adapted from Geoff Coventry  (heavily based on Wray)

A summary of MMT

in plain language

 

Money is a wonderful human invention – perhaps one of our greatest. Monetary systems are generally designed simultaneously to provide for private commercial needs, and also to enable governments to access sufficient resources to create safe, just and ever-improving societies.

 

How does this work?

 

The core concepts:

 

• Why do we have a national currency?

When nations and governments are formed, they need a way for the government to obtain the resources it needs to fulfill its role, whatever that may be. In most developed nations, this is typically done using money.

 

 

• What or whose money do governments use?
 
Governments create their own money. There is a basic formula nations use to create a currency: (i) decide on a national money unit (e.g. Japan called theirs the “Yen”; the United States the “Dollar”, etc.); (ii) the government issues various forms of money “things” denominated in that unit (Yen or Dollar bills, coins, or electronic bank credits); (iii) impose a broad-based tax that can only be paid using the government’s newly created money. And now the government can issue and spend its own money to obtain resources.

 

 

• Why is government money accepted and how does it have any value?

The tax obligation causes the government’s money to become in demand and have value. Since businesses and households must obtain the government money in order to pay their taxes, the currency becomes universally adopted in that economy.

 

 

• Does the government need to collect taxes before it can spend?

Note above how taxes simply return to the government the money it first created. The spending has to happen first since the only way we can pay taxes in government money is by first obtaining government money. The government never needs our taxes in order to spend since it creates the money that it spends.

 

 

• If the government doesn't need our taxes to spend, what are taxes for?

Taxes cause demand for the government’s money so we accept it in payment for goods and services. Taxes also reduce spending power in the economy so that when the government spends to obtain necessary resources, it doesn’t create excessive inflation. Taxes also serve as a tool for public policy to provide incentives and disincentives to influence the private sector.

 

 

• If national governments can just create money, are there any limits to what they can spend?
 
Yes, there are definitely limits. A big constraint on government spending is the political process. It is difficult to get spending approved and funded, and the public generally require their government to act responsibly. Another major limit is the availability of real resources that can be obtained with the issued currency. Governments can’t use their currency to buy what is not for sale in their currency. But sovereign governments are never limited by the availability of their own money.

 

 

• Can sovereign governments go bankrupt?

A nation that issues its own currency can never go bankrupt or be unable to pay its bills, as long as those bills are due in the money they create. Governments that owe debt in a currency or commodity they don’t create can certainly become insolvent and default. So can governments who promise to exchange their currency for another currency that don’t control. However, fully sovereign nations are the monopoly issuer of their currency, and they can always issue their money to make any payment due in their currency.

 

 

• Do governments borrow to fund their spending?

Since currency-issuing governments create money when they spend, they do not need to – and in fact can’t – borrow their own money. Government bonds can only be purchased with government money – money that has already been created. This means that government bonds are serving some other role in the economy aside from funding the government. It is easiest to say that bonds simply provide a safe interest-earning way to save government money. A more complicated reason is that bonds help the central bank manage interest rates, but they are not needed to fund government spending.

 

 

• Does the understanding of modern money affect public policy?

The knowledge that sovereign nations issue their own money means that they are not constrained in the way of a currency-using government. This has a profound impact on the range of policy options available to such governments that are not available to those with less monetary sovereignty. The debate over public policy is important and differences of opinion will remain: however, the debate should not place artificial constraints on the monetary system, but rather look at the effects of each policy on the economy and the general welfare of the people. An important example is unemployment: we now know that governments can afford to employ everyone who willing to work for the government’s money, and that the effects of doing so can stabilize and grow the economy while enhancing the general welfare of the nation.