2. What is Money?
All money exists as an IOU
The “I” is the debtor
The “U” is the creditor
IOUs are recorded in a money of account
The Australian dollar
The US dollar
Japanese Yen
The British pound
The Euro
3. The Money of Account
The money of account is abstract
Like a “meter,” a “kilogram” or a “hector”
It cannot be seen or felt
It is representational, something invented by
humans
In any modern nation, the money of account is
chosen by the national government
4. The Power of the State
MMT emphasizes the state’s power over money
Recognized as far back as Aristotle, through Adam Smith
and into the modern era
John Maynard Keynes told us:
“The age of Chartalist or State Money was reached when the
State claimed the right to declare what thing should answer as
money to the current money-of-account … To-day all civilised
money is, beyond the possibility of dispute, chartalist.”
5. A Sovereign Government
Defines the money of account
Imposes taxes, fees and other obligations
Decides what it will accept in payment to itself
Chooses how it will make its own payments
6. Sovereign Money
Most governments choose their own unique
money of account and issue their own a unique currency
One Nation, One Money
US dollar bills and coins
Mexican peso bills and coins
British pound notes and coins
Most governments also require that taxes be paid in a currency that
the state has the exclusive power to issue
These currencies are “sovereign money”
7. Taxes Drive Money
As long as the state has the power to enforce its tax
laws, the people will need the government’s money
The currency will have value, and people will sell
things (goods and services) to the government in
order to get government’s money
Whatever the government accepts in payment to
itself will become the “definitive” money in the
system
The only final means of settlement
8. The Hierarchy of Money
The private sector
“leverages” the Govt
government’s money
Banks, business firms and Banks
households all issue their
own money IOUs Businesses
Results in a debt pyramid
Households
Where some IOUs are better
than others
9. The US Hierarchy
Operates with its
own fiat money
$
Collects taxes in dollars
& Issues
Spends in dollars the
currency
United States Government
10. The Benefits of Sovereignty
The government can never “go broke” or “run out” of
money
It can afford anything that is for sale in the domestic unit
of account
It does not need to borrow its own currency
It can set the policy interest rate at any level
It has an expanded policy space
11. Pre-1971, Bretton Woods
Spending had to be
controlled
Promised to
convert US
dollars into gold Dollars were
$ subordinate
at a fixed price
United States Government
12. Fixed Exchange Rates
Vulnerable to speculative
Spending had to
attack
be limited
Sacrificed
US$
control of Ruble or Peso
interest rates
Could Could
not issue not issue
Both heavily
dependent on
trade surpluses
Russian and Argentina
13. What About the Euro?
EMU is an exceptional case
Where the currency is divorced from the nation
The Euro is effectively a “foreign” currency from the
perspective of the individual nations
The EUR-17 are users of the currency
They lack the powers of a sovereign issuer
14. The Euro is NOT a Sovereign Currency
EUR-17 must borrow
the currency €
Must pay market Does not
interest rates issue
Can “run out” of Euros
Lacks the policy space
of a sovereign issuer
Italy
15. Money Matters
A sovereign government should be in control of the
currency that sits at the top of its pyramid
Otherwise, it lacks the power to keep its domestic
economy on track
“By virtue of its power to create or destroy money by fiat
and its power to take money away from people by
taxation, [the State] is in a position to keep the rate of
spending in the economy at the level required to
[maintain full employment]”
~Abba P. Lerner, 1947
