Future Monetary Theory

Future Monetary Theory

MMT’s account of the origin of money is a useful corrective to the stories told by orthodox economists. But a deeper history of the social construction of money opens up more radical possibilities for rethinking the monetary order.

The Money Changer and his Wife, Marinus van Roymerswaele, c. first half of the sixteenth century (Wikimedia Commons)

Let’s hope this time really is different. A decade ago, in the aftermath of the previous once-in-a-lifetime economic calamity, tentative early steps toward fiscal stimulus were repulsed by an international turn toward austerity. The American Recovery and Reinvestment Act of 2009 was famously reduced by noted math enthusiast Larry Summers from $1.2 trillion to $800 billion, before being watered down further to appease Senate Republicans. It was much too little, did not address the root causes of the ongoing crisis, and was offset by state-level austerity even before the national turn to fiscal retrenchment after 2010. The costs of austerity were even more brutal across the Atlantic, where the structures of the European Union enforced sweeping cuts in Portugal, Italy, Ireland, Greece, and Spain. The UK opted for grinding austerity voluntarily. One study found that 30,000 excess deaths in the UK over the winter of 2015 alone could be attributed to the Conservative government’s reduction in health and social services. For the sake of comparison, that figure is toward the upper bound estimate of total executions during the Year of the Terror during the French Revolution. At least those people got a trial.

Since the COVID-19 pandemic was declared in March 2020, there have been two fiscal stimulus packages in the United States, and the Biden administration promises that a third is on the way, for a combined total of somewhere between $3 and $4 trillion. Last October the editorial board of the Financial Times announced that austerity was dead and in January issued a mea culpa, acknowledging that expansionary fiscal stimulus might, sometimes, be expansionary. The chief global strategist for Morgan Stanley responded by raising the alarm about “a solidifying consensus in the American elite that deficits don’t matter.”

If this time is indeed different, much of the credit must go to the political movements against inequality, racism, and austerity that followed the 2008 crisis. But there are also new ideas and vocabularies at play, and an escalating dissolution of the boundaries of political possibility. Today you cannot read or argue for long about stimulus checks, government spending, quantitative easing, and unemployment insurance without encountering ferocious disputes about Modern Monetary Theory (MMT). Is it a better, more humane replacement for the gruesome ideology of austerity?

The past few years have been good to MMT. After two decades laboring in the mines of heterodox academic economics, many of MMT’s proponents have found themselves in the public eye. Stephanie Kelton, a leading MMT theorist, was first appointed to the Senate Budget Committee by Bernie Sanders in 2014, then served as an economic adviser to his 2016 campaign; in 2019 Alexandra Ocasio-Cortez was spotted carrying an MMT textbook and the third MMT conference featured a range of new adherents, including a panel where Delman Coates, senior pastor at Maryland’s Mt. Ennon Baptist Church, argued that MMT was a way to achieve the longstanding goals of the civil rights movement and the Black church. In the miserable year of 2020, Pavlina Tcherneva published The Case for a Job Guarantee on how MMT can help achieve the long elusive progressive goal of full employment, and Kelton’s The Deficit Myth became an instant best-seller. In 2021, as progressives of various stripes gather their energies to resist the threat of a post-pandemic drive to austerity, MMT has positioned itself as one of the most salient and comprehensive policy alternatives to a repeat of the mistakes of the Obama administration.

The appeal of MMT is easy to understand. The forbidding, heavily mathematized edifice of academic economics is incomprehensible or repellent to outsiders, and its reputation remains tarnished by the abrupt outbreak and brutal aftermath of the 2008 crisis. MMT offers an alternative; sometimes it is even called a “people’s” economics.

While MMT represents a complex body of scholarship, a few of its core points are now familiar to a broad audience: Governments are not like households because they control their own currencies, which means they do not need to have balanced budgets. Therefore, governments do not need to “pay for” their spending through taxes and borrowing. They can just spend money into existence. In fact, as Kelton writes, “in almost all instances federal deficits are good for the economy. They are necessary.” MMT thus appears to offer a conclusive response to the world’s most popular bad-faith question: “How are you going to pay for it?” MMT tells us this question doesn’t need to be answered. The limiting factor to government spending is typically political, not economic. Kelton again: “the limits are not in our government’s ability to spend money, or in the deficit, but in inflationary pressures and resources within the real economy.” As the world has watched governments around the world produce tens of trillions of dollars in coronavirus response funds—mostly to prop up the sclerotic system of international capital—MMT appears to be vindicated over and over again.

The rise of MMT has unleashed a welter of criticism. Writers in the Financial Times roll their eyes and invoke hyper-inflation. Krugmanite centrists find MMT both novel and persuasive—but what is novel is not persuasive, and what is persuasive was already understood by orthodox Keynesians in 1956. Observers on the left note that MMT originates in the musings of a tax-avoiding hedge fund owner, as well as the heterodox economist Hyman Minsky, whose ideas had a good run during the 2008 crisis, but who also despised welfare state redistribution. There are also serious practical critiques of the job guarantee idea, doubts about the reality of the government accounting exercises that fill the MMT literature, and strenuous objections to the habit MMT proponents have of using a confounding private language in which familiar economic terms appear with altered meanings. Many of these critiques of MMT focus on whether it really is a theory and, if so, whether it really is monetary.

The heat of those debates risks obscuring that some of the most interesting questions MMT opens up are about the nature of money and its relation to modernity. MMT distinguishes itself from orthodox economics by rooting itself in a distinctive historical account of the origin and function of money: neo-chartalism, an update of an early twentieth-century idea that money originated as an expression of state power. Governments can simply spend money into existence today because they have always simply spent money into existence; indeed, that is the only way money has ever been created. This foundational but mostly unelaborated claim to historical legitimacy is one of the most interesting features of MMT. It is more demonstrably correct than most orthodox ideas about money. Yet MMT stops short of grappling directly with the implications of taking this history seriously, instead substituting one just-so story about money for another that fits their policies better. A deeper history of the social construction of money opens the possibility of even more radical alternatives than the ones offered by MMT.

The most familiar story of the origin of money appears in the introductory chapter of nearly all economics textbooks and from there has become part of popular ideological folklore. It goes like this: in the beginning, there were people engaging in free, private exchange using a barter system without any government to interfere or legislate. But barter is inefficient. It relies on a “double coincidence of wants,” meaning that for me to barter for a cup of coffee, I must find a barista who is willing to accept an economic history lecture as a form of payment and a barista seeking a lecture must find an under-caffeinated historian. In an effort to reduce transaction costs and avoid this problem, private traders agreed to use portable, physically durable, quantifiable tokens to represent value, thereby making different things commensurate by converting them to a common abstraction. They invented money. Since then money has always done three things: it has been a medium of exchange, a unit of account, and a store of value. At first these tokens might have been wampum or cowrie shells, but soon it was discovered that precious metals were the best, because they were limited in quantity, difficult to counterfeit, and would be accepted by traders in other places. This system of “commodity money” persisted until the nineteenth century, when central banks began issuing paper money backed by precious metal. With some major disruptions between 1914 and 1944, and then a major structural change into the Bretton Woods system, the gold-standard system, in turn, lasted until Richard Nixon separated the U.S. dollar from gold in August 1971. Nixon’s decision ushered in the modern age of fiat currency—money backed by nothing but the full faith and credit of the issuing authority.

MMT rejects this story entirely. Neo-chartalism does not assume money to be a spontaneous solution created by private actors to facilitate market exchange. Instead, the chartalists claim that money originated with the state. So, the second story: in the beginning, there was the state. Before the twentieth century, states were primarily technologies for fighting wars. Maintaining a monopoly on the physical use of violence was expensive, and states needed a way to bring resources in (through taxes) and direct resources out (through spending). Payments in kind were not sufficient: a state needed some way of converting its subjects’ chickens and wheat to expenditure on soldiers and weapons. Money was the solution. States designated only certain things as acceptable in payment of taxes, which they then used to pay their soldiers and provisioners. Theoretically, the state could designate anything to be money. Money is not some substance that is separate from and prior to the state that the state needs to work to acquire. Precious metals were separate and prior, yes, but they only became money once a state accepted them as means of taxes and payments. Money has value because a sovereign authority creates laws that give it value and uses its coercive powers to enforce those laws.

This story of money is fundamental to MMT, because one of its central claims is that everyone views state finances backward: governments do not first need to tax in order to spend, but instead create money by spending it into existence, then collect part of it back as taxes. “Taxes,” Kelton writes, “are there to create a demand for government currency.” The neo- part of MMT’s neo-chartalism refers to how MMT builds on this origin story of money to describe the function of sovereign fiat currency today. Here is Kelton:

Taxes were the vehicle that allowed ancient rulers and early nation-states to introduce their own currencies, which only later circulated as a medium of exchange among private individuals. From inception, the tax liability creates people looking for paid work (aka unemployment) in the government’s currency. The government (or other authority) then spends its currency into existence, giving people access to the tokens they need to settle their obligations to the state. Obviously no one can pay the tax until the government first supplies its tokens.

What is striking about both the orthodox and the MMT stories is that they are not really histories at all: they are not serious claims about the past, are not based in archival research, and are not concerned with an account of change over time. Instead, like most uses of history in public debate, they are competing sets of present-day normative claims grounded in fantasies about the past. And while it might be valuable to reject one fantasy about money, that does not justify creating another.

Fortunately, we know quite a lot about the history of money. Unfortunately, it is very confusing.

From the Roman Empire onward, gold and silver circulated as money throughout Europe and the Mediterranean trading world, and enabled trade with Asia. But there was never enough of it. Europeans consistently wanted to buy goods from Asia, but Asians had little interest in European goods, so Europe ran a continual trade deficit that they covered with payments of silver. That meant there was a continual drain of silver out of Europe, leading to frequent episodes of “money famines.” Moreover, most silver coins in circulation were too large to be of everyday use. The smallest were often a single ounce of silver, which would be equivalent to something like a month’s wages for a skilled adult worker. (Imagine trying to buy a cup of coffee with a thousand-dollar bill, and the barista can only try to make change with other thousand-dollar bills). This “big problem of small change” and the continual outflow of silver meant that most of Europe was essentially unmonetized. The same was true of Asia and Africa, outside of major trading ports. In some cases transactions were carried out with fiduciary moneys like tin farthings, wooden tokens, or shell trinkets, as the economist story would predict. But mostly people just kept running tabs with each other, stitching communities together into huge webs of mutual indebtedness. Transactions could happen without money and without barter (and for that matter, without the state) so long as they were embedded in communities and networks of trust or kinship.

Aside from the use of money for long-distance trade, it makes little sense to dwell on this ancient and medieval world, mostly unmonetized and lacking state bureaucracies. Instead, the invention of money as we would recognize it dates to the early modern period, between roughly 1400 and 1800. That was a long era of commercialization, state formation, secularization, and imperialism, and money was integral to all of those processes. The monetization of the European economy began with the expansion of silver mining in Joachimsthaler in the Austrian Alps in 1518 (“thaler” is the origin of the word “dollar”) and expanded enormously with the Spanish conquest of the Americas. The genocidal conquistadors found a literal mountain of silver in Potosi, Bolivia, which was mined after the 1570s by hundreds of thousands of slaves. Most was returned to Spain, while some was sent in an annual treasure galleon to Manila in order to pay for Asian goods. The spectacular inflow of silver to Spain precipitated the Price Revolution—150 years of inflation, unlike anything that had ever happened before. From Seville and Cadiz, silver leaked out into the trading circuits of the European and Atlantic economies through commerce, smuggling, and the expenditures of the Spanish Empire.

The monetization of the European world-system was accompanied by developments in banking and debt instruments. Private bankers (often goldsmiths who owned secure lockboxes) accepted precious metals for safekeeping and gave out paper receipts. And from the fourteenth century on, trade was increasingly paid for through paper credits called “bills of exchange,” which worked sort of like a modern personal check, except they could be signed over to someone else and someone else again, thus circulating like money and obviating the need to move boxes of precious metal around. Both sorts of documents were part of a proliferation of money-like instruments and forms of credit, in a variety of different categories. This was still a far cry from modern currency systems. Private banking families like the Fuggers of Augsburg could make loans and extend credit, but they could not issue their own money. The Bank of Amsterdam, established in 1609, was an exchange bank: traders from all over the world would deposit their metal ducats, guilders, guineas, and écus and receive a common bank money back to conduct their transactions. But the bank did not offer credit or manage a government currency, and the bank’s money was completely backed by deposits.

In most early modern European polities, the unit of account differed from the coins in circulation. There was no such thing as a “pound” coin in England, or a “livre” coin in France. The most common French silver coin was an écu, which usually had a face value of three livres tournois. But there were no numbers on most coins, including the écu. They were stamped with the face of the king, and the king could at any time change the relationship between the unit of account and the coins in circulation, such that an écu might suddenly be worth two livres when you were paying them in taxes, but four when the king was paying you for supplies. The same physical amount of silver could arbitrarily be revalued as an expression of royal sovereignty. Louis XIV did this forty times during his long reign.

Since coins were made of precious metals, people would “clip” them by shaving off small pieces and passing the defaced remnant off as a full coin. They could then melt down the remaining pieces and have a new lump of silver. As a result, foreigners would often not accept coins at full face value, knowing the true silver content was less than stated. Occasionally governments would carry out “restampings” or “recoinages,” when they would require all coins in circulation to be brought to the mints to be melted down and remade. The most famous of these, the Great Recoinage of 1695–6, was conducted by none other than Isaac Newton, then the Master of the Royal Mint. He was an enthusiastic prosecutor of counterfeiters and clippers, personally signing death warrants for dozens of people.

What does all this have to do with chartalism, let alone MMT? As Kelton puts it, “Monetary sovereignty is key to understanding MMT,” and chartalism is the historical claim that money has always been an expression of state sovereignty. Money did arise alongside the state apparatus, as a way of turning taxes into wars and a way for European elites to consume more luxury Asian goods than they would otherwise have done. But commercial exchange often took place through non-money or para-money mechanisms. State money was a separate legal and conceptual category, over which early modern states exercised astounding legal control. As the French legal theorist Jean Bodin wrote in his 1583 Six Books on the Republic, money was “of the same nature as the law, and only he who has the power to make law may give law to the moneys.” Money was a political category, a subset of the total universe of credit and debt tools, referring specifically to the one defined by laws, governed by state violence, and enforced through the tax system.

This all suggests a more central role for the state than the orthodox economists’ story of money. But it doesn’t quite add up to a historian’s verdict that the chartalists are right and the economists are wrong. There were also serious limitations on monetary sovereignty, and they undermine many of the contemporary policies that MMT advocates want to draw from their chartalist origin story.

MMT proponents are fond of saying that anyone can issue money; the challenge is getting other people to accept it. That’s even more true than they seem to appreciate. Money crosses borders and must be accepted by foreigners for international trade to work—hence that ancient trade deficit between Europe and Asia. In early modern Europe, a variety of coins circulated within a given state’s territory, especially in border regions and ports. This variety was accentuated by the use of bills of exchange drawn in different currencies by merchants and bankers in different places. Early modern sovereigns could control the money used for taxes and government payments, but they could not control capital flows across their borders or individual transactions. Then, as now, in a world with the free flow of capital, people in other countries were constantly making decisions about the credibility of governments’ claims to monetary sovereignty. When Newton carried out the Great Recoinage, he underpriced silver at the mint, leading to a continual outflow of silver from England to the Continent. In the long run, that was the first step to England adopting the gold standard, but in the short run, it provoked a balance of payments crisis. That is only one example of many that litter the history of monetary systems. Sovereigns govern territory and people, which move less easily than capital does. Without capital controls, monetary sovereignty is always contested, because capital has the credible threat of leaving.

The famous “monetary policy trilemma” holds that a country can only have two of the following three at any given time: fixed exchange rates (as opposed to “floating,” meaning determined by supply and demand), domestic monetary policy autonomy (over interest rates and the monetary supply), and free capital flows. Since the 1970s, most countries in the world have the latter two. The textbook on MMT by L. Randall Wray maintains that a floating exchange rate provides the most “policy space” for MMT’s ideas, with a fixed exchange rate and capital controls a second-best option. Kelton agrees: “Abandoning fixed exchange rates and floating the currency gave currency-issuing governments like the US expanded policy space to sustain full employment.” Astute observers will note that, in fact, the United States has been considerably further from full employment since the end of fixed rates and capital controls in the 1970s than it was before. And yet MMT has little to say about capital controls, and its advocates tend to avoid calling for a political project of reining in and heavily taxing international capital (possibly due to their founder being a hedge fund owner who lives in the U.S. Virgin Islands). More to the point, by not addressing capital controls, MMT skirts the fact that monetary sovereignty is determined not just by state pronouncements, but by international capital.

Governments today face very different constraints and have very different avenues for enforcing their sovereignty than existed at the time of Louis XIV and Isaac Newton. But they still have to legitimate their sovereignty to global capital. In an international monetary system with floating exchange rates and free capital flows, domestic policy will face the verdict of capital markets. For decades, the IMF has partly justified its austerity policies on the basis of the need for “market discipline,” which is what happens when “financial markets provide appropriate signals and constraints to induce borrowers to behave in a manner consistent with their solvency.” For countries in the Global South, the judgment of capital markets can mean currency crises, banking crises, and punishing interest rates that restrain or undermine government spending. Most governments cannot impose sharply progressive taxes to fund a redistributive welfare state, or use their central banks to generate new money for the same purpose, without facing a speculative currency attack, capital flight, and a sharp rise in borrowing costs. Attempts to impose capital controls meet with hostility from international financial institutions. When MMT says that it applies to countries with a high degree of monetary sovereignty, they don’t just mean any country with a currency-issuing central bank. What they mean is the United States, which has the exorbitant privilege of having its currency serve as the international reserve currency. Critics on the left often observe that MMT seems to offer the spoils of winning a class war without having to actually fight it first. That tendency is not cosmetic. MMT is not a modern monetary theory in the sense of being temporally specific to the system of free capital flows and floating exchange rates that we’ve lived with since the end of Bretton Woods in the 1970s. Rather, it is an imperial monetary theory that applies, if it applies anywhere, only to the United States.

Heterodox thinking about money and monetary policy, especially if it is grounded in a plausible history, can help expand our notions of what is economically and politically possible. But the centrality of state sovereignty to the messy history of money leads to more radical implications than those we see in MMT’s signature policies, like a job guarantee. And casting off some of MMT’s baggage could help movements on the left contemplating a global crisis of the neoliberal order.

The Myth of Ownership by Liam Murphy and Thomas Nagel offers one powerful example of the implications of putting state sovereignty at the center of the creation of the modern economy. As they point out, market exchange is impossible without property rights, contracts, and units of account, all of which are produced by governments. Early modern governments created and destroyed property rights all the time—in venal offices, in noble titles, in guild privileges, and in slaves. This point is echoed and expanded by Katharina Pistor’s Code of Capital, which examines the ways that laws turn things into assets. Murphy and Nagel argue that it is nonsensical to speak of a “pre-tax income” or government “interference” in the economy. The libertarian claim of moral necessity in returning to a prelapsarian natural world before the rise of the modern state is a political project, not a historical narrative. All distributions in the modern world are state distributions. You only own things because of a whole range of public policies, and because of the state’s willingness to use violence to enforce your claims to ownership. From the early modern control of the unit of account to today’s tax code, there is no economy separate from—let alone prior to—politics and the state.

“If [Congress] wants to accomplish something, the money can always be made available,” Kelton writes. “Spending or not spending is a political decision.” She is absolutely right. That conclusion implies the need for a politics, not a “descriptive lens of government accounting,” as MMT describes itself. The answer to “how to pay for” healthcare, child care, education, parental leave, sick leave, and decarbonization is exactly the same as the answer to how to pay for brutal imperialist wars, a bloated carceral apparatus, and tax cuts for billionaires. The answer is: “Use the coercive power of the state to conduct a ruthless class war.” The wealthy have been winning the class war, but it isn’t because they’ve had a better descriptive lens of government accounting. You can’t smuggle redistributive politics into the fortress of the state in a Trojan horse of technocracy. MMT and its left critics are too often arguing about the architecture of the horse rather than the content of what a new monetary policy for the left should be. Today there are more and more calls for Universal Basic Income, which MMT opposes. But beyond that, the Norwegian Social Wealth Fund and the Alaska Permanent Fund are models of what Universal Basic Capital Ownership might look like—with citizens receiving returns on revenues from giant pools of publicly managed capital. Emmanuel Saez and Gabriel Zucman have proposed a radical progressive wealth tax specifically to combat wealth concentration. After 2008, the possibility of capital controls was briefly revived, then banished again. The content of those policies, along with universal healthcare, universal child care, and free higher education, are about more than budgetary choices, or maximizing output. They are aimed at decommodifying social relations, at dismantling the sovereignty of capital, and at liberating people from their dependence on the labor market.

The chartalists and neo-chartalists are right that state is not a separate thing from the economy, shaping it from without, but that does not imply anything about the content of their relationship. The state and the economy are co-constitutive, but their history is full of rupture and reconstruction. Taxes and monetary policy are the main ways their relationship changes, and the main levers for enacting different moral visions of society. That was the case in the haphazardly monetized early modern economy, with its focus on territorial warfare rather than international commerce. It was also the case in the imperial gold-standard economy of the eighteenth and nineteenth centuries, with its mobile capital and structural inequalities. It was the case in the world of Bretton Woods, with its capital controls, high taxes, and monetary policy autonomy, and in the unstable and unequal world we have inhabited since the 1970s, which is the expression of the moral vision of untrammeled capital. The pandemic has been forcing a reconstitution of monetary sovereignty, but it takes a politics to determine if the death of deficits means Green New Deal and universal child benefits, or infinite oil subsidies and Pentagon spending.

Any monetary and property system was created by humans acting through laws and governments, not by nature or man’s innate propensity to truck, barter, and exchange. That’s what the history of money tells us, like all history: the world used to be different, which means it can be different again. For it to be different after this pandemic, rather than exactly the same but somehow even worse, there will need to be a radical political rethinking of the monetary order—not a modern monetary theory, but a monetary theory for the future.

Trevor Jackson is an assistant professor of economic history at George Washington University, where he teaches courses on inequality and economic crisis. His book, Impunity and Capitalism: Afterlives of European Financial Crisis, 1680-1830, is under contract with Cambridge University Press.

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