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#