MMT can address operational realities or analyze a Chartalist system. But it cannot do both.

Yuan Dynasty Chao 鈔 – oldest known fiat currency

[First, to be clear, I think neoclassical economics is a non-starter, with the only real discussion of the economy being amongst various mainly post-Keynesian approaches.]

Summary: Both proper stock/flow accounting and chartalism must form a large part of any correct understanding of the economy, and MMT has been/is/will be central to this development. There are, however, some problems related to issues of productivity, foreign trade, and endogenous money. This post is on the latter.

The operational reality is we (the U.S., but really most any country) have a tiny state-money system dominated by a much much larger bank credit-money system.* MMT is usefully focused on the operational realities of this system (god knows the neoclassicals aren’t).

However, there are good reasons to believe that a true chartalist system would be a fairer, more stable, and more productive system (as well as more amenable to MMT analysis).

However, when it is suggested that changes should be made to the existing system to change it to true chartalism, a common response is that MMT is focused on operational realities, the system as it is, and anything else is just wishful thinking.

But this is disingenuous. As (especially) Scott Fullwiler never tires of mentioning, MMT is and has long been full of proposals for change – either changes in how the current system is utilized or changes to the system itself.

Although there is a pragmatic core focus on operational realities (an extremely good thing), MMT does indeed speculate and prescribe (also a good thing). The question, then, is why does MMT seem open to some changes and not others?

An obvious answer is that some changes are more important than others either because of value judgments, or because they seem to follow naturally from the logic of MMT, or both.

For example, the job guarantee seems to be both. Most people of any persuasion would agree that unemployment is not desirable. Additionally, the logic of MMT (and some other views) suggests we have to choose some buffer stock, and a full employment buffer stock is the best option if your goal is full employment and price stability with an overall goal of public purpose (I agree with the MMT JG).

But once the option for change is on the table, why not consider other MMT-friendly options, especially if they are at least as politically viable as the job guarantee? And what could be more neo-chartalist friendly than (true) chartalism?

MMT can either address operational realities, or analyze a chartalist system. But it cannot do both, because the operational reality is that we do not have a true fiat currency and are not operating in a true chartalist environment.

There may be moves away from this operational reality that lead to full employment, a  more just economic system, and greater price stability.  There is good evidence that a highly useful move would be to change to a true fiat currency system.

MMT would be a natural choice to lead this change.

___________________________________________

PS  This comment by Tom Hickey 1. demonstrates the standard first reaction when change is discussed to highlight that MMT has an important descriptive element (this is true, and useful, but besides the point in this case; MMT also has prescriptive elements, and therefore MMTers are choosing their prescriptions just like anybody else), 2. expresses the common view that MMT is not interested in Full Reserve Banking, which as I have pointed out,  is really a movement to implement a true fiat currency (whether Full Reservers realize it or not) and 3. lists proposals by Warren Mosler that come very close to creating a true fiat currency. Which makes me wonder why instead of the relatively complicated steps Mosler and other MMT plans call for, the relatively simple and neo-chartalist friendly step of just creating a true chartalist system is not on the table with MMTers.

* You can say “but the government could make this a true fiat system, they are just parceling out the public power of fiat to the private banks because we want to”. Fine, but still the operational reality is that we do not have a fiat system of money. (It may even be that we have reached/are reaching a point where politically the “operational reality” is that it is not realistic to believe a true fiat system could be enacted even if or when we decide we want one. The reality will be a permanent private credit-money dominated system in a plutocracy.) Oh, and don’t try to hand wave and say credit-money is not state HPM and so doesn’t count, or that it nets to zero and doesn’t count. Credit-money clearly functions as just “money” in the current system in ways that matter, accumulates in an inequitable and unstable way that additionally nourishes the problematic FIRE sector, and clearly causes problems.

 

32 Thoughts.

  1. “The operational reality is we (the U.S., but really most any country) have a tiny state-money system dominated by a much much larger bank credit-money system.”

    “Dominated” is the wrong word. However, you are correct that there is is more bank credit in existence than currency or base money.

    MMT has never said anything different. In fact MMT is very clear about this.

    Your impression of what MMT / neo-chartalism is, is incorrect.

    • y – I never say MMT says anything different.
      I say they generally do not seem to think this is a bad thing.
      I, like others, do.

      As to what dominates, perhaps read the linked paper. It suggests credit-money rather does dominate (assuming govs don’t like depressions and recessions and try to avoid them).

  2. Hi Clint,

    I pretty much agree. My reservations are as follows.

    First, I’m bothered about your use of the words fiat (as is Tom Hickey), and your use of the word Chartalism. My Oxford Dictionary of Economics starts its definition of “fiat” as follows. “Money which has no intrinsic value, but has exchange value because it is generally accepted.” On that definition, central bank created and commercial bank created money is fiat. Thus your claim that “we do not have a true fiat currency” is not correct: our existing system is 100% fiat.

    You are using the word “fiat” (far as I can see) to refer to central bank money, so there is a misuse of the word fiat there.

    As to “chartalism” that is defined by Investopedia as the idea that a particular form of money has value because government accepts it in payment of taxes. That idea does not have much to do with the full versus fractional reserve argument. In particular I personally think that the “accepts it in payment of taxes” point is not the ONLY explanation for money having value. I think that once a form of money gets established, it has a momentum or validity all of its own. To illustrate, what would happen if government spending and taxes shrank to a negligible percentage of GDP? Would money suddenly lose its value? I don’t think so.

    I.e. I don’t strongly disagree with chartalism, but it just might be an invalid idea. And if it was invalid, would that have any influence on the full versus fractional reserve argument? I suggest not. So I think Chartalism is irrelevant to the latter argument.

    I also don’t see any crying necessity for MMTers to get involved in the full versus fractional reserve argument. MMT pushes one set of ideas, and the advocates of full reserve push another set. I actually agree pretty much with both. But I don’t see a need for the two to get married.

    • Ralph – thanks for the comments!
      Limited time, so this is a quickie, sorry –

      I think an argument could be made that the term “fiat” has been stretched the other way.
      The primary idea is the diktat, the decree, the power of the government with its monopoly on the use of force to also have a monopoly on the issue of money.

      To say “it shall be”.

      Then, and only then, are these intrinsically worthless things worth something. The fundamental thing about fiat money is the power of the government behind it.

      Now, this power can be delegated, and the resulting equally intrinsically worthless bank credit-money notes be used as money as well, but it is at the pleasure (or confusion as the case may be) of the government that this happens.

      I think custom has stretched the meaning of fiat to mean “intrinsically worthless” because of the widespread popular belief that money must be commodity backed.

      And MMT stretches the definition of fiat, perhaps unwittingly, to maintain the illusion that a private bank credit-money dominated economy is amenable to neo-chartalist understanding.

      As for the last part of your comment on MMT and FullRB, it is because I do not think there is actually a “full versus fractional reserves argument”. Rather, there is an “outside money only” versus an “outside money dominated by privately created inside credit-money” argument.

      MMT is in many ways about outside money, and they are very astute about it. The goals of Full Reservers are far more likely to be successful with MMT involved; MMT is far more likely to be successful if the goals of Full Reservers (to get a system of outside money only) are achieved.

  3. Clint, here are some links to relevant publications, articles, and lectures. Please take the time to have a look:

    Randall Wray:

    levyinstitute dot org/publications/?auth=287

    cfeps dot org/pubs/books/

    Michael Hudson:

    levyinstitute dot org/publications/?auth=123

    Eric Tymoigne:

    levyinstitute dot org/publications/?auth=326

    William Black:

    neweconomicperspectives dot org/category/william-k-black/page/2

    Steve Keen and MMT:

    debtdeflation dot com/blogs/2012/10/03/presentations-at-umkc/

    debtdeflation dot com/blogs/2012/09/16/fields-institute-mmt-mct-seminar/

    MMT wiki:

    mmtwiki dot org/wiki/Money,_Government_and_Banking

  4. also:

    “The Credit and State Theories of Money”

    arno.daastol dot com/books/wray/Wray,%20Credit%20and%20State%20Theory%20of%20Money%20(2004)w.doc

    cfeps dot org/pubs/wp-pdf/WP32-Wray.pdf

    papers dot ssrn dot com/sol3/papers.cfm?abstract_id=1010462

    papers dot ssrn dot com/sol3/papers.cfm?abstract_id=1800226

  5. MMT primer:

    neweconomicperspectives dot org/2011/09/mmp-blog-14-ious-denominated-in.html

    neweconomicperspectives dot org/2011/09/mmp-blog-15-clearing-and-pyramid-of.html

  6. y – You presumably have some specific set of points in mind with your list of very good articles that most of us commenting here are quite familiar with. Perhaps instead of plopping down a “Norton’s Anthology of MMT” onto the table you could muster a coherent statement of what those specific points are.

    If you would like I would be happy to upgrade such a comment to a post if it is readable and relevant;
    either a summary of your reading list or relevant short excerpts and why you think these germane. Make it as long and detailed as you like. If there are specific points these particular works make that show where I am amiss, I am all ears. You can post it here as a comment first or email it to academicscribblers@live.com

    Cheers,
    Clint

  7. Ralph,

    Here is an example of what I mean about usage of “fiat” in an article by Wray (“y” wanted it re-read, so hat-tip to y). The commentator “Anonymous/Dietmar” clearly uses the term “fiat money” to mean “government money” as opposed to horizontal money. http://neweconomicperspectives.org/2011/09/mmp-blog-15-clearing-and-pyramid-of.html#comment-3584
    Wray answers him and without hesitation alters Dietmar’s phrase to “outside money”. Now, Wray does not discuss the term here (it is just a small comment after all). But Wray seems comfortable equating “fiat money” with “outside money”, and thus “fiat money” as something other than inside/bank-credit/endogenous money.

    ~~~

    I do not want to get lost in arguments over the definition of a word though (although I think there are good reasons to believe my characterizations of ‘Chartalism’ and ‘fiat money’ are correct). So let me say the same thing as the main post in a different way:

    MMT pays attention to operational realities far more than most schools of economics. Many (though by no means all) MMT insights revolve around outside and inside money, and especially a sorely lacking (in other schools of thought) deep appreciation of the powers and possibilities of outside money.

    We have a system dominated by inside money.

    There are good arguments that inside money is highly problematic, no matter how well its operational realities are understood.

    A system of outside money only is much better suited to a core MMT principle of public purpose.

    • I could add to the last comment: As you know, I have argued elsewhere that what Full Reservers are really after is a system of outside fiat money (Fullwiler has said the same; this is not really a controversial idea for MMT if it is thought through).
      Thus Full Reservers want a system that would be much more amenable to both MMT analysis and MMT goals.
      Both camps have smart analyses; both, in my view, deep down have similar goals, even if this is often hidden by terminology and other issues.
      I think this is important and telling.
      A similar needless (and highly related) misunderstanding arose between Keen and MMT. It is being resolved. This also needs to be resolved. The work of Keen and others concerned with private debt, MMT, and the goals of Full Reservers together forms a very powerful and unified vision of the changes to the system we have that need to be made.

      • The quote by Fullwiler is in a comments section on the AMI paper about MMT. http://mikenormaneconomics.blogspot.com/2012/11/ami-weighs-in-on-mmt-negatively.html?showComment=1351990480409#c1238761989221487095

        Fullwiler writes
        “all they’d have to do is just have to stop saying ‘debt-free money.’ What they want is a world of fiat money only and 100% reserves–is that so hard to just say?”

        Fullwiler, like Wray in my 12.59 comment above, is clearly using the term “fiat” to mean outside money, in clear contrast to bank credit-money. In other words, the current system is something other than “fiat money only”, some kind of hybrid state & private credit-money system.

        PS Can somebody please please please come up with a nice snazzy term for the latter? I think part of the problem in accepting that we do not have a pure fiat system of money is that the only alternative system-names are “commodity money” (and perhaps “representative money”). A system of bank created credit-money is none of these. Perhaps if the current system had a memorable and clear moniker it would more readily be accepted as what it is – a small true fiat system with some of the vestigial (though massive) holdover institutional arrangements from gold standard days when letting banks leverage money perhaps was useful.
        At any rate, whatever it is, now no good public purpose that could not be duplicated in a true fiat system is served by allowing the vestigial institutional arrangements of bank created credit-money to persist, while conversely it is clear that private credit-money does real harm to the economy.

  8. During the gold standard era there was far more bank money/inside money in existence than state money (gold coin). But we don’t refer to the gold standard as a “bank money standard” do we? Even though bank money “dominated” (wrong word) the “small gold coin system”.

    During the gold standard, the monetary base was comprised of state gold coin, and bank money was a promise to pay state gold coin on demand. Now the monetary base is state fiat money, and bank money is a promise to pay state fiat money on demand.

    • You are confusing the gold specie standard, gold exchange standard or de facto gold standard, and gold bullion standards, each named precisely based on the relation of gold to bank money.
      In a full reserve gold specie standard there is no leveraging by banks (I am absolutely not arguing for a gold standard in any way).
      Later, the periods when there was leveraging by banks are not particularly known for stability (nor probably for serving the public good).
      So what is your point? Leveraging wasn’t particularly good for stability then, the phrase gold standard has at times referred to a mixed system that wasn’t particularly good, and now we still have a needlessly yet harmfully mixed system when we could have a pure fiat currency that there are good reasons to think would serve the public purpose better.
      Call it what you like.

  9. Even under the gold specie standard there was far more bank money/inside money in existence than gold coin. Banks created inside money through double-entry accounting as they do today. The only real difference was that the supply of base money depended on the supply of gold.

    “Throughout the period under which the United States had a metallic standard, paper money was extensively used. A variety of bank notes circulated, even without being legal tender. Various notes issued by the Treasury also circulated without being legal tender. This use of paper money is entirely consistent with a gold standard. Much of the money used under a gold standard is not gold, but promises to pay gold.

    “Throughout the period before the Civil War, there was no legal-tender paper money in the United States. Yet a variety of paper money existed and circulated as readily as coin. These included private bank notes, some Treasury notes, and (in large transactions) financial instruments called bills of exchange. In each case, these paper claims were promises to pay gold or silver. Consequently, they were an integral part of the metallic monetary standard.

    “Various banks conducted much of their business based on the issuance of notes. Taking deposits and making loans, the banks needed only a fraction of their total assets held as coin on hand. The rest could be held in the form of interest-earning loans, and issued as notes promising to pay the bearer on demand an amount of gold or silver on presentation of the notes. The notes were not legal tender, but circulated on the strength of the promise to redeem”.

    http://www.fas.org/sgp/crs/misc/R41887.pdf

    See this chart:

    http://www.newworldeconomics.com/archives/2011/010211_files/bankgraph4.jpg

    http://www.newworldeconomics.com/archives/2011/010211.html

    ‘Fractional reserve banking’ is as old as banking itself:

    http://en.wikipedia.org/wiki/Fractional_reserve_banking#History

  10. “MMT can either address operational realities, or analyze a chartalist system. But it cannot do both, because the operational reality is that we do not have a true fiat currency and are not operating in a true chartalist environment”.

    Chartalism is not about monetary systems in which all the money is created exclusively by the state. Chartalism is about systems in which the ‘base money’ or ‘definitive money’ is issued by the state (or otherwise chosen by the state). ‘Definitive money’ is the ‘final means of payment’, determined by law, which can be used to pay debts owed to the state (taxes). Today that money is currency (notes and coins), and central bank deposits (reserves).

    In that sense all state money is ‘fiat’ – even if it’s gold coins or bullion – as the state declares it to be money ‘by fiat’.

    Knapp discusses this in “The State Theory of Money”.

    http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf

  11. A ‘state money system’, or ‘fiat money system’ is one in which the ‘definitive money’ is created by the state, or else chosen by the state. In such a system all other forms of money (inside money) are ultimately promises to pay that ‘definitive money’ (state money) on demand. For example, in the current system bank deposits are promises to pay state money, either in the form of currency or central bank deposits.

    The term ‘outside money’ refers to state money, but it can also mean foreign currency or ‘commodity money’.

    MMT economists are well aware of the huge problems surrounding inside money and banking/finance. This is covered in the various papers which I provided links to above (my ‘Norton’s Anthology of MMT’). Their proposed solutions include: comprehensive reform and regulation of the banking and finance sector, the creation of state banks (or possibly full nationalisation in the case of Bill Mitchell), alternative forms of monetary policy (including but not limited to ZIRP), and ‘functional finance’ fiscal policy to maintain full employment (without unsustainable levels of private debt). Fullwiler has also written about the potential for localised ‘complementary currencies’.

    • y writes “MMT economists are well aware of the huge problems surrounding inside money and banking/finance.”

      I never said they weren’t.

      And I agree with many of the measures you mention that they consider.

      I am asking a different question.

      You write “Chartalism is not about monetary systems in which all the money is created exclusively by the state.”
      I am not one to rely on Wikipedia, but presumably the “Chartalism” entry has been vetted by MMTers, financial historians, and other economists many times, so here goes. From the opening lines defining “Chartalism”:

      “Chartalism is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e. fiat money… MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created exclusively by the government.”

      The article later notes “Of course, the [bank] deposits created certainly expand the money supply”. They make no attempt to reconcile the fact this flatly contradicts the original description (“government issued”, “created exclusively by the government”). This disconnect is partly the problem I am addressing. Also, I am well aware others, e.g., Tymoigne, argue any IOU token money backed by the state is chartal. I used the word in my title and brief post to make a point. Happy, though, to change in more detailed discussion to “exclusively government issued state money.” Doesn’t quite roll of the tongue though. Nor does it change the point I am making.

      My question is simple:
      Why are MMTers often, though by no means always, not open to changing the system from a private credit-money driven system to a system where the only money is government issued? (Simultaneously, I am asking pro- Full Reserve people why they can’t see that the problem is not reserve ratios; the better plans indeed do see this- PositiveMoney is entirely about creating a fully state issued currency and eliminating private credit-money creation.http://www.positivemoney.org/our-proposals/ There is some MMT attention to this plan; I think there should be more).

      This is doubly curious because 1. MMT and chartalism are at least in part about government money and presumably MMT prescriptions would operate better in a system of truly state controlled money and 2. there is very good evidence non-government money has done and is doing serious damage to the economy, and does not serve the public purpose well. Additionally, there is good evidence a change away from a credit-money system would address many of the problems you mention MMT is concerned with in a more elegant and decisive way than the often piecemeal approaches they seem to favor. I have asked before: If building a monetary system from the ground up, what aspects of the private credit-money creation system would they keep and why? What public good does it serve that would not be served in a system such as PositiveMoney advocates?

      The purpose of my post is simply to highlight these points. I think recognizing the disconnect I describe would make MMT more coherent and lead to policies that serve the public purpose better.
      Some will agree, some will not.

      P.S. – I cite passing quotes in an earlier comment that show Wray and Fullwiler viewing credit-money as something other than fiat money. Below Scott Fullwiler again distinguishes fiat from credit money, while Tom Hickey calls our current part fiat, part credit-money system “hybrid”, rather than chartalist.

      Scott Fullwiler: “MMT distinguishes between ‘money’ and ‘credit’, too. It’s called fiat money vs. credit money, or horizontal money vs. vertical money.” http://mikenormaneconomics.blogspot.com/2012/11/ami-weighs-in-on-mmt-negatively.html?showComment=1352042190925#c2527134464653414193

      Tom Hickey: “If I were teaching a HS in economics I would present alternative systems that depend on policy choices — a govt money system, a non-govt money system, and a hybrid system such as we have now,…”
      http://mikenormaneconomics.blogspot.com/2012/11/ami-weighs-in-on-mmt-negatively.html?showComment=1352067707885#c1529775264458656911

      Regardless of what Knapp wrote, there is a strong current of logical delineation of the concept “chartal” – the logical rather than etymological definition is pure chartalism = pure state-money intrinsically worthless tokens, with commodity money on the other side. Private credit-money can attach itself to either of these, and probably served useful purposes on commodity money systems, but probably does not on state money systems.
      And tissues aren’t always kleenex, but there you go.

      • “MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created exclusively by the government.”

        Notice the word ‘currency’. Currency is physical cash (notes and coins), and effectively also central bank deposits (reserves) as these are simply electronic versions of paper notes.

        “Chartalism is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e. fiat money”

        State money is the ‘unit of account’. The ‘dollar’, for example. Inside money is denominated in that unit of account (“you have ten dollars credit in your account”).

        Wray makes a distinction between ‘money’ as an abstract unit and ‘money-things’ as physical tokens, with money-things being denominated in the abstract monetary unit. It’s a bit confusing as people (including me) tend to just combine the two.

        “Wray and Fullwiler view credit-money as something other than fiat money”

        Inside money/credit money is privately created or issued, but is denominated in the state unit of account. It is normally a promise to pay state money (fiat money). Bank deposits, for example, are promises to pay. (I say ‘normally’ as some minor forms may not be; bank money is however). So if you have $10 credit in your bank account you are owed $10 of state money by the bank.

        Here’s Wray:

        “To put it as simply as possible, the state chooses the unit of account in which the various money things will be denominated. In all modern economies, it does this when it chooses the unit in which taxes will be denominated. It then names what will be accepted in payment of taxes, thus ‘monetizing’ those things. Imposition of the tax liability is what makes these money things desirable in the first place. And those things will then become what Knapp called the ‘valuta money’, or, the money thing at the top of the ‘money pyramid’ used for ultimate or net clearing in the non-government sector. Of course, most transactions that do not involve the government take place on the basis of credits and debits, that is, in terms of privately issued money things. This can be thought of as leveraging activity – a leveraging of the money things accepted by government, or, what we have called high-powered money. However, this should not be taken the wrong way – we are not hypothesizing some fixed leverage ratio (as in the orthodox deposit multiplier story)”.

        “The Credit and State Theories of Money”

        http://arno.daastol.com/books/wray/Wray,%20Credit%20and%20State%20Theory%20of%20Money%20(2004)w.doc

        Again, Knapp invented Chartalism so just skim through “The State Theory of Money” and you’ll see that he discusses different forms of money in existence and how they relate to each other.

        “there is a strong current of logical delineation of the concept “chartal” – the logical rather than etymological definition is pure chartalism = pure state-money intrinsically worthless tokens, with commodity money on the other side”.

        Chartal money tokens may also take the form of gold coins, for example (and gold is not intrinsically worthless). But their value as money is not determined by the metal in itself.

        • Knapp did not “invent” Chartalism any more than Marx “invented” communism. Chartalist governments throughout history “invented” chartalism. Knapp coined a term and very usefully analyzed these types of systems, which is rather different. Doesn’t make him the last word on them any more than Marx is the last word on communal systems or Smith or Marshall on capitalism.

          Not just popular usage, but even experts like Wray, Fullwiler, and Hickey are using “fiat” and “chartalist” at times at least to mean (or imply in Wray’s case) outside money or a system with outside money only.

          ~~~
          You write “Inside money/credit money is privately created or issued, but is denominated in the state unit of account.” and you emphasize “Notice the word ‘currency’”.

          The “Chartalism” article states: “In MMT, money enters circulation through government spending”. No mention of private bank money things whatsoever in the opening definitions. It only much later mentions that banks also create money things, indeed most money things. And doesn’t note the importance of this.

          Again: Disconnect.

          MMT can be about the mixed system we have; it should strive for a non-mixed system for reasons discussed elsewhere. And again, call these what you like. Doesn’t matter.

          • “Knapp did not “invent” Chartalism”

            “The theory (Chartalism) was presented by German statistician and economist G. F. Knapp in 1895”

            (Wikipedia

            That’s what I meant. If you want to know what the theory known as “Chartalism” is, read Knapp. MMT is a form of “neo-Chartalism”.

            “experts like Wray, Fullwiler, and Hickey are using “fiat” and “chartalist” at times at least to mean (or imply in Wray’s case) outside money or a system with outside money only”.

            “Fiat money” usually means outside money. ‘Chartalist’ does not imply a system with outside money only, however. Read Knapp or Wray or Fullwiler. They are very clear about this.

            I don’t know why you keep saying that Chartalism is about money systems with only outside money, when I have already pointed you to texts by the authors in question which explain very clearly that this is not the case.

            Perhaps you should ask Tom Hickey to clarify what he meant in his comment.

            Chartalism is a theory which seeks to explain what money is, how money came into being and developed over time, and the structure and functioning of the monetary system today.

            “The “Chartalism” article states: “In MMT, money enters circulation through government spending”.

            Yes, MMT claims that payment to the government destroys money and that government spending creates money. This is based on asset/liability accounting.

            “It only much later mentions that banks also create money things, indeed most money things. And doesn’t note the importance of this”.

            What do you want the wikipedia page to say? “Horizontal money is really important”?

            The wikipedia page describes the basics of Chartalism and MMT. The MMT wiki has some more on horizontal money, banking and financial instability.

            I agree the online presentation of MMT needs some work, so that all the resources are easier to find.

            “MMT can be about the mixed system we have”.

            It does describe the system we have. You just want it to describe the system in a different way. But then it would be a different sort of theory.

            “it should strive for a non-mixed system for reasons discussed elsewhere”.

            Possibly. There’s quite a lot of disagreement and debate about precisely that question. Some MMTers think that full-reserve proposals, such as that put forward by Benes & Kumhof, simply wouldn’t work. I think if it could work it might be a really good idea, but I’m undecided as yet.

          • The argument you made above: that “we have a tiny state-money system dominated by a much much larger bank credit-money system.” doesn’t make much sense from a Chartalist perspective.

            As Wray argues, the monetary system is like a pyramid, like any other hierarchical system. The top is the smallest part. This doesn’t mean the base “dominates” the top.

            • Under the current system the base does indeed dominate the top.

              State money under the current system is effectively endogenous.

              This is not consistent with it being a monopoly, and thus highlights the inconsistency of a monopoly “state theory of money” where in effect the bulk of the currency is neither a monopoly nor issued by the state.

              “The endogeneity of bank money follows from the analysis of the circuitists and horizontalists. On the basis of credit-worthiness, subject to capital constraints, private banks issue loans and create deposits (bank money). In doing so, they are not constrained by reserves. If caught short when it comes to settlement or meeting reserve requirements, they can always borrow in the interbank market or from the central bank, which stands ready to accommodate all such demands.

              It is therefore impossible for the government, through its agent the central bank, to control the supply of bank money. All it can do is set the price of government money – in practice, usually the short-term interest rate, though it could set other rates as well if it wished – and accommodate whatever demand for liquidity eventuates. Since credit-worthiness, as assessed by the private banks, will be strongly influenced by the state of the economy and the prospects for income growth, the supply of bank money is endogenous.”
              http://heteconomist.com/verticalhorizontal-vs-exogenousendogenous/

              Further discussion at Small c chartalism, sovereign money, & public policy space v. private space for profit

              • A monopoly supplier can set price or quantity. If it sets quantity, price will fluctuate in response to changes in demand. If it sets price, quantity will fluctuate.

                Between 1979 and 1982 the Fed set the quantity of reserves and interest rates went all over the place (its ‘monetarist experiment’).

                Today the Fed chooses an interest rate and then changes the quantity of reserves as needed to maintain that rate. This means it buys and sells bonds to maintain a particular Fed Funds rate, or lends directly at that interest rate.

                “It is therefore impossible for the government, through its agent the central bank, to control the supply of bank money”.

                This statementby Heteconomist is misleading.

                Bank lending is capital constrained rather than reserve constrained.

                http://bilbo.economicoutlook.net/blog/?p=9075

                Interest rate changes can have an effect on the demand for credit. Bank lending may also be controlled via other forms of regulation and alternative forms of monetary policy.

      • Dear Clint,

        Thank you for identifying the “disconnect” and asking the ‘nail-on-the-head’ question:

        “Why are MMTers often, though by no means always, not open to changing the system from a private credit-money driven system to a system where the only money is government issued?”

        Have you received a reasonable answer yet? If so, could you please direct me to it.

        Also, although a bit long-winded, I think the phrase “exclusively government issued state money” removes any uncertainty about what it is that you’re talking about, and should avoid most, if not all, nit-picking. Therefore, I suggest you continue using this phrase.

        Sincerely,

        Jamie

        • Jamie – Yes, I definitely have begun using the term you mention, and the other ones I mention, and avoiding the ones that just get argued about.

          It’s absolutely ridiculous after ~200 years of economics to still be arguing about terms.

          On MMT & private money – the answers are complex, but basically big C Chartalism with roots in Knapp just simply accepted that private money is part of the system. They are thus really a “leveraged state money theory” down to their roots. Yet even while accepting private money, they have often focused on the dynamics and possibilities of state money (and this is good – the mainstream is totally clueless on this and no one else was doing it).
          But they do not focus on private money creation, even if they of course sometimes address it. Their lack of focusing on private credit-money is part of the reason many in MMT did not at first get what Steve Keen was doing. Luckily they are finally getting it (see my last post and the links in it).

          Basically, what has been called circuit theory or MCT are the folks who get private money creation (there are less of them, and they are less noticeable in the Anglophone world).

          What is of course needed is a full integration of those who focus on state money and those who focus on private money creation. There has not been enough work that shows the interaction of these and the problems it causes, and without this, even the MCT people can’t get the full significance of their own work. (again, I am sure heterodox economists can point to some work like this – but it should be “page one” of their resumes, blogs, etc, and it is not. The Keen/MMT discussion is finally bridging this divide).

          Basically, MMT accepts but doesn’t focus on the downside of private money; MCT focuses on private money and perhaps doesn’t see that it should be eliminated for state money only.
          Curious situation.

          There is not really a true “state theory of money” group (I made the mistake before of assuming chartalism was and that MMT would see itself as needing to move in that direction; big mistake – they don’t). Strangely enough, the closest thing would actually be all the people in favor of Full Reserve banking. However, many of them are nowhere near as educated about the workings of the real economy as they need to be. (many, not all). That is why it is crucial to 1. educate them (FullRB people) more, 2. get the already really well developed and educated MMT and MCT groups persuaded, at least some of them.
          Full Reserve people are viewed (sometimes rightly) as a fringe group, ignored like the ignorant gold bugs and other monetary cranks.
          What is really needed is a true “State Theory of Money” that integrates MCT & MMT and explains why private credit money is not needed at all, and indeed is very harmful, and why the benefits of a pure state money system are great, indeed necessary to stop a lot of the financial instability and allow MMT insights to actually work.
          Of course, then you are asking the MCT people to eventually put themselves out of a job. And MMT people to temporarily at least focus on private money (the bad effects), not state money. So it is not easy to do.

          • Dear Clint,

            Yes, it is ridiculous to still be arguing about terms. It doesn’t help when some economists (and/or some of their followers) invent new meanings for old words with previously well understood meanings. As I said before, I think the legal meanings are the “definitive” ones (pun intended).

            Now I’m going to do a bit of nit-picking myself (sorry!): I think the term “full reserve” is (unintentionally) misleading because in a system that uses “exclusively government issued state money” instead of bank credits, there is no need for any “reserves” – reserves are only needed when banks “leverage” government/government-owned central bank-issued money. The system that Positive Money in the UK, Monetative in Germany/Switzerland, and the AMI in the USA advocate is what Professor Joseph Huber called “plain money” in the 1990s (I know, yet another term!). The term “full reserve” is not really applicable to these proposals and it often leads to these proposals automatically being assumed to be the same as the old “100% reserve” proposals of the 1930s, when they are actually much more advanced than those proposals were. (And I don’t see why proposals of this kind would put MCT economists out of a job, there would still be circuits of money transfers for them to look at, and they would be almost exactly the same as they are now.)

            Yes, improved explanations of a true state money system are needed, and bringing them together with MMT and MCT is not going to be easy (i.e., the way things are is not the way things have to be), but it has to be done. I’m working on it.

            Sincerely,

            Jamie

            P.S. For disclosure purposes, I associate with and sometimes work with people associated with all of the groups mentioned above (Positive Money, Monetative, AMI, MMT and MCT), and people who are placed in the “neoclassical” category as well (there are some good ones).

            • I have to run – so will re-read this. I have decided to more or less stop using “Full Reserves” as it is not really the important idea, and agree. I will have to go back and change my “category” – the term sovereign money woul dbe good but has already perhaps become associated with Full Reserve. I guess I will just call it “pure state money”.

              As far as MCT being out of jobs – is a bit of a joke to make a point – that there would be no more private-credit money to analyze.
              But of course you are right, there will be more than enough work fllowing money circuits and near money things (in part to make sure they stay that way) to keep everyone busy.

              • Thanks Clint,

                I think you’ll find that some of the MMT people also use the term “sovereign money” (and “sovereignty”) to apply to so-called “high-powered money” (or “HPM”)/”base money”/”outside money”/etc., within the present dual system.

                The kind of money system I’m talking about is where all money is the same as U.S. Treasury (Mint) coin – in any form, mainly digital form – i.e., originated as a pure financial (monetary) asset, with no corresponding financial liability, thereby increasing the net position of the originator (per the FASAB handbook), and every subsequent holder in turn.

                All the books will still balance; the residual we can just call equity (or “capital” – i.e., putting more capital into capitalism, instead of more debt). The accounting and legal conventions for this already exist, e.g., FASAB handbook, custodial assets, bailed property, fiduciary responsibility, etc.

                It’ll be politically a lot easier to call for more equity in society (or more “capital” in society), rather than calling for more debt in society (most people don’t want more debt).

                Sincerely,

                Jamie

  12. (p.s. the “new world economics” article only talks about bank notes in circulation during the 19th century. It doesn’t mention the quantity of inside money existing solely on banks’ books in the form of deposits and loans).

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