By Thornton Parker
The way a problem is seen can determine how or even if it gets solved. When the French engineer, Ferdinand de Lesseps, was picked to build the Panama Canal, he saw it as another excavation problem as his Suez Canal had been. But Egypt was flat and Panama had a mountain.
When the United States took over the job, John Stevens, who was put in charge, saw it as a railroad problem. The biggest task was to move ninety-six million cubic yards of rock and earth, as fast as the fifteen giant steam shovels cut them out of the mountain, from the Pacific side of Panama to the Atlantic side for building a dam and raising a lake that would be part of the canal.
The MMT Problem
Developers and promoters of MMT have seen their task as a teaching problem; explaining how America’s sovereign money system works to those who still believe that money is a scarce commodity that restricts what the country can do. Their assumption has been that when more people, particularly political leaders, see that scarce money is not a true constraint, a new world of possibilities will open up for building a brighter future.
But what if those who seem impervious to the new knowledge are resisting because they see very clearly how it can lead in directions counter to their interests? Evidence that they have wanted to keep money scarce and under their control goes back at least a hundred years. (And longer if you consider the Civil War.)
In The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace, the historian, Eric Rauchway, tells how Keynes saw that under the terms of the treaty ending World War I, Germany had no chance of rebuilding the healthy economy it would need to become a stable democracy. He proposed that Germany should float a large bond issue. Seventy percent of the proceeds would be used to pay the victors reparations, ten percent would be used to retire outstanding German bonds, and twenty percent would be used for rebuilding the country. The bonds would be made attractive to investors because Britain, France, and the U.S. would underwrite them.
England and France agreed, but Woodrow Wilson did not. His letter rejecting the proposal said that Congress would not approve of the proposal and that reconstruction should be funded through “the usual financial channels”. Rauchway’s research turned up the fact that the letter was written by Thomas Lamont, a J. P. Morgan partner who was helping Wilson. In short, the banks wanted to dominate and profit from funding Germany’s recovery.
As a passing note, those who oppose MMT because money printing by the Weimar Republic led to its runaway inflation, probably don’t know that the catastrophe resulted from actions by their banker counterparts a hundred years ago.
Rauchway goes on to tell how bankers fought Roosevelt and his New Deal for the rest of his life. Two of his major economic accomplishments were ending the use of gold for international settlements, and having the U.S. Treasury take over and manage this country’s currency. Both were keys to ending the depression and winning World War II which he saw was coming before he became president. MMT promoters are continuing Roosevelt’s fights and I commend Rauchway’s book to them.
From what I have read, MMT promoters have not discussed the role of banks very much. But the number of dollars they create by making loans is many times greater than the number of new dollars the government creates by paying out more than it takes in with taxes. Banks see large government public funding operations as competitors. Except when they needed bailouts, banks have fought government intervention in what they thought of as their economy for more than a century. This will continue until the next recession when they may get in trouble again and will be in weak positions to bargain. Until then, fighting them is probably not a good use of MMT promoters’ time.
Many explanations of MMT include arguments with economists who have opposing views as if their views could be changed. But the case for MMT is being tried in the court of public opinion and there is no judge. The opposing economists are acting as counsels for Wall Street, banks, and other big money interests. It is not in their natures or job descriptions to abandon their clients and agree with the MMT challengers. This is particularly true where the clients have deep pockets and have helped the counsels get to where they are today. Books and dissertations are waiting to be written on how money has contaminated academic freedom and open discussion of economic issues on their merits.
Seeing MMT as a Political Problem
If the preceding is correct, how should MMT be seen, and how should it be promoted? I think of MM as an enabling, leadership tool for situations where resistance does not prevent its use. If early experiences are successful, it should be expanded where the political cases can be won. Thus, I see MMT as a political problem, both for those who promote it and those who resist it. Others may see it differently, and there should be brisk discussion of alternative views.
In the second part of this series, we will consider where this view can lead.
Wow! I think you’ve nailed it. Our human race against time continues with a new and better perspective that, if enough of us, soon enough, get it… We still have a chance to learn and cooperate our way out of our planetary political mess (our religious economic tribal and other problems) (and misunderstandings) to maybe still have a chance to prevail and prosper before we perish naturally (mostly one at a time in our old age) rather than collectively (all-together more or less at the same time like where we seem to be headed). And what a wonderful world it could be then… With persistent true liberty and justice for all…most of the time… “The stuff that dreams are made of.”
“But what if those who seem impervious to the new knowledge are resisting because they see very clearly how it can lead in directions counter to their interests? “ Yes! I agree with your point. It seems the arguments against MMT quickly move away from MMT’s basic straight forward mechanics into the “what ifs” in the most extreme or complex applications. Looking forward to reading more.
MMT should stay out of the political arena. People embrace a few of the optimistic and valid MMT conclusions: we can afford to pay for what society needs. These conclusions have little to do with MMT and are supported by a much broader and fundamental nature of money than the Federal Reseved-based schemes MMT promotes.
The “brisk discussion of alternative views” you seek will never happen within the MMT camp – there is no room for dissent nor self examination. Critics are branded as ignorant cranks. Intellectual dishonesty and egoism is rampant. MMT has the gall to associate other montary reformist proponents as Wall Street plants, when it is MMT that is completely based upon the banking industry-supported Federal Reserve system.
****I guarantee your hinting at the role that bank-credit money plays in our failed economic system will get you ostracized as the big MMT guns pile on. You will never hear from an MMT acadamic of the work of the great economists of the 1930’s Chicago School and other institutions who pleaded with FDR for monetary reform. Instead the MMT echo chamber will snarkily whip out a Milton Friedman slur on the whole school of thought – even though he appeared on the scene decades later. The revisionism is stunning.
Paul Lebow, It’s obvious you could be the dissension that is needed to have a opposing view with your show of expertise of economic theory. Type casting the present or accepted world view does lead a reasonable person to assume the present institutions, Federal Reserve Bank, Wall Street, and others have skin in the game to protect, so I’m not slighted by that identification. Perhaps some links to the 1930’s Chicago School of thought would enlighten us all. I assume you are referring to the Australian School prior to the Chicago School.
Steven –
Please don’t look to MMT for an explanation of bank-credit money. Not that they can’t or won’t but because that is not their focus. There are so many great resources out there – just Google Richard Werner, an economist who demonstrated how the bank-money creation system works. Or the booklet put out by the Federal Reserve “Modern Money Mechanics” (no relation to MMT) where it is clearly states that it is the banks that create money when they lend. If you want a less neutral resource, though thoroughly accurate, Google the American Monetary Institute or the Alliance for Just Money – a treasure trove of resources, including critiques. The works of the economists Joseph Huber or Michael Kumhof are very accessible.
Having said this, bank-credit money IS the money we have in our wallet and bank accounts. Its what we use to pay for goods and services and receive our paychecks. The key feature of money is to act as “a medium of exchange”. Bank money is sanctioned by the US government as the official medium of exchange. It IS money.
The notion that the money in your checking account is an IOU needs to be examined. IOU what? Clearly not silver dollars or gold coins- kind of useless. All the bank owes you is the promise to transfer the balances to and from your account between you and the account of the seller or buyer. That’s it. At best its an IOU from the providers of goods and services in the economy – you redeem that IOU for those goods and services. This is so important to understand.
Robert –
No, I am referring the group of leading American economists in the 1930’s that realized the Federal Reserve banking system was deeply flawed. There was a rift in economics regarding the nature of money referred to as the “banking school” vs. the “currency school” which promoted direct government creation of money. These economists realized the shortcomings of the banking school based upon capital markets. This has nothing to do with Hayek or Milton Friedman.
I agree! That’s why we established in Bulgaria the first progressive party in the world based on MMT macroeconomic ideas. It’s called Bulgaria of labor and reason. We will participate in next year parliamentary elections.
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Developers and promoters of MMT have seen their task as a teaching problem; explaining how America’s sovereign money system works to those who still believe that money is a scarce commodity that restricts what the country can do. Their assumption has been that when more people, particularly political leaders, see that scarce money is not a true constraint, a new world of possibilities will open up for building a brighter future.
But what if those who seem impervious to the new knowledge are resisting because they see very clearly how it can lead in directions counter to their interests? Evidence that they have wanted to keep money scarce and under their control goes back at least a hundred years. (And longer if you consider the Civil War.)
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From what I have read, MMT promoters have not discussed the role of banks very much. But the number of dollars they create by making loans is many times greater than the number of new dollars the government creates by paying out more than it takes in with taxes. Banks see large government public funding operations as competitors.
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A better explanation of the difference between private bank “money” and Federal Reserve Bank money is that private banks do not create money. They create promises of money. When they make a loan to you, it is a promise that if you should need real money, they will fulfill their promise. As long as you use your loan money to pay someone who deposits it in the same bank, no real money is involved. The bank only transfers its promise to you to the person you paid. They only need real money to cover the net outflow from the bank. Some of that real money comes from the Federal Reserve Bank and some of it comes from other sources in the private sector (including interest payments on their loans they made to you, and service fees, selling mortgages to investors). Because of fractional reserve banking and the fact that thee are only 6 major banks in the USA, the need for real money by the banks is very small compared to the obligations on their books.
If MMT would explain the difference between high powered money and private bank created promises of money, I think it would lift a big cloud from everybody’s minds.
From what I have read, MMT promoters have not discussed the role of banks very much.
Then there is a great deal more reading necessary. This is the heart of the work of the MMT scholars – Mosler, the Kansas City school, the Australians. Dozens of old blog posts here would set one straight on this.
They and their great predecessors explain with the utmost clarity the relation between high powered money and private bank money. And why calling one “money” and the other not, a mere “promise of money” is bad terminology that can lead to dangerous errors. For all money by its nature is a “promise” and nothing but a promise.
All the criticism within and implied in these comments is handled deftly and carefully by MMT. But one has to actually read it and realize how it encompasses other theorists and theories, and many proposed – but illusory – monetary “reforms” –
and hobbyhorses.
I don’t recall anything in the the MMT Primer, and all the videos I have seen where any MMT expert has ever said what you say above. Can you provide a pointer to any statement like this?
I see many unjustified inferences that people draw from MMT. They really want to believe it makes a certain claim when, in realty, that claim is either not made or addressed. Its human nature to read more into things if it supports their own personal desires.
Yes, this is an issue for MMT. The concepts are built upon the very convoluted Federal Reserve system so its almost impossible for the public to grasp. To say money is “nothing but a promise” is not sufficient. Credit is a promise, money is more than a promise, it is an accepted medium of exchage sanctioned by the government.
Under monetary reform, the complexity added by the banking industry dissolves away. Money creation is not hidden behind entities such as bond sales, spending into existance, Fed funds rate, federal debt and deficit. In fact money is best understood and explained by non economists such as Frederick Soddy in the 1920’s.