I think the key concept is that when the gold standard was eliminated, and the promise to pay gold for paper was eliminated, paper money stopped being a promise to pay. It stopped being a debt at that point and became instead, as Glass says, a replacement for gold.This is perfect, because it solves a big problem. It solves the problem that the quantity of gold did not always expand at a rate best suited to the economy's current growth potential. With paper money as a replacement for gold, insufficiency of money need no longer be a problem.
Read it at The New Arthurian EconomicsOne problem remains, which is the expansion of private money beyond what the base money can comfortably support. But this problem is no different than it was under the gold standard or in the free banking era. No different, except when money was gold and private money was paper, it was easy to see the difference. Now it is harder to see the difference.
Jim Glass at Worthwhile Canadian
6 comments:
Target a ratio of monetary base to total credit? Then we get back to controlling quantity and not price...
Basically, this is gibberish, haven't followed the further links. Paper money, fiat money - there never has been any other kind of money - is and always was a promise (to pay), a debt, a liability. These are all synonyms. "Money was gold"? Money was never gold. Money can't be gold, gold can't be money, any more than a marriage can BE a wedding ring.
A gold standard is a government deciding to back a worthless commodity, gold, with its intrinsically valuable fiat money, its debts. A currency-backed commodity, not a commodity backed currency. Orthodox "economics" gets it exactly backwards, as always.
People -including many MMT fans - have a passionate desire to make things more complicated than they really are.
"People … have a passionate desire to make things more complicated than they really are."
+1 for truth.
TPTB also have a passionate desire to make things more complicated than they really are and keep us stupid so we don't see who's really picking our pockets.
It starts with our early education and continues from there.
I also argued against the idea that base money is debt in "The Public Money Monopoly". See the section "Money, Credit and Central Bank Liabilities":
http://neweconomicperspectives.org/2012/03/the-public-money-monopoly-pt-i.html
However, I don't think the problem of "the expansion of private money beyond what the base money can comfortably support" is a real problem in the modern era of fiat money. Unlike gold, the government can manufacture additional base money as desired, at virtually zero cost. They don't have to dig it up out of the ground and refine it; they don't have to send conquistadors and hire merchant sailors to whip it out of the labor of foreign slaves and haul it back to the motherland in ships.
The central bank can provide as much base money as is desired and required by the needs of production, consumption and commerce. If they decide that the private sector creation of broad money is too liberal, they can slow down the provision of additional base money to target a higher price for reserves. But there is never any reason in the contemporary world for there to be a "shortage of money" as was sometimes experienced in the early modern period.
And if credit runs far ahead of the provision of base money as a result of speculative or Ponzi lending, the government always has the option of engineering a soft landing by "validating" the debt with either additional reserves or treasury spending in excess of tax revenues.
It's hard to believe now, but the obsession with the need for gold as either the material of money itself, or as the "backing" for money, cause centuries of untold human misery and cruelty. It's amazing that our forbears could have been so daft.
We face a similar version of primitivism in our own time in that many of our contemporaries are obsessed with the central bank channel as the only legitimate means of providing net financial assets to the economy, and refuse to allow the treasury to spend to support demand in the aftermath of a credit crisis. As a result, the pain human costs of the deflation of financial assets, which should be confined primarily to the Ponzi lenders who cause the asset inflation in the first place, is distributed throughout the economy to punish household debtors and save financial sector creditors.
If it is broad money that is too liberal, then is is broad money that should be restricted.
Sure. But one way to do that is to increase the price of reserves by targeting a higher policy rate. Broad money is created by bank lending. If we are ever in a situation again (unlike now) when banks are creating too much money, then the Fed can act to raise the target overnight rate.
I also want households to pay off their debts more quickly. The way to do that is to send money to households. You can't effectively do that by trying to expand credit - which is all the central bank can do, even in normal times when rates are higher and can be dramatically lowered. We need the US Treasury to spend more money, and expand the deficit. We're a monetarily sovereign country. There is no non-voluntary debt/GDP or deficit/GDP constraint that operative.
The way to deal with the Austrians is for everyone in a position of power who actually understands these things, starting with Ben Bernanke. to say loudly and clearly, "You Austrians are idiots who don't understand how the monetary system works."
There is no central bank channel for "increasing the money supply" that doesn't operate via increasing credit. The central bank is juts a big bank at the apex of the pyramid of credit. It doesn't own special monetary guns that shoot credit-free money out into the economy.
Only fiscal policy can increase the money supply and aggregate demand without creating more credit in the system. This is something Sumner et al refuse to get.
If you want households to pay down their debt then the way to do it is not to expand credit.
There are two fundamental problems. The first is ratio of horizontal to vertical money. When the ration of horizontal to vertical increases, then risk exposure rises. Vertical money is stabilizing, but banks don't like it because it means less interest for them.
The second is the expansion of consumer credit. Historically, credit has been largely reserved for financing investment. With the introduction of the credit card, much more credit is being used on consumption than ever before in history. Credit used for investment can pay itself off through the return on investment. Credit used for consumption has to be paid down with worker income.
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