Modern monetary theory, with origins both in chartalism and the “functional finance” doctrine of the 1940s, is the freshest left-progressive gambit to justify radically increased federal spending. It is functional finance, promoted by post-Keynesian economist Abba Lerner, to which Mises refers in this 1950s passage from the new edition of The Theory of Money and Credit. Mises also quotes Beardsley Ruml, the New York Fed chair who in 1945 delivered a talk before the American Bar Association titled “Taxes for Revenue Are Obsolete.” This talk, later published in American Affairs, makes the protoargument for MMT: sovereign national governments, with full control over their treasuries and central banks, can issue money at will to fund government expenditures. Absent any need for taxes, the justification for their continued imposition becomes social and economic, not fiscal.
Everything old is new again. Mises could be describing the thoughts of an MMTer today:
For the naive mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s Treasury Department! The government, professors tell us, “can raise all the money it needs by printing it.” Taxes for revenue, announced a chairman of the Federal Reserve Bank of New York, are “obsolete.” How wonderful! And how malicious and misanthropic are those stubborn supporters of outdated economic orthodoxy who ask governments to balance their budgets by covering all expenditures out of tax revenue!
