Standard Money Theory and the Coronavirus


The theme and illustrations of this essay are from the new book “Paying Ourselves to Save the Planet.”

It might seem, as we observe the U.S. government “instantly” generating $2 trillion new dollars for direct payments and grants to people and businesses, that the coronavirus pandemic has shed a new light on the authenticity (and necessity) of modern money theory (MMT). But that light, if it is being shed at all, is illuminating instead the dramatic limitations of the “standard money theory” we insist on applying to the exigencies of an unfolding modern society (including, but not limited to, how to deal with pandemics).

What do I mean by “standard money theory”? I mean a very simple assumption implicitly built into our mental models of how money works: namely, that the only money available to sovereign governments for their spending purposes are dollars (or euros, or yen etc.) that have been earned in private enterprise. According to the standard theory, the government (in order to spend) must claim a share of that privately earned money through taxation—and if that is not adequate to meet its spending needs, it must borrow a further share by issuing treasury bonds (government debt) which, themselves, can only be redeemed by the collection of future taxes on  private earnings. Thus, government spending to buy the goods and services of public enterprise—those things which profit-seeking private enterprise is unwilling or unable to provide but which collective society requires for its vital functioning—that government spending is literally “feeding” on the fruits of personal labor and entrepreneurship. This view of the sovereign government as the Ouroboros—the mythical snake eating its own tail—permeates our mental models and government policies about money, taxes, and “private” versus “public” enterprise. The snake can eat only so much of its tail before the unimaginable happens!

This perspective leads inexorably and inescapably to two overarching positions in the national economic and fiscal policy debate: First, the snake must be given free rein and nourishment to grow (to stay ahead of the consuming mouth of public enterprise);second, public enterprise’s voracious mouth must be forcefully held in check, lest it get ahead of the snake’s growth, and gobble itself toward the unimaginable oblivion. The tension between these positions has become paralyzing in today’s modern society—as is now evident in our confrontation with the coronavirus. (It will become more evident—and more tense—as the global climate crises unfolds.)

A case in point is a recent news article in the Washington Post about the efforts, within the last decade, by the federal government (spurred by the SARS epidemic) to establish a national preparedness for the next pandemic. A study group identified one of the weakest links to be the availability of protective respirator masks for medical personnel. These masks, unlike other medical components, cannot be produced ahead of time and stock-piled because they have a relatively short shelf-life, with no way of predicting how many years they’d have to sit on their shelves before a pandemic arrived. The federal government awarded a $5M contract to a private medical company to design a high-speed machine that could manufacture the protective masks—as needed—after a pandemic occurred. The design was completed and submitted to the government in 2018—along with a request for the next stage of funding for the more expensive task of building and testing a prototype. This, apparently, was one “bite” too far to allow the Ouroboros: The project was abandoned by the Trump administration— (the same year, it should be noted, that the Ouroboros was fed a gargantuan, growth-seeking meal of tax-cuts).

In hindsight it was obviously a bad decision—but a decision that even political progressives, strapped with the perspective of the Ouroboros, are virtually helpless to counteract. Even president Obama admitted the government was “broke,” and spent a lot of golfing hours with John Boehner negotiating a “grand bargain” to restrain the snake’s out-of-control appetite.

But it was only one of many relevant bad decisions driven and informed by the standard money theory. We read about the 1980’s when, during the SARS epidemic, big-pharma saw great potential for profit-making in the development of a vaccine—and made significant strides in developing one, only to abandon the effort (just closing in on the brink of achievement!) when the SARS virus suddenly subsided: The “market” disappeared!—so what purpose (from the perspective of a profit-oriented and profit financed business) was there in continuing with the effort? It’s now clear that vaccine, had the final efforts been made to develop and test it, could well have proved fateful against the coronavirus we now confront. So, great “profit” could have resulted, but not in the kind of “profit timeline” that profit-demanding private enterprise requires.

So now private enterprise starts again from scratch. Are its fingers crossed that, this time, the pandemic will last long enough to provide a profit-making “market”? Or has another reality taken hold? The realization that without the health and prosperity of collective society private enterprise itself is threatened? Does the Ouroboros now need to be given bigger, trillion dollar tax bites?

What needs to be made clear—shouted from the media rooftops—is that another perspective of the Ouroboros is possible—a perspective in which the tensions of self-consumption disappear, and public enterprise is freed to pursue what is necessary for collective society to meet its challenges and prosper. This other perspective, of course, is modern money theory, or MMT.

MMT views the same phenomena—the collection of taxes by the sovereign government, the issuance of treasury bonds—but sees a completely different structure than what the standard theory insists upon. MMT sees that taxes are spent for public enterprise—but the purpose of taxes is not to fund public enterprise. The purpose of taxes is to infuse the sovereign fiat money with authoritative value. MMT sees that treasury bonds are issued when taxes fall short of the spending needs of public enterprise—but the act of issuing treasury bonds is not the act of “borrowing” money from the private earnings of people and businesses. It is, instead, the act of issuing new sovereign fiat money which subsequently lands in the spending account of public enterprise.

“Deficit spending” is merely an accounting calculation of the difference between taxes collected and treasury bonds issued. What the standard theory so ominously refers to as the “national debt” is not something that ever has to be repaid to anybody for the simple reason that they’ve already been paid (with the treasury bonds themselves which can be exchanged/traded at any moment of the day for sovereign fiat money).

From the perspective of MMT, then, the Ouroboros appears as a completely different animal!

The snake is not eating its tail at all! One might ask what, then, is the snake feeding on if it’s not taxes and private earnings? The answer is it is feeding on the real resources—labor, inventiveness, and materiel—which are available to be put to work in the pursuit of public enterprise. Its feeding has nothing to do with the availability of money but rather the opposite: the availability of money matches the availability of the real resources which public enterprise can marshal to accomplish its goals.

Which brings us, of course, full circle back to what we should be seeing and understanding in the federal government’s response to the pandemic: We are not talking about (and shouldn’t be fretting about) collecting $2.2 trillion in new taxes—now, or ever. Just as we won’t be talking about collecting $100 trillion in new taxes when we get serious about confronting the climate crisis. What we’re talking about, instead, is employing trillions of dollars’ worth of real resources—labor, inventiveness, and materiel—to accomplish the things that private enterprise and finance cannot find a profit in doing, but which need to be done, nevertheless.

24 responses to “Standard Money Theory and the Coronavirus

  1. No matter how loudly one proclaims a spade to be a heart, its still a spade. Call bonds whatever you want but they can always be viewed as borrowing despite the protests of MMT. The current system has failed, no matter what “perspective” or “lens” one views it through.

    The only way Mr. Alt’s vision can be realized it to transform the current system to operate the way he convinces himself it does now. Of course government spending will not lead to inflation if the economic capacity is there. But why, for God’s sake, do this dance with the Federal Reserve – an entity that has lost any effectiveness it might have had?

    No, the government does not create money, Mr. Alt, it creates reserves to grease the interbank transfer process and to ineffectively control the real money supply, which is all generated by private banks through lending.

    Instead of continuing with the charade, do the right thing, enable the government to explicitly create the money used in the private sector and spend for the “public enterprise”. Straightforward, no balance sheet voodoo. And end the ability of private banks to dictate who gets our precious public medium of exchange.

    • John Hermann

      Reserves are a form of currency, and are therefore a form of money. Reserves are basically interchangeable with hard currency (banknotes and coins).

  2. Steven Greenberg

    Private banks do not create money. They create promises that they will deliver government money to you when you need it. Until you tell the private bank to show you the money, what you have in your account at the bank is nothing more than a promise that the bank will deliver the money. The bank is very unlikely to have enough government money to give you if every bank customer demands their money at the same time.

    • Those “promises” ARE the money you and I use. There is no money to deliver – try buying a house with a suitcase full of cash!

      • Steven Greenberg

        There is no money to deliver – try buying a house with a suitcase full of cash!

        If you think only cash is money, it is no wonder you can’t understand this discussion.

  3. Comment. The title “Standard Money Theory”
    is not addressing what needs to happen now in economics around.
    Not when the pandemic is “controlled”. Aside from it coming back
    and whatever the future is; the world needs to know that traditional
    classical economics needs to changed from supply and demand with
    governments being an “invisible hand” (which has never been true)
    to what I have written and published on as The Next Economics (Springer Press, 2013)
    What is the NEXT IN ECONOMICS ? As I noted then and since is Circular Economics
    (CE) that I have also published on and a book with that title along with many
    proven cases. There is MUCH more !!!!

  4. There’s an article that I believe you would find very interesting by the economist Richard Werner – Google: “How do banks create money, and why can other firms not do the same?…” It turns out that those “promises” ARE our medium of exchange, not the government money you refer to. A bank can never deliver the cash equivalent to those promises or credit. They only have enough for daily minor transactions and ATM’s. Its also a silly promise because nobody wants to carry huge wads of cash. Those promises are what we use every day to buy and sell things, and they are, by definition, money.

    • Sharon Greenberg

      You misunderstood what I wrote. When you send money from your bank to someone who uses a different bank, the government money is exchanged (electronically). I am not talking about federal reserve notes. Other firms do create money too. There is the shadow banking system. There are credit card companies (many owned by banks), and there are personal IOUs.

      Think about runs on banks. If banks create money, how can they run out? Who rides into the rescue when banks run out? What do they do to rescue the banks? Only the Fed is allowed to create actual money out of thin air.

      In the article you mentioned, they ask “Are non-bank financial institutions, including so-called ‘shadow banks’, engaged in money creation?” and “This includes the question of whether non-bank financial institutions, including so-called ‘shadow banks’, can engage in money creation as well, the question whether “everyone can issue money” (Minsky, 1986), and the questions of how bank regulation should and how monetary reform could be structured.”

      Can you point me to the place where the article answers those questions?

      • Sharon – Yes you are correct, but those reserves are really bookkeeping devices to show that the bank’s IOU to me, the liability, is transferred to the recipient’s bank when I write a check. That erases my bank’s IOU and it now becomes the recipient’s IOU from their bank.

        Banks cannot create money other than through a loan – that is, they can’t create money just to prevent a run (or buy furniture or pay CEO’s) – that’s why we have FDIC – the gov steps in to the rescue when a bank doesn’t have the reserves to transfer to a recipients bank. If you read the Werner article you will see that reserves never leave the banking system Again, they are there only to allow IOU’s to transfer from one bank to another. To see that the Fed isn’t creating real money, note that the money supply dwarfs the amount of reserves in the system.

        Shadow banks can also create transferrable IOU’s even though they are not part of the Federal Reserve system like commercial banks are. But that process is limited to cases where shares in a money market fund, an example of a shadow bank, are acceptable as payment themselves. Then they act as money.

        A great resource on explaining the reserve system and shadow banking is the economist Dr. Joseph Huber. Google his website SovereignMoney or his paper Dominant Money by Joseph Huber. Also Google Minsky’s Working Paper #127 for his condemnation of the current money system.

        • Steven Greenberg

          Banks cannot create money other than through a loan – that is, they can’t create money just to prevent a run (or buy furniture or pay CEO’s)

          It doesn’t even make you feel a little silly to write that?

    • The point of reserves is to help the payment settlement system flow smoothly. This was why in part the Federal Reserve was set up. There’s no logic to your implication private banks should be able to set up their own reserves system. Moral hazard stopped it working in the 19th century and early part of the 20th century and will so if attempted again. Been there done that doesn’t work!

      • Yes, exactly. A bank needs just enough reserves to meet the daily net demand for payments from its depositors. That’s why there are reserve requirements based upon anticipated flow of money but not at all based upon the total deposits a bank has. Most of those deposits just sit idle on any given day.

  5. Whether “new sovereign fiat money” (Alt) or new “reserves” (Lebow), once spent a new OWNER has control over new WEALTH. Spending into new ownership ensures that newly created money (or reserves) associated with wealth will persist until the underlying money base is reabsorbed into the banking system (by retiring bonds).

    One paramount challenge for MMT advocates is the fairness of initial owner distribution and eventual long-term-distribution of national wealth (which seems to be destined to grow at an unchecked pace).

    • I think you have it backwards, Mr. Alt is promoting new “reserves” which, again, are designed to manipulate the bank’s desire to increase or decrease the creation of the credit-money currently used in the economy and society.
      Money is NOT “wealth” – true wealth is what we produce and consume. Money only serves to provide access to that wealth. But yes, the central issue is who gets first use of that access to wealth by having first use of newly created money. Remember MMT is completely agnostic on this as being merely a “lens” through which to interpret the current system. Monetary reform, on the other hand is a movement founded on justice and transformation to achieve the goal you describe.

  6. Excellent, except “MMT sees that Treasury Bonds are issued when taxes fall short of the spending needs of public enterprise-.”

    • The contradictory story that MMT promotes is that taxes do not pay for government spending. Its a strange way of looking at things that is very unhelpful. MMT struggles to keep the current corrupt and convoluted system in place because they believe reform is not politically possible. Not a very “Bernie” way of looking at things 🙂

      • Steven Greenberg

        I did an empirical study of what happens when there is a run on a bank. If banks create money, how can a run on a bank hurt it? All they have to do is give people the money they created.

        Studies that ask questions, but don’t answer them (Like Werner’s study) are no better than the paragraph I posted above. In my case, I did actually provide an answer.

  7. Christopher Herbert

    Not to be too argumentative, but banks create debt which increases spending, although at an interest and tax expense. Banks do not lend out reserves in order to fund anything. They don’t even consider reserves when they make a loan. They make a loan when they believe they will get paid back with interest. I can’t be sure but up until maybe 1980, bank regulators didn’t even keep track of reserves. It was understood they are irrelevant to assessing whether or not a loan is a good loan. And it is my understanding that every dollar in existence today came about by Congress paying a bill.

    • Yes. Reserve requirements are almost zero in the US – there are capital asset requirements. Dr. Richard Werner did an empirical study of bank money creation. He actually took out a large loan and with the permission of a cooperative bank president was able to follow the money by examining the books and transactions. The bank never consulted its reserves balance in the process of crediting his bank account with the borrowed money. Google Werner, “Can banks individually create money out of nothing?—The theories and the empirical evidence”

  8. Most interesting and instructive interchange here between Mr. Lebow and several others. But its subject matter largely has to do with the details of how the monetary system operates, touching upon more fundamental, elemental issues only when Mr. LeBow provocatively assets that “MMT struggles to keep the current and convoluted system in place because they believe reform is not politically possible.” I myself have wondered about the strange silence of MMT economists (Bill Mitchell and perhaps a few others, excepted) in the face of what seems undeniably to be a potentially revolutionary moment caused by this pandemic. Does this silence indicate that, as academics, they are merely critical observers of the action in the arena, to use Teddy Roosevelt’s memorable language? Contrary to the postmodern fetish of horizontalism, what we need right now, as the plutocrats scramble to protect and enhance their dominance, is good old-fashioned leadership, informed and emboldened by the axioms, not so much the details, of MMT. Remember Teddy’s cousin?

  9. John Hermann

    According to Paul Lebow, ” … No, the government does not create money, Mr. Alt, it creates reserves …”

    Reserves are a form of currency and are therefore a form of money. Banking reserves are basically interchangeable with banknotes and coins (hard currency).