The World According to Modern Monetary Theory

Looking past money to the sovereign power that makes it valuable

Too often the origins of our economic ills are cloaked by a mystical reverence for some autonomous money spirit. The economists behind Modern Monetary Theory (MMT) seek to lift money’s veil by studying the specific actions that occur as money is created, circulated, and destroyed.

For those seeking a grand, unifying sociopolitical economic theory, MMT will disappoint. But as an analytic tool, MMT clarifies who holds genuine power—sovereignty—within society, and how they organize the money system to serve their interests. Unsurprisingly, this is often a story of tremendous cruelty and exploitation.

But the revelation that the rules of money are not immutable laws of nature but are instead created and constantly modified by people opens up possibilities beyond the scope of our current political imagination. The questions become: What sort of society do we want? Do we have the physical resources to support that society? And finally, how the hell do we muster the political will to get there?

First, we must understand the source of modern ­money’s value—and contend with the violence of its origins. Imagine you have just invaded an island. The populace leads a leisurely life of hunting and subsistence farming, and natural abundance ensures nobody needs to work too hard. But beneath the fertile soil are precious minerals that will make you very rich—provided you can get the people of the island to do the backbreaking work of mining for you.

Guns will work for this purpose, but slavery has fallen out of social acceptability. What if, instead of each day forcing workers into your mines at gunpoint, you created your own money system? You could print your face on a bunch of plastic tokens and pay miners with them, while imposing a mandatory token tax at the end of each month. To avoid imprisonment or death, they will have to make sure they work enough to have tokens at the end of the month. Now you need to take out your gun only once a month, when you go door to door demanding your token. The natives remain ostensibly “free.” But the mining still gets done.

A sovereign (you, in this scenario) becomes a money creator not by figuring out how to carve their faces into a coin, but by having the strength to enforce taxes denominated in their own coins. As the economist Hyman Minksy famously said, “Anyone can create money—the problem is getting it accepted.”

Your tokens would be totally worthless without your threat of violence, but with it, they become an overriding factor in your subjects’ lives. Subjects must refocus their society around earning and holding tokens. Some people will work in your mines; others will perhaps sell goods and services to those with jobs. You, in the meantime, will have transformed an entire economy for your profit, with only the periodic use of force.

Forcing people to pay their taxes in a money that is otherwise worthless creates demand for money and gives it its value. This idea, called chartalism, is one of the core building blocks of Modern Monetary Theory. “Modern money” is fiat money, state-issued currency not backed by precious metals or any other commodity. It’s as arbitrary as your island’s plastic tokens. You cannot trade in fiat money with the state for a fixed quantity of gold or barley, but you still need it to pay taxes. The United States has functioned on a fiat system since 1971, when Nixon ended Bretton Woods, the international system of financial relations established after World War II that had permitted U.S. dollars to be converted into gold. The euro, the British pound, and the Japanese yen have since become fiat currencies. But even in ­commodity-backed systems, state-­issued money—if acceptable as payment for taxes—tends to trade at above its strict commodity value. According to Keynes, money systems have been “modern” for the “past 4,000 years at least.”

Variations of the modern-money narrative are found repeatedly throughout history. The levying of monetary ­taxes to create waged labor was “a nearly universal experience throughout Africa” in the colonial era, explains economist Randall Wray. Hut taxes, coupled with extreme violence and racial segregation, forced unwilling migrant laborers into the gold and diamond mines of South Africa. Bernard Magubane, an anthropologist, described the purpose of these taxes as being to “increase the economic pressure on the African peasants” to force them into waged work.

Even earlier, in the 8th century, Anglo-Saxon kings had “struck their names and titles into coin” that they used as payment for things they wanted and accepted in lieu of “in-kind payment of rents” and obligatory tributes, writes Christine Desan, whose research overturns the mythical “barter” story of introductory economics textbooks that claims money was invented only after trading became complex. According to Desan, “money is created when a stakeholder uses his or her singular location at the hub of a community to mark the disparate contributions of individuals in a common way”

Desan’s explanation of money’s origins reminds me of the points system used in the student co-ops I lived in during college. We enjoyed a home-cooked meal each night, and the houses only rarely succumbed to squalor—­despite their inhabitants’ tendency for heavy loads of ­c­ourses and drugs—because the points system imposed work on us. Points could be earned by doing household chores (the more time-consuming the task, the more points you earned), and every member of our co-op owed the house 30 points per week. Point balances were kept on a paper chart or online spreadsheet (no one’s face was minted on any point tokens), and if your point deficit exceeded a certain threshold, you risked getting kicked out.

It’s not a huge leap to imagine a co-op choosing to run a deficit by issuing more points than it collects and permitting them to be traded. This would allow individuals to save points to exchange on private markets for tutoring, homegrown, or whatever else co-opers have the means and inclination to produce. A local farm might even be willing to sell food for points, provided they could use the points to employ co-opers during the harvest. Like colonially imposed money, points would have value as long as co-opers needed them to fulfill their obligation to the house, and the house had punitive means at its disposal to enforce it.

The point, like the token, is an arbitrary unit that has value because of an imposed debt burden. But the resemblance suggests that the logic of modern money can also be put in the service of collective, as opposed to exploitative, political aims.

Sovereigns create money as a tool to obtain the labor and other resources they need to fulfill their political goals. The sovereign steers the ship, at least initially, not some money god. If sovereignty lies with the people, money can be used to serve the common good. If people lack formal political power, more democratic layers of sovereignty may be possible in the shadow of the official sovereign, provided the means of production exists within a community. An understanding of modern money, and its relationship to sovereignty, would be necessary but far from sufficient to bring about such transformations.

When studying sovereign finances, our instincts tend to betray us. Sovereigns create money by spending it into existence. And taxes and fees paid to the sovereign destroy money. Consider our hypothetical colonial government: There is no fixed limit on the amount of tokens it can issue. It imposes a tax burden to create a demand for tokens and give them value. But the only way for anyone else but the government to have its fiat money is for the government to run a deficit—it must issue more tokens than it collects in taxes.

In making such issues, sovereigns are not constrained by the budgetary concerns of individuals. If we spend more than we earn, we will eventually have our credit cut off and will no longer be able to buy things or meet tax obligations. But as money issuers, sovereigns have no need for their own tokens and thus no need to close their deficits. Be it an Anglo-Saxon king or a democratic state, the sovereign’s concern is how it can run up its requisite deficits—how it can use its money to purchase the goods and labor necessary to fulfill its political aims.

One of MMT’s most useful insights is that not all governments are sovereign. A government that does not issue its own currency or has debts denominated in some other’s currency is not monetarily sovereign. Thus it is rarely useful to compare the finances of Greece (which uses the euro, a currency it has almost no control over) to the United States. A better comparison might be between Greece and the state of Michigan, which is also a currency user.

In the U.S., dollars are created when the federal government spends. Congress allocates spending and determines taxation. The state enforces taxation through the IRS, the courts, and, eventually, the penal system. Just as the co-op can never “run out” of points, the U.S. government can never run out of dollars. As long as principal and interest are both denominated in U.S. dollars, the U.S. can always pay by printing money or issuing reserves. The difference between issuing sovereign debt and straight-up “creating money out of nothing” is just timing and some extra money created in the form of interest.

Money scarcity is basically a political decision, as with Congress’s imposition of an arbitrary limit, the “debt ceiling,” on the amount of money that the federal government “borrows.” It’s largely motivated by those who would like to keep wealth concentrated in the hands of a few (who can personally benefit from the metaphorical printing press via government spending or direct access to the Fed).

This is not to say there are no other constraints on public spending. Inflation is a real constraint. If the government spends dollars into existence faster than the private demand for holding money, prices will rise. Savings will lose value, while debt burdens become less onerous. If workers wages fail to keep pace with other prices, they will suffer.

Luckily, the sovereign has tools other than arbitrary debt limits for managing demand for money: taxes. Raising taxes makes money more scarce and in demand. But if the private sector loses too much spending power because the government taxes too much (or spends too little), commerce freezes up.

How do we know when to tax, who to tax, and how? This is as much a question of political values as macroeconomics, but MMT helps us weigh our choices. The prescriptive side of MMT typically focuses on achieving the dual goals of maintaining full employment and price stability (incidentally the same two goals the Fed is supposed to uphold). Rather than focusing on economic “growth” as a good in and of itself, MMT directly seeks the promised outcome of such growth: that everyone who wants a job can find one, and that goods and services remain affordable in relationship to income.

To achieve price stability, MMT rejects the inflation paranoia that pervades conventional wisdom in favor of a more nuanced diagnosis. If prices for certain goods and services are rising, is it because there is too much money going around, or is it because of genuine scarcity? What feels like inflation may actually be wage deflation combined with artificial scarcity imposed by monopolists, speculators, and rent seekers. The effects of those ills will not be fixed by tweaking the size of the money supply. If food ­prices are rising because of speculation, it is better to regulate commodities markets than raise ­taxes.

But even in cases of genuine scarcity, sometimes more spending is warranted. If energy prices are rising because of shortages, it is better to lower demand for energy by spending on alternatives like expanding public transportation and insulating homes than to raise demand for money by cutting spending.

Conventional economics considers full employment to be inflationary, because when labor markets are tight, workers can demand a bigger share of the wealth they create. A “reserve army of the unemployed” keeps labor cheap. The unemployed serve as a “buffer stock” to anchor prices, or as Randall Wray puts it, to “fight inflation through their desperation as they try to bid jobs away from the employed by offering to work at miserable wages.”

MMT, however, argues that prices can be anchored not through the misery of the unemployed but through  the government offering a job to anyone unemployed who wants to work. This guaranteed job, set at a living wage with benefits, would set a floor on wages and give workers the choice to refuse exploitative or unconscionable private-­sector work. A job guarantee would counteract the booms and busts of the private sector, stabilize the economy, and ensure workers have income regardless of the whims of the capitalist class.

If the government can afford to employ everyone, it can also afford to simply pay a basic income to every citizen, regardless of whether they worked. A basic income could make the labor market more competitive if enough people chose not to work. But it does not in and of itself set a floor on wages. Even with a basic income, if there are more job seekers than available jobs, employers will not be pressured into improving working conditions and wages.

Research by Pavlina Tcherneva and Rania Antonopoulos indicates that when asked, most people want to work. Studying how job guarantees affect women in poor countries, they find the programs are popular largely because they recognize—and more fairly distribute and ­compensate—all the child- and elder care that is now often performed by women for free (out of love or duty), off the books, or not at all.

Bill Mitchell warns that giving away money is more inflationary than purchasing labor; a basic income would have to be balanced by more vigilant taxation for its value to not be rapidly inflated away. He also believes that a job guarantee is more transformative in expanding our notions of “work” and political participation. While the implementation of such a program will no doubt be messy and imperfect, excessive fears of “make work” suggest a lack of imagination. If we run out of trees to plant and day cares to staff, everyone can just work fewer hours.

Job and income guarantees are complementary policies. One ensures that those who want to participate in society can do so and be formally recognized and compensated for their contribution. The other ensures that no one is compelled to work if they don’t want to. MMT sees the former as the most direct path to both full employment and price stability, but the programs are by no means mutually exclusive.

Many MMT advocates see the job guarantee as a transitional program to keep workers productive and skilled until the private sector finds a place for them. But a job that serves the public good, provides ample leisure time, and supports a low-consumption lifestyle is itself appealing. For those that value strong community and a healthy environment, the job guarantee could be a chance to opt out of the “work hard, consume hard” lifestyle to do much needed public service, while keeping the private sector open for those with heavier ambitions and appetites.

MMT encourages us to conceive of money as a claim on the resources of society, a promise that entitles one to a bit of whatever resources are for sale. The money system is then an imperfect sort of scoreboard for keeping track of claims on resources. Money only matters to the extent that it can be redeemed for “real” wealth. But what is real wealth? Wealth is a subjective, messy term for things humans care about and depend upon. It includes things we are good at counting, like smartphones and soybeans, as well as things we sometimes prefer not to believe require counting, like clean water and soil fertility. Wealth also includes things which defy easy measurement, such as education, political influence, and health.

Government deficits, the money supply, and GDP are abstractions that obscure the issues of power and distribution of wealth that are the consequence of a given political system. These abstractions make no sense as ends in themselves. A public deficit just means that a sovereign has spent money into the economy that it hasn’t taxed back. It doesn’t say whether that money was spent on bombs or schools or pure graft. A country can have a high GDP because a small subset of the population sells tons of luxury goods and financial instruments to each other while everyone else starves. Ultimately, what matters is the quality and distribution of resources.

Those at the very tip of our economic pyramid understand that fiat money is unlimited, but most everyone below believes it to be scarce. We live under austerity and debt. But it doesn’t have to be this way. The idea that we don’t have the “money” to supply essential public goods to everyone is a pernicious myth that can only be maintained so long as we remain ignorant of how money actually functions. But this myth is merely justification for power structures that are ultimately backed by guns and the vastly unequal distribution of our finite planet’s resources. Knowledge is no substitute for political power. It is merely somewhere to start.