Modern Monetary Theory

Modern Monetary Theory (MMT or Modern Money Theory) is a macroeconomic theory that describes and analyzes modern economies in which the national currency is fiat money, established and created by a sovereign government. The key assertion of MMT is that sovereign governments that are the sole supplier of national currency can issue currency of any denomination, and in physical or non-physical forms. Consequently, these governments have an unlimited financial ability to pay for the things they wish to purchase and to fulfill promised future payments. The real limits to a currency issuing government's spending are the availability of natural resources, goods, assets, workers and services in the real world. MMT claims that these governments also have an unlimited ability to provide funds to other sectors, and that because of this, it is not possible for a government that issues its own currency to be bankrupt.[1]

MMT is seen as an evolution of Chartalism, and is sometimes referred to as Neo-Chartalism.

In sovereign financial systems, banks can create money but these "horizontal" transactions do not increase net financial assets as assets are offset by liabilities. "The balance sheet of the government does not include any domestic monetary instrument on its asset side; it owns no money. All monetary instruments issued by the government are on its liability side and are created and destroyed with spending and taxing/bond offerings, respectively."[1] In addition to deficit spending, valuation effects (e.g. growth in stock price) can increase net financial assets.[citation needed] In MMT, "vertical" money (see below) enters circulation through government spending. Taxation and its legal tender enable power to discharge debt and establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met. In addition, fines, fees and licenses create demand for the currency. This can be a currency issued by the domestic government, or a foreign currency.[2][3] An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities by itself.

History

MMT synthesises ideas from the State Theory of Money of Georg Friedrich Knapp (also known as Chartalism) and Credit Theory of Money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner, Hyman Minsky's views on the banking system and Wynne Godley's Sectoral balances approach.[4]

Knapp, writing in 1905, argued that "money is a creature of law" rather than a commodity.[5] Knapp contrasted his state theory of money with the Gold Standard view of "metallism", where the value of a unit of currency depends on the quantity of precious metal it contains or for which it may be exchanged. He argued that the state can create pure paper money and make it exchangeable by recognising it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices".[5]

The prevailing view of money was that it had evolved from systems of barter to become a medium of exchange because it represented a durable commodity which had some use value,[citation needed] but proponents of MMT such as Randall Wray and Mathew Forstater argue that more general statements appearing to support a chartalist view of tax-driven paper money appear in the earlier writings of many classical economists,[6] including Adam Smith, Jean-Baptiste Say, J.S. Mill, Karl Marx and William Stanley Jevons.[7]

Alfred Mitchell-Innes, writing in 1914, argued that money exists not as a medium of exchange but as a standard of deferred payment, with government money being debt the government may reclaim through taxation.[8] Innes argued:

Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, and present it to the Treasury in liquidation of his legal debt. He has to redeem or cancel that portion of the debt...The redemption of government debt by taxation is the basic law of coinage and of any issue of government ‘money’ in whatever form.

— Alfred Mitchell-Innes, The Credit Theory of Money, The Banking Law Journal

Knapp and "chartalism" are referenced by John Maynard Keynes in the opening pages of his 1930 Treatise on Money[9] and appear to have influenced Keynesian ideas on the role of the state in the economy.[6]

By 1947, when Abba Lerner wrote his article Money as a Creature of the State, economists had largely abandoned the idea that the value of money was closely linked to gold.[10] Lerner argued that responsibility for avoiding inflation and depressions lay with the state because of its ability to create or tax away money.[10]

Economists Warren Mosler, L. Randall Wray, Stephanie Kelton, Bill Mitchell and Pavlina R. Tcherneva are largely responsible for reviving the idea of chartalism as an explanation of money creation; Wray refers to this revived formulation as Neo-Chartalism.[11]

Bill Mitchell, Professor of Economics and Director of the Centre of Full Employment and Equity or CofFEE, at the University of Newcastle, New South Wales, refers to an increasing related theoretical work as Modern Monetary Theory.

Pavlina R. Tcherneva has developed the first mathematical framework for MMT[12] and has largely focused on developing the idea of the Job Guarantee.

Scott Fullwiler has added detailed technical analysis of the banking and monetary systems.[13]

Rodger Malcolm Mitchell's book Free Money[14] (1996) describes in layman's terms the essence of chartalism.

Some contemporary proponents, such as Wray, situate chartalism within post-Keynesian economics, while chartalism has been proposed as an alternative or complementary theory to monetary circuit theory, both being forms of endogenous money, i.e., money created within the economy, as by government deficit spending or bank lending, rather than from outside, as by gold. In the complementary view, chartalism explains the "vertical" (government-to-private and vice versa) interactions, while circuit theory is a model of the "horizontal" (private-to-private) interactions.[15][16]

Hyman Minsky seemed to favor a chartalist approach to understanding money creation in his Stabilizing an Unstable Economy,[17] while Basil Moore, in his book Horizontalists and Verticalists,[18] delineates the differences between bank money and state money.

James K. Galbraith supports chartalism and wrote the foreword for Mosler's book Seven Deadly Innocent Frauds of Economic Policy in 2010.[19]

Steven Hail of the University of Adelaide is another well known MMT economist.[20][citation needed]