Modern Monetary Theory

The Chartalist Theory of Money

Chartalism comes from the Latin word for token.

Advanced by German economist Georg Knapp (1842-1926) in his book “State Theory of Money” (1905).
He argues money arises from state power, not from the exchange of commodities.

The existence of the state that demands payment of taxes in the form it defines as money.

So long as only the government can issue currency, it can never run out of money.

It is the only consistent & logical alternative to Marx’s theory of money.

The term ‘modern’ in MMT refers to the theory, not that money had become ‘modern’ due to the actions of Nixon decoupling the $ from gold.

Adherents include James Galbraith, L. Randall Wray & Steve Keen.
They tend to be supporters of Keynes, who was sympathetic to Chartalism.

 

The Basic Macro-Economic Accounting Equation of MMT

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

MMT argue that anything the government accepts as payment of taxes is money.

The MELT concept, where tokens issued by the state replace commodity money as a measure of value is in fundamental conflict with Marx’s theory of exchange-value as the form of value.

 

Money & Currency

Gold coins can be currency made from the money material, but as they get lighter through wear & tear & ‘clipping’, they are not a good form of currency.

Money can be replaced with tokens made from cheaper materials, e.g. plastic notes.

When there was a gold standard, the currency had a legally defined value in terms of an amount of gold.
Now that has ended we have the illusion that the value of commodities is directly represented by ‘modern money’.

 

The Creation of Money

MMT argue the private sector cannot create net financial assets, as even fractional reserve banking creates both assets & liabilities.

To increase the net financial assets of the private sector requires a government deficit.

These come in two forms:
1. Government notes & bonds
2. Banknotes & coins

This neglects the fact that gold bullion was minted into gold coins for a long time.

Under today’s system, bank reserves consist of:
1. Legal-tender currency (vault cash)
2. Promises by the central bank to pay private banks on demand in legal-tender

The size of the reserves limits the quantity of bank money (promises by the private bank to pay account holders on demand in legal-tender).

The central bank creates reserves by buying a government bond. The cheque gets deposited at a private bank, which in turn deposits the cheque with the central bank.

MMT argue central banks have control over reserves. If commercial banks desire more the interest rates rises, which makes the central bank, through open market operations, create more reserves to maintain the targeted rate.

But history shows that central banks do not have control of interest rates.
In the long-run the interest rate cannot be more than the rate of profit.
It is determined by the balance between the amount of commodities & the amount of money material – gold bullion.
Rising gold production relative to general commodity production will tend to lower interest rates, & vice-versa.

The other factor that influences the rate of interest is the relative stability of the currency compared to the money material.
If the amount of currency is growing faster than gold, then interest rates rise.

In addition to open market operations, central banks can tweak interest rates through re/discounting.
Central banks can charge a rate on the loans they provide to commercial banks.

 

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