In the previous
posting on this subject, we took a look at what is meant in Modern Monetary
Theory (MMT) by “pure money.” We
discovered that “pure money” doesn’t mean what one might expect from the Just
Third Way concept of “pure credit,” but is something similar in form to the
Just Third Way idea, while being pretty much its exact opposite.
 |
| Henry Dunning Macleod |
To explain, “pure
credit” is money created by the expansion of bank credit backed up by a central
bank without the need for past savings on the part of the borrower. Yes, “money” and “credit” are two ways of
saying the same thing. As Henry Dunning
Macleod put it, “Money and Credit are essentially of the same nature; Money
being only the highest and most general form of Credit.” (Henry Dunning
Macleod, The Theory of Credit.
Longmans, Green and Co., 1894, 82.)
And, yes, some
form of savings in the form of non-consumed things needs to be present, such as
raw materials or existing inventories of things out of which capital can be
formed. “Freedom from the slavery of
savings” does not mean the ability to wave a magic wand and create something
out of nothing.
It does mean that
someone who does not have savings in any form can still become a capital owner. He can do this by promising to pay the people
from whom he purchased what was needed to form the capital out of the capital
itself.
 |
| Louis Orth Kelso |
True, most banks
or other institutions making loans of this type will demand collateral, but
collateral is not an essential part of the loan. The purpose of collateral is to minimize
risk. That is why Louis O. Kelso
advocated replacing traditional collateral owned
by the borrower, with capital credit insurance and reinsurance “rented” (so to
speak) by the borrower.
In other words, a
borrower need not have accumulated or saved collateral in order to be able to
borrow. He can pay a fee called an
insurance premium for an insurance policy that pays off in the event of
default.
Today, however,
we look into the third and final principle of Modern Monetary Theory, which is
that “money is not a medium of exchange, but a standard of deferred
payment. Government money is debt the
government may reclaim through taxation.”
Frankly, this
principle makes no sense. How, exactly,
are you supposed to pay someone with a “standard of deferred payment”? When I want to be paid, for example, I demand
so many dollars. In theory, those
dollars are uniform negotiable contracts by means of which “consideration” is
delivered to me, i.e., I am “paid.” I gave something a while back with a value
denominated in “dollars,” and I expect something with the same value also denominated
in dollars.
 |
| Riiiight. Thirty-six inches . . . of WHAT? |
Thus, “dollar” is
not the standard of value, but the measure of value. For example, suppose you go into a store and
say, “I want thirty-six inches.” The
clerk would probably give you a yardstick.
You then say, “No, I want thirty-six inches, not a piece of wood
thirty-six inches long. Just give me
thirty-six inches.”
The clerk looks
at you as if you are a trifle crazy, and says, “Uh, yes, of course. Thirty-six inches of what, sir or madam as the case may be?”
Exasperated, you
say (more or less loudly and insultingly as you can), “I want thirty-six inches
of length. Now, get it for me, or do I have to call the
manager?”
You can see where
this is going. The principle in MMT that
money is not a medium of exchange, but a standard of deferred payment is a
meaningless statement; it is contradictory.
A standard of deferred payment for what? If there was not something given or received —
exchanged — for which payment is owed, how can there be a debt? Is “money” just a way of saying that the
issuer of money never has to give value for what he receives? If money is not the medium of exchange (or
even a medium of exchange), then what is being paid for?
 |
| Is government really a money creator? |
It gets worse.
The second part
of this principle is “Government money is debt the government may reclaim
through taxation.” Let’s break that
statement down into its meaning.
Government issues
$1 and uses it to purchase a good or service worth $1. The recipient of the $1 has a piece of paper
that says the government owes him $1.
Naturally, he
wants something of value for what he gave up in the transaction; what he “exchanged.” So he goes to the government and presents his
$1 for payment. The government then
says, “Sure thing, Bud. For us to
reclaim that $1 debt we owe you, however, we have to collect $1 in taxes. Pay us the $1 you owe us in taxes.”
 |
| "Because my image came up instead of Coogan's, that's why." |
So, the fellow
hands over his $1, and the government marks his tax bill settled. The government then asks him, “What are you
still doing here?” He says, “I want to
receive payment for that $1 that you told me was a debt you owed me.”
The government
looks at him and says, “We don’t owe you anything. We reclaimed that debt by levying a tax on
you. You gave us back our debt that we
issued to pay for the good or service you supplied. We no longer owe you.”
You, of course,
say, “But I’m out $1! We had a
deal! You exchanged $1 for a good or
service I supplied, and you said I would receive a deferred payment for
it. When I asked for my payment, all you
did was take away my money and call it a tax!
You got something for nothing!
You lied! You’re a thief!”
The government,
of course, is offended. They remind you
that in a democracy you are the
government, and you can’t steal from yourself.
They lock you up and throw away the key.
(By the way, we
did not make up that scenario, except for the details. We got it out of Gertrude Coogan’s Money Creators, in which Ms. Coogan
asserted that, yes, money creation by the government is theft, but it doesn’t
count because we are the government, and you can’t steal from yourself. That’s logic.)
No one in his
right mind would agree with a principle, monetary or otherwise, that declares
that theft of any kind is okay simply because the thief is big enough and
strong enough to take what he wants.
That demolishes
all three of the principles of MMT, which to recap are,
·
Money is a creature of law rather than a
commodity.
·
The State can create “pure” money by emitting
bills of credit (issuing debt), making it exchangeable by recognizing it as
legal tender.
·
Money is not a medium of exchange, but a
standard of deferred payment. Government
money is debt the government may reclaim through taxation.
Thus, MMT's three principles in reality boil down to two: 1) Money both is, and is not, a commodity, and 2) Money both is, and is not, a medium of exchange. Even if we accept these contradictions, however, we are still left with a conundrum. If MMT can’t
tell us what money is, what is money? We’ll
look at that next week.
#30#