By L. Randall Wray

My previous blog sparked a lot of discussion, especially over at Naked Capitalism. I do pity Yves Smith! There’s enough nonsense in the commentary to populate a large nation.

As I have argued, it is very hard to figure out what the debt-free money folks want as they are confused on the accounting, vague on the terminology, and rarely provide details on their proposal. However, a reader has directed me to a fine published article that has mostly got the accounting right, lays out a detailed proposal, and contrasts the proposal against alternatives.

I’ll get to that in a minute. First let me quickly respond to comments on the first piece. I’ll limit my response to two complaints that have been made about Part One of this series.

1. Responses to comments on Part 1

The biggest complaint was that I did not take advantage of a teachable moment that the radio program producer had offered for me to explain MMT to the hosts and audience. Instead I just made fun of debt-free money supporters and insulted the producer.

The critics fail to notice that the producer wrote to me to come on the show to talk about debt-free money. There was no invitation to discuss MMT. Producers can and usually do perform a “background” before inviting a guest. I suppose the producer found that I had written pieces AGAINST debt-free money but still wanted me to discuss the topic. I honestly told him I do not understand what the advocates are proposing and hence would not be a good guest. I introduced the banana money as my best (humorous) guess at what they want–which was in the last piece I had written criticizing the debt-free money proposal. The banana is a stand-in for all forms of debt-free money, which must take a “real” form rather than a “financial” form—for reasons I discussed and will expand upon later. Rather than being offended or deterred the producer ran with the idea and created an entire alternative history of the USA based on banana money. I continued to try to get out of going on his show to discuss a topic I do not find appealing, but eventually agreed to come on to say that they can achieve everything they want through ZIRP, which I indicated would take a minute. At that point he invited me to talk about MMT. I was not offensive and he took no offense. Of that I am sure. The exchange was all in good humor. We had a number of cordial exchanges after that. And I assure you every word I posted was in the exchange; I only deleted identifiers.

I see nothing unfair about the banana analogy. Many of the debt-free proponents refer to money backed by “real wealth”, goods and services, precious metals. They fantasize about the good old medieval days, when gold was money and men hacked up dragons as they rescued damstrels in distress—as depicted, I think, on-screen in Game of Thrones (if I’ve mischaracterized the program it is unintentional as I stopped watching TV when they cancelled the double-header line-up of Melrose Place and Ally McBeal). Me? If I were to go back to a utopian past, it would be the primitive communism of tribal society, as depicted in The Gods Must Be Crazy, before the Coke Bottle Money was dropped from Friedmanian helicopters, destroying an idyllic way of life.

The second most popular complaint was about my use of the word “debt”. But the commentators apparently did not notice that the topic of “debt-free money” was introduced by the producer. He used the term, just as all other debt-free money types do, apparently seeing our current money as debt money.  I’m agnostic. My point is that we use double entry book-keeping, and if “money” (however defined) is someone’s financial asset then it is another’s liability. Call it a “credit” (from the point of the view of one holding it), or a “debit” from the other’s point of view; or a debt; or a liability. What debt-free monetary cranks insist is that the money they want the government to create will show up only on the holder’s balance sheet as an asset, with no liability on anyone’s balance sheet. That is what I object to. Some argue that the Treasury, itself, treats coins as “equity”, not “debt”. Fine. Equity is on the liability of the balance sheet. Twist and mangle the language all you want. But at least do the balance sheets correctly. More on that below.

Calgacus had an excellent response on a blog site explaining the use of the term debt. I hope she/he will not mind if I provide a long quote. This is extremely useful not only for the clear explication of the term, but also for links to early expositions of the views now taken by MMT. In particular, Calgacus responds to comments about my use of the cloakroom token (taken directly from G.F. Knapp) as an example of a debt token—a commentator argued that this is not a debt because the cloakroom doesn’t own the coat. And to the claim that coins issued by government are not debts because the taxpayer is the one with debts, not the government that issues the coin. And to the claim that bank deposits are not debts of the bank, because it is the borrower who owes the bank. Here’s Calgacus’s argument:

“Debt” is a word in English – and in every human language. Even nonhuman social animals have some grasp of it. Wray uses the word in the standard very general dictionary meaning of a social, moral obligation. Here is the full definition from the #1 on google online dictionary:

1. something that is owed or that one is bound to pay to or perform for another:
2. a liability or obligation to pay or render something
3. the condition of being under such an obligation:
4. Theology. an offense requiring reparation; a sin; a trespass.

Basically, 4 ways of saying the same thing.

” A cloakroom is not issuing a debt-token.”

It most certainly is. To say it is not is to insist on an alternative meaning of “debt” and to avoid the standard general dictionary meaning, which is Wray’s usage. Alternative meanings involving money & interest are obviously not applicable. Money is credit/debt and obviously this view would be useless & unintelligible gibberish if the latter were defined in terms of the former.

“Nobody will accept this token for payment.” The cloakroom attendant will. Therefore it is a debt, a social, moral obligation, relationship between two moral agents. That is the point.

” the macro-economic substance of the act of issuing the coin is very different from what banks do.”

No, it is precisely the same thing, no more different than the US issuing dollars & the UK issuing pounds. Minsky’s “anybody can create money ….”

“By issuing the coin, the government allows a provider of goods or services to bring forward the settlement of their pre-existing tax debt to the government.”

This is not at all what happens. It could not happen that way, the way the rest of the story proceeds. Issuing of a debt in one direction must precede the settlement, the cancellation of the debt, which can only occur by a debt going the other way.

Here the coin recipient pays the coin to settle his subsequent, not pre-existing taxation. I can’t really understand what is being said here in a coherent way. If the coin is considered a receipt, it is a receipt for taxation-in-kind, taxation in real terms, like a government employee being “taxed” of his labor and given government currency in return. Taxation in kind or taxation in real terms is another word for government spending, which is the opposite of financial taxation – which is what “taxation” means nowadays. In any case, in any system, the coinholder of course relinquishes it, rather than merely keeping & showing it – that’s more like how titles of nobility operated, not coins!

“There is no pre-existing debt of the customer taking the loan. By giving the loan, the bank creates new debt (for which interest is to be paid, whether or not it is put to productive uses).” More errors, at least on what seems to me to be the plain meaning.

As above, there was no pre-existing debt in the government / tax case and the bank doesn’t create the new debt of the customer to the bank, the customer does. There are two credit-debt pairs being created in bank loans, but only one in government spending. That’s a difference between monetary and fiscal.

Basically, this is just Mitchell-Innes & his great predecessors. But only the MMTers – or circuitist / creditary economists like Ingham, Gardiner etc who contributed to the book on Alfred Mitchell Innes great papers seem to get things right. It is all so simple, so obvious, so natural, so easy, so entirely trivial…. That everyone makes a complete mess of it, by scorning the “trivial” chore of getting the trivialities right!

Thanks, Calgacus. Now let’s turn to a concrete proposal.

The Debt-free Stimulus Proposal

It is very difficult to get a handle on the debt-free money proposal because it is hard to find one with any details. However, here is an excellent analysis: “Stimulus Without Debt” by Laurence Seidman, Challenge, vol. 56, no. 6, November/December 2013, pp. 38–59. Now, I cannot be certain whether this is what most debt-free money proponents have in mind. However, Seidman lays out a concrete proposal and contrasts it with alternative methods of stimulus. He even compares his proposal with that of Adair Turner, Chairman of Britain’s Financial Services Authority, who has received a lot of attention for his “overt money financing” of government spending. I know Turner and have great respect for him as a serious critic of our runaway financial system. Many of the debt-free money proponents who have written to me have recommend Turner’s work. Hence, Seidman’s contrast of Turner’s proposal with his own is useful. Finally, as I said earlier, Seidman seems to have a good understanding of accounting.

I am going to use long quotes from Seidman’s piece as I would guess that most readers of this blog have not read the original. I’ll provide commentary along the way. For the most part, I find his analysis impeccable.

First, let’s look at Professor Seidman’s stimulus proposal. He is rightly concerned that fear of budget deficits and government debt hamper the ability to mount sufficient fiscal stimulus to counter a deep downturn, such as the one that followed the Global Financial Crisis. So what can we do next time to finance a stimulus without running up debt? In his example, he presumes the stimulus will take the form of a generous tax rebate for households, much like the one that President Bush pushed through earlier. I won’t go through the evidence he presents that this is an effective way to get income into the hands of consumers who will spend it, thereby stimulating demand. We’ll only concern ourselves with the question, “how can the government finance this without debt”. So here’s the proposal:

the stimulus-without-debt plan proposed here—a particular kind of monetary stimulus—is “a dual-mandate transfer” from the Federal Reserve (the Fed) to the U.S. Treasury. In a severe recession the Federal Reserve Open Market Committee (FOMC) would give a transfer to the Treasury in an amount decided by the FOMC that, in its judgment, would promote the Federal Reserve’s dual legislative mandate—enacted years ago by Congress—of promoting both high       employment and low inflation. It must be emphasized that the Federal Reserve would not be buying bonds from the Treasury; the Treasury would not be incurring debt—it would be receiving a transfer.

How does this differ from normal procedure? Seidman explains:

Standard fiscal-monetary stimulus works this way. To raise aggregate demand for goods and services through fiscal stimulus, Congress cuts taxes or raises government spending (transfers or purchases), and the Treasury borrows to finance the resulting deficit by selling U.S. Treasury bonds to the public, thereby increasing government (Treasury) debt held by the public. The Fed   then buys an equal amount of Treasury bonds from the public in the “open market,” so that the Fed, not the public, ends up holding the increase in Treasury debt. A crucial point is that the Fed’s action does not reverse the increase in Treasury debt: official Treasury debt increases by an amount equal to the deficit that accompanies the fiscal stimulus, whether or not the Fed buys Treasury bonds from the public. Standard fiscal-monetary stimulus entails “monetizing the debt,” not preventing debt.

The Fed is providing a “transfer” to the Treasury, not a “loan”. How does this affect the Fed’s balance sheet?

If the Fed buys a Treasury bond in the open market, it obtains an asset, but if the Fed gives the Treasury a transfer, it obtains no asset. According to conventional accounting, the Fed’s “net worth” or “capital”—defined as assets minus liabilities—would therefore be lower if the Fed gives the Treasury a transfer instead of buying Treasury bonds.

The Obama fiscal stimulus during the GFC amounted to about $400 billion a year for two years. Federal Government debt was increased by approximately the same amount, $800 billion. If the stimulus had been done through a Fed transfer, the Treasury’s debt would not have been increased. Instead, the Fed’s capital would have been reduced by $800 billion—equal to its transfer. On the Fed’s balance sheet, its liability to the Treasury (deposits) would rise by $400B each year, and its equity would fall by $400B each year. As the Treasury’s checks were deposited in household bank accounts, the Fed would debit the Treasury’s deposits and credit bank reserves by the same amount. As households drew down their deposits buying consumer goods, the deposits would shift from bank-to-bank and the Fed would shift reserves from bank-to-bank. (The reserves would remain at the higher level until either cash is withdrawn from the banks, or banks repay loans to the Fed. Note that the nonbank public decides how much cash to hold, which determines the ratio of reserves/Fed reserve notes.)

Why does a Fed transfer to the Treasury reduce the Fed’s net worth? Note that under normal operations, the Fed either lends (reserves to banks) or buys assets (government bonds from Treasury or from banks, or, recently, purchases of MBSs). Its assets go up by the same amount as its liabilities. If the assets earn more than the Fed pays out on its liabilities (reserves; note that Federal Reserve Notes are also Fed liabilities but don’t pay interest), then its net worth rises. The Fed distributes its profits to the Treasury and to its shareholding banks. Transfers, by contrast, increase reserve liabilities without increasing assets; the difference has to be made up by reducing equity. This reduces equity as well as profits since its earnings on assets have not changed but it pays more interest on reserves (unless for some reason the demand for Federal Reserve notes rises by an amount equal to the transfer—which is unlikely).  Lower profits mean the Fed distributes less profits to the Treasury, reducing Treasury’s revenue.

(If the total stimulus amounted to $800B and the interest rate on reserves were 1% then the Fed would have $8 billion less profits to turn over to the Treasury, all else equal. To avoid adding more Treasury debt, the Fed would have to transfer more. This is not a major consideration, but should be recognized: reducing Fed profits reduces Treasury “revenue”.)

If the Fed “transferred” more than its total net worth in its stimulus program, it would have negative equity.

Should we care about the Fed’s balance sheet? On one hand, any bank can operate with negative equity—many have done so and probably some of the biggest ones currently are right now, on rigorous assessment of the values of their assets and liabilities. Banking supervisors often adopt the “extend and pretend” approach—extending the life of insolvent banks while pretending they have positive net worth. We can certainly do that with our central bank, and the justification is probably far stronger. With insolvent banks, the biggest danger is that the incentives are aligned to “bet the bank”—take the riskiest bets imaginable, gambling that some might pay off while the downside is that the already insolvent bank fails. Shareholders have already lost, so who cares. But if the Fed is driven into insolvency while bailing-out the economy in a downturn, that can easily be justified as reasonable public policy.

As such, Professor Seidman recommends changing the way we do accounting:

For a household, firm, or governmental unit, it is important to worry about whether its “liabilities” (what it owes others) listed on its conventional accounting balance sheet are greater than its “assets” (what it owns or is owed by others). But there are at least two problems with using a conventional accounting balance sheet to evaluate the Federal Reserve in the same way it is used to evaluate a firm, household, or other governmental unit. First, Congress has given the Fed the power to create money by writing checks and standing ready to print and provide cash (Federal Reserve notes), a power not available to a firm, household, or other government  unit. Second, one of the large liabilities listed on the Fed’s conventional balance sheet—Federal Reserve notes—differs in an important way from the liabilities listed on the balance sheets of firms, households, and other governmental units…the power to create money surely gives the Fed an important tool for meeting its financial obligations not available to firms, households, and government units. A conventional accounting balance sheet alone is therefore inadequate to evaluate the financial position of the Fed.

Second, on the Fed’s conventional accounting balance sheet, the quantity of Federal Reserve notes outstanding is listed as a liability, and it is usually the largest liability on the Fed’s balance sheet. This made sense historically when the Fed promised to pay gold to holders of Federal Reserve notes if the holders requested gold. But this rationale no longer holds because the Fed no longer promises to pay holders of Federal Reserve notes gold or anything else. Thus, it is no longer obvious that Federal Reserve notes are a genuine liability of the Fed—or even if they are still a liability, whether they are as burdensome as other liabilities.

Despite these two problems with applying a conventional accounting balance sheet to the Fed, there will no doubt be concern about any plan that reduces the conventionally measured net worth or capital of the Fed. Advocates of the stimulus-without-debt plan should emphasize these two problems, object to the use of the conventional Fed balance sheet to pass judgment on the stimulus-without-debt plan, and call for new and better ways to evaluate the financial position of the Fed.

OK, accounting is a human invention, although it follows a logic. Congress can, if it chooses, throw logic to the wind and create special accounting for the Fed. It certainly wouldn’t be the first time a government has applied special accounting to itself—it is common in so-called Banana Republics (and maybe appropriate for banana monies!).

But would the Fed’s debt-free stimulus be legal? Seidman discusses the separation of powers that our founders thought important, with the separation further delineated by the creation of the Fed itself in 1913. Seidman downplays the power to create money given by the Constitution to Congress, focusing instead on the apparent intention of Congress to bestow that right on the Fed—something he believes Congress did in order to constrain itself from simply printing up money and causing inflation:

It was therefore a wise and crucial step for Congress, a century ago, to establish an independent central bank that would control the creation of money. Congress thereby gave up the power to cover its deficit by creating money. This has provided an important check against Congress’s setting government spending well above taxes in a normal economy when no stimulus is warranted, creating money to cover the difference, and thereby unilaterally injecting a combined fiscal-monetary stimulus that overheats the economy and generates inflation.

I would guess that this is the view of most economists and I’ll leave it up to our scholars of US legal history to comment (I find it to be a dubious interpretation). I’m also going to leave to the side the typical belief of economists that Congress is naturally hell-bent on ramping up inflation (again, I’m skeptical); as well as thee typical claim that the Fed is independent (nay, it is a creature of Congress and no more independent of government than are other agencies). What is important is Seidman’s recognition that the Fed’s “right” to create money might not give it the “right” to distribute tax rebates. If that is so, he believes Congress has made a lamentable mistake:

It was, however, unwise for Congress to apparently (if this is the judgment of legal scholars) prohibit the independent central bank from unilaterally deciding to give a dual-mandate transfer to the Treasury. The danger in prohibiting a dual-mandate transfer is that it prevents stimulus-without-debt in a recession or a weak recovery. If legal scholars judge that the current Federal Reserve Act in fact contains such a prohibition, then Congress should amend the Act to specifically authorize a dual-mandate transfer—a transfer that the FOMC judges would implement its dual mandate of high employment and low inflation.

Note that Seidman argues his proposal does respect the separation of powers intended by Congress, for he would have the Fed decide how big the tax rebate would be (hence, decide how much money to create, and when to do it), rather than letting Congress dictate how much, and when, the Fed would stimulate. This would be entirely within the Fed’s “dual mandate” to pursue high employment and price stability; it would ramp up the stimulus when unemployment is high, and cut it off when inflation rises. If this is illegal, he recommends changing the law (and presumably, the Constitution, if need be).

(This would expand the powers of the wise men and women who sit on the FOMC—from interest-rate setting to controlling fiscal stimulus. Well, why not–they’ve done such a “Heck-uv-a-job-Brownie” job so far, missing ten out of the last ten recessions and contributing to ten out of the last ten financial crises. The Fed always “fails upward”, gaining power and prestige when it screws up, so that its next screw up will be even more damaging. But I digress…)

Assessment of the Proposal

Seidman has provided us with a coherent proposal for debt-free stimulus. While he uses an example of a tax rebate, there is no reason why the finance method could not be used for a spending stimulus, such as Bernie Sanders’s infrastructure proposal. Instead of Treasury financing using tax revenues or bond sales, the Fed would provide transfers, reducing its net worth. Treasury can treat these as gifts, meaning it will not issue any debt. (Thanks, Aunt Janet!)

In that sense, the proposal is, indeed, “debt-free”. Of course, it is not “debt-free” in a more general sense, because the Fed’s liabilities grow—first in the form of Treasury deposits and then as the Treasury draws those down, in the form of bank reserves. Further, some advocates of “debt-free spending” seem to mean spending financed in a manner that does not commit government to pay interest. However, Seidman’s proposal fails to meet that definition, too, since the Fed pays interest on reserves.

So it is neither debt-free nor interest-free.

As discussed in Part 1 of this series, many argue for use of “debt-free money” to finance government spending. The “money” created by the Fed in Seidman’s proposal also fails that definition since the Fed’s reserve money is the Fed’s liability. Unless we want to invent a quite narrow definition of “debt” to mean something different from “liabilities”, the Fed’s reserves are a “debt money”. We could call them  “liability money” and then explain that by “liability” we mean “it is not a debt”. (However, as George Lakoff warns us, if you tell someone NOT to think of an elephant that is the first thing they think of. Our debt-free money folks might consider that as they reframe their meme. Yet another reason to run with the banana money meme?)

Changing the terminology from “debt money” to “liability money” is of course possible. By the same token we could instead invent a definition of “debt” that excludes Treasury liabilities, too. Treasury liabilities such as bills and bonds are much like the Fed’s liabilities: both are presumably backed by the full faith and credit of the Congress and both pay interest. We could invent a new term to cover all such liabilities, replacing the usual term, which is debt. I’m open to suggestions from our wordsmiths. (How about “bananas”? That has the unfortunate disadvantage of bringing to mind bananas, but it does have the advantage that it directs attention away from “debt”. Saying that the government “is trillions of dollars in bananas” sounds so much better than saying it “has trillions of dollars of liabilities”—which sounds an awful lot like debt. Or we could just adopt the convention that if we use words like debt or liabilities, what we mean is bananas. What the bank means when it says I have an onerous mortgage debt is that I have a really big mortgage banana. I feel better already.)

To get closer to the goal of “debt-free money” proposals, Seidman could recommend that the Fed stop paying interest on reserves. In that case, while the Fed’s liabilities would rise with its stimulus, it would not pay interest. Banks would simply hold more reserves but would not receive interest on those reserves. Some of the debt-free money enthusiasts insist that government spending should not generate interest payments—especially to banks. That is easy enough to do in Seidman’s proposal—just return to the pre-GFC practice of the Fed by eliminating interest on reserves. (Some even think this will encourage banks to “lend out” their reserves to business, adding additional stimulus. That is confused, but I won’t go into it here.)

At this point we run into a fundamental problem: if the Fed doesn’t pay interest on reserves and the Fed’s stimulus creates excess reserves, then it will drive the fed funds rate toward zero. Indeed, this is precisely how central banks operate ZIRP (zero interest rate policy)—leaving excess reserves in the system is how you do a ZIRP.

How does a central bank keep the overnight interest rate at a target above zero (non-ZIRP)? It either pays interest on reserves (paying a rate approximately equal to the target) or it offers Treasury bonds in open market sales or REPOs. In normal times (before the GFC and QE), the central bank holds a limited supply of treasury debt to sell. This means it could run out of treasury debt before it could eliminate all the excess reserves it created by engaging in a Seidman-type “debt-free” stimulus policy. The only way to avoid a ZIRP in this case is either to return to paying interest on reserves, or to ask the Treasury to sell new bonds. (Admittedly, the Fed is now awash in treasuries, and thus facing the opposite problem; still it is paying interest on reserves so can maintain a positive rate even with massive excess reserves.)

Here is our “teaching moment”:

Debt-free stimulus, or more generally a debt-free government finance spending proposal, actually requires interest payment on debt, unless the central bank adopts a permanent policy of ZIRP.

Either the Fed or the Treasury must pay interest on debt to avoid ZIRP. We can have the Fed issue the debt rather than the Treasury, but it is still debt and it still pays interest. Or we have permanent ZIRP.

This is why I made the claim that all debt-free money proposals reduce to permanent ZIRP.

For a more detailed explanation of why this must be true, see Scott Fullwiler’s piece from last year.

That is probably a big enough lesson for today. Let that sink in. In Part 3 I will explain why I think there are other shortcomings in such proposals, especially misunderstanding over monetary and fiscal policy operations. It will be instructive on that count to compare Seidman’s proposal with Lord Turner’s.


  1. Seems like issuing “the coin” would accomplish the same thing, without changes to the law or the Constitution.

  2. Would it be possible to create second account for the reserves that were not tradable in the interbank market? Banks would not get any interest income on these reserves, they would have to deposit mandatory portion of their reserves in that account and they could still use these funds to make payments to the government, pay taxes for example.

  3. When we are talking about government issued money as a liability we are looking at it from government’s perspective. But in fact, no people is the government. All the people are mere citizens, and we don’t look at money as an liability but as an asset. It is the dual nature of debt both as asset and liability that throws people off.

    “Money is a tax credit” said Warren Mosler. You could say for example that government has trillions of dollars of issued tax credits outstanding.

  4. I have followed Professor Wray’s initial blog on “debt-free money” and all of the comments that have flowed from it, including here and at Naked Capitalism. I have spent at least two hours studying Seidman’s proposal and Professor Wray’s comments about it. I have read several books published by those who regularly blog here and I have learned from them. But I always wind up at the same place. Everyone involved seems to think that our current economic/financial system is a train wreck. Everyone involved seems to think that the current system does not serve the people. I definitely believe these things, and have believed them for more than six decades. For many years I naively believed that the “big boys,” the experts, would set things right. Election cycle after election cycle I believed political candidates when they said that they would take action to aid the people. I was clearly a fool. But, why hasn’t someone done something about it? Why do all the people who blog and comment here and elsewhere stop short of organizing to change things? Perhaps they believe in the political system as I once believed in our economic/financial system. If they do, then they are bigger fools than I am.

    The discussions here are extremely convuluted. People go to great lengths to make something within the fixed structure of our current system. What foolishness. When a system is so bad as this one the best thing you can do is through it out and start over.

    The present system is not a natural system like the solar system or the universe. It is not a natural law. It is a man-made system and therefore we can change it. What will it take for all you experts to get it done?

    Now, I do not mean to overlook some of you here who have made a serious effort to effect change, and others who have worked to explain how our current system works so that guys like me can hope to keep up. I the former case I mean Joe Firestone, and in the latter I mean J. D. Alt. Both writers have helped me immensely, and through me, have helped others to understand.

    But it seems to me that we are poised under a giant overhang of mud and snow, and something will set it off. The results won’t be pretty. Now is the time for the experts to take a courageous step and see to it that our systems are changed for the better. For the experts to simply throw their hands up and say, “I have told you what is wrong, I have showed you some ideas that would improve things once they are applied in the current system, and that is far as I go, my responsibility ends there.” is not enough. Somebody has to do something. If not the experts, then who? If not now, then when?

    • People who write and people who change things are usually 2 different types of people. One type may be inspired by the other, however.

      The biggest problem keeping the current system in place is propaganda. E.g. note the article today in the Libertarian Jeff Bezos’ owned Washington Post, on The Misdirected Anger of College Students, directing college students to aim their anger at older Social Security recipients.

      It would take a lot of money and organization to get together a progressive media empire to combat the propaganda that we are immersed in 24/7/365. This propaganda keeps telling us that we can’t afford Social Security, or any kinds of services for the poor, the mentally ill etc.– although we can always afford more pre-emptive wars.

      Not many people feel up to the task of organizing and collecting donations to fund media to combat the propaganda.. So they just write their books and articles, which are mostly ignored, while the propaganda keeps being broadcast far and wide, and has persuaded voters to elect the 2 Right Wing dominated Houses of Congress we have today.

    • I am pleased, in a limited way, to know that someone else has struggled with this topic mightily.
      To share what I have discovered:
      The Byzantine nature of the United States money system is an artificial construct of the Federal Reserve Act of 1913 which mandates the creation of bond issues to ‘cover’ the debt caused by a Federal Deficit. In other words, when Congress authorizes spending that goes over what the Treasury is taking in as revenue gathering, the Treasury has to ‘sell’ bonds to make up for the overage. But all of that is totally unneeded in a day when our currency is no longer tied to redemption in specie (gold or silver).
      Long story short: -Federal system only, not relevant for states and municipalities:
      Taxes do not pay for anything but rather exist as the progenitor factor (creation force) for money even existing. Taxation is also a tool for controlling inflation and job creation should Congress ever decide to take on that role. Money is created by the Federal Government spending it into existence.

      But then there is the Modern Money Primer on the top of this page. And no,
      politicians do not understand MMT or say they don’t.
      In seeking to understanding how the received wisdom of ‘balanced budgets’ even came into existence, keep reading this blog and
      Bernie Sanders even carries on about balanced budgets and taxes paying for things and he of all people should know better. Or at least he would if he even bother to have a conversation with Stephanie Kelton who runs this blog and is economic adviser to the Senate Budget Committee which Sanders chairs.

  5. “I’m open to suggestions from our wordsmiths.”

    How about ’emittance’ for the initial issuance of currency into the economy? Legally that is what it is.
    When this is done without a debt instrument, I see no cause to call it a liability.

    • How about “activate?”

      • Alright. Exactly how is the term ‘activate’ more appropriate to the government’s emitting currency into the economy? The term ’emit’ at least has a history in respect to this activity as reflected in the Merriam-Webster definition, “to issue with authority; especially : to put (as money) into circulation”. Why reinvent the wheel?

        Also, in counter argument to Mr. Wray’s mention of the need to pay interest as a mechanism of reducing excess liquidity, wouldn’t an increase in reserve requirements have the same effect? I know, there could be nothing more guaranteed to make banker’s howl. I believe it was Warren Mosler who mentioned the problems associated with anticipating changing reserve requirements. I’m just exploring the possibilities.

        • Thanks for your response. “Activate” has the advantaged of allowing us to later “Deactivate” money when we seek to drain excess money from our system to guard against inflation. Because money in our new banking system will be strictly computer bits and bytes, we can activate or deactivate it at will.

          The double-entry bookkeeping that someone mentioned above will stop being a system for hiding things and revert to its original purpose: to keep track of things such as money as it transfers from one citizen’s account to another. This sentence leads to longer discussions about how a new economic system would work, but that is okay with me, but apparently not okay with those who swear allegiance to MMT. They have complained that Paul Krugman does not treat them with the respect they deserve, and they are right–he doesn’t. So, they should be the first to throw open the discussion to blue-sky ideas for replacing our current failed economic/financial system…

      • There’s some necessity to reinvent the wheel?
        Emit has a history in the context of this activity.

        Per Merriam-Webster –

        “to issue with authority; especially : to put (as money) into circulation”

        • You are right, but I will wager that most ordinary Americans will easily understand what “activate” means while they will not have an immediate understanding of “emit.” That is one of the serious failures of our current system, economists. here and elsewhere, bankers, central bankers, politicians, etc. have successfully obscured the true nature of our failed systems by means of opaque language. For example, Ben Bernanke, when accused of giving money to the big banks when he started quantitative easing said he wasn’t giving them money but he was giving them central bank reserves. I kid you not.

  6. I find the Hayek fallacy, the basis of Wray’s argument against debt free money, to be particularly puzzling. Say the government owes a contractor $100,000 for painting a bridge, and pays him with borrowed money (say by electronic transfer of funds). Yes, the contractor may use the profits from this job, say $10,000, to catch up on his taxes. Does that mean all the money the government borrowed is worthless? It is worth something – initially, a paint job. With taxes paid, the government gains $10,000 to spend again, but it still owes the $100,000 it borrowed. Say, instead, the government uses debt free Treasury issued money to pay the contractor (say by electronic transfer of funds – why would it use ETF in one case and wheelbarrows in the other?). Again, the contractor may use his $10,000 profit to catch up on his taxes. That money is not worthless, and the government can turn around and spend it again. Nor is the other $90,000 the contractor spends into the economy. It’s worth about 7 x $90,000 = $630,000 in GDP. But unlike using borrowed money, the government doesn’t wind up owing anybody a cent. What is the benefit of being too “clever” to understand this?

    • You go, Keith Rodgers! I can’t wait to hear the answers to your questions.

    • Keith: you are not paying attention. Sovereign govt does not borrow its own IOUs to make payments. (Neither do you) Forget your math. Repeat after me: Sovereign govt creates what it spends.

      Hepion: Banks “not getting interest” on excess reserves is ZIRP.

      Jonathon: coins are “debts” or “tax credits” or “liabilities” or “bills of credit” or “equity” (whatever phrase tickles your fancy), same as Fed reserve notes, Fed reserves, or treasury bills and bonds.

      Jerry: two hours? That’s nice. Might take more. Solving global warming is relatively easy by comparison. Far more effort has been expended in confusing you and the rest of the public about the horrors of government debt than has been spent by climate change deniers to convince you that global warming is a myth. The debt-free money warriors as well as positive money warriors are helping to muddy the waters, so to speak. Perhaps inadvertently. Put on your mud boots and stick with it.

      • “Banks “not getting interest” on excess reserves is ZIRP.”

        Yeah but with two accounts government could choose whether to pay interest on any particular spending decision. And dont’t banks need interbank interest rate as a reference to witch set other lending rates to? Don’t the FED need it in order to maintain it’s mission?

        And besides calling the second account “a special” account could work wonders with human psychology. The idea that “Government is drawing interest-free money from its special account” could make deficit spending that much easier.

        • And why does the power to set interest rates have sit at a technocratic committee at the central bank, my proposal would take some of that power back to the people who were democratically elected to govern a country.

    • The fallacy is the fallacy of first use you employ. All of the $100K comes back as taxation for any positive tax rate via the spending chain. The only thing that stops that is people saving the money rather than spending it.

      The govt doesn’t owe anybody a cent with ‘borrowed’ money. Government could issue Treasuries as perpetuals. And even if it doesn’t, Treasury always swaps out redeemable bonds for new redeemable bonds in aggregate. Just like if you take a $100 bill to a bank and ‘redeem’ it you’ll find you just get another $100 bill in return. There is no ‘gold’ backing it.

      At best Treasury redemption causes a small redistribution in the economy from people who are saving to people who are spending. However since most are held by big financial operations that effect is heavily muted.

  7. Herman Meester

    Part of the confusion is that people seem to think that the sovereign ‘borrows money.’ But it doesn’t borrow money, that’s impossible, it ‘borrows’ stuff and labor (from the people, or ‘private sector’ in econospeak), and the money (the numbers) that it uses to pay for the stuff and the labor is the record of the fact that the sovereign owes the people, theoretically, the stuff and the labor.

    Obviously it can never pay this back in kind, so what really happens is the government gets real value for mere numbers.

    The only thing of importance is to force the government to employ the stuff and the labor it ‘borrows’ for the common good, thus ‘redeeming’ its ‘debt’ by giving its product (the schools, roads, etc.) away for free to all of us for (some of which it already does), rather than waging wars for oil or imprisoning the population or whatever.

    Rather than debt-free money, we need crook-free government.

    • Use the proper legal language. It is called a bill of credit. It is called that very thing in the Constitution. Today we would probably call it a tax credit but it is a tax credit that is in bill form, can circulate throughout the economy, and can be used as a tax credit by the bearer of the instrument anytime the bearer needs to pay taxes of any kind.

      Using bills of credit as money was approved by the Supreme Court in the greenback cases after the civil war. Lincoln’s greenbacks were bills of credit, so said the Supreme Court.

      • David,

        Thanks for your strict adherence. “It is called that very thing in the Constitution.”
        And that at Art. I, Sec. X. per Note the distinction being made between promissory notes and bills of credit. Promissory notes being similar to a mortgage with the bill of credit similar to a warehouse receipt. The former representing possible future value where the latter represents existing/current value. The one a possible value and thus intangible and the next a ‘real value’, hence the term ‘real bills doctrine’.

        Also note the discussion of the now defunct term redeemable which today only represents the redemption of one bill for another, leaving in place only it’s function as a unit of account.

  8. You are boggling my mind. You say the Fed creates money (bank account) for the Treasury and charges its equity account. The Treasury then records the cash in bank versus a credit to its equity account. So then the Treasury (Dept of Defense) buys an F 35 and records the asset and credits the cash in bank account. Easy come, easy go, no messy bonds to fool around with. So when all is said and done the Treasury is left with an F 35 versus it equity account. And they are out of the game, except for the fact the damn thing won’t fly. Oh well.

    So at this point Lockheed Martin takes the Treasury check to their Bank. The Bank credits the LM account versus a debit to its reserve account at the Fed to clear the check. The Fed then transfers the original Treasury reserve account to the bank.

    Now if we consolidate all this we find that the Fed negative equity zeros out against the Treasury equity account and the government has an F 35 (that doesn’t work) versus a reserve account with the Bank. The Bank has a reserve with the Fed versus the LM checking account, net zero balance. LM, et. al. has gained a net financial asset, namely its account at the Bank that went from the Fed to the Treasury to all the people who built the F 35.

    Now my question. Why record the original entry versus equity? An interagency account between the Fed and Treasury would seem to accomplish the same thing, no? And such will not attract so much wringing of hands and gnashing of teeth.

    ZIRP accounting or else it gets more complicated as the Fed needs to create more free money. This will never fly you know. How in the world will our plutocrats and China make guaranteed interest if we take away their toys and ability to brow beat poor Janet?

  9. It’s interesting that we have an independent central bank, but we don’t have an independent war office or an independent welfare department. I mean if congress/parliament is incapable of controlling spending, surely it is incapable of sending people to their deaths appropriately or keeping pensioners out of destitution.

    I look forward to seeing those advocating central bank independence also advocating removing the nuclear button from the politicians and handing its sole use over to an ‘expert’ committee of army generals.

  10. I’m very pleased to read this description Randy. Because it means that we already have ‘debt free money’ in the UK.

    We were clever enough to nationalise our central bank properly, which means that it is already a subsidiary of our Treasury.

    And of course that means in the consolidated group accounts of the government the ‘debt’ held by Treasury is automatically cancelled on consolidation by the asset held by the central bank. See

    So not only can we have a central bank with positive equity, we can have group accounts that are ‘debt free’.

    MMT had this debt free money thing sorted out before there was even a name for it – by virtue of presenting the government sector as consolidated group accounts.

  11. Neil: as you know, I don’t think it operationally matters much if we properly nationalize the CB (UK) or pretend it is independent (US): the operations will be virtually the same. However, it makes it easier to defend “consolidation” against the nutters who believe the Fed is “private” and that Uncle Sam has to go hat in hand to beg for scraps. And, yes it might help provide a bulwark against the debt-free money types, however I do note that Positive Money is rampant in the UK, much as Ron Paulism is rampant in the US.

    Jerry: I think you need to at least double your 2 hours of study of the topic. Activate is something you might do to Frankenstein’s monster. Or to a magazine solicitation. Emit is something govt does–it creates and emits what it spends.

    • Professor Wray: I see you continue with your petty game. Even though you do not have the backbone to let others see the comment I made directly to you earlier tonight.

      In any case, your snide remark about “activate” is typical of your refusal to let anyone debate with you the weakness of your thinking. But to the point, “activate” is precisely the right term to use. Money exists in unlimited supply, but it is inactive until it is activated by banks, the Fed, or George W. Bush when he distributed about $120 billion directly to citizens in 2008. Whenever we remove money from the supply by taxation we are not actually removing a physical thing, we are merely deactivating computer bits and bytes.

      When you create and emit money as you have said, how do you remove it from the system? Do you “uncreate” it? No. Do you “destroy” it? No. Do you “deemit” it? No. Do you “withdraw” it? No. You “deactivate” it.

      I have attempted to restore the comment you deleted earlier.

      • Mr. Hamrick,

        Please. Let us not, so readily, cast ill intent upon the actions of others. Mr. Wray’s response appears, quite appropriately, constrained to the argument at hand.

        I understand your want to have a term more informative to the population at large, but having them adjust to new terms in an effort to do so quite often will cause just as much or more confusion.

        Emit, as a term, speaks to the nature of the entity of government, in the context of issuing currency, as well as it would speak to the nature of flint emitting a spark when struck by steel. That is, it speaks not only to the action but also to the nature of the entity in causation of the action. Therefore it is quite appropriate to the subject and replacing it’s use with another term isn’t necessary to the understanding of the subject. Let’s not interpose change where not needed lest we be accused of picking at nits.

        The term is emit, a verb; it’s noun is emittance and it’s prepositional phrase is ‘to emit’.

        Also, all specializations of knowledge have their own language. As a culture, we will find it to our detriment to be changing those willy-nilly.

      • herman meester

        Yes you do, money is created and destroyed.
        What’s wrong with the idea that information (a non-physical thing) can be created and destroyed?

    • “I don’t think it operationally matters much if we properly nationalize the CB (UK) or pretend it is independent (US): the operations will be virtually the same. ”

      The operations are indeed virtually identical. And it doesn’t matter for the preparation of group accounts either. As the International Financial Reporting Standard (IFRS 10) states.

      “The IFRS requires an entity that is a parent to present consolidated financial statements … The IFRS defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements.

      An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with
      the investee and has the ability to affect those returns through its power over the invested.”

      What matters is control. There is no doubt that Congress has control over the central bank – sufficient control to require government to offer consolidated accounts including the central bank under the IFRS 10 rules.

      Except of course that government is the government and can exempt itself from the normal accounting rules applied to commerce.

      Perhaps it would be useful to Congress to require government to conform to IFRS 10 and produce the US version of the ‘Whole of government accounts’.

      That way you could save all the negative equity nonsense and people getting needlessly upset about meaningless minus signs.

  12. In his discussion, has Randall Wray addressed the fact that in the current system is always deficient of the cash to pay the accumulated interest on the debt created? I am interested in hearing more discussion on this particular point.

    Is there a solution to this problem in the existing system or would it require a change to the existing system?

  13. Jack: First, you don’t need “cash” to pay accumulated interest on debt. You “pay” interest on bank loans mostly using bank deposits–not “cash”. However, second, there is a well known problem in a very simple “circuit” model of banking: if interest paid on deposits is less than interest charged on loans (which would be the way banks cover costs and make profits) then it is not possible to pay down all debt (including interest). Think of it this way: bank assets (your loans) grow at 6% but bank liabilities (your deposits) grow at 3%. Is this a problem? Might be. But let us say your wage income grows at 5%. Then might not be a problem. Third, the simple circuit model is too simple–it posits a very simple relationship between stocks (balance sheet) and flows (income, production). In the real world, we never end a “period” by paying down all debts and thereby also “destroying” all the deposits. (Oh, sorry, I mean “deactivating” the money that always sits ready to be “activated” like Frankenstein’s monster.) Instead, the more normal case is for both loans and deposits to grow over time and also for income and production to grow over time. If the growth rates for the stocks and flows are similar, we say “velocity” is relatively constant. There is a whole school of thought–monetarism–based on this relationship between money stocks and spending flows. (I think it is mostly a waste of time.)
    Jerry: I misunderestimated. Quadruple the effort. Yes, you do “redeem” yourself when you pay down your bank loan using your bank deposits; your bank is simultaneously redeeming itself as its debts to you are “destroyed”. The redemptions are mutual and simultaneous, taking the form today of 4 electronic debits to 2 balance sheets. In the old days, the tally sticks would be matched and then lit with a match. I guess in your language, when the King “raised a tally” you would call that “activate” and when the tallies were burned you’d call that “deactivate”. I guess dead wooden sticks are just waiting for someone to “activate” them as money. But, whoops, some bypass that step and go straight to the “deactivate” stage in campfires, having never been activated. I think it is clearer to just say the King spent the tally stick IOUs, received them back in tax “returns” (which is where our term comes from), and then burned them.

    • You sir, have the patience of a saint.

      See Jerry, it would be so much easier to use the terminology to which most have become accustomed to using it rather than reinventing the wheel. In this instance of describing the balancing out of debts, ‘extinguish’ is the most commonly understood term. All this back and forth does nothing more than distract from the original argument, i.e., debt free money.

      I still argue that the initial emittance of currency into the economy, when done without a debt instrument, such as when the govt. buys labor or goods directly, there is no liability. Though it be argued that this cannot follow for accounting purposes, that the govt. must accept said currency in payment of taxes, I suggest that the mere contemplation of the proposition that it could possibly refuse, within law at least, is absurd on it’s face given that the currency is emitted for the purpose of acting as a unit of account, ‘for all purposes, public and private’. Otherwise, where is the burden?

    • Mr Wray, Ok, I guess i should have used deposits instead of cash. That said, your response leads me to think you are in agreement that at the top macro level, total deposits are always less than total debts (debts being principle owed + interest).

      That creates an imbalance at the top macro accounting ledger?……..Yes or No?

      And if yes, what is the MMT solution to solving that imbalance issue in the top macro accounting ledger?

      I do sincerely appreciate the conversation…..thks

      • “That creates an imbalance at the top macro accounting ledger?……..Yes or No?”


        What you have forgotten is that bankers consume. Which means they buy the output of businesses, and that is how the interest is recycled.

        Salaries are the wages of workers.
        Interest is the wages of bankers.
        Profit is the wages of capitalists.

        People spend their wages with businesses which then pays salaries, interest and profit to capitalists.

        All of these are priced in $/month. Loans are in $. Confusing the two is like confusing miles per hour with miles.

        As long as everybody spends their income at an appropriate rate the system is dynamically stable.

        I’ve got a little picture that shows how the horizontal circuit within the private sector can remain stable all on its own – as long as certain flow conditions are met:

        The problems start when people decide not to spend all their income and start to accumulate savings. Or they run up too many loans. At some point the flow becomes insufficient to maintain all that and you get a catastrophic collapse.

        • Neil thank you for the feedback. I did look at your charts. They are very good in helping to get a visual on the different line items that need to be factored into the “double entry accounting”. However, without actual numbers, it’s hard to see if it really balances, or not.

          I can agree that the reality is the “system” is complex and dynamic, but RWray indicated in the simple circuit model, the interest paid does creates an imbalance. The problem I still see is: if it starts with an imbalance in the simple circuit analysis, then arithmetic logic ought to dictate that the result of the entire system’s ledger must be out of balance, as the entire system is the compounded accumulation of multiple simple circuit models, no?

          In your last line, where you state “the problems start when people decide not to spend all their income and start to accumulate savings”, I take exception that it’s not the start, but “in addition to”. The structural imbalance of not adding to the system , the interest which is owed on the debts – debts which only create enough deposits to cover the debt, but never the interest owed…..and this is where the problem truly starts.

          And we have seen how a small group of folks can generate ginormous amounts savings that’s so much larger than their spending -which is causing a significant “dynamic instability” to the system. Taxes used to counter this problem, but has effectively been eliminated as a tool for that. Because super duper rich people or companies can now effectively buy tax exemptions to legally dodge taxes.

  14. Seems people just find it ooky to hear “money is debt” a bit ironic given the McMansions I see popping up all over town again. Of course it’s even worse for the “sound money” crowd!

    Interesting discussion on “debt free stimulus” and leads back to my above point, it seems this can become an unnecessary hold up for people and their understanding. It got into discussion of legality and etc while in the end, it’s still “debt based” Shame it seems to be a struggle to grapple with, discussion of stimulus may be easier if this whole debt free worry wasn’t an issue

  15. Why the opposition to debt free Treasury issued money? Wray has argued there is no such thing as debt free money, meaning Modern Monetary Theory (MMT) money is not debt free money, either. Why is MMT money BETTER? MMT embraces debt and explicitly says debt is necessary for the economy. Wray seems to have stoppped claiming that Treasury-issued money must necessarily take paper form and be transported to payees by the truckload, when challenged on this. MMT requires forcing the Federal Reserve System to heavy up on government treasuries which MMT has no intention of ever seeing repaid – it would harm the economy, they claim – or generating interest… as good a fiduciary choice as interest-generating investments in the real economy? Is MMT’s idea BETTER for the public, or just more profitable for Wall Street?