ALTERNATIVE PATHS TO MMT

[ed. This was part Randy’s Talk at ICAPE.]

By L. Randall Wray

First I’ll clearly state what MMT is and then outline four paths that lead to MMT’s conclusions: history, logic, theory and practice.

What is MMT? It provides an analysis of fiscal and monetary policy that is applicable to national governments with sovereign currencies.

There are four requirements that identify a sovereign currency: the national government

a) chooses a money of account;

b) imposes obligations (taxes, fees, fines, tribute, tithes) in the money of account;

c) issues a currency denominated in the money of account, and accepts hat currency in payment; and

d) if the National government issues other obligations, these are also payable in the national government’s own currency.

There is a fifth consideration that follows from these: if a country pegs, adopts a gold standard, or dollarizes, it doesn’t really have a sovereign currency because it is committed to delivering that to which it pegs. That can reduce policy space—unless if it accumulates enough of the foreign reserve.

What difference does a sovereign currency make? We argue that the sovereign currency issuer:

  1. does not face a “budget constraint” (as conventionally defined);
  2. cannot “run out of money”;
  3. can always meet its obligations by paying in its own currency;
  4. can set the interest rate on any obligations it issues.

Now what do our critics accuse us of? Let’s look at the top claims.

Because we say a sovereign government cannot “run out of money”, they claim we advocate that government spend without limit. As if the goal of MMT is to cause hyperinflation.

Because we say a sovereign can always meet obligations as they come do, critics claim we say that deficits don’t matter.

Because we say that government spends by keystroking credits to bank reserves, critics claim we advocate forcing the Fed to print up money to pay for all government spending.

What we actually say is that current procedures adopted by the treasury, the central bank, and private banks allow government to spend up to the budget approved by Congress and signed by the President. No change of procedures is required.

What we emphasize is that sovereign governments face resource constraints, not financial constraints. We’ve always argued that too much spending—whether by government or by the private sector—can cause inflation.

Finally, a favorite criticism adopted by our heterodox frenemies is that MMT doesn’t apply to many countries, such as Somalia. The Central African Republic. the Congo. Liberia. Zimbabwe. Malawi. Mozambique. Ecuador. Greece. Honduras.

And because it does not apply to them, MMT is an America First fascist policy.

What do all those countries have in common? They do not issue a sovereign currency. We’ve always made it clear what we mean by sovereign currency. MMT rigorously applies to sovereign currencies. That may be the minority in terms of numbers, but they probably account for three-fourths of global GDP.

That doesn’t mean that MMT scholars have ignored countries without sovereign currencies—I recommend especially the work of Bill Mitchell and Fadhel Kaboub—but our main focus has been on sovereign currency.

I’m not going to go into the case of developing nations now. I’m going to move on to four paths to MMT.

We usually begin our explication with logic, based on the assumption that economists are good at logic. One would think so – with all their models and math and deductive thinking. However, with about 35 years of work in economics, 25 of those working on MMT, I have concluded that economists are terrible at logic. So let’s begin with history.

1. History

But economists are not much better at history than they are at logic. So let’s try a recent, simple, and clear example – one provided by Farley Grubb, the expert on America’s colonial currency.

The American colonial governments were always short of British coins (but prohibited by the Crown from coining their own) so they each came up with their own money of account (for example the Virginia pound), imposed taxes in that money of account, issued paper notes in the money of account, spent the paper notes, collected those notes in taxes, and then burned their tax revenue.

I told you it would be simple and clear. A one-sentence history of sovereign currency in Colonial America. If you want more details, read Grubb.

I like several things about this example. First, it is clear that the colonies spent the notes first, then collected them in taxes. They could not possibly have collected paper notes in taxes if they had not first spent them because there were no other paper monies around.

Second, the colonies did not spend the tax revenue received in the form of paper notes. They burned the notes. All of them.

In the tax laws they were called “Redemption Taxes” with the expressed purpose of “redeeming” the notes – removing them from circulation to be burned.

Finally, the spending was “self-financing”.

Our argument is that this is the way it has worked for the past 4000 years, at least, as Keynes put it. That is the Modern Money period to which MMT applies

2. Logic

Again, let’s keep this simple. Warren Mosler provides the following example. He wanted his kids to wash his car. To motivate them he offered to pay them using his own business cards. “But dad, why would we want your cards – they are worthless.”

Well, he answered, I’m imposing a tax of five business cards today if you want access to food, clothing and shelter. “But how can we get the cards?” I’ll pay five business cards for washing the car.

Note how all the logic we learned from the history of Colonial currency applies: Warren has to spend first before collecting the cards; no one can pay taxes until Warren spends; and redemption of the cards in taxes removes them from circulation.

The car gets washed and the kids get fed. Taxes drive money and money mobilizes resources such as labor for car washing. In a nutshell, that’s our monetary system.

In modern economies there’s a couple of degrees of separation between taxpayers and the treasury—I’ll come back to that.

3. Theory

MMT adopts the Knapp-Innes-Keynes State Money Theory outlined in the Treatise, the Marx-Keynes-Veblen MTP and its Theory of Effective Demand developed in the General Theory, Schumpeter’s Ephor theory of banking developed in the Franco-Italian Circuit approach, Kalecki’s theory of profits, and Godley’s sectoral balance approach.

Together these provide a coherent, stock-flow consistent heterodox theory of the role of money in the economy. It stands in stark contrast to the Neoclassical loanable funds and ISLM approaches that are fundamentally, irredeemably incoherent.

As the endogenous money approach insists, “loans make deposits and deposits make reserves”. Banks can never “run out of money” since they create it when they make loans, and central banks can never “run out of reserves” since they lend them into existence.

So far, so good. I think every heterodox economist as well as most central bankers are now on board with this. Bank money and central bank money are not scarce resources – we can have as much as we want (and we generally have more than is good for us as Wall Street’s banksters run wild).

Paradoxically, most heterodox and orthodox economists believe that the sovereign government, itself, faces a critical money shortage. Bankers cannot run out. The sovereign government’s central bank cannot run out. But government faces a strict budget constraint; exceeding it leads to disaster: Attacks by Bond Vigilantes. Insolvency. Bankruptcy. Hyperinflation.

The largest and most powerful economic entity the world has ever seen – the US Federal Government – must get its fiscal house in order.

It relies too much on lending by the Chinese! Any day now the supply of dollars to Uncle Sam will cut be cut off! A run from the Dollar will reduce its international purchasing power to peanuts! Our profligate government is leaving hundreds of trillions of dollars of debt to our grandkids!

If I say that the heterodox approach insists that injections are causally prior to leakages, you all recognize that from fundamental Keynesian theory.

And if I say that government spending is an injection and taxes are a leakages, everyone understands.

But when I say that government spending is logically prior to taxes, heterodox economists suddenly get all dazed and confused.

If I say government has to spend first before taxes can get paid, I’m called crazy.

Government spending cannot be financed out of taxes—it must precede taxes. It is one of the injections that creates income that can be used to finance leakages such as saving and taxes.

So Government spending cannot be financed out of savings, either—government spending must create the income that can be saved in the form of purchased government bonds.

This is all just basic macroeconomics. While an individual can pay taxes or buy bonds out of her savings, this is not possible at the aggregate level. Our heterodox frenemies all flunk first year macro theory.

It is the US government’s deficit that is the normal injection that allows our domestic private sector to net save, and as well allows the rest of the world to net save dollars. Neither domestic saving nor foreign saving can be a source of finance for US government spending.

The US government spends only dollars, in the form of reserves issued by the Fed and credited to private bank accounts at the Fed. Tax receipts are almost solely received in the form of Fed reserves debited from private bank accounts held at the Fed.

To the extent that foreign central banks hold dollars, they came from the US and are held in the form of reserve deposits at the Fed, US Treasuries, or Fed notes.

The US government must supply dollars of reserves before it can receive them—just as banks must supply deposits before they can receive them in payment.

PRACTICE

I’m going to be brief on institutional practice—this is something MMT has focused on since the very beginning. Before we documented how the government really spends, no academic economist had any idea. Now it drives our critics crazy and they complain that every time they criticize MMT we go so deeply into the accounting details that it blows their challenged minds.

In the old days, governments just notched tally sticks, minted coins, or printed paper money when they spent, then collected them in redemption taxes and burned or melted them.

Today all modern governments use central banks to make and receive all payments. That’s one degree of separation. Central banks make and receive all payments through private banks. That’s the second degree of separation. Two degrees of separation is so complicated that critics throw up their hands in exasperation when we insist that nothing significant has changed.

Oh, it is all just too complicated!

Government spending is still financed by money creation, and taxes destroy money—in the form of central bank reserves. Instead of wooden sticks, we use electronic keystrokes. Government cannot run out.

The central bank will not say no. From its perspective, it never violates the prohibition against “lending” to the treasury. It simply ensures that the payments system functions smoothly.

Furthermore, government never needs to borrow its own currency. Bond sales by a sovereign government are not really a borrowing operation—rather they offer a higher interest earning substitute for central bank reserves.

This was Warren Mosler’s key contribution, recognized before there was an MMT, and it made him rich because he concluded that credit ratings agencies had no idea what they were doing when they downgraded sovereign government debt.

Government can make all payments as they come due. Bond vigilantes cannot force default. While their portfolio preferences could affect interest rates and exchange rates, the central bank’s interest rate target is the most important determinant of interest rates on the entire structure of bond rates. Exchange rates are more complexly determined, but Keynes’s interest rate parity theorem provides a guide.

The Fed is a creature of Congress, and Congress can seize control of interest rates any time it wants. In any event, bond vigilantes cannot hold the nation hostage—the central bank can always overrule them. In truth, the only bond vigilante we face is the Fed. And in recent years it has demonstrated a firm commitment to keep rates low.

Finally, even if the Fed abandons low rates, the Treasury can “afford” to make all payments on debt as they come due, no matter how high the Fed pushes rates. Affordability is not the issue. The issue will be over the desirability of making big interest payments to bond holders. This is a particularly inefficient form of government spending. In the case of the US, half the bonds are held abroad and most of the rest are held by institutions. There isn’t much “bang for the buck” that comes from spending on interest.

29 responses to “ALTERNATIVE PATHS TO MMT

  1. Steven Greenberg

    A nice serving of economic meat to complement the word salad of “21st Century Machiavellians 1.1: Elites View the Democratic Party as a Containment Vessel for Popular Discontent”

  2. Each of the fifty US states has taxing authority and is sovereign. If, for example, my state of Florida issued its own currency, e.g. Floridas, to operate in parallel with US $ and accepted Floridas as payment of debts owed to the State of Florida, then FL or any other state could supplement the $ it gets from the Federal Govt with state currency designed to meet state needs, e.g. supplement teacher salaries or build state infrastructure. What is wrong with this idea? Is there some Federal law that would prevent it?

    • States are prohibited by the Constitution from making their own currencies.

      • On the other hand, Mosler is advising the Italians to side-step their non-sovereignty by issuing “tax credits” to supplement euros. So maybe Florida can take the hint.

  3. Graham Paterson

    Here’s another take on sovereign currencies that applies to the world of today and is drenched in logic.
    Irrespective of the history of money, in today’s world, “money” really has no other purpose than to act as an acceptable and guaranteed medium of exchange. Every nation, independent, sovereign, or otherwise, must have a medium of exchange in order to function. It would be impossible for a society to function in today’s world without an acceptable and guaranteed medium of exchange. The only alternatives are, either to resort to a barter system, or to let any Tom, Dick or Harriet create a “money” token (as is happening with cryptocurrencies) and create the chaos of trying to compare one privately created currency against another.
    A society does not need any coercion to accept the essential medium of exchange they must have if it is to function in an orderly manner. The only promise the people need is that whatever “money” tokens are designated as the nation’s medium of exchange, are not false tokens. That guarantee is provided by the nation’s constitution through its legislative assembly and its Government by declaring what shall be the nation’s legal tender. Only the Government of a nation should have the power and authority to punish anyone who tries to counterfeit that legal tender.
    It is totally illogical to say a nation must have a tax system to force people to use what everyone knows is an absolutely essential public purpose in providing the acceptable and guaranteed medium of exchange if the society is to survive in today’s world. Any designated medium of exchange does not need to have any intrinsic “value” as, the “money” tokens are simply a measure of the “value” of the object subject to a transaction.
    It is an irrefutable fact, that in today’s world, virtually every person on this planet must have access to “money” in order to survive. Throughout history the biggest single problem that has never been resolved, is in finding a truly equitable method to distribute the nation’s money supply in a way that will benefit everyone. The private banking system, going back to the money lenders of biblical times and before, has guaranteed that such an equitable distribution system will never be allowed to surface.
    It is a problem that has never been resolved, probably because finding a satisfactory solution has never been tackled. However, the distribution of that legal tender is a major link between the Government, the people and the banking system of the private sector.
    Whilst, in truth, there can never be any shortage of legal tender, the way the “money” supply is spent and distributed should always be done on a proper due diligent and accountable basis by both the Government and the private sector banks.
    The fundamental purpose of the private banking system should be to distribute the nation’s money supply to the private sector in facilitating the vast array of wants and desires of the people, but always on a proper due diligent basis.
    No Government has the imagination, ability or responsibility to do this to the degree that is needed.
    The government’s role should be restricted to supplying the essential needs of the society but those needs must not be conditioned by theavailable resources and never on the basis of making a profit. Governments are created by the public to support and provide the essential needs of the public and not to exploit the public by profiteering.
    The Government, through a monetary authority, functioning according to specific constitutional parameters, should SELL to the private banks, access to interest-free money, which a monetary sovereign Government can always create on demand.
    Essentially, the constitutional parameters would restrict the unlimited creation of money and the resultant harmful effects of inflation and deflation. The parameters would do this by requiring a relative balance between the cost of production and the funds available for the consumption of that production. It is obvious that there is no point in producing anything unless it is going to be consumed at some point in time. Both these parameters must be linked to the nation’s population levels.
    After purchasing a requested amount of “money” from the monetary authority, subject to a proper due diligent analysis of the proposal for borrowing, the private banks would then pass that “money” onto the public free of any interest charges. This way, the banks would serve their role in distributing the “money” supply to the public and act as intermediaries between the people and the Government. The banks would be allowed to charge a competitive admin fee over the period of the loan that would include the initial cost of buying the “money”. The banks would not be allowed to charge and compound any interest but could add a competitive profit margin.
    The additional benefit of this concept is that the Government could eliminate every tax now imposed on the economy by simply charging the banks a fee of 1% to 2% of the amount of “money” requested. (This is statistically proven from data provided by the Central Banks around the world.) The Government could spend this revenue on the basis of a budget relating to due diligently assessed commitments.
    With regard to the question of accumulated debt, it should be noted that any Government with monetary sovereignty does not have to borrow “money” from anyone and certainly would be prohibited from doing so in the future when this system is in place. However, reducing the existing Government debt burden can be addressed in two ways. The best option is for the Government to simply create the necessary funds and progressively buy back the debt in a planned manner that would minimize any impact on the economy. Alternatively, the Government could progressively reduce the debt by placing a dedicated “levy” percentage on the price of selling credit access to the private banks. Effectively, this would be a defacto tax paid by the people who borrow “money”.
    While the admin fee and profit margin charged by the private banks would require a continual increase in the “money” supply over time, it would be nothing like the horrendous rate necessary to cater for the compounding of interest charges. Everybody would be far better off and the economy would receive a tremendous boost from the elimination of taxes.

    • You miss out the fact that allowing privately owned banks to create “currency” has been tried in various countries, including the United States, and resulted in control fraud making use of these currencies inefficient in terms of the effort required to check out the solvency of these banks for payment settlement purposes. A compromise solution is the creation of a central bank which creates a parallel reserves based transaction and payment settlement system. In order to drive acceptance of this solution a degree of reserves taxation is required as part of the system.

      • Graham Paterson

        I am not sure, Schofield, what that has to do with the concept of my post, although I agree that setting up the reserve scheme is a compromise necessary to sustain the the continued process of creating “money” as interest-bearing debt. It is that concept which I beleive needs to be challenged.

  4. First let me say, without reservation, I am a believer in MMT. However, coming from country with a pegged exchange rate and its own Central Bank, I simply find it difficult accept the notion that such a country is not a “currency sovereign”. Having become a subscriber to “the importance of narrative”. I am obliged to argue that a country, with its own Central Bank, which has the sole authority to create the “currency” for that country IS a ” currency sovereign”. However, since “currency” is a part of the monetary system, the extent to which such a country can become a “monetary sovereign”, is dependent on its exchange rate regime of choice; the amount of foreign debt it is prepared to incur and the degree to which it is prepared to engage in capital and exchange controls…. If thinking of it in such a manner violates MMT principles in any “real sense”, which I do not think it does, then my “polished lens” would become “smudged”.

  5. Thanks for this concise, yet lucid presentation.

    Two questions that have always made me wonder when thinking about MMT:

    (1) MMT-proponents argue that the issuance of government bonds could (or, in fact, demand should) be abandoned. In that case, how are people supposed to save?

    (2) MMT rejects the idea that banks have to first get (loanable) funds from savers before they can make loans (with this money borrowed from savers). Why do banks seek deposits from savers if these deposits are not needed to “refinance” loans?

    • I’ll let someone else answer #1, but here’s the answer to #2…

      I’ll use an example – A bank underwrites a mortgage to a customer buying a home. The mortgage note is entered onto the bank’s balance sheet as an asset. A check (or other payment instrument) is issued to the seller of the home. If the seller of the home is also a customer of the bank, then when the check is deposited the Bank incurs and increase in deposits which are a bank’s liability. The mortgage became the bank’s asset and the deposit the bank’s liability of equal size.

      Now what if the seller was the customer of a different bank? At some point the Bank is going to be presented with that check = to the mortgage amount. The Bank needs to provide the funds to settle that payment. A profit maximizing bank does not keep money laying around as it doesn’t normally earn any income. So the bank has a few options chose from to obtain funds for settlement… 1) it could sell the mortgage note, 2) it could issue another liability (i.e commercial paper), 3) it could issue more equity or stock, 4) it could borrow from the money markets or 5) it could attract more deposits as when deposits flow into the liability side of the balance sheet so do settlement funds on the asset side. Option 1 means giving up the asset which means losing out on interest income and profit. Issuing equity means diluting existing shareholders (and probably losing your job as bank president). That leaves other borrowing sources and of them customer deposits are almost always the cheapest.

      Long story short, banks seek out depositors to fund their payment settlements at the lowest possible costs to prevent them from having to liquidate income generating assets. Note, this is true regardless of where that payment settlement need comes from… a depositor writing a check to pay for groceries or a check that was issued as part of a loan.

    • Steven Greenberg

      The way I look at it, private banks are in the business of getting money wholesale and selling it or renting it out at retail. There are many ways for banks to get wholesale money. Deposits from savers is only one of the ways banks get money. The only real money that banks need is enough to cover the net outflows from the bank. The net outflows are only a tiny fraction of the loans that the bank has on its books, under normal circumstances. It is only under abnormal circumstances, the crash of 2008/2009 that you get to see what is really going on.

      As long as banks know for certain that they can get “high powered money” from the Federal Reserve Bank when they need it, there is much less need for having reserves on hand.

      • Steven Greenberg,

        Thank you for your reply, where you write:

        “… private banks are in the business of getting money wholesale and selling it or renting it out at retail.”

        This is where I get confused – I thought MMT denies your contention. Or are there alternative uses of deposits?

        I suspect, the answer to my question (2) above is: banks need deposits for different purposes (x,y,z) but not to be able to make a loan to a customer.

        Banks may, however, prefer deposits as a cheap source of funding THE FUNGIBILITY of the money that they lend. By fungibility, I mean universal transferability, in other words, typically a loan should provide a borrower with means that she can transfer to practically any party she cares to make a payment to. In order to do that, banks might need to acquire costly bank reserves, as payments between banks are settled in bank reserves.

        Back to my initial problem:

        The typical reply to my question (2) from MMTers creates the impression that deposits are only needed as a source of cheap funding of bank reserves.

        MMTers fail to spell out the other functions of deposits; to avoid bias or confusion, I feel, the cheap-funding-of-bank-reserves-function should be clearly delimited against these other functions.

        Unfortunately, I am not sure which these other functions are — hence my question (2).

        Can anybody help.

        So, which are these other functions of deposits?

        • “The typical reply to my question (2) from MMTers creates the impression that deposits are only needed as a source of cheap funding of bank reserves.”

          That’s because that’s the only use leaving aside fee generated income or seeking deposits to meet some regulatory requirement. Go back to my reply. The bank is seeking deposits to acquire the reserve balances to clear and settle payments. What financial activity can you think of that doesn’t eventually require the settlement of a payment?

          The FI I work for is a dominant retail institution in our market. Deposits roll in faster than we can make loans. That means, absent any action by various departments here, we’d have reserve balances piling up. As I said before, no FI wants to hold excess money (or reserve balances), so what do we do? We can offer them up in the federal funds market and or buy various US Treasuries or other allowable financial instruments that are for sale. Any and all of those “purchases” or inter-bank loans requires as part of the transaction a clearing and settling of a payment with the counter-party.

          Any institution that has few customers can still lend without any difficulty (up to the limits of their capital position that is). They underwrite their loan like any FI and when associated settlement needs arise they either have the means on hand to meet those needs or they access them through various channels. As macro level needs for settlement balances rises or falls the FED adds and removes balances via open market operations.

          • Adam,

            Thank you for your reply, where you write:

            Serving as a source of cheap funding of bank reserves [A] is “the only use [of deposits] leaving aside fee generated income [B] or seeking deposits to meet some regulatory requirement.” [C]

            By “some regulatory requirement” you mean (minimum) reserve requirements, right?

            What do you mean by “fee generated income”?

            Banks accept deposits and find ways of investing them at a rate higher than the rate they are paying the depositor? [B1] Perhaps also, income generated from cross selling to depositors? [B2]

            Any other ways in which deposits generate fees/income for the bank, directly or indirectly?

            Any idea of the proportions in which [A], [B1], [B2], and [C] apply?

            • Regulatory requirements… yes, minimum reserve requirement is one. More recently banks are holding more reserves for BASEL III liquidity requirements. Some say this is one of the big items the FED missed as they’ve tried to drain “excess reserves” from the system. The FED considers excess reserves those above the US required minimum reserves. However, BASEL III has a requirement around holding enough highly liquid assets to meet any liquidity needs over I believe a 30-day window.

              Fee income… lots of banks seek depositORS who then become a source of various fee income streams… interchange income from debit card and credit card transactions, monthly account fees, overdraft fees, ATM fees, etc…

              As for proportions… that’s going to vary by the institution and their business focus and strategy.

              I’ll give you an example I’m very familiar with. The FI I work for is roughly a $2B depository. In our market there is another local FI that’s about a $2B depository as well. We are the retail elephant in the market when counting people with about 30+% consumer household penetration. Our $2B competitor has a fraction of the number of customers – around 5% of the market. That said our competitor is a very strong commercial (business) institution. Their depository arm is filled with wealth retail depositors and business transactional accounts. Our depository arm has many more retail customers but their average deposit size is much smaller. We’re the largest home equity lender in our market because of our high retail household penetration. Our competitor is in the top rankings for commercial lending. On our income sheet you’ll find a sizable entry for card interchange income because of the number of customers we have. Our competitor doesn’t have that same level of interchange income, but I’m sure they have other income streams that we don’t.

              • Adam,

                Thank you so much for taking time to help me with my questions.

                Your replies are clear and enlightening.

                This use-of-deposits-issue, I can say now, WAS one of the larger patches of confusion in my understanding of MMT.

                You have done me a great favour in clarifying the topic.

  6. It would have been nice to have some references to recommended readings. For instance, which of Grubb’s publications did Wray have in mind? Grubb has lots of them on continental currency, with a few on Virginia. How does he expect the reader to choose the one, or ones, his is thinking of? Unlikely that they would get it right.

    He does something similar in the first paragraph in the Theory section, referring to various theoretical positions with no references whatsoever. One can understand this when giving the talk, but not when this is transferred to a blog post. I amy be wrong but it would seem to have required not much effort or time to add a bit to the talk.

  7. “Why do banks seek deposits from savers if these deposits are not needed to “refinance” loans?”

    If you zoom in close enough you see. Private banks don’t lend out the money they receive from depositors. The money that they lend they simply write into a checking account balance, and write a loan-receivable asset to balance their own ledger. FED VP Alan Holmes said this straight out in a conference paper in 1969
    Private banks need deposits to fund the spending that results from the loans. In principle, the banking system can lend an unlimited amount of money, because anybody’s debit is somebody else’s credit, BUT, if in the course of the day’s business, one bank were to end up with all the debits, and other banks all the credits, then that first bank would be in deep trouble. They depend on the flows between withdrawals caused by their lending, and deposits caused by other banks’ lending. In practice, the imbalances aren’t so stark, and the banks work out their differences in the overnight interbank market.

  8. Steven Greenberg

    Issuing of government bonds is a way of getting people to defer their spending of money. During WW II this was one of the primary reasons for issuing bonds. Deferring spending helped control inflation. I would think it is still a useful tool to have in the monetary/fiscal toolbox. We don’t need to use that tool as often as current law requires. I don’t think we have a need to banish that tool from the toolbox.

    • “.. Issuing of government bonds is a way of getting people to defer their spending… ”

      No, it isn’t. Not as most Gov bonds are structured/used today. Gov bonds are purchased by institutions (mostly) with aggregated funds already deferred from spending.

      Gov Bonds are really just another form of central bank money instrument, more useful than others in certain circumstances. From Gov’s point of view, they are a tool for interest rate management in the interbank (overnight reserves) market.

      MMT points out that paying interest on bonds is unnecessary corporate welfare, and ‘monetary policy’ is either ineffective as a means of regulating aggregate demand, or, in fact, counter productive as a supposed inflation curb. (ie itself just pushing up prices)

      However, as a zero interest rate but Gov backed form of (very high denomination) money, some MMTers advocate limited issuance of eg maximum 3 month maturity bonds (eg Warren Mosler) as an aid to stability in finance sector operations.

      Such things as war bonds, sold in small denominations direct to the public were a means of deferring spending, since they were not trade-able or liquid, and only paid interest or premium upon maturity (some years ahead). If they were cashed in early, any premium was forfeited. But Gov Bonds today are structured very differently and are highly liquid and highly traded. Pretty much the only way Gov Bonds are a lesser form of money is that they cannot be used for banks’ reserves (settlement balances).

      It’s also worth noting that the MMT wiki entry makes this error about Gov Bonds, suggesting they are a means of regulating aggregate demand (akin to taxes) – obviously not a wiki written by an MMT academic. (The MMT wiki entry is complete misinformation/misrepresentation.)

    • Creigh Gordon

      Yes, government bonds can be used to defer spending, as in WW2. That was necessary at the time because employment was effectively over 100 percent, and there would have been shortages and inflation without the deferments that war bonds created.

      • When the U.S. entered the war, and Rosie the Riveter entered the industrial workforce, she had lived through the ’30s and probably watched her parents’ savings, and maybe her own, vanish forever into failed banks. You could forgive her for not letting her pay packets get anywhere out of her reach.
        I think it took the Government Bonds to create the “propensity for saving” that forestalled peoples spending, and the inflation risk, until after the war. Letting your money sit would have been madness otherwise.

        http://www.protestsonglyrics.net/Labor_Union_Songs/Boom-Went-the-Boom.phtml1

        Financial players these days are using bonds in a totally different way.

  9. And in addition to the four points (state chooses a money of account, etc)

    The government also buys goods and services using that created money, from the private sector economy. That is, the state money is about provisioning, in addition to the other points.

    The state money system also provides an infrastructure system for trade and finance, and so in Minsky’s parlance, the state money system is resource creating, raising the level of trade and development. State money implementation should be cost-less, because of this general increase in trade and development, far beyond the nominal cost in tax. The activity taxed wouldn’t exist without the state money system.

  10. Adam: thanks for the excellent posts on banking operations. You saved me a lot of time and I urge all those with questions to read what Adam wrote.

    As to references, you can find them listed in the longer version of this posted on rwer. Farley Grubb has now written 2 excellent papers on paper money in Virginia and North Carolina. I expect he’ll continue to work through the colonies as there are interesting differences among them.