Written by Derryl Hermanutz
It’s good to get people thinking differently about the money system and the federal budget. But MMT’s claim that the federal government issues money by spending it, and destroys the money it collects in taxes, and that Treasury debt is not “real” public debt that burdens taxpayers, does not describe the in-place US$ money system.
Almost All U.S. Money is Issued by the Banks
In the US$ money system it is commercial banks, not the government and not the Fed, that issue the money. When a primary dealer bank purchases a newly issued Treasury bond, bill or note, the bank “buys” the government’s debt, and “pays” for that interest-bearing “asset” by adding a bank deposit into the government’s account at the commercial bank that bought the debt.
Government Debt is Real Debt
The bank may sell the debt-asset into the secondary markets where it is bought with money that already exists as savings, in which case the government really is borrowing from the private sector’s savings. But if the PD bank holds the asset on its own balance sheet, then the bank deposit it created to pay for the asset becomes new money that the government spends into the economy. The government “owes” that money to the bank, or to whoever holds the debt-paper subsequently should the bank sell the note to the public. Payment is due, in money, when the government’s debt-paper matures. And the government pays interest on that debt, which comes out of taxes or out of new debt. Government debt is “real” debt, just like any other borrower’s debt is real debt.
The Government Doesn’t “Spend Money into Existence”
The government has bank accounts, “Treasury Tax and Loan Accounts“, at various commercial banks. As the name suggests, these are the bank accounts into which the government receives tax payments, and receives the money that banks pay when they buy the government’s debt. These are the government’s “income-receiving” accounts. And contrary to MMT’s claim that government “spends money into existence”, taxes and loans really are how the US government gets the money that it spends.
The government periodically transfers money out of its TT&L income accounts, into its “spending” accounts at the regional Federal Reserve banks. The government receives its income through its commercial bank accounts, then transfers the money to its “central bank” bank accounts, then spends the money out of its Fed “checking accounts”.
What Is Should Not Be
I fully agree with MMT that the federal government “should” issue, not borrow, the money that it deficit-spends. Milton Friedman made the same argument in 1948. And in the 1930s, Irving Fisher argued that the government should issue “all” of the money, which people would accept, Fisher wrote, because people “believe” that’s how the money system “already” works. Fisher knew the government does not issue the money, but he argued for monetary reform so that the government really “does” issue the money.
Last year two IMF research economists, Kumhof and Benes, revived Fisher’s reform proposal in their paper, The Chicago Plan Revisited, arguing for “full reserve banking”. Which means the government, not the commercial banks, issues the nation’s money.
MMT Greenfields Logic
MMT’s monetary logic is based on a greenfields money system, a “new startup”. At first, there are no US dollars in existence. The government cannot collect taxes in dollars that do not exist. So before the government can collect taxes in dollars, the government has to “issue” dollars, by spending dollars into the economy.
But the US$ money system did not begin as this kind of greenfields system. Private banks had been creating credit money denominated in dollars long before the 1913 Federal Reserve system began operating. US commercial banks also accepted deposits of gold or foreign currencies, and created US$ bank deposit money to pay for those purchases of gold, pounds sterling, etc. The government issued coins, but the face value of gold and silver coins is equal to their bullion value, and the government has to buy the metals before it can mint them into coins, so there is little seigniorage earned by minting coins from money-metals. And there is little profit earned from minting coins from cheaper metals, with small denomination face value.
Ben Franklin’s and other early colonial governments issued their own “scrip” money, but when the English bankers found out about this they got the English government to ban colonial money issuance in order to preserve the bankers’ monopoly on “gold-backed” money issuance, which, according to Franklin, was the flame that ignited America’s revolutionary war.
Lincoln issued US Treasury Notes, greenbacks, just as the South issued their own graybacks, rather than borrow bank-issued credit money, offered at ruinously high interest, to fund their Civil War efforts.
The colonial scrip period and the Civil War era are the only episodes of significant government money issuance in US history due to strong opposition from European and North American banking interests.
Bankers Won the Constitutional Day
America’s founders argued bitterly over the question of who, banks or the government, would have the right to issue US dollars. The bankers ultimately won that war. 1913 was a decisive victory for the bankers, who gained a legal monopoly on the issuance of US money.
Issuers and Users
MMT’s monetary logic is based on the false assumption of a greenfields money system. In the real system, banks are on the “issuing” side of the monetary equation, and government is on the “user” side of the equation. The money system is divided into banks that issue money, and non-banks that borrow and use money that is issued by banks as loans of bank deposits. The money system is not divided into government that issues money and private sector that uses money that is issued by the government, as MMT wrongly assumes.
Irving Fisher and Kumhof/Benes argue for monetary “reform” that “would” make government the monopoly issuer of money. But that is NOT the system that is presently in operation in the US or in the world.
Advantage China (But Not For Long?)
China’s government owns and controls China’s banking system that issues China’s money, so China is one of the few, if not the only, nation on Earth whose money is NOT issued by private commercial banks. And even China’s government is talking about “opening up” to foreign banking, which would be giving up the greatest advantage China presently enjoys: state monopoly issuance of the nation’s money supply.
Editor’s Note: Derryl Hermanutz has written extensively on the history of money and the political economy issues involving money. Click on links for Other Posts by This Author, below.