The misleading title is because one reader has suggested (thank you, Damien) that I might respond to an ‘Economist’ article on MMT (Modern Monetary Theory). Which seems to go under various headings ‘Magic or logic?’ ‘Nutty or essential?’ depending on which Economist edition you are reading.
Remarkably, it summarises MMT fairly well, whilst pointing out that some critics think it is crazy stuff. Rather like John McEnroe I find that their criticisms cannot (possibly) be serious. Everyone knows that the government prints its own money. The government creates money therefore. Where else do people (and the critics quoted are economists!) think it comes from? Perhaps they are immured in the ‘delicacy of monetary policy‘ – though that is of course smoke and mirrors if it means anything at all.
In the ‘Sunday Times’ John Looby suggests that central banks buying up government debt through QE has made MMT attractive: “The spectacle of central banks creating and spending vast quantities of money, without recourse to taxpayers or bond markets, has propelled MMT towards the mainstream.”
There we are: ‘vast quantities of money without recourse to taxpayers or bond markets’ is coming ‘towards mainstream’ so surely it must be, when it arrives, actual, reality.
So where does this money actually come from?
The usual suggestion is tax, but sometimes it is bullion reserves. I know of no other origin… Does anyone else have suggestions?!
Still, bullion is easy to dismiss.
A formal gold specie standard was first established in 1821, when Britain adopted it following the introduction of the gold sovereign by the new Royal Mint at Tower Hill in 1816. There were various ‘suspensions’ in the nineteenth century but in the end, of course the First World war put paid to it. It is true that Churchill, as Chancellor of the Exchequer, returned the country to the gold standard in the 1920’s but it proved to be financially disastrous, essentially owing to a decline in wages, because there was, effectively, not enough gold to back the currency. The general strike was the result. So in 1931 Britain left the Gold Standard. During the 1939-1942 period, Britain depleted much of its gold stock in purchases of munitions and weaponry on a “cash and carry” basis from the US and other nations. By the time of the post war Bretton Woods agreement countries agreed to fix their exchange rates relative to the U.S. dollar, central banks could exchange dollar holdings into gold at the official exchange rate of $35 per ounce.
In 1971 General De Gaulle who had been asking the US regularly to exchange his ‘dollar reserves’, for gold so he could repatriate it to France, found a request refused. Eventually President Nixon had to admit that there wasn’t any more gold available and in so doing, ‘temporarily’ took the world off the so called dollar based ‘gold exchange standard’. And so, ever since, we remain.
Thus money is nothing at all to do with precious metals – either gold, or Sterling’s historic backer which was usually less available than gold, silver.
Precious metals are a commodity – certainly bright and shiny and attractive to look at but with limited other purpose and, of course, nothing to do with money.
Now I have substantial doubts – which I’ve already indicated here, on the so called ‘Job Guarantee’. But I personally consider that that is outside of the core MMT consideration of where money comes from and how it operates.
So the next post is not only on ‘MMT towards the mainstream’ but also on the logic of spend and tax.