Panel Discussion on Randy Wray's "Making Money Work for Us": Part 1
James Keenan
On March 21, Ryan Benincasa, Adam Rice and myself were part of a panel discussion held at the Henry George School of Social Science in New York City entitled "Modern Money & Public Policy - Should We Worry about the Federal Deficit?". We're going to post the text of our presentations over the next three days, starting today with a presentation by Ryan Benincasa.
Good evening all. On behalf of the Abba Lerner-Hyman Minsky Political Economy Society, I’d like to extend a warm “thank you” to the Henry George School of Social Science for hosting us tonight. I’m very excited to discuss Modern Monetary Theory (or “MMT”) and explore how understanding modern money can enable us to create a more prosperous future.
Each of our lectures will draw from Professor Randy Wray’s latest book: Making Money Work for Us: How MMT Can Save America.
Now, this title may come off as somewhat extreme; we can blame that on Wray’s editor. Nevertheless, we cannot solve the myriad social crises we face today without a better understanding of the tools we have at our disposal. Money is perhaps the most important, and yet least understood, tool we have. Our goal tonight is to try to change that, and challenge you all to reconsider many preconceived notions you may have had regarding money.
So, what is money, and where does it come from? Wray explores this question at the beginning of the book. He leads off with his two favorite phrases that his mentor, Hyman Minsky, used to repeat during his lectures:
“Everyone can create money; the problem is to get it accepted” and “The need to pay taxes means that people work and produce in order to get that in which taxes can be paid.”
Right from the beginning, we see money is inextricably linked to taxation and, therefore, the State. In fact, as we’ll see, money is directly tied to the desire of the State to resource itself. But I am getting ahead of myself. Let’s return to the fundamental question at hand: what is money?
It is common for people to answer this question with some variation of “money is what money does.” Most people probably think of money as a tool they use to pay for things. Orthodox economics have agreed upon the following definition: money is a medium of exchange, a store of value, and a unit of account. But these definitions are wholly unsatisfying; they fail to reach the core essence of what money actually is. We can’t define money by its physical properties, because it comes in many different forms: it could be a metal coin, a piece of paper, or a digital account entry at a bank. In 17th century England, wooden tally sticks functioned as money. In ancient Mesopotamia some four thousand years ago, money was recorded entries on clay tablets.
I have paper dollar bills in my wallet, which read Federal Reserve Note at the top and below says, “This note is legal tender for all debts public and private.” Therein lies a clue: money is used to cancel debts, including debts owed to the public. As Wray points out, the American colonies issued their own paper of money to “pay for” real resources for the public: perhaps they wanted to build a school or a courthouse. Often referred to as bills of credit, the local governments would spend the newly issued money and simultaneously impose taxes to be paid in those bills. These so-called “redemption taxes” were paid at pre-determined dates by returning the paper bills to the tax authorities, and were subsequently burned. The redemption of these debts prompted some colonies to throw festivals in celebration.
The order of operations here is critical. The colonial authorities spent the money first, then taxed it back. The colonists who owed taxes in that money had no way of accumulating it other than directly from the authorities or indirectly through private transactions, which usually required some sort of exchange of real resources. Thus, the bills circulated as money, much to the surprise of the so-called father of modern economics, Adam Smith.
There is a reason we file a tax “return” every year (even though many of us don’t get “returned” any money!), and that is that the dollars are being returned to their original issuer, the United States government. This is one of the critical insights of MMT: it is the only school of economic thought that recognizes the State as the original source of money for an economy.
So what is money? Money in its most distilled form is information; a record of debts and credits, of I-OWE-YOUs and YOU-OWE-MEs. By creating money, the State can use it as a social organization tool to accumulate the real resources it needs to serve the public purpose, such as schools, hospitals, infrastructure, and defense. Or as Wray writes in the opening section of chapter two, “money is and always has been a ‘state money’ – a creation of the authorities who choose a money of account and impose obligations to ‘drive’ the currency.”
In the United States, we have institutions that give the impression that money comes from the private sector; that banks and prudent savers “lend” money to the government when they buy debt securities issued by the US Treasury. Rather than calling it the public’s money, we refer to it as “taxpayer money,” as if those who are net payers of taxes have some sort of legal priority claim over the nation’s output. In reality, it is the other way around: money comes from the government, and the private sector needs the government’s money in order to pay taxes, fees, and fines that the government imposes. A simple exercise in logic reveals this to be true: one cannot pay taxes in US dollars or buy a US Treasury security unless they have dollars in the first place! Accountants use the terms “sources” and “uses” of funds to organize entries on a financial statement. Paying taxes and buying US Treasury securities are ostensibly uses of funds. Therefore the government must be the original source of funds.
So how does money enter the economy? Wray describes two channels: governments and the commercial banking system. The government “creates” money when Congress approves a spending bill and the President signs it into law; the Federal Reserve, who was created by Congress, serves as fiscal agent for the US government, and sits between the government and the commercial banks, dutifully credits the recipients’ bank accounts when the government purchases a good or service. The Fed also lends money, called reserves, to the banking system to ensure there are sufficient funds for banks to meet depositors’ withdrawal demands, as we just experienced with the new Bank Term Funding Program following the collapse of Silicon Valley Bank. Commercial banks exchange reserves, which are merely key-stroked entries on the Fed’s and the banks’ balance sheets, between themselves as a means of clearing payments. And when banks make loans, they simultaneously create deposits, which are essentially claims on the banks’ reserves. This leveraged financial structure is the engine that drives our capitalist economy.
When the government spends more than it collects back in taxes, we refer to this as a deficit. The term “deficit” is misleading, because it implies that the government can “run out of” its own money. Such an idea is absurd; the government cannot run out of its own promises. What it can run out of is real resources; those are the real deficits that we should care about.
So why does the Treasury issue debt securities if the government can just pay for things by crediting bank accounts? Treasuries are a tool for monetary policy; the Fed sets interest rates by buying and selling Treasuries, in effect destroying or creating reserves in the process. And selling Treasuries results in a positive balance in the Treasury’s general account at the Fed. This complicated design is intentional, to give the public the impression that banks are “lending” to the government.
This overly complicated structure is unnecessary. Wray points out in this book that, in the FAQ section of the Fed’s operating manual used by its staff, there is a question posed: what do we do if we receive a Treasury check but the Treasury’s deposit has already dropped to zero? Answer: clear the check and enter a negative number. This is an overdraft. What this shows is that there is no financial limit to how much money the government can spend in its own unit of account.
In closing, I’d like to leave the audience with a question to consider: if money was no object, what would you buy in order to benefit the public good? Thank you!