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Money
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
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
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.”
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
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”
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
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
The US Hierarchy
                 
                                                    Operates with its
                                                    own fiat money
                                   $

Collects taxes in dollars
           &                                   Issues
  Spends in dollars                              the
                                              currency




                        United States Government
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
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
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
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
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
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

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Lesson 1: What is Money?

  • 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