Home > Uncategorized > The origins of MMT

The origins of MMT

from Lars Syll

Many mainstream economists seem to think the idea behind Modern Monetary Theory is new and originates from economic cranks.

New? Cranks? How about reading one of the great founders of neoclassical economics – Knut Wicksell. This is what Wicksell wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank 

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system

We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A  thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of “cash in advance” – LPS] …

For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’  is a reality and not just a theoretical curiosity – MMT describes a fiat currency system that almost every country in the world is operating under.

And here’s another well-known economist with early ideas of the MMT variety: 

[Bendixen says the] old ‘metallist’ view of money is superstitious, and Dr. Bendixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance. With the exception of the last, the only true interpretation of which is purely dialectical, these ideas are undoubtedly of the right complexion. It is probably true that the old ‘metallist’ view and the theories of regulation of note issue based on it do greatly stand in the way of currency reform, whether we are thinking of economy and elasticity or of a change in the standard; and a gospel which can be made the basis of a crusade on these lines is likely to be very useful to the world, whatever its crudities or terminology.

J. M. Keynes, “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal, 1914

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the legal status given to them by government and the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. Hence spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem, since fiat money means that governments can always make more of them.

Financing quantitative easing, fiscal expansion, and other similar operations, is made possible by simply crediting a bank account and thereby – by a single keystroke – actually creating money. One of the most important reasons why so many countries are still stuck in depression-like economic quagmires is that people in general – including most mainstream economists – simply don’t understand the workings of modern monetary systems. The result is totally and utterly wrong-headed austerity policies, emanating out of a groundless fear of creating inflation via central banks printing money, in a situation where we rather should fear deflation and inadequate effective demand.

  1. January 30, 2017 at 4:49 pm

    i get paid in bitcoins now for a few things–not much of course. There are problems with some people into MMT–they are against UBI, and for a guaranteed job. (Of course they wont give me a job i want or can do, they’ll just give me a job i dont want, and they dont want to do). The fact is, there is no difference, if you know your nonequilibrium thermodynamics / statistical mechanics. “what goes in , comes out’.

    you can print any amount of money you want, but the system will re-equilibriate. To model this mathematically you need to know your maximum entropy formalism, with ‘chemical potentials’ as lagrangian multipliers.\,

  2. -----_--__--__--8
    January 30, 2017 at 6:30 pm

    There is the example of Greece having a credit system (withdraw limits.) on top of the paper currency “credit system”.

  3. January 30, 2017 at 8:31 pm

    “What gives them [currencies] value is basically the legal status given to them by government and the simple fact that you have to pay your taxes with them.”

    No that is merely a condition for a given unit of account to be a ‘currency’; its value comes from the products and services generated within the economy, not from thin air.

    Also, the fact that governments don’t outright print money to stimulate economy is not a result of misunderstanding of how the economy works but of serious political consequences of going against the effective monopoly of the global banking cartel over M3 money supply in the form of credit. The banks don’t want their financial assets devalued by government printing.

  4. January 31, 2017 at 12:31 am

    I agree with much of MMT but not the idea that the value of money comes from the demand to pay taxes. If that were true, money would have a purely coercive nature and people would rebel against the state and taxes instead of valuing money. More likely, money is based more on positive consent. Proximally, money is given value by the willingness of those with productive capacity to accept it in exchange for goods. Systemically, money is valuable because it serves as a means to discover and close reciprocity circuits, where producer-consumers are distant but nonetheless manage to exchange value with each other more or less equally.

    The policy implication is that a state stripped of productive assets such as transport services, energy, telecoms, land to rent, etc. is in at risk of monetary collapse – a run on the currency. A state that owns such producers can impose fiat money, because it can order them to accept its currency in exchange for goods and thus put value behind it. A state without productive assets, relying only on taxes, cannot. It’s at the mercy of private money.

    • February 1, 2017 at 4:43 pm

      May I quote “This same type of rhetorical denigration of and disengagement with the credit creation theory is also visible in the most recent era. For instance, the New Palgrave Money (Eatwell et al., 1989), is an influential 340-page reference work that claims to present a ‘balanced perspective on each topic’ (Eatwell et al., 1989, p. viii). Yet the financial intermediation theory is dominant, with a minor representation of the fractional reserve theory. The credit creation theory is not presented at all, even as a possibility. But the book does include a chapter entitled “Monetary cranks”. In this brief chapter, Keynes’ (1930) derogatory treatment of supporters of the credit creation theory is updated for use in the 1990s, with sharpened claws: Ridicule and insult is heaped on several fateful authors that have produced thoughtful analyses of the economy, the monetary system and the role of banks, such as Nobel laureate Sir Frederick Soddy (1934) and C.H. Douglas (1924). Even the seminal and influential work by Georg Friedrich Knapp (1905), still favourably cited by Keynes (1936), is identified as being created by a ‘crank’. What these apparently wretched authors have in common, and what seems to be their main fault, punishable by being listed in this inauspicious chapter, is that they are adherents of the credit creation theory. But, revealingly, their contributions are belittled without it anywhere being stated what their key tenets are and that their analyses centre on thecredit creation theory, which itself remains unnamed and is never spelled out. This is not a small feat, and leaves one pondering the possibility that the Eatwell et al. (1989) tome was purposely designed to ignore and distract from the rich literature supporting thecredit creation theory….(http://www.sciencedirect.com/science/article/pii/S1057521914001070)

      Quote Frederick Soddy, (The Role Of Money,1932), “CHAPTER II
      THE THEORY OF MONEY. VIRTUAL
      WEALTH
      WHAT is Money ? Let us commence our study of the role of money by a comprehensive
      definition of what modern money is.
      Money now is the NOTHING you get for SOMETHING
      before you can get ANYTHING.
      Our task is to understand all that this implies. The definition is, of course, an economic one
      referring to ordinary transactions such as earning, buying, and selling among ordinary folk generous
      uncles and other voluntary benefactors not being under contemplation and the nothing, something,
      and anything of the definition refer to things of real value in themselves, usually termed goods and
      services, or simply wealth, unless hair-splitting or purely technical distinctions turning on the
      precise definition of wealth are involved. Moreover, it refers to ordinary people, in the sense of
      those who neither have the opportunity nor the power of uttering money themselves.
      As a matter of fact, this definition not only answers comprehensively what money now is
      but answers perfectly satisfactorily all that money has always been, whether it has been coin or
      paper or any other form. From the point of view of the owner or possessor of it, money is the credit
      he has established in his favour with the community in which it passes current or is
      “legal tender “, by having given up in the past valuable goods and services for nothing, so as to obtain at his own convenience, in the future, equivalent value in turn for nothing. It is merely an ingenious device to secure payment in advance, and in a monetary civilization the owners of money are those who have paid in advance for definite market values of buyable goods and services,
      without as yet having received them.
      There is nothing mysterious about all this. What has been termed “the moral mystery of
      credit “, meaning credit-money, might just as well be termed the immoral mystery of debt.
      For there is no credit without debt any more than there is height without depth, East without
      West, or heat without cold. The two are related,and although it takes only one to own wealth
      it takes two to own a debt, because for every borrower there is an ower. Money, of course, is an
      entirely peculiar form of the credit-debt relation, if only because whereas all other forms are entirely
      optional, the creditor at any rate being a free agent to enter into this relation or not, money is
      a credit-debt relation from which none can effectually escape.
      Let us right from the start get the signs right. The owner of money is the creditor and the issuer
      of it is the debtor, for the owner of money gives up goods and services to the issuer. In an honest
      money system the issuer of money who gets for nothing goods and services would do so on
      trust for the benefit of the community. In a fraudulent money system he does so for the
      benefit of himself. It makes no difference whether he passes off the money and puts it into circulation himself or lends it at interest for others to pass off for him. In every case what he so gets to spend or lend is given up by someone else. Ex nihilo nihil fit. Nothing comes from nothing, or, in modern phraseology, matter and energy are conserved.”

  5. Craig
    February 1, 2017 at 9:10 pm

    Yes, Soddy’s economic insights are valid, and Douglas’s even deeper insights into the monopolistic paradigms by which the business model of finance dominates all other business models and 90+% of the general populace have been incorrectly characterized and shunted aside. The latter is most often lumped in with the “interest is the entire problem” cranks when the actual problem it exposes is the systemic rate of flow of total costs (of which interest is merely a subset) in ratio to the rate of flow of total individual incomes. It is important to recognize the difference, and also to understand that Douglas was not a general equilibrium theorist nor an advocate of austerity, and that his recognition that the monopolistic paradigms of finance were the real and deepest economic problem was way ahead of his contemporary Keynes and even of current leading edge heterodox economists who still have not come up with policies that would break up that monopoly and reverse the above problematic ratio.

  6. March 17, 2017 at 1:46 pm

    There is much more to MMT than just what your article describes. MMT looks at how money actually works in the economy–a topic that apparently neo-classical economists think is not necessary for their “models.”

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