Debate on “Modern Monetary Theory” Misses the Mark

Artificial wealth comprises the things which of themselves satisfy no natural need, for example money, which is a human contrivance.

~  St. Thomas Aquinas

Buzzwords seem to rule public discussion of just about everything. Money is no exception. Now it’s “Modern Monetary Theory.” What’s that? Well, it depends on who you ask. In modern times, debates usually center on public debt and the government’s fiscal and monetary policies.

An article in Boomberg News argued that the supporters of The Green New Deal favor Modern Monetary Theory (MMT). Critics argue that the costs of universal health care, publicly funded higher education, infrastructure buildout, and conversion to 100% renewable energy production would require unsustainable public debt. MMT supposedly sets no limits on public debt. That is apparently not quite true, but within the U.S. monetary system and corporate political squeeze on public spending, the costs of the Green New Deal, if financed by public debt, would be quite high.

Of course, if we calculate the infrastructure damage of climate chaos even if we met the limits of the Paris Accords – never mind the costs in terms of human lives – the comparative costs of implementing the Green New Deal would be trivial. In that sense, costs are relative. The underlying question is: What does society want to achieve and is it willing to pay for achieving it?

The Debt Illusion

Money is a social construction. It exists by social convention, by consensual definition. Throughout history, money has taken diverse forms, as long as the forms taken could provide the security needed for money to be money. That is why gold worked so well as currency until the global economy grew so large that the supply of gold could not keep up with the need for more currency.

Scholars have written some very large books on the nature of money and debt. How money evolved is quite fascinating. David Graeber’s book, Debt: the First 5000 Years, is quite enlightening, particularly regarding the diverse forms money has taken in history.

Public debt is not necessary; instead, it is a convention devised by bankers to control the economy of nation states. In that, the banks have succeeded.

If a sovereign nation controlled its central bank, it would not need to borrow the currency it issues since it is the sole source of authority to create money. The creation of the U.S. Federal Reserve as a banking cartel in 1913 made that impossible.

The expanding Roman Empire paid its soldiers using gold and silver coins it minted from metals mined mostly in Spain and Portugal. It did not borrow its money from anyone. Among the many causes of the fall of the Empire, was the fact that when the mines played out, the Empire could no longer satisfy its need for more coins to pay an expanding army. The operations of the Empire were stifled because it could not pay its soldiers.

Money need not be based on public debt, but in the industrial economies of the modern era, it is. That political choice enriches the banks and the corporations they fund, and it impoverishes nations. Neither supporters nor critics of Modern Monetary Theory seem to get this.

Implementing a national project or sustaining an institution is not a matter of how much debt we can tolerate. Rather, it is a matter of political will. The lavish support for the military that sustains the global modern industrial-consumer economy demonstrates that.

Fearful Fantasies and Fiat Money

To work effectively, money has to be made of a material and in a form that has some unique irreplaceable quality that makes it impossible to replicate by just anybody. That is why rare metals worked so well until economies grew so large in the modern era that the money supply could not expand enough using gold and silver.

When paper money replaced gold, the idea of “fiat money” implied that paper money was not really “real money” like gold. Nevertheless, it worked because it is hard to counterfeit, making it unreproducible by anyone other than the sovereign (for the most part).

Unnecessary debt combined with the failure to tax corporate profits creates annual deficits, which add to the national debt. The central bank creates fiat money through the sleight of hand of issuing government debt in the form of bonds as the basis of “loaning” money created out of nothing, to the government. If the sovereign issued money without the mechanism of “borrowing” from the central bank (in the U.S., the Federal Reserve) it would not create debt by issuing money.

It’s crazy. But the banks that in practical terms own the Federal Reserve love it.

If a sovereign issued money solely on the basis of needing to fund worthy projects, to hire the workers and buy the materials to complete the projects, the money would, as a result, circulate among the population of the nation, providing the ‘buying power’ needed to generate the goods and services people need.

National debt is unnecessary. In stark contrast, something very much like the Green New Deal is as necessary as anything can be. It is a matter of survival.

Making Money: The Ultimate Illusion of a Debt-Driven Economy

How is money made? Well, in conventional terms we work for it. But where does it come from? We know that the economy needs a sufficient “money supply” so we can exchange “goods and services” every day. Of course, it’s not that simple. After the “Great Recession” of 2008, the Federal Reserve injected hundreds of billions of dollars into the Big Banks. The purpose was to keep them from going under as a result of their gambling with depositors’ money. So, where is all that money now?

The conventional wisdom is that the “the government prints our money.” Technically but only partially true, this image of overworked treasury printing presses is increasingly irrelevant. Most money today is created electronically when banks lend up to some multiple of the money held in their accounts. A bank’s solvency depends on the money it holds “in reserve” – does not lend – in accordance with banking rules. If the ratio of loans to reserves is too high, the bank risks not being able to cover losses if loans go bad.

Reserve requirements were reduced significantly in the years before the 2008 crash. But the “too big to fail” banks took it a step further. They packaged many risky mortgages into highly leveraged “derivatives,” re-sold them to investment clients and each other, and took exorbitant “fees” at each step. It all blew up when mortgages failed and the Big Banks couldn’t cover their losses. So, the Fed stepped in and kept them solvent by “lending” them billions upon billions of dollars.

With the lowering of reserve requirements and the elimination of the firewall between commercial and speculative investment banking, all hell broke loose. Lending practices and the bundling of debt took on the logic of gambling in a casino, but with more hubris. Reliance on complex mathematical models of “risk management” to justify reckless behavior became the biggest illusion of all.

Most critics of the federal “fractional reserve” banking system worry that our “paper money” or “fiat currency” is not “backed” by gold. They consider gold to be “real money,” not arbitrarily “created” money. Gold is an effective standard of value because it is scarce, not reproducible or easily faked, and is universally valued by humans. That’s great, as long as everyone believes in gold’s value.  After all, value is what we make it.  But any economy needs its money to circulate. If paper money had to be backed by gold, there would not be enough to circulate and the economy would stagnate. Yet, if too much paper (or electronic) money is put into circulation, borrowed and invested, then inflation can get out of hand.

There is some validity to the concern of producing an oversupply of money leading to inflation, as has happened in several historical cases. But the biggest problem of money creation lies in our debt-based banking system, created under the influence of the big bankers in 1913. That was when the Big Banks convinced the government to create the Federal Reserve banking system. The Fed is essentially a private banking cartel that “lends” money to the federal government – the nation. Where does the Fed get the money it lends to the government? It simply creates it out of nothing – other than the government’s authorization for it to do so! That sounds crazy because it is, unless you own the Big Banks. But if national banks were owned by the nation, then money creation would not produce national debt.

So, you can see that fundamentally the “national debt” is an illusion created when the government gave up its sovereignty over our currency. Without the privatization of currency creation, indebting the government, there would be little need for an income tax.

A debt-based monetary system is inherently unstable and succeeds only as long as economic growth continues. But as long as conservative reserve requirements held sway and investment banking was separated from commercial banking after the Great Depression, another crash was averted. The Glass–Steagall Banking Act of 1933 kept commercial banking separate from investment (speculative) banking after the Great Depression. And relatively strict reserve requirements limited the Big Banks tendency to engage in excessive speculation – until deregulation beginning in 1999 unleashed the Hounds of Wall Street.

For a hundred years, the government has become increasingly indebted to the Federal Reserve and buyers of treasury notes and bonds.  These instruments are the means by which  the Fed sells our government’s debt worldwide. Despite the increasing debt and interest payments, the economy could be managed as long as it kept growing – adding new money from new debt to pay old debt and interest. The Federal Reserve – the private central bank owned by its member big private banks – partially controlled inflation by controlling interest rates, some of the time.

But the illusion of endless growth and the phantom money it creates are rapidly coming to an end on our finite planet. The debt-based monetary system will be unsustainable in a steady-state economy aligned with real-world limitations – it must be replaced. We must move to a stable ecologically grounded economy.  We can no longer support an ever-growing debt-based money system. In an ecological economy, money will simply circulate as the means for exchanging real value – that is, actual goods and services.