Why Isn’t Modern Monetary Theory Common Knowledge?

I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.

Traffic lights (like money) are a social convention. We agree that red means stop and green means go. Why we’ve chosen these particular colors is an interesting question, as is why we choose to put traffic lights where we do. But the fact that red means stop and green means go just is. It’s something we’ve defined to be true. The workings of money are similar. True, money is more complex than a traffic light — but only in application. In conceptual terms, money is equally simple. It’s a social convention that we’ve defined into existence.

To frame our discussion of money, let’s begin with what it isn’t. Money isn’t a thing. True, money can have concrete forms like dollar bills and metal coins. But it needn’t. It can be as abstract as digits in a bank account, or tallies on a stick. Money is an idea. It’s an agreement to tie our social relations to a unit of account. To understand money creation, we need only look at the principles of double-entry bookkeeping. Debt goes on one side, credit goes on the other. The two sides carry opposite signs and so cancel out. This allows us to create money while simultaneously balancing our accounts.

Here’s a simple example. Suppose that a friend does a favor for me. I want to return the favor, but don’t have the time to do so immediately. So I give my friend a note that says “Blair owes you one favor”. This note is money. It is created from nothing using the principles of bookkeeping. On one side is a debt: I owe my friend a favor. On the other side is a credit: my friend is due a favor. And that’s all there is to it. My friend can now exchange my IOU with other people. It becomes money in circulation.

Understanding this act of money creation is trivial — much like understanding the creation of a traffic light. Just like we define the rules of traffic, we define the rules of double-entry bookkeeping. We then use these rules to regulate our behavior, creating money as we please.

What’s interesting, though, is that few people misunderstand traffic lights. We all know that traffic lights can be put anywhere we want them, and that they’re based on an arbitrary social convention. Yet when it comes to money, the same is not true. Many people fundamentally misunderstand money. To them, it’s not an arbitrary social convention that can be created/destroyed at will. Instead, they perceive money as a scarce commodity — something that, like water in a desert, must be guarded and conserved.

What we really need, then, is not so much a theory of money, but a theory of why people misunderstand money.

The quantified obligation

To think about why people misunderstand money, let’s keep the definition of money in our heads. The anthropologist David Graeber defines it best. Money, he argues, is a quantified obligation. The holder of money is entitled to receive things from other people. (See his book Debt: The First 5000 Years for a detailed exposition.)

We can see from this definition that money is a powerful tool. In fact, it’s a tool for power. If I have a lot of money, I can get other people to do my bidding. This fact is hardly controversial. We all know the adage that ‘money is power’. But somehow we forget this adage when we think about money creation. Money is nothing but a quantified obligation, so in principle anyone can create it. But in practice, few people have this power. The problem is that for money to circulate, people must trust that they can use it to receive an obligation. I could try to circulate a note that says ‘Blair owes you one hug’. But other than my wife and daughter, few people want that IOU. So it will never circulate as money.

In practice, money creation is done almost exclusively by the powerful. Textbooks on money will use the word ‘trust’. They’ll say that money can circulate as long as we trust the issuer. This is true, but neglects the flip side of trust. When you trust someone, you endow them with power. When soldiers trust their commanding officer, they’re likely to obey orders. That gives the commander power. Trust, in many ways, is the basis of power. You can’t have stable power relations without it.

So while I could try to create money, few people would be interested. I lack the trust of the public, which is another way of saying that I have little power. But if government wants to create money, many people are interested. Many people trust the government, which is why governments have power.

Legitimate violence

The sociologist Max Weber famously defined the ‘state’ (i.e. government) as having a ‘monopoly on the legitimate use of violence’. I think we could equally define the ‘state’ as having a monopoly on the legitimate creation of money.1 There are interesting parallels, in fact, between violence and money.

Just like anyone can create money, anyone can do violence. You could walk onto the street right now and shoot someone. But most of us don’t. Why? First, because we think it’s wrong. Second, because the state punishes murderers. In other words, violence in modern societies is highly regulated. The same is true of money. Technically, anyone can create money. But few of us do. Your personal IOU will never circulate widely. And if you try to create state-backed money, the government will punish you. Like violence, the creation of money is tightly regulated. To see this fact, we need only look at language. We have a name for taboo violence (murder) and we have a name for taboo money creation (counterfeiting).

Those of us raised in stable societies take for granted both the regulation of violence and of money. This regulation begins to feel like a ‘natural order’. But if you were raised in a war-torn country, I suspect you’d feel differently. You’d understand that anyone can do violence — with devastating results. And if you lived through a period of hyper-inflation, you’d probably better understand that anyone can create money. (People tend to make their own money when government currency breaks down.)

Limits to government power

One of the main thrusts of modern monetary theory is to point out that government spending has no limits. If governments control their own currency, they can spend as much money as they want by creating money out of thin air. The interesting question is not whether this is true. It’s trivially true — much like it’s trivially true that a green traffic light means go. Any currency issuer (government or otherwise) can create as much money as they want. The interesting question is why governments don’t spend unlimited amounts of money.

Many economists will trumpet inflation as the boogeyman. Create too much money, they say, and you’ll have hyperinflation. Just look at what happened in the Weimar Republic. It’s true that money creation can lead to inflation. But MMT proponents point out that this has an easy solution. Government can destroy money just as easily as it can create it. Government spending creates money. Government taxation destroys it. Again, this is trivially true. And yet few (if any) governments accept this truism. In fact, most governments behave as if money, like water, is a scarce commodity. Why?

The answer, I believe, has to do with power. The creation of money is inseparable from the accumulation of power. Here’s an example. Suppose that I’m a king who claims the sole authority to create money. And suppose that everyone in my kingdom accepts this right. I create hordes of money and use it to buy all the land in my kingdom. I put the landed aristocracy out of business. And in so doing, I put all the citizens under my command. Everyone, in effect, becomes a state employee. It’s the totalitarian dream — an entire society unified under a single hierarchy.

This tale is, of course, a fantasy. The problem for a real king is that his subjects probably won’t accept his right to create unlimited amounts of money. There will be pushback, largely from other powerful people. The landed aristocracy, for instance, won’t want to give up their land. So they’ll oppose the king’s right to create money (and to tax it out of existence). History shows that rather than being sovereign money creators, feudal kings were in perpetual need of finance. This is just another way of saying that kings were relatively weak. They lacked the power to finance themselves.

What is true for the feudal king is true for modern governments. Like the king, governments can in principle create as much money as they want. But in practice they don’t, because there are limits to their power. When governments create money, they accumulate power, which implicitly means taking power away from other (powerful) people. The landed aristocracy didn’t want to cede control of their land to the king. And modern corporations don’t want to cede power to the government. And so these corporations act continuously to oppose government money creation.

The arbitrariness of power

I’m hardly the first to connect money creation with power. It’s been done countless times before. And yet many (most?) people still misunderstand money. Why? A good theory of money should explain this misunderstanding. Why — despite it being plainly true — do we recoil at the idea that anyone can create money, and as much of it as they want?

My suspicion is that accepting this fact is difficult because it means accepting that our existing social order is arbitrary. Those who create money do so not out of any natural right, but because of power that has been arbitrarily given to them. Nothing makes the human mind recoil like learning that the things we hold dear — the patterns and behaviors that dominate our lives — are arbitrary.

This points to a deep truth about human behavior. Our social conventions are, by definition, arbitrary. And yet the existence of these conventions is predicated on us believing that they are not arbitrary. One of the worst things you can say about a law is that it is ‘arbitrary’. Convince enough people of this fact and the law will soon change. Similarly, one of the worst things you can say about money creation is that it is ‘arbitrary’. Our social order depends on us forgetting (or refusing to see) this fact. The flip side is that changing the social order means remembering this arbitrariness.

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  1. I can hear your objections. Private banks create money — so how can government have a monopoly on the legitimate creation of money? I think of banks as the equivalent of military subcontractors. The latter are private-sector institutions that have been given the right to do violence. The same is true with banks, only with money. Banks are private-sector institutions that have been given the right to create money. Just as easily as it was given, government could take this right away.

Further reading

Galbraith, J. (1975). Money: Whence it came, where it went. London: Deutsch.

Graeber, D. (2010). Debt: The first 5,000 years. New York: Melville House Pub.

Robbins, R. H., & Di Muzio, T. (2016). Debt as power. Manchester University Press.

Rowbotham, M. (1998). The grip of death: A study of modern money, debt slavery and destructive economics. Jon Carpenter Publishing.


  1. So, if money is a kind of power, what is power? You effectively answered that question: power is the willingness of others to follow your directions. (I like “directions” better than “orders”; it allows for a wider variety of relationships where one person makes decisions and others follow them.)

    I sometimes think the social sciences need a grand unifying theory of human behaviour to tie them all together. I imagine the entirety of the social sciences being different ways to answer the same question: why do people do what they do? A great part of the answer involves how people make collective decisions, and much of that depends on how people delegate decision-making.

    If everyone has the power to control their own body and mind, the dynamics of power depend on how people agree on who to trust with decisions that involve coordination of collective behaviour.

    Money is interesting in this regard, because of how it is different from political power. I think this may help explain the desire to apply scarcity to money—in effect, invoking a law of conservation of money.

    Having money is evidence of being good at decision-making. In the basic case, people are given money in exchange for things people want. In a fair world, people who are good at making things, or otherwise reorganizing the material world in beneficial ways, should earn more money. Maybe that’s the emotional origin of the theory that productivity equals income: it fulfills our belief, or at least wish, that life is fair.

    But this is a false—or at least an ambiguous—signal. Stolen money is just as effective as money earned “honestly”.

    And then there’s your favourite relationship: hierarchy and income. Position in a hierarchy is another signal—also ambiguous—of one’s ability to make good decisions.

    Accumulation of money, and ascending a hierarchy, are both signals of status: the ability to contribute good decision-making to society. Good decisions increase prosperity for people connected to the decision-maker.

    Interpreting wealth and position as an estimate social contribution is a bit like a laundromat for merit. People want to trust that a person’s power was acquired honestly. But we all know that is not a safe assumption. Still, we don’t seem to have an alternative.

    Wealth and position, in the naive analysis, are both accumulated slowly, by making a large number of decisions that are successful. You do a lot of good work, and are paid a bit more than average, and you spend your money wisely, and you accumulate wealth. You contribute to your community, and offer good ideas and advice, and slowly prove that you are wise and sensible, and acquire credibility and authority.

    If we accept that this naive analysis is no longer valid, the world becomes very scary. If money and power are the result of arbitrary decisions made inside opaque institutions, then the world is not fair, and there is no hope for fairness. It’s very disconcerting to people.

    • As someone whose family was in the philanthropy business, I’ve (second hand) encountered lots of wealthy people. Most of them were “born on third base.” **ALL** of them wanted to act like they hit a triple. The emphasis on individual responsibility for one’s wealth, and a host of “good decisions” is an exaggeration.

  2. What are your views on what “trust” is? For me trust is not binary but a continuum.

    In your ex there is implied trust in Blair’s willing and able to fulfil his liability. That notes gives the holder some degree of power over him should Blair wish to honour the liability. Should the holder try and collect, Blair might offer a second note promising a favour.

    In that light, US dollars (US notes) are the liability of the USA government (which are the people the USA). US notes give the holder some degree of power over USA government should it (they) wish to honour the liability. In the case of the holder of a US note, there is nothing but another note that the US Government can offer.

    For me what you describe is currency which at times can be ‘money good’. Modern currency has lost it’s tangible aspect and has been simplified to just a unit of account thanks to computerization. US notes remain ‘money good’ based on trust. But consider the breadth of that trust.

    Within the USA the US currency gained strength after a series of national and international wars. Interestingly internationally movements are growing towards DE-dollarization. For me this implies falling trust in the currency. Breadth grows and contracts over time.

    Stop lights are both currency and money (to further butcher the analogy). Green, Yellow, Red are currencies and arbitrary. However they imply money – Go,(prepare to stop) and Stop. The trust is in the rule of law and its enforcement. One can make changes in the size and brightness with little change in the currency function. However if too many lights are created the trust begins to breaks down. More and stronger enforcement is often used to maintain the ‘money’ aspects – trust enforcement if you will.

    Every fiat currency in history has failed. Will the current crop survive? As long the exchange of goods and services requires an accounting there will be forms of money (currencies) to facilitate the concept beyond simple barter.

    • Hi Bob,

      I agree that trust comes on a spectrum, as does power. I’ve discussed this spectrum in more detail here: https://economicsfromthetopdown.com/2019/09/26/an-evolutionary-theory-of-resource-distribution-part-2/

      I disagree fundamentally with your assertion that ‘every fiat currency in history has failed’. All currencies are fiat currencies, by definition. Even if you tie money to gold, there is nothing in the gold that tells you how much it’s worth. The fiat is there, under the surface, in the price of gold.

    • ” there is nothing but another note that the US Government can offer.”

      Bzzt! Wrong! The government can offer relief from an inevitable liability: taxes. Taxes give value to the dollars.

      Remember, it’s not “tax & spend.” MMT correctly observes that it’s *got* to be “spend first, then retrieve some dollars in taxes.” (No one has dollars to pay the taxes unless the government spends them first).

      What do we call the dollars left out in the economy, untaxed? Answer #1: the dollar financial assets of the population (i.e. their savings). Answer #2: National ‘debt’… Exactly as your bank account is your asset, but the bank’s liability.

      “Every fiat currency in history has failed. ” Sorry, wrong again. The big objection to fiat currency (typically) is inflation. “Printing” money (most of it is actually electronic entries in Fed accounts, so actually “typing” money) does not cause inflation. Google for a graph of historic inflation, and you’ll see it’s as big a problem when currency had gold backing as not.

      The Cato Institute published an account of 56 historic hyperinflations. How many were caused by a central bank run amok? Answer: zero. What initiated them was a shortage of goods (oil in the U.S. in the ’70s), often accompanied by a balance of payments problem. The extra money “printing” came later.

      In Zimbabwe, the Rhodesian farmers left, and a country that previously fed itself had to import food (shortage of goods, balance of payments problem).

      In Weimar Germany, the French were incensed that the Germans did not deliver World War I reparations (actually promised telephone poles) on deadline, so they invaded Germany’s industrial heartland, the Ruhr…resulting in a shortage of goods, followed by too many Deutschmarks later.

      “Printing money” does *not* cause inflation. Witness the Fed’s behavior in 2007-8 when, according to its own audit, the Fed extended $16 – $29 trillion in credit to the same financial sector that crashed the economy.

      MMT is accurate about all this stuff.

  3. Blair,

    You have a bit of inconsistency here. You declare that “Money isn’t a thing” (with which I totally agree). But then you go on to talk about creating and destroying money, But it seems to me that only “things” can be created or destroyed.

    I prefer to think of money as a continuous “flow” of currency (denominated in some unit of account), the flow started by government by originally spending in that currency to buy some goods or services and sustained by requiring its taxes and fees to be paid in that currency.

    In trying to explain MMT in the simplest possible way, I came up with the one-paragraph of a sovereign-money economy that I put in the Comments to your “The Challenges of Doing Revolutionary Science (Part 1)” article.

    I’ve further surrounded and justified that paragraph at Magic Money Tree, pointing out that we really have two economies at work – one the production-and-consumption economy that GDP measures (and deals only in revenue and expenses) – the other, the FIRE economy that deals in assets and liabilities.

    I’d appreciate your critique of that note as well as any thoughts on how I can do a simple description of the FIRE economy.

    • Hi Ed,

      I admit that you’ve caught me here. In some sense this is a fault of language. We speak of ideas being ‘created’ — scientific theories for instance — but are they really? Certainly the representation of an idea is created when written down as text. Similarly, the representation of money is created when written as a number. But we don’t need the physical number to represent money. We can hold the number entirely in our heads. So in an important sense, you hit upon a deep ontological problem of where ideas come from. I have no answers.

      About the FIRE economy. I owe you both a skype conversation and a blog post on a topic of your choosing. Perhaps we can discuss the latter on skype. Let’s iron out the details on email.

  4. A few comments:

    > Money is an idea. It’s an agreement

    Yes. But more precisely: If we’re talking about money in the most general sense (the first definition here https://evonomics.com/four-definitions-of-money-all-correct/), I think it’s best described as an invention, technology, or methodology. Yes, like traffic lights, but also like algebra.

    > Debt goes on one side, credit goes on the other

    If we’re talking balance sheets, better: *assets* go on one side, liabilities *and net worth* go on the other. (For firms, shareholders’ equity rather than net worth.) Credit is something different in accounting-speak (and it has multiple meanings).

    This may seem fussy, but since we’re trying to peg our understandings here to “principles of double-entry bookkeeping,” it’s important to use that language with precision and clarity.

    >Money, he argues, is a quantified obligation.

    I think it’s far more useful, in a complete and coherent understanding, to think of it as quantified ownership rights (inclusionary but even more so, exclusionary). Tallied as assets.

    The quite ubiquitous focus on debt/liabilities results in an incomplete, and confusing view of things. This focus is especially misplaced IMO because liabilities are far smaller than assets in magnitude. (Which is why we have net worth — the thing that makes balance sheets balance.)

    • Hi Steve,

      I agree with most of your points. As far as Graeber’s definition of (debt-based) money, I think it has the advantage of applying more broadly when ownership rights are not clearly defined, as in simple societies. But I agree that money is quantified ownership.

      • That makes sense.

        On the earliest embodiments of money-like things (putting aside Paleolithic scored bones, which may have been tallies of time, eg lunar cycles): first there were just counting tokens, then those got packaged together into clay envelopes, then tallies of the contents got added to the outside of those. It’s often suggested those packages represented debts, but I’m not sure what evidence supports that. They might represent ownership rights, assets, instead?

        Schmandt-Besserat, for instance, doesn’t weigh in on that question. https://books.google.com/books/about/How_Writing_Came_About.html?id=0k9mAAAAMAAJ

      • Steve Roth: Semenova in her 2011 UMKC dissertation “The Origins of Money” writes about Schmandt-Besserat 1982 (“The emergence of recording”):
        “It is unfortunate that although the link between tokens, bullae and taxation was never abandoned by Schmandt-Besserat, she did not fully pursue her 1982 research program in which she seriously questioned the role of tokens and bullae as simple inventory-keeping devices, and suggested their instrumental role in the context of in-kind payments of ‘taxes’ and tribute to the ancient Mesopotamian temples. My hypothesis points to the importance of Schmandt-Besserat’s (1982) contribution for the development of non-commercial theories of money’s origins.”

        Thought you might find that of interest

    • The sum total of all liabilities and assets is zero by definition — a function of accounting identities.

      So, no. Liabilities are NOT “far smaller than assets in magnitude.” They are identical.

      • There are (non-financial) assets that do not have liabilities. Just worth mentioning. It all depends on what aspects of economy that is being thought about

  5. I look on money as blood. Blood needs to circulate for your body to survive. The economy needs the money in it to circulate. When you have your heart attack, you have just the right amount of blood, but it doesn’t move and you die.
    Also, I think MMT has a blind spot in only considering the role of tax in cancelling fiat money. Tax may regulate the amount of money in the system, but normally, it doesn’t reduce it. If you “follow the money” banks continually take government-created money out of the system to cover bad debts.

    • If you went to the Treasury building in Washington D.C. and paid your taxes with physical dollars….they would shred them. They destroy the money.

      When banks extend credit to borrowers (i.e. create money) and the borrowers repay the loan, that money is destroyed.

      Government money to cover bad debts…? Where does that come from? Mortgage insurance? FDIC?

      Anyway, money is created and destroyed. It’s like the points on the scoreboard at the ball game. You can have a touchdown called back, and removed from the score too. … and you never yell “Hey! Mr. Scorekeeper! You’re about to run out of points!”

  6. I object!

    Your statements that banks are given the right to create money and counterfeiting is highly regulated seems a contradiction.

    The banks do me a favour by lending me an IOU??

    Please explain.

    • No contradiction. We don’t call it ‘murder’ when the military kills its opponents. That’s because states give their armies the legitimate right to be violent. Likewise, states (most of them anyway) give private banks the ‘legitimate’ right to print money. So in the eyes of the state, this private-made money is ‘legit’. You may think not, of course. Whether we call money ‘real’ or ‘counterfeit’ is a moral judgement, not an absolute one.

  7. “History shows that rather than being sovereign money creators, feudal kings were in perpetual need of finance.” Those two are not mutually exclusive. Certainly kings have always needed finance, but the way they have obtained finance is to create a form of money! I.e. according to historians and anthropologists what kings and other rulers have done over and again is announce that some sort of unit can be used to pay taxes (else you go to prison) and the ruler then creates the units and spends them so as to finance himself.

    Henry I of England (who came to the throne in 1100AD) did that with talley sticks (though of course talley sticks go back much further in history).

  8. Michael G,

    I like your blood analogy. Currency needs to circulate through the economy just the way blood circulates through the body. But carry that a step further & I think you’ll see that the circulation is more important than the amount. The brain regulates the amount of blood to what the body needs (which explains why frequent blood donors live normal lives). Similarly, government regulates the amount of money flowing through the economy by what society needs. Normally this is self-regulating – people’s buying rises & falls, business’ supplying rise & falls in accordance. But when there’s a significant glitch in the buying or supplying, government needs to step in to maintain the needed flow. (Otherwise people would revolt before starving.)

    I don’t see MMT considering taxes as a means of regulating the amount of money in the system. (That’s just a convenient answer to quell the fear of inflation among those who still believe that inflation results from too much money). MMT’s position is that taxes are not needed at all, financially. They are required to give credibility to the currency (requiring taxes & fees being paid in a currency they hold a monopoly on). And given that requirement, they see other uses for taxes (such as controlling distribution of income).

  9. Blair, thanks for the article.


    Member banks create dollars via lending with the permission of the government via the monetary system.

    But is the net dollar input into the circulation negative?

    That is, unless aggregate defaults in a given period are greater than interest paid back to banks in the same period, the net effect on the supply of dollars *should be* negative — because, not only is the principle returned in payments, but interest paid to the banks is also removed from circulation.

    If it’s negative, then bank loans decrease the supply of dollars into the economy just like taxes paid decrease the supply of dollars via dollars cancelled.

    Is that right? Or wrong?

    • Hi Kelly,

      You hit on a deep contradiction in deep-based money. Banks create the money they lend out, but they do not create the money required to pay back the interest. The only way the interest can be paid back (by everyone) is if debt grows exponentially. And that’s exactly what’s occurred over time. When debt fails to grow, it becomes impossible to pay back the interest, and there is what Steve Keen calls a ‘debt deflation’. He’s written much more on the dynamics of credit, so I’d check out what he has to say.

  10. To foster clarity of discussion: I find when people discuss “money” there is a huge amount of talking past one another.

    It really helps discussion if everyone says _precisely_ what they are talking about. Every time.
    If talking about bank-credit accounts (deposits) say “bank credit money” (yes, every time). If talking about the $ reserves banks hold in accounts at the Fed, say $ reserves. If talking about cash, say cash.

    You _can_ put cash and reserves together for many discussions, because they are both “real” $ from the CB/Gov, and their accounting is essentially the same (as opposed to bank-credit “money” which are promises-to-pay $ reserves on your behalf (to settle your taxes, buy a Treasury for you, or settle with another bank for you) or to pay out $ cash to you.

    Anyway, being clear between government $ (cash, reserves [and coin from Treasury] and bank promises-to-pay clarifies a great deal.
    {having mentioned coin, remember, there used to be cash direct from Treasury also, that is, US Notes; note that a CBDC would essentially be private accounts at the Fed; note the “mint the coin” would essentially be allowing treasury to issue again; also note that saving $ as treasuries is just another form of [warehoused] government $; so there is about 25 trillion $ saved as a government token that is just not the CB/Gov token (reserves) but rather a treasury token; also note there is zero need to pay interest on saved $ with treasury. The tax-credit of a country is valued bc of the imposed liability (tax) not bc of interest paid on any promissory note; the latter is a highly vestigial, archaic belief)

  11. Trust as the origin of a currency’s purchasing power has circular logic: a person only trusts that a currency will be accepted if they beleive that others also have trust.

    In other words trust in a currency needs a critical mass, it can’t come into existence incrementaly, i.e. one person trusting, leading to a second, a third, etc…

    Given that all societies started using money at a given time in history, how could the trust achieve critical mass ?

    Can a critical mass of trust be creating by holding a meeting where everyone promises they will trust the newly born currency ?

    Seems unlikely ! Trust is a beleif and it’s hard fooling oneself into beleiving something you doubt.

    The chartalist explanation OTOH seems pretty convincing: enforce a tax in a currency with a penalty, and the only trust needed is that the tax (and currency issuing) authority has the means to enforce the penalty. The critical mass of trust is created as fast as you can show you have enough power to enforce the tax.

    As for a theory of understanding why people misunderstand money, I think the WYSIATI cognitive bias (what you see is all there is) is certainly not helping.

    The money as a token or commodity image is powereful, and 99.999% of currency users can use it as a mental model and be economically successful, as long as they are not making very specialized bets involving sovereing currency issuers.

    Naming money units “fiscal credits” would go a long way in clearing confusion on money.

    • The chartalist explanation is still a trust explanation. But the chartalists can only explain money in state-based societies. It also exists in non-state tribes. The trust explaination is based on money being debt, whether its debt from the state, from a bank, or an IOU written on a napkin during the Irish bank strikes (look it up).

      Money comes from credit, it thus measures credibility, which is a synonym for trust. There’s no circle logic either. A promise is a promise through tautology, not circle logic. If I believe in someone’s promise it doesn’t matter what my neighbor thinks. The promises can then circulate individual to individual with no mass-gathering or consensus required other than we all understand what a promise is.

      I agree, naming today’s money units “fiscal credits” would go a long way…but the bitcoiners will never hear it.

    • Additionally, chartists can’t explain the existence of reserve currencies. US dollars are commonly used overseas where there is no tax commitment. Instead other contractual commitments denominated in US dollars must be fulfilled. This comes from the belief in the stability of the USD…which then becomes a self-fulfilling prophecy as it makes it more stable. (a big part of this belief came from the Marshall Plan and the Saudi-US agreement to sell oil in USD)

      I’m a Canadian living in Morocco and I don’t pay US taxes but I do have US dollars.

      It’s not 100% relevant to the origin of money, but its something to consider. Chartalism doesn’t explain money prior to states, and it doesn’t explain how reserve currencies come about. I think chartalism is important to teach, but don’t consider it the full picture.

      • Chartalism doesn’t need to explain money prior to states, because states (and debts) predate money.

        The “reserve currency” as you describe it is a function of rich people (and the organizations they control) seeking an asset beyond the reach of the state in which they reside. The characteristics of an asset best meeting the needs of such people is an interesting topic all its own.

  12. Very glad to see you tackle this topic here. Very glad. One note “It’s true that money creation can lead to inflation.” is a common myth. It comes from neoclassical economics treating money like any other commodity, with its value based on supply and demand. So up supply, decrease value. Sounds good right? But what if money isn’t just another commodity that veils the “real” barter economy?

    If increased money caused inflation we’d never have savings. And every case of hyperinflation was preceded by huge supply shocks, like loss of productive land or more recently economic sanctions. But hey don’t take my word for it, here is an entire article that gives over half a century of data from across multiple countries to prove that increases in money supply don’t cause inflation…oddly, they are more likely to *prevent* inflation!


    Side note: because a large portion of money is tied in the fine print of contracts it’s actually impossible to truly measure the money supply. What’s often happened is 1 of 2 things (a) we see inflation and infer there has been an increase in money as well or (b) we see an increase in printed cash and assume that the rest of the money supply hasn’t changed. This isn’t a good assumption as highly liquid government cash could crowd out private loans.

    • Hi James,

      Yes, you’re correct here. If the increasing money supply is hoarded rather than circulated, there will be no inflation.

    • Here: https://mcusercontent.com/78302034f23041fbbcab0ac6d/files/c71fb40e-2d11-4400-b17e-5791847f5398/iimr.special_e_mail_2003_US_money_growth.pdf

      is someone who is predicting double digit inflation in the US?

      “In other words, 2020 may well see the highest growth rates of the quantity of money in American
      history, apart from some exceptional quarters in the world wars of the last century. Quite probably,
      money growth in 2020 will be the highest ever in peacetime. . . .
      My conclusion is that the USA’s economic policy response to the coronavirus outbreak will be very
      inflationary, even if the political situation and lags in the inflationary process will make this a concern
      more in 2021 (and perhaps 2022) than in 2020. Assuming that money growth does reach the 15% –
      20% band for a few months, the message from history is that the annual increase in consumer prices
      will climb towards the 5% – 10% area and could go higher.”

      • PostKey did you read the article I linked? If corona does cause double-digit inflation it won’t be due to money supply. Instead, it will be due to business closures and increased scarcity. That prediction you posted is based on a faulty theory of money.

        Additionally its only the highest growth rate for the quantity of certain types of money. At least 2/3 of USD exists outside the US and is created outside the US through bank loans. Much of M3 is tied up in fine print that cannot be measured accurately. This is part of the reason why Central Bankers switched to interest-rate targeting instead of money supply targets, we don’t really know the money supply and it’s quite hard to control with so much of it overseas. Companies often take some kind of USD asset and then leverage it 10 fold, but people seem to only complain about government-created cash as inflationary.

  13. Have you considered the role of ‘energy’ in money creation, distribution, and use? Since money buys ‘things’, be it food, computers, medical services, etc., there is energy being used to create and/or support the products or services bought by money. And since energy is in finite supply, especially the primary energy sources we use (fossil fuels), there seems to be a dilemma created through the exponential increase in money supply especially as debt/credit that pulls consumption from the future: infinite growth of money but finite energy (and associated resources) to support the things it buys.

    • Hi Steve,

      I have thought a great deal about energy, and how it relates to monetary phenomena. You can read about it in my book, Rethinking Economic Growth Theory from a Biophysical Perspective. Preprint lives here: http://bnarchives.yorku.ca/426/

      That being said, I don’t believe that credit/debt borrows energy consumption from the future. Debt and credit are what we use to distribute resources in the *present*. Obviously, using up natural resources now means we can’t use them in the future. But this has nothing to do with financial debt.

      Going back to Soddy, I find that ecological economists have misunderstood debt. They think the exponential growth of debt is a problem if resources don’t themselves grow exponentially. But Soddy failed to understand that prices aren’t constant. They can be inflated (as they have been historically) do effectively get rid of debt.

  14. Another approach is that Money does not buy *things* (aggregation problem/capital controversy) instead it buys property or access. Property isn’t a physical thing, you can just hotwire a car if you want to use one. But money guarantees certain social rights through the exchange. And then there are times where full purchase doesn’t happen at all, such as when money is used for memberships, rent, paying fines or taxes.

    The other thing is that less production can increase prices which can then increase the money supply (hyperinflation), such as the OPEC oil crisis. So oil here was less accessible, there were fewer “things” but prices and money went up.

  15. I think there are 2 main misunderstandings about money, and the funny thing is the more trained you are the worse your mistake is. Laypeople know money is important and it makes the world go round. Economists on the other hand think it’s just a veil over the real barter economy of stuff and it’s just another commodity like everything else. Economists talk about money in almost an entirely negative way with constant fears about inflation distorting the “real” economy of barter.

    Because we tend to treat it like some physical substance we get pretty shocked when we learn banks or governments can make it “out of thin air”. Promises and trust though, that has always had lots of value to our social species. We’ve always made promises out of thin air and no one thinks its magic. If we don’t focus on stuff and instead we focus on people and relationships we get a better understanding of money. Our individualism makes us pretty blind to that though.

    One consequence of this that no one has brought up yet is that both economists and the common folk are pretty ignorant about credit scores. Money comes from banks and we know the importance of credit ratings for getting a loan but we never dare analyze that black box!

    I wouldn’t call it “arbitrary” either. People don’t make or take promises through a random generator. I know you don’t mean that Blair, but I hope you can see that there might be better word choice.

    (my emphasis on promises comes from John Searle’s speech act theory and his work “the construction of social reality” where he relates it to money which is often defined as a promissory note)

    And that’s just the simple stuff! Money gets extremely complicated when we start thinking about all the different kinds of hierarchies it involves. Some money is better or more liquid than others. Perry Mehrling talks about this. And then there is the international hierarchy with reserve currencies, African countries dependant on IMF debt, and America as King Dollar.

  16. I disagree that traffic lights are arbitrary–in UK people drive on the wrong side of the street; in USA people drive on the right side of the street.

    This is why UK lost the USA during the boston tea party (see Velvet Underground Boston Tea party on youtube).

    ‘red light green light’ is also a famous song. These are not arbitrary conventions. (The only convention is c —the speed of light –i forget but maybe 3 million miles/ 2nd. while that convention (nothing goes faster than c) i routinely break it when i compete in running marathons and the olympics. Max Bprn shoed the speed of light can have any value it likes. )

    I view MMT as maybe ‘half a theory’ (or warmed over keynsianism). In a way USA is practicing this—just printing money and handing it out.

    I still havent gotten my 1 trillion $ stimulus check.

    (MMT peopkle are against UBI and taxes—some do support a land tax —they keep their money in offshore tax haves. Lafffer (of ‘supply side economics’ i–cut taxes, make work—is their hero.

    People like Randall Wray and Stephanie Kelton support ‘guaranteed jobs’for anyone who wants to work on their wage slave plantation. )

    https://en.wikipedia.org/wiki/Leptogenesis_(physics) explains how assymetry of traffic lights (red, green, etc.) derives from Prophecy (since renamed Profitry).

    I looked at your PhD thesis (has a pretty good list of references.

    I think D Graeber is severely overrated —a kind of anthropologist who missed half the field—he’s like a biologist who can name flowers and butterflies and trees but never heard of a ‘gene’ nor Fisher’s fundamental theorem (UK is trying to rename the ‘fisher lecture ‘ (fisher has at least 10 equations named for him because of his eugenecist and racist views).

    see the blog on lml.org.uk or https://lml.org.uk

    I’ve recently agreed as part of my presidential campaign to make Canada the 51st state of the USA.

    ‘Tar Sands? Our sands!!!’ ‘pipelines? My lines!!

    put a line in the sand.

    To save the caribous and grayling from freezing, the north slope—yukon, NWT, etc.—will be used as a nuclear weapon practice area–a little radioactivity never hurt anyone.
    in Fact you can get supersized caribous, fish , seals , athabascans, and polar bears due to the mutations and polymorphisms.


    • Holy mackeral! Where to begin…?

      “(MMT peopkle are against UBI and taxes—some do support a land tax —they keep their money in offshore tax haves. Lafffer (of ‘supply side economics’ i–cut taxes, make work—is their hero.

      People like Randall Wray and Stephanie Kelton support ‘guaranteed jobs’for anyone who wants to work on their wage slave plantation. )”

      Like most of what you say, this is half true. MMT opposes UBI as inflationary. That’s money exchanged for nothing. A job guarantee at least produces something, and can do so without reference to short-term profit, the guiding principle of most economic activity now. Child and elder care are not profitable, and infrastructure takes a long time to pay out…so we don’t do that stuff. Meanwhile, China has 10,000 miles of high speed trains.

      You are right in pointing out that MMT founder Warren Mosler lives in the Virgin Islands (a tax haven), but many MMT advocates don’t live there. Mosler did get some advice for his seminal paper outlining MMT’s principles from Arthur Laffer (who spells his name with only two “f’s”). Why is consulting Laffer the same as making him a hero? Laffer said cutting taxes would increase revenue. MMT says tax revenue does not provision government programs, increased revenue is not the point. Too subtle a distinction for you?

      Taxes make the money valuable. If you disagree, please tell us where people get the money to pay taxes if the government (the monopoly provider of legal dollars) does not spend those dollars first?

      And must we be chickens to smell a rotten egg? Even Sherlock Holmes claimed Watson’s less-intelligent observations spurred him to insights. Laffer could have just been a “useful idiot.” Mosler tells how he had his insight as he was in a steam room with Donald Rumsfeld, who referred him to Laffer. Does that make Rumsfeld a hero?

      Your assertion that MMT is a “half theory” reminds me of a Stephen Wright joke about how he had a full-sized map of the world. One foot equals one foot. He spent a whole summer folding it. They’re **all** half theories in light of that. No theory of any kind completely explains everything.

      Given your trouble understanding irony, I suppose you wouldn’t understand how a job guarantee would a) provide an effective minimum wage, and b) empower labor in any negotiation with capital.

      Anyway, your dog’s breakfast of objections is not just completely unconvincing, it’s silly. Please stop goofing around. MMT is critical path knowledge. Without it, the population will accept austerity as the inevitable destination of their public policy.

  17. Perhaps my comment is only a side note to the greater concept of MMT, but as I see it, the U.S. has practiced MMT since 1969 (the last year that we could pay the bills). In Principal, we don’t practice MMT, in Practice, we do.

    The funded and non-funded debt of the U.S. is north of $210 TRILLION. The current accepted annual deficit is north of $1 TRILLION with no near-future plan to reel that spending in.

    Again, In Principal, we (whoever we is) will grow the economy exponentially forever to a point of being able to pay those debts; which is physically impossible when measured against remaining resources.

    MMT, (abbreviated), is the ability to produce money (exchangeable capital) without having to account for it. That would work marvelously if there weren’t a physical side to the equation.

    I can explain the latter more readily with a question than with a long mathematical example. If everyone in the world had enough money to support a middle class lifestyle, and poverty was ended all the way around, would this planet be a better place to live? The answer is a resounding NO!

    The reasoning (logic) for the former is actually quite simple. If 7.7 MILLION humans had enough money, they would rid this planet of every known natural resource in a matter of a few years.

    80% of the people on this planet make less than $10 per day and a full 50% make less than $5.50 per day. So what if all of them made enough money to rise out of poverty? Our finite world just couldn’t stand that level of human success.

    • Hi colomike,

      My only qualm here is that redistributing income doesn’t necessarily require economic growth. A big thrust of the degrowth movement is that we should aim for greater inequality at the same time that we consume fewer resources. Whether we’ll ever do this voluntarily is, of course, an open question.

      • Fair question Blair. I believe that anything short of a frontal lobotomy will fail to reign in personal spending. Not only do most folks spend what they make, they borrow the future in the way of loans complete with the magic of compounding interest. Canada recently inched past the 100% mark of personal debt vs. GDP.

        The great majority of humans on the planet consume to the upper limits of their incomes, including two income couples that live against both incomes. Something on the order of 64% of Americans have not saved for retirement.

        Having a greater number of people with greater amounts of disposable income has, to my knowledge, never failed to increase spending. Increased spending consumes resources of every nature and results in increased economic activity.

        My comments are mathematical in nature and should not be confused with my beliefs regarding any sort of social fairness. Having the majority of the money and investments in the hands of a small percentage of social elites is certainly a major issue that will be addressed, one way or another. That said, money is not the controlling element.

        I do believe that de-growth is upon us from a forced physical aspect. Without $TRILLIONS upon $TRILLIONS of forwarded debt and false promises, we would have already reached zenith for a positive growth model.. MMT can provide more money to more people, but it can’t provide more resources.

        Great conversations.

    • Like most MMT critics, you’re arguing against straw men. Seriously : “MMT, (abbreviated), is the ability to produce money (exchangeable capital) without having to account for it. That would work marvelously if there weren’t a physical side to the equation.”

      No. All the money produced, and not retrieved in taxes is a) the dollar financial assets of the population and b) national ‘debt’… All of the “accounting” occurs per double-entry bookkeeping, just as your bank account is your bank’s liability even as it’s your asset. The money without having to account for it was the greenbacks Lincoln used to fight the Civil war. He issued it without increasing the accounting for national debt.

      Incidentally “paying those debts” is an absurdity on the face of it. Are you ready to march down to your bank and demand that they reduce their debt (i.e. the size of your account)? Not very sensible. National ‘debt’ is nothing like household debt. They are **FUNDAMENTALLY** different. See https://www.huffpost.com/entry/the-federal-budget-is-not_b_457404

      And no, producing more money does not produce more resources. MMT makes no claim contrary to that statement. Read Stephanie Kelton’s latest book, and you’ll see she’s very focused on the distinction between money and resources.

      It’s not a deep mystery that currently we have lots of idle resources (70% of productive capacity is employed…in San Francisco, there are five times as many vacant homes as homeless). Employing those resources to the benefit of the poor is what MMT advocates. A job guarantee, far from producing “wage slaves,” gives workers leverage in negotiating with their employers. It also produces something for money expended. The WPA, and programs in Argentina and India have proven this is a successful strategy.

      Anyway, I’d urge you to stop paying attention to the voices telling MMT is invalid and investigate the real item.

  18. Another way to think about fiat money in terms of relationship (rather than as an object) is to see it as a far more sophisticated and flexible system of corvee labour. The monetary sovereign can purchase anything for sale that is denominated in its currency of issue — that is how it provisions itself. By issuing more currency than it demands in return for taxes (the sum of all deficits that form the sovereign debt) the state creates a surplus for the private sector to accumulate so that individuals and organizations can save in the currency of issue.

  19. i dont think ‘money is a quantified obligation’ quite captures it. If I give you some money you are not obligated to do anything for me. Missing from this type of explanation is the fact that unlike many other animals, humans need other people to do things for them, and more than that, we have created social systems which increase these needs – for example, I need somewhere to live and food to eat but it is not legal for me to go onto some vacant land and build a shelter, or to kill some passing animal to eat. So we are motivated to trade with other people, and we accept state created money as a means of doing this trade because the state is able to enforce agreements. If you agree to fix my plumbing there is a state backed mechanism to ensure I pay you. The power ultimately lies in this power of enforcement, and also in the needs that people have. More than that, it relies on the belief in the power of enforcement, since in reality if a large number of people chose not to honour their debts the state could not practically punish every breach

  20. This is very well written, an excellent exposition in simple terms. I hope it will see wide distribution

  21. […] economicsfromthetopdown.com/2020  Why Isn’t Modern Monetary Theory Common Knowledge?     “I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.” […]

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