Schumpeter — an early champion of MMT

22 Apr, 2019 at 11:11 | Posted in Economics | 5 Comments

Evidently this phenomenon is peculiar to money and has no analogue in the world of commodities. No claim to sheep increases the number of sheep. But a deposit, though legally only a claim to legal-tender money, serves within very wide limits the same purposes that this money itself would serve. Banks do not, of course, ‘create’ legal- tender money and still less do they ‘create’ machines. They do, however, something—it is perhaps easier to see this in the case of the issue of banknotes—which, in its economic effects, comes pretty near to creating legal-tender money and which may lead to the creation of ‘real capital’ that could not have been created without this practice.sch But this alters the analytic situation profoundly and makes it highly inadvisable to construe bank credit on the model of existing funds’ being withdrawn from previous uses by an entirely imaginary act of saving and then lent out by their owners. It is much more realistic to say that the banks ‘create credit,’ that is, that they create deposits in their act of lending, than to say that they lend the deposits that have been entrusted to them. And the reason for insisting on this is that depositors should not be invested with the insignia of a role which they do not play. The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not have. The theory of ‘credit creation’ not only recognizes patent facts without obscuring them by artificial constructions; it also brings out the peculiar mechanism of saving and investment that is characteristic of fullfledged capitalist society and the true role of banks in capitalist evolution. With less qualification than has to be added in most cases, this theory therefore constitutes definite advance in analysis.


  1. Isn’t ​Schumpeter ​simply explaining ​we have a fractional reserve​ system​? If the money was 100% produced by the government, the bank would still be lending the same amount of money and earning interest on it.

    ​Isn’t ​​the ​challenge understanding what money is? is​n’t money a public utility, a public resource​​, ​created by and issued by an arm of the government on behalf of everyone​.

    Like a ​public ​road, ​money is a ​public ​medium which helps everyone in the public and private sector conduct economic activity.

    ​Consequently, the people’s governments should not be borrowing the money from a private enterprise. The public should have the seigniorage. If a private oil company wants to pump and refine oil, it pays royalties for the publicly owned resources. ​

    The Nobel Prize winners James Tobin, Maurice Allais, James Buchanan and Milton Friedman ​had it right – government expenditures should “be financed entirely by either tax revenues or the creation of money.” page 4​ of ​

    Click to access AEA-AER_06_01_1948.pdf

    ​That money should come from the Central Bank. The people own it. If interest is paid, it will be returned for profit less the operating costs of the central bank. ​

  2. Robert S. Mitchell:
    MMT doesn’t downplay or deny the ability of banks to create new financial assets. It emphasizes it and writes a lot about it, putting it in their hierarchy, pyramid of money. But by definition they can’t be new net financial assets because of how MMT is using the word “net” – meaning public versus private here, with all private entities like banks combined, glommed together. Private sector liabilities and credits cancel each other out in this consolidation.

    It isn’t something proved by the National Accounts; that is getting things backwards, although exposition often does this misleading thing. The concepts elucidated by MMT (& predecessors) are used to understand the National Accounts, are what the National Accounts are built on and display. Investment = saving is not a misconception, but something to be understood similarly, as a simplified example of or paradigm for a real financial/economic system (ignoring government and or the external sector).

    • “Private sector liabilities and credits cancel each other out in this consolidation.”
      The problem is that Net Worth is technically a liability on a bank balance sheet but shows up as a net financial asset on a bank investor’s balance sheet.
      Financial instruments create assets that are valued higher than their liabilities. The derivative contract becomes a marketable asset whose market price easily becomes greater than the liabilities it must pay. The difference between the inflated asset valuation and the liabilities goes into Net Worth which makes it all seem to net to zero. But if you look at the bank investor’s balance sheet, the Net Worth bank liability shows up as a new net financial asset.
      The National Accounts are more than half imputed. The figures are carefully massaged to make orthodox accounting identities seem to hold. One example is the treatment of insurance companies: it is assumed by orthodox economists (including MMTers) that premiums must match payouts. But insurance companies make more from financial income not included in National Account data, than they make from premiums. National Accounts cannot reconcile this except by adopting very strange conventions that heavily massage insurance company inflows and outflows until it seems like insurance companies are financing payouts with premiums; but in reality, there is a lot of financial sector money creation going on that the System of National Accounts simply ignores.
      “a simplified example”
      MMT simplifies away Eurodollars. See [Eurodollar University](
      “the global reserve currency system as it is, not as it is written in the 1950’s era Economics textbook, needs banks, not central banks, to create monetary resources and then redistribute them all over the world. We cannot directly observe these monetary resources because they are bank liabilities.”
      Private banks expand their balance sheets and keep them expanded as they desire. The idea that because an accounting convention nets assets and liabilities to zero, therefore the circulating credit is not a net financial asset, ignores the business model of banks: put off final settlement for another day, indefinitely, thus keeping credit in circulation as long as they want.

  3. Yet MMT uses System of National Accounts statistics to prove that private banks can only create net financial assets if the government spends first. It’s the “savings = investment” misconception, just with “government deficits” in place of “savings”. In reality, banks create new credit as they desire and keep it circulating indefinitely. MMT denies or downplays this ability of private banks to create new net financial assets. Schumpeter, I bet, would say of course banks can create new net financial assets.

  4. “The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not have.” Debatable, that.

    If those with money in checking accounts (US parlance) or current accounts (UK parlance) shift money to term accounts, that cuts interest rates, which in turn encourages others to borrow from banks. Banks then create some of their home made money and lend it out. That money is then deposited in the accounts of others including those who have shifted money to term accounts.

    In effect, what happens there is that the extra money that savers want to save is given to borrowers shortly BEFORE savers get their hands on it. That seems to induce Schumpeter and many others to think that savers do not influence the willingness of banks to create and lend out money. I suggest Schumpeter & Co are not quite right there.

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