MMT and the Wicksell connection

2 Nov, 2012 at 09:35 | Posted in Economics | 4 Comments

Reading L. Randall Wray‘s new book  Modern Money Theory – in which the author challenges conventional (neoclassical) wisdom on modern monetary theory by replacing the usual mystifications of the nature of money with a theory that shows what’s really going on in modern monetary economies – yours truly came to think of how most mainstream economists seem to think the idea behind Modern Monetary Theory is new and originates from economic cranks.

New? Cranks? How about reading one of the great founders of neoclassical economics – Knut Wicksell. This is what Wicksell wrote in 1898 on “pure credit systems” in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system

We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of “cash in advance” – LPS] …

For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the “pure credit economy” is a reality and not just a theoretical curiosity – MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem, since fiat money means that governments can always make more of them.


  1. Actually taxing does not give value to money per se. It supports a monopoly of a single species of money that the government authorizes and agrees to accept in payment of taxes. That is the definition of “fiat” money: some form of payment which the people are required by law to accept. Money of any kind has value if people are willing to exchange real goods and services for the money, and historically banks issued their own certificates of deposit and banknotes which circulated and were more or less accepted as money. In prisons or other environments where ‘official’ money is scarce, cigarettes function as money. Anything that functions as money, “is” money”, simply because people accept that it has value as money. It’s clearly beneficial that a nation uses a single form of money and that its issuance and value be regulated by the government. I’m not arguing for competing currencies. My point is simply that taxation is not the only or even the main reason that fiat currency is accepted by the people as “money” and therefore has value.

  2. “What gives them value is basically the simple fact that you have to pay your taxes with them”

    Value is one of those words like inflation that is Humpty dumpty like. Imposing taxation creates a demand for the currency – a low pressure area if you like. But you need the corresponding high pressure area if you want the wind to blow and cause some activity. And for that you need to have the taxing authority standing willing to buy something in exchange for its tokens.

    And that something is an hour of unskilled labour at a fixed price – hence the Job Guarantee.

    It is the purchase of something real with the currency, as well as the taxation burden that creates the actual value of a currency.

    • And that something is an hour of unskilled labour at a fixed price – hence the Job Guarantee. Neil Wilson

      Not necessary. Debtors already need fiat to payoff their debt to the counterfeiting cartel, the banks – hence Steve Keen’s universal bailout which he calls “A Modern Debt Jubilee.”

      There’s about an $8.5 trillion difference between US commercial bank liabilities and commercial bank reserves. With a ban on further counterfeiting (so-called “credit creation”), that’s about $8.5 trillion in new fiat that could be distributed equally to the entire population, including non-debtors, just to back existing deposits 100% with reserves with no significant price inflation risk since the total money supply (reserves + credit) would remain constant.

    • Governments purchase thousands of items apart from Job Guarantee labour, thus the the arguments for and against JG are entirely independent of arguments about tax giving the state’s money value and all that. Put another way, if labour markets were much more efficient than they currently are, there’d be virtually no unemployment, thus no need for unemployment benefits, JG etc. But the arguments about tax giving money its value would still be valid.

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