Well-known scholars thus far have understood that the private banking system is the root cause of the perpetuating debt and unsustainable growth that many countries have been experiencing.
These problems have forced many leaders to propose solutions to the current monetary system.
This movement is known as Monetary Reform, and within the movement there are quite a few different camps. These include;
Fiat Debt-Free Money Reformers (FDF)
Modern Money Theorists (MMT)
Post Keynesian Reformers (PKR)
Islamic Banking Advocates (IBA)
Social Credit Reformers (SCR)
Land Reformers (LR)
Hard Money Reformers (HM)
Competing Currency Reformers (CCR)
This article presents yet another monetary theory that addresses a different conception of the nature of money and banking.
The ideas proposed by fiat debt-free reformers, as mentioned in the previous article, were also shared over 100 years ago, by German economist George Friedrich Knapp in 1985. He went on to form Chartalism a pre-evolved form of Modern Money Theory.
Chartalism is an economic theory that outlines the benefits of a government-issued fiat currency and proposes that the value of money should be derived from the government.
In this way, the government should enforce the value of money through legal tender laws and establish the money’s value by accepting it as payment for taxes.
Chartalism had been extremely popular during the late 1930s, when it gained recognition from many prominent economists such as John Maynard Keynes and Abba Lerner.
Keynes had also commented favorably on the principles of Chartalism in his book titled the Treatise on Money.
In addition, Lerner also proposed ideas similar to Chartalism, when he stated that the value of money was determined by the state.
Lerner expresses his stance in his book titled: Money as a Creature of the State, where he wrote,
Depression occurs only if the amount of money spent is insufficient. Inflation occurs only if the amount of money spent is excessive. The government – which is what the state means in practice – by virtue of its power to create or destroy money by fiat and its power to take money away from people by taxation, is in a position to keep the rate of spending in the economy at the level required to fill its two great responsibilities, the prevention of depression, and the maintenance of the value of money.
The theory of Chartalism would transform itself, and the theory evolved over the decades, into what is now contemporarily known as the Modern Money Theory.
Modern Money Theory (MMT)
MMT had been founded by economist Warren Mosler in 1995, closely resembling the principles of Chartalism.
The MMT theorists held the same position as Chartalists, in that the government should be in control over the creation and issuance of money in the economy.
However, the founder of MMT, Mosler, stated that he created MMT on his own, despite the similarities of his theory to the works of Knapp on Chartalism.
Mosler confirmed this in a response to the article on Mises.Org titled The Upside-Down World of MMT where he wrote
I had never read or even heard of Lerner, Knapp, Inness, Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became known as ‘MMT’ entirely independent of prior economic thought.
However, Mosler is influenced by modern economists such as Randall Wray who have helped inaugurate the principles of MMT.
Wray has greatly contributed to the concept of the Job Guarantee (JG) Program, which is a program for the state to hire all unemployed workers in order to attain full employment in the economy.
The concept of the Job Guarantee Program closely resembled the ideas of Post Keynesian economist Hyman Minsky who proposed that the state should act as the employer of last resort for unemployed workers.
Below is a picture depicting various advocates of MMT including Wray, James Galbraith, and Stephanie Kelton and where they stand in terms of economic theory.
As one can see, the framework of MMT can be considered an extension of Post Keynesian, however this does not imply that all Post Keynesians adopt MMT theory.
Mosler’s theory proposes the government to retain control over the creation and issuance of money since this would enable governments to achieve both full employment, and price stability in the economy.
However, the ability to both maintain full employment, and establish price stability has been characterized as impossible by mainstream economists today.
Mosler offers the following solutions, and argues that in order to achieve full employment and price stability, three requirements must be met:
1.) Governments must have complete control over monetary policy
2.) Creation of a Job Guarantee (JG) program by the government
3.) Governments must use taxation to reduce private demand
1.) Since complete control over the money supply is not possible under a gold standard, Mosler advocates for governments to adopt a fiat monetary system which allows the government in power to create as much money as required for its mandate.
2.) Under a Job Guarantee program, the government would unconditionally offer a public sector job at the minimum wage to anyone willing and able to work, thus achieving full employment.
3.) Unlike mainstream Keynesians, MMT theorists argue that taxation is not used to generate profit for the government but rather, to influence demand in order to prevent inflation. Thus, MMT states that Governments must use taxation in order to maintain price stability in the economy.
On the surface, many philosophies proposed by MMT seem similar to other monetary reformers, yet there are also fundamental differences as well.
Debt-free monetary advocates such as Ellen Brown, Stephen Zarlenga, and Dennis Kucinich all advocate for government issued fiat currency, however MMT differs from their proposals with the following key difference.
MMT does not advocate the abolition of private bank credit (cheque-book money); in fact MMT does not address credit money at all. It simply states that the government is the monetary sovereign and that it controls the creation and issuance of all money in the economy.
The debt-free reformers such as Brown would disagree with this view, simply because they argue that 95% of the money supply is created by banks in the form of private bank credit, which is not controlled by the government.
MMT job guarantee program has faced criticism from monetarists following Friedman’s philosophies who argue economic stability is not be possible with full employment. In fact, Monetarists believe in a natural rate of unemployment, and believe that any employment above this ‘natural rate’ would result in inflation.
And mainstream Keynesian economists that argue, that such a program would cause inflation since the government must continually print money to pay the workers.
MMT theorists contend that since the government would employ the unemployed directly, the JG program can avoid the inflationary effects.
On deficit spending, mainstream Keynesians agree with MMT, however, they only agree on deficit spending in times of financial crisis or recession.
Meanwhile, MMT advocates argue that deficit spending should carry on for as long as growth is being achieved.
Mainstream Keynesian Paul Krugman addressed MMT in an article in the New York Times titled; I would Do Anything for Stimulus But I Won’t Do That (Wonkish), where he wrote
But here’s the thing: there’s a school of thought [MMT] which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone. OK, I don’t think that’s right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough.
Krugman advocates that deficit spending should only be embraced in times of financial crises or recessions, and once the economy stabilizes then government’s should be on track to slash the deficit and begin to pay the deficit off.
In another article titled: Deficits and the Printing Press (Somewhat Wonkish), Krugman also adds,
I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.
Post Keynesian, Steve Keen, has also disagreed with the views proposed by MMT. Keen expressed his disagreement in a comment on his article titled; It’s Hard Being a Bear (Part Six)? Good Alternative Theory where he wrote,
Count me out of those who are arguing for an increase in debt as a solution… My call has always been for debt reduction.
The criticisms lobbed at MMT have led to the establishment of yet another monetary reform theory known as Modern Money Realism (MMR).
In fact, work on this theory is still on-going, considering the fact that it has been established in 2011.
Modern Monetary Realism (MMR)
MMR is a school of thought launched by academics Cullen Roche, Michael Sankowski, and Carlos Mucha.
MMR is not a branch of MMT, but rather, yet another critique of it. MMR rejects many of the principles underlined in Mosler’s economic theory.
Roche describes the fundamentals of MMR in an article titled: Understanding the Modern Monetary Systems where he writes,
Modern Monetary Realism (MMR) is a description of the monetary system within a nation operating a fiat currency which involves an autonomous monetary system, monopoly supply, of currency and floating exchange rates. Modern Monetary Realism describes how a government creates, destroys and utilizes its monetary unit and also how the private sector utilizes the state’s monetary unit for its own benefit. Modern Monetary Realism is similar to Modern Monetary Theory (MMT) in many ways and utilizes many core aspects of MMT, but focuses primarily on the operational realities of the monetary system and attempts to eliminate the theoretical aspects of MMT that generate substantial political divisiveness and confusion.
MMR founder Cullen Roche had once been a proponent for MMT before eventually proposing and adopting the theories presented in MMR.
Since Roche has been involved with both MMT and MMR, he offers several fundamental differences between MMR and MMT.
The differences are noted and analyzed in his paper titled; How is MMR Different From MMT?
The two schools of thought differ on:
Inflation and Fiscal + Monetary Policy
Deficit Spending and Trade Balances
Role of banks on the Financial Industry
Full Employment and the Job Guarantee Program
1. Inflation and Monetary Policy
MMT holds the view that inflation can be avoided through government fiscal policy of taxation.
MMR argues that inflation cannot be maintained solely through government fiscal policy since there is a time lag in the economy that is required to implement it.
Roche argues this point in his article where he writes,
Fiscal policy is notoriously slow to enact and relying on Congressman to control inflation through changes in the tax code is an unrealistic policy response without a fixed policy tool (something MMR is in favor of). We do not agree that monetary policy is as ineffective as MMT believes. The Federal Reserve can have an enormous impact on the economy and we believe the Federal Reserve is a tool that requires greater oversight, but should not be reduced to having no role in helping to fight inflation.
Thus, Roche asserts that the policy of using taxation to reduce private demand and inflation, would not be feasible since by the time the fiscal policy has taken effect, it would be much too late to reduce the private demand since the demand would have already shifted to something else.
MMT holds that the government must continually run deficits in order to sustain a growing economy.
MMR argues that deficits, especially trade deficits, are unsustainable and will lead to a reduction in the standard of living.
Modern Monetary Realism doesn’t view large current account deficits as sustainable as they require ever larger global imbalances, [leading to] larger budget deficits and [having the] potential [to] result in a reduced standard of living as the society turns increasingly into a society of consumers as opposed to producers.
MMT argues that countries with their own monetary sovereignty can import all the products they need, and incur deficits rather than focus on producing.
MMR counters that an economy dependent only on imports and consumerism, will reduce its capacity to produce and induce stagnation in the economy as the production and manufacturing sector begin to decline.
MMR advocates that a nation is not wealthy because it can consume a great deal or because its government spends money, but because it can produce a great deal.
MMT lacks emphasis on the idea that producers matter as much, if not more than consumers in the effort to create better living standards in the world. This is not to imply that Monetary Realism doesn’t appreciate consumption, but we view consumption and production as two sides of the same coin rather than a tug-of-war. Maintaining a balance and focus on each is important.
MMT believes that only countries/governments with monetary sovereignty (with their own central bank) can print as much money as they need without going insolvent
A perfect example of a government printing was instituted by Zimbabwe in 2005, when the government printed trillions of dollars in order to fund rising deficits, which inevitably led to hyperinflation.
Although Zimbabwe did not go insolvent, it experienced dangerous levels of hyperinflation, rendering their currency useless.
3. Banks and the Financial Industry
MMT tends to view the banking system as an extension of the government and the public sector. Mosler confirms this view in his paper titled Proposals for Treasury, the Federal Reserve, the FDIC, and the banking system, where he writes,
U. S. banks are public/private partnerships, established for the public purpose of providing loans based on credit analysis.
MMR theorist Roche writes,
Banks are private entities that do not serve the public purpose, as their main objective is to seek a profit for their owners and shareholders.
4. Full Employment and Job Guarantee Program
Many MMR reject the idea of full employment through the Job Guarantee program arguing that it would not be a feasible, nor efficient use of resources.
The JG could create unintended consequences which [could] reduce the potential living standards of the society over a multi-generational period.
MMR argues that the cost of hiring every single worker would not be feasible since large amounts of money would be required to pay for their services.
In addition, MMR argues that since Fiscal policy is ineffective, taxation will not reduce private demand enough to prevent inflation.
As noted above, the primary differences between MMR and MMT lie in the operational realities of the monetary system.
MMR disagrees with MMT on the grounds that many of the ideas proposed by MMT are not valid and do not currently exist in the monetary system.
MMR also rejects the idea that the government is the sole issuer and creator of money in the economy. In this sense, MMR agrees with the views of fiat debt-free reformers, that private banks are the primary creators of money in the economy (over 95%), and not the government (less than 5%).
Pt 11 of this series discusses the solutions proposed by Post Keynesian reformers, that base their principles on endogenous money instead.