Warren Mosler on government as currency monopolist
142. Jim Says: May 6th, 2012 at 9:46 am
Hi Warren,In ‘Full Employment and Price Stability’ you write that “The current monetary system is a classic monopoly with the traditional analysis of monopoly sufficient to describe all aspects”.In other places you state that the government is the monopoly supplier of ‘its’ currency, or ‘its’ money, but that banks also create ‘money’ (credit/ deposit money) when they make loans. Banks presumably also determine the rate of interest that they charge on their loans.How is the first statement (that the monetary system is a classic monopoly) compatible with the fact that banks create money, and that the govt only has a monopoly on the supply of certain forms of money (currency, reserves etc)?Thanks.
Warren Mosler Reply:
May 6th, 2012 at 2:43 pm
yes, the banks are designated agents of the govt that has decided their bank deposits are eligible for the payment of taxes
Update to thread:
Jim Reply:
May 6th, 2012 at 4:34 pm
But the banks create those deposits as and when they want to (by extending credit).A ‘monopoly’ is usually defined as:“The exclusive possession or control of the supply or trade in a commodity or service.”How can the monetary system be a monopoly if banks create their own form of money (which makes up most of the overall ‘money supply’)?The government may regulate the system to a greater or lesser degree, but does not have exclusive ‘control’ over it, does it?Thanks again.
Imtheknife:
May 6th, 2012 at 8:00 pm@jim
Banks have permission from the federal government to create dollars, but only with certain terms. They cannot just create whatever money they want and spend it however they want and have that be the end of it- typically, liabilities are required such that money created by banks must ultimately also be destroyed by banks (that is, an equal and offsetting amount). Only the federal government can do that, and only the federal government can grant that power unto others (such as the central bank, in limited scope, and private banks, through the power of credit creation).
Warren Mosler Reply:
May 7th, 2012 at 6:37 a
right, it’s called regulation and supervision
Warren Mosler Reply:
May 7th, 2012 at 6:30 am
i say the govt and/or it’s designated agents is the single supplier of that which it demands in payment of taxes.fed member banks are currently govt’s ‘designated agents’
143. Jim Says: May 6th, 2012 at 5:16 pm
Also, by ‘their bank deposits’ do you mean their (the banks’) reserves at the central bank?
Warren Mosler Reply:
May 7th, 2012 at 6:36 a
all the bank’s liabilities that can ultimately be used to pay taxes.
reserves are the fed’s bank deposits which count as well.
Jim Reply:
May 7th, 2012 at 8:30 am
Can bank deposits pay taxes? It was my understanding that the actual payment happens in reserves. If I send in a cheque to pay my taxes, that cheque represents a promise by my bank to transfer reserves to the treasury on my behalf.Only a fraction of overall tax payments actually needs to be settled in reserves however, due to the fact that govt spending to banks usually offsets much of the transfer from banks.Have I got this wrong?
Jim Reply:
May 7th, 2012 at 9:07 am
Regulation and supervision doesn’t equal ‘monopoly’. Many types of business require licences, and are regulated by govt agencies.
“They cannot just create whatever money they want and spend it however they want”
No, but neither does the govt control banks’ creation of credit. Most businesses face restrictions on what they can and can’t do – that doesn’t make them part of a government monopoly.
“the govt and/or it’s designated agents is the single supplier”
Shouldn’t that be “the govt and its designated agents are the only suppliers”?
Given the above, this would imply at least a duopoly (or oligopoly) of some sort.Ok, if government wanted to control everything that banks do they ultimately could, but at present they don’t, and they never have. Instead the govt issues charters and sets the rules of the game, as they do with other industries.Thanks.
Warren Mosler Reply:
May 7th, 2012 at 11:14 am
govt controls bank credit extension to the extent it wants to.
and if it messes up a lot of out of control/inflationary consequences can follow.
Warren Mosler Reply:
May 7th, 2012 at 11:11 am
you are conflating assets and liabilities a bit.
your bank deposit is fdic insured.your write a check to the govt. and the fed debits your bank’s reserve account and credit’s tsy’s fed account.
they don’t bounce your check because the bank might not have ‘sufficient’ reserve balance, they just let your banks balance go to where it goes, positive or negative.
if it goes negative, that’s functionally a loan to your bank from the fed.
UPDATE 2:
144. Jim Says:
May 7th, 2012 at 12:22 pm
Thanks for the replies.
On this point
“govt controls bank credit extension to the extent it wants to.”
We could say the govt controls everything to the extent that it wants to. Or in many cases, to the extent that the population allows it to.
Warren Mosler Reply:
May 7th, 2012 at 12:28 pm
yes, making govt the monopoly supplier of business licenses, etc.
the govt allows its member banks to make bank loans which create bank liabilities called bank deposits which the govt has also decided to accept for payment of taxes.
It regulates/restricts this process and examines and supervises it to ensure compliance.
If that puts ‘supplying the thing demanded to pay taxes’ outside of your definition of a public monopoly fine. You’re entitled to any definition you select.
145. Jim Says:
May 7th, 2012 at 12:24 pm
“they just let your banks balance go to where it goes, positive or negative”
Is there a limit on how far a bank’s balance can go negative, out of interest?
Warren Mosler Reply:
May 7th, 2012 at 12:41 pm
yes, if your equity capital falls below the regulator’s comfort zone, or your liquidity, or your asset quality, or your management’s capabilities, or your earnings, or your liquidity, the regulators are supposed to shut you down
.
Source
27 comments:
just ain't nuttin' diagonal 'bout dat, is it?
"Warren Mosler Reply: May 6th, 2012 at 2:43 pm
yes,...."
So Mosler is saying that the government has a monopoly only on certain forms and hence as a result, no monopoly?
Also, Vikram Pandit a secret agent of the government?
Hi Ramanan,
You'll have to ask Warren that.
From the FRA:
"1. Federal Reserve Banks as Depositaries and Fiscal Agents of United States
The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.
So the question is: 'what is "federal reserve bank"?'
If TTL accounts for instance at Citibank have "moneys" deposited in them, and checks drawn against them right from within Citigroup then logically Citigroup is LEGALLY a "Federal reserve bank" for the purposes of the FRA.
Does anyone know whether the US Treasury can order Citigroup to directly disburse right from a TTL account at Citigroup to pay for US government provision????
Resp,
I'll take a stab at it on my own, though. I am not sure if this is the position of any or all MMT economists.
Randy differentiates the unit of account that is established by a government for denomination purposes and money-things that manifest the unit of account in actual transactions, e.g., cash, bank reserves, bank deposits.
For example the federal government through the legislative process under US Constitution Article 1, section 8, establishes the USD as the unit of account in the country. Under the taxing power, it establishes the approved unit of account as the sole payment of liabilities to government, i.e., authorizes the unit of account as the only acceptable tax credit. This is all legal, no actual "dollars" involved yet.
Then the US govt establishes what is and what is not a US currency denominated in the unit of account as USD. For example, only coin, bills and notes issued under the auspices of the federal government are approved and counterfeiting them is outlawed.
I think that just about everyone would agree that this give the federal govt a monopoly on creation of USD as the unit of account and the money-things representing it. BTW, this power is forbidden to US states under Article 1, section 10.
Then the government establishes a central bank and a settlement system using the unit of account under the control of the cb and iaw rules for access and use of the system by approved financial entities.
The federal governmet also allows these approved financial entities to create deposits through lending under certain limitations that govt imposes and enforces.
Then govt agrees to accept money created through lending, which is denominated in its unit of account by approval with conditions, as tax credits also.
Govt retains its control over the although it gives up control over the supply of the unit of account, which becomes endogenous in this legal arrangement. Does this break the monopoly? MMT economists say no, because govt retains control over the unit of account, and others say yes, because it looses control over supply, a necessary element of monopoly.
The other issue is whether anyone else can create tradable tax credits denominated in the unit of account outside of this institutional arrangement. It seems not, although any one can denominate an IOU in the unit of account. However, government will not accept these IOU's as tax credits and they cannot even remotely resemble govt approved tax credit money-things. So it doesn't seem that this affects the monopoly claim.
There is another way of viewing this.
Bank money is an IOU for the state's money. If you have a deposit balance at a bank that is part of the Fed system, you can go to that bank and legally demand physical cash. Physical cash is the state's money, not created by the bank.
Similarly, if you write a check on your deposit balance to a person who has an account at another bank, the settlement and clearing of the check will result in a sum being deducted from your bank's reserve account and transferred to another bank's reserve account. Bank reserves are state money, not the creation of the bank.
If you have a deposit balance at your bank and send a check on that deposit to the IRS, then a sum will be deducted from your bank's reserve account and am equal sum will be credited to a government account. So it isn't really the case that the government has accepted the commercial bank deposit itself as payment of the taxes. It has accepted a portion of the bank reserves for which the deposit balance is an IOU.
Anyone can issue IOU's for the states money and try to get them accepted. But commercial bank IOU's have the additional virtue of being guaranteed. Even if the bank becomes insolvent, the government will redeem the IOU.
The government doesn't just create and administer the unit of account, and declare certain items as acceptable for discharging debts and tax obligations in that unit of account. It also creates and issues specific items - bank reserves and physical currency - for which all other forms of legally acceptable money are viewed as IOUs.
I thought I already explained this point several weeks ago in a lengthy comment, no? Why is it still controversial? It's obvious unless someone wants to be disingenuous and stir up "controversy" where there is none. Randy's got a new WP at Levy on the same issue.
STF,
It is not easy, bear with us ;)
My understanding is that the state is the monopolist in the sense that all arrangements about taxes and spending are at its discretion. It could take away the right to extinguish taxes in deposits any time, or change the rate (10 deposits for 1 USD tax obligation, say), or raise taxes etc.
So yes, it allows some slack, as accepting deposits in taxes, but it doesn't mean it cedes any control. When too many deposits are in existence and paying taxes becomes too easy, they can raise them or stop accepting deposits, just like that.
And let's not view everything as started by an MMR sneak attack, just a bunch of people trying to wrap our heads around that.
Came across this old paper on TTL accounts at St. Louis Fed:
http://research.stlouisfed.org/publications/review/79/10/Accounts_Oct1979.pdf
Provides some background on why TTL accounts were originally established.
FYI
Resp,
follow up:
What gives depository institutions the legal authority to accept tax payments on behalf of the US Treasury and hold them in TTL accounts?
FRA only authorizes "Federal reserve banks" to act as "fiscal agents" of the US. If you collect tax payments, I would say you are acting as a "fiscal agent" of the US.
So either "depository institutions" (ie Comm banks) are acting illegally when they accept tax payments, or they are legal "Federal Reserve Banks" for purposes of the FRA....
Resp,
You cant have it both ways.
Matt, the practically reason for TTL account is in assisting in managing reserves so the Fed can hit its target rate when not paying IOR and doesn't to set the FFR to zero. It's about managing flow.
Here's a linkto the comment (promoted to a post) on government as monopolist that Scott cites above.
Here Randy's recent paper Scott mentions above.
Introduction to an Alternative History of Money
I realize that Tom but by what authority are they allowed to do this?
Ramanan in his "secret agent" comment imo is claiming that comm banks are not affiliated with the govt at all. He is claiming they are part of the non-govt sector.
Ramanan takes exception to Warrens claim that banks are "public-private partnerships".
If banks are NOT govt affiliated, again by what legal authority are they allowed to collect taxes? The FRA does NOT authorize this activity except for "Federal Reserve Banks" acting as "fiscal agents" for the US.
For instance my namesake had to have been legally commissioned by Rome or the Herodians to collect whatever taxes he was collecting. He couldnt have just set up a table in the marketplace with a sign: "pay your taxes here" without some sort of legal commission as a tax collector.
Comm banks are either part of the Federal Reserve Banks or they are running a rogue operation in collecting taxes.
resp,
Banks are members of the FRS, and in fact, the regional FRS banks are owned by the member banks. The FRS is a government institution (agency) that includes public and private characteristics. It's a "public-private partnership," and banks accepting a bank charter sign on to that sort of relationship. They are not private institutions the way that non-banks are, at least in the US.
Matt, the TTL accounts at banks belong to the Treasury. Banks act as agents of the Treasury in transferring customer deposits to Treasury accounts.
It's not all that hard, Matt. Some people don't want to figure it out because it conflicts with their fixed ideas.
So Mosler is saying that the government has a monopoly only on certain forms and hence as a result, no monopoly? Of course the government only has a monopoly on certain forms of money. The Prophet Minsky sayeth: Anybody can create money (his own liabilities), the problem is getting it acccepted (as money). But the government is very much the monopolist over its own liabilities, its own debts, its own money, more than anyone else.
By "agreeing" to be part of the money game the government runs, individuals & firms cede to the governent the right to issue the IOUs in their name, the U-O-Me's called "taxes", diminishing their monopoly power and increasing the government's enormously. The power of the government is what gives its IOUs their strength & desirability.
Wray on some interesting history of the monopolization of money: Generally, only the liabilities issued by those who are relatively high in the pyramid will circulate as means of payment and media of exchange. Over time, there has been a narrowing of the types of liabilities that will circulate, to those in the highest reaches of the pyramid. Thus, the financial system evolved from one in which a wide variety of types of liabilities circulated to one in which government liabilities and the liabilities of banks comprise the vast majority of the circulating supply of means of payment and media of exchange.29 However, that trend has been reversed in recent decades, at least for some purposes as “shadow bank” liabilities became increasing acceptable.
Trixie & PeterP: Exactly right.
I largely agree with Scott Fullwiler's comments on this subject, but Warren seems to be taking a different view to him. Warren seems to be saying that the monetary system as a whole is a 'monopoly', which is not what STF is apparently saying. (see the link to his previous comments).
Warren means the exact same thing. Remember, he talks in metaphors, so he can't be taken literally as you might with an academic explanation.
There was a time in the UK when electricity production was carried out by a whole host of private companies. Then the government nationalised the whole thing.
From 1947 to 1989 the state had a monopoly on electricity production in the UK.
Then in 1989 the system was re-privatised. Companies were given licences by the govt and allowed to purchase/build power stations, and generate/sell electricity for a profit, within certain guidelines set down by the govt. The 'national grid' contecting power stations to consumers was also privatised.
Imagine the national grid had not privatised and was still run by the government. Without it the private companies would be unable to operate. Would this mean the system was a govt monopoly? No.
(That might be a bit like saying that 'cars are a govt monopoly because govt builds and owns the roads').
The govt could at any point change the rules, or decide that it was no longer legal to produce nuclear energy, for example. They could revoke licences (charters), set quotas and prices, or re-nationalise the whole system if they wanted to. Does this mean the system is a monopoly? No.
(They could do all of these things with any other industry if they wanted to).
Scott
"the state's "monopoly" is generally a monopoly over the price of its own money--the interest rate on its money--and the price of things it purchases or sells. Nothing more than that. Nothing less, either."
I agree with this, though perhaps it could be added that the state has a monopoly on 'determining the unit of account and setting the laws/rules of the monetary system" or something like that.
However, I don't fully get the second point, about prices.
In theory the govt could set the price of anything and force people to sell to it at that price (within its jurisdiction).
It can set a floor price for labour by buying up labour that is unwanted by the private sector at that time (unemployed workers).
However if it wanted to buy millions of oranges, for example, would it have a choice not to pay the market price? (leaving aside the possibility of it forcing people to sell to it at its chosen price)
It could offer to pay a below market price, but then no one would choose to sell to it.
It could potentially drive prices up by buying everything in the market, but it can't drive prices down, except by using force.
Have I got this wrong?
I just updated the thread from The Center of The Universe with Warren wrt currency sovereignty as monopoly.
@ Anonymous
1. Wage and price controls.
2. Use of buffer stocks to establish a corridor for price fluctuation of a commodity, such as grain, wool, etc.
3. Setting minimum wage.
4. Progressive tax rate in effect sets income ceilings.
5. Progressive asset taxe rates in effect establish limits on wealth accumulation.
BTW, anyone on Medicare who gets treatment and reads their statements knows what government pays for care wrt what is billed. Those who are otherwise uncovered are legally responsible for the billed rate. The gap here is huge.
There is already a great deal of government price setting or price influencing.
I just updated the monopoly thread again.
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