“Let it be Done” An Alternative Narrative for Building what America Needs

By J.D. Alt

Somehow a great confusion has arisen. It has divided our nation into feuding, bickering camps, caused many to view their own government as a ruthless competitor, and is now seriously threatening us with, among other things, a frightening deluge of collapsing bridges. The confusion is about money—what it is, where it comes from and, most important, whether there is enough of it to pay for all the things we need as a nation.

Presently, we have convinced ourselves there is not enough money to pay for the things we need. The logic that tells us this seems intuitively obvious: American businesses and households, at any given time, hold a given amount of Dollars (which are exchanged back and forth amongst the businesses and households as the economy churns along) and—obviously—there is a limit as to how much the sovereign government can tax those businesses and households in order to collect some portion of those Dollars for its own spending. Many citizens believe the government is collecting too much in taxes—an excess which reduces the Dollars available to be exchanged back and forth in the private economy. Thus, “out of control” sovereign spending is in competition with the businesses and households for a given pie of Dollars. Even worse, when the sovereign government borrows Dollars from that pie, to make up for what it can’t collect in taxes, it is obligating the citizens to pay even more taxes in the future!

In this narrative, the key to economic growth and prosperity is for the sovereign government to (a) strictly limit its borrowing and (b) collect fewer taxes, leaving more Dollars in the private economy for creating jobs. Limiting or shrinking tax collections, however, reduces the Dollars available for public spending—and we are therefore trapped in a perpetual antagonism between the public spending we think is necessary or desirable and the number of Dollars we believe the sovereign government can, or should, reasonably collect in taxes.

This narrative is built upon an understanding of money that goes back to Aristotle: 

“For (the purpose of barter,) the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, (gold) and the like. Of this the value was at first measured simply by size and weight, but in process of time they put a stamp upon it, to save the trouble of weighing and to mark the value.”

(Politics, Book 1, Part 9, Translated by Benjamin Jowett)

In this story, then, money is originally gold (or silver) coinage which has been stamped or “minted” by some authority attesting to the quantity of metal contained in the coin. Typically, these coins were stamped with the visage of a reigning monarch or sovereign—the implicit assumption being that it was this sovereign authority which established the confidence in the accuracy of the stamp.

The story continues along these lines: As the citizens traded and did business amongst themselves, the gold coins became the currency of exchange. At some point, those who had acquired a great quantity of coins needed a safe place to store them. Banks were created for this purpose, and bank-notes were the paper receipts for the gold coins placed on deposit. Soon the paper bank-notes themselves were used as money, with people accepting them in exchange for goods and services because of the actual gold backing them up in the bank’s vault. Whether paper or metal, however, the only way the sovereign could acquire some portion of this money for its own spending was to impose taxes (or fines and fees) upon the citizens.

It is easy to see how our present narrative is a continuation of this story about gold coinage—in spite of the fact that in the modern world today there is no national currency that is backed by either gold or silver. All sovereign monies today are “fiat” currencies (a term we’ll examine in a moment.) Gold coins, which are still minted for commemorative purposes, are simply decorative chunks of precious metal—a kind of jewelry—which are purchased with fiat money. The U.S. Dollar has had no connection to gold or silver for over four decades. Nevertheless, the implicit story about gold coinage stubbornly persists, leading to the fuzzy reasoning that U.S. Dollars (and other fiat currencies) continue somehow to “operate” in the same way as gold coins: (1) Dollars are “struck” by the government (which officially establishes their value); (2) Dollars are owned by citizens and (3) kept in banks which loan them out to people and businesses. The sovereign government itself—to obtain the Dollars it needs to pay for its public spending programs and expenses—must get those Dollars either by collecting taxes from the citizens, or borrowing Dollars from the bankers.

This narrative gives taxes a very specific and narrow meaning: Taxes are how the sovereign government acquires the Dollars it needs for sovereign spending. If it cannot obtain enough Dollars through taxes, then it must borrow Dollars. This is the basic logic of our present political dialog, and it seems to be a logic that is irrefutable.

Fiat Money

There is, however, an alternative history of money with even deeper historical roots: (Philip Grierson, in his book The Origins of Money, traces its source to the early Wergeld fines which prevented blood feuds in early tribal societies.) This alternative story leads to a strikingly different logic about taxes and sovereign spending. This is the story of “fiat” money.

The definition of “fiat” is “an order issued by legal authority.” In Latin, the term means “let it be done.” Unlike gold and silver coins, then, which had value because of the value of the precious metal they contained, fiat money has value because an Emperor or sovereign power declares that it has value. But how does the sovereign establish and enforce this value? What is the declaration that creates “money” people will willingly accept in exchange for real goods and services?

Before answering these questions, it is important to note that many people today—especially those who consciously embrace the gold-based narrative we first described—do not believe that fiat money is “real.” Here is an example of the typical “understanding” about fiat money that is presented by this perspective:

“In a fiat money system, money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it.” (Kwaves.com)

This view sees fiat money as something the sovereign government “prints” to make up for what it needs but doesn’t have. “Printing money,” without anything of “real” value to back it up (even though it is something the sovereign has the authority to do) is thus considered to be deceptive and vaguely criminal, considerations that give rise to indignant recriminations whenever it appears the sovereign government might be stooping in that direction. It has also been demonstrated throughout history, and become a part of economics “101”, that when governments print too much fiat money, the purchasing power of the money declines, robbing the citizens of wealth. Powerful barriers have thus been erected to guard against the sovereign’s potential treachery with regard to its ability to “print” money.

Unfortunately, these perceptions and the barriers erected represent a fundamental misunderstanding of what fiat money actually is and how it functions. Given that we are, in fact, using a fiat money system today, this misunderstanding has much to do with the great confusion in our current monetary dilemma. It is worth some effort, therefore, to try to shed light on the misunderstanding.

Let’s return to our earlier questions: How does the sovereign establish and enforce the value of the fiat currency it issues? What is the declaration that creates “money” people will willingly accept in exchange for real goods and services?

The declaration consists of two parts that work in tandem: First, the sovereign declares that it shall, on some regular basis, collect taxes from its citizens. Second, it declares that the only thing it will accept as payment for taxes due, is the “money” the sovereign—and only the sovereign itself—shall issue. This money becomes the sovereign “fiat” currency: Citizens willingly accept it in exchange for real goods and services because they know:

a)     They are going to need some of this sovereign currency to pay their taxes with, and

b)    They know they will be able to use the sovereign currency to purchase goods and services from other citizens for exactly the same reason.

The central question that arises from this tandem relationship is: if the government of the United States, for example, issues the fiat U.S. Dollars (prints them, or keystrokes them onto an electronic ledger), how do the citizens get hold of the Dollars so they have them to pay their taxes with? The answer is both obvious and startling: The sovereign government has to spend the Dollars after it issues them. And what does it spend the Dollars on? It buys things from the citizens—goods and services which the citizens willingly provide in exchange for the Dollars because they need the Dollars to pay their taxes with.

In a fiat money system, then, sovereign spending happens before taxes are paid! It is literally, by logic, not possible for it to happen the other way around. Furthermore, the fiat Dollars the sovereign spends are not Dollars it has collected in taxes, but rather Dollars it has issued specifically for the purpose of its spending. Finally, and most important: taxes are collected not to provide the sovereign with Dollars to spend, but rather to ensure the citizens will continue to need the fiat Dollars and, therefore, continue to be willing to sell their goods and services in exchange for them. 

Why sovereign spending isn’t “printing money”

Let’s dig a little deeper and try to see why sovereign spending, as described above, is not the same as “printing money”.

Let’s ask this question: what exactly is a fiat Dollar? What does it represent? We know clearly what it does not represent: it doesn’t represent some quantity of gold or silver stashed away in a vault. When the sovereign prints a fiat Dollar it is not printing a “fake” Dollar that is pretending to have some value it really doesn’t. The fiat Dollar also does not represent an authoritarian command by the sovereign that citizens will use it as legal tender to exchange goods and services. Citizens, in fact, are allowed to use any money they please—as evidenced by the recent popularity of “bitcoin” transactions on the internet. What, then, is the fiat Dollar representing, and how does that representation give it value?

What a fiat Dollar represents, in fact, is a debt of the sovereign government. It is an I.O.U. What does the sovereign owe to the bearer of a fiat Dollar? It owes one Dollar’s worth of tax credit. A fiat Dollar, then, is nothing more—and nothing other than—a promise by the sovereign government to accept that I.O.U. as a payment for taxes the citizen owes the sovereign. It is because of this promise—made in tandem with the declaration that citizens must pay taxes on some regular basis—that the sovereign’s I.O.U. becomes something the citizens desire to have. When sovereign spending occurs, then, the citizens provide the sovereign with real goods and services, and the sovereign pays the citizens with its I.O.U.s.

There are several important things to see here:

First, what the sovereign desires to have is not the return of its I.O.U. when tax time comes—what the sovereign desires are the real goods and services it obtains from the citizens in exchange for its I.O.U.s. These could be many things: roads and bridges, jet planes and battleships, medical and air-traffic-control services, weather and GPS satellites…. (The complete list is quite long, and might add up to many, many trillions of Dollars worth of stuff!)

Second, what the sovereign is committing itself to owe by printing its I.O.U. is something it has an infinite supply of: tax credits. Further, the sovereign itself—by imposing regular taxes on the citizens—creates the demand for the thing that its I.O.U. promises to owe. Sovereign spending, then, is not constrained by the number of I.O.U.s the sovereign is able to issue—it is constrained only by the real goods and services that the citizens are willing and capable of providing in exchange for the I.O.U.s. 

Third, when the sovereign receives back its I.O.U.s as the citizens pay their taxes, the transaction is simply the cancellation of an I.O.U. on one side of the ledger, and the extinguishing of a tax obligation on the other: a line is drawn through the tax obligation, and the I.O.U. is torn up. The next time the sovereign needs to buy goods and services from the citizens, it simply issues a new I.O.U. and the process starts over again.

Fiat Dollars, then, function similarly to the electrons in a DC electrical circuit: they flow from a positive source (the sovereign government) to a negative ground (tax collections)—and, along the way, they cause some kind of work to be done. Unlike the battery in a flashlight, however, which will eventually run out of electrons, the sovereign government is capable of continuously producing fiat Dollars—as long as there continues to be citizens willing and capable of providing real goods and services in exchange for the fiat Dollars it produces.

Fourth, the sovereign government has to spend more fiat Dollars than it collects back in taxes. If this were not the case, the citizens, by logic, would be flat broke each time they paid their taxes. Instead, the sovereign spends more than it collects, with the result that the citizens build up a store of the Dollars which they then use in exchanging goods and services amongst themselves (the private sector economy). Most of these excess Dollars are kept in banks, which leverage them with loans that create “bank money”, a leveraging that greatly increases the flow of “money-energy” and work done in the private sector.

Finally, depending on how the bookkeeping that tracks this flow of energy is structured, it could appear as if sovereign spending under a fiat money system is driving the sovereign government gravely into debt. It is easy to see this appearance arising if we insist on measuring sovereign spending with the belief that the spending is paid for with tax Dollars: From this perspective, any Dollar the sovereign spends over and above what it collects in taxes creates a “deficit”. But if, instead, we measure sovereign spending with a correct understanding of fiat money, we can see this “deficit” actually represents something quite different than government debt: it represents the difference between the number of fiat Dollars the sovereign has paid in its spending, and the number of fiat Dollars it has collected back in taxes. In other words, it represents the financial wealth the citizens have retained from the sovereign spending after extinguishing their tax obligations.

The misunderstanding about fiat money, then, derives from the fact that fiat money fundamentally changes—and, in fact, reverses—the relationship between taxes and sovereign spending which existed in a gold-based monetary system.

It is easy to imagine, of course, a sovereign government that grossly misuses the power of its fiat currency. For much of human history, in fact, the goods and services that sovereigns purchased from their citizens did not create or provide a collective benefit for the citizens themselves, but rather served directly to enhance the personal power and aggrandizement of the head of state. To one degree or another, this problem still exists even in well-developed and strong democracies, like the United States. It is a problem that reinforces the “gold-based” money narrative by inviting the notion that authoritarian misrule can be controlled by (a) insisting on the appearance of a “gold-based” currency, and then (b) starving the sovereign authority of its tax income. A moment’s reflection, however, reveals this strategy to be exactly analogous to sawing off the tree-limb one is sitting on. Fiat currency, in itself, is not the problem. It is, in fact, potentially the solution—but to implement that solution requires a functioning political democracy.

Two Narratives to choose

In truth, then, there are two different narratives about money—and about taxes and sovereign spending—we can choose between.  The first, which seems to be the preference of today’s political leaders and economic commentators alike, tells us that for all practical purposes we are broke: It is mathematically impossible for the sovereign government to collect enough taxes to pay for all the things we can document that we are going to need for our collective benefit—and the government appears to already have borrowed more Dollars than it can ever pay back. The things we need—like new bridges, more efficient electrical grids, the next generation of air-traffic control technology—will have to wait. It isn’t clear, though, how long the wait will be, or what, exactly, is going to change to enable the government to ever collect enough taxes to pay for these things in the future. We’re just stuck, and all we have to look forward to is the endless bickering between conservatives and progressives about who’s to blame.

The second narrative paints a dramatically different picture. In a pure fiat money system, the sovereign government doesn’t need to collect taxes in order to spend—it only needs to collect taxes to ensure that the citizens continue their willingness to provide real goods and services in exchange for fiat Dollars. This means two overwhelmingly positive things:

First, it means taxes can become “smart”. Since they are not collected for the purpose of financing sovereign spending, they can be thought about and defined with a completely different set of goals. They can be structured to create positive incentives to encourage all manner of collective, and even personal, benefits. They can be structured to penalize and discourage all manner of actions which bring us collective harm. In addition to maintaining the “value” of the nation’s fiat money, then, taxes can become an implementation of national policy goals across a broad range of social and environmental issues.

Second, choosing to correctly understand and manage a pure fiat money system means the sovereign government can begin immediately to pay citizens to create the public goods and services we deem necessary and desirable as a nation—the only constraint being whether the real resources (labor, materials and technology) are actually available to achieve them.

For example, let’s take those 18,000 “fracture critical” bridges CBS News now tells us exist throughout our national highway system—bridges that could collapse catastrophically if a single rusted bolt or strut gives way (like the one north of Seattle that recently sent three cars and their passengers into the Skagit River.) Are the civil engineers available to immediately begin evaluating and designing the necessary repairs or replacements for each of these 18,000  bridges? I believe quite a few of those engineers, at the moment, are only working part-time. Is the steel and concrete available for the construction to actually be implemented? (The Total Industry Capacity Utilization in America is currently only 76%) Are the cranes required to lift the steel available for lease? (I see them lined up by the thousands, mutely reaching for the clouds, in contractor rental lots across the country.) Are the drivers and welders and concrete finishers available for hire? A lot of them, I believe, are currently collecting unemployment checks.

Under our alternative narrative, then, there is no need to sit around wringing hands and bickering over where the tax Dollars are going to come from: Each of the defective American bridges that we play Russian Roulette with every day could be redesigned, rebuilt, and painted blue—for “new”—within, say, 24 months. It’s literally just a matter of saying, “Let it be done.”

Next time you drive over a bridge, think about which narrative you think America should be using.

54 Responses to “Let it be Done” An Alternative Narrative for Building what America Needs

  1. J.D. – – –

    Excellent essay. You missed one thing, imho. Nowhere did you address the position that would oppose your arguments for the use of taxation to reinforce “desirable activity”.

    You wrote:

    First, it means taxes can become “smart”. Since they are not collected for the purpose of financing sovereign spending, they can be thought about and defined with a completely different set of goals. They can be structured to create positive incentives to encourage all manner of collective, and even personal, benefits. They can be structured to penalize and discourage all manner of actions which bring us collective harm. In addition to maintaining the “value” of the nation’s fiat money, then, taxes can become an implementation of national policy goals across a broad range of social and environmental issues.

    Second, choosing to correctly understand and manage a pure fiat money system means the sovereign government can begin immediately to pay citizens to create the public goods and services we deem necessary and desirable as a nation—the only constraint being whether the real resources (labor, materials and technology) are actually available to achieve them.”

    .

    The argument in opposition would be one that decries central planning as an inefficient process. This opposition would argue that the optimum allocation of assets is obtained by free market forces. The argument is that the optimum for society is obtained when all elements are competing for their own individual self interests.

    There are many reasons to question such philosophy but you have simply ignored it all together.

    • golfer1john

      I think JD skillfully skirted that issue, although implicitly. He talks of the collective benefit being determined in a functioning democracy, so that the people and not any central planners or autocrats would determine what was collectively beneficial. It is well known and widely acknowledged that the free market does not account for all costs, and it is sometimes necessary to adjust things so as to allocate the costs correctly to the activities that caused them. Taxes are an easy way to do that.

    • reserveporto

      I’d point out that taxes are already “smart” and “create positive incentives to encourage all manner of collective, and even personal, benefits”. They’re just “smart” and “creating personal benefits” mostly for someone else….

  2. golfer1john

    “bridges that could collapse catastrophically if a single rusted bolt or strut gives way (like the one north of Seattle that recently sent three cars and their passengers into the Skagit River.)”

    Um, that particular bridge was hit by a truck that was too big to be using that bridge. It had been recently inspected and found adequate. I don’t think the inspectors considered it being hit by a truck, and I heard nobody say that a brand new bridge would have fared any better in such a collision. There must be other examples.

    • My understanding is the bridge failed because it was designed as a “fracture critical” structure—which is a “cheap” way to build bridges because they have no structural redundancy: if one little part fails, there’s no other path for the loads to follow and the system collapses. The truck did not plow into the bridge, it clipped a single strut. It has been reported that there are 18,000 such bridges still “functioning” that were built in an effort to speed up completion of the Interstate Highway System. There are also 66,749 bridges defined as “structurally deficient”—and another 84,748 defined as “functionally obsolete”. But the bridges are just the beginning….

  3. Gold coins, which are still minted for commemorative purposes, are simply decorative chunks of precious metal—a kind of jewelry—which are purchased with fiat money. That’s what gold coins always were.

    … fiat money fundamentally changes—and, in fact, reverses—the relationship between taxes and sovereign spending which existed in a gold-based monetary system.

    Yes, except that the gold based narrative was never true. Money always was fiat money. Gold never really backed or based the monetary system. Fiat money backed gold. That’s why gold is so expensive – as Keynes said early in his career, it was because the central banks of many nations had conspired to make it so. It was four or five central banks, [eventually IIRC he said] just the Fed that set the price of gold. Gold is and always was so valuable because you could get dollars or pounds or francs or rupees for it, not vice versa.

    Let’s dig a little deeper and try to see why sovereign spending, as described above, is not the same as “printing money”. No. Later on you use the word printing anyways! Sovereign spending is “printing money.” IMHO academic MMTers eschewing the word, or looking for new friendlier memes are make a major mistake of rhetoric, they are yielding to an opposed and inane position. Abba Lerner, more wisely, used the phrase all the time.

    Physical analogies are nice, but the ones most people make reverse things. The flow of ideas and understanding was from economics, accounting, things humans understand very naturally – credits and debts – to things which are a bit harder and more distant – the physical world – during the Scientific Revolution of a few hundred years ago.

    • Mark Robertson

      Excellent. Yes, gold was always fiat money. All money is ultimately fiat money. Always has been. Always will be. Indeed, money has never been physical. Gold or currency can represent money, but the actual money was not and is not physical. And yes, fiat money gives “value” to gold, although most people think the reverse is true. Gold traders (who are all hucksters without exception) do everything possible to sustain the illusion that gold gives value to money. This is doubly ironic, since most “gold traders” have no connnection with physical gold. They trade “shares” in “gold exchanges” that have no gold whatever.

    • Yes, except that the gold based narrative was never true.

      If Graeber is to be believed, the gold story is even more bizarrely false: Alt quoted Aristotle, though I believe Aristotle actually correctly identified money, even in Ancient Athens, as a pure social construct. But in practice, the silver that was used to mint Athenian coins was a combination of war spoils and war slavery—so even those stamped bits of metal were still issued by the state before they could be taxed, and the relationship between taxes and spending has always been the reverse of the (classical) liberal delusions of barter and bullion. And of course it’s almost always been the case that face value exceeded specie value.

      That being said, there is a bit of a wrinkle. The MMT story really boils down to the idea that currencies are used based on institutional constraints that limit the scope of individual action, of which taxes and fees are overwhelmingly powerful. However, the currency is only as good as the constraints backing them, so for example the failure of a government often (but doesn’t always) include the failure of its money, but more important to the so-called Axial Age, precious metal would only trade internationally at specie value. After all, Indochinese people weren’t subject to Athenian tax law, so the coins were only as good as their metal content. Just as today’s global forex markets are only as good as the international constraints that back them up.

      This is all irrelevant to Alt’s point, since he’s talking about sovereign spending on domestic projects, but it’s maybe worth keeping in mind that institutional constraints only extend as far as the institutions themselves.

      • Sean: Doubt you will see this – But that wrinkle misses a wrinkle inside it.

        Where does / did the specie value of gold (or silver) come from? Why is/was the metal content of (gold) coins any good at all for international trade? From (knowledge of) widespread and traditional monetary uses, particular for uses for coinage.

        The specie value of gold is a greater fool bubble that has gone on for millennia. Often a vicious circle creating and created by an undervaluation of intrinsically valuable social relationships and productive labor in comparison to a mere hypnotic commodity. An interminable beauty contest of (ir)rational expectations . Guess what commodity is in greatest supply in the world compared to its genuine uses? And whose specie value would plummet if Treasuries and central banks opened their vaults.

        I mightn’t use the phrase “institutional constraint” exactly – but the upshot is I disagree. Institutional constraints extend much further – to the extent of the effect of the institutions, not just the sphere they directly constrain.

    • Calgacus, I may not have been clear. I was trying to make the point that the common understanding of “printing money” is creating something that really has no value, and is therefore “pretending” to have value when it really does not—and the common belief is, therefore, that this “printed” money dilutes the value of the money people already have; whereas the fiat Dollars printed by the U.S. government actually DO have a real value, which is the value of the tax credits they provide. The fact that the sovereign government has the unlimited power to make those tax credits “valuable”(by imposing taxes) is what makes the whole money system work.

  4. What limits government spending is the requirement that it be reclaimed before it distorts the economy; your explanation does not address this. Taxes and tariffs are traditional, but nobody wants to pay the additional taxes if they did not benefit directly from the expenditure. A third method of reclaiming expenditures is to provide a profitable service, like Fannie and Freddie with the government writing down debt instead of investors taking a profit.

    • golfer1john

      “Taxes and tariffs are traditional, but nobody wants to pay the additional taxes if they did not benefit directly from the expenditure.”

      Quite true. When government strays from promoting the general welfare to promoting specific interests, it loses popular support.

  5. Excellent explanation in lay terms. Now just integrate the chart showing the sectoral balances, which so clearly illustrates how “surplus” federal spending feeds the private sector and vice versa. That paints the picture the words so clearly describe.

  6. This article is fantastic! Great content, well-written, and well-structured. Great work.
    Kyle

  7. A very interesting post.

    You did not relate the new fiat spending to GDP. Obviously, the spending of new fiat money will increase the GDP. Less obvious, if the tax rate is less than 50%, the new money will sometime in the future generate more new GDP than the original spending.

    Taxes act to shrink an otherwise endlessly expanding money supply. By using a combination of taxes and borrowing, monetary authority can create a stable money supply. Whether monetary authority chooses to have a stable or an expanding money supply is really up to the managers. Inflation is a choice, not an inherent property of the fiat money system described.

    As you say, the difference between government spending and taxes becomes paper wealth to the citizens. You might add that this difference becomes our money supply! Citizens have traded resources and labor to acquire this paper, government did nothing but print money. Now citizens holding the new money have the opportunity to make the new paper worth as much as they can, trading it to whoever will take it.

    Please find a much more complete description in my paper posted atFiat Money Begins

  8. sunflowerbio

    This is a really clear and concise description of MMT and how it differs from a conventional description of money and the way an economy works. This, I think, really fulfills the call made by Stephanie Kelton a few weeks ago for a description of MMT concepts that an eight grader student could understand. One emphasis that could broaden the appeal of MMT would be to hammer home the point that taxes are not necessary to finance spending by a sovereign government. This point might be the common or connecting point with conservatives who feel that the government taxes too much and creates a drag on the economy. MMT can say, “Sure, we’ll cut taxes even for the wealthy, but in doing so, we will design a tax system that creates wealth for everybody, not just a privileged few”.

    • MMT advocates need to remember that money has the very important longer term property of providing a durable store of value. As I mentioned in an earlier reply, if the tax rate is less than 50%, more GDP results from secondary exchanges of money than results from the first exchange. This is the long term store-of-value property in action.

      Don’t forget that money, once issued, has an infinite life. This simply means that, except for taxes, money can circulate among citizens forever (or at least until it is worn out, lost, buried or burned). Taxes provide a way for government to destroy what was previously printed, thus retaining limited control of the money supply.

      • sunflowerbio

        It’s not intuitively obvious why a tax rate less than 50% increases GDP and a rate greater than 50% shrinks GDP. Can you give an explanation to clarify the point? Thanks.

        • Let us assume that we have the federal government apply a MMT stimulus of one dollar. That will increase the GDP by one dollar.

          Now let us assume that the federal tax rate is 50%. A worker receiving the one dollar will pay 50% immediately back to the government and spend 50%. When the worker spends his $0.50, the recipient will also pay tax at the rate of 50%, leaving $0.25 for the recipient to spend.

          When the worker spends his $0.50, the GDP increases by $0.50. When the recipient spends his $0.25, the GDP increases by another $0.25. This splitting between tax and remaining-to-spend continues until all of the original MMT stimulus is returned to government. The total spent by the first worker and all successive recipients is one dollar when the last measurable increment is added in. At this end, the government has recovered the original one dollar stimulus through taxes.

          The total GDP created by one dollar of MMT stimulus at the 50% tax rate is two dollars. The first GDP dollar is counted at the first exchange. The second GDP dollar occurs over a much longer time frame, which could be years if the recipients decide to save some money for retirement.

          The general formula is Total New GDP = (new money supply)/(tax rate) plus (negligibly small remainder). At the 50% tax rate, the Total New GDP is 2, equally split between initial and delayed. You can see from the formula that the lower the tax rate, the greater the GDP that can be supported with a given money supply.

          The timing of the delayed GDP is completely unknown from any information presented here.

          • Sunflowerbio

            Thank you for responding and clarifying your comment. Thinking more about this while awaiting your post, I thought this was what you meant. What you actually posted originally was not my interpretation, that taxes above 50% shrink GDP, but rather that government expenditures only increase it by diminishing amounts as taxes increase. Even at 90% taxes, GDP is increased by about 11% after the money works its way through the economy and the government has recovered its original investment through taxation (as per your formula, $1/.9= $1.1111+). This makes intuitive and mathematical sense, and strengthens the case for reasonable taxation. There is one more thing (at least) to consider, however. If the government reinvests the collected taxes back into the economy, as it has traditionally done, then these expenditures also increase GDP and have a stimulative effect on the economy, even to the point that they essentially cancel out the damping effect of collected taxes. So in theory any rate of taxation could be acceptable. The real variable here would be whether the government or individuals determine what the increased GDP is spent on. Does this make sense?

            • “If the government reinvests the collected taxes back into the economy, as it has traditionally done, then these expenditures also increase GDP and have a stimulative effect on the economy, even to the point that they essentially cancel out the damping effect of collected taxes. So in theory any rate of taxation could be acceptable.”

              Your quote is the conventional way of looking at taxes and money continually recycling through the economy. I prefer to take the same view as J.D. Alt which is that the returned money is destroyed. Then government can continue the same rate of stimulus by issuing another stimulus dollar. Once stimulus has started, it is hard to stop because the economy quickly adapts to the increased flow of money (increased over pre-stimulus normal).

              (I disagree with J.D. Alt that stimulus (money) is an I.O.U., preferring to think of money as government property temporarily exchanged to citizens. Taxation is merely a recovery of government property in the form of rent for usage. A radical shift in concept and maybe the subject of a future blog.)

              Your example of 90% taxation is interesting. When government is printing money to pay workers, it should be easy to pay a really high wage, recover 90% immediately, and leave the worker with enough after-tax money to equal wages in non-government jobs. If the non-government job is also taxed at 90% however, I wonder if workers will think they get enough advantage from using government money in their daily lives to continue working for money?

              At 90% taxation on each transaction, one dollar of the increased GDP is spent at direction of government and $0.11 in later transactions. Remember that GDP is the sum of all transactions, including government transactions.

              Thanks for asking questions, prompting further thought and analysis.

        • This has my correct web site address. Turns out that the address is case sensitive.

          • sunflowerbio

            Thanks for responding and helping clarify these issues for everyone. On your first point, I don’t disagree with the view that taxes destroy money, but I think that functionally it is a distinction without a difference. Most taxpayers , I think, would object to the destroy and reissue (D&R) concept. They just don’t see why the government needs to tax at all if they are only destroying the revenue. They should simply issue the net of new expenditures and leave the taxpayer alone. That would be the common view, and makes the D&R concept a much harder sell to the general public. Recycling tax revenue, on the other hand, is what individual families, cities, counties, and states do, so nearly everyone understands the concept.
            On the example of 90% tax rates, there was the period in the 1940’s through the 1960’s when marginal tax rates were very high, even over 90% for some years. Of course the average rate paid would have been less on total income because the first dollars were taxed at lower rates, but someone making many millions of dollars would have approached the 90% rate as a limit. This didn’t seem to slow the economy down too much during the period mainly, I think, because investments and expenditures were amortizable or even deductible from income. Thus the super wealthy reinvested their income (or gave large amounts away) rather than hoarding it in tax havens as they do now. I’m not suggesting taxing the average salaried worker at 90%, as that would certainly be a disincentive, but a progressive tax like in the 40’s to 60’s would allow the government to direct spending on more productive enterprises like research, education, and infrastructure rather than speculation in derivatives.

            • golfer1john

              “Recycling tax revenue, on the other hand, is what individual families, cities, counties, and states do, so nearly everyone understands the concept.”

              Yes, which is why MMT doesn’t immediately resonate. The fact is that a monetarily sovereign government is not like an individual family, city, county, or state, which are not monetarily sovereign.

              Traveling at 35,000 feet and 600 mph is also not like an individual family travels, but airplanes do it because they are not like individual families. Yet people readily accept that airplanes do it, because they are familiar with the concept of airplanes and realize that they are different.

              Once people realize the implications of monetary sovereignty, they will change their views. They will realize that the monetarily sovereign government is not like a household.

              But this is not intuitive knowledge. Teaching people born and trained under the gold standard about fiat currency is like teaching someone from the middle ages about air travel.

            • ” On your first point, I don’t disagree with the view that taxes destroy money, but I think that functionally it is a distinction without a difference. Most taxpayers , I think, would object to the destroy and reissue (D&R) concept.”

              You are expressing a plain truth that begs for a satisfying MMT answer.

              Speaking only for myself, I see fiat currency as money that can be created at the whim of a decision maker(s). What is easily created can be easily un-created.

              Of course I recognize that the Federal Treasury must have money on hand to pay bills. Money flows into the Treasury from taxes (which is a method of recycling) and from borrowing. The borrowed money can be borrowed from citizens (which is a method of recycling) or from the Federal Reserve which is always printed. I find it very important that I can not tell if the money is newly printed or old-printed just being recycled. All money looks the same.

              What I can observe is that the Federal Government at the end of the year reports whether it spent more money than received in taxes or less. If it spent more, then the money supply of the nation has increased. If it spent less than received by taxes, the money supply of the nation has contracted. It does not matter if the money was borrowed or printed, the expansion or contraction is the same.

              Yes, this means that Federal Debt is money supply. I accept that addition to the money supply.

              With this view of the money supply creation and destruction, you would probably agree that the model of money destruction when received by government and created when government spends is a more accurate description than recycling.

              Now if we consider how a gold based money supply would work, for sure the gold would need to be recycled. Without recycling, all the gold would come to be held by very few hands.

              If the government we are discussing cannot print money, then recycling is the only model available.

            • Sunflowerbio

              Golfer and Roger, thanks for the input. I think we are all on the same page as far as the government’s ability to create money by fiat. I think we also agree that the MMT concept that collected taxes are destroyed and new money is created by the sovereign issuer to replace collected taxes and make up any shortfall in the budget is a mental barrier to the average taxpayer. This is so because the average taxpayer says, “I work hard for my income to pay my taxes and now you tell me the government simply destroys my tax payment and issues fiat money to fund the government. Why then should I be made to pay taxes at all?” What I have suggested is that MMT not emphasize the destruction of taxes, but rather emphasize the fiat creation of the shortfall (deficit). I suggest that by de-emphasizing the destroys taxes part, it would be easier to gain acceptance of MMT theory. In practice most people don’t have a clue how the money system works anyway, and those who do don’t need to rub the faces of the public in it just to prove the point. This is just a suggestion to ease the transition.

              • “I work hard for my income to pay my taxes and now you tell me the government simply destroys my tax payment and issues fiat money to fund the government. Why then should I be made to pay taxes at all?”

                Indeed. This is an important thing for the layman to know, if he is to be supportive of MMT. This question, like the inflation question, must be met head-on.

                The beneficial effect of taxes (I don’t like “purpose”, because that implies conscious intent that I don’t think is present today) is to regulate aggregate demand. If the government simply spent what it needed to spend, and collected no taxes, then aggregate demand would exceed the capacity of the economy to produce goods and services, and would cause inflation. Government today spends something on the order of 28% of GDP, which is more than could be “leaked” out of the economy by savings and net imports. Some taxing is necessary.

                Which leads to the next interesting question: Now that we know taxes are too high for the amount of government we have, what sort of taxes should we have, and on what activities should they be levied? The answers to this question should generate a lot of support for MMT.

              • Sunflowerbio,
                Thanks for keeping this very interesting and instructive conversation going! From my perspective, understanding fiat Dollars as being I.O.U.s for tax credits ought to solve the dilemma you are talking about: When I give the sovereign back its I.O.U. to pay my taxes it is perfectly logical for the sovereign to draw an “X” through that I.O.U.–indicating it has been cancelled–and, at the same time, drawing a line through my tax liability, cancelling that. It is also perfectly logical for the sovereign, the next time it buys some services, to issue a new I.O.U. to pay for them. It seems to me this is something intuitively reasonable that people should be able to easily grasp and find acceptable. It just requires a slight shift in perspective—one that might be achieved if it is framed over and over again in many different ways.

                • Sunflowerbio

                  That approach is both logical and reasonable if the layman can be brought to accept that government created money is a tax quenching IOU of the government. Maybe repetition can get this across, but it’s going to be tough sell too. Perhaps easier than destroy and reissue (D & R) though.

              • Thanks to Sunflowerbio, Golfer and A.J.Alt for this stimulating, in depth examination of MMT.

                Sunflowersbio has an excellent point, well articulated, and backed up by Golfer. People do work hard for their money (for the most part) and respect that they are doing their part of supporting the national economy. When newly printed money goes for undeserved reward or to politically favored groups, the recycled concept triggers resentment and the model implying printing and unprinting is likely to trigger even more resentment. Money is a human creation–the model describing it must be understood and accepted if money is to work for the stability and betterment of society.

                Thanks to J.D. Alt for this original posting. I understand the money as I.O.U.s concept, but the citizens think of money more like a long lasting gift certificate, or maybe even as “good as gold” (or silver). I have called money “Evidence of Debt”. For sure, when citizens have a dollar, they think of it as THEIR PROPERTY.

                Here is a question regarding taxation. Do Federal Government employees REALLY pay taxes? Especially when the money is printed, are taxes paid when government puts money in one pocket and takes taxes out of the other pocket?

                A great discussion! More to come?

                • golfer1john

                  If government employees don’t really pay taxes (like all the rest of us), how would you account for the fact that two or more government employees of the same pay grade and making the same gross wages can have very different net (after tax) pay? ISTM it is only the tax law that creates that difference.

                • Sunflowerbio

                  Roger, I assume you are talking primarily about federal income taxes. Certainly government employees pay state, local, property and sales taxes as these go to entities other than the federal government. I would say that yes, government employees do pay income taxes even though the hand that dispenses also reclaims. One could say that the government includes enough income in its salary scale to offset the taxes collected, but I think you could say the same thing about the private sector. In fact I have seen it argued that the portion of FICA taxes paid by employers should be counted as part of the income of employees just the same as health care benefits or paid vacation time. Of course employees don’t pay income tax on these benefits, but federal employees are taxed on their gross earnings, less deductions and exemptions. They are not taxed on employer FICA contributions, however, same as private sector employees.

                  • Golfer1John and Sunflowerbio, I also think the government employees pay taxes and work hard, providing an essential framework to run and manage the economy.

                    However, it is interesting and perplexing to consider the tax side of MMT. It is hard to pick a starting point. When I start, I come up with a somewhat radical MMT viewpoint. To me, new MMT money reaches the public by government spending. (This agrees with J.D. Alt.) The public exchanges labor and goods for this MMT paper. Now to me, this action is a tax on the public that reduces the labor and goods available for public consumption.

                    Yes, the employees and goods salespeople are pleased because they have money, no matter that it is freshly printed. The money received is just as good as any of the older money and is like a super-gift-certificate, useful nearly anyplace in the world. I doubt any recipient considers that, with the addition of the new freshly printed money, there is now more money in the world available to purchase from a reduced labor and goods supply (a labor and goods pool just made smaller by government purchases using printed money).

                    A radical thought, I know, but it seems to me to be the logical and mechanical outcome of MMT.

                    Now, how do we control the value of money using taxation? I have no theory at this level but the question of government employee taxes could be a starting point. Next we could consider painters, lawyers, farmers, bankers, and on and on. Taxation is multifaceted.

                  • sunflowerbio

                    Basically MMT says that newly issued money is not inflationary as long as there is unused capacity and underemployed labor in the economy. When the economy heats up (employment is near full and industrial capacity is close to 100%), the government should step in with increased taxes to dampen demand and prevent inflation.
                    Which activities are taxed is a matter of social preference and, as Golfer said, benefit.

                  • Roger, what puzzles me in your reasoning is that it assumes the “government” and the “public” are different people. Every government employee (including President Obama!) is also a private citizen. Presumably, the goods and services the government purchases are things the private citizens (through their democratic representatives) have determined they’d like to have—weather satellites, for example. So when the government purchases a weather satellite, it doesn’t make sense from my perspective to consider that one less weather satellite that would otherwise be available for “public” consumption. In other words, “government consumption” is just a special case of “public consumption.”

                  • “Roger, what puzzles me in your reasoning is that it assumes the “government” and the “public” are different people. ”

                    I guess our perspectives are different. We seem to have many common understandings of how the mechanics of MMT act. There seem other aspects of MMT, not yet discussed, that we may not share common vision but I still consider myself a learner, striving to build a mechanically coherent economic theory. All in good time, MMT is not a simple concept.

                  • Roger,

                    The notion that what the government consumes is not available to the public is not new with MMT. When I was learning economics (prior to 1971) I was taught that the real cost of government was measured by its spending, not by its taxing. The real tax is the resources taken from the private sector, not the money taken from it. But, assuming the transactions are voluntary, it only matters when those resources were already fully utilized. At that point, there needs to be a justification, that the resources are being put to a higher use by being employed by government.

                    Likewise, if the quantity of money grows faster than the supply of goods and services, the value of the remaining money would be reduced; however, again, this happens only when those resources were already being fully utilized. Idle resources can be employed without affect on prices or the value of money or the remaining resources available to the public.

                    Taxation doesn’t directly control the value of money, it controls aggregate demand; specifically, it reduces the income of the private sector, which reduces its spending (consumption of resources). It is the antidote to government spending increases at full employment, which would otherwise be inflationary.

                    Ironically, if MMT is implemented and we get to full employment, then the argument of the inflation hawks will be true: new programs would have to be “paid for” by reductions in other programs, or by additional taxes; that is not true now, because idle resources exist. With a JG, the buffer labor resources would not be idle, but they would be available for use by new government programs or by private employers.

  9. Biggest lie of the 1% is the lie that there isn’t enough money to solve our problems. It is a basic divide/conquer strategy that pits American against American in a needless dispute over priorities. The political & media minions are paid well to continually repeat the BIGGEST LIE.

  10. Gerry Spaulding

    Great piece.
    And ‘fiat-money’ IS what its all about.

    IF ‘fiat-money’ is the “let it be done” money, then all modern money systems are fiat in nature, regardless of whether they are backed by a fine-gold-weight-to-money-unit relationship, or none, all by ‘let it be done’ fiat.
    In modern times, the term ‘fiat-money’ has become that adopted by the Austrian definition, that its fiat nature abandons any relationship to either commodity backing or a fixed rate in exchange to any other currency, allowing unlimited quantities of money to exist.

    The claim is made here that the ‘change’ to a fiat money’ system enabled the government to begin a new ‘money-printing’ era, one that also changed the relationship of the government’s need for taxation to support spending for its budget. That sounds wonderful.
    Please say when and exactly how that happened.
    Was it FDR’s abandoning the gold standard? (by fiat)
    So, have we had ‘fiat-money’ from FDR to present?
    Or, did the Bretton Woods trade-balancing gold-exchange standard put us back on a Non-fiat money system, so that we were only free from ’34 to when BW was actually ratified and effective a generation later?
    Did the government NOT have the power to “create money by spending” from ’58 to 1971?
    And, if government did NOT have the power of a sovereign fiat system in 1971, and therefore needed to tax in order to spend until 1971, then what exactly changed to government finances that freed the government from the need for taxation by abandoning BW’s exchange-standard?
    How did that work?
    And, who knew?

    Or, if truth be told, has the U.S. government ALWAYS had the power to print the money by fiat, and only slowly over the centuries since our founding (Greenbacks notwithstanding) drawn upon the reality of a sovereign government to the point where today, free of any ‘backing and fixed exchange’ regimes, the only thing that prevents government from actually creating money BY spending are a few minor laws (self-imposed constraints) that allow the private banks to create all of the nation’s money.
    Endogenous money and all that.

    • golfer1john

      Sovereign governments have always had the power to be monetary sovereigns. The distinction between fiat and gold standard is whether they choose to fully exercise their power. By promising to exchange gold for their paper, they limited themselves in terms of how much paper they could issue, lest they run out of gold. They acted like a private 19th century bank. There’s nothing particularly Austrian about this distinction. And nothing particularly different in this respect from 1934 to 1971, BW or no.

      • Gerry Spaulding

        Thanks, g1j.
        Leaving aside the Austrian fiat money definition for another day….
        So, sovereign governments DID always have sovereign fiat monetary powers, but that power could not be fully exercised due to the gold standard (acting like private 19th century banks) , and there is nothing differentiating sovereign fiat money from 1934 forward.
        Is that correct? Great.
        So, since 1934 our (U.S.) government has had the power to directly issue fiat money by spending, and this was not discovered until about fifty years later by modern monetary enthusiasts – sometime in the late ’80’s or early ’90’s.
        Is this correct? Great.

        With that as a given, is the problem that nobody in the government KNOWS that they have the power to issue money today by spending it into existence, and thus they borrow and tax existing monies for revenues?
        Or is the problem that the government KNOWS it has the power to create money by spending, and is just not telling anyone so that we can continue to argue over debt versus taxation and by whom, health versus education, etc?
        IF the government HAS the power today to create money via spending, do they KNOW they have the power?
        If not, is anyone planning on telling them?
        Thanks.

        • golfer1john

          I said sovereign governments have always had that power. It is not new since 1934. It was exercised by the US in the 1800’s (“greenbacks”), and by other sovereigns for thousands of years before that. The gold standard, as it was practiced in the 19th and 20th centuries, is relatively new in world history.

          The issue today, if one were to assume good faith on all sides, is that (and everyone knows this, including government) excessive issuance of fiat money can still cause inflation. Not limited by the gold supply, government run amok could spend its currency into oblivion. As we can see in other areas, there need to be tight controls on government to prevent it from running amok (NSA and IRS being just the latest examples).

          The issue is not the power to create money, everyone knows that government has that power, and everyone is afraid of it. The issue is the wisdom of doing it, and in what quantity – again, assuming good faith. The knowledge that is lacking is, I think, understanding of the principles of MMT, as opposed to other macroeconomic theories. People who make analogies of government budgeting to household budgeting truly do not understand that there is a fundamental difference, nor do they understand the implications of that difference.

          Ben Bernanke thinks that QE is helping the economy, when MMT says the opposite. As Mosler says, the Fed thinks that QE is stepping on the gas, when in fact it is stepping on the brake. Bernanke and the other Fed governors are not intentionally sabotaging the economy, and when it recovers despite their actions they will stop QE. If they were malevolent and understood MMT, they would not stop, they would redouble their efforts.

          If Bernanke and the Fed can be so wrong, then I think the good faith assumption is valid. There is no reason to think that politicians can have more on the ball than the Fed, when it comes to economics. They just don’t understand.

          There are voices telling them. They are not convinced, or perhaps they have not the courage to take a position of which their constituents are not convinced. The “famous” economists (e.g., Krugman) still say that deficits are a long-term problem, not a long-term solution, even as some of them advocate for increased deficits in the short term.

  11. Yet another excellent article. You have a great ability to simplify and explain a much mythologized social tool like money. I think though you can take it even one step further back since you use the title “Let It Be Done” for your article. The question has to be asked why we should have “fiat” money imposed upon us in the first place. A clear answer to this question has now recently emerged. It runs as follows. Nature can no longer be simply viewed as “raw in tooth and claw” as the English poet Tennyson described. We can now say that life is driven by three forces not just natural mutation and natural selection but also by natural cooperation. The work particularly of the sociobiologists E. O. Wilson and Martin Nowak, professors at Harvard, show that natural cooperation occurs through the use of five mechanisms of multi-selection to create the elaborate cooperative societies many of us live in. Of these five mechanisms a very necessary and potent mechanism, group selection, comes into play when there is threat and competition from other groups and only strong cooperation within a group can counteract such survival challenges. Over time this mechanism has enabled groups to evolve into the super groups we know today as nations. However, to bind a nation together a degree of coercion is required particular to defend that nation when it is under threat from internal groups or other nations. To mobilize resources to deal with such threats hierarchical leadership, a means of “instruction” and a means of restraining the free-riding or mooching found in human nature that doesn’t want to be “mobilized” is required. Such a solution is found in a “fiat” social tool we call money. Formerly a king or a queen said “Let it be done that we should defend our nation and meet all the challenges that other nations may inflict upon us!” today it’s mainly elected leaders.

    http://isites.harvard.edu/fs/docs/icb.topic426436.files/five_rules.pdf

  12. In other words… Making money need not be heavily taxed, stealing money should be.

  13. Superb post, JD. Clear and easy to follow even when I put on my layman’s hat. Now if only we could get people to listen…

  14. Nice article BUT:
    Citizens, in fact, are allowed to use any money they please—as evidenced by the recent popularity of “bitcoin” transactions on the internet. JD Alt

    One of the most, if not THE most ethical private money forms, common stock, faces a capital gains tax measured in fiat. But if the value of fiat is diluted by, say, using it to bailout the counterfeiting banking cartel then common stock registers a phony capital gain. That’s hardly fair competition, no?

    • “Citizens, in fact, are allowed to use any money they please—as evidenced by the recent popularity of “bitcoin” transactions on the internet. JD Alt”

      That’s no longer true. The US Treasury just clamped down on the owners of Bitcoin saying they were allowed to be an alternate money.

  15. I would tax all activities that are simply trying to get slice of the economic pie, instead of making that economic pie bigger. Advertising, for example, makes sense for individual advertiser since they get good return on money that they spend advertising. From a macroeconomic point of view this is counter-productive since people are employed just to fight over smaller pie than would be the case if these people were employed in productive activities making a larger pie.

    On the other hand I would subsidize activities that produce external benefits to broader society, for example R&D expenditures. Individual company is incentivised to fund R&D expenditures only to the point that it is deemed profitable, even though we know inventions are utilized also outside the company at least when the patents expire. So there is not enough incentives to do R&D work because those making the inventions do not share in the external benefits their inventions are causing.

    By having higher tax rates for advertising and tax breaks for R&D work private incentives would be better focused on employing people to make the economic pie bigger rather than to fight over existing pie.

  16. J. D. Alt – Thanks so much for this essay.

    I came to MMT only last October after hearing Stephanie Kelton on Harry Shearer, and was hooked. After 45+ years teaching philosophy, I really appreciate the importance and difficulty of the conversation you are all advancing. I’m also trying to write essays to deal with these questions at the broadest scale of ethics and public purpose, and trying to include MMT ideas in a simple form for a general public. I’ve especially appreciated Wray’s book Modern Money Theory, Dale Pierce’s “Modern Money Theory: An Introduction” and Dan Kervick’s “Do Banks Create Money From Thin Air?”

    Your essay and the great exchange here are maintaining the highest level of responsible thinking I’ve seen at NEP so far. I have a question. When the Treasury “spends money into existence,” does it always earmark it for specific programs? Or can it simply credit private bank’s federal reserve accounts, to make it available the the private economy in general? And if the latter, does it charge interest to those banks at the rate it thinks will make its offer attractive?

    Thanks, Justin Synnestvedt

    • golfer1john

      “When the Treasury “spends money into existence,” does it always earmark it for specific programs? Or can it simply credit private bank’s federal reserve accounts, to make it available the the private economy in general?”

      Except for the source of the money, Treasury spends just like you do: it buys things. In the context of your question, yes, specific things. It buys labor from government employees, it buys airplanes from Boeing, submarines from Electric Boat. Sometimes it gives money to people on account of something they did years ago, like Social Security payments. Also, just like you sometimes give money to someone for no specific return, government also gives money to people just because they need it, like food stamps and unemployment benefits.

      Crediting a bank’s account at the Federal Reserve as a gift would accomplish nothing useful. There is a non-MMT theory of banking that would say such a thing would increase the bank’s ability to lend, but that is not the case. The bank lends first, and then, if necessary, seeks reserves, and the Fed supplies them, if necessary, at a very low interest rate. Right now, QE has provided banks in the aggregate with $Trillions of excess reserves, and it isn’t helping the economy, it just drives up the prices of the assets they buy, and competing assets.

      Crediting people’s accounts would do something useful. It would make the money directly available for people to spend, which would raise business sales and businesses would hire workers to handle the increased sales, starting a virtuous cycle. At the onset of the great financial crisis, government did something like that, sending a check for $250 (I think that’s the amount) to everyone who filed an income tax return. It helped stave off the downturn for a short while, but it was too small to prevent it. Something similar would be useful today, likewise any sort of tax cut. Instead, we’re cutting spending and raising taxes.

      • Golferjohn, thanks very much for providing this answer to Justin–also for the insight into what QE is actually causing to happen. Much appreciated.

  17. Richard Clifford

    Ancient Oz
    Great presentation and responses.
    In about 1818 the little island of Guernsey, in the English Channel closer to France but an English dependency, was very broke. They owed money to the banks, many were unemployed and could not pay their taxes, They needed to spend money on roads, schools, a market and defenses against sea erosion. They had one advantage, they had their own currency. So they printed the money. They paid it direct to Contractors who built the roads etc. the money trickled down to shop keepers and recovery commenced. Taxation continued as usual and paid off the Bank loans.
    This was continued for 100 years without inflation and with better prosperity then other European countries.
    Do you agree that this is a fine demonstration of MMT ?
    Are there any countries today using these methods and perhaps not admitting it?
    In addition the Governor of the Commonwealth Bank Australia 1911 to 1922 made loans using the same principle. In answer to the press when asked on what basis he made loans he said that if there was sufficient labor, materials and technical know how available to build the project and if there would be sufficient staff to run the project – he would loan the money, He brought Australia through WWl with very little debt.
    I suggest he was using MMT principals. Certainly the banks and the government at the time proceeded to destroy the Commonwealth Bank after his death.
    Finally I would like to suggest that MMT should use the words “printed money” coupled with an explanation of how inflation will be avoided. because you can be sure that Bankers will always couple printed money with inflation.