Info related to Modern Monetary Theory

Suggested Reading/Viewing

1. Dr. Stephanie Kelton’s presentation: Are There Spending Constraints on Governments Sovereign in Their Currency

2. Working Paper No. 778 Modern Money Theory 101: A Reply to Critics by Éric Tymoigne and L. Randall Wray Levy Economics Institute of Bard College November 2013

3. Debt-free Money and Banana RepublicsL. Randall Wray – New Economic Perspectives

4. Taxes are for Redemption, Not Spending – L. Randall Wray (2016) World Economic Review, 7, pp. 3-11

Materials on Federal use of tax receipts

5. Treasury Financial Manual Volume I Part 5 Chapter 2000

6. Statement of Federal Financial Accounting Standards 1: Accounting for Selected Assets and Liabilities – Federal Accounting Standards Advisory Board

7.Modern Money and the Job Guarantee part 1 of Pavlina Tcherneva The Job Guarantee

8. A Keynesian weighs in: Debt Derangement Syndrome

37 Replies to “Info related to Modern Monetary Theory”

  1. Most of the links above are in reference to my presentation at the Alternative Banking meeting on February 24, 2019.

    I’ve been following MMT-related ideas for a long time. As an economics student in the ‘70s, I was horrified at the societal loss inherent in idled capacity. We lose the bridge that might otherwise be built, the mining, the metallurgy, the aggregate demand that spurs investment and employment in industries down the line. But we also sacrifice people’s livelihoods, their skills, their dignity, their local tax base, their children’s shot at a better future. And for what? Lack of money to build the bridge? Green pieces of paper with decimal values and images of historic figures? Designed and printed by the US Government itself? It made no sense. Of what use are austerity, stagnation, involuntary idleness, if your expenditure is my income? Environmental and inflationary considerations aside, this aversion to deploy seemed an inexplicable and self-undermining policy vice.

    I was introduced to the notion of Functional Finance in 1978 via Abba Lerner’s book Flation. In 1979 I took what turned out to be my last Economics course, a microeconomics survey with William S. Vickrey, famed for welfare-maximizing auctions and proposals for congestion pricing. Vickrey, we may recall, was awarded the Bank of Sweden Prize in October, 1996 and passed away a few days after the announcement. I was cheered to find that late in his career my old professor had become an advocate for “chock-full employment” by any deficits necessary, an MMT progenitor. I was saddened that he would be unable to share his unorthodox conclusions about the virtues of public deficits on the global Nobel platform.

    Some time around 2006 I ran a web search on Vickrey to see who might be carrying on his work in Functional Finance and allaying the superstitions around federal government debts and deficits. Matthew Forstater and Pavlina Tcherneva had edited a collection of Vickrey’s macroeconomic writings, and thus I discovered the cohort of fine economists at UMKC and the Levy Institute, and Mosler’s Seven Deadly Innocent Frauds.

    I determined that to be an effective advocate my best approach would be to research these economists’ operational depictions, and see if I could find a correspondence with the system’s own public documentation. MMT’s factuality would be demonstrated not by “Ruml said something” or “Greenspan said something” but in dry documents like the US Summary General Ledger, the Treasury Financial Manual, and the Statement of Federal Financial Accounting Standards. Chapter and verse.

    And upon such research I concluded, by about 2011 and despite my support for a robust fiscal program, that several of MMT’s most distinguishing claims did not comport with the system’s own documentation in the US. These findings were the basis of my presentation in 2019, and will be the evidential foundation of my comments to follow here.

    That’s more than enough background. I look forward to engaging with Alt Banking friends on Zoom, and in well-supported discussion on this site.

  2. What points of MMT do you disagree with? The links you posted are actually good evidence of the MMT position.
    I’m not in a position to argue points but I think if I knew your thesis it would be helpful.

    I watched this today and Stephanie Kelton still seems to be a proponent: Presidential Lecture Series: Stephanie Kelton
    Presidential Lecture Series: Stephanie Kelton
    “But How Will We Pay for It? Making Public Money Work for Us” – Oct. 15, 2018 Our nation’s finances are a blistering topic. Democrats blame Republicans for “…

  3. A more interesting question to me and which you may find interesting is “how is money created?”. This is an entree into “how does banking work?”

    We can also discuss the cost to the Federal Reserve of all the Qantitative Easing post 2009 and why it was not inflationary.

  4. [C]onsider how operations are really done in the US—where the Treasury really does hold accounts in both private banks and the Fed, but can write checks only on its account at the Fed. Further, the Fed is prohibited from buying Treasuries directly from the Treasury (and is not supposed to allow overdrafts on the Treasury’s account) and thus the Treasury must have a positive balance in its account at the Fed before it spends. Therefore, prior to spending, the Treasury must replenish its own account at the Fed either via balances collected from tax (and other) revenues or debt issuance to “the open market”.

    Scott Fullwiler, Stephanie Kelton, L. Randall Wray

    Dan, would it be fair to say that this depiction of US Government spending operations differs materially from the characterization attributed to MMT in our discussion this past Sunday? I believe we heard that money is created ex nihilo by Congress in the spending act, that there is an unlimited overdraft, and that neither tax receipts nor bond sale receipts augment the US Government’s checkwriting balance. There was a lot going on, did I hear this right?

    Rgds – EconCCX

  5. At the Fiscal Sustainability Conference in 2010, the first item in Suggested Viewing above, Dr. Kelton maintained that when the US Government collects taxes, it obtains nothing it can turn around and spend, nothing but the extinguishment of its own IOU. And that when the payments are made in cash, the US Government sends the cash to the Fed, which shreds it and doesn’t book it.

    Paying taxes destroys money. It doesn’t give the government anything. It doesn’t get anything. It eliminates those liabilities. They are, for all intents and purposes, destroyed. [00:18:06]

    That’s if you pay with a check. What would happen if you actually sent the government your cash? Every once it awhile it seems like you hear about some crazy person who does this in protest. They get a huge sack, usually of coins just to make it really offensive and difficult on some poor bean counter. Let’s say you have a tax liability and it’s a hundred dollars and you just mail in a one hundred dollar bill. Apart from the shock of opening the envelope, what are they going to do with this? What do we do with this? Send it to the Fed. That’s where the Treasury banks. Goes to the Fed, and what do they do with it? They shred it. They shred it. Why would they shred it, I mean literally shred it, if they needed it to buy things, if they could use it to spend? Because they don’t use it to spend and they don’t need it to buy things. [00:19:06]

    So why bother collecting taxes at all, if the government doesn’t need our money, and this came up earlier. Lynn raised this question. Why bother collecting taxes? When we pay our taxes, whether by cash or by check, all we’re doing at the end of the day, is returning to the government its own liabilities. That’s all we’re doing. And they say, ‘Thank you very much’, and the transaction is done. They don’t get anything that they can turn around and spend. They get their own IOU back from us. That’s the end of the transaction. [00:19:40]

    So, why do it? Two reasons. One is, and this goes back to the Modern Money Theory that I began with, one is that taxes give value to the government’s money. If they were just to say, ‘We don’t need taxes in order to spend, so let’s suspend all collection of taxes’, that would undermine the value of the currency. It would take away the need that we have to acquire the government’s money. Why would we work and produce things for the government? Why would the government be able to move resources from the private sector to the public domain if it can’t get us to do that by virtue of the fact that we are willing to work and provide things to get the government’s liabilities? So, taxes maintain a demand for the government’s currency – that’s important – and the other thing they do, is they allow the government to regulate aggregate demand. Too much spending power can be inflationary, too little causes unemployment and recessions. [00:20:42]

    Dr. Stephanie Kelton at Fiscal Sustainability Conference 2010 (Part 3)
    (Original transcription from CorrenteWire, no longer posted.)

    Was Dr. Kelton’s depiction accurate? I looked to the public documents to find out. Here’s an image of a page from the US Governments Summary General Ledger as of September 30, 2018. Just a three page document.

    US Government Summary GL Account Balances with highlight

    As highlighted, cash is an asset to the US Government. And we see in item 812500 my favorite ledger entry. Even Mutilated Paper Currency is an asset to USG. Almost $27m as of September 2018. I do wonder how they managed to book that extra penny. Nonetheless, consider. Dr. Kelton says the US Government shreds good paper currency as a redeemed liability. The General Ledger shows that the US Government retains mutilated paper currency as an asset, collectively valued at almost $27 million. Which account should we believe?

    And why indeed, as Dr. Kelton asks, “would they shred it, I mean literally shred it, if they needed it to buy things, if they could use it to spend?” Answer is: they don’t. USG agencies follow the instructions in the Treasury Financial Manual linked above and here. They deliver it to a “commercial bank authorized to accept TGA (Treasury General Account) deposits.”

    Whereupon said currency is accepted for deposit at the commercial bank, then intermixed with currency from supermarkets, bowling alleys and laundromats, and bundled for customers by tellers. Some of it is returned to a Federal Reserve Bank, not for extinguishment but for credit to the commercial bank’s reserve balance. While the Government retains an asset entirely disconnected from the deposited currency: the IOU of the commercial bank, which will soon be obliged to assign some of its own reserve balances to the Treasury General Account to satisfy its liability.

    I would thus argue that Dr. Kelton has used a false operational depiction to support a false accounting depiction.

    Rgds – EconCCX

  6. As I previously mentioned, I am not going to resolve or defend specific statements by MMT aligned academics as they are more than capable of correcting the record as to their statements or writing. I do suggest that your arguments be forwarded to them as I’m sure they would appreciate the chance to clarify the record.

    The discussion point in this “we heard that money is created ex nihilo by Congress in the spending act, that there is an unlimited overdraft, and that neither tax receipts nor bond sale receipts augment the US Government’s checkwriting balance.” came from discussions from back in 2011 as noted below.

    The question came up about overdraft as “new debt”, please see:
    Treasury would continue to spend money, as instructed by Congress in the budget, and Treasury’s overdraft at the Fed would continue to rise. The Fed, for its part, would have two choices when it came to cashing Treasury’s checks: it could either simply print the money, or else it could sell some of its assets — it owns $1.6 trillion in Treasury bonds — and use those proceeds instead.

    Similarly this article discusses the same issue around the same time period:

    “Banks don’t make loans, banks buy securities” Prof. Richard Werner

    The below quote from:
    “The Fed is required by mandate to keep inflation low and stable and to stabilize the business cycle to the best of its ability. The Fed fulfills its mandate primarily by open market sales and purchases of (mainly government) securities. If the Fed wants to lower interest rates, it creates money and uses it to purchase Treasury debt. If the Fed wants to raise interest rates, it destroys the money collected through sales of Treasury debt. Consequently, there is a sense in which the Fed is “monetizing” and “demonetizing” government debt over the course of the typical business cycle.”

    So while the Fed can’t buy new issues directly from the Treasury, it can do REPOS with primary dealers to grant sufficient credit to allow them to purchase the new issues in Open Market Operations.

    Treasury securities are treated as interest bearing cash equivalents. I generally explain this as treasuries are money in a savings account whereas cash balance is more akin to a checking account. The Fed buys securities by updating its balance sheet with the security on one side (asset) and reserves on the other (liabilities), this creates new “bank credits” which is essentially money.

    The Treasury General Account (TGA) does receive money from tax receipts and bond sale receipts. But remember, new money is created through balance sheet operations when the Fed provides reserves to primary dealers (via repos or purchase of other securities) who then use that to purchase treasury new issues.

    I think MMT people may get into trouble as they do not always talk about the Treasury and the Fed as effectively one complex that does government finance.

  7. Dan, thanks for acknowledging your discussion claim about Treasury’s unlimited overdraft at the Federal Reserve Banks. But note this assertion is sourced not to law or praxis or MMT canon, but to a couple of opinion pieces. Salmon is amplifying a musing by Carney, and Carney isn’t certain of his position at all:

    I’m pretty sure the Federal Reserve would go ahead and credit the bank submitting the check with the deposit…Legally, this is a bit murky. It’s not clear that the Federal Reserve would be required to clear a check that exceeded the amount on deposit. It may be within its authority to reject the check…..The law is not exactly clear on this point.

    So I think we can call this a seat-of-the-pants point in conversation and a personal viewpoint founded on separate research. That’s to be expected in spontaneous discussion and we’ll be doing it all the time, which is why I’m glad we can follow up here. But if the claim does not come from MMT or public documents then I think we can safely put it in the rear view.

    That said, a prominent MMTer did suggest a way for the US to circumvent its self-imposed debt limit:

    [H]ere’s a better idea. We’ve got museums and national parks shut down. Why not sell them to the Fed? We can find a few trillion dollars of Federal Government assets to sell–and the Treasury can pay down enough debt to postpone hitting the debt limit for years. Heck, if we run out of Parks and Recreation facilities to sell, why not have the Fed start buying up National Defense? How much are our Nukes worth? That should provide enough spending room to keep the Deficit Hawk Republicans and Democrats happy for a decade or two.

    L. Randall Wray | October 9, 2013
    Flash from the Past: Why QE2 Wouldn’t Save Our Sinking Ship

    The Federal Reserve Banks acknowledge they’re not part of the US Government, and thus Wray is absolutely correct in recognizing that USG must convey something of value to these banks if it wishes to clear drafts on its accounts there. If the US is unable to muster the political will to issue Treasuries beyond the debt limit, then Wray proposes the US sell our heritage assets piece by piece to the Reserve Banks rather than hope for a “unilateral gift” as Carney suggests. USG is an issuer of debt and a user of money.

    Rgds – EconCCX

  8. So, I would like to understand what difference this makes and add some empirical questions:

    As I understand it, EconCCX is saying the Treasury issues bonds which the Fed can buy (though, not directly, they can facilitate public issuance and then buy them).
    Dan is saying that they don’t (or at least don’t need to) issue the bonds but the Fed will just provide an infinite line of credit.

    Some questions:
    1) Am I right?
    1a) in Dan’s case, are you saying that is what they are currently doing or just what they could do?
    2) I thought that EconCCX was right but have looked at Treasury auctions and they don’t seem to be nearly big enough to be issuing all the checks they are, particularly since they don’t have the usual 4/15 tax receipt bump.
    3) So, do you know what the Treasury/Fed have been doing the past month?
    4) I am curious why you think it would matter which is the case?

  9. Dan, I was curious about one other comment that you made. I think you said it was owned by the government. My understanding (which accords mostly with what the Fed itself says)
    is that the Federal Reserve Board is a government entity and the (up to) seven governors are appointed by President, confirmed by the Senate. However the Reserve Banks are private, owned by the banks. Where I differ from the Fed portrayal is that they, accurately, report that the banks are unlike most stock owners because they don’t receive most of the “profits”. That’s true but that doesn’t speak to control. Control of the FRBs is murky but banks do have a fair amount of influence on that. (Unable to resist citing this).

    In any case, if you have a different perspective on this, I’d be happy to hear it.

  10. Again I’m not here to speak for any MMT academics but only express my understanig and research. That said, the Fed can only buy securities so if you want them to buy a building or park it would have to be turned into a security of some sort. That seems silly as T-Bills are unsecured
    and more convenient. The debt limit is a self imposed limitation and can be changed at the will of Congress thus a political decision.

    The Fed owns Treasuries and if the TGA balance gets low, they could be sold to put money in the TGA. They are IOUs of the government and are thus fungible. They also represent a secured mechanism to back any overdraft facility the Fed decides on operationally.

    A general clarification: issuance of Treasury Securities does not create new money but only a transformation of existing cash to an interest bearing form.

    That said, the Treasury’s bank ( the Federal Reserve system is the government’s agent) can create new money when it buys securities by crediting the reserve (checking) accounts of Treasury sellers the Primary Dealers to ensure enough cash to buy new issues.

    At the central bank there are “checking” accounts (Fed Reserve Accounts) and “savings” accounts ( Fed Treasury Accounts) both types are on the Fed computers.

    The ownership issue is a red herring I think as being part of the system allows you to “create money” in the form of bank credit. The interest of the banks is to maximize profits from the “loans” but if USA wanted to spend on social programs how would the banks stop this?

    To Josh:
    1) see my corrected response
    1a) could do by selling Treasury securities
    2) I do not follow Treasury auctions links are appreciated
    3) no I do not know
    4) The basic argument heard often is that we “owe money” that has to be paid back – as if the USA was like NY State or a household. The only thing you get when you redeem a T-Bill is your balance shifted from a savings to a checking account at the Fed. The dollar is a fiat currency after all, it is not exchange-able for anything of value.

    The point of MMT from a macro perspective, at least to me, is that decision makers in Congress feel constrained as if they were running a household budget when it suits them ( paying for social programs but never for military spending) but this is not truly how the monetary system works.

  11. EconCCX – what do you mean by “USG is an issuer of debt and a user of money.” ?

    Are you saying that the Federal government must act like one of the 50 states when it comes to money?

    Just want to clarify to see if we have a fundamental disagreement.

  12. In one of the email threads, EconCCX says:
    “MMT is a neoliberal anti-tax project out to convey the false impression that federal taxes impoverish the citizenry without actually paying for anything. Its consequence is financialization and hence rampant inequality.”

    How is a “job guarantee” program or “employer of last resort” concept neoliberal? can we make these more progressive?
    This seems like a good talking point that is a political position more than a financial operational issue in my opinion.

  13. Dan, the St. Louis Fed piece you cited above concluded that the Fed is not “monetizing debt–using money creation as a permanent source of funding for government spending.

    The idea that FRB would be compelled to purchase Treasuries in unlimited amounts in order to maintain a policy rate of interest does have some antecedent in the MMT literature.

    To support the Fed’s operations, TT&L balances are called in to offset Treasury induced modest and temporary net additions to reserve balances. Operationally, when larger or more permanent net additions to reserve balances are made by the Treasury, offsetting sales of bonds are used to drain the reserve balances. Treasury bond sales have thus been referred to as “interest rate maintenance operations” (Mosler 1995; Wray 1998) since—just as without the TT&L system for smaller and shorter-term deficits—without them it would be necessary for the Fed itself to drain the same quantity of reserve balances through open market sales to support a non-zero federal funds rate target.

    Instead of the complexities of the TT&L system and bond sales, the more direct and more efficient method of interest rate support would be for the Fed to simply pay interest on reserve balances. With interest-bearing reserve balances (IBRBs), absent offsetting Treasury or Fed operations to drain excess balances created by a deficit, the federal funds rate would simply settle at the rate paid on reserve balances. The nature of Treasury bond sales as offsetting, interest-rate support rather than finance would be obvious. While the private sector is offered an interest-bearing liability of the government in the presence of a deficit to support a non-zero interest rate target, this does not necessitate that the Treasury sells bonds.

    Scott T. Fullwiler
    Paying Interest on Reserve Balances: It’s More Significant Than You Think

    Notice though that Treasury bond sales in the first instance are characterized as “interest rate maintenance operations” and emphatically not financing operations. Fullwiler proposed that rather than maintaining a policy interest rate by buying and selling Treasuries, it would be more direct and efficient for the Reserve Banks to simply pay interest on reserve balances.

    This became policy, of course, as explained in the Times by Binyamin Appelbaum. Interest rates are held in range by, as he says, paying banks not to lend, raising the opportunity cost of an adverse clearance.

    The Fed’s Policy Mechanics Retool for a Rise in Interest Rates
    By Binyamin Appelbaum Sept. 12, 2015

    The Board of Governors’ weekly H.4.1 reports show that Reserve Balances with Federal Reserve Banks have burgeoned since the financial crisis, from a mere $12.17B in Aug 2007 to over $3.15T in May 2020. A 258-fold increase.

    Every Treasury purchased by the Federal Reserve Banks augments Reserve Balances. And the Reserve Board maintains a policy rate of interest not by buying Treasuries but by paying interest on Reserve Balances, interest — now on $3.15T — that diminishes the profits these banks can return to the Treasury. So the effect is the same whether USG sells Treasuries to the general public and pays interest, or to the Reserve Banks and forgoes the return of profit: USG pays interest for use of its own supposedly sovereign money, and interest on the debt is a significant component of our tax bill.

  14. Dan, MMT avers that Federal taxation works as calumny doth per Shakespeare: it Robs me of that which not enriches him, And makes me poor indeed. MMT delivers an explicit anti-tax message to the public.

    Once we acknowledge that Federal taxation augments USG spending accounts, we can contrast the MMT argument, via Ruml, that Taxes for Revenue are Obsolete, with a policy founded on Eisenhower-era tax rates whereby Federal taxation simultaneously funds the public purpose and curtails the accumulation of dynastic wealth that is otherwise destined to control the political realm.

    So: the first way MMT-inspired policies foment economic inequality is via the tax channel.

    The second way inheres in spending beyond taxation, which I’ll call, without disparagement, deficit spending. I affirmed its desirable effects enthusiastically in the first post. But there’s an adverse consequence as well. To describe it I must introduce the topic of Debt Deflation, which I’ll also call Deposit Deflation.

    We rely for most of our spending on commercial bank credit, the primary constituent of M2. Like any liability, commercial bank credit vanishes when redeemed to its issuer.

    The money in your checking account is money the bank owes you, not money it is holding for you. So when a bank charges a service fee to your checking account, it obtains no money from you. Rather it ceases to owe some money to you. The money aggregate M2 is diminished by the stop payment fee or the safe deposit fee, whereas it’s unchanged if we spend a like amount at the hardware store. What Dr. Kelton depicts as happening when we pay Federal taxes actually does happen when we make payments to the bank, be it principal, interest or fee. Money is erased from the economy, and not in the temporary form of disintermediation that obtains when we withdraw cash at an ATM, but for real and for good.

    So consider a highly indebted society such as our own. Individuals, institutions, businesses and governments overwhelmed with debt to pay back to the bank. The multiplier effect that attends USG spending diminishes with the increasing likelihood that the next person we pass the funds to will be using them to repay bank debt, student debt, mortgage debt, credit card debt. Principal, interest or fee, that money is extinguished, the multiplier effect curtailed, the circular flow short-circuited.

    Now consider what happens when USG sells a billion dollars worth of Treasuries to augment the TGA, and directs the funds to what we’d both consider a vital purpose. USG gets one spend of the funds for which it has sold the Treasuries. Does the flood worker, let’s say, get the Net Financial Asset? No, she gets the bank account increment, the Debt Deflation money, rapidly dissipated by her debt repayments and those of those that she pays and they pay.

    USG, for its one spend, must repay that Treasury, with interest compounding unto eternity. The bondholder, most likely a financial institution or one of 1%, gets the Net Financial Asset. In exchange for the worthy, essential, magical service of transforming USG’s cumbersome IOU into an effortless tap-to-pay, the financial institution has an asset that will accumulate forever, via rollover of the Treasuries, the interest upon them, and upon the Reserves they engender. And another institution, the fees and interest charged to the bank customer. Who is risk-on as the 258-fold run-up in reserve balances makes it unnecessary to compete for her deposit by paying interest.

    This process is inequity institutionalized. Financial Conquest, as Michael Hudson would say. Not sovereign. Not stock-flow consistent. Deposit Currency Go Pfft! The MMT claim that USG’s red ink is “our” black ink is disgraceful demagoguery.

    So there’s the inequality part, folks. I hope most of you understand the argument, even if you disagree. BTW, Deposit Deflation is precisely why MMT-inspired policies are only moderately inflationary, and it’s also my domain name of several years. I finally put a preview site up in February; it has just one piece in it, elaborating on the paragraph on bank charges above. This discussion will fuel the next round. So many thanks to all who are part of it, and hope to see you on Sunday.

    Rgds – EconCCX
    (CCX for short)

    • EconCCX
      I think here you are arguing against the Federal Reserve and banking in general, but not necessarily MMT.

      Basic Question: Can the USG go bankrupt absent self-imposed limits like the debt limit?

      Does the destruction of money by paying down private debt perhaps cause a paucity of money for normal economic transactions? What is the antidote to Deflation?

      Still digesting some of your other post…

  15. I found an interesting piece and I think this quote sums up the MMT perspective quite well:

    “In the end the problem of paying for something is not a financial issue FOR A MONETARILY SOVEREIGN GOVERNMENT, it is a political and productive one. If congress is willing to do it, it will get funded; if it gets funded then comes the problem of finding the resources to implement the project.”

    CCX – I’m still trying to understand your basic disagreement with a statement like the above?

    Money and Banking – Part 6: Treasury and Central Bank Interactions
    Posted on February 14, 2016 by Eric Tymoigne

  16. Hearing and appreciate these terrific questions. Next piece up will cover Dan’s surmise that I’m arguing against banking and the Federal Reserve in general. Subsequent pieces will concern consolidation of Treasury and Central Bank, FedBanks as Agent to the USG, the Coin, and where the money came from to pay taxes in the first place.
    Today it’s cookout with girlfriend after about eleven weeks of social distancing. Clams, salt potatoes, watermelon and karaoke. Have a great day everyone.
    Rgds – EconCCX

  17. Some anticipation of MMT arguments in Abba P. Lerner’s Flation (1972). Page references are to the Pelican edition, 1973.

    The President's argument can simply be reversed. He could have patted himself and his predecessors on the back for having obtained such a great increase in incomes for the American public at the mere cost of $57-billion in deficits! (6)

    MMT: Public deficits are private surpluses.

    The great inflations took place when governments practiced deficit finance on a large scale, paying their bills with newly created money instead of raising the money they needed by taking some of the existing money away from people by taxing them or borrowing from them. … The same rules, applied in reverse, would also protect us from deflation. The government should not engage in surplus financing or destroy money. It should not raise more in taxes than it spends. But this was less important since there is not at all the same temptation for governments to engage in surplus spending and money destruction as there is for governments to run deficits and create money. The latter enables them to spend money without having either to raise taxes or get into debt. (33)

    Note: Lerner is presenting a “classical analysis”, “successfully taught by the economists of the last few hundred years.” The policy “should nots” are not his own view. I believe, and more importantly believed back in '78, that the depiction of spending by money creation reflected his own understanding. It's MMT's depiction as well. Money creation “enables [governments] to spend money without having either to raise taxes or get into debt.”

    This way of looking at the causes of inflation and deflation, and the simple policy principles that follow from it, was so successfully taught by the economists of the last few hundred years years that it earned the title of “Sound Finance” … The puritanical principle of not living beyond one's means was projected onto government by analogy. The raising of taxes by a government was identified with the earning of money by a worker or a business, so that spending by government in excess of its tax revenues was identified with an individual's spending more than he was earning, getting into debt and courting ruin. It became a commonplace to declare that deficit financing by the government would lead to bankruptcy! (34)

    MMT: US Government is not like a household.

    The inapplicability of this concept to government resulted in an inevitable vagueness as to whether it would be the the government or the country that was conceived of as being hauled into bankruptcy court and ordered by the magistrate not to borrow any more money without disclosing the bankruptcy, on pain of being sent to prison for fraud. (34)

    MMT: US Government cannot go bankrupt.

    Yet another instrument in the hands of the government (including the Central Bank which in the last resort must be responsible to the government), is the borrowing and lending of money. Treasury or Central Bank borrowing from the public has the effect of decreasing the quantity of money in the hands of the public. This is likely to bring about a reduction in spending by the public. Treasury or Central Bank lending money, or repaying old borrowings, has the opposite effect. It increases the amount of money in the hands of the public and induces them to spend more. (44)

    He does tacitly acknowledge here that the Central Bank is not part of the government. But it must be responsible to the government.

    I absolutely concur with the formulation that there is no “magistrate” that can proclaim the US Government to be in bankruptcy, and that USG can roll its Treasuries over indefinitely at some price. But thus it is by borrowing, taxation, fees, sell-offs and retail sales, along with a minuscule contribution from coin seigniorage, that USG funds itself. Rather than by ex nehilo dollar creation, which is the MMT position.

    Rgds – EconCCX

  18. CCX
    Apparently, the book you are referencing was written very close to the time Nixon took us off the gold standard internationally.
    Do you think that would have any impact on his arguments?

    I also don’t see how you quoting the book addresses questions like:
    Is the Government a user of the money like a business or household or the creator of the money?

    Are Bank reserves at the fed equivalent to a checking account and treasury accounts at the fed equivalent to savings accounts as MMT proponents contend? What needs to be done at the time of “cashing in” a T-Bill? would you ever receive anything more than dollars?


  19. No, Lerner was writing in the period between the Nixon Shock and the Oil Shock. He actually supported a purer regime of floating exchange rates than the banded peg the US first agreed to with its trading partners/competitors:

    On August 15, 1971, President Nixon stopped the pegging of the dollar to gold or to other currencies and the dollar floated…[O]ther countries, seeing the dollar float downward in terms of their currencies, would have to let their currencies float upward, in terms of the dollar….[T]o maintain domestic prosperity without regard to what happened to our foreign exchange rate[, a]ll we need do is allow the dollar to float by giving up our pegging activities. (162) But this is not what we did. In December 1971, we agreed to fix the exchanges again at a new set of parities in terms of each other….[I]t is doubtful whether they will be able to stand for long because the world will go on changing. (163)

    Rgds — EconCCX

  20. Dan wrote: Are Bank reserves at the fed equivalent to a checking account and treasury accounts at the fed equivalent to savings accounts as MMT proponents contend?

    No, not at all. This was a topic in the presentation, and I put these two images up to demonstrate the point.

    First is a balance sheet of the Board of Governors, the Federal agency in Washington DC. It’s commonly called the “Central Bank” but we can see here it isn’t a bank. It sets interest rates, makes monetary policy, and promulgates banking regulations.

    Board of Governors of the Federal Reserve System Balance Sheets w highlights
    via Board of Governors of the Federal Reserve System – Balance Sheets – 2017 – PDF

    We can see that cash is an asset to the Board of Governors. About $177.5 million. The majority of its liabilities are personnel related. Nobody has deposits here. The Board owns no Treasuries on the asset side of the sheet, shows no Treasuries as its own debt on the liability side. It certainly could own Treasuries; they’d be intragovernmental holdings. But it doesn’t.

    Compare this to the 2017 financial statement of the Federal Reserve Bank of Minneapolis. Reminder that the Reserve Banks acknowledge they’re not part of the US Government. USG owns not a single share.

    Federal Reserve Bank of Minneapolis Statesments of Condition 2017 w highlights
    via Federal Reserve Bank of Minneapolis – Statement of Conditions 2017 – PDF

    Cash is not an asset to FRBMinn, save for the coins. Treasuries and other USG securities constitute the bank’s primary assets. The bank has millions or billions face value of Reserve Notes in its vaults but they’re neither asset nor liability under FRBMinn’s ownership. The bank can easily shred its unfit notes, and order more (or not, depending on customer demand for paper currency), without materially affecting its balance sheet. Compare to USG, which we saw earlier books even mutilated paper currency as an asset.

    On the liabilities side, first item is, yes, Federal Reserve notes outstanding, net. Deposits owned by depository institutions are the bank’s second largest liability, which we commonly call Reserve Balances. The item Accrued Remittances to the Treasury represents the bank’s unpaid tax bill. The Treasury General Account is a liability of FRBNY, so here at FRBMinn Accrued Remittances appears to be the only debt to USG.

    Rhetorical question: If Treasuries are savings accounts at the “Fed” and reserve balances are checking accounts at the “Fed”, why are they on opposite sides of the balance sheet?

    For the MMT depiction, let’s cite the great Bill Black in New Economic Perspectives:

    [I]f the Fed is buying our debt, then it is not in fact debt.  It is simply an accounting game.  If Division A of Corporation Z “sells” bonds to Division B of Corporation Z there is no change in Corporation Z’s debt levels.  That fact should have led Whitehead and Romney to ask why Treasury was bothering to “sell” U.S. debt to the Fed.  The Fed’s surplus goes to the Treasury, so the Whitehead and Romney theory cannot be that Treasury has “run out of money” and the Fed has a trillion dollars in “extra” “money” that it is lending to the Treasury as a last gap effort to delay the inevitable default on U.S. bonds.  The Fed could simply send its hypothetical $1 trillion in “extra” “money” to the Treasury as a component of its annual “distribution” to the Treasury.

    There is no doubt that MMT imagines the Reserve Banks and the Treasury to be two “divisions” of the same entity, USG. But are reserve notes and reserve balances counted as USG debt? Answer: no. Are Treasuries owned by the Reserve Banks intragovernmental holdings? Answer: no, they’re counted as Debt Held by the Public.

    Federal Reserve Banks are franchises, not unlike the companies that are permitted to mine ores on US Government property. The Banks’ remittances were known as Franchise Taxes until 1933.

    Does Dr. Black imagine that the Reserve Banks can be compelled to credit USG with $1T in checkwriting balance without recompense?

    Reserve Banks’ liabilities are ultimately liabilities of whom? Dan or Josh, hope you’ll take a stab, and we’ll answer in a subsequent installment.

    Rgds — EconCCX

    • CCX
      I think the balance sheet(s) you give above of the Fed committee and Minneaoplis Fed is not really the thing to look at as it seems more useful to look at the holdings of the System Open Markets Account (SOMA), please see link below that shows roughly $3.9 Trillion of Treasury securities and about $2 T of agency securities. these holdings are allocated across all Fed Reserve banks as mentioned. All Open Market Operations are apparently conducted through the NY Fed.

  21. For our earlier discussion on unlimited overdrafts and policy rate of interest, I couldn’t locate the Fullwiler citation I was really looking for. Here it is now:

    MMT’ers are keenly aware that governments can and do write laws that their treasuries’ operations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the “open market,” is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, “specific” cases can and do differ from the “general” case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations. But, this does not mean that the operational function of the Treasury’s bond sales to aid the Fed has changed—to the contrary, with or without legal prohibition of overdrafts for the Treasury’s account, either the Fed or Treasury must offset flows to/from the Treasury’s account to achieve the Fed’s target rate (with the caveat that interest on reserve balances can potentially eliminate this necessity).

    Modern Monetary Theory — A Primer on the Operational Realities of the Monetary System | Scott Fullwiler

    Fullwiler acknowledges that the Reserve Banks are forbidden from providing overdrafts to the Treasury, but argues that they’re obliged to purchase Treasuries to maintain a policy rate of interest. Ah, but then that caveat: interest on reserves may eliminate the necessity. Which is precisely what transpired, so the necessity was in fact no necessity at all. At $3.15T in reserve balances, the Board can’t constrain interest rates by buying Treasuries. Though of course in some MMT depictions, rate management is the only reason the Reserve Banks buy ‘em, by the logic that neither taxes nor bond sales augment the limitless checkwriting power of the USG.

    Reserve Banks’ liabilities are whose liabilities by law? The shareholders.

    12 U.S. Code § 502 – Liability of shareholders of Federal reserve banks on contracts, etc.
    Current through Pub. L. 113-108. (See Public Laws for the current Congress.)

    The shareholders of every Federal reserve bank shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount of their subscriptions to such stock at the par value thereof in addition to the amount subscribed, whether such subscriptions have been paid up in whole or in part under the provisions of this chapter.

    via 12 U.S. Code § 502 – Liability of shareholders of Federal reserve banks on contracts, etc. | LII / Legal Information Institute

    So the TGA is ultimately debt of the Reserve Banks’ shareholders to the USG, and the FRB-owned Treasuries are debt of the USG to the Banks’ shareholders. Thus: the Reserve Banks aren’t the USG; they’re the USG’s creditors.

    When Reuters used a Freedom of Information Act request to investigate some cybersecurity breaches in the Federal Reserve System a few years ago, the reporters noted:

    The records represent only a slice of all cyber attacks on the Fed because they include only cases involving the Washington-based Board of Governors, a federal agency that is subject to public records laws. Reuters did not have access to reports by local cybersecurity teams at the central bank's 12 privately owned regional branches.

    Now we can certainly find careless financial journalism that describes the Federal Reserve System as a consolidated entity. But this piece accurately conveys that reporters who seek to use FOIL on the Reserve Banks will themselves be foiled. The Reserve Banks are privately owned, not part of the government, and any constraints on the government’s powers to draw on their shareholders’ liabilities are not self-imposed, they’re contractual and definitional.

    Rgds — EconCCX

    • Please see my latest comment concerning SOMA – where open market operations are guided by the FED Open Market Committee and holdings are allocated across all the Fed member banks.

  22. This may be a useful link as it allows individuals and institutions to manage their Treasury security holding:

    TreasuryDirect is a website run by the Bureau of the Fiscal Service under the United States Department of the Treasury that allows US individual investors to purchase Treasury securities such as Treasury Bills directly from the U.S. government.

  23. Thanks Dan. Your link showing SOMA Holdings is extremely helpful. Our image of the FRB-Minn balance sheet was indeed intended to represent only a microcosm of Reserve Bank assets and liabilities. It and the Board of Governors financial statement were summary balance sheets, whereas the SOMA page documents Reserve Bank holdings to the level of the individual CUSIP. I was initially a bit surprised to see FRN among the assets, but these are US Treasury Floating Rate Notes, not Federal Reserve Notes.

    A page combining the financial statements of the Reserve Banks as of 3/31/2019 is here:

    As a consolidated listing, this balance sheet subsumes the FRB-Minn, the SOMA facility, the Treasury General Account and all. In it we still see coins, gold certificates, government securities, and government-backed securities among the major marketable assets, and Federal Reserve Notes, Repos, Reserve Balances, and the TGA among the primary liabilities. The USG securities remain on the opposite side of the balance sheet from the liquid accounts: Reserves, TGA and currency. There’s no conflict at all with the sample images I displayed.

    A question though about the SOMA page, your own link. We see:

    The Federal Reserve System Open Market Account (SOMA) contains dollar-denominated assets acquired through open market operations. These securities serve several purposes. They are:

    • collateral for U.S. currency in circulation and other liabilities on the Federal Reserve System’s balance sheet;
    • a tool for the Federal Reserve’s management of reserve balances; and
    • a tool for achieving the Federal Reserve’s macroeconomic objectives.


    In the MMT view, why in the world would US Currency in Circulation require collateral?

    Hope to see you today on Zoom.

    Rgds — EconCCX

  24. CCX,
    “In the MMT view, why in the world would US Currency in Circulation require collateral?”

    When the Fed “creates money” it buys a security and credits someone’s reserve account with newly create “bank credit”/money.

    I think the collateral statement is reflecting that the securities are on the asset side of the balance sheet and the reserves created are on the liability side (reserves can be currency or book entry).

  25. Thanks Dan. I’ll hit it up. By coincidence Bill Mitchell has a two-parter this week of about 7000 words, Why do currency-issuing governments issue debt? Your own view on this question seems sounder than Bill’s. He has debt issuance as a gold standard relic that served at one time to help fix exchange rates, and, prior to interest on reserves, policy interest rates. Now primarily a giveaway to the well-to-do, at the demand of this powerful constituency.

    I’ll have a proper follow-up today

    Rgds – EconCCX

  26. Hi,

    Thanks for this engaged discussion. It would be great if you can come up with a concise summary (or even better small number of short references) of:
    What MMT is?
    Role of job guarantee in MMT
    Government funding in MMT
    Constraints on government spending in MMT

    (Other topics you consider important)

    Where you disagree on any of these issues, again a short description of what each of your perspective is.

    You don’t need to do this in comments, I’m thinking of you revising the page itself.

  27. Vernon maintains: The national debt is the liabilities of Treasury, but if we consolidate their balance sheet with The Fed, then Notes, Coins, and Reserves are also part of the national "debt".

    Yep, if we consolidate the balance sheets. Remember the riddle attributed to Lincoln. “How many legs would a dog have, if we counted his tail a leg? Answer: four. It wouldn’t make his tail a leg to call it one.” Reserve Bank liabilities are the debt of their shareholders, and some of them are USG assets. On what basis would we consolidate their balance sheets and consider Reserve Bank debt to be part of the “national ‘debt’”?

    There is one common justification worth exploring, which Dan provided, and which Bill Mitchell offers here. The Federal Reserve Banks, even if privately owned, are agents of the US Government.

    And so they are. Every bank is the agent of its customers. Reserve Banks print and mail USG tax refunds as USG’s fiscal agents, drawing down USG accounts as they do. Banks settle our drafts as our agents, and they collect from those who have paid us upon our endorsement. We manage both our assets and our liabilities via our banks’ online portals. But these remain our assets and liabilities. They appear on our balance sheets. We can’t consolidate our balance sheet with that of a bank, just because it is our agent.

    A bank as agent of its customers is described in the Uniform Commercial Code:


    … and in this article on the web site of the Federal Reserve Bank of Atlanta.

    An agent is not the principal’s subject. Every agent is itself a principal, within its own realm and upon its own balance sheet. Principal and agent have a contractual relationship. Amazon deals with publishers and distributors on the agency model, and we know they’d best read the contract carefully to understand who absorbs the risks of the sale and where the balance of power resides.

    For a vivid example of the agency in commerce, consider the options at your supermarket’s service desk. At mine, one can pay utility bills, procure postage stamps and bus tickets, effect Western Union money transfers, purchase lottery tickets, register no-contract cell phones for activation, and buy, and activate, dozens or hundreds of brands of gift card.

    These liabilities, assigned via an agent, reside on the books of their issuers. Were we to consolidate the books of principal and agent, we’d see the bus ticket as the liability of the supermarket, or Western Union on the hook for the supermarket’s paper towel bill.

    As it happens, quite a few commercial banks are agents of the US Government, as well as of their other customers. The IRS manual shows that our tax payments are processed by private banks, determined by where we’re instructed to send the check.

    A document on the US Navy’s site shows that Citibank issues the purchase cards that enable USG officials to obtain supplies and procure services to a threshold of $2000-$3000 without having to present a Federal Reserve Bank draft.

    And of course those Depositaries through which US Government agencies process their daily receipts are Financial Agents of the Federal Government, and are so described in Title 31 of the Electronic Code of Federal Regulations:

    So I hope we can agree that the Reserve Banks’ responsibilities as agents of the US Government provide no justification for consolidating their books with those of the US Government. Is there some other justification?

    Rgds – EconCCX

  28. Hi Josh — Thanks for this forum! I’ll follow Dan’s lead if he cares to summarize his points on the main page. My focus would of course be on MMT’s incongruence with the balance sheets and daily business procedures it purports to describe.

    I’d argue as well that a job guarantee cannot possibly be part of an operational money theory, although its false promise seems to be an excellent way of marketing such a theory. The first tranche of site links were mine for the presentation; Dan has said they represent MMT well, but of course if he has others they very much belong on the list.

    Other than that I’d leave the page as it is for at least another month or so. The comment cycle has enabled us to air our views with more nuance and goodwill than head-to-head contradictory summaries would likely permit.

    Rgds — EconCCX

  29. CCX, The consolidation of balance sheet was a convenience to help the viewer of the video, understand the transactions on the balance sheets as there were recurring/redundant entries that cancel each other out so for conceptual convenience those were eliminated through a virtual balance sheet consolidation, not an actual one.

    I’ll consider summarizing, but the ground rules CCX put out at the beginning favored his approach and I don’t think he has answered some of my fundamental questions:

    How is money created (bank/credit/money is created when a bank buys a security)
    Can the USA ever run out of dollars (No)
    What is received by a treasury security holder when they cash it in? ( credit in a bank account)

  30. Hi Dan. I answered your second question in the Lerner piece. There is no “magistrate” that can declare the US to be in bankruptcy, and the US can roll over its debt instruments indefinitely at some price. This is the Functional Finance of Lerner and Vickrey, where both tax receipts and Treasury sales augment the Treasury General Account and USG’s checkwriting power. Whereas in the pure MMT formulation, the dollar is a tax credit, Federal taxes are collected to maintain demand for the government’s currency, and Treasuries are sold for interest rate management (and, historically, for exchange rate management.)

    The two theories are incompatible with one another. Functional Finance recognizes that both tax receipts and bond sales augment USG’s checkwriting funds; MMT maintains that neither does, that US dollars are created ex nihilo by the Congressional acts of appropriation and spending, or by seigniorage. That’s Dr. Kelton’s position to this day. Analysis of USG’s daily business operations, and of the Federal Reserve System’s institutional and legal structure, supports the Functional Finance depiction and contradicts the MMT depiction.

    Your first question is easily answered. Treasuries are redeemed by the US Government, which draws down the Treasury General Account — its own account at FRBNY — and instructs FRBNY to reapportion its debt to USG in favor of the commercial bank whose customer has attained redemption of the T-bill. That bank thus compensated, it in turn credits the customer with a like amount as the bank’s own liquid IOU. The “Fed” does not redeem the T-bill and create the money; rather, FRBNY reapportions its debt among its customers per those customers’ instructions. FRBNY isn’t the USG and isn’t the USG’s money machine; it requires a security, a performing asset, a quid pro quo for the liquidity it provides its customers, including USG. Just as any other bank.

    Which brings us logically to your first question, which requires a more detailed treatment of banking in general. Next installment.

    Rgds — EconCCX

  31. A thoughtful person should probably have a nuanced view of banking, just as they should have a nuanced view of fertilizers and pesticides, technologies that at once feed us and poison us.

    The essence of banking is that the bank accepts something of real world value from the customer, and thereupon agrees it owes the customer a sum of money, payable on demand or for an agreed-upon purpose.

    A mortgage, for example, includes not just a recurring and timely promise to pay, but the bank’s contingent ownership of the mortgagor’s property. A car note entails the contingent right to repossess the customer’s car.

    The bank stands ready to discharge its liabilities in a manner of the customer’s choosing, the options varying with the type of account. For good reasons soon to be described, most of us would rather be owed money by a bank than hold government currency in any appreciable quantity. Money’s liquidity, its very moneyness, is a service that banks provide, even when the low-tech medium of exchange is a bearer asset issued by government.

    When the time comes to discharge some of the bank’s debt to the customer, most often the customer will instruct the bank to clear a payment drafted to the order of someone else. The bank will act as the customer’s agent in doing so.

    If the payee deposits her draft in the same bank as our theoretical bank customer, the bank can merely reapportion its debt to the customer in favor of the payee.

    But more likely the payee will deposit the check in another bank, whereupon the payee’s bank becomes the payee’s agent in undertaking to collect against the draft. If the document is in order and funds are sufficient, the payer’s bank will be obliged to convey an asset from its own portfolio to the payee’s bank to compensate the latter for augmenting the payee’s deposit.

    Which assets can the payer’s bank convey to the payee’s bank? Reserve balances serve as the net settlement mechanism these days. These electronically recorded liabilities of the Reserve Banks — institutions created only in the last century — can be converted to Federal Reserve Notes, paper currency that any creditor is obliged to accept. But the real world securities that the bank owns are collateral for reserve balances, and are routinely conveyed to others as well. The payer’s bank can convey her mortgage or car note to another bank, for example. The money in our accounts is ultimately backed by real property, fully or partially owned by banks.

    I thus view banking, and the money creation and indebtedness that is the product of banking, as decimalized capital barter. You and I don’t trade among ourselves in lumpy securities, difficult to ascertain and collect upon. We prefer to let the banks trade among themselves in these securities, differentiating among them by the pledger’s credit rating, the quality of the collateral, and the various encumbrances upon the pledged capital. We at retail rely instead on the banks’ own liquidity services, their ever more digitally convenient methods for effecting transfers, their time-proven networks and procedures for ascertainment and settlement.

    A bank would rather determine how valuable our house is than how valuable our gold is. An efficient society does not depend for the assignment of value upon a scarce material extracted from the earth. If we make an improvement to our property persuasive enough to the assessor, the bank will lend — will in fact create — more money against it. We can procure a package of almonds by swiping a bank debit card, and all the labor, expertise and investment that have harmoniously combined to deliver this parcel of nourishment to us depend in the end on our bank’s ability to convey some security, liquid or illiquid, to our convenience store’s bank.

    Governments in a capitalist system can create a crude and limited hand-to-hand currency by stamping a piece of metal and assigning it a value. But evaluating and assigning credit is beyond the remit of most governments, and we’d ponder carefully before allow a government official to become our banker, effecting each transaction and determining what we own and whom we owe without favoritism.

    Banking was through most of its history a labor-intensive profession, requiring bankers’ hours and tedious clerical entries. Today banking is technology and capital intensive, with proprietary clearance and discounting mechanisms that governments under our system can’t begin to match.

    These governments, some of them supposedly monetarily sovereign, have always been abjectly dependent upon the money of accounts, and the property rights that underpin them, for their daily business operations. Governments cannot project power — cannot load a musket, cannot mint a coin — without the ability to settle accounts with those at their service. Insofar as such governments do not own banks, they are obliged to surrender illiquid, interest-bearing securities to private banks in exchange for the liquidity each bank provides: the agreement that, upon settlement, the bank, not the payer, will owe the payee the amount the payer paid, and will service that liability accordingly. Governments, including the US Government, collect bank IOUs, not their own IOUs, in taxation. They augment their own accounts by redeeming these IOUs to the issuing banks. They then draw down their bank accounts in expenditure.

    Money in hand is easily taken from us. Bank money is secured by identity checks, encryption, recurring statements, surveillance, passwords, vaults, titles, card freezes, and the digital “paper trail.”

    Moreover, bank money makes our ownership accountable. Bank statements support lawful claims on property. A government coin doesn’t come with an ownership chain. Bank currency facilitates taxation, and — quelling the chaos and retribution that would otherwise obtain — enables us to prove that we paid the folks we claim we paid, and that we own the things we believe we own.

    So I’m happy to sing the praises of regulated banking. It’s an extraordinarily powerful and socially useful mechanism.

    But this group is well aware of banking’s exploitative aspects, such as redlining, TBTF, signature fraud and the capitalization of human enslavement. Banks take real world ownership of the products of human labor, capital, engineering and the natural gifts of the earth, and pay in paper. Interests and fees expand autonomically; the money of account is destroyed in the process of repayment, and banking can slip the bonds of regulation, rendering individuals, institutions and governments, in Frederick Soddy’s biblical invocation, hewers of wood and carriers of water for the financial interests.

    That is the basis for the historic and tribal injunctions against usury, at the heart of the conflicts among the major religions. Compound interest — autonomic indebtedness — engenders blood-and-soil nativism, the scapegoating of tribes, repudiation, banishment, revolution and murder.

    Reckoning with it is key to understanding the world in which we live.

  32. CCX,
    I would restate your commet of ” The essence of banking is that the bank accepts something of real world value from the customer, and thereupon agrees it owes the customer a sum of money, payable on demand or for an agreed-upon purpose.”

    to be:

    the bank accepts a security from the borrower ( a promise to pay ) in exchange for “money” in the form of credits that are fungible within the payment system. There does not need to be anything of value associated with the promise to pay and if there is it is merely a risk reduction technique by the bank.

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