. To try to understand government finance in light of today’s reserve based money is, again, like having a great chart but no way of knowing where you are on that chart. First, get your bearings.
              It’s not the accounting that is forced upon the government, it is the borrowing.
              I know there’s a lot to be said about the overdraft issue, but it really has little to do with the deeper reality of these matters. And I don’t care to get into it right here. I see DanK has left a message that might join that conversation.
              But to say this: “Congress could remove the statutes that forces Treasury to issue USTs and the Fed would still clear of all Treasury’s checks. The overdraft number would just continue to go up indefinitely but the Fed can never run out of money, so it is irrelevant what the overdraft dollar amount is.” – is really to say that Congress, which has the legislative and money powers, can reform the money system however it likes.
              Without agreeing on the consequences of a failure to grant money creation powers to the Treasury, as these consequences are a complete crapshoot subject to much litigation, I again point out that the outcome that you seek is clearly laid out in the Kucinich reform Bill.
              So, if you’re going to Congress to remove the requirement for Treasury to borrow, you better include a provision for the Treasury to create money.
              Respectfully.

              • Auburn Parks

                (JB) “It’s not the accounting that is forced upon the government, it is the borrowing.”
                This is backwards and we will just have to politely disagree here.

                (JB) “I know there’s a lot to be said about the overdraft issue, but it really has little to do with the deeper reality of these matters. And I don’t care to get into it right here. I see DanK has left a message that might join that conversation.”
                The overdraft concept is not some side issue to be glossed over. The govt is the monopoly issuer of the physical currency. Just because the Treasury can’t overdraft, doesn’t mean any of the structural realities are any different than if they could overdraft. The Fed just has to give the money to the primary dealers to buy the USTs to put the money into the treasury account so that its not overdrawn. This is all a shell game that has no bearing on the reality the the Federal Govt can create as much money as they want. The fact that they choose not to is irrelevant to the truth of the matter.

                (JB) “But to say this: “Congress could remove the statutes that forces Treasury to issue USTs and the Fed would still clear of all Treasury’s checks. The overdraft number would just continue to go up indefinitely but the Fed can never run out of money, so it is irrelevant what the overdraft dollar amount is.” – is really to say that Congress, which has the legislative and money powers, can reform the money system however it likes.”
                Yes, Congress has the power to reform the money system however they like…..finally one we can agree on :)

                (JB) “Without agreeing on the consequences of a failure to grant money creation powers to the Treasury, as these consequences are a complete crapshoot subject to much litigation,”
                What litigation issues would you be talking about here?

                (JB) “I again point out that the outcome that you seek is clearly laid out in the Kucinich reform Bill. So, if you’re going to Congress to remove the requirement for Treasury to borrow, you better include a provision for the Treasury to create money.”
                I have not read the bill yet, but how can it lay out the outcomes I seek if you and I disagree at a fundamental level about the govt being able to create as much money as it wants. You think the govt is simply a user of the currency like the rest of us, I think this statement is wrong and as such, we disagree on pretty everything that comes after this foundational principle.

                P.S. Aren’t your views more in line with the MMR guys over at Prag Cap? From everything I’ve read, they also believe the govt is a lowly strategic user of the currency also.

  18. Scott Baker,

    “No, look more closely at your FRN”

    Are you saying that the Bank of San Francisco, not the Bureau of Engraving and Printing, printed that note? And that it can issue as many of them as it wants, and not pay anyone for the privilege?

    • No, I’m sating it was a credit to the U.S. from that bank. Who physically printed it is just a mechanical matter.
      We owe the Federal Reserve, but specifically that member bank, the value of that note, plus whatever interest was attached in the Treasury bond that was used to pay for it.

  19. Now I understand you even less.

    The Treasury printed these notes, and then … what, gave them to the Bank of San Francisco? For nothing? And then Treasury printed some treasury bills, and exchanged them with the Bank of San Francisco for the freshly printed notes? Then the Treasury spent the notes on salaries of government employees, and they began to circulate in the economy. And now, “we” (who, exactly, is “we”? You and me? The Treasury?) owe the bank whose name is on the note, its value? What about the guy who has the note in his wallet? Does anyone owe him anything, or does he owe someone something, because of holding that note? If I own a mutual fund that buys Treasury bonds, isn’t it me, not the bank of San Francisco, who is owed the interest?

    None of what you say sounds at all like the way things work in my world.

    And besides, when Federal Reserve Notes are such a small part of even the smallest measure of the money supply, why is it even important? Aren’t Reserve balances, which can be created only by the Federal Reserve lending them to banks, or purchasing assets on the open market, and not by any private bank, far more important than $1 bills?

    • Sorry, that was in reply to Scott Baker at 4:23 PM.

    • No, as Joe B. and others have pointed out, it’s a change in accounting mostly – only 3% of the money in circulation is coins or bills. The Treasury issues a series of Treasury notes. The Federal Reserve, or others, but here we are talking about the Fed, buys those Treasuries by creating dollars for them, just as a bank creates dollars when it makes a loan. Of course, these are virtual dollars, only created by a computer, and put into the government account. In this case, the Bank of San Francisco authorized my physical note, but the Fed can create virtual notes with a keystroke, which is much more common.
      Then, the governemnt owes the Fed back the principal, and the interest, by the maturity date. In practice, the principal is almost never paid down, and as the MMT folks recognize, it is actually harmful if it is, because that means the government is not spending money in the economy on goods and services, meaning there is less money in circulation, which leads to a slowdown and a contraction, eventually. When Clinton “saved” some $250 billion in the “surplus” of 1999, it was actually the beginning of the end. Despite Greenspan’s counter-action of pumping money into the banking system to prevent a Y2K catastrophe that never came, when that money plus the surplus money was withdrawn, the economy started to contract. The stock market began its 3-year descent in March, 2000.
      Of course, none of this was necessary. Not the debt. Not the contraction. Not the recession. What the economy needed was more money in circulation, preferably for goods and services we need anyway (although Ben Bernanke would prescribe dropping money from helicopters to end the recession just 2 years later, earning him the semi-affectionate nickname, “Helicopter Ben”).
      So, the Bank of San Francisco may have issued dollars against Treasuries, but it was the lower level banks that needed the dollars for their services. Meanwhile, the government owes the Federal Reserve system back the money that was distributed in dollars. And this is why FRNs or their electronic equivalent are debt-money, whereas Treasury-issued money (aka Greenbacks) are credit-money. And before you say it, no, the government does not need to collect those Greenbacks in taxes. Aside from the inflation issue, Greenbacks could just be issued continually to inject money into the economy via the goods and services government needs to provide. This is the aim of the Kucinich/Zarlenga proposal, among other things.

      • None of that helps me understand what you said before, or answers my questions.

        Sorry.

      • Question: you stated “Then, the governemnt owes the Fed back the principal, and the interest, by the maturity date” if the privately owned banks don’t get to make money off of this process why would they ever bid? So if I assume privately owned back do make money from this process then that income which was conjured up by keystrokes goes into the real economy as investment or consumption, is this correct?

        • Of course the banks (I assume you mean bank, though you typed “back”) make money. That has never been in question. The question is why do we allow them to make money when the government has the ability, in the constitution, by precedent, and even by SCOTUS ruling, to “coin Money” on its own? Why do we need to feed rent-seekers the interest for doing nothing that actually needs to be done, when a truly sovereign government could just create its own money? Also, why this love of Rube Goldberg financing, when simpler direct financing would do?
          If we want the economy to hum, and people to do the jobs that need doing and to HAVE jobs, why not provide all three without enriching those people who siphon off rent on money?

          • So the Treasury conjures up T Bills that banks buy by conjuring up Dollars and the banks makes money that it uses to buy real assets with from the rest of us who are forced by the Goverment to hold Dollars or go to jail in order for us to distinguish our tax liabilities? How is this legal again? How can a few elites sit around key stroking wealth transfer of real assets like that?

            • Yes, that’s how it works. And yes, that’s not how it ought to work morally.
              Actually, I’m a bit nervous about having ALL the money originate with the government – the Federal budget is only $3T. There is the other $12T in the annual GDP supposed to come from if private banks aren’t allowed to create money when they loan? I know the AMA says it will all originate form the Monetary Authority, but that’s one authority I am suspect of. And existing assets are not enough when the money supply needs to expand, or it would have already done so.
              Personally, I’d rather see a Land Value Tax naturally suppressing excesses in the RE market, but then we need a twofer in the area of economic reform, and it’s hard enough getting just one major reform passed. Sigh.

              • “the Federal budget is only $3T. There is the other $12T in the annual GDP supposed to come from ”

                So many things confused. Apples, peaches, and chevys.

                Net money creation by the government is not measured by its spending, it is measured by its deficit. Government creates only about $1T each year, lately. Government doesn’t need to buy all $16T of goods and services produced each year in order to support GDP or GDP growth.

                GDP is the total of goods and services produced. In terms of money, it is the total supply of money times its velocity, the number of times it is spent in a year. MV=$16T. No relation to how much government created that year, or even how much banks created. GDP uses all the money ever created (and still in existence) by government and by banks.

                Net money creation by banks is not necessary for GDP to grow, much less to exist. GDP has grown for 4 years now with net destruction of bank money: people are paying off their loans, on balance, not taking out new ones.

                • First off, I was speaking of how the AMA (aka Kucinich’s HR2990 bill) would have changed things. Under that plan, the banks would no longer be able to create money. They would have 100% reserves, no more fractional reserves. Therefore, they would be loaning their costumers’ money out, without creating money as they do now when they make a loan.
                  This is where things get sticky, IMO. The government budgets about $3T for spending/year. Yet, we have a $15T (OK, maybe $16T) economy today, so the 13-14T has to come from somewhere. Since business basically runs on credit now, much if not most of that money is ultimately created by banks, except it wouldn’t be under the Kucinich plan. If banks did not have enough money to lend (and frankly, I don’t see how they ever could *OR* alternatively, how they could ever have enough to pay their depositors if…10%…30%…???? wanted to withdraw their money), they would have to borrow money from the government because there would be no such thing as fractional reserve lending anymore.
                  This means two things: 1. The government would have to respond in a timely and consistent manner, 2. The government would SOMEHOW have to know when to apply the breaks on loaning money to the banks, pretty unlikely given the irrational exuberance of the Fed in the past (OK, it’s the Monetary Authority under HR2990. Meet the new King, same as the old King). Even if the government did come up with some “formula” the banks would howl if they couldn’t get money to make loans in boom times, and so would their customers/voters. Then, the pressure on the government to release funds would be overwhelming, IMO.
                  Again, this only applies under HR2990, not under the current system where banks simply create money as they make loans, or don’t.

                  • I don’t know all the details of Kucinich. Presumably the Monetary Authority would still supply reserves as needed to maintain the target interest rate? Banks would still not be reserve-constrained, and so could lend as now, to credit-worthy customers at profitable interest rates.

                    The $13T of GDP that is not spent by government is spent by the private sector, by households who earn money by working for businesses, and the businesses who get money from their customers. It is circulation of money that existed before this year, some of which has been in existence for over 200 years. It is not money created by banks this year. This year, and the previous three years, banks have been un-creating money. Households and businesses are paying off loans faster than they take out new ones. But they are still spending that $13T, and spending 1% or so more each year than they spent the previous year.

                    Again, I don’t know the details of the bill, but I’m guessing that all the same government policy options would be in place as today. The Monetary Authority would raise rates when they became afraid of inflation, and lower them when they became more afraid of unemployment. Automatic stabilizers would remain in effect, Republicans would propose tax cuts and Democrats would propose spending increases, and government would run deficits, sometimes too big and sometimes too small, mostly too small if you believe in MMT. None of that is dependent on fractional reserve banking.

                    I’m guessing that today, bank lending is pro-cyclical, so that 100% reserve lending might be less pro-cyclical, if it affects the volume of lending at all.

            • Banks don’t just conjure up the money to buy T-bills any more than they conjure up the money to buy office furniture, laptop computers and parking lots. To buy T-bills they have to surrender to the Treasury some asset they already possess: a portion of their reserves.

          • Government securities in a hierarchical state-run monetary system are one mechanism by which financial institutions are able to earn net positive interest in the aggregate, and thereby pay interest to their own depositors. I assume savings accounts with interest will remain a desired public benefit no matter how the banking system is reorganized, even if we went to 100% publicly owned banks. For example, if there were only a single, publicly operated bank headquartered at the Treasury, with deposit accounts earning interest, then those interest payments would be a form of direct government emission of money. An alternative, somewhat more cumbersome system that accomplished more-or-less the same thing is to divide the banking sector and the central bank from the Treasury, then have the financial sector buy bonds from the Treasury, the central bank buy the bonds from the banking system, and the Treasury buy back the bonds from central bank.

            • The “public” barely owns any Treasury bonds, even through 401ks. These are the holdings of large institutional investors mainly. If you want to support these idle rent-seekers (seeking rent on their holdings of financial instruments), you’re welcome to try. You certainly will have the support of the top 1%. But not mine. I prefer to see money go to the productive classes of the economy, the ones that actually make stuff and provide necessary, not speculative services – like teachers, firefighters, even Postal Workers (the claim that the P.O. is losing money is another scam by the elitist privateers – the fact is the P.O. has been forced to pre-fund its health plan for 75 yers, something no other private or public company has every been required to do. Remove that requirement and return over-funding of its pension fund – yet another gift to Wall Street – and the P.O. would be in the black, yes, even with the internet).
              It’s the productive classes that will determine whether the country survives and competes in the future, not the speculators, who can and do pick up and move to another country whenever they want.

              • Auburn Parks

                Scott
                In order to minimize the amount of money the govt gives to the “rent-seeking” owners of USTs in the form of interest, AND maintain a healthy savings vehicle for the working folks…….we could do these two things:
                1. Maintain 0% (or near zero to adjust for inflation etc) interest rates for USTs
                2. Offer a new type of govt bond that pays inflation rate plus x% (maybe 4%….the math is better left up to people other than me) but we cap the amount of income that can be put into these bonds per year to whatever we determine is fair for only the working folks. Something along the lines of a cap set at $50,000 a year (how many middle class folks save $50K a year?…not many I imagine, so maybe $20,000 would be more appropriate). This way 0% interest rates don’t sap the income of savers. The more income savers get in interest the more they can spend into the economy.

                • OK, now I feel I have to speak like a banker! Why would I buy a Treasury bond that pays 0%? That’s a loss, measured against inflation, and we’re not likely to get away from inflation anytime soon (in fact, if you measure it the way it was measured a generation ago, the way statistician John Williams’ measures it on shadowstats.com, you find inflation is actually 9.7%! This comports more with actual middle class experience, and with people who don’t flip houses for a living).
                  I think the cap will be gamed by clever hedge fund managers through some kind of slice and dicing vehicle.
                  There are already TIPS that pay according to inflation. We don’t need more investment products – there are too many already. We need more Jobs.

              • I just described a method for cutting the rent-seekers out of the picture, but as usual you didn’t respond to it.

                • Well, the first one leaves open the question as to how the Treasury gets the interest it’s going to pay its bondholders (leaving aside for the moment the very real possibility that wealthy investors will find a way to get around the $20,000-$50,000 limit because, well, that’s how clever they are). Of course, the Treasury could just create the money, ala Greenbacks, but if they’re going to do that I think it is economically, as well as politically, wiser to put that new money TOWARD something, something that we need anyway, like new infrastructure, etc. We Greenbackers and MMT folks are already susceptible to being called Free Money Theorists, and giving money for nothing would only reinforce that charge.
                  You seem to be worried that the bank won’t make enough money to create loans, without some sort of government interest paying bond; you said “Government securities in a hierarchical state-run monetary system are one mechanism by which financial institutions are able to earn net positive interest in the aggregate, and thereby pay interest to their own depositors.” But why can’t banks earn interest to pay on deposits through prudent lending? Isn’t that what a bank is supposed to do? Why do they have to earn loanable money through ROI?
                  The second alternative you describe as “cumbersome” and I agree, it is TOO cumbersome. Simplification should be another goal in dis-empowering the Money Power. They already bamboozle people through obfuscation.

                  • Scott, the question is how the banking system in the aggregate acquires the additional reserve balances it needs to accommodate economic growth. An individual bank can make money by making profitable loans that simply steer assets from other banks into their own accounts. But the banking system as a whole cannot increase its own financial assets, or private sector financial assets at large, in that way.

                    I understand the Chicago Plan approach, which is to have the government continually spend additional money into the private sector via fiscal policy. That’s fine as far as it goes, and as everyone knows I am a “big government” progressive who wants to use the government’s inherent monetary power to drive an expansion of public enterprise. But I don’t think the Chicago Plan approach is flexible enough in a modern economy with thousands upon thousands of private sector entrepreneurs as a system for efficiently correlating the needed increase in the money supply with the value-generating activity of economic actors. We need the monetary expansion to be taking place “on the ground”, so to speak, where real economic value is being created by private sector actors.

                    The commercial banking system is not a self-sufficient free banking system. So as its balance sheets and deposit liabilities continually increase, its need for government-issued cash and government-issued clearing balances must necessarily increase along with those liabilities. There is no process by which a bank (or banks in the aggregate) can simply create dollars and “deposit” them in their own reserve accounts. If a bank creates a deposit balance and then uses it to make a payment to another bank, that payment obligation can only be settled if the bank already has the needed reserve balances. An individual bank can acquire those reserve balances from other banks. But the banking system in the aggregate cannot acquire additional reserve balances from outside banks, since by hypothesis there are no banks outside the banking system. The bank doesn’t have to have the reserves before making the loan and creating the new deposit balance, but it has to acquire them eventually. (Note this has nothing to do with whether or not the central bank chooses to impose a reserve requirement. Expansion of bank lending in the context of economic growth naturally requires an expansion in reserve balances.)

                    This is not a “free money” approach to anything. Entrepreneurs go to bank and request loans. The banks provide the entrepreneur with funds for the new business, in exchange for the entrepreneur’s promise of a return of the funds with interest. The entrepreneur takes the fund, builds or expands a business, and thereby creates additional economic value. The economy has more net real output then before. The entrepreneur converts that output to money, and pays some of that money back to the banks. So in exchange for the financial capital advanced to the entrepreneur when needed, the entrepreneur gives the lender a share of the profits. All the while, the bank is paying interest to its other depositors in exchange for their decision not to move their accounts or redeem them for cash. As mentioned, the system can work at the level of an individual bank if the borrowers and the banks are acquiring the funds needed for interest payments from other private sector sources. But for the system to work in the aggregate, the central bank has to continually inject additional reserve balances into the system. This is not a free lunch, “money-for-nothing” system. The money that is being pumped into the system is continually flowing toward the areas of the economy where entrepreneurs are creating value. The central bank injections are monetizing the expansion of national output, so you get more goods and services, more money, but stable prices.

                    Now if we want to make sure that that is indeed where it is going, and that financial assets are not flowing to parasites who are skimming unearned financial wealth off of the productive activity of others, it its worth considering further turning the banks into an arm of the public, without the unnecessary baggage of stockholders, extravagant salaries and bonuses, and ponzi-like derivatives schemes. But I think we will still need banks, and we still need credit and loans, and we still need to the money-creation aspects of the system to be tied to the credit functions.

                  • Yes, I agree with you on most of the objections to a government-only issued system of money, and wrote that earlier.
                    However, for the government’s OWN expenses, Greenbacking is a desirable alternative, especially if, as now, the private sector is not stepping up to the plate with loans and new businesses. No one – from the Fed, to government, to private analysts – believes the economy is performing to capacity. That excess capacity has to be absorbed. There are millions of jobs to be done and millions of people who want to do them. It’s just foolish to let a fiat thing like money stand in the way when it is within government’s power to create more.

                  • And I forgot to mention that the other reason the commercial banks do not constitute a self-sufficient free-banking system that creates our society’s money “from thin air”, is because the only reason you can use your deposit balances to discharge tax obligations is that those deposit balances are bank liabilities – they are debts of the bank, claims against the banks’ reserve balances. When you pay your taxes out of your bank deposit account, the bank then must either transfer an equal amount of its reserves directly to a Treasury account at the Fed, or it must augment the Treasury’s balance in the TT&L account the Treasury holds at the bank. When the Treasury then spends from that TT&L account to pay some payee, the bank’s reserves at the Fed will be debited, and the reserves of the payee’s bank will be credited.

                  • Something we agree on. We need the government to step up its own purchases and other spending.

                  • Dan,

                    “When the Treasury then spends from that TT&L account to pay some payee”

                    The Treasury doesn’t spend from TT&L accounts. It only spends from its accounts held at the Fed.

                • True enough y, but that’s just a reserve management and interest rate stabilization tool. Every day transfers of bank reserves from banks providing TTL accounts to the Treasury are are made from those banks’s reserve accounts to the TGA account, and then when the Treasury spends later in the day, those balances go right back into other bank reserve accounts. It really wouldn’t matter if the transfers went directly from the first banks’ accounts to the recipient banks’ accounts and bypassed the TGA account.

  20. A member of the board of one the G20 central bank nations argued that the current mechanic of the Treasuary issuing bonds and private banks buying the bond and making money from the operation is the cost of doing business for the service these banks provide because if the Treasuary issued interest free money it would case deflation, what would be the MMT reply?

    • Well, I don’t think that’s true. But it all depends on how much the treasury issues. He’s probably thinking that if the Treasury stopped issuing interest-bearing bonds and only issued non-interest bearing dollars there would be a net loss of interest income to the private sector. But that would only be the case if the Treasury didn’t emit enough dollars.

  21. Joe Bongiovanni, You’re attacking straw men.

    MMTers agree with you: private debt should be sustainable, serve productive purposes, not exacerbate inequality, etc. Banking needs to be reformed, rentier capitalism needs to be abolished, the economy should work for all, not just for a tiny minority.

    (Presumably you don’t think all private debt should be eliminated).

    The only real difference between us is that you want full-reserve banking. That’s it.

    You think all of the above can only be achieved if we have full reserve banking. Others disagree.

    Ok?

  22. (Edit): Help me out here and share your view on the following statements:

    * The supply of money is determined endougensly by the level of GDP.
    * The creation of new money by the financing of new Goverment debt with private bank credit expansion is the way Fiat money had operated.

    • “* The supply of money is determined endougensly by the level of GDP.”

      No idea, assuming you mean endogenously. I think the velocity of money would respond to changes in quantity in such a way as to purchase all the goods and services produced (GDP), as long as prices were relatively stable. It also depends on how you define “supply”. If it’s monetary base, then the Fed controls it, and has expanded it enormously in the past few years, without a corresponding change in GDP. Shifts between M1 and M2 are decisions of individual citizens, perhaps you could say they were in response to the level of GDP, or perhaps not, things like interest rates might be more important. I suppose there are studies, so I would defer to their results, if they were unanimous.

      “* The creation of new money by the financing of new Goverment debt with private bank credit expansion is the way Fiat money had operated.”

      Had operated before what?

      If you mean to describe the mechanics of Treasury borrowing, I suppose that is accurate enough if you’re very loose about the terms. I have adopted the MMT view that money (and private sector net financial assets) is created when government deficit spends, and the mechanics of government buying and selling T-bills as mandated by Congress is an asset swap that has no economic effect in itself (only implications for future interest income.)

      Money is also created when banks make loans within the private sector, but that creates no new net financial assets.

  23. “Private banks issue all the money into circulation

    Ah, is that the semantic sticking point? OK, yes, they go into circulation when a bank hands them to customers for the first time. Let me ask you, since I’m not a banker, do those banks get the notes from the government for the cost of printing them, or do they have to give reserves in the face amount of the notes? If I were a bank, and got them for the cost of printing, I would surely order lots and lots of them, and redecorate my lobby, get myself a fancy new desk, maybe give better toasters to my customers. And bonuses, huge bonuses for everybody! (Oh, they do that already,don’t they.) If I had to pay for them, though, I would only order what I needed to satisfy the demands of my customers who were willing to give face value for them in some other form, like old notes, or bank balances.

    I’m guessing the banks don’t get them for the cost of printing, they have to buy them from the government for the face amount of the notes. In that case, what is the economic significance of the fact that they were “issued into circulation” by the bank, and not the government, since they were created by the government? What would have been different if the government had sold them to a collector (as it does, in uncut sheets)?

    If all it takes to become “bank money” and not government money is that the government money was magically transformed to bank money when it passed through the bank, then the whole discussion is meaningless.

    • Exactly right. Federal reserve notes and reserve account balances are just different forms the Fed-issued liabilities. A bank can exchange some of its reserve balance for an equal amount of cash, or exchange some of its cash for an equal amount of reserve balances.

      Similarly, if the bank has a customer with a deposit account at the bank, the customer can give the bank cash in exchange for an augmented deposit balance, or exchange some of the deposit balance for cash.

      But the bank can’t just create a deposit account for itself at its own bank and then exchange that deposit balance for Fed-issued cash. That would make no sense. A deposit balance in an account at the bank is a liability of the bank, not an asset. Similarly, if an exceptionally high number of the depositors at a bank decide they want cash instead of deposit balances, and the bank doesn’t have enough, it has to obtain that cash. It can do this by exchanging some of its reserve balance, part of it’s assets, for the cash. The bank can’t just say, “Hey Fed, give me some cash!”

      The fixation on the slippery category of “money” is missing the overall picture here. Our society runs on the exchange of negotiable debt instruments. That’s what the money in bank accounts consists in. When we say banks can “create” money, all that means is that banks can issue a kind of negotiable debt that is broadly accepted in our economy.

    • joe bongiovanni

      Golfer,
      There was no sleight-of-hand wordsmithing afoot.
      I like to think that our reason for being here is to inform and be informed. So, why bring in anything about ‘semantics’. Much better to ask – “what do you mean by this?”. BTW, you’re better off not assuming anything about anything.
      Ultimately, MMT promotes a theory about the money system in the national economy. If you lose sight of that bigger issue, you’ll be misled.
      “Issuing into circulation” is how money things become money – part of the money supply and the money system. Issuance is distinct from money creation.
      But they are only relevant to the larger issues of – “who creates and issues the nation’s money” in the national economy? It’s important to know the answer to that question.
      I believe that we know that the bankers create and issue the nation’s money, and I’m obliged to explain how and why this happens. But for some reason, some MMT economists want to pretend that the government ACTUALLY issues the nation’s money. Some when it spends. Some when it ‘circulates’ paper money. Some when it circulates coinage.
      Coinage enters into circulation as a payment by the government into the economy. It is a direct, no-debt issuance BY THE GOVERNMENT.
      Paper money enters into circulation as I said earlier. The private banks do it by making it a debt, and collect the seigniorage ‘gain’ relative to its use. That is a little more complicated, but it is true.
      The only other ‘money’ today is bank-credit money.
      Paper money is ‘in circulation’ whenever the private Member bank receives it from the Reserve bank in exchange for collateral, and it goes on the books of that bank. At that point it is capable of immediately becoming part of the money supply.
      Only the Reserve bank corporation gets the currency for the cost of printing. The Member banks must provide collateral TO the reserve bank, as according to the Regulation.
      To be clear, the banks do not get them for nothing – but neither do they buy them from the government. The government supplies the banknotes to the private banking SYSTEM for the cost of printing. But in order for the banknotes to have value as money in circulation, the system requires collateralization.

      There is no economic significance to the fact that the currency is issued into circulation by the banks and not the government. Currency represents a small percent of all the money in circulation. In England the publicly-owned BoE issues the currency into circulation, as do other nations.
      Again, the whole discussion can only be worthwhile if relevant to the changes we want to make for our society, using the money system. If MMT can get comfortable with the reality THAT the banks issue all the money in this country (c.e.) as part of their modern theory of the money system, then we could talk real seriously about whether that’s the proper relationship for a sovereign people to have with their very own fiat money system. Or not.
      Thanks.

      • Banks only need to pledge collateral for reserves if they are borrowing the reserves. But if what they need is just more cash, they can exchange reserve balances they already have for the cash. It’s just an exchange of one kind of Fed-issued money for another.

        • joe bongiovanni

          I would like to totally agree.
          Except that reserves are not money. Just Fed(CB) – DI accounting balances.

          Not that we were discussing borrowing reserves.
          Nor that any bank just needs more cash already in circulation.
          We were talking about issuing the paper currency into circulation.
          As in, an increase in currency, new money.
          As in, who issues the nation’s ‘money’, and how.
          That newly, serialized piece of FRB-of-issue paper will not enter circulation except by being collateralized.
          As according to Reg A collateral requirements.
          By the bank that receives it.
          That is true of every piece of currency that first enters circulation, thus increasing the money supply.
          Thanks.
          I owe you another reply but can’t find the comment.
          Soon.

          • What sort of things do they pledge as collateral?

            When and how do they repay the loan and reclaim their collateral?

            • joe bongiovanni

              golfer,
              the more I try to steer the conversation to understanding the monetary system, the deeper we get into the weeds.
              Not sure why the collateral call between the FRB and the Member bank can inform that discussion in any way, but, it is the same as any borrow from the FRB, covered here:.
              TITLE 12–Banks and Banking
              CHAPTER II–FEDERAL RESERVE SYSTEM
              SUBCHAPTER A–BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
              PART 201–EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION A)
              §201.108 Obligations eligible as collateral for advances

              • Please, don’t go into the weeds. Just plain English. Try to do it like Dan does.

                • joe bongiovanni

                  golfer.
                  Not sure what you are talking about???
                  The weeds is where you’re living out here trying to understand what kinds of assets can secure a collateralization of credit from the FRB, including new cash. That’s weedy.
                  So I give you the Fed Regulation link that shows all the stuff that serves as collateral for these credits from the Fed. If you don’t care to read it, then fine.
                  I can only tell you that it is a huge pile of stuff. So,………………
                  It seems that we’ve forgotten that we were talking about who creates / issues the nation’s money, how and why. That’s what Auburn Parks and I were discussing up there somewhere.
                  So, a reminder.
                  The private banks issue all of the nation’s money into existence as debt, except coins, which are issued into existence by the entity that MMT calls ‘the monopoly issuer of the currency’, the government.
                  If we’re done with that, then let’s move on.
                  Thanks.

              • the more I try to steer the conversation to understanding the monetary system, the deeper we get into the blah.

                sorry, but just blah. Blah blah blah. Full reserve banking, which you don’t like to call full reserve banking. That’s it. Nothing more. No need for the rhetoric.

              • Joe, “advance” means the same thing as “loan”. The bank only needs collateral to borrow the reserves.

          • Banks do borrow reserves, Joe. They use the discount window to borrow them when they borrow directly from the Fed, and the Fed Funds market when they borrow them from other banks. That is why and when they need collateral. Those aren’t the only ways of obtaining reserves, but they are two of the ways. Banks now also obtain additional reserves, for example, as interest on their existing reserve balance. They don’t need any collateral for that, and they can exchange some portion of those balances for cash.

            And banks certainly do sometimes need more cash. Their cash is a portion of their total reserves. They need to have a certain amount of cash to meet their debts to their depositors, a debt the depositor collects on whenever they withdraw cash from an ATM. If they don’t have enough cash, they buy some from the Fed in exchange for reserve balances; and if they have too much cash they sell it back to the Fed for reserve balances.

            You can call a bank’s reserve balance an “accounting balance” if you like. But it’s not fundamentally different from your accounting balance at your bank. Your bank account is your asset and the bank’s liability. Your bank has its own bank account at the Fed, which is the banks’ bank, and that account is your bank’s asset and the Fed’s liability. You use your deposit account to make final payments and extinguish debts, and your bank uses its deposit at the Fed to make final payments and extinguish debts. Same thing.

            • joe bongiovanni

              Sorry, Dan, I never discussed whether banks borrow reserves, and how the market for different types of reserves work within the payments system. And I don’t care to because the reserve system itself is irrelevant to the money system that is important to the real economy.
              I was ONLY discussing cash(paper money) as a component of money – who creates and issues the paper money, and not the market for cash and reserves. I don’t care about that. It means nothing to the real world economy and our system of money.
              Just exactly the same as I couldn’t possibly care about whether my bank account functioned as a liability to the Fed. That’s just their own internal way of keeping the thing ‘account-able”.
              The money system. Money. Purchasing power. Economic power. Wealth distribution. Well-being.
              Or, irrelevant.
              As in reserves.

          • What is “– DI”?

          • So, you’re saying the DI doesn’t exchange anything for the new currency, it pledges some collateral and borrows it from the Fed?

            And they pay interest?

            Why go to all that trouble and expense? Why not just exchange reserves for it? Reserves earned no interest until very recently, and very little now. Is there a law saying how they have to do it?

            • joe bongiovanni

              RECALLING: the matter being discussed here is WHO issues the paper currency into initial circulation.

              And here, it’s the NEW money, as paper currency; therefore, an addition to the cash (paper currency) in the M-1 money supply.
              Only in that case is it not interchangeable with other reserves.
              Yes, in that case, it must be borrowed into circulation.
              And credit transactions between the FRBank and the Member bank involve interest costs.
              The Member bank could get its cash needs from many sources, but if it is borrowing new money from the Reserve bank, it is a credit transaction.
              Again, not really relevant to WHO issues the paper currency into circulation.
              Thus, coins excepted, the banks issue all the money into circulation, cash and credit.
              Thanks.

      • “Paper money enters into circulation as I said earlier. The private banks do it by making it a debt, and collect the seigniorage ‘gain’”

        About how much is the seigniorage, and why don’t banks do it way more often, if it is a profit center for them?

        How, exactly, do they “make it a debt”? And who are the debtor and the creditor? Is the amount of the debt equal to the face value of the currency?

        • Yes, you are right golfer. There is no seignorage.

          Seignorage is what happens when, for example, a government mints a coin or manufactures a paper note that it then uses to purchase a good or service that is worth more than the cost the government incurred in labor and materials in order to manufacture the coin or note.

          But when a bank creates a deposit account balance that, that balance is a debt of the bank. If the banks gives an account balance increment to some business in exchange for some good, the account holder can then draws on the account to pay someone else, even someone at another bank, and when that happens the bank loses assets equal in value to the payment.

          So if Bank A credits $100,000 to the account of Acme Asphalt to get its parking lot paved, and then Acme Asphalt buys $100,000 worth of steam rollers by paying Syd’s Steam Rollers with a $100,000 check drawn on its account at Bank A, and then Syd deposits the check in Bank B, then after Bank B has settled with Bank A, the end result is that Bank A has lost $100,000 worth of reserve balances, and in exchange it has received a paved parking lot.

          Now instead of buying $100,000 worth of pavement form Acme, Bank A could buy a promissory note from Acme instead. It increments Acme’s account by $100,000 which Acme then uses to buy said steam rollers from Syd as before. Syd deposits the check at Bank B, Bank A and Bank B settle, and now the end result is that Bank A has lost $100,000 in reserve assets, but gained a promissory note for $100,000 plus interest.

          I don’t think we want to see the interest as seigniorage since its no different from what happens if you or I exchange $100,000 for a promise of $100,000 plus interest. We are able to make money because for many people depending on their circumstances, $100,000 in the hand now is worth somewhat more than $100,000 a year from now.

          • joe bongiovanni

            “Yes, you are right golfer. There is no seignorage.”

            Yes, you’re right Dan, there is no seigniorage, only gain, and that’s what I get for cutting and pasting from the other thread about the difference between the government-owned BoE ‘issuing’ the currency into circulation, and gaining the seigniorage.

            Apologies.

        • joe bongiovanni

          First, they make it a debt by collateralizing it into existence in a transaction between the FRB-of-note and the bank.
          Think of the private banknote sitting in the private bank vault.
          It has no value as money until somebody borrows it.
          And it creates a cash flow.
          Same way with our paper money.

          Yes the amount of the ‘debt’ is the face value of the currency but the amount of the collateral required is situation-dependent.
          At issuance, the creditor is the FRB and the debtor is the DI (Member bank).

          The seigniorage gain is within the circulation of all paper money within the banking system. The amount of the gain on each new currency unit would be the average interest arbitrage over the life of the Bill.

          Way weedy.
          Why?

          • “collateralizing it into existence in a transaction between the FRB-of-note and the bank.”

            I don’t understand this language. Tell me more about the transaction, and the collateral. I’m not interested in all the statutory requirements for the collateral, just pick the most common type and give me an example of the transaction.

            Maybe of the form “the bank pledges as collateral a $10,000 T-bill that’s sitting in their vault, and the Fed sends them 10,000 $100 bills. The bank’s seignorage is $990,000.” Something like that. Plain English.

            Sorry to be so “weedy” about this, but the way you describe things just seems so unlike anything I’m familiar with. And your use of language is very confusing.

            • joe bongiovanni

              RECALLING: the matter between us is who issues the currency into circulation: the government or the banks?
              The banks issue all the currency into circulation.
              How it is done is wonky, weedy and irrelevant.

              Yeah, guilty about the language there.
              Ask the Fed who puts currency into circulation, and how:
              http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html

              Ask the Treasury who puts currency into circulation, and how:
              http://www.treasury.gov/about/education/Pages/distribution.aspx

              The collateralization transaction “rabbit-hole” is not relevant.

              – The Member bank pledges a $10K Treasury Bill or a ((15) Commodity Credit Corporation certificates of interest in a price-support loan pool.)) – or one of greater value depending on the Member bank’s situation, nominally $10K, TO the FRBank of circulation imprinted on the Bills, and receives 100 $100 Bills.
              – The bank’s gain, not seigniorage, depends on its management of those $100 Bills.
              – If the bank lent them to a bookie, then the gain is the difference between the bank’s borrowing cost within the Fed system, and their lending price for use of the money – the same as any money created by the bank.
              – Once in circulation, the $100 Bill becomes the same as any other cash currency.

              Again, all irrelevant to the matter of who issues the nation’s money.

              • I matters a lot who produces the nation’s money. From the end of the Fed link you cite:
                “The distribution of coins differs from that of currency in some respects. First, when the Fed receives currency from the Treasury, it pays only for the cost of printing the notes. However, coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins. ”
                So, the seigniorage benefit is to the Treasury for coins, and to the FRB for paper money (FRNs). To put it even plainer, the Federal Reserve Banks PAY for coins, and the government (meaning, the taxpayer) pays the Federal Reserve, with interest, for FRNs.
                What could be a plainer indictment of rent-seeking, wealth-destroying behavior by the FRB and other owners of Treasuries?

                • joe bongiovanni

                  Scott,
                  Yeah, totally agree.
                  With one exception. My mistake.
                  “Seigniorage” pretty much has the definition of being ‘government’ revenue.
                  I had used ‘seigniorage/gain’ in reference to the BoE (government) issuing its own currency and let it slip into this discussion of the Fed’s issuing new monies.
                  The FRB’s and their Member banks being each and collectively NOT THE GOVERNMENT, their rents collected on the paper currency, is plain old accounting ‘gain’ on these transactions.
                  Thanks.

                  • Well, not to take Wiki as the last word, but they say:
                    “Seigniorage (pron.: /ˈseɪnjərɪdʒ/, also spelled seignorage or seigneurage) is the difference between the value of money and the cost to produce and distribute it. The term can be applied in the following ways:
                    Seigniorage derived from specie—metal coins—is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.[1]
                    Seigniorage derived from notes is more indirect, being the difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes.[2]

                    Seigniorage is a convenient source of revenue for some governments.”
                    ….but, for personal seigniorage:
                    “Examples
                    Scenario A
                    A person has one ounce of gold, trades it for a government-issued gold certificate (providing for redemption in one ounce of gold), keeps that certificate for a year, and then redeems it in gold. That person ends up with exactly one ounce of gold again. No seigniorage occurs.
                    Scenario B
                    Instead of issuing gold certificates, a government converts gold into currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency. She keeps the currency for one year, and then exchanges it all for an amount of gold at the new market value. If the value of the currency relative to gold has changed during the interim this second exchange may yield more or less than one ounce of gold. (Assume that the value or direct purchasing power of one ounce of gold remains constant through the year.)
                    If the value of the currency relative to gold has decreased, then the person receives less than one ounce of gold. Seigniorage occurred.
                    If the value of the currency relative to gold has increased, the redeemer receives more than one ounce of gold. Seigniorage did not occur.
                    Seigniorage, therefore, is the positive return on issuing notes and coins, or “carry” on money in circulation.
                    The opposite, “cost of carry”, is not regarded as a form of seigniorage.”
                    http://en.wikipedia.org/wiki/Seigniorage

                  • joe bongiovanni

                    Scott,
                    I would never disagree with wiki, but…
                    neither would I intentionally use seigniorage to relate to anything except a source of ‘government’ revenue derived from coinage.
                    I guess it’s in the eye of the beholder.
                    Thanks.

                • In that same link, it also says:

                  “Each Federal Reserve Bank is required by law to pledge collateral at least equal to the amount of currency it has issued into circulation. The bulk of the collateral pledged is in the form of U.S. Government securities and gold certificates owned by the Federal Reserve Banks.”

                  So this is where the collateral comes in. When the FRB issues the notes into circulation – to the DIs, actually, because they aren’t really “in circulation” as long as they remain in the vault of the DI – it pledges to the Treasury Dept., whence the notes originated, collateral of equal value. Treasury securities, for instance. And the face value of the securities pledged must be more than the currency, because their value as collateral, assuming that the interest still goes to the Fed, would be less than face value. Anyway, it appears as though the notes are a loan from the Treasury to the Fed. Which raises a whole lot of other questions about how that loan would be repaid, because the link also says

                  “When a Federal Reserve Bank receives a cash deposit from a bank, it checks the individual notes to determine whether they are fit for future circulation. About one-third of the notes that the Fed receives are not fit, and the Fed destroys them.”

                  When it destroys them, it should also probably deduct them from the total of notes it has put into circulation, so that it need only post collateral on the net amount issued, not the gross.

                  The bills in circulation would tend to increase over time, and the securities pledged would mature, and need to be replaced by others.

                  It’s all still quite convoluted, as the Fed could just as well have credited the Treasury’s account balance for the face amount instead of just the printing cost, when it instructed the computer to do that credit. The “by law” part makes me think it is arranged this way so as to satisfy someone’s desire for the Fed to receive the seigniorage, and someone else’s desire to make it look like they weren’t. But then that seigniorage would become part of the Fed’s profit that is turned over to Treasury each year.

                  So,to get back to who creates and issues the nation’s money, at least the bills, as well as the coins, are not created by private banks.

                  So, the remaining dispute with MMT is whether government deficits constitute an “issuing” or “creation” of money, and whether the answer to that question depends on whether or not Treasury issues any securities.

                  Joe,

                  what would be your take on this:

                  Congress does away with the requirement for Treasury to borrow what it spends and does not tax, and in the following year Treasury spends $4T and taxes $3T and issues no new securities, except to roll over existing ones. The “national debt” remains constant in the first year. The Fed buys up $1T more of the previously-existing national debt in their open market ops.

                  In the second year, the economy booms, and before Congress can act, Treasury spends $4T and taxes $5T, and again issues no new securities except to roll over maturing ones, and the national debt stays constant. The Fed sells off $1T of the existing bonds they have been holding.

                  In the third year, Congress hits a bulls-eye on taxing and spending, and the budget is exactly balanced at $4T. Treasury and the Fed decide that more T-bonds are needed, and so Treasury issues $1T of them and the Fed buys $500B of the new issue. Maturing securities are rolled over.

                  Question: In each year, how much net new non-government sector financial assets were created by Treasury? By the Fed? Explain.

                  I’ll give what I think is the MMT answer:

                  Year 1, Treasury $1T, Fed 0. The budget deficit creates money. Fed ops are asset swaps that create nothing.
                  Year 2, Treasury $-1T, Fed 0. The budget surplus destroys money. Fed ops are asset swaps that create nothing.
                  Year 3, Treasury 0, Fed 0.

                  • joe bongiovanni

                    golfer,
                    So far the main thing that I agree with here is that the whole thing is convoluted. Also unnecessary.

                    “” So,to get back to who creates and issues the nation’s money, at least the bills, as well as the coins, are not created by private banks.””
                    Excuse me.
                    I thought we just spent a few days painstakingly deciding that the private banks – the member bank (DIs) of the national banking system, ISSUE the paper banknotes into circulation, and exactly how they do so. Maybe it is just me.
                    The matter of who ‘creates’ any money is irrelevant (like those private banknotes), as only at ‘issue’ does it become money.
                    Bank-credit money is created and issued (as M-1 account balances) together.
                    The Treasury creates and issues the coins.
                    The Treasury creates and the private banks issue all the paper currency. I don’t know how that is escapable from understanding at this point, but ….again, maybe it’s just me
                    The thing to remember about who issues the paper currency is this – in jolly old England, the BoE is government-owned, unlike our private Fed. It is a simple matter to emulate this CB-government relationship in order for the paper currency to be issued by the government and not the private banks.

                    NOT exactly sure if this point was aimed at me or not.
                    As in : ‘what would be your take on this:’
                    “”So, the remaining dispute with MMT is whether government deficits constitute an “issuing” or “creation” of money, and whether the answer to that question depends on whether or not Treasury issues any securities.””
                    Actually, what is really needed is causation, and not inference, or deduction.
                    A deficit is an unfunded balance in a federal budget. Today the government must issue debt in order to borrow money from the private, money-issuing sector in order to provide the proceeds needed in the TGA account so that Treasury has the money to spend.
                    I DO hope the cause and effect is clear.

                    If the Treasury does not issue debt, then it cannot obtain the funds from the money-issuing private sector. If the INTENTION of monetary policy is to print(issue) the balance of the budget that is unfunded, then that ‘money-printing balance’ should show up as the funding source on the government budget. It should not be deduced by the lack of Treasury debt. It should be the money-creation policy of the government. To me, this exemplifies and fully implements Lerner’s proposal to fund the Treasury without debt.
                    The answer to whether the government issues money when it spends is not informed by these sectoral balance nor NNFA outcomes. Rather the sectoral balance outcomes are informed by government policy being implemented. The question between MMTers and reformers is about what is the government policy with regard to funding the untaxed balances of the annual budget.
                    Where we stand is within HR 2990.

                    Sorry, but your what-if exercise seems to have something to do with these sectoral balance accounting outcomes. To me this has exactly zero relationship to the design and operation of the money system. It is economics stuff, not money stuff. The money stuff is about HOW TO achieve those outcomes.
                    The only thing that matters is that sufficient money exists to fund GDP potential. If so, there will be minimal pressure on inflation or deflation, meaning that the purchasing power of the currency is maintained – protecting its legacy.

                    That would be my take on this. That, and perhaps a little amazement that these FF outcomes are so important to MMT’s theory of money.
                    Thanks.

                  • What is FF?

                    Is there something about this other than the different views about whether the Fed is part of government or not?

                    I’m understanding you to say that what matters is who issues the money into circulation, not who creates it. That the DI’s issue all the money into circulation, not the Fed, which creates the FRNs, and not the Government, which creates the coins only.

                    How about when a primary dealer buys a T-bill, do they issue dollars into circulation? Create dollars? Both? Neither?

                    When China buys a T-bill, do they issue dollars into circulation? If primary dealers do issue money, and a bank in China merged with an American primary dealer, would China then be able to issue dollars?

                  • joe bongiovanni

                    golfer,
                    Thanks.
                    First, FF = functional finance – part of the MMT construct of money-economics.

                    ‘Is it whether the “FED” is part of the government or not.’
                    BIG picture = a question about who creates the nation’s money, public or private.
                    Right here, it’s been about whether that part of the Fed system that issues (you’re saying ‘create’ here) the paper currency into existence is a public body acting with a public purpose (one of MMT’s identities = ‘public purpose money’).
                    There is a part of the Fed –the Policy-setting BoGUVs and even Open-Market Committee — that function as part of GUV monetary policy setting.
                    But the part of the FR SYSTEM that issues the paper currency into existence is the Member Banks of each Federal Reserve District – each Member bank being a private bank corporation – in contract with the regional FR bank – each being a private bank corporation.
                    So, the issue is whether the issuance of the currency into existence, the creation of ‘money’ via currency-issuance, is a private or a governmental function.
                    It is a private function, operating for private gain.
                    The private banks issue the currency.
                    It is not about whether “the FED” creates or issues the currency, as “the Fed” is a ‘system’ with a somewhat amorphous identity, being part governmental, and part private – primarily determined by who pays the salaries of the employees of the particular portion of the system.

                    To be clear, neither ‘the Primaries’ nor China create nor issue any paper currency, or it would be counterfeiting.
                    China buys T-Bills using re-circulated, already existing ‘bank-credit’ dollars that US commerce has sent to China (China’s bank at the Fed) to purchase goods and services, having nothing to do with paper currency.
                    The Primaries have special accommodation with the Fed in regard to their crediting powers, but ultimately serve no money-issuing function at all.
                    I’m not sure what would happen if a Chinese bank could buy a US FRB-Member-bank and become a currency issuer or not. It would be the Member bank – subject to all the FED-to-DI supervision and regulation that did the issue, and not China.
                    Again, that is not relevant to how the money system works.
                    It is not relevant to the outstanding difference of opinions between reformers and MMT about who, NOW, creates the money, and how.
                    Thanks.

              • Joe, I feel like we’re making real progress, or at least I am making progress in understanding you.

                That first link to the NYFED web site says

                “To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited.”

                That’s the way I would have done it. Not the way you described, with collateral and all. It goes on to say that smaller banks without reserve accounts at the Fed get cash from correspondent banks, and pay them for the service, as well as paying face value for the cash.

                I wonder if you have any further comments on this?

                I agree that issuing the cash into circulation is done by private banks, or mostly, the NYFED web site says, by ATMs, which may be owned by businesses that are not even banks at all. I don’t think that is of any relevance economically.

                • joe bongiovanni

                  golfer,
                  Thanks.
                  ‘I wonder if you have any further comments on this?’
                  Again, I think I agree.
                  My example had to do with who ‘issues’ the money, and how.
                  In the case of the ongoing needs for currency, there is no requirement to borrow it, and that is the observation from the Fed site – a transaction around the reserve account.
                  When we talk about ‘issuing’ the currency into circulation – as in who ISSUES the currency – it is about increasing the amount of money in circulation, not about turning it over back and forth, bank to customer to bank to FRB. All of that currency being re-circulated as the Fed described it, came into circulation, was ISSUED, by collateralizing / borrowing.
                  After issuance into circulation, it is all fungible with other money in the banking system, cash or credit – or reserves.
                  Thanks.

                  • “All of that currency being re-circulated as the Fed described it, came into circulation, was ISSUED, by collateralizing / borrowing.”

                    I don’t think so. From the Fed web site you cited:

                    “The public typically obtains its cash from banks by withdrawing cash from automated teller machines (ATMs) or by cashing checks. The amount of cash that the public holds varies seasonally, by the day of the month, and even by the day of the week. For example, people demand a large amount of cash for shopping and vacations during the year-end holiday season. Also, people typically withdraw cash at ATMs over the weekend, so there is more cash in circulation on Monday than on Friday.”

                    “The public typically obtains its cash from banks”

                    This is currency being issued into circulation, no?

                    “people typically withdraw cash at ATMs over the weekend, so there is more cash in circulation on Monday than on Friday.”

                    Currency is not “in circulation” when it is in the bank vault (or in the ATM).

                    Yes, as the quantity in circulation rises and falls, some of it is currency that was previously in circulation, was temporarily taken out of circulation (or old bills replaced by new) and is being recycled. But, as the quantity in circulation reaches new high levels, there is nothing that says any borrowing was involved.

                    There’s probably evidence of that over the past 4 years, as net private sector debt has been falling, and retail sales rising, implying a need for more currency in circulation, especially at Christmas. That new currency did not come into circulation by borrowing, because there was no net new borrowing.

                    When banks make loans, that does increase the money supply (M1), but does not usually result in any currency entering circulation. It normally creates a balance in a deposit account, electronic money not currency. You differ with MMT on whether money created by government deficit spending is bank-issued debt or not, but I don’t see how you can say that conversion of a bank balance to cash involves any sort of new debt, even if it does increase the amount of currency in circulation to a new all-time high.

                    You don’t mean by this that the Fed is actually borrowing (because they have to have collateral) newly-printed FRN’s from Treasury, not really buying them for 4 cents a bill (and profiting from the seigniorage)? Do you?

                  • joe bongiovanni

                    golfer,
                    At this point I ask that you take care to put all of that information in perspective.
                    That would require distinguishing between ‘issuing” paper money, which is what we were talking about, and the fact that the general public, me included, get most of our cash from ATMs.
                    The ATM question is informed by the source of the cash.
                    It’s either a private venture in contract with the bank, so the private contractor had to acquire the notes from somewhere called a bank who gets them from where?
                    The other option is that it’s part of the banking operation.
                    EITHER WAY….
                    I would never contemplate that a $20 coming out of an ATM is just entering into initial circulation as I put it into my pocket.
                    And if its NOT just entering initial circulation, and it is not being issued, then it has no relevance to who issues the currency into circulation.
                    Please be assured of so, and think about it.

                    You seem to be QUITE confused between money coming into initial circulation – as in who ISSUES the paper money , and how …… and how the cash money goes into and out of circulation between the banks, the public and the FRBs.
                    Rather I can only ask that you think about this difference as being between who issues the money and who uses the money.
                    I never said that conversion of bank credit money to cash involved creating/issuing either new money or new currency. I said the opposite – that after issuance, all the money forms were fungible.

                    “” You differ with MMT on whether money created by government deficit spending is bank-issued debt or not,””
                    Sorry, golfer, I would never characterize any disagreement as such.
                    I do disagree with MMT THAT any money is created by deficit spending unless it is a matter of public policy that it happens, and that mechanism are in place to ensure that it happens, and exactly HOW it happens (HR 2990). I answered this point in detail a minute ago.

                    “”You don’t mean by this that the Fed is actually borrowing (because they have to have collateral) newly-printed FRN’s from Treasury, not really buying them for 4 cents a bill (and profiting from the seigniorage)? Do you?

                    That’s hard to understand. The Fed – the Regional FR banks through which paper currency is ‘issued’ to its Member banks, just receives its Member bank collateral and pledges the collateral as needed within the Fed system. It does not involve Treasury.
                    Those regional banks collectively purchase the FRNs at their printing costs – YES.
                    Again, at that stage they are no different from unsubscribed private banknotes.
                    And, yes, they do so from Treasury.
                    And, no, they do not borrow the FRNs from Treasury.

                    Please think about the difference between issuance and the general circulation of the cash money.
                    Thanks.

                  • “The Fed – the Regional FR banks through which paper currency is ‘issued’ to its Member banks, just receives its Member bank collateral”

                    Here we go again. I thought we had established that the DI’s don’t pledge collateral, they buy the bills from the FRB for face value, and issue them into circulation. It is the FRB’s that pledge collateral to Treasury for the face amount of the bills they order.

                  • joe bongiovanni

                    golfer,
                    One more time.
                    First, we are talking here about who ‘issues’ the paper money into the currency market.
                    Second, the FRB’s only need to ‘hold’ the collateral, in order to balance their books against the currency issued into circulation.
                    Treasury is only the ‘printer’ of the Bills and sells them to the FRB system for the cost of printing.
                    Treasury holds no collateral for or against the currency that it prints.

                    As we’re talking about issuing the new currency into circulation, kind-of ipso-facto, we are not talking about ordinary, everyday circulation by purchasing and selling the currency back and forth between the banks and FR banks and customers, etc.
                    Which is what you are describing.

                    In that ‘initial’ new-currency issuance, the Member banks must add new collateral in return for ‘increasing’ its currency holdings. And the FRB must hold that additional collateral, as I said above.

                    Weedy, yes. But also irrelevant to the money-issuing question.
                    The sovereign fiat money system question is WHO issues the money, and not how.
                    Thanks.

          • “Think of the private banknote sitting in the private bank vault.”

            Are you talking about 19th century banking here, before there was a central bank in the US? If not, then what? What is a “private banknote”?

            • joe bongiovanni

              Thanks.
              This IS relevant to WHO issues the nation’s paper currency.
              First, yes, and we had these private banknotes into the 20th century. But the point of reference here was the difference between printing/creating something of paper – either a private banknote or a FRBanknote – and having those banknotes sitting in either the private bank vault OR the FRB bank vault, and in both cases the notes having ZERO monetary value, UNTIL, and only if, they become ‘money’ by having someone borrow them into existence in a debt-based money system.
              Point being: Creating/printing paper notes that serve as money is different from issuing those notes into circulation, and the latter is the instance of money-creation.
              Thanks.

          • “The seigniorage gain is within the circulation of all paper money within the banking system. The amount of the gain on each new currency unit would be the average interest arbitrage over the life of the Bill.”

            I don’t mean to be weedy, I just don’t understand what you’re saying.

            “within the circulation of all paper money within the banking system.”

            I have no idea what that means. Is there a typo in there, maybe?

            “The amount of the gain on each new currency unit would be the average interest arbitrage over the life of the Bill.”

            1. Currency unit = what? Each FRN?
            2. Average interest arbitrage between what two interest rates?
            3. What is indicated by capitalizing the word Bill? Does it not refer to a dollar bill, or a $100 bill, but something else like a Congressional Bill?

            • joe bongiovanni

              Yeah, not well stated.
              The gain from issuing the currency by the bankers is the same as issuing the money via bank loans. In the case of currency, it does not relate to a loan that ends the life of the credit/debt. It circulates as interchangaeable with bank credit until it ends its circulation.
              So, it’s not seigniorage as in a government issue. The source of the gain is the fact that the banknote continues circulation within the banking system.

              1. Yes, each FRN.
              2. Interest rate on deposits; interest rate on loans.
              3. Nothing. Yes, any FRBanknote.

              • joe bongiovanni

                I should have said, interest rate on borrowings, and interest rate on loans.
                Banks often do not borrow from their depositors.

              • OK, just one more thing: How does a bank gain by the currency being in circulation? (In particular, how does the issuing DI gain by virtue of having issued it? It’s issued at par with bank deposits. Nobody pays interest on FRNs like they do on loans.) Are you just saying that more currency means more GDP, and so more business for banks?

                • joe bongiovanni

                  Well, indirectly, yeah.
                  Like I said, if the DI loaned the new currency to the bookie ( I know that is absurd but any loan can be taken in currency), that is how the DI would gain the interest from THAT transaction. And that is the only transaction related to ‘issuance’.
                  Afterwards, as you said, the bank has equally fungible cash and credit to lend out and depending on the borrower’s preference, the ability to gain from each lending transaction, which is all the more business for banks.
                  In reality, the banks make more gain from ATM-cash fees than from loans taken in cash.
                  And then, like I said, cash currency pretty much remains in circulation forever, like all ‘real’ money. (Meaning that when it is replaced from being worn out it is done without additional encumbrance).
                  Thanks.

  24. “reserves are not money”

    Instead of just repeatedly asserting this as if it is a obvious fact, why not try to explain why it is that you hold this odd belief.

    • Reserves are part of the “monetary base”, from which money is created by banks when they lend. At least that’s the way Wikipedia says it. Reserves don’t circulate, and can’t be used to purchase any real goods and services, only to settle transactions between banks, and between a bank and the government. The reason QE has been so ineffective is that all it does is increase reserves, nothing for the real economy. Bigger deficits would have affected the real economy, because they would have created money.

      If you google “money supply”, Wikipedia sez:

      MB: is referred to as the monetary base or total currency.[8] This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply.[12]
      M1: Bank reserves are not included in M1.

      • “… from which other forms of money …”

        Isn’t the natural implication from that statement then that MB is one form of money and M1 is another form of money?

        MB circulates in a more closed economy, so to speak, among banks and the Treasury. Other forms of money circulate among commerical bank depositors. The monies are arranged in a hierarchy, the assets of the depositors are the negotiable liabilities of the commercial banks, and the assets of the commercial banks are the negotiable liabilities of the Fed.

        • Perhaps “reserves are not money” is too imprecise. Reserves don’t count in the various money supplies, M1, M2, M3, etc. They can’t perform most of the ordinary functions of money that regular people expect of it. I don’t suppose it’s wrong to think of reserves as a “different kind” of money.

    • joe bongiovanni

      Not that you really deserve a response after suffering your ‘blahs’, but here it should be obvious that this is not about full reserve banking, is it?
      It’s about the nature of reserves in any central banking, fiat money system, and whether in that sovereign fiat money system, reserves ARE money, or not.
      We could suffice with golfer’s comment that:
      “Reserves don’t circulate, and can’t be used to purchase any real goods and services, only to settle transactions between banks, and between a bank and the government.”
      More on that later. But my point is much more factual and legal – reserves are not money because they fail to meet any legal aspect of what is money in that sovereign fiat money system.
      Any financial media that fails to hold the essential qualities of money is not money. That essential ‘money’ quality in a sovereign money system is to serve as the universally accepted medium of exchange, as they say. In law:
      FA Mann The Legal Aspect of Money – Ch. 1; The Conception of Money.
      “The quality of serving universally as a medium of exchange within a given economic area and in a given national system is the essential requirement of money. This is one of the reasons why Bills-of-Exchange, bank bills, stamps, postal orders, … Gold bars, Treasury Bills, and so forth, are excluded from the legal notion of money.”
      Notice all these things that serve a monetary function, yet are not money, are items you can hold in your hand. They are not merely accounting identities. Further,
      “While denomination with reference to a specific unit of account is necessary to confer upon a chattel the quality of money, not everything that is so denominated is money. Treasury Bills for example are expressed in terms of the unit of account, but they represent merely claims to money – their reference to the unit of account is only indirect.”
      The reference of reserves to the UoA is even more opaque.
      And for the neo-chartalists :
      “Chattels which have been created by law and which are denominated by reference to a unit of account are money if they are meant to serve as universal media of exchange in the state of issue.”
      “Money is not the same as credit. Nor is the law of money identical with the law of credit. Nor does the fact that ‘bank credit money’ largely functions as money, prove that in law it necessarily and invariably is money.”

      “Only those chattels are money to which such character has been attributed by law, i.e. by or with the authority of the state.”
      Money only exists by authority of the state. Have a read of the statutes on the money system. They identify the things that ARE money. Surely you agree that nowhere are reserves ever mentioned as money.

      All the above quotes are from F.A. Mann’s leading textbook on international monetary law.
      From, I believe, golfer’s observation:
      “The reason QE has been so ineffective is that all it does is increase reserves, nothing for the real economy. Bigger deficits would have affected the real economy, because they would have created money.”
      So, here is a differentiation between money and reserves that is quite clear. By serving as the medium of exchange, whatever serves as money itself represents the purchasing power of the money system. Anything that does not provide purchasing power by which goods and services are bought and sold in the national economy, no matter how described or defined elsewhere in accounting norms of the central bank, are not money.
      Reserves are not money.
      Not legally.
      Not factually.
      Not practically.
      All as according to the Bernank.
      Blah?

      • FWIW, Ellen Brown, author of Web of Debt and head of the Public Banking Institute, agrees with you in this article:
        http://www.huffingtonpost.com/ellen-brown/fed-could-fix-economy_b_2754709.html
        “…According to Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund:

        “[B]anks do not lend ‘reserves.’ […] Whether commercial banks let the reserves they have acquired through QE sit ‘idle’ or lend them out in the internet bank market 10,000 times in one day among themselves, the aggregate reserves at the central bank at the end of that day will be the same.”

        This point is also stressed in Modern Monetary Theory. As explained by Professor Scott Fullwiler:

        “Banks can’t ‘do’ anything with all the extra reserve balances. Loans create deposits — reserve balances don’t finance lending or add any “fuel” to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its… interest rate target.”

        Reserves are used simply to clear checks between banks. They move from one reserve account to another, but the total money in bank reserve accounts remains unchanged. Banks can lend their reserves to each other, but they cannot lend them to us.

        QE as currently practiced is simply an asset swap. The central bank swaps newly-created dollars for toxic assets clogging the balance sheets of commercial banks. This ploy keeps the banks from going bankrupt, but it does nothing for the balance sheets of federal or local governments, consumers, or businesses….”

      • Even though bank reserves are not money in circulation, they do enable the banks to create money as debt as multiple of the reserves. Thus although the reserves are not technically money, they can become money at some point if they are withdrawn from the bank. Now, are people’s deposits, whether in a savings account or in a checking account, assets of the bank or are they liabilities? Or is it that their outstanding loans are assets ?There always seems to be some confusion about this in the public’s mind. In addition, is the bank’s initial capital also counted as reserves ?

        What actually constitutes “reserves” ?

        • joe bongiovanni

          Frank,
          While there is a relationship between reserves and bank lending, I don’t consider the relationship as either enabling or preventing lending by the banks. It’s just that some banks have a reserve relationship that must meet a regulatory requirement quite infrequently, and so occasionally the banks trade reserves to hit the mark. It can usually be met with ‘cash’ balances these days, subject of course to a run on cash.
          When discussing QEs excess reserves, the main mark is that they have zero effect on the real economy, being comfort food primarily to those who follow the accounting balances strictly between the CB and the commercial banks.
          Reserves are irrelevant to anything we want to do with our sovereign fiat money system.
          They are irrelevant to sovereignty.
          They are irrelevant to fiat money.
          The Kucinich Bill proposes a ‘real money’ sovereign fiat system that excludes reserves.

          I’m not sure how non-cash reserves ‘themselves’ can become money in any way.

          And while I advise steering clear of bank balance sheet weediness unless it is essential to understanding ‘money’.
          On the bank’s BS, your loan doc and PN are its assets, and your account balances are its liabilities.

          I’m not certain about bank capital’s role except as relates to capital requirements, where it is relevant to a more relevant regulatory requirement.

          Non-cash reserves are created by the Fed, ostensibly for the reserve market that provides mostly for interbank lending of balances for payments settlements, etc. But again, central bank reserves, because of the systemic vertical money construct of MMT, have taken on an undeserved and misplaced relevance to our shared notions of using the money system to achieve socio-economic transformation.

          If it’s ‘money’, then it involves purchasing power, exchange in commerce, growth in demand and job creation, it pays for schools, hospitals, infrastructure and well-being.
          If it doesn’t do that, it’s not really money.
          That’s why reserves are not really money.
          Thanks.

        • Frank,

          Reserves are cash in the bank’s vault and balances in their reserve account at the Fed. Neither of these are in circulation, although the cash in the vault can enter circulation, and then would become money.

          There are rules about banks having to maintain some quantity of reserves, but the requirement is met in arrears. Don’t hold me to the exact times and quantities, but it goes something like “if your loans today are 100, your reserves next Friday must be 10.”

          The Fed can control either the supply of reserves or their price. They really don’t have ability to control the supply effectively, because if a bank makes another loan and the Fed doesn’t supply the needed reserves, the interest rate goes to infinity as the bank desperately tries to borrow from other banks who have no excess to lend. So the Fed controls the price of reserves (the Fed Funds Rate) and supplies or drains reserves as necessary to maintain their set price. Just recently they started paying interest on excess reserves, and that keeps the Fed Funds rate from dropping to zero, even as they add $3T of excess reserves by QE.

          If the Fed ever decides to raise the Fed Funds Rate, they will have to sell off all the QE assets to drain all the excess reserves before the rate will budge. Or they can raise the rate they pay on excess reserves.

          Reserves are important because they are the way the Fed controls interest rates. They are not important to the price level, GDP, savings, lending, or anything else in the real economy. Cash in the vaults is managed by the banks to meet their customers’ demands for cash, and is a small part of reserves.

          Because the Fed controls only the price and not the quantity of reserves, banks are never “reserve-constrained” in making loans. They can always get the required reserves. There are rules about bank capital that constrain lending. Capital is like their “net worth”, the difference between their assets and their liabilities. There are no doubt many assets and liabilities, but the ones unique to the banking business are loans (assets) and deposits (liabilities). The level of capital is a measure of the financial strength of the bank. When borrowers default, capital goes down, and the bank could get in trouble if they have too many “non-performing” loans. Or if they buy toxic credit default swaps or other derivatives. The “stress tests” for banks must have mostly to do with the quality of their loans and their capital position. Some of the exotic instruments don’t have a liquid market, so the banks used a “mark to model” technique to value them, instead of “mark to market”, or else just carried them on the books at cost. The inaccuracies of these techniques contributed to the Great Financial Crisis, and are still an issue today in assessing the financial health of some banks.

          Capital is an accounting item, calculated from total assets and total liabilities, and not specifically related to any particular asset such as cash or reserves. The initial capital, from when the bank was founded, is of no importance anymore. How much is left (or has accumulated) since then is what matters.

  25. “FRBs (themselves legally private bank corporations)”

    They are legally public-private institutions. A strange hybrid, but a hybrid nonetheless.

    • joe bongiovanni

      I provided the citations to the statutes by which reserve banks are created.
      They are private, stockholder-controlled banking corporations.
      The public part is their hands in our pockets.

  26. Joe,

    Out of reply links again.

    You confuse me when sometimes you make a distinction – very pointedly – between “creating” money and “issuing” it. Other times you seem to use the two terms synonymously.

    Likewise with “money” and “currency”, which is only confusing because much of this discussion has been about paper currency and coins specifically, as opposed to electronic currency.

    But, for now, I thought you would say that when Treasury has an auction, and a primary dealer buys a new T-bond, money is created/issued into circulation, specifically the increased balance in Treasury’s bank account in a private bank. (I have no idea what “special accommodations” you mean, or would be necessary. Isn’t this just like any bank making any loan?) If not created/issued into circulation then, the money must be created/issued into circulation when Treasury spends that increased balance. That would be the MMT view, not the “reformer” view that it is private bank lending, not Treasury spending, that creates/issues money into circulation.

    What have I missed now?

    • joe bongiovanni

      golfer,
      First, I find that if I use the ‘reply’ link that comes in my email notification that it always seems to work. Discovered only recently.
      Second (out of order), private banks create and issue bank-credit money.( +/- 97% of all money)
      Treasury creates and issues coins.(+/- .3 % )
      Treasury creates and the private banks issue the paper currency, (+/- 2.7 %) which is how we started this conversation, in reply to my question – I believe – about why Auburn Parks was using money and currency in a differing way.
      Often people (me included) use the term ‘create money’ when they mean ‘issue money’.
      But when the media is paper currency, there is a difference

      Far as I know, NO, a Treasury issuance never conjures up new money. In and of itself, the purchaser of the Treasury security needs to have the money to convey to Treasury, again Primary Dealer accommodations notwithstanding.
      Any bank can purchase any marketable security anytime, and Treasury debt is no different.
      Perhaps I’m wrong, but the implication of the question is whether the Treasury issuing a $Billion Debt increases the money supply by that $Billion.
      Situation – again SINCE we’ve had a Treasury…..
      The Treasury must BORROW its unfunded (by tax revenues) balances in order to have money to pay that balance of its bills.
      The implication there is that someone must have the money to lend to the Treasury.
      As such, there is a transfer of privately-held monies to the public sector for the Treasury to use to pay its bills, including interest on its debts previously issued.
      Government is a ‘user’ and not an issuer of the nation’s money (c.e.)
      Whether the credit accommodation to the PDs results in an instant or temporary slug of new money by THEIR borrowing is not consequent to the fact that when sold, someone must hold those Treasuries, and those someones must have given up a $Billion of previously existing money.

      Think of how it would have worked a hundred years ago. Pretty much the same. The Treasury borrows money that someone else has already created.
      Hamilton won. We the people borrow our own money.
      Thanks.

      • I’ve been roughly following this dialogue at a distance, probably missing some nuances along the way.
        But this raises an interesting question. If I, with more than an average interest in monetary matters, and you two, with the same, can’t agree on the basic mechanics of money creation, what hope is there for a populist movement, which we will need if we are ever you move the Power-That-Be to do what must be done.
        I said it before, but I think now with more evidence: the simplest and easiest-to-understand monetary reform would be to simply allow Treasury to create debt-free money, as Lincoln did it, as SCOTUS affirmed, as coins already do, and as the Constitution allows (requires?). Plus you have the advantage of sticking it to the near-universally loathed banks.
        Sovereign Money. Now.

        • joe bongiovanni

          ‘ what hope is there for a populist movement?’

          chaos.
          open minds.
          understanding.

          The usual.

          But, for the populist movement to succeed.
          a workable solution.

      • Did you just say the Goverment defecit spends by collecting taxes?

        • joe bongiovanni

          Please say what it was that I said and maybe I can explain.

          “Deficit” – a stock.
          “Spends” – a flow.

          I always refer to ‘deficits’ as unfunded budget balances.
          By unfunded, I mean as in with tax revenues.
          As in : total budget – minus – tax revenues = unfunded budget balance = deficit.

          The government TODAY cannot spend money that is identified as a deficit balance, unless it obtains a revenue source. TODAY, that revenue source is the proceeds from public debt issuance.

          I’m glad you bought it up in this sense.
          Reformers and Theorists SEEM to agree that government should not need to issue debt to fund its deficit balances in its budget.
          Reformers are strongly in favor of having the government “print the new money required to do so” as in the Kucinich Bill. (create and issue)
          The K-Bill is an acknowledgement that TODAY no power exists for the government to print the money needed to fund those balances. Therefore it proposes a broad statutory reform agenda that would fully enable the government to do so without issuing debt.
          The Theorists claim that TODAY the government creates money when it spends.
          And destroys money when it taxes.
          So, the lesser the taxes, the greater the deficit and the greater the amount of money created by government spending.
          Right there you could see the problem being solved were the Theorists correct – which they are not.
          Government does not create any money when it spends.
          Government does not create any ‘money’, coins excepted.
          Please do not “gotcha” me on ‘create’ money.
          Thanks.

          • “Government does not create any money when it spends.”

            How can it spend that which has yet to exist? The money needs to exist before it can be spent and the money is made available in the TGA because private banks purchased Government debt in a currency owned and controlled by the very same Government. The Government choice of using this process is to set the intrabank rate and pay the private banks for providing this service.

            What did I miss?

            • What did you miss?

              Maybe that this system was not created from scratch. I don’t know the history right up to the Federal Reserve system in 1913, but the private banks used to print up and issue their own paper money. There was a gold standard, under which the United States was obligated to buy and sell gold at a fixed price to redeem its own currency, so it must have been issuing some, too (Gold Certificates and Silver Certificates?) During part of the time there was a bimetallic standard, with a fixed price of gold and of silver, and the ratio between those prices was of great significance. And, of course gold coins in denominations similar to those for which we have only bills today, like $10, $20 and $50, and in those days $50 would buy a lot more stuff than it does today.

              And the whole rest of the world was on (and off, periodically) metallic standards of some sort. To convert overnight from that environment to floating rates and fiat currencies and a whole different banking system would have been chaos. So, it was done in steps, and is still going on, if MMT and/or the Reformers will have their way. Or maybe even if not, and China has their way. I don’t see any reason to believe that the current setup is the endpoint of somebody’s grand design. It seems more likely it is an evolutionary step on the way to … nobody knows.

            • joe bongiovanni

              ‘What did I miss?’
              I wouldn’t know where to begin.
              I should have left it there, but ….
              I’m trying to wrap my head around that…..

              I’m trying to figure out why, if the government SOMEHOW owns and controls the system of money, the stuff that is denominated in the unit of account of the $US, be it paper, plastic or digital, the government didn’t just SPEND that money rather than, …. than,….. I don’t know, how did the bankers get that money in the first place?

              That’s why I think the way it works is that the private banks create (issue) the money, RATHER THAN the government, and they have set up the national money system so that they issue all the money as a debt – this is the KEY to their power over the people – and so the wage-less people need to come to them and borrow their money, or else there is no money. And they suffer.

              And that goes in spades for that government of the people . If they want any of that bank-created money – you now, if they want the stuff that they SOMEHOW own and control, then the government needs to get in line with the regular people and borrow it from…….from…… the privileged creators of these debt-based monetary assets that serve as money; bank loans.

              Which is 100 percent of all the proof that I need that the government of the United States is a user, and is not the monopoly issuer, of the nation’s money.

              So, the only explanation I can come up with for the government to be borrowing something that it has the power to create out of nothing is that the government DOES NOT KNOW that they own and control that money system.
              So, I guess that’s the part I think you’re missing.
              Thanks.

              • I had this discussion some days ago with a board member of a central bank of one of the G20 nations. His answer was the current operations are in place to give value to money and give banks some indication of what rate they should charge for loans keeping in mind that risk assessment is done bank side. Value for money can be archived in nations that do not have direct taxes like many developed nations such as Arab OPEC members via this operation. When asked why not issue the money directly he stated it would lead to deflation as banks will not ‘work’ for nothing and the economy will not have enough ‘money.’

                Governments own and control the national currency and central bankers, finance ministers and the rest of government are all convinced that the current mechanic is the best they have. It is not easy to continuously probe government officials and after reaching a certain depth even veteran board members will say its too ‘technical’ and they don’t really know.

                Who issues most of the money used in the economy today? The government allows private banks to do so to give value to the currency first and foremost (again many nations do not tax directly and the local currency is stable and in high demand).

                • joe bongiovanni

                  Great comment. Thanks.

                  My takeaway, in order of truthiness, quoting yourself and others.

                  “after reaching a certain depth even veteran board members will say its too ‘technical’ and they don’t really know.”
                  “The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class..” Rothschild.

                  “the current operations are in place to give value to money and give banks some indication of what rate they should charge for loans”.
                  “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” JK Galbraith

                  “When asked why not issue the money directly he stated it would lead to deflation as banks will not ‘work’ for nothing and the economy will not have enough ‘money.’;”
                  “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. Money will cease to be master and become the servant of humanity.” -Abraham Lincoln

                  “Governments own and control the national currency and central bankers, finance ministers and the rest of government are all convinced that the current mechanic is the best they have.”
                  “The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government ever since the days of Andrew Jackson… “-Franklin D. Roosevelt

                  Finally just to add for reference :”When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” N. Bonaparte

                  So, no buy here.
                  Whether money is issued privately or as a governmental function, the amount required to achieve economic growth potential with neither inflation nor deflation will be exactly the same. The economy will have the money it needs.
                  As such, the market for capital will determine FIRST what banks need to pay in interest to use the savings of its depositors for lending, and this will, in turn, determine what banks can charge for the risk of lending that same money. It’s not that complicated, really – it’s called supply and demand on a level playing field.

                  Banks would not work for nothing. Rather, they would do banking, like people think they do now. And the money would have a motherland, and know patriotism. Because it’s OUR money.
                  Thanks.

          • Not trying to “gotcha” on the money creation issue, but all that is needed is Congressional Authorization to do so. The POWER to do so is already in the constitution, in historical precedent, and in affirmation by SCOTUS.
            It doesn’t matter whether it’s the Kucinich bill – HR2990 (which, for the record, I have problems with, in respect to the non-Greenbacking parts), or the simpler LaHood bill to create $350B for highway projects (HR1452).
            The point is Congress can create (“coin”) money anytime, in any amount, for any reason, it chooses, has done so, and can do so again.

            • joe bongiovanni

              Scott,
              That ‘gotcha’ missive was aimed at golfer as ‘create’ and ‘issue’ have become an important distinction.
              And I prefer to keep the discussion about fixing the MMT construct of monetary economics in order to make it workable.
              We have discussed the Kucinich Bill and alternatives on the Monetary Reformers Google group, and perhaps should again, rather than this thread accommodated by NEP.

              But your last sentence is somewhat analogous to the MMT position, which is of course correct, as it simply describes the legal factual reality around any sovereign fiat money system. A sovereign nation can make any laws with respect to its money system.

              But to say that Congress can do that (create money) now today, as in without the K-Bill or whatever reform must come to the system of money, is a little, well, expressive of the monetary powers of the Congress today.

              Greenbacks required the Greenback laws.
              Congress issuing money into existence will again require changes to the laws.
              Who actually has the power to make that happen now is the sovereign people, though wageless and debt-saturated they may be today. There is a way to change the standing of the people in the money system, and there is a way to change the monetary powers of the Congress, and that way is reform.

              Thanks.

              • Well, I don’t mean to beat this point into the ground; we both have better things to do, bu to just point to one example, the simpler one, of the LaHood bill – HR1452. this would have created $350B, interest-free, U.S. Note money, specifically focused on highway infrastructure (LaHood was a Congressman at the time, later Obama’s Transportation Secretary). There was no talk of “special powers” or breaking new ground in the bill, just issuing what Lincoln and SCOTUS already affirmed could be issued – U.S. Notes.
                Now, I agree with you that THIS congress seems alarmingly reluctant to exercise its constitutional powers, in this and other realms, but that just means we have to elect representatives who will follow the constitution, not twist it around and ignore it to pursue their personal ideology.

                • joe bongiovanni

                  Scott, you know I agree, especially on that last part, and I do not to take anything away from the efforts of Rep. LaHood, which were an exemplary public service.
                  My only point was that in order for the government to not issue more debt, legislation is required, and once you’re going to do legislation, go all-in with the K-Bill. The Money System Common.
                  As for the LaHood Bill, it was not really about US Notes, as far as I can see.
                  It was about government loans to public entities that are issued interest-free for those specific public purpose needs. Again, it was a great proposal for policy that went as far as it did.
                  But it was not really Lincoln-esque, nor Kucinich-like.
                  Or, did I miss something?
                  Thanks.

                  • “My only point was that in order for the government to not issue more debt, legislation is required, and once you’re going to do legislation, go all-in with the K-Bill. The Money System Common.”

                    Would you guys agree that, all else equal, by removing interest-bearing (including discount) U.S. government financial assets, greater issuance of non-interest bearing assets (~larger budget deficits in today’s system) will be required to make up the difference?

                  • Yes, debt-based money has a limited shelf life.
                    I’ll relate an axiom I heard on CNBC from a hedge fund manager, speaking at Davos (he waxed philosophical). He said of the Euro debt crisis “You know, in the old days, Europe used to have a war whenever the debt go too high. Then, the winner would get resources to cover their debts, and the losers would have their debt wiped out, either by the banks being dissolved when their country lost, or by the country itself being absorbed, including their banks, so it was no problem anymore.” I’m paraphrasing a little, but not much.
                    Now, everyone wants peace. That’s why the EU was formed, after all. That’s fine. But the EU gave monetary control over to the banks, and they, more than any other body, are why there are wars in the first place (to pay debts, see above). This is untenable and we MUST go to some form of debt-free money, at lest for the government, if not the private sector (which will continue to go boom and bust until there are Land Value Taxes on everything nature produces, and on prime locations). But at least the government will be solvent and able to rescue the country during the busts.
                    MMT won’t get us there. The goals are the same, for social justice and creating money to meet the productive capacity of the nation, not the credit cycle. But you can’t there by simply ignoring the debt, or pretending it’s just an internal book-keeping matter. You need to ELIMINATE the debt, and those who profit form it – the rent-seekers. you can’t do that without debt-free money.

                  • War wasn’t the only avenue. So was successful gold prospecting (see economic expansions post 1840s, post 1896, for example; not to mention the nearly complete disappearance of bimetallism post-1896). A rarely used (at least post-Newton parity) but just as effective and far more humane method was repegging the target parity.

                    Of course, this is all independent of public debt issuance, which begs the question of just how big a deal it really is in establishing just and humane monetary/fiscal policy.

                  • The problem is the politicians, or even kings, were/are so institutionally captured that they cannot imagine, or dare to imagine, a debt-free money system. If they try, they are either assassinated (Jackson (attempted) Lincoln, Kennedy), or de-throned/unelected.

                  • “The problem is the politicians, or even kings, were/are so institutionally captured that they cannot imagine, or dare to imagine, a debt-free money system. If they try, they are either assassinated (Jackson (attempted) Lincoln, Kennedy), or de-throned/unelected.”

                    Scott, this is exactly the kind of hyperbole I associate with most AMI sympathizers. Based on some elements of truth, but ultimately over the top. Fact is, under a precious metals-based system, a flexible peg works, which (in my view) tosses the whole conspiratorial anti-debt apparatus out the window. (Especially if combined with a well-designed estate tax and, as you noted earlier, fair taxation of economic rents — although it clearly sounds like we differ on what constitutes those in the monetary realm.)

                    P.S. Let’s not forget that Jackson’s ‘debt-free’ vision ended in economic depression.

                  • It’s actually a pro-debt conspiracy. That’s not hyperbole, it’s just the way this version of Capitalism works. Really, this list isn’t long enough to cite all the examples, so I won’t bother if you aren’t convinced already.
                    Yes, Jackson forgot to fund the economy after closing the 2nd National Bank of the U.S. We never really crawled out of that massive depression until Lincoln created Greenbacks during the Civil War. Gold-backed money just creates deflation, as there is never enough precious metal to support a growing economy, so the economy just doesn’t grow. We had a dizzying number of currencies prior to the first legal tender Act enacted by Lincoln – read Stephen Mihm’s book on that “A Nation of Counterfeiters.” Most of us would not even recognize the country’s money policies (plural) back then.
                    A flexible peg? In a gold market that in TOTAL, represents less than the market cap of Apple (even down here)? Where more than 1/7th of the volume is traded on ETFs? Oh sure, that’s a secure base for our money.
                    Besides, what’s a free market guy like you doing endorsing government interference in the free market for precious metals by basing the money on it? The Free Market rocks! No, really, the Free Market…rocks (gold rocks, silver rocks, etc.). :)

                  • “Gold-backed money just creates deflation”

                    Classical standard did most of the time, but not always. For example, Google Witwatersrand and you’ll know right away why the bimetallism in WJ Bryan’s Cross of Gold speech died after the 1896 election. Likewise if you look at Roy Jastram’s gold and wholesale price data in The Golden Constant.

                    Am I advocating a return to gold? Heck no. It was a rather unjust system because of the extremely lumpy nature of gold discoveries. I was referring to it in order to illustrate what I see as a flaw in the ‘bankers are all out to get us’ POV. (And granted, people with the gold tended to favor a deflationary stance, all else equal; I’m not trying to sweep institutional economics under the rug.) Your Apple reference tells me you still don’t get my point. Existing supply means nothing until you attach a nominal parity to it…right?

                    Finally, I haven’t written anything that should give you a sound basis for determining what my views on government and markets are…your willingness to assume that which you don’t know tends to reinforce my skepticism toward your beliefs about money and banks. I think you are taking some valid factuals and running wild with them. Sound and fury perhaps?

                  • joe bongiovanni

                    Arturo,
                    Thanks.
                    Only if the perceived non-interest bearing ‘assets’ are in the form of publicly-issued equity money.
                    What I would agree with is that given our huge store of unproductive economic resources in our modern capitalist economy, manifesting in reduced demand, government has an increasing role in making those resources productive and in increasing demand.
                    That is the role of government in a modern economy.
                    How the government best does so depends on your understandings about money.
                    My monetary crutch pretty much rests upon Soddy’s “The Role of Money”.
                    http://ia700306.us.archive.org/15/items/roleofmoney032861mbp.pdf

                    In a modern sovereign fiat money system, the government has the power to create national exchange media as public equity, and this is what is proposed in the Kucinich Bill.
                    What comes to mind in a question like this is the convoluted reasoning that what the government should do is to issue debt ( a monetary asset), and that the central bank should then purchase and hold that debt, and through its reserve management policy, establish near-zero interest rates on that government debt.

                    To me that is a rube-goldberg monetary operation.
                    It continues the abdication of the public’s money-creation powers to private bankers for no good reason, with questionable longer-term policy implications due to the necessary unwinding of excess reserves as a temporary monetary policy tool.

                    The problems of the debt-based money system cannot be resolved with more debt, of any kind.

                  • “the government has the power to create national exchange media as public equity”

                    Referred to as ‘net financial assets’ (NFA) or a similar term in MMT’s framework, and created (assuming a closed economy for simplicity’s sake) by fiscal deficits and certain (and thus far unusual) central bank operations. That’s the crux of it. See the Fullwiler paper I linked here where he uses social matrix accounting to show — rather clearly, imo — that a Treasury deficit, even though obscured by current regulations and the existence of Treasury auctions, leads to expansion of NFAs, i.e., ‘public equity.’

                  • joe bongiovanni

                    Sorry. no internet for two days.
                    That’s definitely one way to look at it.

                    Main difference being that when I say public, I mean the public, the people.
                    And when I say equity, I mean equity. Something they own.
                    Let me guess, functional equivalence.
                    Eye of the beholder kind of thing.
                    Monetary assets are here called public equity.
                    Public equity becomes the “i.e.” for private capital goodies.
                    Perhaps not quite alchemy, surely just different definitions.

                    I don’t disagree with anything in the Scott Fullwiler paper. At least, not that I have seen.
                    It could be said that as presently run, the capitalist economy drives us deeper and deeper into debt, which is a monetary asset to the creditor.
                    Increased debt equals increased assets.

                    Public equity from money creation.
                    The equity is in the form of unburdened exchange media in a permanent money system.
                    It is public because the benefits of a permanent money system reside with the users of that system. Consumers are provided with permanent debt-free money that circulates without any interest cost attached into the hands of the producers and service providers.
                    It’s the type of equity that comes from being the owners of the money system.
                    Which sovereign peoples are.

                  • The LaHood bill specifically required $350 in US Notes. There’s a reason for that, and it’s because Congress simply cannot require a private central bank (yes, it is) to issue debt-free money. The Fed sets interest rates, and they are never quite zero, and the private banking system, which is where a highway bill bond would normally be floated, is even more gouging.
                    LaHood knew this and therefore proposed direct issuance of US Notes.
                    This is why he will always be my favorite Obama cabinet member. :)

                  • Oops, make that $350B as in BILLION… :(

      • Ooops. I thought the primary dealers were the banks, making loans to Treasury with (in the reformer model) the securities being the collateral, so to speak. Some are banks, but now I think they are acting as securities brokers trading for their own account, and not acting as a bank. Probably a separate division of the company. Primary dealers buying and selling T-bonds are simply doing asset swaps of their existing bank balances for the T-bonds, which Treasury creates from nothing, just like anyone signing a promissory note.

        So, for me to understand the reformer model, I need next to understand how it views “The Fed”, meaning their open market operations, buying T-bonds.

        I understand you to have said that the OMO section of the Fed, the part that Bernanke is Chairman of, as opposed to the 12 regional Federal Reserve Banks, like the one Geithner used to be President of, is an arm of government, not itself a private bank. When Bernanke was asked where the Fed got the money for QE, he said that the Fed buys Treasuries and other assets from private sector owners simply by marking up their accounts, not by transferring money from some account of its own in a private bank. And, as I understand it, the Fed does not have such accounts in private banks. The Fed doesn’t have money, it creates it whenever it wants to spend some.

        Do reformers agree with such a description of how Fed OMO works?

        • joe bongiovanni

          golfer,
          Here’s the thing.
          There is no need to understand the weeds around the central bank’s policy mechanisms or its internal accounting system. The only thing that anyone needs a broad understanding of is who actually creates the nation’s money, and how.

          The banks create the nation’s money and they lend it to the government.
          That happens in a bunch of transactions that determine financial statement balances in various accounts.
          Understanding who zooms who is only important relative to changing the system so that the government creates the nation’s money.

          Yes, the Open Market Committee is an unnecessary and irrelevant Guv-op that should be dismantled immediately upon transfer of the money creation power to the government.
          There is no need to try to manage interest rates to control the amount of bank-credit money in the economy so as to achieve the government’s monetary policy objectives of price stability and employment.
          The money will be public money.
          And the amount in the economy will be determined by the monetary authority.

          PLEASE do not make me explain again that what the Bernank was referring to was not money, but asset swaps between the CB and the banks – with the Fed’s so-called assets being MORE excess reserves.
          There was no money created.
          As the Bernank said of those reserve balances:
          They are not in circulation.
          They just sit there.
          They are not money.
          And the Fed (FRBNY) is not the government.

          Thanks.

          • “Issue of currency should be lodged with the government and be protected from domination by Wall Street. We are opposed to…provisions [which] would place our currency and credit system in private hands.”

            Theodore Roosevelt

  27. @joe bongiovanni

    “It could be said that as presently run, the capitalist economy drives us deeper and deeper into debt, which is a monetary asset to the creditor. Increased debt equals increased assets.”

    That sums up our current monetary system very succinctly, and yet most people, especially the rich ones, seem to think of debt as a problem. Without this debt they would not be rich ! Of course, it becomes a problem when the people who owe the debts can no longer afford to pay them off, because they are unemployed or their income has declined relative to the cost of living. Then governments step in and bail out the lenders i.e. the rich folks.

    • …which is one of the big reasons MMT will and has run into trouble being accepted. The government has indeed, as you said, bailed out rich folks. Any system that says A) that debts don’t matter, which annoys the rich initially, than after convincing them of that (if that’s even possible, and I don’t think it is), says they are going to take actions like increasing the debt which is going to bail out rich folks (rentiers), is going to meet opposition from BOTH the 1% and the 99%.
      That leaves 0% in favor, aside from a few academics and those who want to use MMT as a tool to continue to loot the public.
      Greenbacking, debt-free money, sovereign money, positive money, or any of the other very slightly different versions of Lincoln’s initial paradigm, is consistent and clear – money for the government should be created by the government, debt and interest free, and put to work for the People. Plus, we have actual examples of where this has worked, a very big plus for imagination-deprived politicians.

      • Scott

        Do you have any specific examples of countries that use debt free money ?

        • Well, America remains the best example of a country which used debt-free paper money (virtually all countries use debt-free coins, though some may still tie their value to intrinsic worth, though I can’t think of any that still do). The American United States Note was the original Legal Tender under Lincoln, introduced in 3 series from 1862-1863, until there was $450 million of it, some 40% of the currency at the time. An attempt was made to abandon the U.S. Note in the 1870s, but by the time it got down to $351m, we were in a general deflationary depression (that’s really redundant – ALL depressions are a result of deflation, whether of debt-money or debt-free money). The Greenback Party, and general popular demand froze the withdrawal of U.S. Notes to $351m, where it remained through the rest of the series of issuances (14 total), until 1972, but the U.S. Note remained in circulation, still at $351m, until 1996, until Treasury officially burned its stock. Even today, an estimated $250m is still out there, much of it available to collectors on eBay (I have two $5 U.S. Notes, bought for apx. 2 times face value – they are a good investment!).
          You can read about other countries here: http://en.wikipedia.org/wiki/Monetary_reform#Social_Credit_and_the_provision_of_debt-free_money_directly_from_government
          and click on the links for other countries, as well as authors like Ellen Brown and Stephen Zarlenga (The Lost Science of Money should be read by every serious monetary reform student).

          • It seems therefore that no country presently uses debt free money. The Vampire Squid banking system has wrapped its tentacles around the entire globe and has its beak stuck into every aorta.

            Even a Canadian twelve year old girl, Victoria Grant denounces the system.