A Memo From MMT’s Legal Department

By Rohan Grey and Raúl Carrillo

Orthodox economists are often inclined to think of law as an external force that ‘intervenes’ to regulate otherwise naturally occurring economic phenomena. In contrast, Modern Monetary Theory and its antecedent intellectual traditions have long recognized that law in fact constitutes and shapes modern economies and the monetary regimes that underpin them. For example, Knapp argued explicitly that money was a “creature of law.” Similarly, Keynes, in A Treatise on Money, stated:

“The State…comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contracts. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time-when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern states and has been so claimed for some four thousand years at least.”

Today, many of the core propositions of MMT can be understood as essentially legal arguments. Here are a few examples:

• MMT’s determination that that a Job Guarantee is necessary because the state creates unemployment by imposing a non-reciprocal liability (i.e. a tax) that can only be satisfied by obtaining its tokens (i.e. tax credits), and thus owes individuals the ability to work for those tokens, is an argument about legal systems design. That is to say, the Job Guarantee is a legal remedy to the problem of legally-created unemployment. This framing echoes the legal arguments made by the British peasantry in response to the 18th century enclosure movement. When the state privatized farming and hunting lands previously considered part of the commons, peasants demanded compensation. Although the enclosure story focuses on the coercive creation of private property rights and the Job Guarantee story focuses on taxation , the underlying legal reasoning is the same: when the state prevents its subjects from subsisting independently from the state-controlled, monetarily driven, social provisioning process, it cannot exclude them from equitable participation in that process.
• MMT’s observation that the state has a “monopoly” over money can be understood in relation to the longstanding legal prohibition against counterfeiting–not only of currency, but also of private monetary instruments issued under state sanction. For example, laws against securities and wire fraud, as well as regulations prohibiting non-banking institutions from issuing demand deposits, are all examples of the state’s power to delineate the scope of legitimate monetary transactions. From this perspective, the notion that money is a public monopoly supports, rather than contradicts, Minsky’s famous dictum that “anyone can create money, the challenge is to get it accepted.” After all, the question of acceptance is, ultimately, one of legal legitimacy. Indeed, we see this quite clearly in current regulatory debates over financial technologies. For example, while the U.S. Treasury has classified bitcoin as a “currency,” the Commodity Futures Trading Commission continues to treat it as a “commodity,” and the Internal Revenue Service taxes it as “property.” Together, these legal classifications determine bitcoin’s ‘moneyness’ by establishing the boundaries of its legitimate commercial use.
• MMT’s recognition that certain operational constraints on macroeconomic policymaking are merely “self-imposed,” rather than intrinsic to the monetary system, reflects a sophisticated legal understanding of the varying malleability of constitutional versus statutory provisions, as well as administrative rules, regulatory guidances, and mere informal conventions. For example, while the minutiae of the Federal Reserve Act may be highly restrictive to the day-to-day activities of a bureaucrat operating in the bowels of the St. Louis Federal Reserve, they don’t present any ‘deep’ constitutional barrier to a member of Congress contemplating reform of the Federal Reserve System itself. With these distinctions in mind, MMT’s tendency to analyze Treasury-Central Bank operations from both a “consolidated” as well as a “deconsolidated” approach is not a technical weakness but a visionary strength. MMT economists are not ignoring institutional granularity, they are appropriately acknowledging the plasticity of law and the power we have to change it.
• Finally, MMT’s embrace of Minsky’s balance sheet view of the monetary economy and its commitment to stock-flow consistent models implies recognition that finance is governed by man-made accounting laws, rather than natural laws. These accounting laws are ultimately subject to the same legislative, administrative, and judicial input as any other laws. They are also subject to constant manipulation: a notion intrinsic to the concept of control fraud. . Whereas it is mathematically impossible to make 2+2=5 in the real world, such an outcome is easily achievable in the nominal realm of legal accounting and thus throughout the financial system and the monetary economy overall.

At the same time, the dialogue between MMT and the law is a two-way street. Indeed, modern money theorists have historically found mainstream lawyers far more eager to grasp and grapple with the radical political implications of their insights than mainstream economists. For example, Innes, who, according to Randy Wray, wrote “two of the best pieces written in the 20th Century on the nature of money,” chose to publish his ideas in the Banking Law Journal. Similarly, Beardsley Ruml, President of the New York Federal Reserve and author of the excellent proto-MMT Taxes for Revenue are Obsolete, first presented his argument to the American Bar Association.

In 2012, in recognition of this natural pairing between MMT and certain kinds of legal thinking, several of us formed the Modern Money Network (MMN), a non-profit, educational organization dedicated to promoting public understanding of money and finance. From our initial beginnings as a student group at Columbia Law School in New York City, we have grown into an international organization with affiliates and supporters in Europe, Australia, and elsewhere.

In recent years, many progressive and radical lawyers and legal academics have embraced MMT’s core ideas and arguments. For some, this is a result of direct engagement with MMN and/or the broader MMT community. Others have arrived here on their own, using independent thinking to reach similar technical and normative conclusions. For example, as University of Maryland Law Professor Frank Pasquale observed in 2014:

“[A] renewed emphasis on a key legal insight (the government cannot default on debt it issues in its own currency) can lead to an adjustment to economic theory (MMT), which in turn informs a new legal proposal to get past the current, futile […] debate. It’s a movement from legal insight to economic insight back to legal insight, or L – E – L. … The legal foundations of MMT make it both scientifically, and normatively, a better theory of our economic system than the dominant paradigms of monetary policy.”

Similarly, University at Buffalo Law Professor Martha McCluskey noted in 2016:

“Modern money theory explains that political and legal systems for creating, regulating, and distributing money are fundamental to economic prosperity and stability, necessarily shaping (not “distorting”) and facilitating private exchanges of goods and services. … the economic costs and benefits of public money creation depend on the contingent, complex value-laden questions of how that money is spent and invested and how effectively taxes and other forms of regulation help steer economic and political activity toward the productivity, stability, and legitimacy that will help maintain currency value.”

Developments like these have been both validating and deeply encouraging. At the same time, MMN continues to relentlessly promote MMT in the legal world, through organizing widely attended educational events, and bringing economists and lawyers together with the explicit purpose of building a truly transdisciplinary theoretical and policy framework for achieving social and economic justice. Some MMN highlights during this period include:

• A seminar on bridging legal and economic perspectives on money, ft. David Bholat from the Advanced Analytics Division of the Bank of England and MMTer Pavlina Tcherneva;
• A seminar on the federal budget at Harvard Law School, ft. Amar Reganti, former Deputy Director of the Office of Debt Management at U.S. Treasury, and MMTer Stephanie Kelton;
• A seminar on money markets, ft. New York Federal Reserve Bank Legal Counsel Joseph Sommer, former U.S. Treasury Department Senior Advisor Zoltan Pozsar, and MMTer Marshall Auerback;
• A seminar on central banking as part of a series on the “law-money nexus,” ft. former U.K. Financial Services Authority Chairman Adair Turner, former Central Bank of Argentina Economic Research Director Matias Vernengo, former Assistant U.S. Treasury Secretary Richard Clarida, and MMT fellow traveler James K. Galbraith;
• A symposium on the future of Greece and the Eurozone, ft. the now-Prime Minister of Greece, Alexis Tsipras, Greek Alternate Minister for Combatting Unemployment, Rania Antonopoulos, Rutgers Law Professor and author of Rep. John Conyers H.R. 1000 full employment bill, Philip Harvey, and MMTer Mathew Forstater;
• Panels on public banking, the legal architecture of economic institutions, and the role of economic models in public policymaking, at the student-organized Rethinking Economics New York conference at Columbia and New York University Law Schools and the Economics Department of the New School;
• Panels on public money and financing the criminal legal system at the annual Rebellious Lawyering Conference at Yale Law School, the nation’s largest student-run public interest law conference;
• A 1-credit, student-driven course on law, money, and finance at Columbia Law School;
• Three chapters in an upcoming law school casebook, authored by the Association for the Promotion of Political Economy and Law (APPEAL), exploring the legal architecture of public and private money, the legal foundations of the job guarantee, and the law of derivatives regulation;

And these are just the tip of the iceberg. For anyone, regardless of experience or background, who is interested in learning more about MMN’s forays in the legal world, please join us and the rest of the MMT community at the historic 1st International MMT Congress at the University of Missouri-Kansas City in September. To borrow a phrase, we believe that anyone can create law, the only challenge is to get it accepted. We look forward to rising to that challenge with you all, together.

See you there!