Subtitle: A Primer on Macroeconomics for Sovereign Monetary Systems,
Palgrave, Macmillan, 2012, 294 pgs., index, bibliography, paperback
The author's objective in writing this book was the justify what he claims is
the current monetary manipulation practiced by governments ( rulers ) through
their central banks used to finance welfare 'states'. But with a careful
analysis the reader can see that it is an unintended exposé that reveals
what may actually be happening. The question the reader needs to answer is
whether this is only the academic concept and theory of the author or is it
believed by the Federal Reserve and included as part of the theoretical base on
which it decides on its monetary policy. I find no discussion of this theory in
Mishkin's textbook on Money and Banking.
Please go to the discussions of chapters 6 and 7 to learn what the book is all
about and then return to the previous chapters to read how the author seeks to
justify his recommendations.
From reading the first pages of this book I felt something was missing or
wrong. But this was not made clear until reading the final chapters. In those
the author makes explicit his adherence to Keynesian economic theory but he
does not write so explicitly that it is 'Chartalist' theory of the nature of
money stemming from George Friedrich Knapp's book The State Theory of
Money and related German Historical School authors - plus the follow-up
text by Abba Lerner "Money as a Creature of the State", which he does
reference and admire.
Throughout, he ignores issues that S. Herbert Frankel stressed - especially the moral aspects of
a money system and the history of the conflict between governments (rulers )
and societies over the proper role of money. He conveniently skips rapidly
through the history of money during previous centuries, when the role of money
and its creation was different than the situation he wants the reader to
believe is the only reality. For this history one should read Reden, Davies, Martin,Whalen, Kwarteng,
Graeber and others. And when his discussion comes
to the central issue of 'value' he punts.
For the best and clearest discussion of the nature of money, credit and value
please read Ludwig von Mises - The Theory of
Money and Creditand the wider treatment of related issues in his
Human Action. One simply cannot
understand political/economy with out mastering Human Action.
Professor Wray's book is a theoretical justification for increased government
spending and intervention in the national economy in order to reduce business
cycles and also 'solve' unemployment. He describes the modern government
process of creating money while exchanging it for its acquisition of goods and
services without stating that it is real assets created by private individuals
that the government is acquiring. He shows that governments issue credit as
payments and then impose taxes to receive back the same credits to balance
their financial accounts. He claims that this was always so, but it was not.
But he ignores the fact governments tax different individuals than those who
receive the credits - another method governments use to redistribute wealth.
So, it is actually a disguised theoretical justification for expanding
government control of every aspect of economic (hence political as well)
activity through government creation and control of the money supply. The
public is in this way taught to believe that this government manipulation is
not only justified but also actually is simply the reality of how the world
operates. It is the central issue that Ingham and
Frankel identified, that money is a component of a social system and has
greater roles than that conceived of in materialistic economic thought. In the
process of claiming that government manipulation of the money supply is simply
reality, he also claims that the public - that is everyone - is a debtor since
they live on credit supplied by the government. He denies that any private
source can create credit, but the history of money shows that this is false.
According to Dr. Wray, all 'savings' that individuals may have were provided by
government. Again, false.
The theory is outrageous. Among other things it promotes the concept that the
public OWES debt to the government - the rulers - in this way the coercive
ruler's demand that the people pay TAXES is called 'debt'. It asserts that all
'money' is created by and belongs to the rulers and that the rulers establish
its value both as a 'standard of value' and as the 'medium of exchange'. Which
results in the rulers being empowered to manipulate 'money' to suit their own
purposes. Note that he use the word 'policy' when he means 'politics'. This was
true of the ancient "Oriental Despotisms" (See Wittfogel), (including
Ancient Egypt, Mesopotamia and China) but was fought for centuries after people
became free with the collapse of the Roman Empire. Discussion of the origin,
control of, and use of 'money' may be found in many references listed here but
it beyond the limits of this review.
From study of this theory that purports to justify the Federal Government's
current monetary policy executed via the Federal Reserve it becomes clear why
it was critical in 1913 to pass a Constitutional Amendment to enable assessment
and collection of an income tax, essential as described in this book as one
side of the government payment by credit system. The bankers who created the
FED demanded a sure process by which they could count on the Government ability
to pay off debt generated by credit - history showed them clearly the frequency
of sovereign default. See Reinhart &
Roghoff about this. So the Progressives who wanted expansion of the money
supply so that they could then use it, agreed with this. But, note, the
original act creating the FED prohibited it from buying Treasury bonds
directly, the Congress people knew their apples. So now Bernanke and company
came up with the round about system in which the Treasury sells (auctions) its
bonds to selected commercial banks and then the FED buys the bonds from them,
Clever, yes, at least according to Dr. Wray. Another financial element that
came with the creation of the FED is the so-called debt limit. The 'hard money'
politicians realized that the purpose of the creation of the FED was to expand
government credit=debt. Prior to this event it was the rule that Congress had
to authorize EACH time the government proposed to create debt by issuing bonds
- that is exchange bonds for purchases. They hoped for a brake on debt
expansion. So they set a legal limit. Unfortunately the demands of World War
One immediately caused a need to exceed this new legal limit. Compare the Civil
War and World War One government financing method. (See
Gordon and Whalen) And once breached the debt then was
easily breached over and over.
The author insists that the idea that the government debt is a problem is a
'myth'. But what is the real 'myth'? The government story that its 'money' is a
'store of value' when the author insists that government can change the 'value'
of its money whenever it chooses. Even more disturbing is the manner in which
the author dismisses everyone who is concerned about expanding debt as
'hysterical' and disparages the well known record of medieval and early modern
finance as 'stories'.
I include below a list of some important references on the history and role of
The author sets the stage for his discussion of how money functions when a
government is the sovereign controller of its creation, distribution and
especially 'value'. He proposes to describe the current 'modern money
theory" (MMT), which he writes is not new but has not been adequately
taught to the public.
He writes, "To put is simply, we have uncovered how money 'works' in the
modern economy". ... "'Modern money theory' has spread the ideas
around the world"... "'Modern Money Theory' is now widely recognized
as a coherent alternative to conventional views."
But, he does not describe what the 'conventional view' of the nature of money
is. He simply ignores whatever the 'conventional view' was as being irrelevant
today. Indeed, the 'war' between those believing in social creation of money
and the champions of 'state' power has not ended.
He continues, "This Primer seeks to fill the gap between formal
presentations in the academic journals and the informal blogs." ...
"In addition, it will explicitly address another gap: the case of
Further, he adds, "Unlike my 1998 book, this Primer will not revisit the
history of money or the history of thought. The exposition will remain largely
theoretical." ... "In this Primer we will examine the macroeconomic
theory that is the basis for analyzing the economy as it actually exists. We
begin with simple macro accounting, starting from the recognition that at the
aggregate level spending equals income". "We then move to the
sectorial balance approach showing that the deficits of one sector must be
offset by surpluses of another. We conclude by arguing that it is necessary to
ensure stock-flow consistency: deficits accumulate to financial debt: surpluses
accumulate to financial assets."
Fortunately we have other references that discuss the history of money,
especially those by Ingham,
Davies, and Martin. The last sentence above is critical as
explanation of the current public concern about the U.S. federal debt.
Wray continues his outline, "We next move to a discussion of currency
regimes - ranging from fixed exchange rate systems (currency board arrangements
and pegs), to managed float regimes, and finally to floating exchange
rates". ... "We will examine how a government that issues its own
currency spends. We first provide a general analysis that applies to all
currency regimes, we then discuss the limitations placed on domestic policy as
we move along the exchange rate regime continuum. It will be argued that the
floating exchange rate regime provides more domestic policy space".
What does this mean? What is 'space' in domestic policy? It is an argument
against such a constraint as a 'gold standard' or ANY international monetary
standard of 'value'. The 'space' and the creation of 'floating exchange rate'
are the ability of government rulers to manipulate their currency to achieve
political goals. "Money' cannot at the same time be both 'floating' in
value and also a 'standard of value' that is reliable.
He explains, "The argument is related to the famous open economy
'trilemna' - a country can choose only two of three policies: maintaining an
exchange rate peg, maintain an interest rate peg, and allowing capital mobility
(meaning capital movement across international borders). Here, however, it will
be argued that a country that chooses an exchange rate target may not be able
to pursue domestic policy devoted to achieving full employment with robust
Bingo - here we see the full purpose of this book and its advocacy of a theory.
The MMT (and actually all economic activity) is means and the end desired is
political. Specifically here, it is to be claimed that adhering to the MMT
theory government can achieve sufficient control of the economy via
manipulation of money to create 'full employment' without stifling 'economic
growth'. After chapters devoted to monetary theory we come in the final
chapters to the full elaboration of how this political policy can be achieved.
But what is this policy? Clearly it is to place 'achieving full employment'
above maintaining a stable money value.
Then the author writes this remarkable comment. "This leads to discussion
of monetary and fiscal policy - not only what policy can do but also
what policy should do. Again, the discussion will be general because the
most important goal of this Primer is to set out theory that can serve as the
basis of policy formation. This Primer's purpose is not to push any particular
policy agenda. It can be used by advocates of 'big government' as well as by
those who favor 'small government'."
What is this? Double-speak? Yes, the chapters on 'pure' theory are couched in
general language that claims to elucidate the reality of how money 'works' but
it is entirely based on a particular philosophy of money - championed by Keynes
and other followers of Knapp - that money belongs to governments for their use.
The alternate philosophy (conveniently ignored) is that money belongs to
society, not governments. (See Frankel among
others). There is much more here. But Dr. Wray continues with this,
"Finally, we will explain the nature of money. We will see that logically
money cannot be a commodity; rather, it must be an IOU. Even a country that
operates with a gold standard is really operating with monetary IOUs, albeit
with some of those IOUs convertible on demand to a precious metal. We will show
why monetary economies typically operate below capacity, with unemployed
resources including labor. We will also examine the nature of creditworthiness;
that is, the reason why some monetary liabilities are more acceptable than
others. ... "Understanding what money is provides the first step to an
analysis of what went wrong in the events leading up to the global financial
crisis of 2007. "
There is more discussion on the applicability of this MMT to developing
nations, but the above provides the essence of the content and purpose. The
main problem for 'developing nations' is that they frequently finance
themselves by obtaining credit( that is buying bonds) denominated in the
dollar, pound or Euro) and the policies this author champions leads to a
'flexible', that is unstable, 'value' of the dollar and Euro.
Box - Definitions: An excellent idea - to provide these definitions at the very
beginning of the text. And they are quite revealing.
First are good definitions that separate 'money' as he will use it as 'measure
of account' from what he will call 'money things' for what is used as 'medium
of exchange' - A distinction long over due. But his purpose then is to be able,
correctly, to consider "IOU's that is credit balances as money. Which is
correct but not realized by many of the public.
Second is definition of currency, also needed, but he includes in this treasury
He has definitions for 'bank reserves', 'net financial assets', 'financial
debt', and 'three sectors balance'.
This is an interesting one and it is critical to his theory.
He divides the economy into three sectors - domestic government, domestic
private sector, and foreign. Separating government in this way is crucial to
the MMT. He then establishes relationships. He states that 'we know'
spending=equals income for the total economy. Well, this means that everyone's
income comes from someone else's spending and all that is 'spent' goes into
someone else's income. But then he divides both spending and income into that
which occurs in each of the three sectors and writes that if spending in one
sector exceeds the income of that sector then that means that the sector has
created a 'deficit' or if it spends less than its income it has created a
'surplus'. He does not state where either the spending or income is generated.
So then he claims that these 'surplus' or 'debt' must be offset by the opposite
condition in one of the other sectors or both. Ignoring the foreign balance for
the moment - this means that private 'surplus' must be created by government
'debt'. How convenient!. But I disagree - credit money that is created can go
into someone's income account without having been spent by anyone.
He creates a typical economist's equation to express this. E=spending;
Y=income. So Government Y - E + Private Y - E + Foreign Y - E=0.
Or Government balance + Private balance + Foreign balance=0.
But this is a crucial, false division in categories since government is not
separate from private - they are both parts of the same society's economy.
Government is merely a group of individuals headed by the 'ruler'. All
production is created in the private economy, while consumption is expended by
all, private and government. But Government creates no production. So both
Government income and spending come from the Private sector, neither are
generated Within something that can be defined separately as a
He then cites the definition of GDP, itself controversial. In which
'consumption (C) - 'investment' (I), and 'government' (G) and net foreign
import and export balance. But this is a definition of output, not input. But
this defining of the Government sector as something external to and separate
from the Private sector is the critical basis for his theory of how MMT
functions, as we will see below. Moreover, as Mark Skousen demonstrates in his
book, The Structure of Production,
there is much economic activity involving exchange of real assets for financial
assets (money) in the production process itself and this is not included in
A more appropriate categorization to make relationships clear is this: Consider
consumption and production. Everything consumed must first be produced
(created). Every live individual is a consumer ( and some dead people also)
while only a fraction of the population in a society are producers. Consumption
is mostly continuous, that is required daily. But production is episodic - some
production requires a year, or more than one year. All producers are consumers
but by no means all consumers are producers. Moreover, producers in general do
not consume all that they produce, while they do consume much that they do not
produce. Hence society survives by the continual redistribution of production
among producers and consumers. All savings is the result of retained
production, not consumed, generally termed wealth. And the increase of
society's wealth depends on at least a proportion of that retained production
being 'invested' by being consumed in the process of increasing further
The next categorization to consider is 'rulers' versus 'ruled'. The 'rulers'
are invariably consumers but not producers. All production is created by the
'ruled' who are of course also consumers. Hence all consumption by the 'rulers'
comes from extraction of part of the production by the 'ruled' which reduces
the quantity for the 'ruled' to consume. The concept of GDP with its category,
'G' is actually consumption by government extracted from 'C' and a reduction in
'I'. Now, in Dr. Wray's categorization 'domestic government' is the 'rulers'.
This is why his theory about sectors having 'surplus' and 'deficit' is designed
to justify the 'rulers' exappropriation of production from the 'ruled' for its
Chapter 1 The Basics of Macroeconomic Accounting
Dr. Wray condescends to inform the readers that his explanation of 'basic
accounting' is critical. As he writes, "But you cannot possibly understand
the debate about the government's budget and (critique the deficit
hysteria that has recently gripped many nations) without
understanding basic macro accounting. So be patient and pay attention.
The 'hysteria' I feel is hysterical laughter when I read this stuff.
"Section 1.1 The basics of accounting for stocks and flows".
One's financial asset is another's financial liability.
The stress is on financial, when one owns real assets there is no
So far so good. This is indeed a truism that many people do not understand. In
fact failure to understand this is a source of continual financial problems. So
many individuals do not recognize that what they call financial 'assets'
are also some one (or organization's) 'liability'. And that what the recognize
as their financial 'liabilities' (debts) are considered some one else's
'assets'. And the chain can be lengthy as 'assets' and 'liabilities'
proliferate throughout the economy. This is why when some entity defaults on
its 'liabilities' it can generate a cascade of failures as defaults on
'liabilities' destroy other's 'assets'.
Dr. Wray explains this in his discussion of bank deposits, financial
institutions, and households all having both 'assets' and 'liabilities'.
" Inside wealth versus outside wealth".
This is where Dr. Wray's explanation based on his categorization and theory
gets the readers into his mesh. Pay attention and think critically. Especially
note he is writing about financial assets - not real assets. We have to
quote this at length as it is critical.
The author writes, "It is often useful to distinguish among different
types of sectors in the economy. The most basis distinction is between the
public sector .... and the private sector". (I note this is a false
distinction) "If we were to take all of the privately issued financial
assets and liabilities, it is a matter of logic that the sum of financial
assets must equal the sum of financial liabilities. In other words, net private
financial wealth would have to be zero if we consider only private sector
IOU's. This is sometimes called 'inside wealth' because it is 'inside' the
private sector. In order for the private sector to accumulate net financial
wealth it must be in the form of 'outside wealth', that is, financial claims on
another sector. Given our basic division between the public sector and the
private sector, the outside financial wealth takes the form of government
IOU's. The private sector holds government currency (including coins and paper
currency) as well as the full range of government bonds (short-term bills,
longer maturity bonds) as net financial assets, a portion of its positive net
Wow, long but critical. But what does it mean? First, we can ignore this
artificial separation of the government sector from the private sector. The net
balance of financial 'assets' and 'liabilities' of the whole society is indeed
zero. And remember all this 'wealth' is netted to zero, in other words exists
only as accounting conventions. But by no means all of it has been created by
the government sector. 'Assets' and counter part 'liabilities' have been
created by the public sector itself. Then why and how does the private sector
come to have these government IOU's that the author claims add to the 'wealth'
of the private sector. The missing and inconvenient truth here is that the
government (rulers) creates these IOU's (that is credit instruments) out of
nothing and then exchanges them with the public (the ruled) for real assets
(such as food, buildings, clothes and battleships). So the public (ruled) are
receiving government IOU's (imaginary wealth) in exchange for giving up part of
its own produced real wealth. The government of course adds 'liabilities' -
that is debt - to its balance sheet. But to eventually balance its books it by
laws (coercion) assesses the public with Taxes which return the IOU's to the
Treasury and reduce this notational debt. Clever, no? But of course the
Government in recent decades has NOT balanced its books but has continually
issued more and more credit until it constitutes the great majority of the
money supply itself, while expanding its debt on either its ledger or that of
"A note on nonfinancial wealth a (real assets)".
The author here writes that real assets are one's actual wealth 'not offset by
another's liabilities, hence at the aggregate level net wealth equals the value
of real (nonfinancial) assets"
What he fails to mention is that the process he described above resulted in an
amount of that total aggregate of real wealth being shifted from the private
ownership to the government (rulers) for their consumption or retention as
wealth (or consumption by their favored voter groups..
"Net private financial wealth equals public debt".
This section is an elaborate explanation of the transfer of this financial
imaginary wealth 'assets' and 'liabilities' between government and private
sectors. But the author continues to ignore that these transfers are the result
of the government exchanging its created credit 'assets' for real wealth -
assets - produced by the private sector. And by defining this "net private
financial wealth" he makes the reader believe that he owes ALL of his
financial wealth to the government. Actually private individuals have financial
wealth created by other private individuals (or banks) even though financial
assets and liabilities do net to zero.
He writes misleadingly, "If the government always runs a balanced budget,
with its spending always equal to its tax revenue, the private sector's net
financial wealth will be zero".
True, indeed, when by his definition the government and private sectors are
separate and have separately defined accounting balance sheets, but what is
missing is that this exchange process results in the government having obtained
real assets (food etcetera) expropriated from the private sector for 'free'. He
here is trying to get the reader to believe that should the government ever
actually balance its budget private individuals would have zero financial
"Rest of world debts are domestic financial assets"
"Basics of sectorial accounting relations to stock and flow concepts"
Another note on real assets
"Conclusion: one sector's deficit equals another' surplus"
The author presents this in a convenient form: Domestic Private Balance +
Domestic Government Balance + Foreign Balance=0
Again, this is only financial balances and it based on his fiction of
there being separate Government and private sectors..
"Section 1.2 MMT, sectorial balances, and behavior"
In this section the author explains his theory based on his division of the
society into a private and government sector plus foreign. He wants to show
that 'money', that is credit, 'flows' between these sectors.
He writes, "It is not sufficient to say that at the aggregate level, the
private balance plus the government balance plus the foreign balance equals
The 'balances' are debt=credit, or asset=liability. And he further states that,
"the US private sector balance was negative during the Clinton Goldilocks
years while the government balance was positive". But this frequently
stated claim is also false. The real situation was that during the Clinton
years the total federal government debt INCREASED every year, one can read it
right on the web site of the Bureau of the Public Debt. His point is that he
believes understanding these sectorial conditions is necessary in order 'to
formulate policy'. But his sectors are an illusion of his own creation.
He continues, "it is not possible to say with certainty what causes a
particular sector's balance. It is quite easy to say that if the government
runs a surplus and if the foreign balance is positive then the domestic private
sector must by accounting identity be negative (running a deficit)".
"Explaining why the US private sector had a deficit during the Goldilocks
years is harder; it is even more difficult to project if and for how long that
deficit might continue." Then comes this admission. "Another way of
stating this is to say that a good understanding of MMT does not give one a
monopoly on explanations of causation. We must not be overly confident".
Perhaps the problem lies in the imaginary nature of MMT itself, just wondering.
However Dr. Wray forges ahead undaunted. Next comes:
"Deficits-savings and debt-wealth"
Undaunted he writes, "We have established in our previous sections that
the deficits of one sector must equal the surpluses of (at least) one of the
other sectors." And, "We have also established that the debts of one
sector must equal the financial wealth of at least one of the other
Here he is laying the ground work for a claim later on that the financial
wealth of the private sector is generated by the financial debt of the
government. He not only ignores but denies that the private sector can
accumulate financial wealth without government deficits mounting into debt.
Note also the term 'financial' - which ignores the role of the private sector
in creating non-financial wealth which can be and is exchanged all the time
during the production process for and from financial wealth.
Then come several dubious assertions that are central to Keynesian theory: a)
Individual spending is mostly determined by income. And b) Deficits
create financial wealth. And c(Aggregate spending creates aggregate
income.And d) Deficits in one sector create surpluses of another.
Dr. Wray repeats his equation - Domestic Private Balance (he means assets
versus liabilities) + Domestic Government Balance (again A vs L) + Foreign
Balance=0 and he means ONLY in financial accounts He then includes a 'Technical
note: in a side-bar box. with answers to several questions.
"1.3 Government budget deficits are largely nondiscretionary: the case of
the Great Recession of 2007"
First off lets get beyond this political mantra to reality. This huge category
of government spending is only 'nondiscretionary' because the politicians
exorcizing their discretion chose to create a category they could claim to the
public that is beyond their ability to control. They exempt it from the annual
political budget process - and they frequently slip other expenditures into
'off budget' accounting to make the budget appear to be balanced.
Dr. Wray continues to claim he has proven the same thesis over again. Now he
claims that while "household income largely determines spending at the
individual level, at the total economy level it is the reverse - spending
This concept leads him to his theory and claim that individual income is
determined by government spending. And he then cites and claims validity for
Keynes' famous theory of the 'paradox of thrift' which supports the theory that
there can be 'excess saving' and this is the problem that requires deficit
spending by government. The following paragraph is worth study.
He writes. "However, there is an issue of immediate interest given the
deficit hysteria that had gripped the United States ( as well as many other
countries.) HYSTERIA indeed. Pity the ignorant public. Then there is
"The national conversation (in the United States, the United Kingdom, and
Europe, for example) presumes that government budget deficits are
discretionary. If only the government were to try hard enough, it could slash
its deficit .... However, anyone who proposes to cut government deficits must
be prepared to project impacts on the other balances (private and foreign)
because by identity the budget deficit cannot be reduced unless the private
sector surplus or the foreign surplus is reduced."
Now pity the poor politicians who have no discretion and cannot reduce their
budgets lest they injure the public. What a farce. We all, public and
government, are locked in to a vicious treadmill. He continues by labeling
those concerned as 'deficit hysterians'. The more times I re-read this screed
the more agitated I become. But he continues, by claiming the US budget
deficits generated during and after the so-called 'global financial crisis'
(including graphs) were caused by 'automatic' rather than 'discretionary'
spending. Sure, 'automatic' rather than 'discretionary' because politicians had
previously used discretion to exonerate themselves from having even to discuss
spending with the voters. What a farce indeed! This section continues for
several pages complete with more graphs liked to more fallacious excuses. Big
blame is pointed at the 'public' for failure to save - spending more than their
income. But he opts out with "The cause is beyond the scope of this
section." The excuses become worse.
Then we have another side-bar box. "The paradox of thrift and other
fallacies of composition". "One of the most important concepts in
macroeconomics is the notion of the fallacy of composition: what might be true
for individuals is probably not true for society as a whole."
Of course, society is not composed of individuals.
"The most common example is the paradox of thrift: while an individual can
save more by reducing spending (on consumption) society can save more only by
spending more (for example, on investments)" But this confuses 'saving',
'spending' and 'investment'. But investment is created from the retained
earnings of producers, who are of course individual members of the private
sector. Government does not and cannot 'invest' nor 'save'.
"1.4 Accounting for real versus financial (or nominal)"
In this section Dr. Wray turns to explain the relationship of 'real' assets to
'financial' assets and 'liabilities'. He does get into reality.
"The states' monetary unit is a handy measuring device that we can use to
measure credits, debts, and something fairly esoteric we might call 'value'.
Bingo. For so many economists 'value 'is indeed 'esoteric' perhaps even
" 'Value' is more difficult. We need a measuring unit that is appropriate
to measuring the heterogenous things. We cannot use color, weight, length,
density, and so on. For reasons I will not go into right now, we usually use
the states' money of account. otherwise, we can only measure value in terms of
the thing itself."
He continues with some irrelevant examples. A full discussion of the fallacies
in economists' theories (or avoiding) 'value' it takes a lengthy discussion.
But the first, and simple, point is that the 'states' (read government) money
of account is not a stable measure of value because its value is always
changing. One cannot obtain a valid 'measure' of changing 'value' by using a
tool that itself is always changing. But fundamentally 'value' is not an
attribute (like weight of length) that can be attached to any material or
non-material thing, 'Value' is relative in time and space and in relation to
the supply and demand for all other things. It exists ONLY in the mind of
individuals. After lengthy discussion Dr. Wray turns to focus again on the
'monetary part of the economy'.
"Indeed, on what Keynes called 'monetary production' and Marx called M - C
- M, in which production begins with money (M) to produce a commodity for sale
(C), for 'more money' (M'). We focus on this because that is basically what
capitalism is all about and we are mostly concerned with how' modern money'
works in a capitalist economy".
This Marxist - Keynesian theory is false. And Dr. Wray is to be congratulated
for noting some of the problems with theory. But he should describe the reasons
it is false in detail and then not rely on it. But he proceeds to create more
side bar boxes in which he explains in detail 'accounting through balance
sheets'. All this is well and good. But his description includes his theory
that all the 'credit' generated in the exchange process between financial and
real assets comes from the government. It does not, now, nor did it during the
19th century when the American economy expanded greatly on the basis of
privately generated credit. For that matter, the creation of the Bank of
England in last years of 17th century enabled Great Britain to financed its
wars with France with private credit.
Next Dr. Wray creates another side-bar box in which he clearly explains the
accounting via balance sheet displays that shows how financial assets and
liabilities - that is credits and debts - balance on the 'books' of banks and
households. In this 'net worth' is the difference between assets and
liabilities. This is very clear. But he extends his balance sheets to claim
that the relationships between assets and liabilities must also apply to a
relationship between the total private sector and government. This refuses to
admit that the private sector generates its own credit - debt relationships to
fund investment. But what is really critical and not explicitly noted is that
in these financial balances one entity's assets are another (or several)
entity's liabilities and in reverse. And these relationships multiply into
unseen chains. The result is the 'snowball' effect when one entity defaults on
its liabilities that were the assets of another entity whose liabilities were
in turn assets of another thus bringing down the whole edifice of credit
"1.5 Recent US sector balances: Goldilocks and the global crash'
Here, Dr. Wray applies the theory to the actual financial crisis of 2008. He
states that he will demonstrate the 'causes' of the crisis. Naturally he has to
throw in political commentary on the side. He claims that President Clinton
inherited a period of 'substandard' national 'economic growth'. But economic
expansion had been significant since President Reagan. He claims that this
expansion began rapid increase again with President Clinton only to crash again
in the 1990's. He wants to apply his theory to 'explain' the causes of the 2008
financial crisis. He has to mention again 'Clinton's budget surpluses' which in
reality were merely concealed by claiming expenses were 'off budget'. But the
fundamental 'slight of hand' in his theory and the graph he provides is that it
does NOT have anything to do with causation. It is all about results. He
correctly demonstrates that the decade and more prior to 2008 was one in which
private debt greatly expanded as people were spending more than they produced.
And he shows the opposite balance that government deficits, (debt) also
expanded. He makes it appear that the eventual collapse was the fault of the
private sector's excessive spending. But he does not show that the government
balance sheet debt was its offset to the govenment pouring credit into the
private sector that enabled it to spend and accumulate debt. And of course he
rightly shows the collapse generated drastic reduction in private debt which
collapsed the government credit based money supply requiring the emergency
government creation of more credit. But all of this is results, not causes. The
cause was the government demand that the private sector buy houses and pay for
them with government backed or supplied credit.
"1.6 Stocks, flows, and balance sheet: a bath tub analogy"
Complete with diagrams of water flowing into and out of a tub, Dr. Wray
demonstrates the relation between flows - water going in and out - and stocks -
the quantity in the tub. All of this is to again claim that there must be a
financial net zero between private and government sector's assets and
liabilities. The claim is that ALL private 'saving' is due to government
'deficit'. Well, this is true in a way, but not 'all, it is enabled by a false
concept and definition of 'saving'. Real 'saving' is only the retained earning
from investment. True, much of the credit balance on the individual's bank
accounts in the private sector is credit supplied by the government, not
generated from investment, and is shown on the government account as debt. If
the government gives individuals credit in their bank account, which is not
spent, that is not saving - it is not a part of real wealth even though the
government calls it its own debt.
Dr. Wray recognizes public skepticism and tries to eliminate it in another side
bar box. - Objections to accounting identities. His 'explanations' amount to
sarcasm and slight of hand. But what all this 'analysis' which he admits
excludes much of the real - material - world is pure financial - that is
theoretical - manipulation. But, again, what he demonstrates without mentioning
it is that, indeed, very much of the financial wealth - on paper - that Forbes
and others cite as the 'wealth' of billionaires is really only an accounting
relationship to equal off setting and supplied government debt.
"Chapter 2 - Spending by Issuer of Domestic Currency'
Dr. Wray opens by noting that his explanation in Chapter 1 was the prepare to
examine the nature of modern money. And "Further, a key
distinguishing characteristic of MMT is its view on how govenment really
spends, based on a theory of sovereign currency. "We will examine
spending by government that issues its own domestic currency". This is
indeed a reality the public should well understand. It is directly a part of
the entire government budget process.
"2.1 What is a sovereign currency?"
- The author begins with the concept of 'money of account'.
He begins by averring that through history it was a situation of 'one nation -
one currency'. Well, that might cover the situation in, for instance, medieval
France, Italy and Germany, and ancient Roman empire, where they were not each
one nation and had multiple currencies. And he admits that there are plenty of
examples of the use of foreign currencies within a nation (for instance early
US). But then comes a telling comment.
"We will argue that the government has much more leeway (called
"domestic policy space") when it spends and taxes in its own currency
than when it spends or taxes in a foreign currency."
This quiet remark is shown to be the author's real purpose in all this, when,
in later chapters he shows how government manipulation of the currency
(actually money including credit) enables it to pursue its political objectives
(policies) despite political opposition. And there still are 'private
currencies' in the US. He reveals here that his objective in his argument is to
define the ability of government to have more "domestic policy space"
meaning ability to do what it wants politically.
"Sovereignty and the currency"
The author states that one of the key and most defended prerogatives of
sovereignty is its monopoly on the creation of its currency. It does this by
determining what currency will be acceptable for payment of debts to the
government itself. And in reverse it alone has the legal power to create that
currency (including both physical things like coins and abstract things like
credit accounts). Then, government decides itself with what currency it will
use in exchange for the goods and services it demands. Yet, more than one
currency frequently circulates in a country. It was the norm in medieval times.
And I personally have exchanged dollars for many goods in Russia at the delight
of the vendors there.
Then another side bar box for 'frequently asked questions'. To answer he first
returns to discuss the concept of money of account. And he holds the
concept of medium of exchange for later. But he does mention the vexing
situation in which our government in effect has authorized private banks to be
a main engine in the creation of the medium of exchange linked to the money of
"2.2 What backs up currency and why would anyone accept it?"
" The dollar is not backed with gold."
Do reserves of metal or foreign exchange back the currency? His answer, no and
in this he is correct.
But the dollar is the world reserve currency and even though its relative
'value' to other currencies continually changes on the FOREX it serves as
'backing' for other currencies in its role as bank reserve on which the
'fractional banking' credit expansion system relies. And the exchange of
physical assets in many countries is based on dollars even when the country has
its own currency.
"Legal tender laws"
Dr. Wray repeats his earlier point that some governments demand payment of
taxes and other bills in their currency (legal tender laws) so people are stuck
with it. But he also points out that there are also instances in which
currencies are either used without such laws or not used even with them.
Finally he punts and invites the student to 'ponder' why currencies are
accepted as a medium of exchange.
Seems to me the ultimate answer is 'trust' but that is not his answer.
Another side bar box appears in which Dr. Wray discusses gold and fiat money.
"2.3 taxes drive money Sovereignty and taxes"
Now Dr. Wray changes courses and insists that currency (he means money)
acceptance rests squarely on the government demand for it. "All that is
required is imposition of a tax liability to be paid in the government's
currency. It is the tax liability (or other obligatory payments) that stands
behind the curtain."
Well, yes and no. This is a fundamental precept of Keynesian economics, which
tried to ignore the existence of money in its theories. There are other
quantities of 'money' circulating in the country and accepted in payment or as
reward besides the government's currency and they are not accepted for payment
of tax or debts to the govenment. During the 19th century the US economy
expanded rapidly on the basis of credit money that was not acceptable for
paying taxes. But the author is determined to insist on his theory of the
exclusive role for government debt to enable the private sector to function.
What does government promise? What does a government IOU owe you?
A wonderful statement is next. "The 'promise to pay' that is engraved on
U.K. Pound notes is superfluous and really quite misleading... The UK treasury
will not really pay anything (other than another note) when the five-Pound
paper currency is presented." The same goes of course for the US Treasury.
The author then deftly mentions the origin of the Bank of England after King
Charles 'stopped the Exchequer' but then skips on.
He drops the hammer here. "We can conclude that taxes drive money.
The government first creates a money of account ... and then imposes tax
obligations in that national money of account. In all modern nations this is
sufficient to ensure that many ... debts, assets, and prices will also be
denominated in the national money of account."
Next another box in which the author attempts to support this 'conclusion'.
"2.4 What if the population refuses to accept the domestic currency?"
Dr. Wray repeats his key theory that making the sovereign's currency 'legal
tender' is insufficient. Rather it is the law that this currency must be used
to pay tax that is the critical requirement. And, then, since the public must
have this currency to pay tax it then reasons that the currency will be useful
for exchange with others. It is worth our repeating as well that this is the
reason that establishment of the Federal Reserve System as the engine for
government expansion of credit as money which necessities simultaneously
passing the Constitutional Amendment to authorize the Income Tax. During the
19th century the American economy did very well without both the Income Tax and
the Federal Reserve credit is money regimes.
The author then makes this cryptic remark. "Later we'll see what bank
reserves really are." He then devotes several pages to discussion of
various situations in which the public has more or less government supplied
currency to meet the governments ability to collect it back as tax. The onus is
on the public to accept and use this government currency. But the entire system
is designed to enable government to acquire more and more of the economy's
production of real assets in exchange for its self-created currency (again read
money including credit).
"The problem is not really one of government 'afordability' but rather of
limited government ability to mobilize resources because it cannot impose and
enforce taxes at a sufficient level to achieve the desired result. (more
spending) Government can always 'afford' to spend more (in the sense that it
can issue more currency), but if it cannot enforce and collect taxes it will
not find sufficient willingness to accept its domestic currency in sales to
Wow, the public needs to study this expression of what government is doing.
More to come in another box.
"2.5 Keeping track of stocks and flows: the money of account."
Stocks and flows are denominated in the national money of account
In this section the author elaborates on his previous description of stocks and
flows. He discusses wages and other income and the results of wages being spent
on consumption or saved. And he also brings in the banking system and the
intermediate agency in processing the exchanges.
Here is the kicker. "Like all currency, reserves are the government's
This is a critical fact the public does not understand, according to this
author. All that 'money' they see in their bank statements are actually IOU's
created by the government - that is government debt. And all those financial
assets that Forbes, Fortune, and other commentators show as part of the vast
'wealth' of listed billionaires are government IOU's as well. But what about
the millions of American dollars that form the actual reserves of dozens of
government around the world?
"The financial system as electronic scoreboard"
Dr. Wray is clear and succinct. "The modern financial system is an
elaborate one of record keeping, a sort of financial scoring of the game of
life in a capitalist economy." And he elaborates on details.
This makes it very similar to the monetary systems of ancient Egypt and
Mesopotamia in which accounts were kept by official scribes.
Then we have: Question: "Is all money debt"? - Answer - "Yes,
all money 'things' are debt. Again that is a topic for detailed treatment
For more read Graeber on Debt.
There is more: "Question"? What is the difference between money of
account and the medium of exchange?" Answer: "Think of it this way:
money of account is the measure (foot, yard, inch): medium of exchange is the
thing being measured (shoe, ear, earlobe). Domestic currency is the
government's IOU and demand deposits are bank IOUs, but both of these are
measured in the money of account... They are issued by quite different
entities. An IOU is a debt, so government IOU's are debts, just as demand
deposits are debts of the bank. We denominate these debts in the money of
account, and both of these types of debts can be used as media of
This 'answer' reveals the fundamental fallacy that underlies economic theory
and resulting financial practice. The author states, unfortunately correctly,
that the financial system is 'measuring' assets whose value constantly changes
with a 'measuring rod' that itself is also constantly changing, but at an
unrelated rate. There is NO established standard for financial measurement
similar to the international measures - (meter, kilogram, degree Celsius).
And., I repeat, 'value' what is being 'measured' is not an attribute of the
real assets for which it is claimed.
"2.7 Sustainability conditions"
In this section Dr. Wray explains how and why the government can continue to
function with an expanding debt. He provides the usual economic equations
describing various relative relations between total debt and GDP and interest
rates. His conclusion is that government can continue as long as the interest
rate it pays is less than the rate of growth of national production as
'measured' in GDP.
"Chapter 3 -The Domestic Monetary System: Banking and Central
"3.1 IOU's denominated in the national currency: government and
He begins with his continually repeated theory, "All 'modern money'
systems (which apply to those of the 'past 4000 years at least' as Keynes put
it) are state money systems in which the sovereign chooses a money of account
and then imposes tax liabilities in that unit" .
Well, Keynes to the contrary not withstanding, this is simply not true. This
'modern money' system is indeed 'modern' and did not exist for even 3-400 years
let alone 4000. (See references listed below.)
"IOU's denominated in national currency: government"
In this part the author discusses the issue of 'convertibility' of the
government's designated currency (money)
"Private IOU's denominated in the domestic currency"
In this he notes that private issuers of IOU's (including banks) promise to
accept there own liabilities - back as payment.
"Chapter 4 - Fiscal Operations in a Nation That Issues its Own
Dr. Wray describes his intended content: "we will begin to examine our
next topic: government spending, taxing, inerest rate setting, and bond issue -
that is, we will examine fiscal policy for a government that issues its own
And, significantly: "Note that it is not possible to completely separate
fiscal policy from monetary policy, especially in the area of the issue of
So the Treasury and FED do work together, despite the idea that the FED is
"4.1 Introductory principles"
Please pay close attention to the author's statements in this section.
Everything you were taught to believe is false and what you thought was false
is actually true. (Orwell?) I need to quote the author here at length in order
for you patient readers to see through it.
"Statements that do not apply to a currency issuer"
"Let us begin with some common beliefs that actually are false, that is to
say, the following statements do NOT apply to a sovereign
1. "Governments have a budget constraint (like households) and have to
raise funds through taxing or borrowing".
2. "Budget deficits are evil, a burden on the economy except under some
special circumstances (such as a deep recession)".
3. "Government deficits drive interest rates up, crowd out the private
sector and lead to inflation".
4. "Government deficits take away savings that could be used for
5. "Government deficits leave debt for future generations, government
needs to cut spending or tax more today to diminish this burden".
6. "Higher government deficits today imply higher taxes tomorrow, to pay
interest and principle on the debt that results from deficits".
"While these statements are consistent with the conventional wisdom, and
while several of them are more-or-less accurate if applied to the case of a
government that does not issue its own currency, they do not apply to a
What does this mean? It is critical to understand this. By 'currency issuer' he
means currency-creating monopoly. It is the basis for both the creation of the
FED and income taxes and for the government efforts to prevent any private
source for the creation of credit=money. Prior to 1913 the U.S. government did
not create the majority of the actual bank credit that financed American
economic expansion. Nor did the Bank of England do so initially for a lengthy
period. Nor did medieval and early governments.
"Principles that apply to a currency issuer".
"Let us replace these false statements with propositions that are true of
any currency-issuing government, even one that operates with a fixed exchange
Here the author exposes his approved version of current reality. It is the
reality, the question is, should it be approved?
1. "The government names a unit of account and issues a currency
denominated in that unit".
2. "the government ensures a demand for is currency by imposing a tax
liability that can be fulfilled by payment of its currency".
3. "government spends by crediting bank reserves and taxes by debiting
4. "in this manner, banks act as intermediaries between government and the
nongovernment sector, crediting depositors' accounts as government spends and
debiting them when taxes are paid".
5. "government deficits mean net credits to banking system reserves and
also to deposits at banks".
6. "the central bank sets the overnight interest rate target, it
adds/drains reserves as needed to hit its target rate".
7. "the overnight interest rate target is 'exogenous', set by the central
bank, but the quantity of reserves is 'endogenous', determined by the needs and
desires of private banks".
8. "the 'deposit multiplier' - is simply an ex post ratio of reserves to
deposits - it is best to think of deposits as expanding endogenously as they
'leverage' reserves, but with no predetermined leverage ratios".
9. "the treasury coordinates operations with the central bank to ensure
its checks don't bounce and that fiscal operations do not move the overnight
interest rate away from the target".
10. "the treasury cooperates with the central bank, providing new bond
issues to drain excess reserves or with the central bank buying treasuries when
banks are short of reserves".
11. "for this reason, bond sales are not a borrowing operation (in the
usual sense of the term) used by the sovereign government, instead they are a
tool that helps the central bank to hit interest rate targets".
12. "and the treasury can always 'afford' anything for sale in its own
currency, although government always imposes constraints on its spending".
Wow, so what does all this mean? Quite a few things. It shows that the creation
of the FED accomplished the goals of the 'progressive' movement to fund a
welfare state. It did this gradually. It brought the entire previously private
banking industry in the U.S. under its control. In that process it made the
banking system centered on the FED the executive arm of the treasury in
creating the real money supply and manipulating monetary policy to favor
government political objectives. In 19th century America the independent
private banks issued credit and frequently became bankrupt in 'credit crisis'
events. But there was no total, central banking 'system'. But creation of the
FED created a national banking 'system' thus creating the possibility of a
systematic credit failure. As is apparent from other sections of the book, the
private banks that stand in the favored priority position in the bond sales
process mentioned above are enabled to extract sizable fees and commissions
from each transaction to fund themselves and enrich their officers. And they
are also enabled as the 'house' to 'play' the secondary bond market to extract
Also, the author mentions that government is able to 'spend' and to 'buy'. This
means the government is exchanging its self-created credit for real assets
(goods and services) from the private sector which produces them. The
government consumes real assets produced by the private sector and when it
'balances' its books by taking back all of the credit via taxes it has in
essence obtained real assets for nothing. It is not 'crowding out' the private
sector by 'borrowing' but simply confiscating assets from the private sector.
The author hastens to add that he is not advocating that government 'buy'
everything it can. And he further comments. "These principles also do not
deny that too much spending by government would be inflationary". And he
notes that there may be effects on exchange rates.
"4.2 Effects of sovereign government budget deficits on saving, reserves,
and interest rates".
"Budget deficits and saving"
The author writes, "Recall from earlier discussions in the Primer that it
is the deficit spending of one sector that generates the surplus (or saving) of
the other: this is because the entities of the deficit sector can in some sense
decide to spend more than their incomes, while the surplus entities can decide
to spend less than their incomes only if those incomes are actually generated.
In Keynesian terms this is simply another version of the two statements that
'spending generates income' and 'investment generates saving'. Here, however,
the statement is that the government sector's deficit spending generates the
nongovernment sector's surplus or saving."
But, Keynes' concepts here are false and Wray's use of these in his government
- nongovernment categories is also false. Wray's purpose again is to convince
the public - private sector - that their 'saving' is courtesy of government
created deficit (debt). This is a false manipulation of the concept of
'saving'. In reality 'saving' is ONLY created by producers -it is the retained
earnings held out from the production process and not consumed. Keynes' idea
that 'spending generates income' is false. Spending dissipates income. And
income is created from the retained earnings from production. Likewise, Keynes'
idea that 'investment generates saving' is misleading because only productive
investment from which an amount of retained earnings is possible can create
savings, if that earnings is not consumed. The government deficit is the
accounting difference between the amount of credit-money it created and the
amount of that which it confiscated back via taxes. So it is credit-money still
circulating in the economy, but no one 'saved' it. But the real 'savings' in
the economy was created by the private sector.
But Dr. Wray continues, "Obviously this reverses the orthodox
(conventional wisdom) causal sequence because the government's deficit
'finances' the nongovernment's saving in the sense that the deficit spending by
government provides the income that allows the nongovernment sector to run a
Bravo and kudos for our generous government! But this is so false it hurts. The
nongovernment sector's income was created by its own production and its savings
are what was retained and not consumed. It is the government's deficit spending
that enables government to confiscate a significant proportion of the
nongovernment's retained earnings from production (in the form of real assets)
and consume it for its own purposes, while leaving some of those earnings to
private owners. Colbert's advice.
Next, he writes, "All of this analysis is reversed in the case of a
government surplus: the govenment surplus means the nongovernment sector runs a
deficit, with net debts of bank accounts and of reserves." The destruction
(net debiting) of nongovernment sector net financial assets of course equals
the government budget surplus".
Again, this is upside down. A government surplus means it confiscated more
financial and real assets than it created in its issuing of credit. So it is
true that the nongovernment sector is left with even less than when the
government runs a deficit.
"Effects of budget deficits on reserves and interest rates".
This section is a description of the inner working mechanisms for transferring
credits and debts between treasury and the banking system. The author
occasionally wonders why all this complex mechanism is needed when the treasury
seemingly could simply act as its own bank and deal with private banks
directly. He is correct, and the answer is that the fiscal conservatives
recognized when the FED was established what the inflationary results of the
direct link would be and wrote into the law that the FED cannot 'buy' treasury
bonds directly from the treasury. And at the same time they created a legal
maximum for the total federal debt (a limit). But the clever progressives and
bankers soon created a way around this by establishing the intermediate process
in which the treasury 'sells' its bonds to the select private banks and the FED
then buys them from those banks. Of course the treasury pays fees and the
bankers reap a nice profit. Read Calomiris for
detailed description of the political nature of banking systems.
"Complications and private preferences"
The author answers several common questions about how and why the system
functions. The answers repeat his descriptions. One of these is "what if
the central bank refused to cooperate with the treasury? The answer is that the
central bank would miss its overnight interest rate target (and eventually
would endanger the payments system because checks would start bouncing). "
Nice answer, in other words the central bank is NOT independent of the
"4.3 Government budget deficits and the 'two-step' process of saving"
This is more elaboration of the same theory about the relations between
government deficits or surpluses and the nongovernment sector.
"To put it as simply as possible, government deficit spending creates
nongovernment sector saving in the form of domestic currency (cash, reserves,
and treasuries). This is because government deficits necessarily mean that
government has credited more accounts through its spending than it debited
through its taxes."
But what this really means is that the government exchanged its credit IOU for
real assets created by the nongovernment sector and then took back in the form
of taxes less of those credit IOU's than it gave. So the nongovernment sector
is left holding government credit IOU's worth less than the value of the real
assets it exchanged.
Then the author continues with this. "And some members of the
nongovernment sector can save in the form of claims on other members of the
domestic nongovernment sector, but that all nets to zero (as we said, that is
Not quite. First, it is these 'claims', that is privately created credit, that
finances the production cycle. Second if and when there is a default between
the private (nongovernment) debtor and creditor the net is less than zero -
negative. And thanks to the bargain between government and investors back to
the creation of the Bank of England the government steps in to balance the
financial system. And third, the government created credit IOU's remaining with
the nongovernment sector are not 'savings'
But the author continues, "as argued above, the nongovernment savings in
the domestic currency cannot preexist the budget deficit, so we should not
imagine that a government that deficit spends must first approach the
nongovernment sector to borrow its savings. Rather, we should recognize that
government spending conceptually comes first, it is accomplished by credits to
bank accounts. Further, we recognize that both the resulting budget deficit as
well as the nongovernment's savings of net financial assets (budget surplus)
are in this sense residuals and are equal."
Again, Dr. Wray totally ignores that there is an exchange of real assets taking
place in this process. Real assets created by the nongovernment sector (in his
terms). Government spending does not come first. First comes the creation of
real assets by the nongovernment (private) sector. Production always comes
before consumption. The government is NOT borrowing the nongovernment sector
savings, it is confiscating real assets. True, the government IOU's left with
the private sector were created by government in its process of deficit
spending while exchanging them for real assets worth more than the residual
The author then relies on Keynes again for that writer's concept of saving. The
story becomes really deep. This is the 'two -step idea. He writes, "it is
best to think of the net saving of the nongovernment sector as a consequence of
the government's deficit spending, which creates income and savings. These
savings cannot preexist the deficits, since the net credits by government
create the savings. Hence the savings do not really 'finance' the deficits, but
rather the deficits create an equal amount of savings".
No and again no. This is a pure effort to make the public believe they are
beholden to government and to mislead everyone on the reality of the production
process and real savings. Again, the author has it backwards. First comes
production by the nongovernment 'sector' out of which the private owners retain
some earnings - that is do not consume everything. Meanwhile the government
exchanges (takes) a significant portion of the production (25% or more) and
consumes it, thus reducing the quantity of retained earnings and in the
exchange gives the private sector credit IOU's. Then the government takes back
the major proportion of its own IOU's by taxation, leaving the private sector
with some of the credit IOU's that it has the nerve to call 'savings'. But that
was but a part of the real savings generated by the private producers in the
form of retained earnings. Result is that there is less available for
investment to create increased future production.
"Bond sales provide an interest -earning alternative to reserves."
Dr. Wray descries the process in terms of the use of treasuries in manipulation
of interest rates. And he includes some comments about the Chinese in this
"4.4 What if foreigners hold government bonds?"
The author describes the process by which foreign governments come to own US
cash and treasury bonds. They likely will hold more in treasuries because those
pay some interest. And he notes the impact of this on exchange rates. It can
lead to currency depreciation. But his discussion relates to only the holding
resulting from the balance in export- import. There are other causes of foreign
accumulation of dollars. And he does not discuss what the foreign banks do with
the dollars. Actually, the dollars are used by foreign banks as reserves
against loans just as our domestic banks use them. And foreign banks need
dollars because many exchanges of goods and services between two foreign
countries are calculated in dollars.
"4.5 Currency solvency and the special case of the US Dollar"
In this section the author discusses some of the other reasons for foreign
holding of US currency and bonds.
"4.6 Sovereign currency and government policy in the open economy".
This section treats on the impact of government deficits on the country's
current account deficits with respect to foreign countries. The main point is
that the current account deficit or surplus must balance with the capital
account surplus or deficit. There are different results for countries that have
'pegged' or otherwise fixed their currency and those who operate a floating
rate currency. This gets into the question of trade balances and dollar
"4.7 What about a country that adopts a foreign currency?"
This is a special case but the analysis of results is the same. One conclusion
follows: 'A nation that adopts a foreign currency cedes a significant degree of
its sovereign power. The discussion extends into the next chapter.
"Chapter 5 - Modern Monetary Theory and Alternatives"
This chapter is about governments that create various types of currency in
terms of their exchangeability and convertibility with foreign currencies. The
author dispels many myths, such as the real role of gold, but indulges in
others. The sections titles are:
" 5.1 The gold standard and fixed exchange rates".
"5.2 Floating exchange rates".
"5.3 Commodity money coins? metalism versus nominalism, from Mesopotamia
This section includes a diversionary description of the origin of coined money
- typical mistakes about barter, and confusion about the money of account in
Mesopotamia. Temple economies were despotisms that set wage and price controls.
For classical Greece and Rome read von Reden and
Landes. Or read the many books based on
"5.4 Commodity money coins? metalism versus nominalism after Rome".
This section is full of mistakes and confusion about money during the 'middle
ages' and the role of kings ( rulers). There were hundreds of mints and kings
did not control them all nor of course the creation of credit. Kings and other
rulers were owners of private property themselves and derived their personal
incomes from rents or sale of their own production, not only from coining money
or issuing credit as Dr. Wray indicates. And they borrowed heavily from private
banks and from international merchants. Only for extraordinary costs - mainly
waging war - did they need extra funds from taxation and extensive borrowing
from foreign bankers. And especially for the republican cities the taxation
systems were different from today. For medieval economy read
Spufford. For much specific detail on this
"5.5 Exchange rate regimes and sovereign defaults".
"5.6 The Euro: the set-up of a nonsovereign currency."
The author here is on more solid ground in his discussion of the creation of
the Euro and its fundamental problem.
"5.7 The Crisis of the Euro".
"5.8 Endgame for the Euro?"
He speculates about the future.
"5.9 Currency regimes and policy space: conclusion".
"Chapter 6 - Monetary and Fiscal Policy for Sovereign Currencies:
What Should Government Do?"
Now we get to the purpose of the book in this and the next chapter, please note
the key word 'should'.
As Dr. Wray puts it, "In this chapter we will turn to what government
ought to do. This chapter will specifically treat only sovereign government
- one that issues its own currency. From the chapters above, that will make it
clear that we are addressing only a government that does not face an
afordability constraint.. In this chapter we will examine alternative views
about the proper role for government - given that it can 'afford' anything for
sale in its own currency."
The point being that he is advocating for US government political policies.
Yes, we by now should be convinced that the American government can spend as
much as it wants to buy whatever it likes by exchanging electronic credit
accounts for real assets. But the author asks the question - should it?
"6.1 Just because government can afford to spend does not mean government
ought to spend."
He claims, "Understanding how government spends leads to the
conclusion that afordability is not really the issue - government can always
afford the 'key strokes' necessary to make expenditures as desired"
Some 'legitimate' reasons for constraint include.
"1. too much spending can cause inflation
2. too much spending could pressure the exchange rate
3. too much spending by government might leave too few resources for private
4. government should not do everything - impacts on incentives could be
5. budgeting provides a lever to manage and evaluate govenment projects".
He continues, noting, that even if these considerations are met there still is
a constraint from 'opportunity costs'. And he mentions other possible reasons
to constrain government spending.
"6.2 The 'free' market and the public purpose'
Dr. Wray shows correctly that in reality the 'free market' does not exist due
to multiple influences and interferences. But from this he claims, "there
is no scientific basis for the claim that 'free markets' are best".
Indeed yes, since a real 'free market' in the utopian vision of Adam Smith has
never existed it has never been 'scientifically' tested. But that is no excuse
for failing to note 'why?' and attempting to eliminate the known causes for
this condition. But he continues by, instead of advocating corrective changes,
acquiescing in acceptance of the situation since 'free markets' are
"irrelevant for the modern capitalist economies that actually exist".
Is this as 'cop out' or what?
But this argument brings the author to discussion of 'public purpose'. Well, he
admits that the public purpose "is not easy to define or to
identify". What his concept in his theory amounts to is manipulating the
conditions that have prevented existence of a real 'free market' to accomplish
political purposes. His discussion is balanced and forthright. He boldly
"The public purpose is inherently a progressive (liberal in US
terminology) agenda that strives to continually improve the material, social,
physical, and psychological well-being of all members of society. It is
inherently 'aspirational' in the sense that there is no endpoint as the
frontiers of the public purpose will continually expand."
Note that individual 'moral', 'cultural' and political freedom categories of
well- being are not mentioned. Note that this and subsequent comments claim
that 'conservatives' are opposed to this agenda. And note that this completely
ignores the historically based exposition of the nature of 'public choice'.
Namely that the individuals who claim to impose government policies on society
have their own private agendas in mind. Note that the 'public purpose' agenda
is infinite in time and 'aspiration' and can never be satisfied even with more
and more government control and manipulation of all aspects of social and
individual behavior. But, having dispensed with the notion that governments
cannot 'afford' to undertake unlimited 'progressive' agendas, the author claims
that any restraints are a matter of judgment.
He sums this up clearly, "When we add MMT to the more liberal vision of
the pubic purpose, or when we add to the public purpose considerations such as
'full employment' and 'price stability' or even just 'economic stability' then
MMT helps us to find a way to achieve that public purpose by quickly disposing
of the notion that government cannot 'afford' such policies." QED.
Never mind that application of the MMT theory by governments already has shown
that 'full employment' - 'price stability' and 'economic stability' have been
lost in the process.
"6.3 Functional finance"
The author cites Abba Lerner, for creating the theory that is mainly what he
has been citing - about government ability to solve problems such as
unemployment by spending more. Indeed, he notes, that Lerner rejected the very
idea that government should 'balance' its accounts and not create an expanding
debt. Dr. Wray then discusses the monetarist theory of Milton Friedman,
claiming that it is quite close to how the actual system functions. But he
claims that the problem is that government spending has not been enough.
"And, indeed, that is how modern government budgets do operate: deficits
increase in recessions and shrink in expansions."
But 'shrink' does not mean surplus to reduce the size of the debt created
during even 'normal' times let alone the expansions during recessions.
Currently federal government deficits - in theoretically economic expansionary
time - are nearly half a trillion dollars a year - adding another trillion to
the deficit in less than three years. This is called 'functional finance'.
"6.4 - Functional finance versus the government budget constraint"
This section is more of the same. The author's insistence that the public (and
many economists) have the wrong idea about money and government spending.
Throughout the book the author derides anyone with alternate views.
His theory is expressed concisely. "Taxpayers pay taxes using government's
own IOUs: banks use government's own IOU's to buy bonds from government."
"There is no recognition that all spending by government is actually done
by crediting bank accounts - keystrokes that are more akin to 'printing money'
than to 'spending out of income'".
This is true, the popular idea that the government 'sells' bonds to the public
is wrong, actually the government issues credit via bank accounts. But in
addition there is no real difference between the government paying for goods
and services by minting coins, printing dollar bills, and paying for same by
exchanging bonds - except that the bonds include a promise to pay some interest
(which the government tries hard to keep smaller than the annual depreciation
of all currency value via inflation. But the author neglects to mention two
critical (vital) facts.
One is that government is not the ONLY creator of credit (much as it wishes it
were). Credit is also created by many private entities. If it were not, the
process of wealth creation via a surplus in retained earnings by producers
would by much smaller or non-existent. But expansion and contraction of
privately generated credit is now a serious problem that interferes with
government policies. The author ignores history. The economic expansion of the
United States during the 19th century was financed by credit generated by
private sources, there was no FED or central bank after the Second Bank of the
United States was not renewed.
Two is that the taxes that the author claims are merely the essential return to
government of the credit it previously issued are by far not collected
(confiscated) from the same individuals to which the credit was issued. This
planned policy is an essential component of the 'welfare state' progressive
purpose to shift - reallocate - wealth from producers to non-productive
Nevertheless, the author continues for several pages with such as this,
"This confusion by economists then leads to the views propagated by the
media and by policymakers: a government that continually spends more than its
tax revenue is 'living beyond its means'.. And "a sovereign government
cannot really become insolvent it its own currency . " No doubt English
King Charles II and French King Louis XVII wish that this were true. The author
claims further that the alternative view is a 'myth' and that budget balancing
is a 'religion'. And, "that indicates just how dysfunctional the myth that
government, like a household, must balance its budget has become." This
comment is followed by another side bar in which the author cites Paul
Samuelson and Ben Bernanke in support of his MMT theory.
"6.5 The debate about debt limits (US case)"
This section is an analysis of the political struggle in 2011 over the
statutory 'limit' on the size of the US Federal debt. The author does not tell
us when and why this statutory debt limit was established or when and why it
was then that Congress authorized it be exceeded, and why has it been
repeatedly exceeded since 1917 (sometimes with no political struggle and
sometimes with considerable struggle). I have long believed Congress could save
itself considerable wasted time and argument by simply abolishing it. It never
served the purpose for which it was enacted.
But Dr. Wray provides several very ingenious methods, manipulation of fiscal
and monetary actions, that would enable government to spend without exceeding
the legal limit - in fact without making the official public statement of debt
size greater. His suggestions involve various slight of hand maneuvers in which
quantities in the Treasury and FED balance sheets are exchanged. A surprise is
his statement that Treasuries held by anyone are what is counted as the
government debt (for which there is a legal limit). But that currency and bank
reserves - that is the money supply -is not counted in the government debt.
This is the method used by FED Chairman Bernanke when buying up Treasuries and
other securities onto the FED balance sheet. Another idea he springs is for the
Treasury to give the FED non-marketable securities - similar to the securities
in the so-called Social Security Trust fund. This would enable the government
to spend and show its debt without it being in the category of the legal debt.
He continues, "The second method is to return to Treasury creation of
currency- on a massive scale." Again, currency is not counted as federal
debt although it really is. "Currently the US Treasury has the authority
to issue platinum coins in any denomination, so it could, for example, make
large payments for military weapons by stamping large denomination platinum
coins. The coins would be Treasury IOU's but would not be counted among the
bills and bonds that total the government debt."
Paul Krugman suggested this in print. I don't know who thought of it first. But
it is silly. Why use platinum? Only because the establishment mantra is never
to touch gold. But platinum has more industrial uses than does gold. And it
would be just as easy to mint a coin out of gold as out of platinum with the
same face value. The only difference between a Treasury created currency (such
as a coin) and a government bond is that the latter carries a promise to pay
some interest, but both are government IOU's.
"6.6 A Budget stance for economic stability and growth"
This section is all about increasing the role of the government in the economy
via additional manipulation of the money supply. The presumption is the
validity of the political policy that government is responsible for preventing
unemployment, among other conditions of 'welfare'.
The author forthrightly states, "First, government spending needs to be
counter-cyclical. One way is to make spending automatically" by having a
"generous social safety net." "Second, government needs to be
relatively large". And it needs to be as large as total private investment
and 'swing' counter cyclically. That is increase when private investment
declines. This whole section is based on the author's notion that credit is
only created by government spending and that saving is only the result of not
spending some of what government has created. But real saving is ONLY created
by private investment in production and is the 'retained earnings' from that
investment. But again he repeats the claim that there was a real budget
'surplus' during the Clinton presidency.
Then his ideas get worse when he writes "We conclude that at least some
governments will have to run persistent deficits to provide the net financial
assets desired by the world's savers."
"6.7 Functional finance and exchange rate regimes"
In this section the author creates another side-bar in which he discusses the
effect of the US trade deficit and resulting effects in the capital account.
The Chinese and others accumulate dollar assets that they mostly trade into US
Treasury bonds and notes that generate interest. He does show the interesting
(an generally overlooked in public discussion) that this trade deficit
generated by US consumers buying from foreign producers is financed by the
credit money given by the FED-Treasury process. What he does not mention is
that the US Treasury as an asset on the books of a foreign central bank serves
it in the same way as a similar asset on the books of a domestic US bank. The
foreign banks are then able to create new quantities of lending and to finance
investment and trade by their own industries. He also discusses the possible
future in which the US dollar is no longer the world reserve currency.
"6.8 Functional finance and developing nations."
This short section is about how the MMT theory functions in a developing nation
depending on whether or not is also relies on its own sovereign currency -
generally without currency controls - or if it relies also on borrowing in a
foreign currency. The whole issue is about the government's presumed desire to
"6.9 Exports are a cost, imports are a benefit: a functional finance
In this section the author continues to discuss and evaluate exporting versus
importing in terms of the net effect on employment and unemployment, again,
revealing one of his central concerns.
Dr. Wray writes, "In real terms, exports are a cost and imports are a
benefit from the perspective of a nation as a whole. When resources, including
labor, are used to produce output that is shipped to foreigners, the domestic
population does not get to consume that output, or use it for further
production. The nation bears the cost of producing the output, but does not get
the benefit. On the other hand, the importing nation gets the output but did
not have to produce it".
"Chapter 7 - Policy for Full Employment and Price Stability"
Dr. Wray, again clearly describes his objectives. "In this chapter we will
examine policy that will promote full employment with price stability. Most
economists believe that full employment and price stability are
Of course he does not believe this and has structured his argument for MMT as a
way of proving this is false. He insists that full employment can and should be
achieved by proper government application of MMT theory.
"7.1 Functional finance and full employment'
Dr. Wray believes that,
"A government that issues its own currency can always afford to hire
unemployed labor. However, achieving full employment might affect inflation
rates and the exchange rate."
Gee, whoda thought.
"In recent years, a number of economists have returned to the idea of a
government program to operate an 'employer of last resort' (ELR) program, also
called the 'job guarantee' (JG)".
"A JG or ELR guarantee program is one in which government promises to make
a job available to any qualifying individual who is ready and willing to work.
The national government provides funding for a universal program that would
offer a uniform hourly wage with a package of benefits."
The author describes some he claims.
"Macroeconomic stability issues'
He writes that with flexible parameters including the compensation the program
will be counter -cyclical.
"What about exchange rate effects?"
He poses some questions and offers solutions.
"As we have seen, a sovereign nation operating with its own currency in a
floating exchange rate regime can always financially afford an JG/ELR
Here, we are back to the author's theory espoused in this book, that the
government can 'afford' to pay for anything and everything it wants. Well, of
course it can, as long as the public is willing to exchange government credit
for real assets.
Employment swings The author estimates that this amounts to about 4 million
workers between 'full' employment and maximum unemployment. His scheme is
designed to offer temporary employment as needed, but can the employment be
"7.2 The JG-ELR for a developing nation"
The author applies his concept to such countries and I will skip comment.
"7.3 Program manageability"
He describes some of the critical objections being stated and offers his
objections or solutions. In this section he again includes a side bar in which
he states, "John Maynard Keynes was arguable the greatest economist of the
twentieth century, and is commonly called the father of modern
macroeconomics". Well, I have to disagree with this appraisal - Keynes was
"7.4 The JG/ELR and real world experience"
In this section the author describes some government job creation programs
tried in 20th century.
"7.5 Conclusions on full employment policy"
The author again relies on Lerner. "Lerner proposed to use monetary and
fiscal policy to achieve full employment. he argued that unemployment is
evidence that government spending is too low, and thus that 'functional
finance' dictates it is govenment's responsibility to increase spending to
It seems to me that one main cause of unemployment is that wages are being
artificially kept to high as prices decline in a deflation. At any rate, it is
clear that government cannot know better than private markets which jobs should
But he continues with this, "The other issue is the exchange rate, and a
possible outcome of full employment is that imports might rise and put pressure
on the exchange rate. And, again ,we conclude that some combination of floating
exchange rate and or capital controls usually will be required to resolve the
'triemma' problem; if government wants policy space for domestic programs, it
needs to float the currency and/or control capital flows. In addition, a
discussed, government can design the program to minimize imports and to
Indeed it can do all of this, by seizing control of the economy and trashing
the 'value' of money.
"7.6 MMT for Austrians: can a Libertarian support the JG?"
In this section the author distorts some of the 'Austrian School' concepts and
mixes others with 'Libertarian' ideas, but the two are not the same. Moreover,
throughout he has distorted the whole concept of what money is and from where
it comes. In this section he throws in other topics such as gold and Social
Remarkably, he also claims that, "from inception imposition of taxes
creates unemployment. It is sheer folly to then force the private sector to
solve the unemployment problem created by the government's tax."
What this actually says is that the JG program will increase the national money
supply by inserting via credit methods more money than the government taxes
extract. What it amounts to is a requirement of people to work to obtain the
government credit rather than simply receiving 'welfare' benefits.
And he recognizes this, "How can the belief that all ought to work (to the
best of their ability) and contribute to society, rather than lay about and
collect welfare by called socialism?"
"7.7 Inflation and the Consumer Price Index"
In this section the author discusses the CPI as a measure of inflation. He
considers that some inflation is necessary. One very interesting concept he
offers is called the "Baumol disease' the term describes the fact that
while productivity in manufacturing and agriculture has been huge, in the
service sectors such productivity lags or does not exist. A barber cannot
accomplish more hair cuts in an hour now than in 1700. A symphony orchestra
cannot 'produce' a rendition of music any better than in 1700 or before. In as
much as the service sector is larger and larger its impact is greater. Thus
nominal wages grow faster than productivity because we have those low
productivity sectors that get the same wage increases. He includes a disdainful
commentary on the foolish 'gold bugs'. But has, himself, commented on the use
of platinum as a way to defeat statutory debt limits.
"7.8 Alternative explanations of hyperinflation"
In this section the author seeks to dispel the notion that the MMT policy will
create 'hyperinflation'. This gets into countering the 'monetarist' theories
about a link between quantity of money and price levels. And this then focuses
on the 'gold bug's concepts. Much of this repeats his description of money in
previous chapters. I agree with his point that the 'gold bugs' are wrong. But I
disagree with his repeated views on money creation itself.
He repeats, "That brings us back to 'how governments really spend', Any
government that issues its own currency spends by 'keystrokes' crediting the
account of the recipient and simultaneously crediting reserves to the
recipient's bank. It could print currency and make payments that way, but the
effect will be the same because recipients would make deposits in banks, which
would receive credits to their reserves. "
Agreed. But then he writes,
"You cannot print up Dollars in your basement: government has to keystroke
them into existence before you can pay your taxes or buy treasuries".
This is what he has claimed throughout the book and it is false. From the
'great monetary agreement' between the British sovereign, the Bank of England,
and the merchant public, credit has been created by private sources. Today,
there are many private sector entities that create credit which is used as
money in daily exchange. See Coggan and
Martin among others in the list below.
But, he continues, "On a floating exchange rate that is the end of the
story. Banks can use their reserves to buy Treasuries, and depositors can
demand cash in which case the central bank ships it to the banks while debiting
the banks' reserves. But no one can return government IOU's to demand gold or
foreign currency at a fixed exchange rate".
But, this is not the issue. He digresses into the difference between a
'floating' and a 'fixed' exchange rate in international monetary practice. And
this does have significant effects on government monetary policy because is
involves the responses of foreign governments and individuals to our domestic
As he notes, "The floating rate provides policy space that can be used by
prudent governments to pursue domestic policy goals with a greater degree of
What he means by this is that with floating exchange rates a government can
conduct a domestic policy (especially welfare spending) without being
constrained by an international fixed standard for the 'value' of money - such
as a gold standard. This was recognized by W. J. Bryan the 'progressives' back
in the 1880's and led to the creation of the FED and federal income tax. Like
Bryan Dr. Wray is much against policy restraint due to maintenance of
international standards for money.
The real issue is that, while the government now can create credit to exchange
for real assets via 'key strokes', it is not the only source of credit-created
money. The credit- money that financed the great economic expansion of the
United States in the 19th century was created by private sources. One purpose
of the creation of the FED was to consolidate all credit creation under the
government control via the FED. This was achieved for a time but eventually was
lost with the expansion of 'vendor financing' and other private sources of
"7.9 Real world hyperinflation"
In this section the author describes in more detail several historical examples
of hyperinflation His narrative is clear. But this phenomena is not the issue.
"7.10 Conclusions on hyperinflation"
He writes, "This is not the simple Monetarist story in which government
'prints too much money' that causes high inflation, but rather a more
complicated causal sequence in which high inflation helps to create deficits,
that by identity equal net credits to balance sheets."
I agree that Monetarism is not a correct theory. But it is not the real issue.
"7.11 Conclusion: MMT and policy"
"Chapter 8 - What Is Money? Conclusions on the Nature
This is a clear summary. What is remarkable is the author's hubris in
explaining to the readers the confidence game being played on the public by
governments and central banks.
He writes, "In an important sense our task throughout this monograph has
been to develop a theory of the nature of money. When asked "What
is money?", most people respond - quite reasonably - that money is used to
buy something. This gets at money's use as a medium of exchange, which
is of course the most familiar use. If pressed further, most would also say
that money is something one can hold as a store of value. Indeed,
economists recognize money as the safest and most liquid store of value
available, at least outside situations with high inflation when money's value
But in reality 'money' is changing in 'value' constantly and governments like
for its 'value' to decline over time, not to mention that they can and do
arbitrarily change its value (devalue) their money when they want to.
He continues, "Some people will also mention the use of money to pay down
debt, with money used as a means of payment, or means of final
settlement of contractual obligations.
These are specific types of use as 'medium of exchange'.
Further, "a common response would be to evaluate worth in terms of money,
this time acting as the unit of account used to measure wealth, debt,
prices, economic value".
Indeed, true. But misleading. Because both this 'unit of account' and the
assets being evaluating are changing continually. Their 'values' are changing
even as they are being 'measured'. But governments like to teach the public to
think in this way.
Now the author explains further. "These answers take us quite far in
understanding what money is, each focusing on a different but widely
recognized function or use of money, identifying money with what
money does, But we might try to dig deeper, and ask what is the nature of that
'thing' that serves these functions?"
Actually the 'recognized' functions mentioned here confuse and conceal rather
than enhance understanding. For one think the several functions are not
performed by the same actual 'thing' even though they are all called 'money'.
"8.1 Is money a physical thing?"
Here the author disparages anyone who questions what money is or its relation
He writes, "...many people rather instinctively believe that money must
have some real physical existence, or at least it must be 'backed up' by hoards
of precious metals kept safely in government vaults. Some who know that is not
true fear that the money we use today is somehow illegitimate, a 'false' money
precisely because it is 'worthless' pieces of paper or electronic entries down
at the bank. That is a typical response by Austrian-leaning 'goldbugs', often
followers of Ron Paul ....."
This bit of tendentious disparagement is false. Those who question the official
view promoted by this author are actually concerned that the government (and
this author) knows that it can and does change the real value of this 'money'
as it pleases while simultaneously claiming to the public that it is
maintaining the 'money' as a standard 'store of value'.
But he continues, "What we have tried to do in this monograph is to
present a careful and coherent exposition on the nature of money."
And he has succeeded in this beyond his own expectations, by revealing (between
the lines) what that nature actually is.
Further, " we have consistently distinguished between the money of
account and money things denominated in that money of account. We
have argued that all those money things , in turn, are liabilities,
obligations, IOU's, of their issuer, At the same time, they are assets of the
holder. The nature of the obligation of the issuer is this: one must always
accept one's IOU in payment to oneself. The bank that issues demand deposits as
its liabilities must accept its demand deposits in payment on the loans it
holds as assets. The government that issues currency as IOU's in its payments
must accept its currency in payments to itself... So there really is something
standing behind the money things: the promise of the issuer to take them back.
All well and true. The fact that currency (coins and paper) are but the same
IOU's of the government as its 'bonds' is a very important concept the public
should understand. But there is a critical factor that is ignored in this
explanation. Namely, the real and relative 'value' of the IOU when paid back to
the issuer will NOT be the same 'value' that it had when it was exchanged to
the individual for a real asset. And the government knows this. The process in
which it exchanges its IOU to a private party in payment for a real asset and
then demands the IOU back in payment of taxes at a lower relative 'value'
results in the government 'profiting' from the exchange in a way that the
public hardly notices. But critics such as Congressman Paul do notice and
understand this subterfuge.
The author dismisses the desire of 'gold bugs' to base the 'money' on gold. It
is true that gold is not 'money' as its proponents claim. And gold (like
everything else) HAS no intrinsic 'value' as they claim. But the purpose of
insisting that the 'money' used as a 'medium of exchange' is to limit its
supply - to prevent government from creating more 'money' as it suits itself.
But he is correct in his description of how gold became seen as the basis of
'money'. The governments, begining with John Locke's insistence, set the value
of a measure of gold in terms of its money, not the value of the money in terms
Dr. Wray has this correct "The 'gold bugs' have mostly got it backwards:
it was not gold that gave money its value but rather gold had its money value
because its price was pegged in terms of money by the government
The same goes for silver when it is denominated in money values. This results
in typical discussions of the movement of prices in late middle ages being
backwards as well. But neither gold nor silver has any more 'intrinsic' value
than does any other object.
But then the author misfires when he writes, "We have seen that there is
no automatic reason to fear use of money things that are not backed by precious
metals (or foreign currencies".
On the contrary, we have seen great fear is justified in government control of
'money' whether it claims it is 'backed' by metal or not. Or at least to base
one's understanding of 'money' in terms of what 'value' really means and what
government is doing with the 'money'. Then the authors hits the nail precisely.
"In any case, this monograph has tried to analyze the economy we've got,
with the monetary system we actually have. And that is one that is based on a
money of account chosen by government, and almost everywhere subject to the
'one country, one currency' rule. The currency (meaning including credit ) is
issued by a sovereign government when it spends, and received by government in
payment of taxes and other payments to the government".
"8.2 Propositions on the nature of money"
Now the author writes more detail and explicitly notes that he is relying more
on Keynes's theory. He focuses on three propositions which he writes will
"provide structure to dig a bit deeper into our theory of money"..
"1. money buys goods and goods buy money, but goods do not buy
goods". (This excludes gift giving, reciprocal exchange and barter.)
"2. Money is always debt; it cannot be a commodity from the first
proposition because if it were that would mean that a particular good is buying
goods". (Again this excludes barter).
"3. Default on debt is possible, which means that credit worthiness
matters. Not all money things are created equal." (The possibility and
result of debt is a topic of much controversy in economic modeling.)
So this is a theory, unfortunately it is much of the real monetary situation as
"Goods don't buy goods"
The author recalls the standard economics text books' descriptions of the
origins of 'money'. He is referring to the idea promoted by Adam Smith and
subsequently that exchange of goods initially was by barter. Of course Adam
Smith and others had no real knowledge of ancient societies, let alone their
economies. But anthropologists today are sure there never was such activity as
'barter' within primitive or other societies. Dr. Wray writes,
further on, that this idea is false, but also that the veracity of this story -
true of false - does not matter anyway. But it tends to support the theory that
'money' is 'neutral' that is not essential to the analysis of economic
behavior. He extrapolates this concept to claim that there never could have
been 'commodity money'. "Further", he writes , "money is not
something that is produced, it is not a commodity that is produced by labor
(otherwise it would be a 'good buying a good'". Nor do people seek 'money'
for itself. "At most we can say that we seek money because it provides
access to the commodities that satisfy those desires".
An excellent point over looked by those who accuse wealthy people of greed in
seeking to amass money. But the Marx equation of M - C - M does claim that
people seek 'money' for itself and this is a major leftist complaint even
For several paragraphs the author quotes and comments on statements by Keynes.
But the thought shifts. "Maintaining relative scarcity of money keeps it
valuable, but that at the same time means that it should not be something
produced by labor." And then, "But there is a more important point to
be made. Keynes explicitly presumed that the purpose of production in a
monetary economy is to accumulate money." This desire to accumulate money
but at the same time the inability to use labor to produce it that prevents
labor from being diverted to its production".
This is opposite to Dr. Wray's previous comment.
Well, Keynes was wrong about the 'desire', that is motivation, for production
of goods and service, it is mostly NOT to accumulate money. Then we read this,
"that money is not a commodity produced by labor, must underlie Keynes's
view. And that is why unemployment develops when people want the 'moon'
(money" but cannot produce it with labor".
A clever (3 shell switch kind of move). Of course individuals don't 'produce'
money (unless working at a mint) but they Acquire money by producing a
good or service that has sufficient 'value' to be exchanged for 'money'.
The author continues for several pages with the convoluted extrapolation on the
Marx-Veblen-Keynes monetary theory of production in which the concept of
'value' is twisted around including the misleading Marxist idea expressed as
M-C-C'-M'. (That production begins and ends with 'money'. He boils this down
to, "Indeed it is the necessity of producing commodities and then selling
them for money that underlies capitalism". Indeed, it underlay many
societies' exchange systems other than capitalism.
But this Marxist idea is false.
1 - Someone with M does not need to invest, to produce anything - C - in order
to obtain more money. The equation is M - M. Actually that was Aristotle's
major complaint, that people were using money to obtain more money without
producing anything. And it is the basis for Jewish, Christian and Islamic
prohibitions on lending at usury, which is using money to obtain more money
without producing any thing. And it is the central premise of hedge funds
2. But if someone does invest money to produce something C - it often is not
with the motive of obtaining more money, rather it is to solve some problem
such as pumping water from a coal mine, or curing some disease.
3 - And the final M - obtaining more money is not an end in itself, but a means
to obtain ends that are not economic. (See Ingham)
Then Dr. Wray continues, "Indeed, if you think about it, if you exchange
one commodity for another there is no need for money, even as a measuring
That does not mean 'money' has never been a commodity.
Certainly, read the Journals of Lewis and Clark to learn that they traveled
from St. Louis to the Pacific and back during 2 years, meeting and passing
numerous different Indian societies and lived without spending a penny in
currency. But they were very astute in their assessments of relative 'value' as
they exchanged goods and services along the way. They vividly demonstrated both
that barter was not practiced Within each social group,
but was the typical method of exchange Between separate social
groups. And such exchanges were always based on each party believing they were
giving up something of less value than what they were acquiring.
So Dr. Wray's comment here is irrelevant.
"8.3 Money is debt"
The author repeats, "Throughout this monograph, we have argued that money
is not a commodity, rather it is a unit of account. A unit of measurement is
not something that can ever be obtained through a sale. No one can touch or
hold a centimeter of length or a centigrade of temperature."
An excellent point that the public, indeed, needs to understand. One problem
is, however, that economic theorists then equate 'money' as this unit of
measurement with international fixed standards such as meters and liters as in
the above analogy. But he continues at length. A better analogy would be the
'money' used in a Monopoly Game. According to the game rules the players are
issued paper 'money' at the beginning and more as the game progresses, and this
'money' is used for exchanging property. But the game would be identical if
instead of the paper money a 'banker' would be given the role of keeping the
accounts on paper such as in many card games. He tries to describe this idea,
but not clearly. However, the author describes the central role of banks in the
creation of the credit 'money' that the entrepreneur uses to initiate his
production process with the role that such banks do play in Europe. But in the
US banks have played a lesser role, as much credit 'money' is generated in the
commercial paper markets. Nevertheless, his description of the 'circular'
process is valid. But, more fundamentally, here he indulges in the common
description of three quite functional activities all being called 'money' when
this creates confusion. - 'a standard measure of 'value'' - a 'medium of
exchange' - a 'measure of account' are three functions that would be better
given separate names rather than all of them called 'money'.
The author then shifts to an alternate theory of production - credit - and
money. This is Schumpeter's description of the production process in social
terms - its role in society. For a more detailed and valid description of the
production process read Skousen.
Money is debt (again!)
The author sums up, "We conclude: money is debt. It need not have any
physical existence other than as some form of record, mostly an electronic
entry in a computer. Money always involves at least two entries: debt of the
issuer and asset of the creditor".
This shorthand is a bit confusing,
The author expands the concept. "In practice, creation of money usually
required four entries: a prospective producer issues (that is exchanges) an IOU
to a bank and receives a demand deposit as an offsetting asset; the bank holds
the producer's IOU as its asset and issues the demand deposit as its
The author continues with the thought that 'anyone' can create credit by
accepting an IOU from whom he granted credit. Exactly, And that is the source
of much financial fragility and problems in the US.
The author next digresses with a 'box' in which he discusses Schumpeter's ideas
and answers the question "Where do profits come from? We skip this detail.
"8-4 Liquidity and default risks on money IOUs"
The author begins by citing Charles Goodhart,
whose theories are controversial. But this point seems incontrovertible. Dr.
Wray notes that Goodhart claims that a problem with standard economic models is
that they dismiss by assumption the fact that defaults on debt can and do
occur. This means that in their theoretical models the borrowing - credit
creating - process is risk free and there never is a 'liquidity' constraint..
Dr. Wray, correctly writes, "obviously almost all interesting questions
about money, financial institutions, and monetary policy are left out if we
ignore liquidity and default risk'.
In this single page the author summarizes his concept, claiming that it
identifies 'the macro identities as well as the stock flow implications that
are necessary to formulate policy for any sovereign nation, including
It is a theoretical justification for his 'policy' meaning political agenda
that is the purpose of the book.
Some additional reading - I am writing reviews and commentary on these
books - but you will note, if you look, that I have not completed some of them.
David Hackett Fischer - The Great Wave
Kwasi Kwarteng - War and Gold: A 500-year history of Empires,
Adventures, and Debt
S. Herbert Frankel - Two Philosophies of Money: The Conflict of
Trust and Authority
G. L. S. Shackle - Epistemics and Economics: A Critique of Economic
Geoffrey Ingham - The Nature of Money
Geoffrey Ingham - Capitalism
Frederic S. Mishkin - The Economics of Money, Banking &
Felix Martin- Money, The Unauthorized Biography
Perry Mehrling - The New Lombard Street: How the Fed Became the
Dealer of Last Resort
Nicholas Wapshott - Keynes - Hayek: The Clash That Defined Modern
Hunter Lewis - Where Keynes Went Wrong
Jerry Z. Muller - The Mind and the Market - Capitalism in Western
Charles A. E. Goodhart and Dimirius P Tsomocos - "The Role of
Default in Macroeconomics"
Charles A. E. Goodhart - "The Continuing Muddles of Monetary
Theory: A Steadfast Refusal to face Facts'
Philip Coggan - Paper Promises: Debt, Money and the New World
David Graeber - Debt: The First 5,000 Years
Glyn Davies - History of Money: From Ancient Times to the Present
Lawrence H. White - The Clash of Economic Ideas
Charles W. Calomiris and Stephen Haber - Fragile by Design: The
Political Origins of Banking Crises and Scarce Credit
Anat Admiati & Martin Hellwig - The Banker's New Clothes: What's
Wrong with Banking and What to Do about It
Peter Conti-Brown - The Power and Independence of the Federal
Stephen D. King - When the Money Runs Out
Rana Foroohar - Makers and Takers: The Rise of Finance and The Fall
of American Business
John Tamny - Who Needs the Fed?:
Danielle DiMartino Booth - FED UP: An insider's Take on Why the
Federal Reserve is Bad for America
Paul Krugman - The Return of Depression Economics
Barry Ritholtz - Bailout Nation
R. Christopher Whalen - Inflated: How Money and Debt Built the
Bernard Bailyn - The New England Merchants in the Seventeenth
Sitta von Reden - Money in Classical Antiquity
Carmen Reinhart and Kenneth Rogoff - This Time is Different
Peter Spufford - The Merchant in Medieval Europe - Powser and
Edward Cheyney - The Dawn of a New Era
Mark Skousen - The Structure of Production
Bernard DeVoto, ed. - The Journals of Lewis and Clark
David Lavender - Bent's Fort
Myron P. Gilmore - The World of Humanism 1453 - 1515
Paul Mantoux - The Industrial Revolution in the Eighteenth
Ludwig von Mises - Human Action
Ludwig von Mises - The Theory of Money and Credit
Ludwig von Mises - Socialism
Ludwig von Mises - TheAnti-Capitalisttic Mentality
Ludwig von Mises - Theory and History
F. A. Hayek - The Road to Serfdom
F. A Hayek - The Constitution of Liberty
George Melloan - The Great Money Binge
More recommended Readings