Lars P. Syll — The money ‘trick’

"Modern money" is state money. Abba Lerner explains the "trick" by which a state creates its money.

Imposing taxes and accepting its own liabilities in payment creates demand for the currency. In this sense, state money is "monopoly money" in the truest sense, since modern have a monopoly on the issuance of currency, regardless of whether or how they choose to exercise it.

Monopolists are prices setters rather than price takers. Hence, the value of the currency is established based on what the state is willing to pay in markets to move private resources to public use. 

Or the state can choose to fix the price for it to exchange a real resource for its currency, such as fixing the conversion rate for gold under a gold standard. A state can also choose to peg the value of its currency to another currency. If the state fixes the price, then it loses currency sovereignty, since it must obtain the good to meet demand for conversion.

A state is a currency sovereign if and only if it lets its currency float and doesn't create obligations that are out of its control, such as borrowing in a currency that it does not issue and must obtain to meet its obligations. Then the state becomes a currency user of that currency.

Presently, the one price that most  modern states that are currency sovereigns is the own rate of the currency (along with the discount rate) that is set by the central bank. MMT proposes setting the own rate to zero and providing liquidity as necessary for the payments system to clear. This obviates the ned for a discount rate. 

MMT proposes anchoring the price of the currency to the value of a unit of unskilled labor  (MMT JG). The price anchor sets the MMT JG proposal apart from other job guarantee proposals that do not anchor the currency, which risks inflation if the wage is indexed, for example.

Lars P. Syll’s Blog
The money ‘trick’
Lars P. Syll | Professor, Malmo University

Peter Cooper — State Monies are Fundamental to Modern Monetary Economies

What is the most appropriate entry point to the study of a monetary economy in which government is currency issuer? Is it “the market”? Is it the definition: total spending equals total income? Is it real exchange? Real production? Is it total output? Total employment? Total value? Distribution of income? The origin of profit? Price formation? Competition?

I would answer “no” to all these suggestions. They are all important aspects of the subject, but they are all embedded in something else. They are all embedded in a social context that is put in place through collective action. In modern monetary economies, this collective action is conducted through currency-issuing government and its instrument, state money.
The operation of markets requires various collective arrangements already to be in place, which can be summarized as the laws and regulations governing property rights and their transference, along with supportive social institutions.

Spending, in a modern economy, is monetary, and is received by somebody else as monetary income. But where does this “money” come from?

The weakeness of conventional economic is that it assumes away the social basis for a modern economy, e.g.,  by beginning with the Robinson Crusoe model of barter exchange in Econ 101.

Modern economies are nothing like that.

Modern economies, even relatively ancient ones, presume an existing institutional basis, e.g., in law. Property, for example, is a legal matter. Law ariese out of custom. Even the most ancient socieites were regulated by custom.

There is no "natural" field in economics that is anything like the natural sciences. Presuming there is skews the investigation from the outset.

A small mistake in the beginning is a big one in the end, according to the Philosopher [Aristotle] in the first book of On the Heavens and the Earth. —Thomas Aquinas, De ente et essentia

heteconomist
State Monies are Fundamental to Modern Monetary Economies
Peter Cooper

Peter Cooper — Short & Simple 12 – Government Money

We saw in part 2 that to establish a currency, government needs to do three things: 

1. Define a unit of account (e.g. dollar).

2. Impose taxes that can only be paid in that unit of account.

3. Spend or lend the currency into existence.

The most basic purpose of taxation (introduced in step 2 of the sequence) is to create a demand for the currency. Provided taxes are effectively enforced, we in the non-government will have a need to obtain the currency, because it is the only means of paying taxes.

Economists sometimes summarize this as “taxes drive money”....

heteconomist
Short & Simple 12 – Government Money
Peter Cooper

JP Koning — Money in an economy without banks

Most of the world's money is currently in the form of deposits created by banks. After the 2008 credit crisis, which instilled a strong suspicion of banks among the public, it became fashionable to ask what money would look like in an economy without these organizations. Burn them to the ground or shutter them, what rises in their place? One vision is to pursue pure centralization: have the state monopolize all money creation, say by providing universally-available accounts at the nation's central bank. Positive Money is an example of this. Another alternative, by way of Satoshi Nakamoto, is to pursue radical decentralization: replace bank IOUs with digital commodity money in the form of bitcoin and other private cryptocoins.

I'm going to provide a few historical examples that sketch out a third option for replacing banks; bills of exchange. A system underpinned by bills of exchange is capable of converting illiquid personal IOUs into money using a distributed method of credit verification, as opposed to a centralized method patched through a banking organization. Unlike bitcoin, however, these are IOUs, not mere bits of digital ledger-space. While few people these days are familiar with the bill of exchange, in its hey day this instrument was responsible for executing a large chunk of the Western world's transactions.

Moneyness
Money in an economy without banks
JP Koning

David Fields — Capitalism is national & transnational, but what about the money?

Marxians picking up on MMT.

Radical Political Economy
Capitalism is national & transnational, but what about the money?
David Fields

Lars P. Syll — The origins of MMT

Knut Wicksell on credit money, and J. M. Keynes on state money aka "chartal"money, where "chartal" means a token. States issue tokens that they alone are permitted to issue whose nominal value the state sets in the unit of account it establishes. "Modern" money is both credit and chartal money rather than a commodity used as a numeraire in barter.

Max Weber also discusses this in Economy and Society: An Outline of Interpretive Sociology, p. 76 (available at Archive.org).

"Money" we call a chartal means of payment which is also a means of exchange. An organization will be called a "means of exchange," "means of payment," or "money" group insofar as it effectively imposes within the sphere of authority of its orders the conventional or legal (tormol) validity of a means of exchange, of payment, or money; these will be termed "internal", means of exchange, etc. Means used in transactions with non-members will be called "external" means of exchange.

Means of exchange or of payment which are not chartal are "natural", means. They may be differentiated (a) in technical terms, according to their physical characteristic— they may be ornaments, clothing, useful objects of various sorts — or according to whether their utilization occurs in terms of weight or not. They may also (b) be distinguished economically according to whether they are used primarily as means of exchange or for purposes of social prestige, the prestige of possession. They may also be distinguished according to whether they are used as means of ex- change and payment in internal or in external transactions.

Money, means of exchange or of payment are "tokens" so far as they do not or no longer possess a value independent of their use as means of exchange and of payment. They are, on the other hand, "material" means so far as their value as such is influenced by their possible use for other purposes, or may be so influenced.

This distinguishes money as the nominal unit of account from tokens that represent it. Randy Wray call this money versus the money thing.

Money is a cultural institution. Credit is based on contract, which was first established in custom and later in law. State money is a legal institution established by the state.

These concepts and conventions long predate contemporary analysis in the theory of money, including MMT.

Lars P. Syll’s Blog
The origins of MMT
Lars P. Syll | Professor, Malmo University

Heske van Doornen — The History of Money: Not What You Think

Most of us have an idea of how money came to be. It goes something like this: People wanted to exchange goods for other goods, but it was difficult to coordinate. So they started exchanging goods for money, and money for goods. This tells us that money is a medium of exchange. It’s a nice and simple story. The problem is that it may not be true. We may be understanding money entirely wrong.

The above story assumes that first there was a market, and then people introduced money to make the market work better. But some people find this hard to believe. Those who subscribe to the Chartalist school of thought give a different history. Before money was used in markets, they say, it was used in primitive criminal justice systems. Money started as—and still is—is a record of debt. It is a way to keep track of what one person owes another. There’s anthropological evidence to back up this view. Work by Innes, and Wray suggest that the origins of money are more like this:

The Minskys
The History of Money: Not What You Think

Heske van Doormen, UMKC

Geoff Coventry — Modern Money: The Basics

Short summary of currency along MMT lines.

It's The People's Money
Modern Money: The Basics
Geoff Coventry

Pavlina R. Tcherneva — Money, Power, and Monetary Regimes

ABSTRACT

Money, in this paper, is defined as a power relationship of a specific kind, a stratified social debt relationship, measured in a unit of account determined by some authority. A brief historical examination reveals its evolving nature in the process of social provisioning. Money not only predates markets and real exchange as understood in mainstream economics but also emerges as a social mechanism of distribution, usually by some authority of power (be it an ancient religious authority, a king, a colonial power, a modern nation state, or a monetary union). Money, it can be said, is a “creature of the state” that has played a key role in the transfer of real resources between parties and the distribution of economic surplus.

In modern capitalist economies, the currency is also a simple public monopoly. As long as money has existed, someone has tried to tamper with its value. A history of counterfeiting, as well as that of independence from colonial and economic rule, is another way of telling the history of “money as a creature of the state.” This historical understanding of the origins and nature of money illuminates the economic possibilities under different institutional monetary arrangements in the modern world. We consider the so-called modern “sovereign” and “nonsovereign” monetary regimes (including freely floating currencies, currency pegs, currency boards, dollarized nations, and monetary unions) to examine the available policy space in each case for pursuing domestic policy objectives.

Levy Economics Institute of Bard College
Money, Power, and Monetary Regimes
Pavlina R. Tcherneva 

ht David Fields

Randy Wray — Debt-Free Money Part 4: American Colonial Currency

Nest installment in the series.

New Economic Perspectives

Debt-Free Money Part 4: American Colonial Currency

L. Randall Wray | Professor of Economics, Bard College

Randy Wray — THE VALUE OF REDEMPTION: DEBT-FREE MONEY PART 3

Sorry that it has taken me a while to get back to my multi-part series on debt-free money. This is the third part of the current series, although I had previously written several other blogs on the related topics of debt-free money, positive money, and 100% money. See links at the bottom.

New Economic Perspectives
THE VALUE OF REDEMPTION: DEBT-FREE MONEY PART 3

L. Randall Wray | Professor of Economics, Bard College

Andrew Lainton — Is State (outside) money a liability, and if so to whom?

Readers of this blog will now that I have strongly argued that economics must be rebuilt around the accounting constraints of capitalism- balance sheet economics -, that these constraints are underlying laws of the economics system not legal conventions. Whether or not conventions align with them is just contingent however if account don’t match them that are likely to lead to false economic decisions with real consequences. From this perspective the resolution to such theoretical debates is straightforward in method but not always easy in practice, it is to determine what the accounting mistake is. 

From the balance sheet perspective a liability will be held by an economic agent if it readers an economic service. So what is the nature of that service?

Decisions, Decisions, Decisions
Is State (outside) money a liability, and if so to whom?
Andrew Lainton

Paul Davidson — Bitcoin and MMT

What is Bitcoin? According to Modern Money Theory, bitcoin can not be money since it is not accepted in payment of taxes by any government — nor is it issued by any government via the governed purchase of goods and/or services from the private sector. So what is bitcoin in terms of MMT?? I do not know what MMT proponents would respond to this query?

Professor Davidson seems to be confused over necessary v. sufficient conditionality wrt state money aka currency (Chartalism), and money as an IOU that is transferrable (Innes, Minsky).

Requirement of state money aka currency is sufficient to create demand for the unit of account that the state issues as the sole provider. In this sense, currency is a tax credit. Other forms of money are not unless the state agrees to accept them at its payment offices. If it doesn't then they must be exchanged for currency for payment of taxes, fees, fines, or other financial obligations to the state required to be settled in the state's unit of account.

Any IOU can serve as "money" as an exchange medium if a counterparty will accept in exchange.

However, the rest of Davidson's post is interesting. Bitcoins are neither issued by any state, nor does any state accept them in payment of taxes as far as I know, and they are not anyone's IOU either, in that they are "mined" digitally as an analogy to precious metals, gold in particular. Is gold bullion money? Some would say yes. Others would say it remains a commodity that can be bartered for other commodities, unless it is minted and issued as a money thing. How does Bitcoin fit into this scheme?

Real-World Economics Review Blog
What is Bitcoin?
Paul Davidson | Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville

Guest Post: Ralph Musgrave — Physical cash: Cullen Roche versus Warren Mosler

Physical cash: Cullen Roche versus Warren Mosler
Ralph Musgrave

I agree with some of the criticisms Cullen makes of MMT in his article “A critique of MMT, Modern Monetary Theory." However he goes off the rails in section 5 of that article.

First he says “In MMT all money is essentially state money.” Well that’s news to me: MMTers are well aware of the fact that commercial banks create a form of money when they extend loaans, aren’t they?

Next, Cullen criticises Warren’s ideas on the source of physical cash (dollar bills, etc.). Warren says households cannot obtain physical cash unless the state has first spent state money into the private sector with the private sector then using that state money to purchase physical cash off the Fed. Cullen disagrees: he says all that’s needed is for commercial banks to create money, which occurs when a commercial bank extends a loan.

I’ll try to sort this one out, and may fall a*se over t*t in process, but nothing venture, nothing gained. For Cullen’s argument see the paragraph starting “A good example of the erroneous MMT position…”: that’s in section 5 of the article.

Warren says in effect that when a commercial bank needs $X of dollar bills, it orders them from the Fed and the Fed debits the commercial bank’s account at the Fed by $X. Correct.

Now the credit balances that commercial banks have at the Fed must have come from somewhere: they come from the state having first spent state money in to the economy.

Of course it would be POSSIBLE to have a system where the state spends no state money into the economy, and where, when a commercial bank wants physical cash worth $X it goes into debt to the Fed. But that’s not what happens in the real world: amongst other reasons because the Fed, like other central banks, charges punitive rates of interest to any commercial bank going into debt to the Fed.

So as far as the 2013 real world is concerned, Warren is in right: physical cash is in effect money which the state has created and spent into the economy.

But against that, Cullen says, “So the cash comes from the Treasury, but not through spending, but through the desire from someone who already has an inside money account to draw that account down. Again, inside money precedes outside money.” (I.e. he is saying that commercial bank created money precedes state money - physical cash in particular).

But hang on: Cullen himself admits in section 5 of his article that about 10% of money in circulation is state money. So there is plenty of state money sloshing around which the private sector can use buy physical cash off the Fed.

But Cullen likes to concentrate on the 90% of money which is commercial bank created. He says that for the most part, when the private sector gets physical cash, that comes about as a result of households and firms depositing collateral at commercial banks, and having their accounts credited, and then using a portion of that credit balance to get hold of physical cash.

Well that’s true, but it doesn’t alter the fact that when a commercial bank wants $X of physical cash from the Fed, the Fed debits $X to the commercial bank’s account at the Fed. Hopefully that’s sorted out that argument.

Alternative banking systems.

As distinct from the banking and monetary system that actually exists in 2013, various other systems are perfectly feasible, as Cullen rightly points out. For example a system under which the only money in circulation is central bank created would be feasible: it’s called full reserve banking, and that system has plenty of advocates. And certainly, under that system, it would not be possible for anyone to obtain Fed created physical cash unless the state had first created and spent money into the private sector.

Conversely, there have been systems in the past where central banks were non-existent, yet there were thriving and efficient commercial banks, which issued their own bank notes. Those banks used gold to settle up with each other, though even precious metals aren’t essential since banks can settle up using almost anything: shares, real estate, you name it.

Those types of “central bank free” system existed in Scotland, Scandinavia and Canada between very roughly a hundred and two hundred years ago. George Selgin describes these systems in his various publications, including his book “The Theory of Free Banking”.

Positive Money — 10 year old explains the truth about where money comes from...

10 year old explains the truth about where money comes from...

Positive Money

(h/t Ralph Musgrave via email)

Positive Money has an out of paradigm bias toward full reserve banking, but this is worth watching if only for the clever presentation in only 3 minutes. However, it does ask the key question about money creation. If it was imprudent bank lending that resulted in the crisis, why are we being pushed into debt to the banks again as the solution to the crisis when government issues the currency?

Dan Kervick — Do Banks Create Money from Thin Air?

It is sometimes said that commercial banks in our modern monetary system create money “from thin air”.  While there is truth in this metaphorical claim, the metaphor can also be seriously misleading, and leads some to attribute powers to commercial banks that are actually retained by the government alone under our system.  It is worth trying to get clear about all this.

New Economic Perspectives

Do Banks Create Money from Thin Air?

Dan Kervick

Paul Meli — Does Credit Drive the Economy?

Much of the commentary on the economy seems to assume that it is driven by credit. The statement often made in blogs and news articles is that 90% or more of the money in circulation is private debt, the rest coming through net government spending, so clearly credit (debt) must be the main driver of the system. It's obvious. A caveman could see it.

I believe this is a gross mischaracterization of how the system actually functions.

Where do these claims regarding credit domination of the system come from? Is it truth or fiction. From what I had seen it was nothing more than an article of faith, I had never come across any proof or support that this was actually the case.
Based on the claims, the "money supply" people must be alluding to is the supply of dollars in existence within the domestic non-government. This is pretty simple number to figure out…

The View From Mars
Does Credit Drive the Economy?
Paul Meli

Auburn Parks — Of course money doesn't grow on trees.....its not a commodity!

Getting the word out to the progressive community.

Daily Kos — Money and Public Purpose
Of course money doesn't grow on trees.....its not a commodity!
Auburn Parks

Andrew Lainton — Optimum Taxation Policy and the Impact of Public Debt Under Modern Monetary Theory

This post was prompted by Tim Wortsall, of all peoples, post on whether progressive taxation makes sense a MMT world. In a sense he was right, and perhaps Randall Wray in response was not, the principles of taxation radically change in an MMT world as the overiding princple is how taxation can create inducements to restore full employment not how taxation can fairly fund public spending.

Decisions, Decisions, Decisions
Optimum Taxation Policy and the Impact of Public Debt Under Modern Monetary Theory
Andrew Lainton

Lord Keynes — Bitcoin is no Great Mystery

Lord Keynes reflects on Bitcoin.

Social Democracy For The 21St Century

Bitcoin is no Great Mystery

Lord Keynes