In recent years, people in the monetary and economic reform movements alongside the general public have been hearing more and more about something called “Modern Monetary Theory”. Modern Monetary Theory, or MMT for short, is a heterodox macroeconomic theory principally focused on how the financial system works and how it could be used to achieve more satisfactory economic outcomes. It seems that it has largely grown out of the tradition of chartalism and is sometimes referred to as neo-chartalism as a result. Warren Mosler appears to have served as the single greatest progenitor of the movement. Other ‘big names’ in the MMT world include: L. Randall Wray, Stephanie Kelton, Bill Mitchell, and Pavlina Tchernerva.
The point de départ of Modern Monetary Theory seems to be the observation that a government that exercises its monetary sovereignty by issuing its own currency can never run out of money. A chief corollary of this claim is that such governments cannot go bankrupt either so long as the debts are denominated in their own currency. Monetarily sovereign governments are typically federal or national governments. As the currency-issuers for a given political jurisdiction, they possess a natural monopoly on a nation’s currency in all of its various forms: bills, notes, and electronic central bank credit. Hence, if such governments need more money, they can always create more for themselves, rather than borrowing it or taxing to obtain it. That seems to be correct as far as it goes and it is something with which Social Credit would agree.
From there, MMT supporters go on to argue that in order for an economy to fully actualize its production potential, which necessarily implies a state or condition of full employment, the government should create and spend as much money as is necessary to achieve that end, while taxing or taking back the money spent at a high enough rate so that there would be no inflation. Relying on the government to do the supplementary spending would have the added advantage of ensuring that the additional production (which is required to fully utilize existing economic resources) would be composed of, presumably, much needed public goods that would benefit everyone: things like better educational services, universal high quality health care, upgraded infrastructure, and so forth.
Since MMT is receiving more and more press and would appear, in my view at any rate (and more on this shortly), to be the system’s answer to the neo-liberalism of the past 30-40 years, it is crucially important that Social Crediters become aware of what MMT claims and what it proposes and also what the due Social Credit response to MMT should be. In what follows, I will attempt to outline some of the more salient MMT propositions and policy-prescriptions and to indicate both the points of contact and commonality with Social Credit, as well as the key areas of disagreement where the two part ways. This survey does not pretend in any way to completeness. In my experience, MMT is not as clearly and as thoroughly expounded by its proponents as it presumably could and should be and thus the scope for genuine misunderstandings, obfuscation, changing goal-posts, hand-waving, and incomprehensible word salads has been enormous.
Technical Claims
That there should be no artificial financial limits or constraints on productive activity is something that both MMT and Social Credit can agree on. As an old Social Credit axiom puts it: “whatever is physically possible and desirable should be financially possible”. The real economy should be in the driver’s seat and finance or money only serving as a mere adjunct to catalyze production. When MMT proponents argue that we can or should be able to afford whatever public goods and/or social programmes that are needed by the population provided that we have the physical economic resources to satisfy those claims, they are surely right.
Another central pair of MMT claims is that federal taxes can only be paid with currency and that taxes are therefore what give value to currency. ‘People demand currency because they need to pay taxes’ or so the MMT narrative runs. These claims seem dubious for a number of reasons.
First off, virtually no one, no worker, consumer, or businessman literally pays taxes in bills and coins (central bank reserves are not part of the money supply, but count as part of the monetary base), but in bank credit. People go into the market as workers or investors or speculators to obtain money, any kind of money, and that money is usually received in the form of commercial bank credit (because the vast majority of the money supply exists in the form of bank credit). They do this for many different reasons, not just to be able to pay taxes (more on this in a moment). But even when it comes to paying taxes, no one seeks out currency in particular to pay federal taxes. In fact, the vast majority of people would be surprised by the MMT claim that federal taxes have to be paid in currency; they would not have been aware of any such stipulation. If it is indeed true that federal taxes must be paid in currency, MMT proponents are going to have to do a much better job of explaining how the mechanism actually works and proving that it does, in fact, work in the manner described.[1]
As far as what makes currency acceptable or accepted by people, I think there is a simpler explanation in any case than that currency is special and must be obtained for the purpose of meeting tax obligations: currency is legal tender. People have to accept bills and coins, for example, in exchange for their goods and services because the state has, by fiat, decreed that these bills and coins are money and must be accepted in payment of debts.
Finally, from a Social Credit point of view, what ultimately gives value to money, whether in the form of currency or credit, is not that people need money to pay taxes, but rather the fact that there is real wealth in existence (potential or actual) that can be claimed by the money tokens. It’s the existence of real goods and services with costs and prices attached to them, or the raw capacity to produce such real wealth, that ultimately gives value to money. This can be proved quite easily by a thought experiment: if no taxes were levied and the regular flow of production were unimpeded, there would be still be a demand for money in order to obtain goods and services in exchange for it.
Closely connected with the idea that taxes give value to the currency or money in general, is the MMT claim that, contrary to the common perceptions of politicians and of the public at large, taxes don’t fund federal government spending. What they mean to say with this is that it is not the case that the government first collects taxes and then spends money into the economy on this programme or that one. Rather, the government spends first and then re-collects some of the money it has spent in taxation. This, I think, is true. The government first obtains the money it needs to spend from the banking system before it charges consumers for it in taxation.[2] However, this time sequence does not obviate the fact that consumers still pay for government goods and services in their taxes. Taxes merely serve the role that prices serve in the private sector, where the private provision of goods and services are concerned. That taxes don’t fund the government upfront does not mean that they don’t fund the government after the fact; we pay for government goods and services just as we pay for private goods and services. Government production does not cost nothing; it is not for ‘free’.[3]
Besides this disingenuous attempt to demystify taxation, MMT actually goes a step further and asserts that borrowing does not fund federal spending either. MMT basically says that whenever a monetarily sovereign government spends it creates the money that it spends through the balance sheet operations of the central bank. This claim is more problematic. Firstly, it is not always clear just what is being affirmed. It is undoubtedly true and it is contested, I believe, by virtually no one that the central banks can create money in the form of electronic central bank credit for a monetarily sovereign government. But saying that something can be the case is not saying that it always is or must be the case. MMT proponents often seem to give the impression that we are dealing here with a strict necessity of the system and that every dollar of federal spending involves money creation, first by the central bank on behalf of the government and then, presumably, by commercial banks who receive the corresponding reserves from the government when the government wishes to spend.
In a very important research paper available on the Canadian Library of Parliament website that was published in 2011, Penny Becklumb and Mathieu Frigon, researchers from the Economics, Resources, and International Affairs Division of the Parliamentary Information and Research Service, unequivocally state that, as far as Canadian federal government operations are concerned, only a small portion of the federal government’s money is created by the central bank and very often it is held on reserve in view of contingencies and not spent into the economy at all. The rest of the governments bonds and treasury bills are purchased by commercial banks (which create the money with which they effect said purchases), brokers, and investment dealers. I will quote all the relevant parts of this document in full as this issue is such a bone of contention and this paper quite conveniently and clearly contradicts the standard MMT position in multiple places (emphasis in bold is mine):
“This paper explores the operational and legal aspects of how, by buying newly issued federal government bonds and treasury bills, the Bank of Canada creates money1 for the federal government. Information about how private commercial banks create money is also provided.
“In June 2011, as part of the debt management strategy2 included in its 2011 Budget, the Government of Canada announced its intention to borrow $35 billion over the next three years in order to increase its deposits with financial institutions and the Bank of Canada by about $25 billion and to increase liquid foreign exchange reserves by US$10 billion. The intention of this "prudential liquidity plan," as it is known, is to ensure that there are sufficient liquid assets to cover at least one month of the federal government's net projected cash flows, including interest payments and debt refinancing needs.
“The government justified this plan by stating that liquid financial assets "safeguard its ability to meet payment obligations in situations where normal access to funding markets may be disrupted or delayed," and that this "supports investor confidence in Canadian government debt."3 In response to the government's June announcement, in October 2011 the Bank of Canada announced its intention to increase from 15% to 20% its minimum purchases of federal government bonds.4 As explained in this paper, the Bank of Canada's purchase of federal government bonds is a means by which the Bank creates money for the Government of Canada. The Government of Canada may elect, as it did in the context of the prudential liquidity plan, to keep this money in its deposit account with the Bank rather than spend it.
2 How the Bank of Canada Creates Money for the Federal Government
“The Bank of Canada helps the Government of Canada to borrow money by holding auctions throughout the year at which new federal securities (bonds and treasury bills) are sold to government securities distributors, such as banks, brokers and investment dealers. However, the Bank of Canada itself typically purchases 20% of newly issued bonds and a sufficient amount of treasury bills to meet the Bank's needs at the time of each auction.5 These purchases are made on a non-competitive basis, meaning that the Bank of Canada does not compete with the distributors at auctions. Rather, it is allotted a specific amount of securities to buy at each auction.6
“In practical terms, the Bank of Canada's purchase of government securities at auction means that the Bank records the value of the securities as a new asset on its balance sheet, and it simultaneously records the proceeds of sale of the securities as a deposit in the Government of Canada's account at the Bank – a liability on the Bank's balance sheet (see Appendix A). ….
“By recording new and equal amounts on the asset and liability sides of its balance sheet, the Bank of Canada creates money through a few keystrokes. The federal government can spend the newly created bank deposits in the Canadian economy if it wishes. ….
3 Money Creation in the Private Banking System
“Private commercial banks also create money – when they purchase newly issued government securities as primary dealers at auctions – by making digital accounting entries on their own balance sheets. The asset side is augmented to reflect the purchase of new securities, and the liability side is augmented to reflect a new deposit in the federal government's account with the bank.
“However, it is important to note that money is also created within the private banking system every time the banks extend a new loan, such as a home mortgage or a business loan. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money (see Appendix B). Most of the money in the economy is, in fact, created within the private banking system.
“A key similarity between money creation in the private banking system and money creation by the Bank of Canada is that both are realized through loans to the Government of Canada and, in the case of private banks, loans to the general public.”[4]
Finally, while there is no explicit acknowledgement in MMT of a price-income gap or the discrepancy between the flow of costs/prices in the economy vs. the flow of consumer incomes, with the former surpassing the latter (and therefore no attempt to investigate its various causes), there is an implicit recognition of the Social Credit gap insofar as government deficits are seen as necessary for maintaining economic functionality (equilibrium) and the avoidance of recessions. But, as I have tried to show elsewhere: https://www.socred.org/s-c-action/social-credit-views/living-beyond-your-means, it is not just the government that is or must be in deficit to maintain equilibrium, consumers and businesses are also not running balanced budgets by spending more than they receive in income or revenue and borrowing the difference.
Philosophical and Policy Claims
It is in the realm of ‘philosophy’ and policy that the greatest differences emerge between MMT and Douglas Social Credit. The contrast is so stark that MMT, like Keynesianism before it, can rightly be described as an inversion of Douglas Social Credit, as if it were an attempt to stand Social Credit on its head in the service of increasing centralized power.
Whereas MMT appears to stand for the full actualization of the economy’s productive potential as an end in itself, as if the purpose of the economy were simply to produce as much as we can, Social Credit stands for the full actualization of the economy’s useful productive capacity, i.e., production which answers to bona fidehuman needs, which is a very different thing. The objective of economic life as MMT perceives it necessitates a policy of full employment. In order to achieve that end, MMT proposes the introduction of a federal job guarantee so that anyone who needs work can be put to work on public production by the government at minimum wage. Social Credit, by contrast, says that if we can actualize the useful productive capacity with only a minority of the workforce actually being employed in production (which is undoubtedly the case in any first-world, industrialized nation), then that is a good thing because it means that we can start distributing increased leisure. Thus, over and against MMT’s policy of full employment, Social Credit champions a policy of the minimum employment necessary.
Now, in an era of increasing automation, a federal job guarantee also bears a very sinister implication. As the private sector can meaningfully employ fewer and fewer people – it has been repeatedly predicted by several commentators, social critics, and futurists that 50% of American jobs, for example, will be automated within 20 years – the job guarantee means that the government will have to provide the work for the people who are losing their jobs due to automation. The logical endpoint of this type of progression would be for the government to serve, not merely as ‘the employer of last resort’, but as the main employer in society. Should the government eventually start to employ the majority of workers, all at a minimum wage, there will be very little difference between that and a communist economy in which the government owns the means of production, all economic decisions are made according to plans executed by centralized bureaucracies, and all workers are paid equally. In other words, it seems to me that the pledge of a federal job guarantee within the context of the fourth industrial revolution may very well eventuate in a communistic or communist-like economic order. This would mean that MMT is communism through the back door. Indeed, given the current SJW political and cultural climate, one can imagine that the MMT society of tomorrow might be even worse, in certain respects, than the communism of the past. Will people be paid minimum wage by the government to, for example, dress up in drag and read stories to little children? Would “Drag Queen Story Hour” be one of the eligible activities for job guarantee recipients? Might people even be coerced into doing things of this nature if there is nothing else for them to do?
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[1] It has been suggested by certain MMT proponents that I have read more or less recently that what happens with respect to federal or national taxes is something along these lines: people pay bank credit via taxes into government accounts at commercial banks. The government then directs the bank to pay back the equivalent in central bank deposit or reserves to the central bank and both the bank credit and the reserves are cancelled out of existence. But even then it remains true that people are not paying their taxes directly in currency and thereof they would have no need to demand it. It is likewise true that government expenditures must be made in bank credit, not cash or central bank deposits, so the MMT emphasis on currency with respect to this question of money’s ‘value’ would seem to be misplaced.
[2] But this is not exclusive to the federal or ‘monetarily sovereign’ government; it is probable for reasons of convenience and need that all governments spend first and then tax the money spent or some of it back.
[3] In this and a number of other ways, MMT distinctions seem to be ‘distinctions without a difference’ rather than novel revelations about how the financial system actually works.
[4] https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201551E
Cf. also this statement from the Bank of England paper “Money Creation in the Modern Economy”:
"Banks buying and selling government bonds is one particularly important way in which the purchase or sale of existing assets by banks creates and destroys money."
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?fbclid=IwAR1C714MNuK_vOf_4_9skFq14PRfvAb2FvTdYY0eN2vW8hzsrPTLRlHawI
