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Adherents of modern monetary theory (MMT) argue that money is “a creature of the state,” as the economist Abba Lerner famously put it back in 1947. As they see it, money initially comes into existence as a result of government spending and derives its value from the fact that it can be used to discharge the public’s obligations to the government. The policy implication—that we don’t need to worry about the budget deficit, because it can be financed through money printing—has led many to imagine that a panacea for all our economic problems has at last been found.
But is the dollar really a creature of the state in the way these economists imagine? There are two serious problems with this idea.
First, it is clearly not the case that the US currency originally came into existence as a means of covering some initial state expenditure at the dawn of the republic. Indeed, as Robert Murphy writes In his review of Stephanie Kelton’s MMT manifesto The Deficit Myth: “The MMT explanation of where money comes from doesn’t apply to the dollar, the euro, the yen, the pound…Come to think of it, I don’t believe the MMT explanation applies even to a single currency issued by a monetary sovereign. All of the countries that currently enjoy monetary sovereignty have built their economic strength and goodwill with investors by relying on a history of hard money.”
Second, in the modern world there can be little doubt that dollar creation occurs primarily through the banking system, not via payments to federal workers and contractors or transfers such as stimulus checks. Nor is it plausible that the currency’s value is derived from the fact that it is accepted by the IRS. After all, most international transactions are settled in dollars, the majority among counterparties with no US tax liabilities. Does anyone really believe that the elimination of US taxes would imperil the dollar’s role as a global means of payment?
The MMT story evidently has little relevance to most of the world’s currencies and would therefore be a poor guide to policymaking in any of the countries where it is being discussed. Yet it is not entirely true that it does not apply “even to a single currency issued by a monetary sovereign.” It actually applies quite well to the currencies issued by the former Soviet Union and its eastern European satellites through the end of the 1980s. It is also not without relevance to the Chinese yuan today. (For more on the socialist foundations of China’s current economic system, see my report “The China Model,” available here).
In the traditional socialist economies, money was conceived of as circulating in two circuits. The first consisted of payments among state sector entities, which would take the form of adjustments to state bank accounts required for deliveries of goods and services under the central plan. Here, money really only served as a unit of account. The second circuit involved cash flows to and from the household sector. Cash would be issued to pay workers’ salaries and make various other disbursements and withdrawn when households bought items in state-owned shops, paid bills such as rent on their state-owned apartments, or made bank deposits.
This second circuit is what MMT is about, with money being put into circulation through government spending and taken out when payments are made to the state sector. The only real difference is the character of the return leg of the trip, which the MMT theorists imagine to be a matter of paying taxes rather than shopping for daily necessities. They fail to realize that theirs is rightly a theory of socialist money, not money in a free enterprise economy. It is a theory of money as a vehicle of state control disguised as a manna from heaven with the power to guarantee freedom from want.
The MMT understanding of fiat currency is essentially that of Joseph Stalin, who claimed that “the stability of Soviet money is assured above all through the enormous quantity of commodities over which the state disposes and which are put into circulation at fixed prices. Who among economists would deny that such a guarantee, which exists only in the USSR, is a more real safeguard of a stable currency than any gold reserve?” Certainly not MMT economists! (This quotation can be found on p. 28 of Gavin Peebles’s A Short History of Socialist Money.)
Mises Institute fellow Lucas Engelhardt concluded a recent presentation on MMT with the rhetorical question “What is the path we are put on if we accept this theory as a practical matter?” For the theory’s policy prescriptions to make sense, we would have to begin moving toward an economic system to which it actually applies—toward a Soviet-type system where most obligations are obligations to the state because most of the productive assets are state owned. The answer to Engelhardt’s question is that we would be on the familiar path that previous attempts to replace market outcomes with state planning have invariably followed. We would be on Hayek’s road to serfdom.
Check out www.markdeweaver.com for more commentary by this author.
