Lesson 1: What is Money?


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Lesson 1: What is Money?

  1. 1. Money
  2. 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. 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. 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 theState claimed the right to declare what thing should answer asmoney to the current money-of-account … To-day all civilised money is, beyond the possibility of dispute, chartalist.”
  5. 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. 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. 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. 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. 9. The US Hierarchy  Operates with its own fiat money $Collects taxes in dollars & Issues Spends in dollars the currency United States Government
  10. 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. 11. Pre-1971, Bretton Woods  Spending had to be controlled Promised to convert USdollars into gold Dollars were $ subordinate at a fixed price United States Government
  12. 12. Fixed Exchange Rates  Vulnerable to speculative Spending had to attack be limited Sacrificed US$ control of Ruble or Pesointerest rates Could Could not issue not issue Both heavily dependent on trade surpluses Russian and Argentina
  13. 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. 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. 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