By L. Randall Wray

Some time ago, I labeled the “debt-free money” campaign a non sequitur in search of a policy. (See here.) However, this non sequitur refuses to die. I went on to joke that if they want a debt-free money, they ought to propose that government issue bananas as currency.

I frequently am asked to do interviews and I almost always accept them. However, when I was asked last week to participate in a radio show devoted to debt-free money, I struggled mightily to get out of it. As you’ll see, the program’s producer took my idea of banana republics and ran with it. I thought readers might get a kick out of this exchange (the producer’s emails are in italics, my responses are in bold). After the exchange, I’ll summarize my objections to the notion of debt-free money.

>>> Subject: debt based money

>>>Dear Mr. Wray,

I would like to invite you to our weekly radio show.  The show will discuss how to eliminate our debt money system and replace it with a wealth based money system. The basis of the theory is to have governments SPEND money into circulation as opposed to borrowing money into circulation.  We would like to hear your views on the matter.

>> On 12/1/15 10:24 AM, L. Randall Wray wrote:

>>> This sounds confused to me. If bananas were money wealth, government could spend them into existence. Otherwise, I cannot make any sense of what you’ve written. I probably wouldn’t be a very good guest.

>> Subject: Re: debt based money

>> Dear Mr. Wray,

>> On the contrary, you would be a wonderful guest. As you are aware, in our current monetary system, all bananas are loaned into existence by commercial banks.  And with each loan, our banana supply increases.  However, each loan has an interest charge. When a commercial bank makes a loan, the principal is created, but not the interest.  Consequently, in order for me to pay back all the bananas I borrowed, plus the interest, I must capture bananas that you borrowed with your principal.  Also, governments need to capture bananas from your principal, to make their principal + interest loans, payments.  An individual can become free of debt, but collectively, we cannot.

>> We are just proposing that governments create bananas from nothing, like commercial banks do now, but spend the bananas for infrastructure needs that everyone wants.  Like roads and bridges etc.  It has been done before.  In 1861 Abraham Lincoln needed bananas to fight a war.  Patriotic northern banks offered to lend him the bananas at 35% interest.  Instead, Lincoln had the treasury create Green Back dollars.  (they have written songs about these )  They were used to pay troops, buy ammunition and supplies.   They were made legal tender. Bananas, spent into circulation without debt, without interest.  Oh yeah, and he won the war.

>> The 1792 coinage act allowed an individual to hike his donkey into the hills, mine silver or gold, bring the metal to the U.S. Mint and the government would turn his metal into legal tender coin, free of Charge. The man preformed the labor, and his labor was directly transformed into bananas. Not as a promise to pay down the road with an interest charge, but as a legal tender banana that could be spent into circulation without debt.

>>Please come on our show.  It will be fun.

> On 12/1/15 1:15 PM, L. Randall Wray wrote:

> Sovereign government can no more borrow its own IOU than you can borrow your own IOUs. And money is not bananas, except perhaps in monkey republics. Money is always and everywhere else an IOU. As my prof, Hyman Minsky, always said, discipline the analysis with balance sheets. Show me the balance sheets in which government creates and spends money that is not its liability, vs the balance sheets in which government borrows its own currency from banks. If you provide those, then we have a place to start the discussion. Otherwise, I cannot make sense of what you are arguing and wouldn’t know what to discuss.

> Subject: Re: debt based money

> That’s the point.  Money doesn’t always have to be borrowed.  It is a violation of natural law for us to be required to borrow money, just to participate in commerce. As a young boy you probably brushed aside an ant hill, built in the crack of a sidewalk.  What did you find the next day?  A partially rebuilt ant hill, a foreclosure sign or a society that did what was necessary to survive without debt?

>This proposal is completely different from what is now being practiced. It requires unlearning, common sense, and approaching the balance sheet and other orthodox systems in a completely different way. If the accounting balance sheet is your main criteria for analysis, the proposal can be manipulated to satisfy the bookkeeper.  A Natural Equity or Asset Monetization Account can be created to balance your E+L = A requirements.  And please keep in mind, if business man “A” starts a company, on October 1st, with $25,000 of operating equity, there will never be any discussion of where or how that equity came into circulation or existence in the first place.  Whether that cash was actually an IOU or a promise to pay, is not important in any accounting system, because the balance sheet only requires data, after October 1st, not before.

<<Can you be available for the show?

<<On 12/2/15 7:47 PM, L. Randall Wray wrote:

<<All money, save bananas in your monkey republic, is debt. It is on the liability side of issuer and asset side of holder. You cannot change that through confusing semantics. If all you want is zero interest on government liabilities that is easy to arrange. You do not have to pervert either accounting or language. A simple new instruction from Congress to its creature, the Fed: Zirp forever. The deed is done. I cannot see how that could take up more than 60 seconds of a show. If you want to schedule 60 seconds, I can probably do it.

< Subject: Re: debt based money

<Wonderful.  We will love to have you on. The host also wanted you to come on to discuss what you have been doing at Modern Monetary Theory.  Perhaps you will be willing to stay on longer to go over that part of your work.

OK, I couldn’t wiggle out of the interview. So here is my objection to debt-free, wealth-based money.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is “wealth-based”, not “debt-based”. Its value is determined by the value of the plastic, cardboard, or paper.

Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.

Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.

As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal.

If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk. Maybe the news agent is hungry for a banana.

But I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money. Calling bananas money is a perversion of the language.

I don’t think our debt-free money cranks really want government to “issue” bananas. I think they want a “money” that is a record. But a record of what? If not debt, what?

From what I gather, they want government to issue notes (many—like the producer above–love to refer to Lincoln’s Greenbacks) or electronic “money”. But what are notes or electronic entries? They are records of indebtedness—debts that can be redeemed in payments to the issuers. They are debt tokens, redeemable in payments of debts owed to their issuers.

When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks hate payment of interest by government. I’m not sure, but I think what they really want to do is to prohibit government payment of interest.

That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds. I’m with them. Advocate ZIRP, not banana money.

We don’t need a non sequitur in search of a policy.

However, there are some advocates of debt-free money who understand MMT’s point about sovereign government. Some of these even recognize that the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our (nongovernment) net financial (dollar) wealth.

But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding. (I’ll write a blog on that soon.)

Hence the conceit is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat.

While I’m somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.

Our debt-free money folks (including the producer above) believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.

But that is not true. Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.

When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury’s deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.

Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always “debt-financed” spending, using government debt.

Telling the Treasury to stop selling bonds will not stop the government from going into debt.

Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds that promise interest above zero, we will have already achieved what our “debt-free money” champions want.

However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins). Government will be in debt. But it can choose not to pay interest.

There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.

For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds.

I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent. It doesn’t pervert any accounting. It is simple and follows normal banking practice.

Your overdraft at your bank is a loan; there is no economic reason why the central bank branch of government cannot allow an overdraft by the treasury branch of government to spend funds already budgeted by the elected representatives and signed by the head of the administrative branch of government. Overdrafts are normal banking procedure; they are well-understood and not at all scary. Uncle Sam ought to be able to run an overdraft at his bank. His spending is already checked by the budget. His signature on his debt creates what is without question the most highly esteemed “note” on the planet. It is accepted all over the globe. His banker—Aunt Janet—ought to accept it.

Again, we don’t need a non sequitur in search of a policy. Our debt-free advocates usually do not tell us how they would change procedures to allow treasury to spend without government going into debt. The reference to Lincoln’s Greenbacks is not helpful.

Even if we grant the advocates the perversion of language—to say that paper money issued by treasury is not the treasury’s debt—do they really imagine that we will go back to the 1860s payments system? Uncle Sam will deliver a wheelbarrow full of notes to your mailbox on the first of every month to pay Social Security? Will Uncle Sam send trainloads of cash to Lockheed to purchase fighter jets?

(Or will Uncle Sam instead mint the trillion dollar platinum coin. Boy oh boy will someone be in trouble if that gets lost in the wash!)

In a later blog, I will address a proposal to have the Fed provide “transfers” to allow Treasury to spend, crediting the Treasury’s account with hundreds of billions of welfare that can be spent. This, I think, subverts normal bank accounting (the Fed would have no asset to offset the deposit liability to the Treasury) even as it creates a government debt (Fed reserves) transferred to private banks when the Treasury spends. In other words, it really does not eliminate government debt—it just allows government to spend debt that need not pay interest. Still, the most straightforward way to accomplish this is—as I discussed above—to direct the Fed to allow interest-free overdrafts to the Treasury. But this is not a “debt-free” way to spend.

And what about our Monkey Republic that spends debt-free bananas? With only the satiable monkey appetite driving demand for bananas, and with no taxes to be redeemed in banana debts, it would probably end up as a banana republic—putting too many bananas into circulation fueling a banana hyperinflation.


  1. Great to see you posting again Prof Wray.

    Is it off to think that so much of the debt free money debate is simply that it makes people feel weird?
    They just can’t, in their gut and DNA, think about because debt is a scary sounding thing or makes them uncomfortable? (Or they are gold bugs and don’t get debt based money still applies to that!)

    Guess I lucked out, my Money & Banking class began with “Money is inherently debt” and “We all start with some debt, which is to the government” Was some grad student at Rutgers that I didn’t really think much of, but as I started to get into MMT can’t help but think I had a rare winner in that guy!

  2. I’m an MMT’er, and am sympathetic to both ways of framing this – I acknowledge the technical accuracy of how you present it, but acknowledge how the political-narrative of ‘debt-free-money’ coins the whole issue in a far easier to understand way than most MMT narrative does (the latter of which tends to extremely strongly induce cognitive dissonance in people – and its discussion of debt is a part of this – so needs much improvement in its narrative if it’s to gain enough traction among the public and in politics).

    I think a lot more time needs to be put into picking apart the different TYPES of debt that there are, and distinguishing between them, when describing issues like this.

    Remember that the term ‘debt’ carries heavy emotional connotations/reactions to the term (David Graeber’s book ‘Debt’ documents this extensively), which are never going to go away politically – and zero-interest debt, with no timeframe for repayment, is COMPLETELY different to most peoples general understanding of debt (such that it renders most emotional reactions to the term ‘debt’ irrelevant) – so I think the narrative has to be adjusted to account for this, and you MUST distinguish between different types of debt.

    If you make these distinctions, I think the term ‘debt free money’ can begin to make a lot more sense – as it’s really about being free of a particular TYPE of debt – and I think it can be quite compatible/complimentary to MMT.

    Since the term ‘debt’ is so loaded, I think that developing a new narrative which takes certain types of debt, and just stops calling it debt – to call it something else entirely – is the most sensible way to go; there needs to be a way to shed the moral/emotional baggage that the term carries, and discarding the term is one way.

  3. “Bananas are not “issued”. They are cultivated, harvested, transported, marketed.”

    And before too long preserved and hoarded – because the supply of bananas is under threat from disease.

    So even banana republics are not going to exist in the future.

  4. “Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves.”

    There is another way of looking at that. What government can do, by virtue of the licence that pegs the liabilities of commercial banks to the central bank, is force commercial banks to lend money to the government sector.

    Bank ‘reserves’ are called reserves because they are a reserve liability of the government sector to the commercial bank. To the commercial bank they are an asset. In effect the commercial bank has made a loan to the central bank arm of government.

    And of course by accounting identity when a bank makes a loan it makes a deposit – which ends up in the hands of the person the government is paying.

    So what government can do is *force* commercial banks to expand their balance sheets by spending and *force* them to shrink their balance sheets by taxing. In other words the control of a bank’s balance sheet isn’t entirely in the hands of the bank – if they want the bank’s deposits to be known as ‘US dollars’.

    So you don’t need the central bank or Treasury at all. They are technically surplus to requirements. All you need is the legal right to force commercial banks to create loans for your benefit – at whatever interest rate and term you demand.

  5. Instead of talking about “bananas” as a debt-free currency, maybe it would be more relevant to discuss how a Bitcoin-based economy would (not) work. Because some people accept Bitcoin as a medium of exchange, the proponents of crypto-currency say it would work as money. Any thoughts on this?

  6. Your explanations of MMT are so easy to understand. Thanks.
    The “greenback” was not debt free money. The government agreed to sell bonds that could be bought with greenbacks that paid 5% interest for twenty years (they were called five-twenties). And the interest was paid in gold.
    I am starting to wonder if ZIRP is a good thing. Maybe the public desires a certain amount of “safe, free income”. While treasury securities’ principle may be safe, with ZIRP there is very little income. And it is starting to look like ZIRP may have more deflationary forces which is also bad for growth. Japan at 200+% debt/gdp and the US above historical average but still weak growth. Maybe the treasury (or central bank) should pay around 4% on all govt debt forever (sort of like consols).

    • The government could offer certificates of deposit to domestic ‘savers’ — individuals and businesses — at an interest rate equivalent to the current rate of inflation. Of course there would be some minimum time of holding the certificate with a penalty of foregoing an interest payment in the case of early withdrawal. Also, there would have to be a limitation of not being able to use these certificates as hypothecation for credit or a repo-style operation.

      The government could then make the claim that its money can indeed function as a store of value.

  7. All ‘money’ implies a promise or an obligation. The issuer of money makes an explicit promise of some kind of future benefit to the person who accepts the money. ‘Debt’ is a perfectly valid characterization of that obligation.

  8. Perhaps it’s the negative connotations of debt and “borrowing” that throw us off. For my thinking, you don’t “borrow” your own money; you “manage” it.

  9. Most existing short-term bonds don’t offer a coupon, right? The effective interest rate is then set by the actual and desired liquidity of buyers. The same idea applies to bonds that offer a coupon. The Fed uses OMO to make certain the buyers have the right amount of reserves to choose to buy bonds at the Fed’s desired effective interest rate. With true ZIRP, the only difference between reserves and bonds, is liquidity. Even though bonds can be traded in the secondary market, even with a very deep such market (the size of the market being a chief factor in determining the interest rate), transaction costs are non-zero. That makes bonds in ZIRP always a worse deal than reserves.

  10. Thanks all. I will be brief, responding to all of you.
    We are all of us, always, in debt. I like Atwood’s book, Payback: debt and the shadow side of wealth, best. We need to embrace that. Govt’s debt is our asset. It is tempting to finesse that; call it something else (bananas?) but ultimately that will not be satisfying. Debt is the tie that binds us to our fellow humans. However, it is true that no one–govt included–borrows one’s own debts. You owe your parents because they brought you up. You cannot borrow that back.
    Eric Tymoigne already tore apart bitcoins, in these pages. Nothing more to say. The fair value is Zero. Zip. Nada. These are not debts.
    Not convinced by Neil. We need a central bank; its liabilities are used for clearing and this is what gives it the ability to come to the rescue every generation (or even more often) as the private banking system self-destructs. There is nothing wrong with our current operating procedures–they work just fine. Treasury spends through the Fed; All treas spending takes the form of reserve credits. The question is whether banks ought to earn interest on reserves. I like Zirp. I understand Markg’s concern that “we” want a risk-free but positive earning asset. But we have it. It is called Social Security. Ramp that sucker up to the point that we can live off it at retirement (Bernie’s platform). I’d eliminate all other government advantages to risk-free saving. You want a positive return? Take the risk.
    Debt free money is a confusion, advanced by the confused. Sorry to be so harsh. It is like a “debt-free life”. Cannot be done. It is in the nature of life. And money.

    • “We need a central bank; its liabilities are used for clearing and this is what gives it the ability to come to the rescue every generation (or even more often) as the private banking system self-destructs”

      I’m not suggesting we don’t. A central bank operates like any other central clearing system. It reduces liquidity risk and it acts as the backstop when the private banks stop trusting each other. But that’s a function of a sensible clearing system – and it works whether government spends or not.

      What I’m saying is that the government’s ability to direct the private banks to create deposits is a separate from the central bank, and it is that ability to *force* other banks to create deposits in people’s accounts and *force* them to lend to government that is the function government is actually using.

      The central bank account held by Treasury is just a more convenient way of achieving the same goal.

      I’m not suggesting any change. I’m offering a different viewpoint on the system that separates clearing from the state spending injection process. And it makes it clear that the whole process doesn’t depend on a central bank, just that a central bank approach is far more efficient.

  11. I am convinced by the main thrust of the MMT narrative, however in regard to this article I would point out that the word “debt” is not synonymous with the word “liability”. A debt has a payment schedule and a timeline. A liability does not need to have this. With a monetary deposit (taking the form of bank credit money), the depository has a contingent liability towards the depositor — an obligation to provide the depositor with currency on demand. However a deposit is not a borrowing or a debt.

    Likewise, the government has a liability towards those who possess currency (or its equivalent) to accept it for the payment of any tax obligations. This is also contingent, because not every citizen in the possession of currency has an obligation to pay tax to the government. It cannot be construed as a debt because no payment schedule is attached to the mere possession of currency by a member of the public.

    One can of course argue that even if someone possessing currency has no tax obligations (e.g. children) the mere act of spending this money will ensure that, sooner or later, it finds its way into the hands of those who do possess tax obligations. Nevertheless one can conceive of a community which conducts its transactions using some combination of barter and exchange of currency they happen to possess, in which the currency acts as a medium of exchange but does not represent a liability of the government because none of the citizens qualify for the payment of taxes (perhaps because their respective incomes are too low). At the very least, this matter is debateable.

  12. Maybe what they want is not, technically, “debt-free” by your definition, but interest-free and repayment-free.

    What if the Treasury, henceforth, issued only a 0% coupon perpetual bond redeemable at par on demand, and issued them in whatever amount the buyers of them demanded. And the Fed bought them in sufficient quantity to maintain their par value at all times.

    MMT would have no issue with this scheme, except for being as equally unnecessary as the current system. Perhaps the “debt-free” crowd would join the MMT crowd, and both sides can stop the semantic argument.

  13. Dr. Wray is speaking to the “top down” debt free money issue. There is a “bottom up” view also, if I may characterize it that way. The modern Chicago Plans requiring trust banks prevents banks from creating money for their own benefit out of thin air is appealing to many people. A good example is described in I cannot accept the notion that sovereign governments spending money into the economy necessarily will produce inflation as implied in this article. After all, the government has the perfect tools for controlling the money supply; taxing and spending which are sledge hammers compared to a central bank’s puny tools of interest rates and OMO.

  14. Stephen Ferguson

    The “debt-free money” campaigner’s (at least here in the UK) other favourite meme is the claim that 97% of ‘all money’ is private bank-created (with the remaining 3% consisting of UK government-created notes and coins).

    This too has a whiff of the non-sequitur about it, as it blatantly omits, from from ‘all money’, the hundreds of billions of £s of UK government-created reserves (that end up in private bank deposit accounts).

    Unfortunately this meme has legs as this Bank of England paper apparently backs the assertion up…

  15. The state accepting it’s own Money as a means of payment (not only for taxes but also for other transactions where the state is a seller) is fine with me, but I don’t get the conceptualisation of this acceptance as a “debt” properly speaking (the acceptance is an automatic underlying obligation for sure, but nothing you can represent in a Balance sheet as a “debt”).

    If I issue an IOU it’s “understood” that anyone in its possession can pay his debts towards me with it. That’s part of the logic of an IOU applied to the situation where the owner of my IOU owes me too. How can this be a special debt besides the dept to pay the promised sum on presentation of the IOU?

    The term “debt” used for the acceptance of Money as a means of payment though seems rather a metaphor to me than a Balance sheet reality.

    This said I completly agree that there can be no debt-free-money in a Balance-sheet based system and that taxes drive (or rather attract, that is create demand for the currency) Money.

    • Eric above nails it: “… there can be no debt-free-money in a Balance-sheet based system…” I dealt with those “balance sheet” folks for many years. We called them “bean counters” because they only knew which column to put a number in and addition and subtraction. They had not the slightest notion of where money came from, what it was, why it was needed nor how it was used. All they knew was how to count “beans.” Placing the economic well being of a nation in the hands of such people is ludicrous. Additionally, I know of no law on the books nor any article in the constitution that requires the nation to use balance sheets to determine the status of the monetary system.

  16. As I am sure you are aware, your post has been put on Naked Capitalism.

    I responded by arguing, as a lawyer, that when you say there is no such thing as debt free money, you have just overruled the Supreme Court of the United States which for over 150 years has said there is. They don’t call it debt free money. The proper legal term is a bill of credit which is mentioned in the Constitution as a means of issuing “debt free money.” A bill of credit is that antithesis of an IOU.

    My irritation is that economists seem to have never heard of or understood this system of money. But it is clearly a system that is not based on debt. I am not going to repost all my comments there here. But you can read them and I will be glad to discuss them with you.

  17. Prof. Wray,
    I too am glad you’re back blogging. I believe the best teachers combine mastery and love of their subject with an awareness of its place in the larger picture of life. You have these skills, and add a gift for clarity, and a sense of humor, so that even beginners can share your perspective. Thanks.
    Let me underscore your point that life is all about debt. I would just add that all debt – both interpersonal and financial – is ultimately social. We need to emphasize this, and stop the trend toward financial debt, which is dehumanizing, and gives unfair power to fewer and fewer owners of the debt.

  18. Dear Prof. Wray:

    I think you’ll find this criticism ( ) worth answering.

  19. I agree with you Stephen Ferguson.

    The monetary reform organisation Positive Money (PM) persists with the claim that new bank credit money is created only through bank lending. If anything is truly crankish, it is this uninformed claim. From the PM website we are told: “… all bank-money is lent at interest:  Someone, somewhere, is paying interest on every bit of bank-money in existence.”

    However the first proposition is demonstrably false, and it follows that the second proposition is also false.
    The reason is very simple. In brief, commercial banks create credit money not only when they lend, but also (debt-free) when they spend in order to accommodate their many costs, and when they invest by purchasing securities from the private sector (e.g. from bond dealers). And bank credit money is also created (debt free) whenever the central bank purchases securities from the non-bank private sector, which it does frequently as part of its open market operations (buying Treasuries from large institutional investors) and in quantitative easing.

    • John H., are you saying banks create the funds to pay their bills, that their expenses are not paid from income?
      John Kenneth Galbraith famously noted the singular difference between banks and other businesses. He observed that banks must spend money before they get it where as other businesses must get it before they can spend it. If your statement is true then interest income to banks is 100% profit.

  20. Stephen, the problem here is that we have a dual monetary system in which bank credit money and reserves tag along with each other with every transaction, but do not actually mix. It is incorrect to say that reserves end up in bank deposit accounts. Bank deposits are composed of bank credit money, not reserves.

  21. So, all government spending is “deficit spending?”

  22. Stephen Ferguson

    Many thanks. PM’s 97:3 ratio is as gross a distortion of the truth as someone with an aversion to the colour white loudly claiming the French tricolour is 50:50 red and blue. I understand PM’s, unscrupulous, motivation for pushing it, however why the BoE concluded the same is a complete mystery. Don’t they know where their pay checks come from?

    Good point too on crank obsession with interest payments. Steve Keen got so exasperated with the ‘The Principal And Interest On Debt Myth’ that he felt moved to explain why its such a naive line of reasoning…

    PS Agree on your point about reserves never ending up in private bank accounts – only private bank money exists there. Apologies if I gave that impression.

  23. Yes I glanced at the commentators over at NC–most of the comments were far too silly to respond to. I will make two general responses, which are also related to a couple of comments above.

    First, the critics fail to notice that a radio 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 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. 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’ve had a number of exchanges since then. And I assure you every word I posted was in the exchanges; I only deleted identifiers.

    Final point on this topic: I do not proselytize. I never go door to door, or radio show to radio show, or blog to blog to convince anyone of anything. I have written hundreds of thousands of words on MMT, including two versions of my primer. Anyone who is really interested in learning something about MMT can read the primer. I don’t use interviews or emails to change people’s minds—it is a duplication of effort in a format that is not suited to the topic, and I do not have the time to do it to please the dozens of people I get unsolicited every week, writing personal emails to me to tell me that I’m wrong.

    Second, I can see there is an attempt in some comments to distinguish among debt, credit, debit, IOUs, and liabilities. Fine. Go for it. Call it what you want. Again, the careless commentators have not noticed 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. 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 on the liability side of another’s. 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.

    • When a bill of credit is issued, is it really a liability? Is a tax credit a liability? At most it is a contingent liability. But I don’t think it is that. If Bed Bath and Beyond issues a coupon for 20% off, is it a liability of Bed, Bath and Beyond? I don’t think so.

      This is the legal difference between a debt and a tax credit. And I think it is significant. If tax credits float around in circulation, are they real debts of the government before they are used?

      I don’t think they are debts. They are just a means of paying taxes instead of something tangible like a horse, a cow, or bushel of wheat.

      I think Joe Firestone’s trillion dollar coin was a good idea as far as it went. But it was not an actual bill of credit. I would much rather see the government pay its employees with tax credits, its soldiers with tax credits, its contractors with tax credits and even Congress and the Judiciary with tax credits. Let the tax credits circulate and become our money. It gets the banks out of the equation.

  24. financial matters

    I don’t think this is necessarily what you are addressing but I think the public banking and peoples QE people have a more colloquial use of the term ‘debt free money’.

    They start with the concept that most people now have to access money through the private banking system where they have to pay it back with interest.

    I think they view ‘debt free money’ simply as the govt sending them a check for say a $1000 that they don’t have to pay back. Or also the govt directly spending money for public purpose such as funding medical care or education.

    • Financial matters, your statement is precisely correct: ” Or also the govt directly spending money for public purpose such as funding medical care or education.” And the money spent by the government that way stays in the economy and is not subject to being “lost” by repayment of a loan. It can only be removed by taxes or other government fees.

  25. I think it would be helpful to distinguish between different kinds of debts. When a private entity goes into debt, his debt is settled in outside assets he does not issue. This can lead to all kinds of trouble including default.

    When government issues money it does it to the population that is already indebted to the government by the tax burden. Government is in a special position because it has the power to make laws, to indebt others by degree.

    Power, law, obligation. Private debt settled in outside assets. I think these are so different kind of concepts that a clarification would be in order. Can anyone think of reasonable terms we could call these two items?

    • Yes. It is called a Bill of Credit. It is referred to in the Constitution. Our Supreme Court has said nearly a hundred and fifty years ago that Bills of Credit can be issued by the Federal government (Lincoln’s greenbacks were bills of credit).

      They are simply a tax credit. They are not debt. The best known historical example of tax credits as money was the British tally stick system, Colonial scrip and Lincoln’s greenbacks.

      When a person does something of value for the government, (i.e. soldiers and suppliers of Lincoln’s army) they were issued a tax credit for their service or for the goods they provided. They were easily circulated because they were tax credit for the bearer of the instrument. By governmental fiat (order) they became legal tender. All federal, state and local taxes could be paid with these tax credits and anything else.

      When a government issues tax credits as its currency, it does not borrow from banks, and it does not need to tax the citizenry to pay off bank debt. Taxation at that point is only a means to remove money from the system or to redistribute it.

      I erroneously thought bills of credit were what MMT was proposing. But I guess not, or their advocates can’t seem to articulate it.

      • One more example where Professor Wray is wrong in his assertion that all money is debt. From history again.

        When silver and gold miners took their silver and gold nuggets to the mint and had them converted to coins, where is any creation of debt in that scenario?

        There is none. These coins become legal tender and could be used to pay taxes, to satisfy other other debts or to buy goods and services.

        It wasn’t until we began replacing gold and silver coins with pieces of paper representing them that we ran into trouble.

        • Let me be a bit more precise. It wasn’t until we created pieces of paper that were IOUs for specifically denominated coins of gold and silver or other gems and jewels of value that we ran into trouble. Then money became debt based.

        • To be even more precise, it wasn’t the fact that gold and silver coins were replaced by paper money, it was the fact that the Government condoned and authorised allowing the private banks to use the fractional reserve system. That’s when the nation’s money supply became issued as debt.
          Davidgmills, above, explains what a lot of people believed when they read up on MMT , and it was definitely not the version pushed by Randall.
          The accounting process is just the tool for keeping track of the money supply; it is not a process for defining the purpose of having money. The fact that bookkeeping gives names to figures on different sides of a ledger, really doesn’t matter at all, in terms of the purpose for having the money supply a society needs to function effectively. The determining factors for the quantity of money needed are related to population sizes, the productive capacity of the society and the consumption capacity of that production. These factors go directly to the creation of employment opportunities. The money supply is certainly not related to any taxation demands an irresponsible Government wants to apply to a monetary sovereign nation.

  26. Thanks for the query Charles. This is an issue that many people cannot get their heads around, but the explanation is really quite simple.

    We have a dual monetary system in which bank credit money and reserves tag along with each other in every transaction, but do not actually mix. Any payment by the private sector to a commercial bank entails the destruction of bank credit money (this applies in particular to the payment of principal and interest on a bank loan), however the reserves are conserved and merely change owners. The reserves associated with the bank’s interest income are now free reserves, and are accounted as profit for the bank — they can be thought of as making up a temporary increase in the bank’s capital, or net worth.

    When the bank spends, to accommodate its many operating costs, it creates new bank credit money in the accounts of the payees. In addition to meeting its operating costs, a relatively small fraction (perhaps 2-3%) of commercial bank income is used for purchasing interest-bearing assets. In the spending process, the free reserves (or their equivalents) representing the bank’s income are transferred to the payee’s bank (assuming this differs from the spending bank).

    The conjunction of bank income and bank spending has no impact on net financial assets held by the private sector. By contrast, deficit spending by a sovereign government ADDS TO the private sector’s net financial assets. This difference between the respective impacts on private sector assets of bank spending and government spending is a very important insight that I believe MMT has contributed to economic thought.

    When you think about it, spending by the banking system – using financial assets acquired as bank income – implies the restoration of bank credit money to the economy from which it was originally removed.

    I hope that all makes sense. If not, I will be happy to expand on it.

  27. The people that talk about “debt-free money” obviously mean something else than what an Economist means by “debt-free”, and it is not even “interest-free debt money”.

    It is pretty obvious when you see it from the point of view of any greek finance minister, for example Y Varoufakis, who argues strongly for it.

    What they want is debt- money denominated in a “hard” currency and where the debt never has to be paid back (Y Varoufakis wants the greek government to have an unlimited, never-to-be-paid-back, “overdraft” at the ECB). It is really as simple as that: debt that never has to paid back; and that be used to buy lots of the good stuff in life from exporters.

    Because the “debt-free money” people don’t really have anything substantial against debt as such, only against paying it back; and they want it denominated in “hard” currency so it can actually buy something.

    Therefore the proper interpretation of “debt-free money” is really “free money”.

  28. Blissex,

    Surely a debt which never needs to be paid back is not really a debt at all. It seems to me that the essence of a debt is that it has a payment schedule.

    • John H., how would you classify a demand note?

      • Charles, in regard to a demand to be paid (in a particular way), it may be thought of as a contingent liability of the entity to which it applies. It is not a payment schedule as such. A payment schedule sets out an agreed term (time-span) during which payment must be effected, and the conditions for the payment of interest, including the amounts and payment times.

      • Charles, a demand for payment (in a particular way) may be thought of as a contingent liability of the entity on which the demand is made. It is not a payment schedule as such. A payment schedule entails an agreement about the time-span (or term) during which payment must be effected, along with the amount and terms of payment (including payment times) of any interest due.