By J.D. Alt
There’s a joke about a farmer and his pig. The pig is covered with a patchwork of large and small Band-Aids. A puzzled visitor asks the farmer: “Why is your pig covered all over with Band-Aids?” “Well,” says the farmer, “obviously, I can’t butcher him all at once: if I cut out too much he might die—and then I’d soon have nothing to eat.”
Most people who hear this joke chuckle to themselves (in a sickly way) because they intuitively realize the absurdity of the farmer’s misunderstanding the true nature of his resources. It is exceedingly odd, therefore, that most of these same people find it difficult to understand that our political and economic leaders—and the mainstream media that covers them—view the U.S. economy with exactly the same logic as the farmer views his pig.
Specifically, the most persistent and destructive myth of our current political times is that the U.S. government must collect taxes from its citizens—or borrow Dollars from them—in order for the federal government to have Dollars to spend. The simple mathematics of this story are as staggeringly improbable as the farmer’s attempt to eat his pig without killing it: The annual gross national product (GDP) of the U.S. citizens is around $15 trillion—but how much of that can the federal government reasonably tax, on average, without so severely dampening household buying power that the economy contracts? Twenty percent, maybe? But that only generates $3 trillion in annual taxes—and Congress has already committed the federal government to spending $3.6 trillion! So there’s a shortfall of $600 billion—money the government (since it has no other source of revenue) will have to borrow. And so it goes, year after year, building up an enormous “deficit” which soon has an an annual interest payment that eats up most of the tax revenues, requiring the government to borrow even more money to cover its spending requirements. And this calculus doesn’t even factor in the spending that’s going to happen when the baby-boomers begin (very soon) to retire in masses, demanding their Social Security payments and Medicare services while no longer paying FICA taxes. Not to mention the fact we need to repair or rebuild some 18,000 bridges, along with a few other pieces of critical infrastructure (like water-mains and sewer plants) that folks regularly utilize to live their everyday American lives. It’s pretty clear, in other words, the poor pig is close to death, and we’re not even close to paying for all the things we really need, or would like to have as a prosperous nation.
So what, actually, is wrong here? Is it possible that, like the farmer, our political and economic leadership—and the mainstream media that keeps us “informed”—are confused about the true nature of the federal government’s resources? Hard as it is to believe, the unavoidable answer is: “Yes.” There are two deep misunderstandings about our sovereign monetary system which support the myth, and which the mainstream leadership and media apparently hold as unquestionable doctrine. The first is that “banks create the nation’s money”; the second is that “printing Dollars creates inflation.” Let’s examine the two misunderstandings in turn:
Banks create the nation’s money
If you hold the belief that banks create the nation’s money when they make loans—the loans being used to generate the profits, interest and wages which create the citizen’s wealth—then you must logically conclude that, in order for the sovereign government to obtain some of those U.S. Dollars for its own spending, it has no choice but to obtain the necessary Dollars from the citizens either through taxation, or through borrowing. The sovereign government, from this perspective, has no other significant source of revenue.
While this seems like a reasonable perception, it conveniently overlooks the actual mechanisms of the U.S. Reserve Banking System. In fact, when a bank makes a loan, the “dollars” it creates and deposits in the borrower’s account are not sovereign U.S. Dollars, but are bank I.O.U.s. If the borrower decides to withdraw the bank I.O.U.s from his account (through the ATM, for example), the bank promises to instantly convert those I.O.U.s into the real thing: sovereign U.S. Dollars. And where does the bank get the sovereign U.S. Dollars it needs to make its promised conversion? It borrows them from the Federal Reserve—the Central Bank of the sovereign government—which issues the necessary real Dollars and deposits them in the bank’s reserve account at the FED. In other words, it is the sovereign government (acting through its Central Bank) which creates all of the U.S. Dollars that exist in our economy. By law, anyone else who tries to create a sovereign U.S. Dollar is a counterfeiter. While more complicated layers and actions are involved, this is the essence of how the Reserve Banking System and the U.S. monetary system function—with the critical point being that it is the sovereign government which issues the U.S. currency. (It literally can come from no other source!)
This, then, raises a crucial question—again, conveniently ignored by the mainstream doctrine and media: If it is true the sovereign government has the exclusive power to issue U.S. Dollars simply by issuing them, then why is it logical for the sovereign government to collect taxes? What does it need the tax dollars for? If it needs to spend a Dollar, why doesn’t it simply issue a Dollar and spend it? The truth, which the political and economic leadership refuses to acknowledge, is that this, in fact, is exactly what does occur: The sovereign government issues Dollars, and then spends those dollars to buy from the citizens goods and services which create a public benefit. (Like a satellite GPS system, for example.) It then turns around and collects some of those Dollars back in taxes. But why? Obviously, it doesn’t need those Dollars for spending, so why does it collect them?
The answer is probably the most ingenious social tool every invented—and is likely the chief reason why human civilization, with its unique system of monetary economics, has grown to dominate the ecosystems of the Earth. The “tool” works like this:
(1) A sovereign power declares that its citizens must, on a regular basis, pay taxes or face imprisonment. (This might seem mean-spirited, but the tool doesn’t work otherwise.)
(2) The sovereign then declares that the recurring tax must be paid using money which the sovereign, itself, has the exclusive right to issue. (This is, by definition, “fiat money.”)
(3) Because the citizens need the sovereign money to pay their taxes and avoid prison, they are then willing to provide real goods and services to the sovereign in exchange for the money.
(4) The sovereign, therefore, is now able to obtain real goods and services in exchange for something of which it has an infinite supply—the money it has the exclusive right to create.
(5) The sovereign money quickly becomes the “legal currency” and “unit of account” for all transactions within the society operating under the sovereign’s power.
Taxes, then, are collected not because the sovereign needs the tax dollars to pay for sovereign spending, but because it is only the tax burden that makes citizens willing to provide the sovereign with real goods and services in exchange for the sovereign’s money. The sovereign spends first, collects taxes after—and since it is only the sovereign who can create the money in the first place, the direction of these events, conceptually, cannot happen the other way around. It is precisely for this reason that the mathematics of mainstream doctrine—collecting taxes to pay for sovereign spending—can never add up to anything but a protracted impossibility.
Printing currency creates inflation
The second misunderstanding follows directly from the first: Since the very nature of a sovereign fiat monetary system is the issuing (or “printing”) of currency, it is illogical to suppose that this, in itself, creates inflation. It is patently true that if the amount of currency significantly increases relative to the number of goods and services available to be purchased, the currency will be devalued by rising prices. It is obvious, however, that two issues are at play and not simply one: (a) the amount of currency and (b) the number of goods and services. Inflation, therefore, can be generated by either of these elements becoming unbalanced—and, in fact, the two most frequently cited historical examples of hyper-inflation were instigated not by the exuberant printing of sovereign money, but rather by a sudden and severe drop in the availability of goods and services. Here they are:
Germany after World War I: What actually happened? Germany’s industrial heartland, the Ruhr, was shut down by the German workers protesting the imposition of war reparations by occupying Belgian and French troops. The German government continued to issue currency to pay the workers—to support their protest—and the amount of currency relative to the goods it could purchase was soon sky-rocketing out of balance. Zimbabwe in 2008: What actually happened? A civil war destroyed the country’s industrial capacity and a land reform program transferred ownership of a highly productive agricultural sector to a segment of the population with no farming experience. With the collapse of both industry and food production, there were fewer and fewer goods and services to purchase and the value of the Zimbabwean Dollar collapsed.
In each of these cases, the sovereign government was forced to inflate the face “value” of the currency it was issuing in a desperate race to keep up with its falling value—but in each instance what instigated the hyper-inflation was a sudden and rapid decline in national productivity.
Those who claim that the “printing” of sovereign money will inevitably lead to inflation are, therefore, either being disingenuous or misinformed. The more important issue, by far, is whether and how the sovereign money issued is actually used by the citizens to create new goods and services. As long as there is capacity for that to occur—under-utilized labor, materials and technology—the issuing and spending of sovereign Dollars to employ those resources will not cause inflation but, instead, will grow the economy and reduce unemployment.
An easy balance sheet experiment
In conclusion, here’s a quick experiment that any curious journalist can do in just a few moments to demonstrate the underlying reality of sovereign fiat monetary systems. Hopefully, it might engender a journalistic interest in further investigating the impossible and self-defeating mathematics of the mainstream doctrine.
Take a blank piece of paper and create a simple balance sheet. Title the left side of the balance sheet “Sovereign Spending”, and title the right side of the balance sheet “Citizen’s Income”. Each side of the sheet begins with a balance of zero. Now imagine the sovereign decides it needs to repair a bridge that’s in danger of collapse. It sends out an RFP and ascertains that the resources to repair the bridge—the engineers and draftsmen, steel and concrete, labor and equipment, are in fact available in the private market, and that certain private citizens are willing to provide these goods and services to repair the bridge for the sum of $3 million. So the sovereign government engages these private citizens to make the repairs. When it comes time to pay the citizens, the sovereign issues $3 million in U.S. currency and deposits those Dollars in the citizen’s bank accounts. The balance sheet then reads like this: on the “Citizen’s Income” side of the balance sheet there’s a positive $3 million. On the “Sovereign Spending” side there is a negative $3 million.
Looking simply at the balance sheet, it appears the sovereign has a “deficit” of $3 million. The logic of mainstream doctrine tells us that “deficit” has to be recovered either through taxes or borrowing. But in what sense does it represent something that needs to be “recovered” or “replaced”? What happens if the sovereign doesn’t even try to recover or replace those Dollars? Obviously, nothing (bad) happens at all: The citizens have $3 million in wealth that they can use to buy cars and houses and groceries; a bridge is made safe again to drive across; the sovereign has $3 million less of that which it has an infinite supply of: sovereign U.S. Dollars.
If, on the other hand, we insist that the sovereign’s “deficit” be recovered, what happens? If the spending is “replaced” by taxation—with the sovereign collecting $3 million back from the citizens, the citizen’s side of the balance sheet would be zero again—(they’d be broke and unlikely, therefore, to buy either cars or houses.) If the spending is recovered by borrowing the $3 million from the citizens, the citizens will have simply traded their $3 million in Dollars for $3 million in U.S. Treasury bonds which the sovereign will then pay them interest on with currency it issues from its infinite supply. Which leads to a final question an aggressively curious journalist might care to investigate: Why does the U.S. sovereign government borrow trillions of the Dollars which it has, itself, created in the first place? To begin researching that answer I’d suggest beginning here.
While there is an element of logic in this argument you seem to deliberately overlook the fact that the actual number of banknotes and coins in the society only represents about 3% of the total amount of “money” used in transactions.
Even when a borrower converts their IOU’s into physical money, it is inevitably returned to the banking system and becomes a book entry. The banks then re-circulate that physical money without necessarily going to the Federal Reserve to draw out extra banknotes. Likewise, most of the tax payments made by the taxpayers are in the form of cheques – not physical dollars – again a simple book entry. In many instances the taxes are actually paid with IOU’s rather than dollars, and hence, it is the private banking system, with their ability to continually create interest bearing credit out of thin air that really sustains the economy.
Certainly, there is a considerable benefit in having a single universally recognised medium of exchange in a given society, but to claim taxation is the reason this universal acceptance occurs doesn’t make sense.
A logical and rational society do see the advantages of having a common media of exchange and that is far more likely to be the reason they are prepared to grant the responsibility to a government to create, maintain and administer the security and credibility of such a media.
But the fact is, as Warren Mosler explains, the vast amount of financial transactions are simply a computer spreadsheet run by the private baning system with the aquiencense of the government.
When a taxpayer pays taxes with a check, the settlement of the payment consists in a transfer of a bank liability in the taxpayer’s account to one in a Treasury department account. If the latter account is at a different bank, then a transfer of reserve balances – government liabilities existing as credits to a bank’s reserve account – must take place at that time. If it’s at the same bank, then a reserve balance transfer will occur later anyway, as balances are continuously transferred from TT&L accounts to the Treasury general account at the Fed prior to their being spent by the Treasury. In one way or another, the government taxes back its own liabilities. And that’s the only reason that the government is willing to accept a bank liability of some kind in payment of tax obligations: because the tax payment extinguishes the government liability.
Bank liabilities in the form of bank deposit balances are not some kind of free-floating bank fiat money, nor are they merely an unspecified claim against generic bank assets, as they might be in a free banking system. They are very specifically backed by government-issued liabilities, and those liabilities are drawn on when ever a bank-to-bank or bank-to-government payment is ordered by the depositor.
The issue of physical currency vs. electronic account credits is irrelevant to the entire discussion. The USG’s non-maturing, non-interest-bearing liabilities are issued in both forms, and they are fully interchangeable. What we live in now is very similar to a gold standard regime, except instead of using gold, we use USG-issued dollars as the fundamental asset backing all other monetary assets.
Are you slipping? “balances are continuously transferred from TT&L accounts to the Treasury general account at the Fed prior to their being spent by the Treasury.” I thought the Treasury could spend at will regardless of balances? Not counting the MMT assertion that money is created when the Treasury spends, destroyed when it taxes (in which case Treasury accounts at the Fed have no meaning beyond unnecessary internal accounting).
If it doesn’t have a sufficient balance in the general fund, the Treasury has to sell bills, notes and bonds.
I’m confused. The normal argument in NEP and in the book Understanding Modern Money is that the government does not need tax money to spend and the government has no need to issue bonds, it can just spend what it wants. J. D. Alt also implies this in the essay above.
I would agree with you that the Treasury has to sell bills, etc. in order to spend money. I’m just surprised that an NEP author would make the statement.
It depends what you mean by “need”. The procedures the government has in place right now require the Treasury to issue bonds to carry out its authorized spending if its existing funds are insufficient. The Treasury used to have a draw authority with the Fed, but that was allowed to expire in 1981. That’s why we can have those debt ceiling messes. If the Treasury could simply spend as desired and overdraw its Fed account, then there would not be any debt ceiling standoffs.
But of course Congress could change those rules any time it wants. So that’s the sense in which Congress doesn’t need to tax or borrow in order to spend. The existing rules are rules Congress itself established and voluntarily imposed on the government’s own operations.
In the many nations, such as the US, the Treasury must have a positive balance in its CB account before it can engage in spending.
This is a voluntarily imposed constraint, the result of deliberate policy choice NOT a law of nature or, more importantly, of accounting.
Certainly the Treasury having a positive balance in its CB account before spending is a voluntary constraint. They are the government, they can spend without borrowing. Of course, the government could also just quit paying for things and force people to provide goods, labor, etc. That doesn’t make it a practical system.
Is there an example of a government which spends without borrowing (without ruining the economy, of course)? Of course, most nations make a mess of their monetary system in fairly short time (whether by poor policies, wars, or whatever). There are only a handful of nations which have kept the same monetary unit for over 100 years.
I’m just repeating the arguments I laid out in “Do Banks Create Money from Thin Air?” – which you can find on this site by clicking on my name in the “Articles Written By” section.
I believe this reserve accounting tour is responsive to Guggzie’s observation that people pay their taxes with checks that use bank-money rather than any GUV-induced or issued ‘monies’.
The actual payment of taxes, from payer to Treasury by a check, merely ‘passes though’ the national payments system, a system presently operated by the Fed as the nation’s central bank, going directly into the TGA at Treasury, as you say “prior to their being spent by the Treasury”.
Treasury’s TTL accounts have been pretty much irrelevant since the crisis.
See Chart 2 here
And all modern reports put the overall RB balance for TTL accounts at or near zero, primarily because the Fed has fractured both required/excess reserve relationships with QE, and the targeting of the overnight rate with IOR, making the TGA account balance also irrelevant to OM operations.
Second, in this check-payment instance, the Treasury (government) does not ‘tax back’ its own liabilities, its tax receipts come directly from the checking account liabilities of the bank in whose checking account the taxpayer’s payment balance resides.
As such, the reason the Treasury(government) accepts a bank liability in payment of a tax obligation is simply because bank-credit serves the function of money in the national economy, including these private-public transactions. The government needs tax money in order to spend (as you say above) and the tender of bank-credit from taxpayer to Treasury satisfies FULLY the government’s requirements for increasing its TGA account balance, via the credit by the taxpayer’s payment amount “prior to their being spent by the Treasury” – completely regardless of what happens in the CB’s backroom operation of payments- and bank liability balance adjustments.
In that payment-transfer transaction, no liability of the Treasury(government) is extinguished. And nobody involved in the transaction (taxpayer or Treasury or ANYONE) cares what happens deep in the payments-system reserve accounting backroom – it is ALL automatic between the CB and the DI’s regardless of from where the payments came.
Finally, even in the stylized abstraction of the mechanics of reserve accounting presented, no ‘liability’ of the quasi-governmental CB (FRBNY) is extinguished in this transaction. Are the balance of total CB reserves outstanding changed whenever a taxpayer pays his or her tax bill by check? The affected reserve balances move among/between the paying and paid agents – and, though it may momentarily be removed from a money supply aggregate, none of it is extinguished by the Treasury’s receipt of a check. The total reserves are the same at the start and end of the banking day, as a result of this transaction.
Although I don’t accept that reserves are ‘government-issued liabilities’, that they are ‘drawn on when ever a bank-to-bank or bank-to-government payment is ordered by the depositor’ should be all that is needed to prove that the reserve balance, as a central bank ‘liability’, is transferred and not extinguished.
My issuing of six checks for payments today, regardless of the recipient, including the Treasury, does not change the total reserve balance in the payments/settlement system. Even if it did, it is of zero economic consequence.
Exactly what the takeaway is from the last para escapes me, except to agree that the use of ‘reserves to back the currency’ is an unnecessary and arcane throwback to the gold standard when banks held gold assets against their private banknote issuances.
Today’s reserve balances are not USG-issued ‘dollars’ of money. They are $US-denominated account balances, being required under this unnecessary and arcane system in order to settle the payments and liability balances between the banks. It is those same banks that actually create the $US-denominated bank credits that serves as our national money –the legal, universally-accepted means of exchange in the national economy of issue.
Again, in the present system, reserves have nothing ‘causal’ to do with either endogenous money creation or how to achieve the needed growth in the economy. We’re much better off ignoring them as a socio-economic factor, and perhaps abandoning them as an unnecessary anomaly in our national system of interbank settlement and payments.
Second, in this check-payment instance, the Treasury (government) does not ‘tax back’ its own liabilities, its tax receipts come directly from the checking account liabilities of the bank in whose checking account the taxpayer’s payment balance resides.
Woefully incomplete. When the taxpayer pays the tax, via check or electronically, he is issuing a payment order on that account. The bank thus has to pay the Treasury. The Treasury and the bank both have accounts at the Fed, and that’s how the payment is made: the appropriate balance is ultimately transferred from the bank’s account at the Fed to Treasury’s account at the Fed. The payment asset used to make that payment is a Fed-issued deposit liability, not a commercial bank liability.
The Treasury does initially accept a bank liability. If the taxpayer has the same bank as some Treasury TT&L account in the appropriate district, then that bank might simply transfer the balance for the depositors account to the TT&L account. If the TT&L account is at a different bank, then the first bank must make an interbank payment via a Fedwire transfer of reserves to the second bank.
But this is just the first stage of the process. For Treasury to spend, it has to get the balance in its general fund, and that requires either drawing on the TT&L accounts or taking in direct payments from taxpayers. Both of those processes require a transfer of bank reserve funds from the reserve account of the bank in question to the Treasury’s general fund. Banks have to settle with the Treasury. They don’t just pass on some meaningless “IOU to nowhere”, which is what a so-called commercial bank deposit “liability” would be to the Treasury if it were not a liability that was made good on with a Fed-issued payment asset.
We don’t live in a free-banking system. Bank liabilities don’t exists as some kind of free-floating bank issued fiat money, or a commodity money backed only by bank commodity assets or fixed assets. They are also not just some kind of conventional scrip or clam shell money in digital form. Bank liabilities are convertible by law, and on demand, into Fed-issued money. This isn’t just some kind of formal or symbolic arrangement. Commercial bank liabilities are actual liabilities: they are debts of the bank for something else on which the bank must continually make good. They make good on these debts routinely, in the course of everyday business either by redeeming the deposit balances into physical currency, one main form of Fed-issued money, or by obeying depositor payment orders for payment to other banks and their depositors, which requires a transfer of reserve balances, the other main form of Fed-issued money.
You and I accepts bank deposit liabilities as our money, and don’t care about the underlying structure of the monetary and payment system on which these deposit balances float. But that’s not what the Treasury accepts. It requires the return of its own liabilities. And since the Treasury won’t accept anything else, then you and I would be much less likely to accept an unbacked bank pseudo-liability too.
Perhaps we could live in a system in which banks issued their own forms of independent fiat money, and the US government simply behaved like any other income seeker in the economy, collecting whatever happened to be the conventional form of money via taxes and spending it. But that’s not the system we do live under. The US government and Fed took over the monetary system at the beginning of the century.
This by no means entails that the Fed can cause more commercial bank deposits to exist simply by supplying banks with more Fed-issued reserve account deposits. The direction of causation goes the other way: from borrower to commercial bank to Fed. The borrower has a demand for credit that the commercial bank satisfies by issuing a liability, a debt to the borrower, in exchange for the borrowers promissory note. The accumulation of additional deposit liabilities that the bank must redeem creates more commercial bank demand for the required payment and redemption asset: Fed-issued notes and reserve account liabilities. The Fed accommodates that demand in various ways.
This deep hierarchical structure of payment assets and liabilities for liabilities is a good part of the reason why commercial bank deposit balances are so universally accepted. If a bank was not legally bound to convert your deposits into Fed-issued currency on demand; and if it were not legally bound to make good on your payment orders by conveying payment assets to other banks which it can only obtain from the Fed, bank liabilities would float against one another and would frequently become junk.
I have dealt with this at length in a previous post.
Dan, thanks for the reply.
I had great trepidation about posting that lengthy comment. Glad at least one person rad it.
Or is the reply so woefully convoluted and overstated as to mean NOTHING to the real world economy in which we all live, work and spend, and of which we are concerned ?
We leave that to the eye of the beholder, and I will not go there (FURTHER !) in response
MMT is a monetary-economic construct that claims the ability to transform our present failed REAL political economy to its full-employment and non-inflationary potential, through its ‘new’ understanding of modern money.
Achieving GDP potential is what it is all about.
A lack of adequate circulating media – a.k.a. MONEY – is the macro-economic mark that must be overcome, and we need to deal with REAL ways to overcome that lack of purchasing power(demand) in the national economy. The rest is feel-good and meaningless hyperbole.
Stephanie most often correctly points out in her post-Post-Keynesian fashion that the overcoming of our present economic inertia can be readily accomplished, all as consistent with both functional-finance and sectoral-balance accounting. Again, correctly so.
But none of that has anything to do with the twin Achilles heels of MMT. One is the false construct that money IS debt. The other is in falsely claiming that at present the government is the monopoly issuer of the currency.
All of these convoluted and overstated backroom reserve ‘adds and drains’ among the CB and banking counterparties are part of MMT’s effort to show that the government is the monopoly issuer of the currency. Which, of course, it is not.
Taking the sectoral balance ‘license’ of joining the private central bank and its thousands of currency-issuing Member banks with the public U.S. Treasury for the purpose of sectoral-account balancing, and applying that ‘constructed’ accounting identity to the inner workings of the banking and monetary system of our real national economy, is what frustrates good people’s efforts to come to a proper understanding of how this ‘money’ thing really works.
In the real world of how things work, as I said, the private banks create the nation’s money. The Fed says so. The Treasury says so. Frank Newman says so. Every knowledgeable banker says so. And every non-MMT monetary economist to come down the pike since there was such a discipline says so. Even the MMT monetary economists embrace endogenous money creation by banks – as if that didn’t matter to the GUV-monopoly-issuer hyperbole.
How the banks create the nation’s money is as plain as the nose on my face. It’s a variation on Donavan’s theme.
“First there is no money, then, endogenously, there is”.
Money supply, bank balance sheet and national purchasing power advances.
You can blame it on me for having inadequate wage distributions so that I need the loan to pay expenses if it makes you feel good, but if I could create the purchasing power myself, then I wouldn’t go the bank to get it.
What most people care about is how to fix the economy by use of the ‘money’ system.
A basis for understanding the potential for doing so is contained in DelMar’s “The History of Monetary Systems”.
If you don’t first understand that the foundation of the sovereign nation’s national economy is its own monetary system, then you can come TO money via, credit, debt, barter or the nuances of its backing phenomena – a.k.a.’reserves’ in modern money parlance.
The advancement of our national economic objectives of achieving non-inflationary GDP-potential through the use of the monetary system has absolutely nothing to do with whatever system we have established for operating a payments and settlement system.
It’s not about who creates the ‘backing-media”, it’s about who creates the ‘exchange-media’, the purchasing power. That’s where the focus must be in solving our socio-economic ‘imbalances’.
You can spend as much time there as you like. And you may convince a whole bunch of people that the smartest kids in the room are those with a full comprehension of the nuances of the reserve ‘add-drain’ accounting of our settlement media.
But that will not change the political-economic reality that the government is NOT the monopoly issuer of the currency. What it might do, I fear, is mislead those interested that such is the case, the result of which will be the GREAT FAIL to empower the people to take back the money-issuing monopoly from the bankers, and begin to solve the real problems of the mal-distribution of our nation’s income and real wealth.
For the Money System Common.
As I said in the original post, there is some truth in the idea that banks “create” money. But without an understanding of how those commercial bank deposit liabilities that we use as money are connected to the broader legal and institutional structure of liabilities, assets and, obligations that constitute the nation’s payments system and taxation system, that slogan is quite incomplete and likely to be very misleading.
“Endogenous money” has been used to mean a multiplicity of things. One extremely simple-minded form of the doctrine is that the commercial banks effectively have their own printing presses by which they manufacture from thin air the very assets needed to meet their own liabilities. This is wildly off, and a bank director who operated under that woolly assumption would soon drive his institution into bankruptcy.
I have laid out the architecture of the system as carefully as I know how after researching it, without sloganeering, and giving due attention to both the private and public dimensions of the system. Some people don’t like to look at the details of this architecture because it interferes with the ideological slogans they would prefer to hang onto. If you think my account is factually wrong, then point out exactly where it goes wrong. Just saying “money is exogenous” doesn’t help.
I’m not interested in some MR vs. MMT ideological war. Lets just stick to the legal, operational and institutional facts.
Dan, thanks again.
I really do appreciate your obvious thoughtfulness.
A little bit ironic here, but not how you may think.
Sometimes when I comment on MR, a respondent will think I’m arguing in favor of MMT (which I do occasionally elsewhere in the PK vein on the role of governmental budgeting in the national economy).
And now here, the reverse, perhaps.
But even at MR, the “R” provides some defense against the other option that NEEDs to be on the table, that of real public (exogenous) money creation and issuance. (I’d like to think they’re warming to the idea.)
Given that, as a nation, we are REALLY operating an endogenous money system, the Realists are arguing about how that endogenous money system really works – correctly, I think.
That there are ‘fundamentals’ between these two ‘MM’schools provides some boundaries for several of the key issues around modern monetary economics.
The pity to me is that the focus on ‘these’ differences limits a lot of what ELSE needs to be said about ‘money’.
Not about financial assets.
Not about who owns what liabilities.
Not about what constitutes other legal obligations, related mostly to high finance.
And not about settlement media.
But about Money.
Again, avoiding the first order problem of ‘what is money’, what is important is who creates the nation’s money, and how.
Your ‘endogenous-monied’ banker is a fair example of what is not important.
While individual banks do create their own assets (LDs and PNs) , along with their own liabilities (deposit accounts), the error is not in thinking that the asset created by that bank is necessarily used to pay off the corresponding, or other, liabilities of that bank.
Liability management is a clear banking function, but it has nothing to do with money-creation and issuance.
The error is in not thinking that the PRIVATE banking system as a whole creates all the assets needed to pay off all of the liabilities of the banking system as a whole, interest excepted.
I’m not saying you think that.
I’m saying that this is the resulting and far more important political-economic reality.
Bank-credit serves the money function of exchange media- purchasing power in the national economy.
IT is legal to tender to satisfy any financial(monetary) obligation, by lender or borrower, to either the private or public sector.
As such, banks create the nation’s ‘money’.
Reserve accounting be damned.
This is ‘of the essence’ for anyone approaching the study of modern money through the prism of a national monetary system.
Once it has been thus established, that it IS the private bankers that create the nation’s money and thereby determine the actions of finance that further affect the economy, the question that must be understood to be properly answered is, ‘how do they do it?’.
As indicated, they do it by indebting (issuing debt-based money to) the people, households and businesses that need the money for sustenance and commerce, holding the borrower’s real assets against any failure to repay.
We call this endogenous money.
I call it part tragedy and part travesty, and as a sovereign citizen, quite insane.
And thus, unacceptable.
That’s how you become a monetary reformer.
I sleep well. But I spend a lot of time pondering the ‘why’ of MMT. Why does MMT, as an oft-described progressive-school view of the national economy, not only accept, but go to great lengths to defend, the proposition that its OK for private international bankers to issue this nation’s money?
With deference and apologies to my friends in the UK, that’s why we threw out the Brits bankers in the first place.
For the Money System Common.
While individual banks do create their own assets (LDs and PNs)
I have no idea what you are talking about. Assuming an PN is a promissory note, banks do not create the promissory notes they hold as assets. If a bank makes you a loan, they give you a deposit account with a balance in it. In exchange, you give them a promissory note for some amount that is somewhat greater than the amount in the bank account. The deposit balance is then the bank’s liability and your asset. The promissory note is your liability and the bank’s asset. That’s the nature of the exchange that occurred between you. It was an exchange of a debt for a debt. Clearly the bank did not create the promissory note. A bank cannot just print up a binding promissory note that says “I, Gerry Spaulding, owe the First Mechanics’ Bank one bazilliondy dollars.” Only you can issue that promissory note. The bank only accepts it once you have issued it. They have issued and you have accepted their IOU, and in return you have issued and they have accepted your IOU.
If you refuse to engage with the legal structure of debt, credit and obligation – of financial assets and liabilities – and assume that is all just some kind of meaningless ledger fluff in the background, then there is not much point in talking about it. You are committed to your ideology and don’t want facts to get in the way. You are determined to hold onto the completely mistaken view that banks create their own financial assets from whole cloth so that you can then go onto to complain “How in the world did we ever allow these evil banks to create our money from whole cloth?!!!”
The MMT focus on banks is mainly just about understanding how the current system actually works. One can’t begin to sensible proposals about reforms – big ones or little ones – without beginning with an understanding of how the present system operates. Unfortunately, the blogosphere is crawling with monetary cranks who refuse to let understanding get in the way of doctrine.
Dan, thanks again.
But not as appreciative this time. I do not understand the ‘crank’iness of your reply.
GS : “While individual banks do create their own assets (LDs and PNs)” – viz, loan documents and attached – or often included – promissory notes.
DK: “I have no idea what you are talking about.” ….”The promissory note is your liability and the bank’s asset”. “Clearly the bank did not create the promissory note.”
So, the LD and PN (again, often one document) is/are the bank’s asset(s). The bank owns them, we agree, housed in their vaults or traded at will. Why do you claim that the bank does not ‘create’ the promissory note (as part of the loan-making process)? What great understanding of how the money system works are you intending to convey here?
Speaking of the money system, when EVERY loan is made by a bank, its balance sheet increases, the borrower’s balance sheet increases, the money supply increases and the amount of purchasing power in the economy increases. That’s all because banks create ‘money’ by making loans.
For anyone unfamiliar with the rights of the bank to promulgate into existence (create) the bank’s LD and PN, as its condition FOR CREATING THE NATION”S MONEY, they should go to the bank with their own LD and PN and see if they walk out with any deposit in their account. I tried it once in the ‘80’s – in the most minimalist of fashions – was told the loan committee would need to review and approve any changes, and only with prior approval of their lawyers, if I cared to cover the extra expense, without any guarantees. So, it’s the bank’s document. It is created by the bank and for the bank. It becomes, upon execution and perfection, the asset of the bank.
That it is the borrower’s liability does not change anything. It is a stark, and I feel incontrovertible, fact that the banks create their own assets(LD/PN) when they create money by making loans.
This whole – who ‘creates’ the LD/PN bank asset — is just another example of silly and meaningless liability-ownership banter, which purports to promote an understanding of “ how the present (modern money) system operates”. It does no such thing.
Dan, please don’t think that I misunderstand debt and liabilities or that I am afraid to discuss the breadth of same. It is absolutely pointless to the matter of our needed social and economic reforms for anyone to hang out in these accounting weeds.
I should thank you for dismissing my ‘fantasy’ that it is the banks that create the nation’s money, which I did by citing full and unconditioned support for this idea from the Fed, Treasury, Newman, Turner (former chair of the UK’s Financial Services Authority) and every other knowledgeable banker in the world(but Not MR). Where is your proof and your legacy of supporters for the WAN that it is not the bankers who (endogenously) create this nation’s, and all nation’, money in our modern monetary economies?
As I said of the Austrian’s after Robert Murphy’s ‘love-in’ with Warren, MMTers also should get out more often.
Cranks are small tools that, when used effectively, create large, and sometimes powerful, revolutions.
So, the LD and PN (again, often one document) is/are the bank’s asset(s).
No! After the loan is made the promissory note is the bank’s asset and your liability. The deposit balance is the bank’s liability and your asset. They are not by any means both assets of the bank.
It takes two to tango. One party issues one IOU and the other party accepts it; and in exchange the second party issues another IOU and the first party accepts that one. The first party did not “create” both IOUs.
The fact that the two IOUs might be recorded and concluded on the same contractual document is irrelevant. That is the case with many contracts. If I promise to give you a bushel of wheat and you promise me five pounds of bacon in return, and we shake hands on it in front of a few witnesses, then you have a new liability in the form of a legal obligation to deliver wheat, and I have a new liability in the form of a legal obligation to deliver bacon. The liabilities are clearly different liabilities. But there is only one handshake.
Banks are rolled up by the Fed all the time due to failure to meet their capital requirements or out-and-out bankruptcy. Both these things occur when assets are insufficient relative to liabilities. On your account this process should never occur because banks create their own assets!
Commercial bank deposit balances are one form of liability that functions as money in our society: the kind of money you and I use to transact with each other. Central bank reserve account balances are another form of liability that functions as money in our society: the kind of money commercial banks use to transact with each other. The two forms of money are interrelated. When the commercial bank issues its liabilities to borrowers in the form of deposit account balances, in exchange for repayment obligations undertaken by those borrowers, the bank thereby puts itself on the hook. The borrower is going to issue payment orders on the account, and in order to make good on the payment orders, the bank will have to make payments from its reserve account.
If you don’t understand the accounting “weeds”, then you can’t understand how to reform anything without botching it up. It’s like trying to fix a car without understanding what is under the hood. Maybe don’t want to look under the hood because what is under there is a threat to your pre-determined ideological commitments.
This is responsive to Dan Kerick at 1:22 PM.
Gee, Dan, if I didn’t know better I might think that you are accusing me of being an ideologue. Careful when pointing fingers.
GS : “So, the LD and PN (again, often one document) is/are the bank’s asset(s).”
DanK : “No! After the loan is made the promissory note is the bank’s asset and your liability. The deposit balance is the bank’s liability and your asset. They are not by any means both assets of the bank.”
Either you are not understanding what I am writing as clearly as I can right there, or you need to get some advice in comprehension of how banking and money works. I’d like to think it’s the former.
I did NOT mention the ‘deposit balance’ as that IS the liability of the bank. The deposit balance represents the financial-proceeds that exist from the bank making the loan.
I mentioned the Loan Document. And I mentioned that the LD and PN are often either conjoined internally, or one as a referenced appendage of the other.
The Loan Document is where the conditions of ‘making’ the loan are expressed, where the borrower provides security to the bank, etc. – thus all the conditions for the transfer of the loan amount to the borrower are perfected FOR the borrower.
(Give me your third-born and I’ll give you the money!)
The Promissory Note is the document that conditions repayment of the loan. It lays out the fund-flow terms that make it possible for the bank to manage the liability that is being created in advancing these proceeds to the deposit account, which must clear the payments system, thus perfecting the conditions FOR the bank.
(If you PROMISE to pay back the money, I’ll give back No. 3.)
Thus, the LD and PN are both in the vault of and under free control of the bank, being their collected asset(s).
You repeat again that : “On your account this process (failure) should never occur because banks create their own assets!”
You see, Dan, it is the fact that banks decide to make a loan or not to make a loan that gives them the ‘power’ to create their own assets. Making a loan to a borrower in no way removes the bank’s liability management requirements – it merely provides the bank with principal and interest income with which to both manage their deposit-clearing payments, and pay those exorbitant salaries to the window-tellers. To proffer that creating an asset WHILE creating an equivalent liability, which a bank loan MUST do, renders insolvency impossible is again, either ridiculous or a complete misunderstanding.
Dan, I asked that you not think that I don’t understand reserve accounting weediness. My abhorrence for attending thereto derives from knowing that it has absolutely nothing to do with the real economy where we all live and work – in solving those economic problems by deficit-financing that Stephanie so well advances. That is the important stuff.
As far as looking under the hood goes, I provided links to the Fed’s Modern Money Mechanics publication, subtitled – A Workbook on Bank Reserves and Deposit Expansion.
According thereto, the banks create the money in the money system when they make loans – thereby rendering IMPOSSIBLE and quite silly that government(Treasury) is the monopoly currency issuer, and THAT is the salient issue.
I first read MMM about 40 years ago, spending time with my Dad and FR economists in comprehending its workings. I’ve done the hard work, Dan, spending years under the hood. I haven’t learned through some stylized ‘interpretations’ (by Mosler, Wray and others) of the works of Mitchell-Innes, Knapp, Lerner and Godley about how things work. Not that each of them do not have a lot of it right.
The problem with MMT’s accounting-centric view, ignoring the reality contained in so many publications as to give heterodox-economics a bad name – is that it provides the alibi that reform is not necessary, because, BY ACCOUNTING IDENTITY the government is the monopoly issuer of the currency. Which is just plain ludicrous.
You see, Dan, it is the fact that banks decide to make a loan or not to make a loan that gives them the ‘power’ to create their own assets.
You’re going in circles. The bank can’t make a loan unless a borrower accepts the offer, so the bank cannot all by itself “create” its assets. And the loan transaction creates something on the negative side of the ledger for the bank at the same time that it creates something positive. When the bank makes a loan it acquires something of positive value, an asset, in the form of a promissory note. At the same time, the bank incurs a cost, something of negative value, because it either (i) gives the depositor some cash, thus reducing its vault cash assets, or (ii) gives the depositor a deposit balance, which is a legally binding obligation to deliver cash or make a payment on demand.
You keep trying to move the conversation into other issues that I am not talking about. I am only talking about the structure of obligations and instruments in the system as it actually exists. I have discussed various options for reform – some modest, some fairly radical – in other places.
There are three forms of money here that need to be distinguished:
1. Commercial Bank Deposit Balances – These are liabilities of the commercial bank and assets of the depositor.
2. Federal Reserve Bank Deposit Balances (Reserves) – These are liabilities of the Federal Reserve and assets of the financial institution that holds the account.
3. Federal Reserve Notes – These are liabilities of the Federal reserve, and assets of whomever happens to hold one, which may be a commercial bank holding the notes in their vault, or an individual or non-banking firm holding the notes in a safe or a wallet.
These three forms of money are importantly related, because the way in which commercial banks make good on the obligations of Type 1 is to deliver assets of Type 2 and 3. Since the assets of the latter two types can only be issued by the Fed, the entire existence of the commercial banking system and the Type 1 form of money existing as deposit balances depends on the Fed’s decisions over how much, and to whom, and under what terms, it issues the money of Types 2 and 3.
To proffer that creating an asset WHILE creating an equivalent liability, which a bank loan MUST do, renders insolvency impossible is again, either ridiculous or a complete misunderstanding.
That’s not my misunderstanding, it’s yours – which follows from the silly repetition of the idea that banks “create their own assets”. They don’t. They contract to receive those assets, which they get in exchange for giving something up. If you either give somebody $10,000 or issue that person an IOU for $10,000 in exchange for an elephant to be delivered 6 months from now, you haven’t “created” an elephant. Similarly, if a bank either gives you $10,000 in cash or issues an IOU for $10,000 (which is what a deposit balance effectively is) in exchange for a promissory note for $10,500, then the bank hasn’t created an asset worth $10,500. It bought that asset.
Gerry, I’ve been reading you too, and you are saying things which I cannot understand as other than flatly, clearly, obviously wrong.
The error is in not thinking that the PRIVATE banking system as a whole creates all the assets needed to pay off all of the liabilities of the banking system as a whole, interest excepted.
I’m not saying you think that.
Well, I do, because the private banking system clearly cannot create “all the assets needed”. At the very least, banks may be taxed themselves. They cannot create the money or financial assets to do this themselves. While occasionally they prop up zombie banks, like right now, governments do not let banks be insolvent in terms of government money forever, which is what this would require. On the other hand, interest is not necessarily an exception. Things can be structured so that the banks can pay any amount of interest to themselves, to the private sector.
IT [Bank credit] is legal to tender to satisfy any financial(monetary) obligation, by lender or borrower, to either the private or public sector. Absolutely wrong. Payments to the federal government cannot be and are never finally settled by bank money / bank credit. Period. Even if the government lets the bank be a zombie and eat everybody else’s brains for a while, debts to the Feds don’t just disappear. Far from being “legal tender”, a financial crisis is when the banks themselves don’t accept other banks credit – and it is a pretty short memory that doesn’t remember this happening on an enormous scale quite recently. Sure, they can tender it, anybody can, but mere private banks can’t make anybody else accept their credit.
This ultimately has nothing to do with private or public or whatever, but is a tautology, as Dan points out too in other words. You cannot satisfy a debt of any sort to anybody else without tendering something that the anybody else has in some way (perhaps implicitly) agreed counts as satisfaction. People ain’t satisfied until they are satisfied. Debts, promises, obligations involve two entities, not one entity, a bank, with imaginary, magical powers.
Why does MMT, as an oft-described progressive-school view of the national economy, not only accept, but go to great lengths to defend, the proposition that its OK for private international bankers to issue this nation’s money? It doesn’t. Bill Mitchell, for example thinks that all banks should be publicly owned. I tend to this view, because they are just more bother than they are worth. But a “private”, 1950s boring regulated banking system is hardly different from this, and enormously more efficient than todays giant tapeworms. The proposition that they defend is the obvously true one that in reality, the banks are not in control. Why would they work so hard to corrupt the government if they had the real, active, legal control over national economies so many imagine they do?
I don’t understand this criticism. Warren’s “Proposals for the Banking System” are intended to make banking boring again. They’ve been out there for a while, and Randy has written a lot on this as well. http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html
Perhaps you are misunderstanding. I find your ‘flatly, clearly, obviously wrong’ to be a hint excessive. Just a hint. Would be much better to first cite what it is that you are correcting, and after doing so, say exactly what is wrong. Thanks.
One of the great misunderstanding I would like to see discussed and clarified in these money system discussions is the different effects that the banks and the banking system have on and within the economy as (1)the provider of the nation’s money, and (2) of being a business. The front-door versus the back-door stuff.
Banks thus have a unique “monetary-financial plus business” juxtaposition that is often confounding.
So, it is in discussing banks as the creators of the nation’s money, in creating THOSE assets and liabilities that serve effectively as the nation’s purchasing power media needed for ALL commerce, including the banks, those banks create all the assets needed to clear all the liabilities created as money by those banks.
As far as the nation’s money system is concerned, ALL of the nation’s money is created as a debt, that is, it is issued into circulation by creating a debt – a.k.a. bank-credit money. The only media that can clear a bank-created, money-lending obligation is more bank-issued media, c.e. .
So the principal payments on the loan ‘clear’ (some say extinguish) the debt-money created when the loan is made. Asset and liability “poof”. The banks do that.
On the other far-off hand, the bank profits primarily(?) on its interest rate spread, also fees. So the bank, as a business entity, has its own income and payments stream. While it is probably a contentious matter as to exactly how the bank manages the flows of these funds, (as you said, “Things can be structured so that the banks can pay any amount of interest to themselves, to the private sector.”) I make no claim in that regard. It is not in any way related to the monetary system function of creating the nation’s money of the bank. It is related to the pencils, paper clips and salaries, and, yes, the tax expenses that every business must contend with.
Perhaps you have misunderstood that I am making any claim in regard to the bank as a business entity. I am not, so I hope this is clear. Banks can either earn or borrow the funds needed to pay its taxes, just like the Restofus.
Please, Cal, ‘zombie banks’ may be the ‘currency du jour’ as knowledge among financial punditry, but it has no place in our discussion. Please leave it aside.
Cal : “Payments to the federal government cannot be and are never finally settled by bank money / bank credit. Period.”
Please notice that I said NOTHING about ‘final settlement’, which is a practice that happens between the CB and DIs in the settlement and payment system, being a bank-liability management issue, and not a monetary exchange matter.
So please be a little more careful with your “Absolutely wrong.”s. I said bank-credit was legal to tender in payment in order to satisfy any legal obligation to anyone, which is what the Restofus do in the real economy. I stand by that statement, and ask you to prove it even a little wrong.
And, in case you are not aware, there is a difference between that which is legal for tender in payment for settling any legal obligation, which I discussed, and “legal tender”, which I did not discuss. So please do not conflate these, as it can lead to misunderstandings.
Anything I have said about bank-credit money has nothing to do with (also please leave at home) “tautology” at all. It is all based on the legal aspects of money.
Your little missive about those special bank powers is wasted as anybody ‘owing’ a debt obligation to anyone else has already agreed to its ($US-denominated bank-credit) form of payment obligation. Again, this looks confusing to the real issues at hand. In case you forget – it’s about who creates the nation’s money, and how.
Yeah, I am familiar with those who say we should nationalize the banks, also Mr. Hummel’s very decent “single-depository’ approach. There is no need to nationalize the banks. Banking, as financial intermediation between informed borrowers and lenders, is properly a private sector function. It is money-creation that belongs to the government. At least Lincoln thought so.
““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.”
So, why is it again, that MMT stands with the private creation and destruction of the nation’s circulating media?
Warren’s banking system proposals are actually quite good, reducing the risk profile of the D-institutions. These actions reduce the depth of the pro-cyclicality of debt-based money(fractional-reserve banking) , but they are inadequate and still require too much regulation, supervision and support by the public. Putting the banking system on a full-reserve basis would accomplish more stability than Warren’s proposal.
His proposal to end Treasury issues is quite good, also supported by other Theorists. But the only way that his ‘deficit-spending-as excess reserves’ makes sense is continuation of private debt-based money.
It is Turner’s Overt Money Finance(OMF) proposal that turns that deficit balance into demand-inducing, income-stream purchasing power.
You know, the stuff that puts everybody back to work.
From Volcker’s Group of Thirty:
Stephanie Kelton: It is not clear whose criticism you mean. What I meant is that Mosler’s boring banks again would not be so different from state run enterprises. Because neither boring banks nor even today’s nonboring banks have the magical power so many seem to think they do, of absolute, formal, legal control of a nation’s (base) money. Just standard MMT, AFAIK .
Gerry:Would be much better to first cite what it is that you are correcting, and after doing so, say exactly what is wrong. Which is what I usually do and did, rather carefully. Using italics for what you said.
I said bank-credit was legal to tender in payment in order to satisfy any legal obligation to anyone, which is what the Restofus do in the real economy. I stand by that statement, and ask you to prove it even a little wrong.
If you aren’t talking about “legal tender”, when you say “legal to tender” then what are you talking about? You just said “which I discussed” – but I can’t find your explanation of a non-trivial meaning. Google seems unfamiliar with any specialized meaning of “legal to tender” It is legal for anyone to tender anything to anyone (well, not cocaine) for any debt. I addressed this point: “Sure, they can tender it, anybody can, but mere private banks can’t make anybody else accept their credit.” Yes, banks have a power that everybody else has, which is why it is not worth mentioning. The state (ordinarily, and in theory) does not accept mere bank credit as satisfaction. The zombie issue cannot be left aside, because what you are saying can only have meaning if the state lets a bank be insolvent forever, endlessly extend credit to it, never finally settle anything, because the bank doesn’t have the reserves or other assets to settle with – because it is a zombie bank.
The only media that can clear a bank-created, money-lending obligation is more bank-issued media, c.e. . Your meaning is ambiguous. Dollar bills, reserves, state money in our modern systems are always usable to clear bank-created, money-lending obligations of an initial debtor. They are legal tender in theory and in practice. The bank / banking system then becomes the creditor of the state, and this credit can only be used by the banking system as a whole to purchase other state credit, like bonds. In turn, this state credit is the only thing that the state accepts as ultimate settlement of debts owed to it by the banking system. So either you’re saying that dollar bills aren’t “media” that can clear an initial debtors debt, that banks don’t accept US dollars, which is wrong, or that you have to pay a debt to a bank with a credit from a bank, which is again tautologically true of anybody and any transaction and has nothing to do with banks.
It is money-creation that belongs to the government. Minsky was clear and correct -anybody can create money. The problem is getting someone to accept it. In essence, money creation cannot be restricted to the state. People are going to run up private debts, and once they are negotiable, they are money in some sphere. But in the modern world, the money banks and even more, the private sector create is inferior to the money that the state creates when it spends. The state right now has and exercises the power you think it should have. The banks right now do not have the power you think they have.
You frequently use “media” or “medium” or “medium of exchange”. As Mitchell-Innes said, there is no “medium of exchange”. Think in terms of “medium of exchange” and you will get everything backwards and wrong.
Trying to keep this constructive, if not brief.
GS earlier: “I said bank-credit was legal to tender in payment in order to satisfy any legal obligation to anyone, which is what the Restofus do in the real economy. I stand by that statement, and ask you to prove it even a little wrong.”
Cal : If you aren’t talking about “legal tender”, when you say “legal to tender” then what are you talking about? etc.
I note no effort is made to show that my statement is even a little wrong, but is obviously misunderstood.
The former ‘legal to tender’ is a private, contractual status recognized in monetary law– as in : this media form is legal to tender in payment for… as I said.
The latter ‘legal tender’ is a governmentally-conferred monetary status – having a legal status within the national currency. Only the national government can confer a ‘legal tender’ status on media that serves as money within its money-system statutes.
The difference does not make them an opposition to each other. Just different.
I was trying to avoid any claim that I was calling bank-credit money ‘legal tender’, recognizing that the government has not quite, specifically brought bank-credit to that status.
Many say that bank-credit money is ‘legal tender’ always with quotes or italics to differentiate between currency and other media that obtain statutory money identification. While I do not disagree with that interpretation, I also recognize there is a difference and, in a discussion such as this, the difference as to what we are talking about really should remain obvious. I’m not trying to confuse the discussion.
If a more clear understanding is necessary, I suggest a read of F.A. Mann’s The Legal Aspect of Money. Chapter II covers “The Monetary System, its Organization and Incidents and Chapter III., Monetary Obligations: Types and Payments.
Then, I guess, there’s “zombie banks”, apparently.
Calgacus’ statement –
“”The zombie issue cannot be left aside, because what you are saying can only have meaning if the state lets a bank be insolvent forever, endlessly extend credit to it, never finally settle anything, because the bank doesn’t have the reserves or other assets to settle with – because it is a zombie bank.””
I know an equation was made between something I said and “zombie banks” but I honestly have no idea what you are talking about.
This is one place where “what you are saying” needs clarification. I am saying a lot of things. I don’t recall saying anything about a bank not managing liabilities – I make it a focus.
Having assets to settle (manage) liabilities is a paramount consideration. I don’t support any monetary regulation that does not immediately render an insolvent bank obsolete.
I feel this might be one of those busying red-herring rabbit holes, but I can’t even figure out what it means. Maybe we could have a separate discussion somehow. I would be glad to do it.
GS earlier : The only media that can clear a bank-created, money-lending obligation is more bank-issued media, c.e. .
Cal : Your meaning is ambiguous. Dollar bills, reserves, state money in our modern systems are always usable to clear bank-created, money-lending obligations of an initial debtor. They are legal tender in theory and in practice…..
So, Cal, did you mean to say – what do I mean by that?
Because I am glad to explain. It is very consistent with Wray’s explanation about IOU’s. The (bank) issuer of private debt-based money must accept private debt-based monies in settlement of its IOU. As you said.
But importantly, in the debt-based private system of money, this paradigm is manifest in my statement – THEREFORE, as to the entirety of the debt-based monetary system, the banks MUST create all of the assets needed to cancel all of their liabilities. Because the banks create all the money.
And they do
And with regard to “reserves and other (non-currency) state money being usable to ‘clear’ obligations of an initial debtor, … Actually, no.
No initial debtor – borrower from a commercial bank – can settle its debt obligations to that bank with reserves. That is patently ridiculous. Borrowers, unless they are themselves banks, have no access to CB-issued reserves.
So, resort is had to ‘the dollar’ to prove me wrong, as if they were issued into circulation as exchange media by the government. They are not. They become ‘money’ when Member banks collateralize them and they become part of the money supply. That bank-credit exchanges in ‘form’ to currency-dollars does nothing about the math of money-creation.
So, yes, you can pay off a bank-debt with cash, but that cash is debt-based money.
GS earlier : It is money-creation that belongs to the government.
Cal : Minsky was clear and correct -anybody can create money. The problem is getting someone to accept it. In essence, money creation cannot be restricted to the state. People are going to run up private debts, and once they are negotiable, they are money in some sphere….
First: Funny, I thought that MMT posited that government WAS the monopoly-issuer of the nation’s currency. Yet, when I say what Lincoln said – that money-creation belongs to government – I get yet another selective, over-used Minsky quote.
Please have a good read of Minsky’s Working Paper No. 127 at the Levy Institute, written at a time when his ideas had much further advanced, finding the merit of Fisher’s ‘monetary authority issuing power’ an important reform to consider.
Second, your idea about ‘money’.
“People are going to run up private debts, and once they are negotiable, they are money in some sphere.”
In some Mitchell-Innes sphere perhaps. But they are not money; they are credit. Herein lies the folly of MMT’s construct that money is debt(credit).
When money is issued without debt and restricted to the state power, and any privateer of debt issues a loan of his own (state-issued) money, then he extends his purchasing power as a credit to another person, but that purchasing power (money) was in existence on the day the loan was made. Zero new money is created. It is merely the liquidity preference of the parties being interchanged.
Have a read of Kucinich’s HR 2990 to see how all of this might work.
Cal : You frequently use “media” or “medium” or “medium of exchange”. As Mitchell-Innes said, there is no “medium of exchange”. Think in terms of “medium of exchange” and you will get everything backwards and wrong.
Puhleeez, whenever any of Mitchell-Innes brilliance is hurled my way, I laugh. As I do here.
Again a read of F. A. Mann’s Chapter on the organization of the national monetary system will inform that it is ‘universally-accepted exchange media in the state of issue” that is required for any ‘media’ to have the legal status of money in that state.
For edification purposes.
Gerry, I will reply at the end in a new comment. This thread is too deep and hard to find already. I also have a comment down there (my earliest one actually), currently at the bottom of the page, directed to you, which you may not have seen.
“Bank liabilities are convertible by law, and on demand, into Fed-issued money. This isn’t just some kind of formal or symbolic arrangement. Commercial bank liabilities are actual liabilities: they are debts of the bank for something else on which the bank must continually make good.”
I would only add that banks are the recipients of government granted privileges that guarantee the on-demand convertibility of bank-credit into government money.
With rights & privileges come responsibilities & obligations and this case is no different.
Banks are obliged to follow the rules & regulations the government sets determining the conditions under which credit may be granted.
I would only add that banks are the recipients of government granted privileges that guarantee the on-demand convertibility of bank-credit into government money.
Right, but the banks have to pay for most of that money.
You mean RR?
I think they should be abolished.
You state that citizens need sovereign money to pay taxes. This isn’t really true — discounting the odd person who goes to the IRS office and pays in person in cash, citizens do not pay the IRS using sovereign money, they use some form of bank IOU. Any conversion to sovereign money is behind the scenes and invisible to ordinary people. Similarly, government payments are in the form of “bank IOUs” by the time they reach anybody in the real world. So the distinction between “sovereign money” and “bank IOUs” seems rather artificial.
In reality, money has value because people accept it in payment. If people were to lose confidence in the dollar and start trading using some other currency, the dollar wouldn’t have value even if it were required to pay taxes (I’ve seen this during foreign travel, US dollars are the preferred payment many places even though taxes must be paid in the local currency).
For inflation you bring out the same two most commonly known hyperinflation examples. Wikipedia lists about 50 cases of hyperinflation, and this doesn’t include other cases of high inflation which doesn’t spiral completely out of control. While most hyperinflation cases are associated with war or major social disruptions, others are not. Is there a comprehensive study showing that all of these are due to a decline in productivity? And show causation (e.g. declining productivity resulted in inflation, not the other way around?) I have seen research showing a strong correlation between growth in money supply and inflation, you seem to say this should not be the case. Of course, the first question for any of these is “what is money?” There are many definitions of money, from the conventional M0, M1, M2, etc. to the “total government debt” definition used by authors of this blog.
“they use some form of bank IOU”
The clue is in the word “IOU”.
What does “IOU” mean?
It means “I OWE YOU”.
When your bank gives the government its “IOU”, it is simply saying “I OWE YOU”.
The way it works is that the Treasury requires all debts owed to it to be paid in full, at some point.
So if your bank owes money to the Treasury on your behalf, it will have to pay that money in full, at some point.
So, to put it simply, when you pay your taxes, your bank first of all debits your account, and then promises to pay the Treasury the amount owed in full.
Then at some point in the near future your bank actually pays the Treasury the amount in full. It pays your taxes, on your behalf, with the reserve balances (money) it holds at the Fed.
Your bank simply acts as an intermediary between you and the Treasury.
I understand how the system works. But the argument here is based on how the US Reserve economy “really” works. I am merely pointing out how the system “really” works for the general public — we don’t see any difference between a “bank IOU” and “sovereign currency” (meaning cash and bank reserves). It’s all money, and no distinction is made between cash and bank deposits (beyond the “under the mattress” minority, but they generally have sense enough to hoard something with more value than pieces of paper).
That’s fine. But since the bank balance you use is in fact an IOU from the bank, then when you pay your taxes with it, the payment order you issue is a direction to your bank to pay the government. And banks do that by directing the Fed to transfer funds from their reserve accounts to Treasury accounts.
ThomasW – “we don’t see any difference between a “bank IOU” and “sovereign currency” (meaning cash and bank reserves). It’s all money”
Government money is the unit of account in which bank credit is denominated.
But a reserve account balance or a central bank note is not just a unit of account. Units of account are abstract standards of measurement. Notes and account balances are payment assets that are denominated in that unit of account, and can be used to make payments.
I think MMT writers talk about Germany and Zimbabwe because those are the two examples that hard money fans bring up again and again to prove that printing currency creates inflation. If there are other lesser known examples of hyperinflation that prove the point better it’s a mystery to me why they are never specifically mentioned.
On the tax front you need to look at the system as a whole not simply how it appears to the front-end user. At the end of the day it’s the banks’ reserve accounts that are debited and credited when taxes are paid whether by cash or bank cheque.
It’s more than hard money fans who argue inflation results from “printing money”.
Unfortunately the argument always goes between “too much money never causes inflation” (generally argued here) and “too much money will result in hyperinflation”. I’m not concerned with hyperinflation, which can be argued to need some major economic disruption (though some would say we just had one). I’d be more concerned about a persistent moderate level of inflation (the 5-20% a year variety).
As to your comment on the tax front, MMT defines the monetary system in order to meet its needs (merging the Fed and Treasury, defining treasury debt as money). These are done arguing “it’s how the system really works”. If money has value because it’s required to pay taxes, I would think you’d look at how the system really works from the taxpayer standpoint.
Who’s arguing that “too much money never causes inflation”? – a specific quotation would be good. You yourself raised the 50 hyperinflations listed on Wikipedia. Now you’re concerned about persistent inflation of as little as 5%. Way to move the goalposts. Hell of a long way between 5% and the 6.5 sextillion % estimated peak inflation rate of Zimbabwe in 2008.
“I would think you’d look at how the system really works from the taxpayer standpoint.” – This I can’t make any sense of. Why would you try to understand a larger system by looking at it only from a limited subjective point of view. That’s how we got the Earth standing still at the centre of the universe with everything else circling it. I mean it’s obvious right – the Earth doesn’t move.
Right, the MMT authors repeatedly insist that the only real constraint on spending is the inflation constraint.
Regarding “too much money never causes inflation”, I’ll start by quoting the post above:
“Since the very nature of a sovereign fiat monetary system is the issuing (or “printing”) of currency, it is illogical to suppose that this, in itself, creates inflation.”
That says “too much money doesn’t create inflation” to me.
Beyond this, NEP features repeated arguments for higher government deficits. If inflation is mentioned, it is generally discounted as not a problem in the United States today (likely true, less certain in the future). Alternately inflation concerns essentially become a footnote, as when Joe Firestone has argued that Social Security cannot go bankrupt (true if the government keeps creating money), slipping in a single sentence about the United States possibly having to adjust its use of resources or something to that effect. That simple sentence sweeps the issue under the carpet.
Randall Wray in Understanding Modern Money states that inflation cannot occur without full employment. He later adds a caveat “unless the tax system breaks down”. Oddly enough, he never mentions US inflation in the late 60s and 70s in the book.
I apologize if I seem to be moving the goalposts. The original post brought up “printing currency creates inflation” and immediately put this in the context of hyperinflation (which can be easily discounted). Unfortunately opponents of the arguments presented in NEP tend to also jump immediately to hyperinflation (if nothing else it makes a better sound bite). Much more likely is an extended moderate level of inflation such as the US experienced in the late 70s and early 80s. This level of inflation can have serious consequences for the average individual.
ThomasW – “Since the very nature of a sovereign fiat monetary system is the issuing (or “printing”) of currency, it is illogical to suppose that this, in itself, creates inflation.”
That says “too much money doesn’t create inflation” to me. ”
That is not the plain meaning of the text.
Rather, it asserts that the act of issuing currency itself does not necessitate inflation.
ThomasW – “Randall Wray in Understanding Modern Money states that inflation cannot occur without full employment.”
That is not the claim he makes, if I remember correctly.
Rather he states that the occurrence of monetary inflation is (almost) always restricted to conditions of full-employment & capacity utilization or upon the destruction of a nation’s productive capacity.
Vilhelmo – If “Understanding Modern Money” makes statements about capacity utilization or destruction of productive capacity with respect to inflation could you provide page references, I don’t remember anything of the sort.
Checking my notes on the book, Mr. Wray states that deficits will not cause inflation unless at full employment. The only exception he states is if the tax system breaks down. I don’t remember any sort of qualifications. I also don’t remember any statement about capacity utilization (beyond the impression that full capacity utilization can only exist when there is no unemployment). Again, if I missed them let me know where they are.
I think banks mislead people when the IOU’s they issue are called deposits. Maybe they should be called a line of credit (credit meaning value not debt).
“the sovereign government which issues the U.S. currency”
Would it be correct that the executive arm through the bureau of engraving creates the currency but has no power over it because it has to hand it over to the fed? Or is this simply a convention which the treasury can overrule?
“It is obvious, however, that two issues are at play and not simply one: (a) the amount of currency and (b) the number of goods and services”.
Question: What if the government spends 4 trillion dollars on building bombs and missiles, and blows them all up in some foreign land?
In this case the “goods and services” (bombs) produced no longer exist – they have been destroyed by war. But the money still exists!
So in this case there is an obvious imbalance created between the amount of money and the ‘number of goods and services’.
Explain that, please.
A teacher who receives $20,000 a month from federal gov’t had already extinguished her services for that time period. She gets to keep her cheque and the social benefit of services rendered takes the form educated students.
The $4 trillion used to build bombs and missiles detonated in foreign lands are now in the hands of private citizens. The social benefit of products acquired takes the form of enhanced national security and military power.
What’s the problem?
If I spend $5 on a cheeseburger, the cheeseburger disappears even faster than the bombs and missiles.
Philipe, Even though it is destructive to life and property, the US war making machine still pays people for the “services” it provides through “defense.” Jobs in weapons engineering and manufacturing are major components of the US economy. In fact, these fields constantly lobby the US government to increase or maintain war making ability (and local police forces are small adjuncts of the military through their swat teams). So in effect the government has paid for a wasteful and destructive “service”, and yet the logic is the same as paying people for the bridge the author uses in the example. We’d get way more value as a society if we invested in bridges, schools, green infrastructure, etc. than we do from war.
There is a minor error in this otherwise excellent analogy. If the sovereign has an infinite supply of dollars to begin with (see Warren Mosler’s comparison of points on a scoreboard), the sovereign still has an infinite supply remaining after spending $3 million of those dollars into the economy. Therefore, there is nothing on the government’s balance sheet which needs to be replaced — and the deficit on the spreadsheet is an irrelevancy.
Furthermore, per philippe, it simply doesn’t matter what the government spent money is used for — whether it is spent for repetitive productive activity or simply blown up in battle (repetitive productive activity is more socially and economically useful) the government still has an infinite amount of dollars available and the money spent is circulating in the economy unless it is removed by taxation. It still have to be concerned about not issuing more dollars than there are goods and services available to purchase, but that is easily controlled via taxation when necessary.
All one has to do is recognize the tens of trillions of dollars that the Treasury and the Fed have dumped into the banking system in order to preserve the perverse (non-productive) casino economy, with effectively no inflationary impact, to understand this point.
You make two excellent points John, the government/Fed support of the casino economy that is unrelated to the productive/consumption capacity of the nation, has virtually no social benefit to anyone except the bankers and their gambling customers. The other point about the bombs and Warren Mosler – as Warren said, the assets of a nation are all that it produces and keeps for itself, which includes imports, less all that it exports – and using bombs and military hardware overses to kill and maime other peole is akin to exporting them. Whilst taxation can, and is used as a tool to dampen the economy, it would not be necessary if the growing money supply were linked to the growing productive/consumption capacity of the nation. If this was an essential controlling factor in the money supply, inflation would not be a significant problem.
we would simply state that the bombs were consumed. just like food eaten or baby sitting services rendered. they just no longer exist as durable things after their consumption
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I grasp the concept of a sovereign currency issuer (such as the US and the UK), and their ability to credit bank accounts at will. I also understand that non-currency sovereign nations (such as Greece and Ireland) must first find the money before they can spend it. However, where I stumble is that it is observationally impossible to distinguish between the two.
For example, both the US and Ireland:
*Borrow money from the non-governement sector
*Observe as a central bank buys and sells government bonds
There isn’t an operation that differentiates the two – other than the entity that controls the central bank (which may hold a clue to the answer). Only the identity declares the identity true, i.e. “The US is sovereign in its currency because – the US is sovereign in its currency.” But none of the actual transactions differ between the two currency regimes.
What have I missed?
Purpose of issuing bonds is different. Currency user borrows to have money in his account in order to spend. Sovereign government issues bonds to allow its central bank hit its overnight interest rate target. Traditionally bonds offered interest earning alternative to holding mere non-interest earning reserve balances, though nowadays many central banks pay interest on reserves. Im sort of surprised that MMTers don’t talk about this more because paying interest on reserve balances negates whole rationale for issuing bonds.
Also, do sovereign governments borrow money? http://www.youtube.com/watch?v=4J0j5VwnD7I
The central bank in the Irish case is governed in Frankfurt by people the Irish government does not appoint. (The head of Ireland’s national central bank is only one member of the governing council.)
The central bank in the US case is governed by a Board of Governors, 100% of whom are appointed by the US President. The Federal Open Market Committee, which implements the board’s chose monetary policy, is majority composed of the Board of Governors. That board is itself subject to routine US Congress oversight.
If Ireland chooses to withdraw from the European monetary system and go back to running its own central bank and issuing its own currency, that would produce a fairly radical change in its economic system and its relationship with the rest of Europe.
If the US chooses to alter its monetary system and change the assignment of strategic and day-to-day responsibilities for running the nation’s monetary policy, all it would have to do is change some laws. The currency wouldn’t change, and the internal and external systems for transacting with that currency probably would change much either.
Sorry, I know I must have missed it, but please explain the ‘mathematical impossibilities’ that have here been declared a new doctrine.
I read the article twice through, without ever observing the impossible math.
I have a feeling it is not related to P < P+I .
It cannot possibly be related to the thousand cuts on the swine by the farmer – that is allegory, and no math there.
Is it hidden somewhere in ‘the most ingenious social tool ever invented’ – whatever that may be?
Is it hidden somewhere in the mythical ‘balance sheet’ example?
A balance sheet must balance the financial accounts of a single entity.
If you use T-accounting to show one entity’s(government) ‘assets’ on one side and another entity’s (consumers) ‘assets’ on the other side, you do not have a balance sheet, you have a flow of funds.
A leaning-post for MMT is the failure of the monetarily illiterate to understand, and therefore confuse, stocks and flows. From where I type, you are apparently here.
Is it hidden in the political-economic conundrum questioning the government’s massive borrowings in the face of its apparent powers to create money, with which the article ends? Because, quite frankly, that is something that ought to be addressed.
Again, please simply explain the ‘mathematical impossibilities’ to which the title alludes.
What exactly did you have in mind there?
Though the tone of your questions sound derisive, I’ll take them at face value and venture a response. The “mathematical impossibilities” implied in the essay refer to the calculations that attempt to pay for the things we need as a prosperous nation by using “taxpayer’s money.” As has been pointed out by innumerable politicians and pundits, the federal government can’t collect enough tax dollars to cover the spending which, as a collective democracy, we’ve already asked it to cover and which, looking towards our future well-being, we’d like to see it cover. The present political turmoil derives explicitly from this “impossibility.” MMT and the theory of sovereign fiat money shows us that this is, in fact, a false dilemma. It is based on a fundamental misunderstanding of how fiat money is created, driven into the economy, and then destroyed through tax collection.
So far as banks “creating” money, I suspect much of the confusion stems from the fact that if a banker makes a loan he causes the creation of “bank money” which, in turn, is convertible to sovereign fiat money depending on the kinds of transactions the customer subsequently engages in. It is not the bank, however, who “creates” the sovereign fiat money that enables this conversion to occur. My understanding is that at the end of each day the FED “issues” (and loans out) whatever amount of fiat money is necessary for all the checks in the country to clear and all the reserve accounts to balance. On a given day, the FED doesn’t say, “Uh-oh! We don’t have enough dollars!”
JD, thanks a bunch.
And, apologize if any derision was beheld by my questions. It’s just that what you have written here DOES explain your thinking on something as stark as a ‘doctrine of impossible math’, whereas the article left me wondering what exactly that doctrine was, and I didn’t want to assume anything in reply.
Using your words here – this ‘impossibility’ is really about the fact that “”the federal government can’t collect enough tax dollars to cover the spending which, as a collective democracy, we’ve already asked it to cover and which, looking towards our future well-being, we’d like to see it cover.””
I’m not sure that this is a mathematical impossibility, as much as a political one, but that mathematical problem is not impossible to overcome in one of two ways: either the sovereign government borrowing the same (deficit) amount of money from the private sector who have the money, or the sovereign government itself issuing the same amount of new fiat money into the private sector by spending.
I think that what you’re really talking about is simply the sovereign government’s self-imposed budgeting constraint. It is real, and law, as the government (Treasury) cannot spend what it does not have. Legally.
The present political turmoil is much more reflective of the results of that constraint, given that a debt-ceiling statute can limit the government’s borrowing option, which statute ought to be immediately withdrawn.
However, in reality, the present political turmoil is fully reflective of the fact that the sovereign government has given up(delegated) its power to autonomously and independently issue the nation’s money to the private banking system, through the bankers’ debt-issuing, endogenous creation of the nation’s money.
Absent such a construct, the government would fill the deficit between spending and taxation with what the former chairman of the UK’s Financial Services Authority Adair Turner calls Overt Money Finance(OMF). From Volcker’s Group of Thirty :
I know the MMT construct about the borrower creating the nation’s money through accounting “logic”. But the Federal Reserve, the nation’s CB, explains clearly in its Modern Money Mechanics handbook that the banks DO, in fact, create the nation’s money, how it is done and the real purposes and mechanics of CB reserves.
Moreover, a read of Frank E. Newman’s “Freedom From National Debt” touted on these NEP pages as supporting the MMT ideas about the beauty of the national debt, states a minimum of seven times that the private banks DO create the nation’s money.
As CEO and high executive of global TBTF institutions for 35 years(plus two years collecting a government salary at Treasury), and therefore the DUDE who was doing the deed, he ought to know how money is created.
By the way, ‘bank-credit’ money is not ‘convertible’ into sovereign fiat money, except insofar as all money is fungible. Bank credit money serves the function of sovereign fiat money directly as a result of the charters given under the Act. There is no need to convert anything. Bank-credit money serves directly as the LEGAL, universally-accepted media of exchange in the national economy in which it is issued.
Banks directly create purchasing power from their money issuance(rental). That’s why they do it. What happens in the accounting world is not so important as what happens in the real world.
Thanks and apologies again, JD.
Don’t taxes serve another purpose? Taxes weren’t created for wealth redistribution but the way taxes affect income streams at various levels would seem to accomplish some redistribution of wealth. When taxes were ‘progressive’ wealth shifted from the richer to the poorer. And as the tax rates have tilted the other direction they’ve had the opposite effect. The portion of the National productive capacity that the government commandeers through taxes, assuming more consumption is needed to balance aggregate demand with aggregate supply can again serve as a means for wealth distribution through direct grants of money or through services beneficial to the public. Expenditures for public benefit are again subject to ’tilt’. Government employment can provide incomes for people that might otherwise be unemployed. When tax monies are used to contract out for goods or services, this can favor the poorer if wages are strong and it can also favor the richer when commercial contracts result in high profits to the business that garner them. We seem to be living in an era when all the tilt is slanted against the little guy.
There is likely nothing more important today than the need for a wholesale understanding of the creation and issuance of money in the national political economy.
Instead of that basic understanding, another shoe-horning transformation of reserve-accounting nuance into governmental money-issuance rises to the fore.
But that needed understanding about money creation and issuance has nothing to do with reserve accounting.
The central bank established the reserve accounting system by which to clear payments among the nation’s depository institutions. This has nothing to do with who, in reality, issues the ‘money’. Reserves are simply $US-unit-of-account denominated CB settlement media.
Some say that CB reserves ‘legitimate’, or validate, bank-credit money. This is true as far as ‘reserves’ being necessary for ultimately settling the ‘money’-issuing bank’s liabilities that are created when banks also create new purchasing power. But the CB’s use of reserves as validation media of the settlement system for bank loans is a long way from that use of reserves proving that the government, therefore, ipso facto, creates the money used in the national economy. This cannot be proven, as it is not true.
Interestingly, the ‘begin ‘here’’ link takes the reader to Dr. Stephanie Kelton’s Homepage where a click on the ‘blog’ link takes us to Stephanie’s blurb about Frank N. Newman , the “Treasury official” who supports MMT, advocating a read of Warren’s 7DIF book.
Frank Newman has been CEO, President and high executive in many of the Mega-(TBTF) global Bankcorporations for over 35 years, while serving 2 years at Treasury getting deregulation done. He is a banker and not a government official. His book, “Freedom From National Debt’ is very clear to assert numerous times that it is the banks that create all of the nation’s money – as it is very well true that they do.
Gerry:His book, “Freedom From National Debt’ is very clear to assert numerous times that it is the banks that create all of the nation’s money – as it is very well true that they do.
I doubt that. “All” is wrong. Do banks print dollar bills? Even if one wants to wrongly dissociate the Fed from the Government to put FR notes and reserves in the “banks” column, do banks mint coins?
Look at Wray’s last couple economonitor columns and his comments there. MMTers perfectly well understand the idea you are getting at of “banks creating all the nation’s money” – that’s what M1 M2 etc are.
But the base money, direct obligations of the government, most certainly is created by the Federal Government. Who else can create obligations, debts of the Federal Government but the Federal Government itself? That these obligations, like reserves are at the base of the pyramid, are used for penultimate settlement in the US economy is a sociological fact.
Bank money is what people use day to day, most of the time. But that’s not everything that is happening underneath. Even if it is just as little thought of in ordinary life, what happens underneath is as important as the boring 4000 miles of rock you are standing on. And the earth was a nice round sphere with 4000 mile radius, even if people thought it was flat. Money always was and always will be a creditary relationship, and people’s behavior will always be guided by that fact beneath their feet, even if they consciously delude themselves it is a thing, a commodity.
Many of the problems are terminological, semantic. This comment is very theoretical, but I think that is where your disagreements with MMT lie. I hope you understand that what you call “debt-free money” – greenbacks, US notes are a type of what MMT, Mitchell-Innes, FDR call “credit”=”debt”. The question is whose usage makes more sense, is more consistent with standard usage, standard meanings not interminable soporific disputations about whether money “really is” credit/debt or not, when the opponents are simply using different definitions of words. (I’m on the MMT, Mitchell-Innes, FDR side).
Related point: either the sovereign government borrowing the same (deficit) amount of money from the private sector who have the money . In MMT, in reality imho, the transaction you are calling “sovereign government borrowing” simply is not “borrowing”, as that word is used in any other context. It is an “asset swap”. The government merely offers the public the choice between two of the government’s liabilities. Which is nothing like borrowing from a bank to get a mortgage, where the individual trades one of his liabilities for one of the bank’s.
The less terminological point, your position on which is not clear to me, is what sort of critter you think “money” is. The MMT / Institutional /Circuitiste / Creditary /Chartalist /Keynes view is that money is “nothing but” a social relationship. Keep to that, (although many MMT fans find that difficult!) and everything in MMT is crystal clear, indisputable. But the opposed view is that money is a “thing”, like a rock, an object, a “medium of exchange”. In other words, what is “money” more like, “a marriage” or “a wedding ring”?
Easy point first: ‘legal to tender’ OK, I agree that what you are saying is true – it is not even a little wrong – if you mean “legal to tender”. But it appears true about everyone and everything and to have nothing to do with banks and bank credit. What on earth is NOT “legal to tender”? – all I can think of are cocaine, slaves, stolen merchandise, counterfeit money etc. Something else being not legal seems to me to be just an eccentricity of the law. Do you mean it using it won’t incur sales taxes or the like? Otherwise it seems to me to be a nearly useless concept, not really relevant to the abstract level where I contend MMT critics make major conceptual errors.
The general point, which goes for most everything that I am disputing with you is that what you are saying is either clearly false understood one way, or clearly true – but of every transaction, between anyone. One level of analysis is used for the state; a different one for banks. Most particularly, privileges you say are restricted to banks are true even more of the state – which is the paramount, the greatest creator of money. Bad theories that deny this do so by using words one way for some actors, like banks, but different ways for the state. If you use words and the level of analysis consistently, the incredibly simple theory called MMT always proves trivially correct. If you are still listening, or even if you are not, I will post a different comment on each point down here, by and by. Arguing with AMI people and with Dan Kervick, who has his own (imho wrong-headed) variant of MMT always helps me understand and explain the real thing a bit better.