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.”
 |
| Thomas Hobbes |
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 |
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.
 |
| Jean-Baptiste Say |
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.
#30#
