I have, for some time now, focused on understanding and sharing what economists had to say about needed monetary reform in a July 1939 proposal entitled “A Program for Monetary Reform” (PMR). Not just folksy wisdom from times past, this program was generally approved or approved with some reservations by 86% of the academic economists from 157 colleges and universities. The program is 42 pages long and resists summary description.
I am frequently asked, “How is that different than MMT?” MMT is Modern Monetary Theory. At the risk of wearing out your eyes or breaking Mystic’s OdioGo again, I will try to compare the main points of the program to what I believe are the main points of MMT.
Modern Monetary Theory is a “new” way of looking at Chartalism, hence “Neo-Chartalism”. Chartalism is the theory that money derives its value from the state. Money can be any medium of exchange that is issue by or under the direction of the state in exchange for goods and services consumed by the operations of the state. The money is called “charta” in the theory, hence “Chartalism”. The state then demands that money be paid to the state in the form of fees, fines, duties and tariffs, essentially taxation.
The essential read to understand Chartalism is “The State Theory of Money” (English edition 1924) by G.F. Knapp. Chartalism disposes the idea that money derives its value from precious metals. MMT places the 19th century Chartalism in our modern political and economic world.
In My Opinion, Chartalism or the state theory of money is correct. The history of barter systems and their transition or social evolution to money systems is misrepresented by enthusiastic supporters of the gold standard. Barter was never an efficient system and token coins were the invention of structured societies where there was state presence and enforcement, the state quickly capitalized on its role in money creation and the value of money increased because of the states fiat demand for money not because of the value of the precious metals that were coined.
Gold Standard -
Both MMT and PMR dispense with the need for precious metals. The Chartalistic view is that money derives its value from the state mandate, fiat. The 1939 economists dispense with the gold standard in PMR citing the many negative impacts of the gold standard on the economy and the value of money.
In My Opinion, both MMT and PMR are totally correct. This doesn’t exclude the possibility that precious metals could be used as commodities for barter-style exchanges, collateral for some types of money creation, a mutually accepted medium of exchange for some international business or an investment or savings.
Stable Buying Power -
The stable buying power of money is one of the key concerns of PMR economists. Central management of the money supply by a state monetary authority based upon the cost of a basket of goods and services is central in the program. The principle purpose of taxation is to prevent inflation and maintain the stable buying power. Ideally, the state would spend just enough money on operations to maintain money supply and taxation would be minimal.
MMT view stable buying power as a political consideration. Inflation would be the result of irresponsible money creation and spending by the state. MMT doesn’t concern itself with inflation except to the point that it is viewed in a negative way by savers whose savings would loose buying power. Taxation is one way that MMT proposes to limit inflation, but the principle purpose of taxation is to create demand for money. If the state does not tax its citizens the demand for money drops and the money looses its value.
In My Opinion, direct taxation whether it is a tax upon the person or their property (including their labor) is a serious problem. That doesn’t change the fact that taxation is correctly identified by MMT as the vary thing give money value and by both MMT and PMR as the tool for maintaining the stable buying power of money. Taxes should be indirect taxes upon privileged activities such as tariffs on imports, doing business as a corporation, or bank money creation. Most private property ownership and business activity should be exempt from taxation and regulation. I also favor the PMR position that stable buying power is important in money management.
Full Employment -
Where stable buying power is the dominant theme of PMR, full employment is the dominant theme of MMT. When willing human labor is not employed, the creation of real wealth in goods and services is unrealized. The state must use its money creation power to employ the labor that is not demanded by the private sector.
PMR also focuses on full employment as a goal, but takes the view that when money is well managed there will be sufficient employment in the private sector viewing unemployment as a symptom of deflation due to contraction of money supply. Where MMT calls upon the state to create money and employ people directly, PMR calls upon the state to create and spend money to stimulate some direct hiring by the state, but mostly hiring in the private sector.
In My Opinion, it is a genius observation by PMR economists that deflationary contraction of money supply leads to massive unemployment. I support the MMT goal of direct, full employment. I have concerns that a fully employed society will over utilize limited resources like coal, oil, copper and even water, but I will address that concern separately.
Fractional Reserves and Lending -
PMR focuses on eliminating the money creation power of banks and financial institutions other than the state. It calls upon banks to maintain 100% reserves of demand deposits (checking accounts) and to lend from savings and bank assets. Essentially, PMR creates a banking system were most banks are like old-fashioned savings and loans banks with some banks being investment banks.
MMT doesn’t worry so much about bank money creation so long as the money is created for productive purposes or is collateralized. The state gets to regulate bank money creation but doesn’t stifle demand for money by insisting upon a government monopoly on money creation.
In My Opinion, there is merit to both positions. I would insist that when banks issue credit, the same as money, the bank should issue both the principle and the interest at the time the loan is made. There should be strict limits on interest rates, fees and collateralization. And, the state should tax earnings from this kind of money expansion at a higher rate. I think that depositors should have the choice of full-reserve deposits subject to fees, incentivized fractional reserve deposits or savings that are known and understood to be loans to the bank that earn interest for the saver.
State Borrowing -
PMR would phase out and end the practice of borrowing money to fund the operations of government whenever the monetary authority was able to create sufficient money, at least at the federal level of government. This would happen because the government would only spend from excess capacity in a growth economy.
QUESTION, what does government do in a stable or contraction economy? Does the government use money creation power to compete for real resources, such as labor and materials, with the private sector? Is the “public good” better served when government prioritizes resource utilization than when business does so based on “profit motivation”?
MMT views government borrowing as a kind of savings in which the saver loans the money to the state instead of the bank. Money loaned to the state earns interest just like money loaned to the bank.
QUESTION, the state doesn’t need to borrow this money to pay for state activities because it can create all the money it needs. The state doesn’t need to borrow this money prevent inflation because it can tax it away. So why should the state borrow money? Is the state borrowing of money designed to compete with the bank savings and ensure a fair rate of return for savers?
In My Opinion, the practice of state borrowing to fund the operations of the government is a problem; it is a kind of usury where those few who have the most means benefit at the expense of the many that do not. It is part of an overall objection that I have to all lending but more particularly to lending as a means of money creation.
State Lending -
PMR calls upon the government to get out of the banking business and let the banks lend and insists that banks get out of the money creation business and let the government issue the money.
I’m not sure where MMT comes down on this issue but considering that it calls upon the state to borrow money from some, it might also call upon the state to lend money to others.
In My Opinion, it seems that PMR economists frequently emerged a decade later as being somewhat neo-liberal. Just My Opinion, but it seems that PMR economists were all about the strict definition of government power and viewed money creation as one of the those powers reserved to the government and the Fractional Reserve Banking System as something like a privatization of legitimate government power for profit by the banking community. Modern society has accepted the idea of the Federal Reserve Banking System being our nation’s “central bank” but in 1939 that was not a settled issue.
Program for Monetary Reform -
I might be a bit off in my assessment; some of the economists seem to have been progressives concerned about the social injustice of monetary system that was designed to transfer wealth from the many common people to the few wealthy people. Some where pragmatists who knew that the era of the gold standard was over and that we needed a managed money system; they wanted the government to manage the money in a transparent way instead of trusting money management to the banks. Maybe some of them just saw the math problem that created the boom and bust business cycles that benefited the banks and hurt the common people. A few might have seen the humanitarian potential for government no longer shackled and constrained by the limitations set on it by bank created money.
Modern Monetary Theory -
It seems to me that MMT offers something more than just sound money for an otherwise private economy.
- The full employment plan of MMT provides private business with a ready pool of skilled and unskilled labor while also providing laborers with social safety net. Anyone that wants to work can work and can get paid a modest but fair living wage to do so. Businesses must compete for labor by offering laborers and something more. It might be a higher wage, more hours, or less tangible rewards like additional education or work in an area of personal interest.
- The government also provided savers with a modest rate of return on a safe investment. Banks and lending institutions must compete for this money by both higher yields and safer investment. People would no longer have to put their money in high-risk investment schemes just to set aside for retirement. Also wealthier people and intuitions would find this an attractive way to hold money that would otherwise set idle. It might even end the roulette-style financial market forever.
- Stable buying power may not be the highest priority of MMT but it is on their radar and they recognize its social and economic importance even if modest inflation is unlikely to destroy an economy or collapse a money system.
- Social impact is a major issue for MMT, taxation is essential to maintain the value of money and prevent inflation, but MMT seems to recognize that regressive taxes that hurt those who least able to pay then are not necessary. The social impact of unutilized labor and all of the issues related to unemployment is the major emphasis.
In My Opinion, PMR and MMT are incredibly similar. I tend to lean a bit more toward MMT. I am a bit unsure about letting banks continue to lend money they do not have, even if constrained by better rules. I am also a bit concerned about government borrowing being a wealth transfer scheme. If banks couldn’t create money in the form of credit, there would be a higher natural demand for savings. But I like the idea of government stepping in to provide savers with a safe, lower yield alternative.
I would like to know how MMT affects tiered government activities. Much is said of the sovereign state level of government that we tend to think of as the federal level, but I don’t understand how this impacts states or provinces, counties and municipalities. Should monetary distributions be made to these levels of government such as apportionment? Should no-interest loans be extended to lower levels of government subject to repayment by local taxation?
And what about money as a public utility with a public dividend? Should there be some kind of general or direct distribution as a sort of public dividend on the overall productivity. That might require a bit more flushing out! But such a direct distribution could end the need to most other forms of social assistance, or it could just be largess from the community chest.