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 and Losing It

Ever wonder why you just can’t “get ahead”? Well, it’s all part of the larger scheme of things. Oh, I know, some folks do get ahead in one way or another and to one extent or another. But only the very few – the less than one percent – really make money and keep it or even accumulate enough wealth to leave a sizable inheritance to their children. The number of Americans literally living from hand to mouth has grown astoundingly high, especially since the ascendancy of the new financial elites with the deregulation of financial markets. To understand it all we have to step outside of our ordinary ways of thinking about money, value, and our lives.

In a moral economy, things would be different. But that’s not where we live. Our economic system has devolved from open competition of individual entrepreneurs in wide open environments, to a closed system of centralized economic growth in denial of limits. The perpetual-growth economy is controlled by giant investment banks and hedge funds and runs on debt-based money. That means money is created by debt itself.

On first thought that doesn’t make much sense; money is supposed to represent value, not debt. But that is not how it has been set up ever since the private central banks were given control, indeed ownership, of the creation of money. Instead, money is a product of the strange relationship between the nation and its private bankers. The Federal Reserve System was established as the “lender of last resort.” in 1913. This was meant in part to respond to fiscal crises such as the financial panic of 1907. The other part was a quiet takeover of the money system by the big private investment banks.

Making Money by Indebting a Nation
Some argue that the creation of the Fed as an independent agency was in fact a takeover of the function of a national central bank by the private bankers of the time. That view has significant historical validity. Though chartered by the U.S. Congress, the Federal Reserve System consists of twelve tax-exempt regional Federal Reserve Banks organized and operated as private corporations. Most importantly, the Fed was given control over the creation and lending of money.

Absurd as it sounds – and ever so costly –the national currency is not created by the Treasury. The Treasury only acts as a printing shop for the Fed. In effect, the Fed is a private banking cartel that lends to the government and to member banks the money it creates by generating public debt. So, to conduct its operations, the government has to “borrow” money from the Fed, which sells Federal Notes and Bonds to represent that debt. The U.S. Treasury can only offset that debt by collection of income taxes and other revenue. A lot of technicalities in this process obscure the basic fact that the right of the nation to produce its own money was high jacked by the biggest banks – “members” of the Fed – back in 1913. That has cost us all dearly ever since.

The Federal Reserve issues Federal Reserve Notes and Bonds. These draw interest for the buyer and charge the government, in whose name the Fed issues these debt instruments. So, the money the government ‘spends’ is owed to those institutions which ‘buy’ from the Fed the bonds and notes that signify the debt. One might say that the Fed is a “free rider” middleman. This process indebts the government – that is, the people – for all the currency, whether paper or electronic, that the Fed issues as part of its monetary policy.

Perpetuating Public and Personal Debt for Fun and Profit
The government becomes indebted in its turn to the ‘creditor’ institution or nation that bought the bond, for its face value plus any interest that accrues over time. The Fed is owned by its member private Big Banks, which have a sweet deal we’d all love to get a piece of but never will. The Fed issues credit to the Big Banks, say a billion dollars, and the Big Banks in turn loan out many multiples of the billions it ‘borrows’ from the Fed. Since the crash of 2008, the deal has been especially sweet, since the Fed charges a near zero interest rate. The Big Banks get to charge market rates for multiples of the funds borrowed for next to nothing. Huge profits beget huge bonuses for bank executives, not to reward some kind of executive performance, but for their just ‘being there.’

We should all be so lucky. But we are not. The average person, small business, or even not-so-well connected corporation has to borrow from the institutions run by the financial elite – the Big Banks – in order to initiate a major project of whatever kind. That borrowing had to be paid back with interest, so that whatever is done with the money has to “earn” more money than was borrowed in order to pay back the loan. That is often not easy. Just paying a mortgage seems to take forever. Even at a “reasonable” interest rate for a thirty year mortgage, most folks “pay back” more than double what we originally borrowed.

But in any case, what most people don’t understand is that the result of all this is that more money is always owed than is “out there.” If every loan requires repayment plus interest, where does the interest come from? Well, from “profit” or from wages, if the borrower is lucky. But that profit or wage comes from money already in circulation; that money in circulation was also created as debt. So, the only way for all money owed to be paid back is for more debt to be created, releasing more dollars into the money supply, paying off prior debt.

Reaching the End Game
Sound like a Ponzy scheme? If it does, that means you are paying attention. It is essentially no different than a Ponzy scheme. The whole house of cards stands on a perpetual expansion of debt that enables previous debt to be paid and the system to continue. That is only one of the reasons why the debt based economics of endless growth cannot ultimately be sustained. Debt cannot be expanded indefinitely.

There is another reason the debt-based growth economy cannot continue indefinitely. As with any exponential scheme of expansion, the limits of its environment eventually constrain it from continuing. That is where we are today with reference to “capitalism as we know it” and the material limits of the planet earth.

If you know anything about population growth, you recognize that a seemingly small percentage rate of growth after a few generations results in a very large number of people. From our current world population of around seven billion, growing at a moderate rate, we will soon have a population that by anyone’s measure cannot be sustained on one planet. One additional fact is important. A relatively small proportion of world population participates in the industrial growth economy but everyone else – of course – wants to. That is why more and more people everywhere find it increasingly difficult to “get ahead.” The game is almost over; it has reached its limits. Current world financial instabilities are symptoms. Economies with social purpose must replace mindless growth for the purpose of concentrating wealth in fewer and fewer hands.

Another way is possible and necessary. Money is inherently a public good. It is an inherent right of the nation itself to maintain sovereignty over its monetary system. The central banking system should be nationalized and subjected to public policy rather than be driven by private profit for financial elites in opposition to the public interest. Then, money could be based on credit, properly invested in the public interest, and thereby eliminate most of the false public debt it has caused by having been privatized.