My conclusion is that the question of whether a country does or does not have its own currency is not a binary one, as it's almost always imagined to be.…
It follows that no country with a private banking system has full monetary sovereignty. The central bank will never be able to exactly control the pace of private credit creation, and to do so even approximately except by committing regulatory tools which then are unavailable to meet other objectives. In particular, it is impossible to shift the overall yield structure without affecting yield spreads between different assets, and it is impossible to change the overall pace of credit creation without also influencing the disposition of credit between different borrowers. In a system of credit money, full monetary sovereignty requires the monetary authority to act as the monopoly lender, with banks in effect serving as just its retail outlets.….
In normal times, the various forms of payment used within one country are sufficiently close substitutes with each other, exchange sufficiently close to par, and are sufficiently responsive to the national monetary authority, relative to forms of payment used elsewhere, that, for most purposes, we can safely speak of a single imaginary asset “money.” But in the Greek case, it seems to me, this fiction obscures essential features of the situation. In particular, it makes the question of being “in” or “out of” the euro look like a hard binary, when, in my opinion, there are many intermediate cases and no need for a sharp transiton between them.I would not say that no country with a private banking system "has" monetary sovereignty. All sovereign states possess monetary sovereignty as an aspect of sovereignty. The question is how states choose to exercise it, for example, through delegation. In modern economies, banks are chartered institutions as rule, and firms are also licensed to do business. Financial firms have institutionally defined fiduciary responsibilities in terms of agency, for example. Charters and licenses can be specified, the conditions changed, and they can be revoked, too.
For example, the UK decided to nationalize the Bank of England in 1946, which had been a private company owned by shareholders since its inception in 1694. The US has institutional a central bank, then abolished it, and the instituted it again on different terms having both public and private aspects. Similarly, the US abolished the domestic gold standard during the Great Depression and unilaterally abrogated the Bretton Woods Agreement in 1971, bringing the the gold standard to an end internationally. These were pretty major moves, and they illustrate the sovereign power of states over "money."
For example, a state could choose to retain total control over its currency as the currency monopolist, although this is rare. Or it could choose to delegate some or all of its power to other institutions through legal (institutional) arrangement, as most states choose to do. At bottom, this is a constitutional and legal issue involving institutional arrangements rather than specifically an economic one, although it has far-reaching economic consequences.
This seems to be amply demonstrated by the situation in the EZ, where the issues involve institutional arrangements that established the system and who is in control.
The important takeaway regarding monetary sovereignty, or currency sovereignty as MMT economists prefer to say, is that a sovereign state can always change it policy, even breaking agreements and treaties. That has consequences, of course, but it is in the purview of sovereign state and bound up with the institution called sovereignty, which is legally a combination of all power with respect to a domain.
Money and other forms of credit are established institutionally in accordance with laws, regulation, and judicial precedent. Although the terms tend to be used generically, there are important institutional aspects that are influential if not determinative in many cases. Money and credit are historical phenomenon that manifested first customarily and then institutionally in a variety of ways, many of which are importantly different and ignoring relevant differences can undermine an otherwise rigorous analysis. More attention needs to be directed to institutional effects.
The Slack Wire
The Greek Crisis and Monetary Sovereignty
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York
The Slack Wire
The Greek Crisis and Monetary Sovereignty
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York
7 comments:
If you look at the euro area, it seems unclear how much sovereignty was lost, in principle at least. If the Eurocrats were not sociopaths, the system could have worked reasonably well and accommodated the stabilizing effects of the welfare state. This would have required taking a looser stance towards the various treaties, but there were precedents in how excessive deficit procedures were waived against France and Germany.
(This is a digression from the emphasis of JW Mason on the banking system, but if the governmental finance had functioned properly, there would have been less issues with the banking system.)
"banks are chartered institutions as rule, and firms are also licensed to do business."
Sure. And all property rights are ultimately defined by law. So in principle, a sovereign is responsible for every decision made by every economic unit. But I don't think this is a helpful way to look at things, most of the time -- it's usually helpful to distinguish between public and private decisions.
As a historical matter, it is certainly not true that sovereign governments "delegated" their power to create means of payment to banks. On the contrary, government is a latecomer to the world of private credit money. The analogy with fiat moneys created by colonial states in places like Madagascar, which MMTers are fond of, is totally misleading for non-colonial situations.
More generally, any time anyone makes any choice in return for a promise or IOU of any kind from someone else, money has been created. The only way you can have full monetary sovereignty is to prohibit all private credit transactions of any kind -- which wasn't attempted even in the USSR under Stalin.
I am not disputing that. I am jus' saying' that sovereignty is a legal concept that gives a state total power if it chooses to use and has the political ability to do so. That is difficult in a democracy.
There are also real and financial constraints internationally. Even the most totalitarian states can't just do as they please but have to operate in a world in which they don't have complete access to resources at their command.
The point that I was attempting to make is that money & banking, especially, and finance, too, are based on institutional arrangements that are at bottom legal. So is commerce.
This vitiates the assumption that market fundamentalists make about market forces being "natural." There is very little about modern societies that is natural in any meaningful sense, other than that everything is either natural or a natural product of evolution, and a distinction without a difference is meaningless.
See Christina Desan, Money as a Legal Institution .
Moreover, modern money as a unit of account established by states is also governed by accounting practice, and accounting and law/regulation are joined at the hip. There is no commerce with out enforceable contracts and contracts are not possible in a modern economy without accounting standards.
As we saw in May 2009, when the FASB change the rule regarding mark to market to mark to model the equities market reversed its fall, possibly into oblivion if there were a global depression following the collapse of the banking system, and it hasn't looked back since.
And without "forbearance" (turning a blind eye) the TBTFs would have failed and had to be put into resolution. See Bill Black on this, for example.
Same with the extraordinary measures taken by the Fed base on emergency powers.
All this was possible because sovereignty. What happens is that government stepped in and took some back in order to save a private financial system that was drowning.
"More generally, any time anyone makes any choice in return for a promise or IOU of any kind from someone else, money has been created."
It is. However what denomination is it and what is it pegged to?
When I create money I don't create Sterling. My liabilities can float against Sterling. The debt I own can be sold on at a premium or a discount relative to any other sort of money.
The key aspect of sovereign power is that it can rope institutions into a peg with its own liability that allows a one-to-one conversion of their own liabilities into state money. And that state money is what is used to pay taxes and therefore is always in demand.
The institutions that do this gain a credibility boost and make their liabilities more widely accepted, which means their loans are more sought after since they are seen as a more secure institution. That gives them a competitive advantage in the lending money market.
Joining to the state money is a Faustian bargain but one that eliminates competitor liabilities - particularly if the state then regulates or taxes to discourage other sorts of money and reinforce the monopoly.
For example the countersigning and distribution of cheques in the UK was outlawed on money laundering grounds, but had the side effect of forcing all transactions directly via intermediate bank accounts.
JW Mason,
You are probably right about the existing nations, but if you go back far enough, "governments" appear to be tied to the issuance of coins. I believe that there are theories that writing evolved out of record keeping by authorities. (The authorities were religious, but I would consider them part of "the Establishment".) Credit probably existed, but it may have been tokens that acted as claims on a variety of real goods. Without written records, it is unclear whether those tokens would be as fungible as coins.
There are complex "credit" relationships in "gift-giving" societies, but it is debatable whether you could consider that "money".
As Neil Wilson so wisely hints the problem with the Eurozone is its architects were ignorant about the fiducial benefits to money derived from full fiscal and monetary powers which come only from complete political union. Achieving such union in Europe with its multitude of languages and ancient suspicions was always going to be a tall order.
JW Mason - your may not be going far back enough, starting only at (the exceptional) medieval & early modern periods to arrive at the incorrect conclusion that "government is a latecomer". MMTers & others have written a lot concerning Egypt & Mesopotamia - millennia before the first coins were issued. And the monetary authorities then were far closer to modern governments than modern banks. Really, there is no other way it could have proceeded logically, phenomenonologically.
You define money somewhat more broadly than MMT and so say "full money sovereignty" is not really possible. You can think of money as a way of looking at credit, but in practical terms, it is negotiable credit, not any credit. There can be other credit issuers, but still with governments on top, which is what MMT means by "monetary sovereignty". The word is Rodger Mitchell's, who distinguishes between degrees of it sometimes - it can be more potential or more actual. But it isn't too useful a word if the old USSR didn't even have it.
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