The New Regulatory Regime of Modern Fiat Money
By J.D. ALT
I was momentarily taken aback to read in the Washington Post that a primary reason Donald Trump was elected president of the United States was because of a little swampy area in the middle of an Iowa farmer’s cornfield. The cornfield in question belongs to an Angus beef farmer named Annette Sweeney who was both incredulous and outraged by the Obama administration’s new regulations on Clean Water. The regulations, known as WOTUS (Waters of the United States), established that the 1972 Clean Water Act applied not just to just major bodies of water, but also to their headwaters which, by circuitous routes, feed them. This headwater stipulation, by definition, included a ½ acre swampy place in the middle of the cornfield Annette Sweeney’s family had used to feed their beef cows for over two generations. This meant that the cornfield she thought belonged to her family was now essentially under management of the federal government—which stipulated requirements for new inspections and permitting regimes costing her thousands of dollars and untold hours of strife just to be allowed to plant feed-corn without garnering federal fines. Not only did Annette Sweeney vote for Donald Trump, she became a political activist advocating, successfully, against government regulations of virtually any kind whatsoever.
Reading her account, I too was incredulous and outraged—but for a different reason: I realized, suddenly, that farmer Sweeney’s story represents a perfect example of the failure of our political imaginations to come to grips with, and effectively utilize, the reality of the fiat-money system we have actually been using now for over half a century. We continue, in other words, to make ourselves miserable simply to maintain allegiance to an outdated macro-economic myth.
To be specific, the WOTUS regulation imposed by the Obama Administration was, first of all, based on irrefutable and pragmatic logic—namely that if you dump manure and pesticides and fertilizer into the headwaters of a community fishery or drinking-water reservoir, you will poison a critical resource shared by the larger community of people. That is the proverbial no-brainer that even farmer Sweeney (according to the article) is in total agreement with. The problem is NOT that we cannot agree that we shouldn’t poison the water we all share; the problem is that we believe our sovereign government (our collective self) doesn’t have the financial resources available to pay for addressing the problem. The problem—which is a collective problem—must therefore be paid for by the private individuals who happen to occupy the place where the problem is occurring. And this solution is imposed by means of “regulations” which, in essence, establish how and in what way the private individual must do the paying.
This regulatory strategy—necessary to protect the public good—is predicated upon a macro-economic calculation, as I suggested earlier, that says the State cannot collect enough tax dollars to pay for the work, the materiel, or the technology that a practical solution entails. The labor may be sitting idle on the fence, the tools and equipment may be sitting idle on the shelves of a nearby AA-Rental—but the State simply does not have the dollars to put them to work. Therefore, the State has no choice—in the interest of the public good—but to impose its “regulatory regime” requiring, in essence, that Annette Sweeney use her financial resources to put the labor and the tools to work. Or alternatively, to accomplish the same public good, by simply ceasing her farming operations and allowing the land to return to its original, unpolluting state of swampiness. This is what I would call the “You Pay” regulatory strategy of our old macro-economic myth.
A proper understanding of Modern fiat-money, however, makes possible an entirely different approach—and it is very straightforward and simple one: Instead of “regulating” dollars out of Annette Sweeney’s pocketbook, offer her the opportunity to earn a fair payment for building and managing the bio-retention swales and systems that will keep her little headwater clean and clear. Since she already agrees it would be beneficial and “community-minded” to do so, it seems likely she’d be happy to take up the cause—and add the compensation to her annual cash flow. This is what I would call the “We Pay” regulatory strategy of modern fiat-money. What could be simpler? What could be more effective? What could be more sensible?
And all it requires is a simple “reality-based” understanding of our modern money system.
If Trump is listening, please hire this man.
If I were a part of the government which controls the cleanliness of head waters, and if such waters do not self cleanse (as is my experience with another application during a camping holiday), then having paid for the necessary cleansing I would expect to have full control of the source. But since in practice the government does not participate in the cleansing and since in practice much of such pollution can clean itself, due to exposure to the natural elements of air, rocks and soil, there is in fact no need to argue this case further. If by lack of care a stream of water downstream of its user becomes polluted then the cost to other users should be borne by the polluter.
All perfectly sensible JD, but confusing and complicated by your assertion that a money system can only be created as a means for paying taxes. A money system really only has one single purpose – it is about the most practical and convenient way to establish a universally accepted medium of exchange within any given society. As long as that medium of exchange can be established by using an acceptable form of token and that token can have some form of guarantee it is not a false token, then it really doesn’t matter what form that token takes. Essentially, the token need have no intrinsic value and can be a digital token, as is the vast majority of the “money” in circulation today. As long as the Government is prepared to recognise digital “money” as equivalent to legal tender, and are able to monitor and control the creation of digital “money”, it can serve, as it does today, an acceptable part of the society’s money supply. Creating a nation’s universally accepted money supply is really a fundamentally legitiamte, purpose of a responsible Government. People will use it because they need to use it for its convenience in day to day living,; it needs no coercion from a tax system to force its acceptance.
Graham Paterson: You can describe the money system any way you want, but it does not change what the money system actually is. MMT is not inventing a new money system. MMT is describing the money system we are actually using in the world today. The official name for what we call a U.S. dollar is a “Federal Reserve Note.” It is a Promissory Note signed by a designated representative of the sovereign U.S. government. The “promise” it makes is singular: It promises to accept the Promissory Note as payment for taxes and fees levied by the U.S. government. Because the government DOES in fact levy fees and taxes on its citizens, they need to earn those Promissory Notes in order to have them to cancel their taxes with. This is why the government’s Promissory Notes become the “money” you refer to. And it is why the government HAS to issue and spend them before it can accept them back as tax payments. And, furthermore, is why the government can issue and spend them at will to buy the public goods and services it deems to be in the collective interest. When that is understood, it becomes possible to pay citizens to create the public good rather than coerce the citizen to create the public good through “regulation.”
Thank you JD for the reply. I agree with what you say, especially about MMT not inventing a new money system. I have often said that MMT is not really a theory, it is a true and proper description of how the money system is supposed to work. Although your explanation of the dollar note being a promissory note is relatively correct, I do not understand why you seem to ignore the huge amount of digital “money” created by the private banks under the fractional reserve system. I believe Lincoln’s description for the creation of his “greenbacks” to be a completely accurate description of how a money system is supposed to work. Lincoln’s effort did mention the taxpayers, but not in the sense of it being the purpose for creating the “greenbacks”.
the real purpose for creating the “greenbacks” was to thwart the private bankers holding the Government to ransome. Lincoln was also aware of the need for the Government to create “credit” as well as physical money. I presume you are aware of his statement as follows –
“The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers….. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.”
Yes I have read that explination of money (promissary notes) before. But that gets me back to my question that I posted on your other article just before this one. Correct me if I have this wrong. The government pays for goods and services which introduces money in to the economy. Some of the money that the government used came to in to the form of tax payments which were from money that it had previously introduced. Some of it came from taking out a loan from the federal reserve. Yes I know that the federal reserve part is purely fraudulent. But, one way or another more money is created. Also it is my understanding that private banks create money when they issue credit cards and when they issue loans with money that they do not actually have. So lots of money gets created out of thin air. That seems much easier than growing it on trees. So making this money has consequences.
There are consequences for the national economy where the money was created. There are also consequences for other countries that accept this currency for payment for goods and services. It does not seem hard to imagine that with lots of money flowing in to the hands of consumers through credit lines, and loans, and through the payment salaries to governement workers, and to payment to companies large and small by the government for goods and services with money that would have been unavailable to the government if it had to pay its bills through tax income alone that demand for goods and services will increase, not only for domestic goods and services but for imported goods (both raw materials and finished goods) and services as well.
So it is not hard to understand that to obtain these imported goods and services (American) companies and consumers are competing in an international market. Because they recieved money that was created effortlessly their bargining position is better than it would have been had they not aquired this easily created money. Therefore at least in the short run they (Americans) will be able to outbid competitors to get what they need or just want. But perhaps a correction can occur with a devaluation of the exchange rate. I am unsure how that would work. It seems to good to be true, for Americans anyways. But any nation could do this. I suspect that every nation does do this. But if the government of one country does not do it as much as the government of another country it would seem that such a government is screwing its own people. Unless I am missing something.
Also the USA has a massive budget deficit and a huge balance of trade deficit. Yet Germany has a huge budget deficit and has a balance of trade SURPLUS. So it is clear to me that a budget deficit does not automatically mean trade deficit. OR maybe something is being hidden in Germany. German statistics would include its trade with other European countries. Comparing the USA with Europe might be the more relevent compairison. I do not know if the EU has a trade deficit or surplus. But if I stop writing to check it now I have to wonder if it runs a surplus it is because something is being hidden. What I can not say. I am just a suspicous person.
But I think my suspicions here are warranted at least for the time being because for me things are not adding up.
You say some odd things. For example: “Yes I know that the federal reserve part is purely fraudulent.” Huh?
You apparently overlook the debt that people use for money all the time, believing dollars (fraudulent?) are the only money. Hyman Minsky used to say everyone can create money; the problem is getting it accepted.
So if neighbor Bob gives me a $50 IOU in payment for my old lawn mower at a garage sale, then neighbor Sally accepts Bob’s IOU in payment for my debt, that IOU is a “money thing.” Extending credit (as I did in this example) is all that’s needed to make “money things.”
You’re most familiar with this if you have a bank account. That account is your asset, but what is it to the bank? Answer: the bank’s liability. When you write a check, you’re assigning a portion of the bank’s debt to you to the payee. Again: using debt as money.
Currency (dollars) is nothing but checks made out to “cash” in fixed amounts. The Fed carries currency on its books as a liability, too, just as your bank carries your account(s) on its books as a liability.
Federal “Debt” is unique because its manifestations (dollars) can retire an inevitable liability: taxes. This means that government money becomes the “money of account,” or the money by which all other money is measured.
As for the “problem” of Federal “Debt”…Capitalist predators hope to persuade you that it’s a problem because they profit from that delusion. But Federal “Debt” is really the sum total of dollar financial assets (currency, T-Bills/Bonds, bank reserves) that are circulating in the economy. Reducing it is the equivalent of depositors going down to their bank saying “We’re really worried about your debt (i.e. our assets in bank accounts), worried that it will crush our grandchildren, etc. Please reduce that debt (i.e. our assets in bank accounts) by reducing the interest paid on savings and increasing your fees.”
If you ever heard of depositors doing this, you’d think they were at the bank of crazy people. Yet the “Fix the Debt” crowd wants you to do exactly this. Pete Peterson is funding multiple think tanks and talking tours to promote this version of “Fiscal Responsibility[tm].” What it really is is Fiscal Stupidity.
We do have experience succumbing to Fiscal Stupidity, too. Since 1776, there have been seven major reductions in National “Debt.” The last one was the Clinton Surplus. The one before that occurred in 1929. Andrew Jackson (AKA proto-Trump) actually paid off the “debt” in 1835. What correlates 100% with these “Debt” reductions? A Great Depression-sized hole in the economy within a few years.
This makes sense, too, because what reduces when that “Debt” reduces are the dollar financial savings of the population. Any emergency, or interruption of regularly expected income means defaults because less savings backs up peoples’ ability to pay their obligations. So loan defaults, asset forfeitures and foreclosures follow on the heels of these fits of Fiscal Stupidity (see this, for the footnotes: https://www.huffingtonpost.com/l-randall-wray/the-federal-budget-is-not_b_457404.html)
Notice also that government *must* run a deficit so people can have dollars with which they can transact business. Similarly, the owner of the world’s reserve currency (now dollars) *must* run a trade deficit, otherwise the world’s trading partners won’t have dollars with which they can transact international business.
Warren Mosler seems to say imports are pure benefits. They give us real goods and services, and we give them pieces of paper (dollars) they can’t even use to pay taxes. Steve Keen says this is a very U.S.-centric view, and doesn’t apply to all nations the way it does in the U.S.
…So I hope this is reassuring to a suspicious person. Dollars are a measurement, not a commodity. We’ll run out of them when we run out of inches, or points at the ball game. Any shortage of dollars (“We can’t afford nice things because, darn it! We’re out of money!”) is purely artificial, and done in the service of the plutocrats who hope to pick up those foreclosed assets on the cheap.
A federal reserve is not needed to issue debt to a treasury dept. and then charge interest on that debt. What is not fruadulent about that? Anyways I am interested in getting some peoples thoughts on the international consequences of these policies.
From the ever-reliable internet: Fraud = deliberate deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. What’s not fraudulent about an “unnecessary” Federal Reserve (i.e. the U.S.’ central bank)? No deception exists about its functions or existence. You may not like it, but it’s all out in the open, so not fraudulent.
You’re even confused about its functions. Some Federal “debt” offers no interest payment. Take a look at the currency in your wallet. That’s “debt,” and pays no interest. So if you don’t want interest, you already have your wish.
And yes, currency appears on the Fed’s books as a liability. That is a convention of double-entry bookkeeping, not deception, fraud, or anything else. It’s just how it is, and has been since medieval times.
If you believe Treasury should issue currency directly, without accounting for it as “debt” (in quotes because the obligation is to pay the “debt” in currency), or the intervention of a central bank, and believe that will somehow prevent bad policy decisions, the history that actually occurring is not promising.
Lincoln financed the Civil War by issuing greenbacks from Treasury, without “debt” accounting. Wartime inflation (straining the productive capacity of the economy) ensued, then crushing deflation occurred as the government withdrew the greenbacks from circulation. So…no reassurance of good policy decisions could be offered even though no central bank issued “debt.”
The deflation was particularly damaging in the South. After its defeat, the South lost its biggest asset (slaves), all its currency and all its banks failed. The Populist Moment by Lawrence Goodman says the state of Connecticut had more currency than the entire Confederate South.
What happened? The South began getting its goods from the “Furnishing Man,” later shortened to just “The Man.” The Man distributed goods on credit at financing rates that would make payday lenders blush. What followed would accurately be called subjecting an entire population to debt peonage.
You’re concerned about the sideshow. Alt has it right.
Thank you for your comments
Dear Professor J.D. Alt,
Perhaps my comments above were not clear. I was seeking comments from you or perhaps some of your collegues about how all this easily created money affects (effects?) international trade, and what stratagies different governments of the world are following and what strategies they should be following.
I suspect that if Bitcoin investors had their way, Bitcoin would be the medium of exchange and they would be able to pay taxes in Bitcoin and probably see no reason why they shouldn’t. So, yes, tax “coercion” makes sense to me to keep things efficient, effective and straighforward.
As a former farm owner of some bottom ground located adjacent to a major river, which also contained four low lying swampy areas, I can both sympathize and understand Annette Sweeney’s concerns. I sold my farm ground in 2015, I believe before the WOTUS regulations came into force, but I will point out that there were in place some We Pay options available that could have made her concerns moot. I placed all four of my swampy areas into a Conservation Reserve program which not only paid me an annual rental fee for the acreage, based on productive history of the land, but also paid part of the cost of planting the swampy areas in native grasses and forbs, which also established cover for native birds and small animals. This is the type of win-win situation which is possible when the collective “we” operates in concert with private land owners for the common benefit. Of course funding for such programs is not dependent on taxes collected, though almost no one in Congress is aware or acts on that knowledge. That is the high hurdle which must be overcome to free us from the tyranny of the Deficit Hawks.
Interesting and informative articles about things like cornfield swamps and government regulations are useful and appreciated. But what America needs, what the world needs, DESPERATELY, is a young, smart, charismatic, independent Democratic presidential candidate, a JFK version of Bernie Sanders, to announce NOW and begin a nationwide three-year-long public education campaign centered on how MMT can bring about full employment and widely-shared prosperity through decent-paying federal jobs designed to meet essential human needs and restore the natural environment–the very sorts of vitally important jobs that today’s private sector does not find profitable to create. Then all of us who “get it” can get behind this candidate and his or her message RIGHT NOW and throw ourselves into the Herculean effort. Bernie showed that we don’t need big money to launch and run such a campaign, but that it can be more than amply crowd-funded via the internet. The time to make America great again, IN THE RIGHT WAY, is running out, and the brash and bold political move I’m describing simply cannot wait any longer to be made. If we really want MMT to catch fire and re-ignite hope and optimism in the average citizen–creating an intoxicating sense of possibility not seen or felt since the 60s–then this political challenge should take precedence over everything else. Every discussion of MMT, no matter what the immedicate focus or context, should include–and culminate–in this sublime and achievable vision. Send forth the call, and the candidate will come!
I don’t disagree at all (except if you want to see the predecessor to Trumps comments about North Korea, see what JFK said about Castro and Cuba)… Still you’re mostly right.
One question for the New Perspectives people (or you) is whether MMT is ready to come in view in the Overton Window (the range of policy options considered respectable/reasonable/worth entertaining). Bernie hired Stephanie Kelton, but talked like someone who believed money is a finite commodity, not a social construct. I really respect Bernie’s political insight, so if he doesn’t think MMT is ready for prime time, who can?
I think Mary Mellor has raised some important issues relative to flexible exchange rates in her excellent book ‘Debt or Democracy: Public Money for Sustainability and Social Justice’
One of the important concepts of MMT is the importance of having a flexible exchange rate to have full power over your currency. This is fine as far as it goes but tends to put hard currencies against soft currencies where a hard currency can be defined as one that has international authority/acceptance. Having flexible exchange rates also opens up massive amounts of financial speculation relative to fluctuations of these currencies against each other and trying to protect against these fluctuations.
“”Keynes’ proposal of the bancor was to put a barrier between national currencies, that is to have a currency of account at the global level. Keynes warned that free trade, flexible exchange rates and free movement of capital globally were incompatible with maintaining full employment at the local level””
“”Sufficiency provisioning also means that trade would be discouraged rather than encouraged.””
Local currencies can work very well locally to promote employment but can have trouble when they reach out to get resources outside of their currency space especially if they have a soft currency. Global sustainability programs need to take a closer look at how to overcome this sort of social injustice.
Having a ‘hard currency’ seems to reflect a combination of power and trust which seems to be eroding toward the US as China/Russia/Iran seem to be gaining in these qualities.
This is the kind of information that I am looking for. I hope that even more is forth comming.
Awake Comm. J.D. ALT! ,,,Lo!
Woke to Muellering this today…….the…..” MMT=C² “…is….. thus an acromeme to bind them all.
Hie thee to dis-ambiguation:
MMT=C² – Make My Taxes Count [can be printed on cap]
MMT=C² – Make My Trillion$ Coin [tip o’ cap to J. Firestone]
MMT=C² – ModernMonetaryTheory is (the key to the) Commons/Public good
MMT=C² – MMT taps the infinitude of needs/purposes
MMT=C² – rips off Einstein for the progressive social equation
MMT=C² – inverts the scary argument of “How do we pay for it?” to “What’s worth writing off?”
MMT=C² – simplifies argument of rude candidates/pundits/officials as to who they serve
MMT=C² – incorporates blockchain and binds bitcoin to serve us
MMT=C² – bribes N.Korea out of it’s nuclear ambitions
MMT=C² – makes public reparations\restitution possible for every citizen
MMT=C² – heals the arguments that I have with that alt-right troll at the gym
MMT=C² – reinvigorates citizenship in any polity
MMT=C² – kills the use of debt as a weapon
MMT=C² – it oughta’ be ’cause it already IS
Use/improve this meme to___________?