By L. Randall Wray

*I’ll return to my series on the role of taxes in MMT later this week. Meanwhile, here’s a short post on MMT.

Modern Money Theory (MMT) seems to confuse two groups of otherwise sympathetic economists. First there are those like Paul Krugman who are generally of the Keynesian persuasion and who like MMT’s “deficit owl” approach. I think Krugman would really like to stop worrying about the deficit so that he could advocate an “as much as it takes” approach to government spending. The problem is that he just cannot quite get a handle on the monetary operations that are required. Won’t government run out? What, is government going to create money “out of thin air”? Where will all the money come from?

He really doesn’t understand that “money” is key stroke records of debits and credits. He still thinks banks take in deposits and then lend them out. He starts to tear his hair out whenever someone tries to correct him on this. He’s wedded to the deposit multiplier idea he got from his Econ 101 textbook.

The other group that is otherwise sympathetic is the Post Keynesians. They understand banking. They know that “loans create deposits”. They know the “deposit multiplier” is actually a “divisor”, as “deposits create reserves”. (Not in any metaphysical sense but rather in the sense that an interest rate-targeting central bank always accommodates the demand for reserves.) However, they cannot understand how a sovereign government spends. Doesn’t it have to borrow the currency from private banks? Like Krugman, they argue that (given modern arrangements), government cannot spend by “keystrokes”.

So here’s an attempt to put the fears of Krugman and Post Keynesians to rest. There is a symmetry between bank lending and government spending.

I also hope to help clarify things for a third group—the “debt-free money” folks who want Uncle Sam to spend “debt-free money”. Short answer: depending on how you look at it, he either already does, or cannot ever do so.

Here we go with the basics of MMT.

For the past four thousand years (“at least”, as John Maynard Keynes put it—see note at bottom), our monetary system has been a “state money system”. To simplify, that is one in which the state chooses the money of account, imposes obligations denominated in that money unit, and issues a currency accepted in payment of those obligations. While a variety of types of obligations have been imposed (tribute, tithes, fines, and fees), today taxes are the most important monetary obligations payable to the state in its own currency.

There is an approach that begins its analysis of money from this perspective, now called Modern Money Theory (MMT). It is based on the work of Keynes, but also on others such as A. Mitchell Innes, Georg F. Knapp, Abba Lerner, Hyman Minsky, Wynne Godley, and many others—stretching back to Adam Smith and before. It “stands on the shoulders of giants”, as Minsky put it.

Its research has stretched across the sub-disciplines of economics, including history of thought, economic history, monetary theory, unemployment and poverty, finance and financial institutions, sectoral balances, cycles and crises, and monetary and fiscal policy. It has largely updated and synthesized various strands of theory, most of it heterodox—outside the mainstream.

Perhaps the most important original contribution of MMT has been the detailed study of the coordination of operations between the treasury and the central bank. The central bank is the treasury’s bank, making and receiving payments on behalf of the treasury. The procedures involved can obscure how the government “really spends”. While it was obvious two hundred years ago that the national treasury spent by issuing currency, and taxed by receiving its own currency in payment, that is no longer so obvious because the central bank stands between the treasury and recipients of government spending as well as between treasury and taxpayers making payments to government.

However, as MMT has shown, nothing of substance has changed—even though taxpayers today make payments from their private bank accounts, and banks make the tax payments to treasury for their depositors using reserves held at the central bank. And when treasury spends, its central bank credits reserve accounts of private banks, which credit deposit accounts of recipients of the government spending.

In spite of the greater complexity involved, we lose nothing of significance by saying that government spends currency into existence and taxpayers use that currency to pay their obligations to the state.

MMT reaches conclusions that are shocking to many who’ve been indoctrinated in the conventional wisdom. Most importantly, it challenges the orthodox views about government finance, monetary policy, the so-called Phillips Curve (inflation-unemployment) trade-off, the wisdom of fixed exchange rates, and the folly of striving for current account surpluses.

For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing.

When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.

MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, prevent overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.

You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.

So, much like the relation between taxes and spending—with tax collection coming after spending–we should think of bond sales as occurring after government has already spent the currency and reserves.

Most Americans are familiar with the phrase “raise a tally”, which referred to the use of notched “tally sticks” that served as the currency of European monarchs. The sticks were split (into a stock and stub) and matched by the exchequer on tax day. The crown’s obligation to accept his tally debt was “wiped clean” just as the taxpayer’s obligation to deliver the tally debt was fulfilled. Clearly, the taxpayer could not deliver tally sticks until they had been spent.

It surprises most people to hear that banks operate in a similar manner. They lend their own IOUs into existence and accept them in payment. A hundred years ago, a bank would issue its own banknotes when it made a loan. The debtor would repay loans by delivering bank notes. Banks had to create the notes before debtors could pay down debts using banknotes.

In the old days in the US, notes issued by various banks were not necessarily accepted at par—if you tried to pay down your loan from St. Louis Bank using notes issued by Chicago Bank, they might be worth only 75 cents on the dollar.

The Federal Reserve System was created in part to ensure par clearing. At the same time, we essentially taxed private bank notes out of existence. Banks switched to the use of deposits and cleared accounts among each other using the Fed’s IOUs, called reserves. The important point is that banks now create deposits when they make loans; debtors repay those loans using bank deposits. And what this means is that banks need to create the deposits first before borrowers can repay their loans.

Hence, there is a symmetry to the way the sovereign spends currency (or central bank reserves) into existence first, and then taxpayers use the currency (or central bank reserves) to pay taxes.

Sovereigns spend first, then tax. In that sense, they do not “need” tax revenue in order to spend. This does not mean that sovereigns can stop taxing, however. MMT says that one of the purposes of the tax system is to “drive” the currency. One of the reasons people will accept the sovereign’s currency is that taxes need to be paid in that currency. From inception of the currency, no one would take it unless the currency was needed to make a payment. Taxes and other obligations create a demand for the currency that can be used to make the obligatory payments.

Note that we can say something similar about banknotes and bank deposits. Part of the reason we will accept them in payment is because “we” (at least, many of us) have obligations that need to be paid using banknotes or bank deposits. We’ve got a mortgage debt, or a credit card debt or a car loan debt—all of which normally are paid by writing a check on our bank deposit account. We can fill-up that account by accepting checks drawn on other bank deposit accounts, and with the Fed ensuring par clearing, our bank will accept those checks.

While there is a symmetry between government currency issue and private bank issue of notes or deposit, there are also asymmetries.

Government imposes a tax obligation on (at least some) citizens. Private banks rely on customers voluntarily entering into an obligation (that is, they decide to become borrowers). We can all “choose” to refuse to become borrowers, but as they say, the only thing certain in life is “death and taxes”—these are much harder to avoid. Sovereign power is usually reserved to the state. This makes its own obligations—currency and reserves—almost universally acceptable within its jurisdiction.

Indeed, banks and others normally make their own obligations convertible into the state’s obligations. This is why we call bank checking accounts “demand deposits”: banks promise to exchange their own obligations to the state’s obligations on “demand”.

For this reason, MMT talks about a “money pyramid”, with the state’s own currency at the top. Bank “money” (notes and deposits) are below the state’s “money” (reserves and currency). We can think of other financial institution liabilities as below “bank money” in the pyramid, often payable in bank deposits. Lower still we find the liabilities of nonfinancial institutions. And at the bottom we might find the IOUs of households—again normally payable in the obligations of financial institutions.

A lot of people have great difficulty in getting their heads around all this “money creation” business. It sounds like alchemy or even fraud. Banks simply create deposits when they make loans? Government simply creates currency or central bank reserves when it spends? What is this, creation of money out of thin air?

Yes, indeed.

Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”. You must understand that “money” is by nature an IOU. You can create a dollar-denominated “money” by writing “IOU five dollars” on a slip of paper. Your problem is to get someone to accept it. Sovereign government has an easy time finding acceptors—in part because millions of us owe payments to government.

Bank of America has an easy time finding acceptors—in part because millions of us owe payments to Bank of America, in part because we know we can exchange deposits at the bank for cash, and in part because we know the Fed stands behind the bank to ensure par clearing with any other bank. However, very few people owe you, and we doubt your ability to convert your IOU to Uncle Sam’s IOU at par. You are low in that money pyramid.

Both Uncle Sam and Bank of America are constrained in their “money creation”, however. Uncle Sam is subject to the budget authority that is provided by Congress and the President. Occasionally he also bumps up against the crazy (yes, crazy!) Congressionally-imposed “debt limit”. Congress and the President could and should remove that debt limit, but we surely do want a budgeting process and we want to ensure that Uncle Sam is constrained by the approved budget.

Still, Uncle Sam ought to be spending more whenever we’ve got unemployment.

Bank of America is subjected to capital constraints and limits on the types of loans it can make (and types of other assets it can hold). Yes, we freed the banks from most regulations and supervision over the past couple of decades—to our regret. Those with the “magic porridge pot” do need to be constrained. Banks can, and frequently do, make too many (bad) loans—which can bubble up markets and create solvency problems for them and even for their customers. Prudent lending is a virtue that ought to be required.

The problem is not the “thin air” nature of the creation, but rather the quantities of “money” created and the purposes for which it was created. Government spending for the public purpose is beneficial, at least up to the point of full employment of the nation’s resources. Bank lending for public and private purposes that are beneficial publicly and privately is also generally desirable.

However, lending comes with risk and requires good underwriting (assessment of credit worthiness); unfortunately our biggest banks largely abandoned the underwriting process in the 1990s, with disastrous results. One can only hope that policy-makers will restore the good banking practices that were developed over the past half-millennium, shutting down the largest dozen global banks that have no interest in good banking.

Some have given up hope in our banking system. I’m sympathetic to their pessimistic views. Some want to go back to “greenbacks” or to the Chicago Plan’s “narrow banks”.

Some even want to eliminate private money creation! Have the government issue “debt-free money”! I’m sympathetic, but I don’t support the most extreme proposals even if I support the goals. Such proposals are based on a fundamental misunderstanding of our monetary system.

Our system is a state money system. Our currency is government’s liability, an IOU that is redeemable for tax obligations and other payments to the state. The phrase “debt-free money” is based on a misunderstanding. Remember, “anyone can create money”, the “problem is to get it accepted”. They are all IOUs. They are either spent or lent into existence. Their issuers must accept them in payment. They are accepted by those who will make payments, directly or indirectly, to the issuers.

In the developed nations we have thoroughly monetized the economies. Much (maybe most) of our economic activity requires money, and we need specialized institutions that can issue widely accepted monetary IOUs to enable that activity to get underway.

While our governments are large, they are not big enough to provide all the monetary IOUs we need for the scale of economic activity we desire. And we—at least we Americans—are skeptical of putting all monetized economic activity in the hands of a much bigger government. I cannot see any possibility of running a modern, monetized, capitalist economy without private financial institutions that create the monetary IOUs needed to initiate economic activity.

The answer, it seems to me, to our current financial calamities does not reside in elimination of our for-profit financial institutions, even if I do see a positive role to be played by new public financial institutions (maybe some national development banks and some state development banks and a revived postal saving system?).

We do, however, need fundamental reform—including downsizing (probably breaking up or closing) of the behemoths, greater oversight, more transparency, prosecution of financial fraud, and putting more of the “public” in our “public-private partnership” banking institutions.


Note: See L. Randall Wray, Understanding Modern Money: the key to full employment and price stability, Edward Elgar 1998; and Wray, Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Palgrave Macmillan, 2012.



  1. So, the 17T$ of debits (not debts) on the gov’t books, that the radical right (RR) are always wailing will kill our grand-children, is really 17T$ of credits that are sitting in the bank accounts of all citizens, companies and states, right? That would mean that the 17T$ in all the bank accounts is really “lag time taxes”. Money being used while waiting to be repatriated back into the Treasury in the form of taxes. In the mean time the $s are used to buy shoes and cruises.
    So, the foaming mouth RR hysteria about debt is really based on political ideology (austerity for the poor, SS, M-C, M-A, SNAP, etc.) and the debits (not debts) has actually nothing to do with economics.

    • Rich,

      I don’t think “foaming at the mouth RR hysteria” is based on “political ideology”. My impression is that Rogoff and Reinhart just don’t understand the nature of and relationships between national debts, base money, inflation, etc. I.e. it’s pig ignorance rather than political ideology.

    • I do not understand the hysteria from those who do not buy in to MMT. Every industrialized nation has a “debt” that is a large percentage of its GDP. James Galbraith has written about this extensively and shown that this “debt” does not necessarily lead to higher taxes, or hyper inflation. So I do not understand the hysteria even for those who have not accepted MMT.

      • Joe, The explanation is that a significant proportion of human beings are driven by emotion, not logic. In the case of debt, they are driven by or controlled by the negative emotional overtones of the word “debt”. And it’s no use explaining to them that national debts are completely different to the debts of a household or firm. They just won’t buy it. They’re controlled by emotion.

        Krugman said that Rogoff had an emotional thing about “debt”, or words to that effect. Krugman is right.

    • financial matters

      As LRW says budgets still matter. Shoes are probably more important than cruises. Factories more important than propping up home prices. Medical care more than banker bonuses. Jobs more than yachts. But yes deficits represent to a large part money in people’s pockets. And this doesn’t have to be inflationary if it employs unemployed resources. And it can take on mega projects like developing alternate sources of energy.

  2. Nice article by Randy, but I don’t agree with his arguments against having just “debt-free” money.

    First, he makes the common claim that so called “debt-free” money (i.e. the state’s money) is not actually debt-free in the sense that the issuer of debt-free money (i.e. government) “must accept” it’s money “in payment”. This is a bit of a minor and semantic point, but I think Randy is actually wrong there.

    There is actually a distinction between privately created money and government created money, as follows. For every dollar of private money there is, no question, a dollar of debt. That is, such money does not exist without debt.

    In contrast, government money can perfectly well exist without debt. That is government could print and spend into the private sector a number of dollars needed to keep employment as high as possible (a policy that MMTers would approve of), while conducting its tax and spending by using privately created money. In that scenario, the hypothetical “debt” owed by government to holders of government money would become meaningless. But to repeat, that’s an unimportant point.

    Next, and of more importance, Randy says “In the developed nations we have thoroughly monetized the economies. Much (maybe most) of our economic activity requires money, and we need specialized institutions that can issue widely accepted monetary IOUs to enable that activity to get underway. While our governments are large, they are not big enough to provide all the monetary IOUs we need….”

    Now that contradicts the claim rightly made by Randy and dozens of MMTers namely that there is NO LIMIT to the amount of money that government can print and spend. Robert Mugabe illustrated that point, didn’t he?

    Next, Randy says, “I cannot see any possibility of running a modern, monetized, capitalist economy without private financial institutions that create the monetary IOUs needed to initiate economic activity.”
    Now why is privately created money needed in order to “initiate economic activity”? If I want to start producing widgets clearly I need enough money to buy a widget factory complete with widget making machines. If I have enough government produced money, I can fire ahead. And if my customers have enough government money, they can buy my widgets. And if I don’t have enough cash to buy the factory, but someone else has a pile of government money and will lend it to me, then again, I can fire ahead.

    In short, privately produced money is just not necessary.

    • Ralph: you’ve been around the track enough to know that no one would accept govt currency if there were not taxes to drive it. Sovereign govt first puts you in debt, then provides you with the means to pay your debt. Taxes; currency. Yes a govt COULD decide not to be a govt issuer of the currency but instead be a nonsovereign user of the currency. But, how can you have a private banking system without a money of account and a currency in which to clear. So you are just creating a counterfactual to argue.
      Your other complaint is rather misleading. Yes, we say govt cannot run out of its money. But it can run out of stuff to buy. And we want to constrain govt long before it buys up everything. There is a public purpose but also a private purpose. In the USA we split that somewhere around 30/70; in France they go for 50/50.

  3. David Chester

    I was recently impressed with the concepts of “inside money” and “outside money”. In other words not all money circulates throughout the whole system. Inside money keeps to the householder earnings and spendings paths. Outside money is what is owed to and by the government and banks and which generally the public never sees. There is an interchange between the two however, when householders prefer to save money in a bank. Unless the rate of dis-savings equals the rate of savings, there is then a money flow between these two kinds of circuits.

    I am writing as if the model for total money circulation is already known, but in fact most sociologist-system thinkers have different concepts of the number of places where this model has its entities (or agents) and its money flows. So in building up such a concept of different kinds of paths for money we firstly need to construct a model. However the lack of acceptance of a common model hampers all argument about what actually is going on with our money system. It means that we should go back to base and build up a new and satisfactory theory not only of money but of the reciprocal flows of goods, services, valuable documents etc.

    I suggest that the only model which answers these needs as well as covers the Smithian Theory of the 3 factors of production and their 3 returns, is to be found in Wikimedia, common, macroeconomics, as: DiagFuncMacroSyst.pdf (which I devised some years ago), and which has the unique properties of comprehensively covering the whole system in as simple a way as possible, without oversimplification (Einstein, on scientific theories).

  4. You need to see that government is essentially a bank. Once you get to that point it is much easier to see what is going on.

    Then you see government ‘borrowing’ in the same way as bank ‘borrowing’. Banks ‘borrow’ your salary as an involuntary consequence of your decision to save in that bank.

    Governments ‘borrows’ as an involuntary consequence of you decision to save rather than spend. We have a dynamic currency system that allows you to save financially regardless of the amount of current investment currently happening. Which is a good thing because the alternative is that your savings are destroyed in the bonfire of a depression.

  5. “In the mean time the $s are used to buy shoes and cruises”

    The net financial assets of the private domestic sector…the “money we already have”…can only be spent once our current income has been exhausted…(it’s otherwise impossible, mathematically…if you spend your savings the income you didn’t spend becomes your savings)…

    How large is the subset of the population that has savings and is willing (or able) to spend in excess of their income? For one thing, trying to do so would outstrip production quickly (GDP ~ $17T), and is evidence that it isn’t, nor does it ever happen. Instead that wealth mainly earns rent and buys influence and power.

    Seems to me the only portion of this money that gets “spent”…applies towards GDP…is Investment spending, which was about $2.7T in 2013…less than 5% of the dollar financial assets in existence.

    • Paul: all the savings are already “used up”, as the pecuniary accountancy of the investments. (See Fagg Foster.) And btw there is no way we would outstrip our productivity capacity by spending more–we could have chinese growth rates for a number of years before we run up against capacity constraints.

  6. Paul Krugman is influential and inclined to be an ally. I wonder if have you discussed this with him and tried to learn what he knows and thinks? Is his problem really “that he just cannot quite get a handle on the monetary operations that are required”? Or has he deeper concerns?

    As one possibility, the economic problem is explained as trying to satisfy infinite human desires with limited resources. Government creating “as much [money] as it takes” could weaken the power of money as a disciplinary tool in that process. What distortions might that cause?

    For example, some argue that government spending should be expansionary as long as it is not inflationary and there is significant unemployment; and that a primary purpose of taxes should be to drain off excess dollars before they become inflationary. But inflation is not uniform. For example, the costs of college are rising much faster than general prices. Why would having the government pick up more of the the tab not result in higher faculty and staff incomes relative to other fields. How long could that continue before the public reacts and moves that class of resource choices from economic to political.

    In addition, the labor market is increasingly driven by specialized skills, knowledge, and power. The unskilled and those with limited or unneeded skills are an increasing share of the labor force. With more automation and robots on the way, full employment as we used to understand it could be a long way off.

    Finally, have you any reason to believe that taxes would be increased as full employment and inflation are approached?

    In Revolutionary Management, Alan Axelrod writes that John Adams kept asking, “Then what?” Is is it possible that some who resist MMT are either consciously or unconsciously asking the same thing? If so, then the mechanics of accounting and reserves are not really your primary obstacles. Rather they are basic questions about basic feasibility.

    • Tip: true that elasticity of production varies across sectors–as Keynes argued. “True inflation” only occurs when all sectors have reached capacity. So the trick is to expand with targeted spending. See Keynes and Tcherneva.
      I think you give Krugman far too much credit here. His model is wrong. It cannot get him where he wants to go. In a better world, he’d drop the model and trust his sympathies.

    • golfer1john

      “have you any reason to believe that taxes would be increased as full employment and inflation are approached?”

      Mostly, it would be automatic. As the JG workforce contracts, wages paid to JG workers drop and taxes paid by private sector workers expand. It is conceivable (though perhaps not mathematically possible) that it could become an unstable system of increasingly wide fluctuations, but more likely the cycle would be self-dampening.

      My preference would be for an “independent” organization modeled on the Fed to adjust a low-rate, broad-based tax in order to stabilize prices and the size of the JG workforce. I’ve suggested a 3-6% tax on all business gross receipts, to be adjusted in increments of 0.1% not more than once per quarter. It could replace the corporate income tax and FICA.

  7. I still maintain that MMT suffers from a deficit in it’s model. The significance of the deficit is not explored. The deficit is more than just a debt, it is a metric, a surrogate, that R&R attempted to explain. When we say “While our governments are large, they are not big enough to provide all the monetary IOUs we need for the scale of economic activity we desire.” Actually, the government has issued trillions, shouldn’t that be enough for transactions? Where is the money graveyard? Where do the trillions go? Why not issue The Coin for trillions more? There must be a reason that banks issue loans and not grants. Why dollar credits are collected as taxes in a system that is not bound by revenue. We don’t collect taxes just because we want money to be accepted, we switched from gold backed credits to expanding dollar credits without blinking an eye. Taxes are part of the circulation of credit. One thing that is clear, our economy is not more stable or more vibrant when excess savings accumulate and consolidate.

    An excessive volume of credits in the economy creates a social problem. Excess savings does not equal investment. It equals investment and mal-investment, mal-investment fuels anti-growth economic forces, destabilizing the economy and society. There comes a point where monetary policy becomes ineffective and we need to manage what we have if we want a stable society. This is hard to do when Capital has rigged the system towards trickle up and wealth consolidation among the few. Treating money as a store of value is a mistake, a flaw in the system. It would be better if a limited amount of money were more evenly distributed and circulating, although there can be a less even distribution of wealth in the form of assets as a reward for ambition. The acquisition of money should be a temporary state when converting labor into assets. Money is a bit like pesticides and fertilizer, a little is good but a lot is problematic.

    The Amish are interesting folk. They own enough assets that they can manage, to earn a living and raise a family, but no more. Having an extra 500 acres is not desirable, it is a liability. Working 18 hour days building houses to save a million is probably unheard of. Their wants are limited by the nature of their society. The biggest threat to their livelihood is a Mexican with a power nailer. The other threat are drugs that muddy thinking and ambition.

    • Ransome: I beg to differ. Private sector surpluses do make the economy more stable; govt sector deficits provide that wherewithal. this is what Godley and Minsky taught us. I think the deficit in thinking about deficits is in your own thinking. However, I agree that we are long past the point when monetary policy could do anything beneficial. Now up to fiscal policy or sheer luck.

  8. Dr. Wray is a good teacher. His material and his points are clear, his logic is well stated and the flow of his material is well organized. That said, I disagree with two points, one stated point and one unstated but implied. First, the implied point regarding commercial banks and their function. The lending function of commercial banks always removes money from the economy. Every loan a bank makes results, when the loan is repaid, in the removal of money from the economy by an amount equal to the interest on the loan. The math is very simple and very easy to demonstrate. If banks lend money at a constant rate into the economy they will eventually, at a tractable time, hold all of the money and none will be left in the economy. This points up an important function of the central bank and the national debt/ savings account. The CB must buy a part of this ND to replace the money banks have taken from the economy as interest, establishing a conduit from the US Treasury to the coffers of commercial banks. This is the immorality of “debt money”.

    The above is true because the FG does not add nor subtract money from the economy, by choice not necessity, as Dr. Wray explains. As long as spending equals taxes plus treasury sales the FG moves money around in the economy but does not add nor subtract from the total supply.

    The stated point I cannot accept is calling money an IOU. If I hold a dollar in my hand, who is “I”, who is “you” and what is “Owed?”

    • Charles: No, banks don’t “move money”, they create deposits when they lend. To put this simply, what they really do is make payments for their “borrowers”, putting same in debt and earning interest for doing so. As Minsky always told me when I was his student: discipline your ideas with balance sheets. Do it right and you cannot go wrong.

      • Dr. Wray: With all due respect, I have no problems with your description of what a bank does. I understand the process you describe. I did not say banks move money, I said they REMOVE money from the economy and that the Federal Government moves money around in the economy via spending, taxing and sale of treasuries. Specifically, by selling treasuries the govt removes static money from the economy and spends it, hopefully, into active parts of the economy mainly as wages for working people. This corroborates the notion that deficits are good when the economy needs stimulation.

        • David Chester

          It does not support the theory that deficits are good for the macroeconomy. The situation you have described is not the only way that money is transferred and deficits grow. Deficits are also bad for the economy because they force the government (Fed) to print more money or to buy up more Treasury Bills. Just because one aspect of an activity is beneficial it does not mean that this activity is generally beneficial. I see these stupid illogical claims all the time and this is surely the reason why many people cannot take the experts seriously.

    • golfer1john

      “Every loan a bank makes results, when the loan is repaid, in the removal of money from the economy by an amount equal to the interest on the loan. The math is very simple and very easy to demonstrate. ”

      I’ve seen this sort of statement repeatedly and it is simply mathematically wrong.

      Banks have costs as well as interest revenues. They pay salaries and bonuses and rent and dividends, and, yes, even taxes. Some of them add net money to the economy, as they spend more than their income, though not for long.

      Only the aggregate additions to bank retained earnings is money removed from the economy, and that is occasionally a negative number.

      • Of course, it is not rocket science, I realize that and I actually, in my block diagram of the system, had cost of operations of the bank flowing back into the economy. But my point remains, banks can only remove money from the economy or, as you suggest, stop removing money and go bust. The obverse side of the coin is also obvious. Some entity must replace and grow the money in the economy and that entity is the central bank, which was the essence of my argument.

        • golfer1john

          Also not necessarily. The bank could pay out all its profits in dividends, and take nothing from the economy. Interest in that case is not a factor at all. Even if the bank retains earnings, the amount removed from the economy is not even close to the amount of interest, it is but a small fraction of it with no consistent relationship.

          And, anyway, banks are no different from any other business. All retained earnings of any business is money removed from the remainder of the private sector.

          And I dispute the notion that banks provide no useful service in return. Without banks, I’m sure other organizations would step in to perform the lending function, indeed they already exist, but we might not like their terms so well.

          • Good point, Golfer, I stand corrected. The money can be returned to the economy via dividends. Thank you. But banks are different. As John Kenneth Galbraith described it so succinctly in one of his books, banks are the only business that has to spend money before they get it. I hear you too about those bank competitors but my view of them is that they are a sign of the failures and weakness of our present monetary system, not an endorsement of the existing order of things.

            • golfer1john

              “banks are the only business that has to spend money before they get it.”

              That requires some explanation. How does the new hardware store sell the first nail before it has spent the money to purchase it?

              • That is the point. All other businesses have to get money before they can spend it but banks spend it (loan out of thin air) before they get it (repayment of loan plus interest). JKG just compressed the process in a very neat way as he did in many of his writings.

                • golfer1john

                  So, lending = spending ?? I wouldn’t have made that equation. I think lending is an exchange of liabilities (financial assets), where spending is an exchange of a financial asset for a real asset. Fundamentally different.

                  Still, just like the hardware store, the bank must get money from investors, like any other business, to spend on infrastructure before they can open their doors.

                  And any business (or individual, for that matter) can lend. Before credit cards, I used to sign for purchases at the drugstore, and they’d bill my Dad at the end of the month. That’s a loan, too, and the drugstore lends first and get paid back later, just like the bank. I suspect a lot of businesses have similar arrangements with some of their customers, even today.

                  There are unique things about banking vs. most other businesses. They lend for a living, and they are supposed to be more strictly regulated. Ability to lend is not unique, and they do have to get money before they can buy the things they need in order to open and run their business.

                  • I understand what you are saying, Golfer, but perhaps you would need to read the JKG material to understand what he is saying and the point he is making. The title of the book is “Money: Whence It Came, Where It Went”. It was published in 1975. It is a good read.

  9. Steven Penfield

    The government can’t borrow endogenous money without ‘spending’ the reserves to shuffle it to the treasury. Is that what you mean by not borrowing money it hasn’t already spent? Apologies if I am missing something obvious…

    • steve: banks directly or indirectly purchase treasury bonds using reserve deposits at Fed. So these must first be created before the bonds can be sold. In the old days, you could use currency–spent first by sovereign–so the relation was more obvious. Spend (or lend) reserves (and currency) first before reserves (and currency) can be spent buying treasuries.

  10. Ben Johannson

    Where is the money graveyard? Where do the trillions go?

    $2.7 trillion was destroyed in tax collection last year. Around $500 billion flowed to the foreign sector as we bought foreign stuff. Trillions more went to repaying liabilities to the banking system; those IOUs are destroyed as they are collected. One of the things we tend to gloss over is that there’s a whole lot of money unprinting in our economy.

    One thing that is clear, our economy is not more stable or more vibrant when excess savings accumulate and consolidate.

    We had six depressions during the gold standard era, and one over a roughly equivalent period of time after dropping a fixed-rate. I would argue the current system is far more stable.

  11. Dear Dr. Wray, I started following your writings a couple of years ago after you wrote an article citing Dr. George Lakoff’s call to use the latest insights of the brain in our mutual work of creating the ideal caring citizenship experience. As a financial advisor for 24 years and the co-founder of the Empathy Surplus Project, I was very excited to see an economist of your stature suggest it’s important to begin to frame the work of economics around empathy and responsibility for self and others. One of those insights that Dr. Lakoff talks about is the use of repetition of words that will activate the specific location in our brains where compassion lives with whatever we’re talking about. By doing so, for example with MMT, eventually a physical neural pathway is connected in the brains of your readers between MMT and compassion / responsibility for self and others. Are you still interested in trying to make that connection? If so, how would you do it in this article? Caring citizens are the solution, Chuck

    • Charlie Watts (Love your drumming!): Absolutely and we are always looking for suggestions as to how to do proper framing. Caring, compasionate, and responsible Progressives endorse MMT, as opposed to selfish and socially irresponsible Regressives who embrace the deficit hawk positions. Witness Larry Kotlikoff who peddles socially divisive “us vs them”, youth vs old intergenerational warfare with infinite horizon budget shortfalls (that he now estimates at $200 trillion!). Your suggestions on the above are welcome.

  12. Dr. Wray, this is a good article, one I can pass around. May I make a suggestion for the future? Could you add more subheads to break it up so that an economic-idiot reader can keep his moorings as he reads, sort of like foretelling or a ‘coming up at 11’ headsup in the news. The subheads would also afford you the opportunity to use some of your humor.

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