Last week we delved into Modern Monetary Theory, or “MMT” as it is known, based on Keynesian economics, which is in turn derived from the “chartalism” of Georg Friedrich Knapp, also known as “the State Theory of Money.” As we noted, the essential principles of MMT 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.
|John Maynard Keynes|
We agreed with the first principle, that money is a creature of law and not a commodity, but noted that at least with respect to money not being a commodity, MMT theorists contradicted themselves, and treated money and credit (two aspects of the same thing) as if it was, in fact, a commodity, the independent variable in the Quantity Theory of Money equation:
M x V = P x Q
where M is the quantity of money, V is the velocity of money (the average number of times each unit of currency is spent during a period, P is the price level, and Q is the number of transactions, M is the “independent variable” and V, P. and Q are the dependent variables. V, P, and Q are determined by M, not the other way around. Thus, despite the claim that in MMT money is not a commodity, it is treated precisely as if that were the case.
Today we will look at the other part of the MMT principle that “Money is a creature of law rather than a commodity.”
Again, we agree that money is a creature of law . . . but disagree that the MMT theorists know what that means! The problem is that the MMT principle is not really that money is a creature of law, but a creature of the State! As John Maynard Keynes asserted (without presenting any proof, of course),
It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp’s Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. ( John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
Presuming that the following statements are equivalent is to make a profound error about money, law, and man and the State, to say nothing of God and the natural law and thus reason itself:
· “Money is a creature of law.”
· “Money is peculiarly a creation of the State.”
To explain, we need to ask ourselves What is the source of power in civil society, and thus all rights and law? Is it the abstraction of the State or the collective? Or is it actual, flesh-and-blood human beings?
If, as Thomas Hobbes asserted in Leviathan, the State is a “Mortall God” in which the “Immortall God” vests absolute power, then human beings only exist at the sufferance of the State. In, on the other hand, God vests individual rights and sovereignty into actual human beings instead of an abstraction created by human beings, then the State only exists at the sufferance of the people — the organized group of individuals, not the abstraction of the collective.
If we go with the theory of Hobbes, then there is no law higher than the State. Money being a creature of law is necessarily “peculiarly a creation of the State.” The State owns everything and everybody, except where it has for the sake of expedience permitted otherwise, but always subject to the ultimate sovereignty and power of the State. As Hobbes explained,
A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, "That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign." Every man has indeed a Propriety that excludes the Right of every other Subject: And he has it onely from the Soveraign Power; without the protection whereof, every other man should have equall Right to the same. But if the Right of the Soveraign also be excluded, he cannot performe the office they have put him into; which is, to defend them both from forraign enemies, and from the injuries of one another; and consequently there is no longer a Common-wealth.
John Locke was closer to a personalist (a focus on the human person instead of the collective) understanding of taxation and the right of the State to “create” money. As he put it in his Second Treatise of Government,
Sect. 140. It is true, governments cannot be supported without great charge, and it is fit every one who enjoys his share of the protection, should pay out of his estate his proportion for the maintenance of it. But still it must be with his own consent, i.e. the consent of the majority, giving it either by themselves, or their representatives chosen by them: for if any one shall claim a power to lay and levy taxes on the people, by his own authority, and without such consent of the people, he thereby invades the fundamental law of property, and subverts the end of government: for what property have I in that, which another may by right take, when he pleases, to himself?
In other words, taxation is not, as Hobbes believed, the exercise of the property right by the sovereign, but a grant from people to the State with their consent to defray the legitimate costs of government. Anything else is theft.
So, yes, we agree that money is a creature of law . . . but not a State creation. Why?
The law of the State must adhere to a higher law, that of nature, “the natural law,” which is based on human nature. Assuming you want to go to an ultimate source, then it comes from God, Who built the natural law into human nature, not into the collective or any personification of it. Those are human creations, not divine creations or themselves divine.
Money is therefore a creature of law of nature, which is based on justice, specifically commutative justice, the most basic form of justice from which all other forms of justice derive. Commutative justice is the justice of contracts, of equality, or of exchange. It says that for something given valued at, say, five dollars, then something to the value of five dollars must be received.
Given that money is defined as “all things transferred [exchanged] in commerce,” then we realize that all money is a contract, and in that sense all contracts are money. This is consistent with Adam Smith’s first principle of economics (“Consumption is the sole end and purpose of all production”) and Say’s Law of Markets (“Production equals income, therefore supply generates its own demand, and demand its own supply”).
Briefly, everything else being equal (economists love to say that, as well as “on the other hand. . . .”) — meaning not taking charity, theft, inheritance, gift, etc., into account — the only way to consume something is to produce something. You must either produce all that you consume, or enough to trade to others for what you want to consume.
That is, you enter into exchanges with others (“contracts”) and fulfil them by having produced something and then trading it to someone for what that other has produced. In short, you have created money by being productive and engaging in exchange. You are obeying the law of nature that says if you want something someone else has, you offer a fair and just exchange of something you have that the other wants.
But what if the State has said you may not engage in any exchange unless the State authorizes it? That is what Keynes was saying when he claimed that the State has the power to interfere in any contract at any time (all contracts are “money contracts,” as we have seen). Is that right? No. Is that just? No — but the whole of Modern Monetary Theory is built on the assumption that it is the “right” way to manage the money supply . . . to the advantage of the State. . . .
So the bottom line is that in MMT money is not really a creature of natural law, but a creature of human positive law, which may be in conflict with natural law, and is thus a creature of the State, not of true law.