When reading Warren Mosler and listening to NiMa and Dylan Moore advocate for Warren Mosler’s explanation of MMT on two previous Think Liberty podcasts, one continually experiences the phrase “spending money into existence”. This expression fundamentally disturbs my understanding of economics and in exploring the term and its implications and after due consideration I wonder if we can either correct the language being used or restrict the referencing of MMT to fiat forms of money.
With the focus being on money, it is being explained that the issuer, in this as in essentially all cases government, is creating money out of nowhere and is merely incrementing accounts to do so. The extended explanation is that by requiring it as the means of paying taxes, the money is given validity and value. This is described as spending money into existence. I want to challenge this idea of that money obtains value without some corollary condition.
An economy must preexist a State. This must be true because how would the State’s agents and officers forego the cost of essential survival to create the money?
The first role of the State is typically to provide its jurisdiction with the security necessary for private economic actors to continue sustaining economic activity. To be able to focus on that, much of the State’s agents’ essential needs must be paid for so they are free to perform their services. This is an expression of the division of labor and specialization of skills.
This is done by transferring some surplus economic value from the private sector to the nascent public sector. Depending on the respective moment in history when a particular government came into existence, it may have depended on a pre-money system such as tribute. Tribute, like barter, is the exchange of or gifting of items of value in the absence of or instead of money.
A war chief’s government in a tribal example only became an inherited title after demonstrating its military prowess. Over generations, this fact might be subsumed by a tradition crediting the Office to a God but at its inception, the role had to be earned either by service or by conquest and most likely a blending of these activities. This Office is to be understood like all economic entities as a consumer of value from the surplus work of the community.
There is no creditable special dispensation from economic reality for an issuer of money as seems to be posited in the explanation of MMT. The economy must preexist and some surplus value must be “transmuted” before the State can create money. The State’s incentive to create money is to make its own consumption more efficient and as an additional service to the community, it’s jurisdiction as its production grows. To accomplish this, the State must transfer some of that consumed “tribute” value into the stored value of its money.
MMT On “Spending Money Into Existence”
It’s problematic in at least two ways to describe spending money into existence. A legitimate description of spending is an exchange of value without a calculable loss. For example, when a consumer spends a dollar, that dollar does not become $.99. The new user gets $1.00 and the consumer spends the dollar. Let’s leave the discussion of inflation aside. The word “spend” simply does not imply any change of value such as creating something from nothing. Whatever the issuer is doing to create the currency, it’s contradictory to describe it as spending unless the issuer is receiving something for it.
Creating money is an activity dependent on preconditions. The State is only able to pay the private sector in dollars because it was already consuming something from the economy, such as what was previously collected in tribute. The creation of the dollars is corollary to the State having accumulated value before redistributing value in dollars back into the economy. If I were an economics student seeking my Ph.D., my thesis might explore the conversion of seized value into the currency.
I believe it requires a willful suspension of reasoning to deny that the creation of money is not corollary to accumulated value even if it is in another form. Money is fungible after all. These conditions cannot be divorced and treated as silos. They are part of the very system that makes the State legitimate as an issuer of money.
Consider turning gold bullion into gold coins. The State does not give the gold value; the value of gold is intrinsic. The State provides verification services by minting it into a form that is recognized for its value in measurable terms such as 24 karat purity and mass/weight. By having State agents or State contractors perform this work, some stored value is spent to modify the metal. The issuer’s agents are paid for time and materials. There is no spending it into existence from a condition of non-existence. As with all products, work was employed to change a material and give it new utility. Why should this be different for fiat money?
Having proposed this contrary viewpoint of what is happening at the most fundamental economic level, I wish to reproach the argument that MMT is a theory of how all money is created. I can most generously allow that MMT is the explanation of how fiat money works, but not how all money works. Contrary to claims, it is not persuasive that it is how a gold-based money worked. I don’t know if it’s how a crypto-based money would work, but since crypto is based on a mining algorithm I don’t think MMT applies to it either.
The advocates of MMT as a blanket theory of money seem to be mistaking correlation with causation. However, this is not to challenge the actual monetary practices that Warren Mosler experienced and is describing.
I do not contest these important lessons of how ignorant State policy contrives the amount of money in circulation.
I am suitably horrified that the people that are given authority over the decision to create more dollars or to tax dollars out of existence are so completely ignorant of the consequences of their actions. For this, I am grateful for the tutelage we have received.
I do not contest that for expedience that the banking system is foregoing a ledger system to track income and spending the way an accountant does and the way both gold and crypto/blockchain are tracked, but calling this creation and destruction of money is more suggestive of a desire to create an exotic narrative. Another explanation is that the State’s agents are a combination of lazy and would rather not track those credits and debits too closely.
Furthermore, I do not contest that austerity is a bad idea when it is done without a radical reduction in taxes, especially income taxes.
Conclusion: What MMT Gets Wrong
In summary, nothing I have read or learned has convinced me that fiat money is somehow more flexible than a gold and silver based money. It’s merely more expedient for an issuer whose interests’ are perverse and far less restrained by the practices available to a fiat currency.
I disagree with the idea that this is something we should fix long-term or stop challenging. Fiat is a license for bad behavior and the outcome is unlikely to be controlled via any political system. Any money must be protected from the political system, not manipulatable by it.
I urge others to discontinue misappropriating the term “spending” by including it in the phrase “spending money into existence” with the implication that no value presupposed the alchemical conversions of previously collected value into new or replacement money. Even fiat money requires an economy before it can exist.
You can read more by Brian White on Think Liberty here.