Sustaining an Economy that has the feature of Commonwealth Via MMT principles
When Hillary talks about balancing the budget without adding to the national debt, I disagree a bit with her. She and her advisors are still under the sway of certain myths about money and economy that are deeply entrenched in American Academia, Business & Finance. Although thanks to the influence of the Post Keynesians and Modern Money Theory (MMT), less so than before. This is a reason for guarded optimism. I hope she'll listen to what he has to say. If Trump wins, heaven help us. If we can develop an economy with sovereign powers over our money we can do everything we want to, within reason, well. This is because most of what we've been taught about balancing budgets is false.
Post Keynesianism/MMT as a Way Forward
The Post Keynesian James K. Galbraith has been working with those who embrace ideas known as Modern Money Theory (MMT). These are derived from lessons learned from dealing with both silver & Gold backed money and with purely fiat money. They also draw from "Chartalist ideas" and ideas derived from the 19th century Greenback and populist movements. James K. Galbraith moved in that direction with his discovery that our deficit problems are a function of both National Debt, "private debt" and also economic inequality. They only seem radical because the current system is extremely convenient to a very small, dominant and vocal monopoly that pretty much blacklists opposing views.
What is the Money Privilege
The core realization of the Chartalist movement is that power over money is a "privilege" and is part of sovereignty. While Notes resemble ordinary debt, they aren't ordinary debt when they are issued as money. They may start as "Bills of Credit" but the difference between a bill of credit and other debt, is that while all credit is issued as an asset for the holder and a liability for the government. A bill of Credit, is also a privilege to buy and sell in public markets, which drives commerce and so comes with a duty to provide some service for payment. Money spent into the economy drives our economy. The person receiving it turns around and buys goods and services, with each person the money passing through doing the same thing in turn. Keynesians talk about a money multiplier. Friedman talked of "the velocity of money". In both cases each dollar spent into existence generates multiple dollars in revenue. And the privilege of handling such money is a valuable one.
Privateers of Money
In most societies this money privilege has been farmed into private hands, who often behave like pirates and so can easily be called privateers. Private banks often control this privilege through what is called reserve banking. That is they arrogate to themselves the power to spend money into existence through loans, which in turn create reserves of money that can be lent in turn. Modern Money changers, called banks, find a way to tax nearly every transaction involved in money. In that way they can nearly exclusively benefit from the money power of even the most sovereigns. Where money is sovereign, it can be exchanged for anything.
And in most of the world, it can also be hoarded. And thus those who have arrogated the money power have traditionally also amassed vast fortunes, sometimes at the expense of those who trusted them with that power. The illusion that money must have a physical value (be made of gold or silver) comes from the fact that those entrusted with the money power, throughout history, have more often abused it than earned their trust.
The roots of the money power lie in Piracy and warfare, colonialism and empire, trade and commerce. Reformers have argued for at least 150 years that we need to wrest the control of the money power from private bankers, tax and regulate it better.
Anti-Reformers have a long list of arguments for why none of that should happen but their reasons really boil down to the fact that the money privilege and the property ownership privilege combine to allow great fortunes for some at the expense of the many -- and once a reformer "pond" reaches the other side of the board he/she tends to be captured by the system. But I don't want to talk about that this post.
For more on Governing theory related to this read:
- Issues with notes as legal tender
- No it doesn't trickle down
- Render Unto Caesar what is Caesar's
- Bonapartism and Haiti
- Plutocrats Versus Democrats
- Sustainable Economic Policy II
Paying for Privilege
But today I want to focus on understanding the solutions. As Henry George Says (see Sustainable Economic Policy II):
"the power to issue money is a valuable privilege which, to secure the best circulating medium and to put all citizens on a footing of equality, ought to be retained by the general government, and to be permitted to no one else"
And therefore those whose privilege rests on the power of money over property should either due their duty virtuously to drive commerce (actual capital investment) or pay for that privilege, and should pay for any unearned fruits of that privilege. What that also means, is that the payment for the privilege is due at the end of the commercial cycle, and that the money should be issued at the beginning of the cycle.
Paying it Forward
Thus while formally money is just another form of credit, in reality bills of credit, establish a "debt of honor" or a "debt of privilege" for those privileged to be paid with them. The Governments books must balance, but not over the short run. Instead money has to be issued and then it has to be taxed out of existence in order to avoid hoarding. Indeed economic instability, inequality and crazy business cycles can be blamed on the tendency of pirates to hoard money. In the old days that would be literal chests filled with gold and silver. But nowadays it is usually cash reserves, debt, properties and financial instruments. Looked at it from that POV it is the duty to tax progressively in order to ensure that those with wealth use it responsibly and don't impoverish everyone around them. More on this I will talk about later.
Taxing back Privilege versus "paying for things"
Thus while in most conventional discussions of governing an economy the talk is about how budgets must balance, a deficit is "bad" and Governments that run deficits are bad or reckless. From the Point of View of reformers and MMT government that acts like a private household or a private business is not a sovereign Government. On the contrary the business of Government is to enable households and private businesses to order their business. And since the money privilege is a valuable privilege that ought to be governed for the common good it needs to be managed that way.
Modern Monetary Theory in an Open Loop
Modern Monetary theory can be argued as if it were a closed loop society. L Randal Wray has this chart for money creation and destruction:
L Randal Wray notes that a:
"monetarily sovereign government is the monopoly supplier of its currency and can issue currency of any denomination in physical or non-physical forms. As such the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay"
The legal term "privilege" sheds light on this. When money is sovereign, those the government buys resources from can turn around and pay their own debts and replace lost resources. If money sovereignty is in private hands then it becomes a tool for wealth aggrandizement, hoarding and oppression. Money that has its sovereignty questioned loses it's value and becomes mere shreds of paper or a fraction of it's nominal or original worth. So inflation can be seen as a war on the sovereignty of money.
Even in a world where Pirates, Privateers and Pirate Kings rule the money. The money available is usually ample for the purpose of driving commerce, until the inequality, inequity and hoarding it generates sucks the wealth out of commerce and impoverishes people. This is why the holders of such wealth can party so hearty right up until their minions pickup pitch forks and come for their heads. It is in the best interest of the pirates to give up hoarding and let the money in their hands be used for the common good.
Taxation as recovering reserves
The true purpose of taxation is to protect the stability and value of the money supply and avoid inflation. Under a Chartalist system deficits only matter because they mean that money is not going where it should go, people are unemployed and resources are being wasted.
Wray writes that:
"the injection of government currency (through expenditures or advances) into the other sectors must occur before the destruction of the government currency (through tax enforcement and repayment of advances). In an economic system in which a sovereign government operates through its own monetary system, spending (or lending) must occur before taxing. In addition, taxes are not a funding source in that logic. They are part of the destruction of government currency, i.e. they return currency to the issuing government."
In Modern Money theory, money is being advanced to money lenders and to projects and acquisitions/purchases of merit, and repaid later as taxes. Wray puts it this way;
"Thus, the government “budget constraint” is more relevantly interpreted as an expost identity that shows the sources of injection and destruction of government currency. It is not an equation describing the choices to fund government expenditures. Within that logic, a fiscal deficit represents a net injection of currency that usually needs to be drained"
This reverses the POV that posits that money is "borrowed" from the economy and then the Government pays back that borrowing with taxes. On the contrary money is fronted to the economy and then paid back as taxes or via duties and services. Excess reserves must be recovered to avoid hoarding of them by those granted a privilege to use and re-spend government issued money. Taxation is also there to reduce or mitigate any damage done by those officers who had the privilege of handling money and deciding where it should be spent.
MMT in a Complex World
Wray & other MMT writer's vision is almost a tautology within a closed system. But how does one make it work within an international system? It can be done. The Pirates can be overthrown!
Yes, in reality the Pirate Kings still rule our Earth. This means that:
- Nations are usually not Sovereign over their own money
- Nations are either creditors or debtors to private individuals [directly or through institutions] and other Nations
The International Monetary Mess
The key to answering this is to recognize that the power to issue money is a sovereign power. Where countries are Federated into a commonwealth of commonwealths the power to front money needs to be controlled on Federal principles. That is the Central Government has general powers and ever more local governments share in their specific expression all the way down to local government. And where one wants the ability to trade internationally, one has to establish markets that regulate such exchange for the mutual benefit of the exchanging parties. It is not fair to take away local power for the sake of central powers, nor is it fair for local power to be at the expense of the powers needed by a well constituted federal system.
The money needs to enter the system through several directions. One is a commercial banking system, for lending money into existence to support markets and people participating in them. The other is a system of investments in and through ever more local governments, in order to sustain the common infrastructure and utilities necessary to support local and networked markets. Investment in education, science, infrastructure, all need to be done on a regular and sustained basis --> and drive the economy. One key "bank" we need is a national infrastructure bank operated on Chartalist principles. And we need to ensure that wages are sufficient so that everyone can participate in the system and is compensated for their efforts. This is not socialism. Markets are necessary. Social Services are a function of self government and folks looking out for each other.
And of course that money has to be exchanged in a manner that enables communities to exchange with one another. Our international money system also needs to be reformed in a way that is fair both to central governments and their subsidiarity divisions -- all over the world. If nations are no longer creditors and debtors the way they were before that will end some of the mess we are facing. I'll talk about this more later.
- L Wrandal Wray
- I've flirted with both Postive money folks and the MMT folks. Reddit has a good article on the distinction:
- I haven't married either of them yet, but am mostly in the MMT camp right now.