By J.D. ALT
Everyone knows how a country-club works: Members pay dues, and the dues are used to pay for the expenses of running the country-club—maintenance and improvements, kitchen and service staff, golf-course mowing and landscaping, etc. Sometimes a big expense comes along (like putting a new roof on the main club-house) and the cash-flow from the monthly, or annual, dues isn’t enough to cover the one-time cost. In that case, the club would take out a bank-loan to pay for the new roof and the dues would then service the loan. It might be necessary, under those circumstances, to raise the dues to ensure that while the loan is being serviced the kitchen and dining services continue and the golf-greens are manicured. There would likely be a vote by a board of club-directors to determine if a due-increase was necessary.
Many, if not most, people believe this is basically the way the United States of America works: it’s like a very big country-club, and citizens are required to pay dues to keep it maintained and running. The dues are called “taxes” (for some reason) but they amount to the same thing.
Many, if not most people also believe the United States of America is a poorly managed “country-club” because it consistently borrows WAY more dollars than it can possibly pay back with the dues it collects. It is “fiscally irresponsible.” The “club-directors” consistently vote to borrow more and more dollars, while consistently refusing to raise the dues as necessary to service the loans. Many, if not most people—including most of the “club-directors” themselves—believe this “fiscal irresponsibility” will eventually bankrupt the nation, just as a similar irresponsibility would bankrupt even the wealthiest country-club.
Somehow the “inevitable” bankruptcy of America never happens, though. No one seems able to explain precisely why that is. They can only explain that it is “inevitable” because common sense says if you’re a country-club you cannot continuously spend more dollars than you collect in dues, and you cannot continuously borrow money without paying it back. Why does America’s inevitable bankruptcy never seem to happen?
The answer is because America is NOT a country-club.
The easiest way to visualize how and why this is true is to imagine an actual country-club operating in the same way as the United States of America. Let’s call it “Club USA.”
The first thing Club USA does is put its members on notice that dues must be paid with the club’s own paper money—which the club shall print in a secure back room of the club-house basement. Nothing else will be accepted as a payment of dues. In fact, the money the club shall print (to be called a “clubber”) will be prominently printed with the following inscription below the photo-image of the club founder, and signed by both the club secretary and treasurer:
This note shall be accepted as payment for all dues owed to Club USA.
We now have an interesting situation to consider: The club treasurer can turn the crank on the printing press in the basement room, churning out clubbers whenever she feels inspired—or whenever the club-directors direct her to do so. But how do the people who need the clubbers—the club members themselves—get their hands on the clubbers so they can pay their dues?
The first way is the simplest: they earn them. The club members provide some service, or some goods, to the club—perhaps they rake sand traps every morning, or they provide the kitchen with lettuce and carrots from their garden. In exchange for the sand trap raking or the carrots and lettuce, Club USA pays them with the clubbers printed in the basement room. Those members now have the “money” they need to pay their dues.
The members who provide goods and services to the club will earn many more clubbers than they need to pay their dues. What do they do with the rest? They use them, logically, to buy goods and services from other members who also need to earn clubbers so they can pay their dues as well. In this way, clubbers become a general currency of exchange within the larger community of the Club USA membership.
The second way Club USA members can obtain clubbers is a bit more complicated, but once it’s set up it works just as seamlessly. The club board-of-directors authorizes three or four of the club members (with impeccably trustworthy credentials) to become “club-banks.” Let’s call them “CBs.” After agreeing to a stringent set of guidelines, the CBs are authorized by the club to issue loans to club members “denominated” in clubbers. The CBs don’t give their borrowers actual clubbers—the ability to print clubbers remains strictly within the club’s basement printing room. But the “CB-clubbers” loaned out are essentially the same as actual clubbers because Club USA—as part of its authorization agreement with the club-banks—promises to convert, on demand, the “CB-clubbers” to real clubbers printed in the club-house basement and signed by the club secretary and treasurer.
Voila! Now all the members (provided the CBs determine them to be credit-worthy) can obtain the clubbers they need to pay their dues. Importantly, they’re also able to obtain the clubbers they need to buy goods and services produced by other club members. Or, alternatively, they’re able to borrow the clubbers they need to produce goods and services themselves that other club members might want to buy. If the club members want to borrow from the CBs—whether to buy goods and services, or to produce them—there is never a shortage of clubbers for them to have (assuming, again, the CBs determine the borrowers to be credit-worthy). Whatever number of “CB-clubbers” the club-banks loan out, the club treasurer in the basement room is able to crank out real clubbers to back them up.
But why would a few of the impeccably trustworthy club members agree to become “club-banks” and provide this necessary but complicated and time-consuming loan service to the other members? The reason is because a big part of the agreement they have with Club USA is that they’re allowed to charge interest on the “CB-clubbers” they loan out. Even though the interest they receive might be paid with their own “CB-clubbers,” don’t forget that Club USA has promised to convert those “CB-clubbers”—on demand—into real clubbers printed in the basement room. It’s a promise that Club USA never fails to fulfill.
We could continue this thought-exercise all the way through to visualizing, for example, how the club treasurer manipulates and controls the interest rate the club-banks charge their club-customers, or how and why the club treasurer might decide to issue Treasury bonds that club-banks and club members can “store” they’re excess clubbers in. But the more useful thing we should accomplish before our attention span wears thin is to focus in on the REALLY IMPORTANT things our thought experiment is showing us:
- The club treasurer, operating in that secure room in the club-house basement, is able to create as many clubbers as necessary, whenever necessary, to (a) buy goods and services from the club members, or (b) back-up the “CB-clubbers” the club-banks loan out to club members either for consumption or production.
- Since no. 1 is true, what does the club treasurer do with the dues she receives from the club members? It is obvious she doesn’t need the dues in order to have clubbers to spend—she has, in fact, already spent them, and now they’re coming back to her in the form of the dues! She doesn’t need them for anything other than the paper they’re printed on: She simply grinds them up, puts them back in the paper machine, and uses the recycled paper to print new clubbers as they’re needed.
- If no. 2 is true, the Club USA board-of-directors need to ask—and answer—a few simple questions:
- Are they really collecting dues in order to pay for the expenses of running the country-club? ANSWER: Obviously not, since Club USA is buying goods and services from its members first and then collecting dues afterwards.
- If the directors decide to put a new roof on the club-house and build another nine holes for the club golf-course, do they need to increase the membership dues? ANSWER: Obviously not, since they are going to print the clubbers necessary to buy the new roof and build the nine holes first—then collect dues (as always) and put them in the paper-grinder to create new clubbers with.
- Does Club USA ever need to borrow clubbers from the club-banks (or anyone else?) ANSWER: Why would the club borrow something which it has the sole legal authority to produce? Why would it borrow a “CB-clubber” from a bank, and then convert it, on its own demand, into the “real” clubber which only the club, itself, has the authority to produce? While the concept of “debt” for all the club members is very real, for Club USA, itself, it is a uniquely illogical construct.
- Can the club do something really wonderful for its membership like, for example, provide each member’s children with a free college education? ANSWER: Of course it can, and here’s the reason: Since Club USA is the exclusive producer of clubbers—able to produce as many of them as it wants, any time it needs to— that means the club can buy any goods and services its members are willing to sell in exchange for clubbers—including, for example, classrooms and teaching services to provide a college education for all the membership’s children.
Club USA is obviously an artifact of the imagination. No country-club could really function as we’ve described. The monetary system we’ve attributed to Club USA, however, is NOT imaginary. It actually exists and is operating in the United States today—and has been operating here for over half a century. This is why America is not a country-club—and why our “board-of-directors” should stop thinking and behaving as if it were.
I believe in what you say, I think. But I am working class, blue collar from a blue collar back ground, I do not truly understand economics (I’m not sure economists do). Your articles are clever, often amusing but they are too long, almost verbose. May I suggest you shorten them?
Use fewer words.
And, let me just see if I’m getting this right: the economy is what people do; economics is the way economists describe it.
I am a write in candidate for congress, Florida district 19, and would dearly appreciate some help explaining MMT to the voters.
Actually, an excellent introductory example JD and something a lot of people can relate to. Now you need to follow up with a clear and similarly understandable example of how Club USA can monitor and control their ability to produce unlimited “Clubbers” without creating runaway hyperinflation.
That is the club, which the pseudo “scientists” of orthodox economics, will try to bash you with.
In another followup article, you should also try to explain the reality related to the “CB’s”, which everyone knows, in that the “CB’s” have been in existence centuries longer than the 50 years you have mentioned.
A further article would also be useful in explaining what happens when the “CB’s” choose not to worry about finding “creditworthy” borrowers, but instead, are allowed by the Club USA management to create all manner of, basically, fictitious scraps of paper for use as gambling chips.
As Pete implies above, the way you have, quite brilliantly, illustrated this subject is a whole new ballgame to a lot of people, but it is a ballgame they can relate to. Each step along the way has to be clear, succinct and related to the real world outside of Washington and the rarefied field of economic academics.
Pete, you are going to have a hell of a time trying to explaine to voters how an MMT economy works. That is why I suggested (see my comment following J D’s previous post) that an MMT knowledgible President show the public how an MMT economy works rather than trying to explaine it to them. A picture can be worth many thousands of words.
Pete Pollard. Thank you for your comment. I am not an economist. I’m an architect who started out building houses as a carpenter. I got started in all this economic stuff because I couldn’t understand why America didn’t have enough money to build houses for people to live in when—for whatever combination of reasons beyond their control—they had no place to live. I stumbled on MMT, which I discovered is really just an explanation of how the modern fiat-money system we have in America actually works. I had to work hard to understand it. I’m still working hard on fully understanding it. Part of the difficulty is that the people explaining it are economists who talk in jargon to each other. I decided to try to figure out ways to explain it in ordinary language and analogies that “regular” people could visualize and adapt to their personal understanding of reality. As you point out, I have not fully succeeded in doing that. Each time I write an essay—and I’ve written about 10” of them (stacked vertically) over the past six years, I think “this is the one that will connect.” But I’m always disappointed. I must tell you that the fact you responded to this essay—and that you are a write-in candidate actively participating out front in our democracy—means a lot to me. It’s very encouraging. I feel like I’ve connected a little bit! I’d love to help you explain MMT to your constituents. The best I can do, however, is give you these links to a youtube video and an ebook that I believe still constitute the most “accessible” visualization of MMT to the American worker—whether they have a blue, white, or sweaty collar. Good luck in your campaign.
Ebook: (It only costs $1.50)
The country club metaphor is helpful in showing the unnecessary and obfuscating central bank component of currency-issuing nations. But I think that MMT is overly-invested in the mundane fact that federal taxes must be paid in a nation’s currency. The idea, of course, is that it is this tax payment obligation which underlies and undergirds the value and necessity of currency. It seems to me, however, that the most powerful and pervasive force that makes money valuable is not the periodic tax obligation, but rather the pure subjective human agreement, made almost unconsciously yet universally throughout a society, that a certain currency will be accepted as the principle means of exchange for all goods and services. Over-emphasizing the tax obligation tends IMHO to mask or minimize the startling reality that money, freed from the gold standard or other self-imposed constraint, comes into existence and operates only by human will, nothing more. There’s an interesting tie-in here to quantum physics, which, according to its most radical theoreticians, has revealed that the particles and waves observed in experiments do not really exist “out there,” but are themselves nothing but observations. This parallel–that both the material and monetary worlds are called into existence by mind–would make for a fascinating article or book, given a creative author both scientifically and economically conversant.
Newton Finn, you miss the point entirely! What the central bank does is not obfuscating and unnecessary at all. Where did I say that? Also, how is it “mundane” that citizens have to pay taxes in the currency issued by the federal government? And assuming you’re correct that there is not a direct correlation between people’s need to pay their tax obligations using federal currency and their willingness to use that currency for everyday transactions, the fact remains that the federal government has unlimited powers to create that currency at will—which means it can buy anything the democratic will of the people decides they want to buy. Ultimately that’s the only salient point of MMT.
The obfuscation involved in the current operation of central banking–only one example being the setting up of an unduly elaborate “accounting system” to make it falsely appear that a federal government must sell bonds to support the spending of money it creates by that very spending itself (artificially linking federal spending to debt, as state bank money, in the form of loans, is actually linked)–is succinctly explained by Mitchell and Fazi in “Reclaiming the State” and discussed at considerably more length in the blog post linked below, along with several others on the same website. I’m in total agreement with your salient point of MMT and thought I made that clear in my comment.
Its not the scientists that are pseudo, but the subjects that some economists believe to be scientific!
So, J.D.. Is the spigot for taxes in the p.s. pot the main reason that the diagram has been reversed for so long in the political neoliberal world of thinking? That certain few entities simply do not want to be taxed their fair share to keep the inflation meter out of the red zone? Thus keeping the what we’re taxed for and how much we’re taxed an unfair burden to the many. What little I’ve gleaned from MMT taxation is that it would seem to be favorably regarded by the business community. Not taxing production. But the top 5% simply loath’s taxation of their income earned in their sleep as dear old Michael Hudson says of classical economists. Surly I’m overly simplistic, and lord knows it’s not fair to imply some kind of class warfare to wrestle away their nocturnal fiat income .
P.S. Your youtube is superb.
I have argued the same case about “money” as stated by Newton above. Money is the most convenient medium for the exchange of goods and services. It is by far the best system yet devised by man to facilitate the daily need to trade. However, a money system will only work effectively if it has two essential properties. First, whatever tokens are used for the system need to have a level of universal acceptance within a given community. While a community could have, and in the past have had a series of different tokens designated as “money,” and produced by private money lenders, it becomes a nightmare to evaluate one token against another. Hence, the universal acceptance of one token serves the community far better than multiple tokens. As far as I can imagine, only a nation’s Government is in a position to comply with its public responsibility to determine what shall be designated as the nation’s legal tender. Having determined the types of tokens to be used as legal tender, the second property for a money system then comes into play. That property is the guarantee that the designated tokens are not a false, or countefeit tokens. Only a nation’s Government is in a position to provide that sort of guarantee and to police any infringement.
I do not believe a tax system is at all necessary for a Government to force the nation to accept what they decide shall be legal tender. Creating a money system is really an essential public service to facilitate trade, and as long as the two principle characteristics are observed, any form of token can be used – and that includes, as is currently the major share of every nation’s money supply, all the digital “money” created by punching some keys on a computer keyboard in the private banking system.
How can we be so theoretically naive? To imagine the “people” spontaneously agree somehow on what they will use as “money” for everyday exchange transactions. No, it can ONLY happen from the top down. It’s as fundamental as the way gravity works.
Fair enough JD. I agree it can only really happen from the top down, but the “top” is the representatives the people choose to form the Government. It then becomes part of the Government’s responsibility to create a universally accepted medium of exchange as a public service to allow the convenient means of day to day trading. Obviously, there will virtually never be a simultaneous agreement between all the “people” – pretty much on any issue, but if the “people” choose to accept a democratic form of Government based on rule of law, then the “people” essentially agree to delegate their authority to that Government body to make decision on their behalf. In theory, that is how it is supposed to work, and I would be pretty sure the vast majority of “people” would prefer the convenience of a money system over the alternative cumbersome system of barter trade.
Graham, here’s the contradiction in MMT’s focus on taxation as providing the “grounding” of the value of currency. The cardinal principle of MMT, which is self-evident when you think about it, is that currency-issuing nations, not self-constrained by something like the gold standard, have the inherent ability to create fiat money merely by spending it into existence. Such nations need not sell bonds NOR LEVY TAXES to create money, but rather vice versa. The money is created by government spending, with bonds then being merely a convenient way to store some of that money (and earn interest), and tax payments then being that portion of the money that is taken back, shredded, and removed from the private sector. BUT HERE’S THE RUB: if taxes aren’t necessary to create money–indeed, can’t create money–and are instead merely a mechanism to reduce its private sector supply, then how can these same taxes be deemed the ultimate bedrock upon which money is considered to have any value at all? Surely, it is only widespread subjective social agreement, especially in a developed commercial nation like ours, that bestows abiding value upon fiat currency. If the US government were to announce tomorrow that it would accept some alternative, other than dollars, to meet tax obligations, or that it would stop collecting any taxes at all (as MMT asserts it can do), does anyone believe that the dollar would then just collapse and disappear?
I don’t recall MMT actually asserting taxes to be the ultimate bedrock upon which money is considered to have any value at all.
They do assert that taxes legitimize the use of the issued currency among the populace. It demonstrates the imposition of authority of the sovereign state (aka federal gov’t) to make monetary, as well as fiscal, rules.
“the fact remains that the federal government has unlimited powers to create that currency at will—which means it can buy anything the democratic will of the people decides they want to buy. Ultimately that’s the only salient point of MMT.”- J.D. Alt.
Thank you. That is the first time I have seen, in print, that simple declarative statement.
Newton Finn, Graham Paterson, the theory you are suggesting is called “legal tender chartalism”. Basically, it just doesn’t work. Nobody is going to accept the state’s or anybody else’s money if the state ITSELF does not accept it for something people want – and that’s what taxes (or fees or whatever) are. It can work for a while out of inertia, but not very long. If the government is dumping new money in by spending and NOT taking it out by taxing, there is going to be high inflation = loss of value of money. Period. Unlike taxation, legal tender laws are only known in some cultures (Western ones, they are unheard of in the East). And they just don’t work. Historical experience shows that they cannot maintain the value of money without taxation, and with taxation, they are superfluous.
It also misses the point theoretically – “means of exchange”, “medium of exchange” are very misleading ways of thinking about money, because they focuses on commodity exchange or barter, as the commodity theory of money does. In MMT, “There is no medium of exchange” (Alfred Mitchell-Innes). MMT is about creditary transactions, which are more fundamental than barter and exchange- and are seen everywhere, long before money and capitalism. Again, credit and debt are fundamental and ancient, not barter. The standard economic fairy tales about money reverse the historical and logical order. The “tokens” are what MMT calls “money-things” dollar bills, checks, even computer entries. They are not the “money” which is an immaterial credit/debt relationship between the issuer and the holder. The “money-things” are only “tokens”, symbols of the “money”, the same way a wedding ring is only a symbol of a marriage.
I understand the wisdom of taxation, by a currency-issuing government, for reasons other than the creation of money (a foolish, self-contradictory concept that MMT lays bare). But if people have faith in their government due to its size, duration, and power, wouldn’t they also have faith in its currency, without regard to whether or not their government chooses to tax for other than revenue-producing reasons? And despite the distinction you draw between hard money and credit/debt, I can see no substantial difference, other than interest, in the thousand dollars under my bed and the thousand dollars I now owe the bank for the loan I took out to buy that bed. If I so chose, I could simply take that money under my bed and pay off the loan (with a little added interest), couldn’t I? Would you be willing to explain this distinction further so that I can get a handle on it?
Newton Finn:But if people have faith in their government due to its size, duration, and power, wouldn’t they also have faith in its currency?
No, because actions speak louder than words. The government, by not accepting its own money in taxation is denying by action the truth of its words that “government money is valuable.” Money is “abstract” credit, but it never works in the real world if it can never be used as credit for something. If the government spends anywhere near the amount it does now, it has to tax somewhere vaguely near that amount. Usually taxing will be less than spending, but they almost always will have to be in the same ballpark.
A usual example of what you are saying is the Maria Theresa thaler. At times it was not accepted for tax payments in some or all places, but it was usually accepted somewhere later. The silver content kept the value up and now many old ones have large numismatic value. So no taxation and low spending (because it requires silver to be minted) can work, but not forever.
Taxes are and in the foreseeable future will be the practically important payments to the government, but any fee or price or payment to the government for something “real”, something people want, can drive demand for money. Anything the government sells. (Note – income taxes can’t drive the initial demand for money, they can only augment it – if nobody wants or has a reason to hold shmollars, levying a tax on shmollar income or holding is not going make people want shmollars.)
And despite the distinction you draw between hard money and credit/debt, I can see no substantial difference, other than interest, in the thousand dollars under my bed and the thousand dollars I now owe the bank for the loan I took out to buy that bed.
That’s quite right, but I didn’t really draw a sharp distinction between “hard money” and credit/debt, because there isn’t any. That is the core of MMT: Money is credit and nothing but credit. The only true distinction is who issues the credit? Bank money is different from government money because the bank is a different institution from the government. Today, government money is on top because the certain necessity of payments to the government -i.e. taxes – is next to the certainty of death. So bank money is denominated, measured in terms of government money.
I’m not sure your assertion to “a little added interest” is entirely realistic. It could apply to small items but if you take the mortgage loan for a house over say, 25 years, the interest paid will amount to approximately 200% more than the principle loan. Where does this extra 200% come from? The Government is not going to give it to you, that’s for sure. Essentially, it must always come from the increase in the money supply that inevitably comes from further borrowing by businesses and other clients of the financial system. As long as interest is charged on any loan there must always be a continual increase in the money supply.
Sorry, I’m just a blue collar guy with no credentials but I just don’t buy it. It COULD work out that way but doesn’t necessarily have to. If the mix of products available to the consumer stays the same there might be hyperinflation, but this economy brings new stuff to the market all the time! And how about people who don’t think they have enough stuff? Give them more money they will spend!
Isn’t that a law of economics: if people have money and are secure in their future they will spend every penny they have?
Thanks for that Calgacus, and while you are probably completely correct in saying that a credit /debt evolved long before money because that is really just an extension of human nature. When someone helps someone else, in whatever way, as normal human beings, we feel an obligation to repay them in some way. That would have been the norm before someone came up with the idea of creating a token to be used to facilitate the exchange of goods. Obviously, with the barter system, people who were more productive, or as was probably more the case, stronger and more powerful, could force others to do the production, and that led to the feudal system. Without knowing the detailed history relating to the creation of a money system, it seems precious metals, such as gold and silver, became commonly accepted, and from a bit of historical research, it seems the people who controlled the mining and/or looting of those precious metals, controlled the number of tokens that could be produced. As the story goes, modern-day banking evolved when someone came up with the idea of offering patrons the safety and security in storing their excess gold and giving them a receipt to confirm the deposit. It was when the astute warehouse man realised that all the patrons never came to collect their gold at the same time, and the patrons found it more convenient to use their receipts for buying goods and services, that the fractional reserve system was born. With some judicious calculation, the warehouse man worked out that he could issue additional receipts as loans and charge interest from the borrower. Essentially, as is still happening today, this is akin to dealing in stolen goods, and for anyone else other than our private bankers, this would land them in gaol.
Contrary to your claim, the concept of legal tender has worked magnificently for centuries, and that is certainly confirmed by President Lincoln’s creation and issue of “greenbacks” during the civil war.
Again, on the contrary, virtually everyone around the world today, and in almost every society, would far prefer to accept a money token that is certified by the Government and has a degree of guarantee that it is not counterfeit. The universal acceptance of the US dollar around the world is proof of that.
The fact that the Government accepts their legal tender in payment of tax is really immaterial to the society’s benefit in having a single universally accepted token and one that comes with the guarantee it is not a false token.
In today’s world debit and credit are simply accounting terms, basically fraudulently used to maintain the status quo of the rich and powerful over the not rich and powerful.
As JD and MMT has pointed out “the fact remains that the federal government has unlimited powers to create that currency at will—which means it can buy anything the democratic will of the people decides they want to buy. Ultimately that’s the only salient point of MMT”.
And that point also refutes the point that taxes are necessary to justify the issue of a legal tender.
It also makes the point that the only real purpose for having a money system is, in truth, to act as a convenient medium of exchange. There really is no other purpose in having a money system. There is absolutely nothing misleading about the term “medium of exchange”.
While “creditary transactions” are certainly accounting fundamentals for today’s financial system, and has been so for many centuries, it is only fundamental for maintaining the banking system that controls everything in today’s world.
Under the capitalist system, the profit motive controls what can be achieved – if there is no potential for a profit, nothing will be attempted.
But, just ask yourself, where does the profit come from? It certainly doesn’t come from production. Production is useless if the product isn’t consumed. Every single dollar of profit comes from consumption – that is an undeniable, undisputable fact. And that is precisely what is wrong with today’s economic system. Unless the consumer is able to acquire sufficient purchasing power to consume the mass of productive capacity that is possible today, the system must eventually destroy itself.
Thus, you rather ridiculous assertion that a tax regime must be imposed to suck up the excess of “money” in the society completely misses the point. The only reason there would be an excess of money in the society is because the private bankers and the Government has allowed that to happen through ignoring the essential necessity to balance the nation’s productive capacity with its consumption capacity. The people are ALWAYS, the ultimate consumers, and unless the people have sufficient purchasing power to consume what is produced, the whole system will collapse- just as history has proven.
MMT and its predecessors focuses quite a bit of attention on the history, the development and evolution of money and credit. Keynes called it (his) “Babylonian madness”. The upshot is: the usual history in economics books is nonsense. MMT goes by the history of historians, archaeologists, numismatists, anthropologists, sociologists, accounting theorists etc. Credit and money are much older than coins, older than gold and silver for monetary purposes. Trade and credit and money didn’t grow out of barter.
Contrary to your claim, the concept of legal tender has worked magnificently for centuries, and that is certainly confirmed by President Lincoln’s creation and issue of “greenbacks” during the civil war.
No, it is refuted, not confirmed by Lincoln’s greenbacks. Lincoln’s Treasury Secretary was Salmon Chase, who was perhaps the biggest opponent of the “legal tender” idea ever, probably going too far even. Chase’s position was that calling something “legal tender” made it less not more valuable, because those were just empty words. So the greenbacks were acceptable for US tax payments, for instance for a newly instituted income tax. Those taxes were what made the greenback valuable. And that is what today’s US dollar is – a tax credit. This is described in Mitchell-Innes papers and in Wray’s first book on MMT, Understanding Modern Money for instance.
In today’s world debit and credit are simply accounting terms, basically fraudulently used to maintain the status quo of the rich and powerful over the not rich and powerful.
They’re universally understood concepts that mean the same thing now that they have always meant, the same thing in ordinary language as in accounting. So the rich & powerful use them fraudulently. So what? That is like saying that there is something wrong with addition and multiplication because the rich and powerful always make arithmetic mistakes in their own favor and everybody else’s detriment.
Thus, you rather ridiculous assertion that a tax regime must be imposed to suck up the excess of “money” in the society completely misses the point. The only reason there would be an excess of money in the society is because the private bankers and the Government has allowed that to happen through ignoring the essential necessity to balance the nation’s productive capacity with its consumption capacity.
My “rather ridiculous assertion” is much the same as your second sentence above, so this is self-contradictory. For how does government allow an excess of money in society, how does it not balance production & consumption? By not removing the excess money – in other words by not taxing. (By taxing here I mean any monetary payment to the government)
MMTers usually say that taxation is a sufficient but maybe not necessary condition for creating a demand for money. But note that there aren’t any real, important examples where it wasn’t necessary. In particular, a US (federal + state & local) government that spends something like 25% of GDP into the economy every year cannot cut taxes to nothing without setting off very serious inflation. Do it consistently for years, convince people that that is the policy, and dollars become worthless.
There is absolutely nothing misleading about the term “medium of exchange”.
I was quoting Alfred Mitchell-Innes’ papers and Randall Wray here at New Economics Perspectives. I mean, this is an MMT site and MMT says “medium of exchange” is very misleading. You’re free to differ of course. It takes some thinking to see what “there is no medium of exchange” means, but there are many people here to explain MMT.
Thanks Calgacus. I hope you are enjoying your retirement. I certainly am out here on Kauai.
Calgacus and Graham Paterson thanks for this very informative discussion! This almost feels like the old NEP, which I dearly miss because I learned so much from the commentaries. Keep arguing in your respectful ways, because the truth is getting squished out for everyone to see.
Let me second the “motion” for more lively and respectful discussion on this forum. Whatever disagreements we MMTers might have about this or that aspect of the overall analysis, those differences are dwarfed by the shared recognition that fiat money is created only by sovereign government spending and is constrained only by the goods and services available in that sovereign government’s currency (sovereignty meaning here that the government has retained its right to issue currency, unlike in the EU). It’s that elemental insight, yet to sink into the minds of many (economists included), which opens the necessary economic space (breathing room, literally) for a wide variety of governmental programs vital not only to economic and social prosperity but to human survival itself. Since the private sector leaves massive environmental destruction in its wake, how are we to begin to address this gradual ecocide without massive federal spending to address it–to remediate and restore nature when and where we can and to protect and preserve whatever natural health still remains? The job guarantee proposal put forward by MMT would provide a powerful tool in this regard were it to be heavily invested, as some have proposed, in meeting this most daunting challenge of our time. Thus, for me, MMT is not merely about economics but about whether human beings and other life forms will continue to exist on this planet. I hope and pray for a closer linkage–perhaps even a full-blown partnership–between MMT and the environmental movement, to the immense benefit of both.
Thanks, JD and Calgacus, and all the other commentators. I too find having these sorts of respectful discussions opens our minds to new ideas and new ways of thinking. It is very easy to accept what is considered the norm and not question the foundation. I think it is a wonderful thing when we are offered the chance to see how other people think.
The time between posts on the NEP MMT blog is fall asleep, move along, nothing to see here, why bother.
Someone should fund a constant question and answer posting for the precariat (those, more and more precariously on the economic fringes).