For a few years now, Modern Money Theory, or MMT, has been the hottest buzzword in economics. The insights of MMT regarding our nation’s spending debate have been simultaneously misunderstood, disregarded, and celebrated. In this essay I will explain the central argument of MMT. I will explore why its conclusions are dangerous in the wrong hands, and show how a radical libertarian application of the same macro-economic relationships can feasibly support the ideas behind Proudhon’s “Bank of the People.” In the debate between centrally organized economies and those decentrally organized, the coordinating potential of democratically operated banks merits consideration.
The essence of the political process is coming to terms with the inherent trade-offs we face in a world of limited resources and unlimited wants. The idea that people can improve their lives by depriving themselves of surplus goods and services contradicts both common sense and any respectable economic theory. When there are widespread unemployed resources as there are today in the United States, the tradeoff costs are often minimal, yet mistakenly deemed unaffordable.1
MMT is an accounting explanation of what happens when the Federal Reserve, the US central banking system, adds money to the US economy (it also covers other countries with fiat currencies). Founded by Warren Mosler, its origins date back to Chartalism, first described by Georg Friedrich Knapp in his work, “The State Theory of Money.” I would like to return to a discussion of Chartalism below, but one main principle is a familiar concept: monopolies. A monopoly sets the price for whatever it provides, meaning that the price today is the same as the price in the future, and there is therefore no interest rate, or rate of return for holding onto the good. MMT claims this is the same relationship at work in monetary policy. Government is the monopoly provider and issuer of currency. Therefore, the government can set whatever interest rate they want, but the market cannot feasibly reward holding onto something that doesn’t become worth more over time, so any central bank interest rates above zero percent are effectively removing resources from the economy. This causes unemployment.
How exactly do higher interest rates remove resources? When business owners or entrepreneurs seeking to start new businesses take out loans, they must evaluate whether their business will be profitable enough to pay back the loan. Businesses that might have been able to turn a profit with a lower interest rate will not be started, and businesses that find themselves struggling may need to close when they might have survived with a lower interest rate. Limiting businesses to only those able to pay a higher rate unnecessarily hinders growth and exacerbates decline. This in turn causes unemployment because only the relatively more profitable business ventures will be taken, leaving others to seek employment from them if available. This also leaves those with capital and the ability to leverage economies of scale with a distinct advantage against smaller competitors.
The Origins of Chartalism
Georg Friedrich Knapp’s work in The State Theory of Money explains this unique theory of money, which often conflicted with the theories of the metallists of his time.
Debts expressed in units of value can be discharged by engraved pieces, either coins or notes, which have by law a certain validity in units of value. Such pieces are called Chartal means of payment, or money. The validity is independent of the contents of the pieces. Law proceeds from the State; money is accordingly a State institution.2
For an issuer of a currency, this means money must be spent into existence by the issuing agency first paying someone to do something, or exchanging the new currency for the old (as happens when one country conquers another). It is this threat of the use of force that causes people in one geographic area to use only the currency of whoever conquered them, usually by demanding it be used in a year to pay taxes back to the government in that same currency. It is by this means that governments provide the infrastructure and services they desire — they can choose to raise crops or raise armies as they see fit.
MMT Today
MMT’s predictions seem to be playing out in reality as well. The US government has been massively spending far beyond revenue on their military for decades, but we have yet to see runaway inflation. According to MMT, this is because taxes play a deflationary role, removing money from the economy (with different impacts depending on where it’s taken from). It takes massively mismanaging an economy of this size to result in high or hyperinflation. Considering the results of our economic policies thus far, we clearly have more options available to us.
Instead of buying bullets and bombs which are used to destroy people and economies, and cause a net loss to the world, those trillions of dollars could be invested in better schools, affordable or free college, social programs, hospitals, therapy, sex-education, or non-military technology. Does anyone doubt our economy would not grow more for it? It is the relationship of spending to our GDP and the profitability of those specific investments that is important, not solely the magnitude of the debt. You wouldn’t look around you at bridges and roads and say “where are we going to get the money to pay for all this? We must return it to zero out the debt which is hurting our economy!” Even the money you would use to pay it back would have to first be spent into the economy — creating a debt. Because most people fundamentally misunderstand the relationship between the government, taxes, and people(the issuer and users of currency), they think about these problems exactly backwards.
It makes sense why so many, including libertarians, are hostile to MMT. However, the macro-economic relationships that allow MMT to function remain valid even if we find a way to get an economy to use a new currency without the threat of force. As mentioned previously, this tool is dangerous in the hands of authoritarian regimes. The ability to spend without having to force any special interests to pay more taxes or cut any spending from current budgets is alluring. As anarchists, we know power corrupts absolutely, and unleashing the ability to spend trillions of dollars is as massively significant as it is frightening. But it’s important to remember that it’s already happening, simply without people having the power to direct the spending to better places. Anarchists too should recall it was Proudhon who famously elaborated on the idea of a “Bank of the People.” His idea called for loans with no interest or “at cost” for the administrative expenses and risks taken. While exact operations were less clear, it has always been an anarchist idea to end rent-seeking by destroying the advantages capitalists have held over labor. MMT makes those operations a lot clearer.
Can a libertarian approach to implementing this framework allow us to separate the benefits from the violence, giving us a weapon against the state that allows both individual autonomy and agency as well as collective decision making for concentrating spending?
I believe that in the debate between centralized and decentralized economies, autonomous, democratically run banks can use this tool stolen from authoritarian regimes. Once adopted, its ability to more fluidly and responsively react, combined with its members’ abilities to invest or divest at will, should provide radicals with a more powerful weapon than the one they stole.
Implementation
A transitional stage would allow for a voluntary entry into what becomes a market entity capable of working counter-cyclically — like a commune or union of sorts but with a currency to allow for internal transactions. I’ll return to what operating counter-cyclically means momentarily and how it’s useful.
Individuals in any current system might pool resources and funds to contribute to the foundation of this democratically-operated central bank. The issue with transitioning from any current fiat currency to a new one is giving people a reason to use the new currency. If an individual wishes to pay others, the currency being traded must be able to be used to obtain food, housing, medical services, and all the other things in an economy. Anyone offering a new currency must be able to demonstrate that there is an advantage to using the new currency in terms of buying power. Attracting more individuals to join the economy and offer their diverse goods and services to exchange for this currency is a necessary step. Once there are enough people willing to work for a currency, members can vote on who or what deserves more funds. Imagine a new society has formed and wants a hospital built — they can decide that the central bank creates a few million worth of new bills to attract a construction team and the hospital gets built, providing value to the society. The builders now contribute those bills to the rest of the society who are providing for their needs in exchange. They would only have taken the payment if they knew services they needed could be provisioned with it; with each new service added to the economy, the currency grows in value in real terms. Each new member has one more reason to join than the last.
If the decisions being made become unprofitable and the buying power of the currency decreases, the members must reign in their investments or risk losing out to other groups that are more profitable. It may be possible that individuals join and leave associations or are members of multiple simultaneously. This could be similar to something like dual-citizenship today.
To begin such a system, people could donate to the pool of resources and funds, and/or there can be a membership price. This allows individuals to exchange their membership fee for bills in the new currency and use the fee to invest in capital to get the economic leverage of the association started. The fee allows members to vote on how the future spending will be allocated. Use of the currency, of course, need not be exclusive to members — but voting power can incentivize further investment into the association. Something small like $500 could be an entry fee for membership, exchanging for new currency. I am aware Proudhon believed the Bank of the People should have no capital — this may be able to be achieved, I cannot say for sure — but it is not clear exactly what he might have meant considering he believed the accumulated talent of labor to be a form of “capital.” Proudhon would have had many disagreements with MMT, but he also was not aware of everything that we are today. I believe the establishment of the means of destroying capital are ultimately in line with the aims of the Bank of the People. Rather than Proudhon’s emphasis on many different Syndicates, it would give all members an equal vote on decisions directly (though they could still organize by industry if they wanted).
An additional incentive to non-members to join the banking association is that the currency, if properly managed in a growing economy, could become competitive with authoritarian fiat currencies. Once the buying power of the new currency is stronger than the competitors, there will be some market transition to the competing economy. This economy need not be geographically separate from non-members. In all likelihood, if competing associations adopt similarly informed models, there may be many associations overlapping, allowing individuals even more representation in how their resources and currencies are managed. They can join whichever groups favor their industries or are geographically convenient. Whereas Americans today have no say over where trillions of newly printed dollars go, under this system members could vote on investments and leave the association if they don’t like the decision, taking their economic contribution with them. This model of voluntary associations of tax-paying members can allow different groups with different ideas sharing the same geographic area to experiment in different strategies, and learn from each other, joining and separating as desired on an individual level, even on a vote-by-vote basis.
Unique Advantages
The advantages of a market entity capable of working counter-cyclically include, for example, the ability to respond to a pandemic by offering pay for needed projects like increasing medical infrastructure or production of masks in lieu of the pay people miss from shuttered businesses, quarantines, and lockdowns. As Warren Mosler has pointed out in his debate with Robert P. Murphy,3 markets are pro-cyclical. When things are growing people spend more and when things are declining people spend less. It helps to have a central bank capable of increasing spending leveraged against the economic capacity of an economy, to balance against the drop in spending in order to maintain employment. Unemployment arises when there are not enough dollars in the economy to allow less profitable opportunities to be taken. An association operating a central bank according to these principles can offer something Mosler has expounded upon called a Job Guarantee. This could be offered for necessary infrastructural repairs and other such things at a set wage rate below the prevailing market rate, such that in economic declines it is an alternative to unemployment; during recoveries, the set wage remains below what the market offers, allowing workers to resume employment in the private market as wages outbid them from the guaranteed position. Banks can offer zero-interest loans to new businesses or struggling businesses to assist in transitioning the economy from one industry to another.
Proudhon pointed out that the primary function of capital is rent-seeking. When a capitalist owns the means of production and the workers are unable to use their skills without the capitalist, it is the capitalist taking advantage of the unavailability of credit. If workers could get loans for the investments they need, they wouldn’t depend on capitalists. Only the productive would have the ability to profit. Proudhon strongly believed this system would demonstrate the fact that labor produces all value, and capital truly produces nothing. By putting economic power into the hands of the common people, capitalists must find some other way to be useful besides idly owning resources that anyone is capable of obtaining. MMT meets the requirements of this most anarchist of tactics. It asserts zero-interest rates as natural and preferable.
There’s no reason why anarchists should feel the need any longer to re-invent the wheel, so to speak, when it comes to banking. If what is desired is a means of coordinating resources that respects individual autonomy, MMT offers a modifiable framework. This tool of authoritarians, abused and underutilized, can be adopted into a truly functioning Bank of the People. Their best weapon is more powerful in the hands of the many than it is in the hands of the few.
In 1849, financial feudalism has its fortress: it is the Bank of France. A clever engineer has come to tell us that this fortress, which all thought impregnable, is not so. Let us have courage, then, and the temple of usury, no longer seeing the product of our sweat flow into its coffers, deserted by its priests, will collapse, taking the old world with it.4
- Warren Mosler, Soft Currency Economics. pp.1. <http://moslereconomics.com/wp-content/uploads/2018/04/Soft-Curency-Economics-paper.pdf>
- Knapp, Georg Friedrich, The State Theory of Money. pp 25. <https://socialsciences.mcmaster.ca/econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf>
- Warren Mosler and Robert P. Murphy, MMT vs. Austrian School debate. <https://www.youtube.com/watch?v=cUTLCDBONok>
- Proudhon, Pierre-Joseph, Bank of The People. <http://www.anarchism.pageabode.com/pjproudhon/bank-people>
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