Wednesday, March 20, 2019

Stephen Mihn - American Colonists Had a Modern Monetary Theory of Their Own

This article was tweeted by Stephanie Kelton and fits in well with my own theories with how MMT works, which I have printed here before.

I would like to add, that money does not create wealth, work does. I can create wealth by growing potatoes in my back garden, or some fruit, or by making things in my shed, or just by offering my labour. But what if there is not enough money in society because people don't want to take out anymore loans, or the banks don't want to lend to poor people, or because there is too much in debt in society, then transactions between people may become difficult as bartering is very cumbersome and inefficient?

So, there's plenty of wealth, but not enough money, and the gold standard would make things worse by making money even more scarce. Then, what's the solution: one is for the government to inject money into the system, and one way to do this would be for the government to create the money and spend it on government services. Then the wages of the public staff would filter out into the private sector enabling more work to be done.

The private sector would then expand and employ more staff who will do the work which pays for the public services. Therefore, the rest of society gets and excellent deal: low cost public services because people who were idle before are now in work contributing to society. And they won't need anymore government assistance either.

It's a great deal for everyone: the capitalists who run industry will get richer,  the underemployed will find work, and  those already in work get low cost public services. Conservatives will come onboard.

Eventually, the government will need to tax the money it put in back out again, but with so many more people in work, the tax burden will be shared more widely. 

 Hutchinson and the others devised an unusual solution to the problem. They issued what is generally recognized as the first fiat currency in the Western world. The twenty-shilling notes they printed cheekily claimed that they “shall be in value equal to money”  meaning that they were equivalent to silver coin.
This was, on the face of it, preposterous. Massachusetts had no ability within its borders or beyond to compel people to accept the money at face value. Despite its promise to redeem the money at a “convenient time,” the colonial treasury could not do so when it first issued the bills.
Dror Goldberg, the leading historian of this formative episode, summed up this venture: “Never before has history seen such a weak money.” Which begs the obvious question: Why would any self-respecting soldier accept it, or for that matter, a shopkeeper, merchant, or anyone else?
The answer lies with the other language that appeared on the bill. It declared that they “shall be accordingly accepted by the Treasurer, and receivers subordinate to him, in all public payments.” They could be used to pay taxes.
Hutchinson and his allies spent before they taxed. And it was precisely that fact  that the money they injected into the economy would then be withdrawn via taxation  that gave the money its value. And it worked. The money circulated in the colony, greasing the wheels of commerce, and then disappearing at tax time.
They didn’t realize it at the time, but this group of dour Puritans had effectively invented a crude forerunner of MMT, though they would have probably called it PMT (Puritan Monetary Theory). A government spent before it taxed, creating money in the process; this money fueled economic activity; and then taxation sucked the money out of the economy.
It was a brilliant invention, and as Goldberg notes, “The currency we use today is essentially the same as the money created in Massachusetts.” But before anyone reads this as an unqualified endorsement of MMT, consider the rest of the story.
Other colonies, mindful of the success of Massachusetts, also issued paper currency structured along the same lines. Sometimes it worked. But sometimes, the money lost its value. The reason lay with tax policies: It’s one thing to create money via government expenditures. But some colonies forgot to raise taxes high enough to pull it out of circulation.
Bloomberg

37 comments:

Ralph Musgrave said...

Money creation by governments / rulers goes back much further than that. King Henry I of England who came to the throne in AD1100 issued tally sticks to pay for stuff he wanted and announced that those tally sticks could be used in payment of taxes. And I think some of the rulers in Mesopotamia (between the Tigris and Euphrates rivers) were doing the same long before Jesus Christ appeared, but I’m not an expert on that.

Kaivey said...

Yes, I've read about the tally sticks, Ralph. What a great idea, and no gold, just wood. Apparently, it worked very well.

And we still use the word 'tally' today, we might say, ' it tallies up'.

Konrad said...

OFF TOPIC

@ Kaivey: On my way out, I wanted to say that you changed my mind about something. Several posts ago you discussed your own theory of money. You suggested that money “stores” work. I disagreed, saying that money cannot “store” anything, since money has no physical existence, just as the word “red” cannot store color, since “red” is strictly a mental thing.

Upon reflection, I agree with you that while money cannot “store” work like (for example) a physical battery can store an electrical charge, or like gasoline can chemically and physically store work, money nonetheless stores work because humans agree that it does.

If I say that, “This hundred-pound note in my hand is 100 pounds’ worth of work,” then in one sense my assertion is false, since money has no physical existence. But in another sense my assertion is true because we agree that money stores work.

This is not delusion or pretense. It is the nature of mind and reality.

I contend that for us humans, reality is whatever we collectively agree and believe that it is. We live in a consensus reality. He who controls the narrative controls what we believe and agree with, and thus controls reality.

How about the physical world? Does it exist apart from human minds? Yes, because (as I see it) “mind” is not limited to humans. For me, the universe is nothing but mind. If all humans vanished, the physical world would still exist in the mind of the universe, or of God, or whatever we want to call it.

These are abstract and esoteric concepts, but my point is that the difference between mental and physical is not fixed and immutable. The difference is what we decide it is.

Therefore when we use our intellect alone to ask questions, we are always limited to “Yes and no; both and neither.”

Q. Does this 100-pound note store work?
A. Yes and no.

Q. Is this stored work physical or mental?
A. It is both and neither.

I'm not playing word games. I merely point to the limits of ordinary intellect.

Kaivey said...

Yes, Konrad, a £5 note is worth no more than a £10 note as both cost the same to produce, but the agreed sum is different.

Clint Ballinger said...

"On my way out, I wanted to say that you changed my mind about something." Everyone take note - this is how good discussion is supposed to work.
Well done Konrad!

Ryan Harris said...

Anyone heard from Tom? News said Iowa City was evacuated for flooding but I've not seen him posting lately. Hopefully he is okay.

Kaivey said...

I hope so, Ryan.

Bob Roddis said...

Rothbard blew that colonial MMT B.S. out of the water decades ago.

https://www.economicpolicyjournal.com/2019/03/the-wonderful-world-of-money-printing.html

André said...

Bob Roddis,

"(...) pointed out that monetary issues had led to a doubled cost of living in twenty years"

A 100% inflation rate in 20 years means an annual inflation rate of 6%, which is small and completely normal. It is absurd and intellectual dishonest to call it "price inflationary disaster" or "rampant price inflation".

Also, pure inflation means that both prices and wages are increasing. If wages do not follow prices, that is a problem of inequality, economic distribution, etc, but not inflation. You can have 0% inflation rate and wages falling year after year...

Noah Way said...

Depending on Roddis for intellectual honesty?

That's almost as funny as depending on Roddis for intellect.

Greg said...

Actually doubling in 20 years is less than 4% inflation I think. Rule of 72

Jonathan Larson said...

While I mostly agree with the points made by the MMT enthusiasts, I find it amusing that they believe their thoughts are somehow "modern". The writings of Ben Franklin or Peter Cooper, or Henry Ford and Thomas Edison were written long ago and most of them understood the money question a whole lot better than the MMT promoters of today. Because the question is never what form money takes, but what are the mechanisms that make it valuable.

As Cooper would say,"any money you can use to pay your taxes is by definition valuable." This was only one of his many insights on the money question that gave Lincoln the use of the Greenbacks to fight the Civil War and caused Cooper to run for President in 1876 as the nominee of the Greenback Party.

Kaivey said...

Modern Money Theory was not the name the MMT academics wanted, but it stuck so they put up with it.

Bob Roddis said...

There's nothing "small and completely normal" about any inflation. Plus, it's good to know that you people are still oblivious to the workings of Cantillon Effects and you still totally lack any familiarity with the essential concept of economic calculation.

Kaivey said...

I might cut my neighbour's grass and rather than he do some work for me he gives me £5. Then, a week later I ask my other neighbour to wash my car and I give him £5 to do it. Later in the week, the neighbour who I cut he grass for, paints my other neighbour's shed for £5, and now we have all exchanged work with one another. The neighbour whose grass I cut got his £5 back and now he can repay the bank with it is the wants.

Instead of getting my neighbour to wash my car I could have held onto the money for many years and put it in a jar for a rainy day.

A few years later I fancy some beer but find I have no money in my wallet, and the off-licence (liquor store) won't let me use my cards for under £5, so I go to the jar to get the £5.

I did work for my neighbour and for the work he gave me £5. Symbolically, I converted the work I did into £5.

Am analogue signal can be converted to a digital code of noughts and ones, but sound is not noughts and ones anymore than apples are bananas, but the binary code can be converted back into sound through a digital to analogue converter.

So, the work I did got changed into a £5 note, but it's only an agreement. A number of years later I go to the off-license to buy two bottles of beer and it comes to £5.

The beer took a lot of work to make. The bottle manufacturer had to buy sand, labour, and energy, and the brewery had to buy raw materials, labour, and energy. Delivery drivers had to be paid, and accountants too, plus the store keeper.

I did work for my neighbour and I got a ticket for it. I can look at that ticket as a store of my work, or at least its a promise someone will do work for it in the future.

Years later, I buy some beer with it, and the work is returned. Or rather, the final exchange of work has taken place.

It's a great system, where as money is tied to work, not commodities.

André said...

Bob Roddis,

"Cantillon Effects" is just one of many theses not supported by empirical evidence.

6% annual inflation rate is perfectly normal. You could live perfectly normally with that. No economy ever was affected by this kind of inflation rate. The article you shared is misleading and obviously biased. If it was talking about a 50% or 100% annual inflation rate, then it would be understandable, although you need 100%+ a MONTH to call it "rampant price inflation" or "price inflationary disaster".

I do not agree totally with MMT, and I do not think that many aspects of MMT or any other economic theory will ever be 100% supported by real world evidence - you do need, at some fundamental level, some leap of faith, even if it is 1% leap of faith to 99% empirical evidence support. But it is easy to identify B.S. when you see one. And this article you shared is pure B.S...

Bob Roddis said...

"Cantillon Effects" is just one of many theses not supported by empirical evidence.

Of course there is empirical evidence of these effects but you really do not need to have such evidence to know they exist. If a rich person gets a fiat money bank loan out of thin air, he/she can and will use it to bid up the price of real estate/stocks etc… Generally, they will be able to find a new buyer who has an even larger fiat money loan to purchase the property at a profit. And so it goes until it become evident that there is no one with money they have actually saved to purchase the property at its now grotesquely inflated bubble price. Then the prices will collapse in a spiral of debt deflation.

The result of any artificial money creation is a “Cantillon Effect” of wealth transfer to the first recipients of fiat money loans or payments (and fractional reserve loans before the central bank) from the general public which is invariably to the wealthy along with a total distortion of the price, investment and capital structure due to false and unsustainable prices induced by artificial credit and money creation. All to solve problems that do not ever exist but for the fiat money system in the first place.

André said...

"Of course there is empirical evidence of these effects"

Then were is it?

"but you really do not need to have such evidence to know they exist"

That is called religion, not science

Bob Roddis said...

There's no evidence or even any logical reason to suggest that laissez faire leads to monopoly or unemployment. Speaking of religions. More like The Keynesian Death Cult.

S400 said...

Where's the empirical evidence for the Cantillion effect, Bob?

Bob Roddis said...

S400 said...
Where's the empirical evidence for the Cantillion effect, Bob?


I provided it, numbnuts. The recipients of fiat loans buy up all the property and stocks and bid up the prices which the middle class and poor can no longer afford. The wealth moves invariably to the rich through the bidding up of asset prices. AKA fiat money causes extreme wealth inequality.

The first recipients of new money bid up the price of stuff which reduces the purchasing power of existing money. Ultimately, the value of the monetary unit is diluted but not all at once or in one place.

OMG. You people are SO FREAKIN' STUPID. And dishonest.

If in 1971(enter year) I purchased an item for $1.00

then in 2019 (enter year) that same item would cost: $6.24

Cumulative rate of inflation: 524.1%

https://www.usinflationcalculator.com/

Greg said...

Minimum wage was 1.60/hr in 1971. Its now over 7.00/hr Prices relative to wages determine buying power

Now, I do think we should include prices of homes when determining inflation and that would surely change present inflation reports.
I can see the dynamic you describe being in affect with real estate but that would happen no matter what the monetary regime is. You saying that didn't happen prior to 1971?

Greg said...

Actually min wage is now 11.00/hr. My bad

André said...

"I provided it, numbnuts. The recipients of fiat loans buy up all the property and stocks and bid up the prices which the middle class and poor can no longer afford"

So the "evidence" is your sentence?

Well, that is no evidence at all.

You look like that AXEC / E.K-H bot, who is programmed to say that the things it claims are real just because it said so... "The earth is flat, and it is flat just because I claim so. You just need logic to see that, you don't need empirical evidence. The earth is flat [1], the earth is flat [2], the earth is flat [3]"

Bob Roddis said...

Why don't you people provide your own alternative "empirical evidence" of how asset bubbles occur under a fiat system?

The fact of the matter is that SOMEONE has to spend the new money first and there will have been no impact whatsoever on the CPI unless and until that money has been spent. But when it has been spent, it will have increased prices, if ever so slightly. Such spending will necessarily have resulted in that buyer having been the highest bidder BECAUSE THEY WERE ABLE TO MAKE THE PURCHASE. They now own the asset. They can probably sell it at a profit in the short term to someone else who has obtained a fiat money loan. Does this not almost always occur in an inflationary asset bubble? Further, isn't that process the entire purpose of Keynesian stimulus? To subsidize transactions with fiat money that would not have occurred otherwise?

You people are so dishonest that you will deny the self evidence process that occurs in EVERY real estate bubble. Where's you "empirical evidence" that an MMT government in an inflationary crisis could and would raise taxes (without being lynched by the public) and that such taxation would eliminate the problem of inflation and otherwise not harm the economy?

Bob Roddis said...

Where's your empirical evidence that the free market results in mass unemployment or monopoly? It's doesn't exist. And you know you cannot show it.

André said...

Well, I don't know whether MMT claims that free markets are bad. Some MMTers would probably say that, others wouldn't. What they claim is that usual, orthodox macroeconomics and the resulting policy making is bad.

You can prove that high public debts to GDP are not necessarily inflationary by looking at Japan, for example. You also can see that Eurozone currency design leads to unemployment and low growth.

Of course, I wouldn't be capable of showing you evidence in a blog, but I can show you work of people who did: Bill Mitchell, Warren Mosler and Wary.

I don't expect you can show me evidence here, but I was expecting you were going to cite some book or article of authors who did. Instead you are just trying to appeal to logic without foundations and implying that evidence is not needed.

Also, Rothbard and all libertarian authors I read (not so many, 4 of them) would never pay any respect to evidence, just like the usual mainstream economists do. They are, like the mainstream, just charlatans claiming things without evidence.

Bob Roddis said...

1. Since you clearly have no familiarity whatsoever with even basic Austrian School concepts or analysis, I wonder how you can reject something that you do not understand.

2. So Japan had a “lost decade” under Keynesianism? All this money pumping and the economy just lies there like a dying dog. How encouraging. All that trouble caused by busybody monetary czars trying to solve problems that do not exist but for fiat money and Keynesianism which are the actual causes.

3. I would presume that Japan’s CPI would have been much lower if not artificially raised by fiat money creation. But you can’t measure the road not taken since it never actually happened, right? You can’t measure events that never occurred. So much for “empirical evidence”.

4. Evidence? A prosperous society depends upon the information produced by the prices resulting from voluntary exchange. Socialism forbids the creation of that information. Fiat money distorts it in an unsustainable manner. Those truths are undeniable and the necessity of that information is essential. Keynesians deny it (or more likely, they are too dumb to notice it) and obsess about "aggregates" of data which do not exist.

5. An unsustainable inflationary boom can exist while the CPI hardly moves at all. The 1920s saw a slight decrease in the CPI but the unsustainable inflationary boom caused the 1929 depression. Ever read “America’s Great Depression”?

https://mises-media.s3.amazonaws.com/Americas%20Great%20Depression_3.pdf

Bob Roddis said...

As long as we are discussing “empirical evidence”, wouldn’t the best evidence be reading the actual book (1673 pages long) as opposed to a few short paragraphs from a blog post before making a decision about a school of thought? Start with Chapter 26 page 621, of “Conceived in Liberty” from which the short quote in the blog post was taken. There’s plenty of empirical evidence in there. The evidence is so decisive that Keynesians and “progressives” would obviously want it suppressed and never read.

https://mises-media.s3.amazonaws.com/Conceived%20in%20Liberty_Rothbard.pdf

André said...

I read a book called "Man, Economy and State". It is very long, and I was told that it has the core Austrian School concepts. It has no respect for evidence. It is just a guy (Rothbard) claiming big things without looking for real world data.

"So Japan had a “lost decade” under Keynesianism? All this money pumping and the economy just lies there like a dying dog"

High debt levels doesn't mean high public spending or high public deficits. Japan is obviously not an example of "Keynesianism". Things may be changing, but for the last decades, Japan follows the common neoliberal doctrine, desperately trying to reduce their debt levels (but is unable to).

"I would presume that Japan’s CPI would have been much lower if not artificially raised by fiat money creation. But you can’t measure the road not taken since it never actually happened, right?"

You cannot measure that road, but you can claim that there are many countries that issue fiat currency and have no inflation or low inflation.

If the CPI is unable to measure inflation, then it failed its sole purpose and its methodology needs to be changed.

Bob Roddis said...

I simply do not believe you read and/or understood a word of “Man Economy and State”. Did you understand the parts about the central concepts of VIOLENCE vs non-violence in analyzing economics? Do you dispute that humans act and that such action is an observable fact and is universal as part of each voluntary and involuntary exchange? Did you read and understand this short passage on pages 84-85? I doubt it. Do you dispute this analysis?

From this point on, we shall develop an analysis of the workings of a society based purely on voluntary action, entirely unhampered by violence or threats of violence. We shall examine interpersonal actions that are purely voluntary, and have no trace of hegemonic relations. Then, after working out the laws of the unhampered market, we shall trace the nature and results of hegemonic relations—of actions based on violence or the threat of violence. We shall note the various effects of violent interference with voluntary actions and shall consider the consequences of approaches to a regime of total hegemony, of pure slavery or subjection. At present, we shall confine our discussion to an analysis of actions unhampered by the existence of violence of man against man. The major form of voluntary interaction is voluntary interpersonal exchange. A gives up a good to B in exchange for a good that B gives up to A. The essence of the exchange is that both people make it because they expect that it will benefit them; otherwise they would not have agreed to the exchange. A necessary condition for an exchange to take place is that the two goods have reverse valuations on the respective value scales of the two parties to the exchange.

https://mises-media.s3.amazonaws.com/Man%2C%20Economy%2C%20and%20State%2C%20with%20Power%20and%20Market_2.pdf

André said...

I read it.

"We shall note the various effects of violent interference with voluntary actions and shall consider the consequences of approaches to a regime of total hegemony"

Yes, then he considers the consequences of "violent interference" and reaches the conclusion that it is bad. Without a single real world data. You just have to take his claims for granted.

Libertarians work with the concept that there are things so obvious that you don't need to prove them with real world evidence - and they claim that the rational self interest is one of them. They don't realize that this is religion, not science.

Bob Roddis said...

Rothbard's analysis was wrong because he produced no "data" that showed that violence is bad, especially when compared to peaceful, voluntary exchange??? There was no "data" to show that slavery was evil??? Such garbage "analysis" on your part that does not even qualify as analysis.

You have no "data" or empirical evidence which demonstrates or even suggests that laissez faire results in unemployment or monopoly. Where's your "data" and/or empirical evidence?

What we have here is the typical inability of a "progressive" or Keynesian to engage.

André said...

I never claimed that "laissez faire results in unemployment or monopoly". I don't know why you say that.

When someone is killing others, dumping radioactive waste on other people waters and etc, anyone would believe that such person should be stopped - if violence is needed for that, than so be it. Violence may have its place in society.

But that is not the point. It doesn't matter what is my or your view on violence. The fact is that governments are authorities that have and use the monopoly over violence. The fact is that currency has value because of that monopoly over violence, and that fiat currency is not inherently inflationary. And history has shown us the accumulation of authority and power is inevitable. If you claim that under anarchy people would suddenly get happy and everything would get better, you should give some evidence that this is the case. Otherwise it is just all blind belief.

Bob Roddis said...

The Kindergarten Guide to MMT:

The Real Economy – Part 1
People have a habit of acquiring and disposing of things. These trades are called the economy.


Really?? Where's the data proving that, huh?? [I'm joking, for you slow kids. Meaning most of you].

http://mikenormaneconomics.blogspot.com/2019/03/frank-ashe-kindergarten-guide-to-modern.html

https://actuaries.asn.au/Library/FSF10_Paper_Frank%20Ashe.pdf

Bob Roddis said...

When someone is killing others, dumping radioactive waste on other people waters and etc, anyone would believe that such person should be stopped - if violence is needed for that, than so be it. Violence may have its place in society......But that is not the point. It doesn't matter what is my or your view on violence. The fact is that governments are authorities that have and use the monopoly over violence.

Apparently, you missed the CENTRAL POINT differentiating aggressive violence (forbidden) from defensive violence (allowed):

2) Such self-ownership implies the restraint of violent or fraudulent aggressions made upon it. (3) Individuals, therefore, have the right to protect themselves by force against such aggressions made forcibly or fraudulently, and they may delegate such acts of self-defense to a special body called a government. Page 185, "Man Economy and State".

Bob Roddis said...

The fact is that governments are authorities that have and use the monopoly over violence. The fact is that currency has value because of that monopoly over violence, and that fiat currency is not inherently inflationary.

Fiat money has value because the of threat of violence from the government if you use other forms of money. In the USA, that violence takes the shape of taxing every transaction you might make as an exchange of property. Otherwise, people could use forms of money that maintain their value and exchange it at tax time for near worthless fiat money to pay taxes.

And history has shown us the accumulation of authority and power is inevitable. If you claim that under anarchy people would suddenly get happy and everything would get better, you should give some evidence that this is the case. Otherwise it is just all blind belief.

There used to be slavery in the western world. People decided that was outrageous and immoral and put a stop to it. Gay people used to be imprisoned or executed. Entire populations of conquered people were executed and their women dragged off as sex slaves. Enlightened people have put a stop to that. It is a pathetic admission that you have no argument at all against our proposal to prohibit all aggressive violence and can merely bleat that, oh, there's always been violence so I guess violence isn't so bad. Pitiful.

Finally, the modern world of affluence which never existed before in history is evidence that voluntary exchange produces prosperity.