MMT is right … which (paradoxically) is why it is wrong

by Jehu

I’ve been thinking about responding to this article, Internet Marxists Who Are More Austrian than Neoclassical), but I don’t want to repeat myself, so let me try a different tack. I don’t guarantee MMTers will understand my argument. In fact, I don’t think they care about my argument. But, in any case, here goes:

The essential paradox of Modern Money Theory is not that it is wrong, but that it is wrong because, essentially, it is right.

The writer appears to believe that any opposition to MMT policies must result from the belief, “that a state currency not ‘backed’ by gold must surely have zero value or, at the very least, command a level of acceptance likely to crumble at any moment.”

Let me assure the writer that, at least in my argument, this concern is misplaced. I do not oppose MMT policies because fiat currency is subject to depreciation. Nor am I a gold-bug or what he calls an “Austrian Marxist”. In fact, communists were advocating a non-commodity means of exchange while bourgeois neoclassical theory was still in its infancy. Further, the Soviet Union and all socialist experiments of which I am aware, had no commodity money at all.

Thus, to understand why I oppose MMT we have to begin with its core assumptions — assumptions that I think are entirely valid.

The core assumptions of MMT:

According to the writer, in another post titled “What is Modern Money?”, the issuance and management of the national currency is a monopoly function of the state:

“A modern money system, as that term is applied in Modern Monetary Theory, typically has three key features. Two of these features are always present. The third is optional but normally should be in place for the full benefits of modern money to be enjoyed:

1. The currency is a public monopoly. Government issues the currency and is the only entity allowed to do so.

2. The currency is nonconvertible. It is a fiat currency. The government does not promise to convert its currency into a precious metal or some other commodity at a set price.

3. The exchange rate is allowed to float. The government does not promise to maintain a fixed exchange rate with any foreign currency. Instead, the exchange rate is ‘flexible’ or ‘floating’. As already mentioned, this feature is usually operative, but not always.

Taking these three features together, we can say that modern money normally involves a ‘flexible-exchange-rate nonconvertible currency’, or ‘flex-rate currency’ for short.

While I agree with MMT on these fundamental statements, they are simply statements of observable facts, no different than making the observation that objects fall to the ground at an accelerating rate of speed. Facts are facts, but they are also subject to interpretation based on more fundamental economic analysis.  Depending on how you evaluate these facts can lead to very different conclusions.

I approach the core assumptions of MMT from the perspective of Marx’s labor theory of value not from the perspective of bourgeois neoclassical theory. This approach allows for a very different perspective.

“Anything can be money”

The first assumption means that for a given territory only one national currency is allowed to circulate as means of exchange by law. This is because, in order for the state to impose its will on its citizens, they cannot have recourse to alternative means of exchange. While the writer might be interpreted as simply referring to alternative currencies issued by other nation states, this assumption actually includes all means of exchange that can be used in transactions — commodity money, foreign currencies, credit money, etc. The state must not only be the exclusive issuer of the national currency, all competing money-forms must be seized, outlawed or have already been withdrawn from circulation.

In neoclassical theory, of which MMT is a sub-branch, in theory anything can be money. However, this means we now have a problem: If it is true that anything can be money, the state could not have a monopoly on its issuance. Thus the corollary of the neoclassical assumption that anything can be money, is that money must be what the state, and it alone, says is money. To legally impose this monopoly on the definition of money, the state has to actually gain a monopoly control over all forms of money within its territory.

The modern money school does not satisfactorily explain how the state actually gained a monopoly over all alternative means of exchange, but simply assumes it does by demanding payment in taxes. Nor does MMT ever examine the implications of this control over money for the societies where the state has gained its monopoly.

So, let’s look at history.

A massive credit crisis

To be clear, in 1933 Washington did not simply replace gold with a fiat currency, the holders of gold withdrew their gold from the market and the state was forced to stop redeeming its valueless currency. This means the United States experienced a massive credit crisis and a run on the banks that forced Washington to stop redeeming it currency.

A close reading of the numerous Federal Reserve minutes from the 1930s will confirm that it is not the least bit true, as the writer asserts, that “the state … dictates the terms on which its currency is to be issued.” In 1933, the United States was forced to end redemption of its currency for gold, because its reserves were being drained by the redemption by the holders of its currency.

According to the Federal Reserve minutes of October 1930, within the space of only one month about 31 million troy ounces of gold were drained from US reserves by individuals who redeemed the government’s worthless currency for gold. Something like this also happened again in 1971. Although private ownership of gold was illegal in the US at the time, a few very big holders of dollar — US allies, like France and Britain — redeemed their valueless dollars for gold at such rates Nixon was finally forced to withdraw from Bretton Woods and the last vestiges of the gold standard collapsed. In 1971, the United States dollar suffered what can only be called a massive currency crisis which forced it to float the dollar against gold.

To be clear, in neither of these cases did Washington dictate the terms on which its currency was issued.

As Krugman has shown, (and for which he won the Nobel Prize, I believe) the loss by a country of sufficient reserves to defend its currency is a true catastrophe. According to Krugman the drain on reserves by redemption of its currency can rapidly morph into a full-blown currency crisis.

“Suppose speculators were to wait until the reserves were exhausted in the natural course of events. At that point they would know that the price of foreign exchange, fixed up to now, would begin rising; this would make holding foreign exchange more attractive than holding domestic currency, leading to a jump in the exchange rate. But foresighted speculators, realizing that such a jump was in prospect, would sell domestic currency just before the exhaustion of reserves – and in so doing advance the date of that exhaustion, leading speculators to sell even earlier, and so on … The result would be that when reserves fell to some critical level – perhaps a level that might seem large enough to finance years of payments deficits – there would be an abrupt speculative attack that would quickly drive those reserves to zero and force an abandonment of the fixed exchange rate.”

This is what happened to the dollar in 1933 and again in 1971.

I want to emphasize this argument is not Marx’s, nor is it mine, nor is it even an argument made by a gold-bug simpleton from the Austrian school. This conclusion belongs to Paul Krugman and was based on the experience of the US and Portugal in the 1970s. Krugman shows that even if the state has the equivalent of years of reserves in its possession with which to defend its peg to gold, it can be forced off the gold standard by speculative attacks.

Krugman’s theory explains why the United States and the other industrial powers were forced to end domestic redemption of gold in the 1930s and why the United States was forced off the gold standard entirely in the 1970s. The actual historical record shows that it is utter nonsense to argue, “[acceptance] of a state currency – whether linked to gold or not – is ensured by the state enforcing a tax obligation”.

If the state has the power to enforce acceptance of its currency, it is only on the basis of the most restrictive conditions of international trade as were found in the Soviet Union prior to its collapse, the capitalist industrial countries prior to the inter-war period or medieval China. However, as the world market expands and countries become more dependent on one trade with one another, the capacity of a nation state to maintain its own currency peg to a commodity money is quickly eroded and states generally lose the capacity to enforce acceptance of its currency.

Inconvertible currency does not behave like money

Which brings us to the second assumption of MMT: the state could impose fiat on society simply by refusing to redeem its fiat for commodity forms of money.

In economic theory, money is the medium for the circulation of commodities — a necessary and irreplaceable instrument to facilitate exchange in any commodity producing society. Prior to modern money, what served as money was any number of actual commodities or tokens. If in one place one sort of money was scarce while another plentiful, the latter could be used. Over a period of time (hundred or thousands of years?) any number of increasingly valuable metals might play the role of money. Where the metals were scarce, people might even use tokens like tally sticks, etc. In any case, no central authority determined what thing was employed as money. It was a matter decided by society.

To make a long story short, between 1929 and 1971 all alternatives to state issued fiat currency were suddenly and without warning withdrawn from circulation by their owners. It was as if the oceans suddenly receded for no apparent reason and folks sitting on the beach were left wondering what had happened. No one on the beach realizes the ocean disappearing signals the imminent arrival of a deadly tsunami.

Likewise, for whatever the reason, not just gold and silver, but all forms of money and especially credit money, vanished from circulation in 1929. In the aftermath of the sudden disappearance of money from circulation, a single money remained behind: state issued fiat. And this is because, of all monies that were in circulation at the time, state issued fiat currency could be detached from the values of commodities simply by executive order.

And why? Because when a fiat currency is detached from commodity money — something the state is forced by event to do to protect its reserves — the fiat no longer expresses the values of the commodities for which it is exchanged.

This argument, of course, only makes sense if we assume, as classical theory and especially Marx’s labor theory does, that a commodity money expressed the value of commodities in the first place. If a commodity money never expressed the value of commodities, it should not matter whether it was linked to a commodity money like gold or not.

In other words, you cannot make much of a case for ending the gold standard unless you admit inconvertible fiat currency does not behave like real money. Moreover, if you do not agree with this view — and most people don’t — you can’t explain why money suddenly disappeared from circulation in 1933 and again 1971. The classical view of money thus explains why money disappeared in 1929, as well as why the state has a monopoly on what serves as money today.

Classical economic theory argues money is now a monopoly power of the state because other forms of money based on commodity money can no longer circulate in the economy as monies. The currency is now nonconvertible precisely because only nonconvertible tokens will circulate as money.

The economic logic of floating currency exchange rates

Finally, inconvertible fiat currency has no fixed exchange rate to any other currency because the first two assumption of MMT are true for all currencies in the world market.

What allows fiat currency to circulate in the economy after commodity money was withdrawn is the fact that it does not express the values of commodities for which it is exchanged. The foregoing statement is true, but it can also be restated: It is not simply that the fiat no longer expresses the value of commodity, inconvertible fiat expresses the values of all commodities as zero. Since a unit of fiat contains no value, in an exchange it expresses the value of the commodity for which it is exchanged as zero.

If all currencies within the world market are inconvertible fiat, they all express the values of all the commodities of the world market as zero.

Thus, each fiat currency is to another fiat currency as zero is to zero — that is, they each have identical exchange value. It does not matter what the exchange rate is between any two currencies in the world market, since each represents a value of zero socially necessary labor time. Fifty dollars equals fifty times zero, and this can be exchange for forty euros that equal forty times zero. If later ninety dollars are now exchanged for ten euros, the results are the same: ninety times zero equals ten times zero.

The exchange rate between inconvertible fiat currencies is, therefore, meaningless so far as classical labor theory is concerned, because zero will always equal zero no matter the quantities of currencies. Floating exchange rates have no impact on capitalist accumulation.

Implications of modern money theory

The implication of the above arguments is that one does not have to accept MMT’s explanation for how the state came to monopolize money in order to see MMT can still be an accurate description of “how modern money works”. You don’t have to believe that the state control of money results from its ability to tax or any of the other nonsense MMTers prattle on about. Even if they are wrong about everything the history of money prior to 1971, the MMT school can be right in their core assumptions regarding the present global monetary system.

Thus my opposition to MMT has nothing at all to do with its core assumptions; rather my opposition to MMT is based on the fact that when the gold standard collapsed this was because money itself became a fetter on capitalism. If a commodity money cannot circulate as a medium of exchange, it obviously cannot become capital through the buying and selling of labor power. The inability of gold to circulate had no impact on its ability to function as money — although this function is now restricted — but it did prevent commodity (hard) money from becoming capital, which is a catastrophe for capitalism.

To put this another way, at a certain point in the development of capitalist production, money became incompatible with capitalist production — an event predicted by classical theory (i.e., Marx) long before it happened.

The Lost Opportunity of the MMT School

Unfortunately, one thing that is lost if you accept most of the MMT’s schools views on the history of money is how huge the change has been since 1971. To be clear, 1971 was the year “The Empire Strikes Back”. If 1789 set history on the march toward subordination of the state to the democratic will of its citizens, 1971 was the year the state declared its independence from democracy.

In 1971 the state demonstrated that it no longer needed to live off the meager resources it could raise through taxation and was thus free of all democratic control. Few people outside of the MMT school realize exactly how much power the state has gained since 1971.

For anti-statists, the argument of the MMT school is important for explaining the increasingly totalitarian character of the state.

There is nothing theoretical about the capacity Washington has to finance its own operations. MMT is not theory about how Washington might operate if it realized the power it has, it is the way Washington operates right now and how it manages to finance its huge military and global adventures.

Washington has completely slipped its democratic harness.

The post-crisis debate over the causes of growing inequality

MMTers complain that the state has the power to fund all the programs necessary to end poverty and hunger in the US right now. Although this is true, it is entirely beside the point, because Washington is not the least bit interested in ending poverty and hunger; and, even if it were determined to end poverty and hunger, this does not require any state spending for the very same reason that the state does not need to tax or borrow to finance its own operations.

Since we see mounting evidence of inequality, poverty and hunger, not only in the United States but throughout the world market, the arguments made by the MMT school suggest Washington is actually using the power it now has, thanks to modern money, to maintain and expand inequality, poverty and hunger.

The state produces nothing and can only make use of resources that have already been produced. According to MMT, Washington can print currency to buy these excess resources and employ them to end poverty and hunger. This is true, but MMTers overlook an important corollary: Washington can also buy the resources to prevent prices from falling to a level people can afford.

To give an example: the state can print currency to buy excess farm output and distribute it directly to those who need it. But it can also print currency to subsidize monopoly prices. Or it can print the currency and simply pay farmers to not grow food in the first place and subsidize prices that way. Finally, it can print currency and use this currency to deploy excess labor power from the agriculture sector to the defense sector in order to build aircraft carriers rather than grow food.

And it can call this latter program “full employment”.

What is common to all of these uses of currency created out of nothing is that none of them end poverty and hunger, but they are profitable.

Modern money and the excess profits of capitalist firms

Here is the thing: MMT can show how it is possible for the state to use MMT to prop up profits; instead they choose to lobby support for more abuses by the state. They begin with the argument that if the ‘private sector’ (i.e., the capitalists) choose to save more than they can invest productively, the state is obligated to make this excessive accumulation possible by running deficits and borrowing the excess savings (capital) that can’t be invested profitably. In the long run, private firms could not accumulate more profits than they can invest profitably if the state did not run the deficits (and thus issue interest paying treasury bonds) that make this possible.

Thus, unlike in the early 1900s, state deficits make monopoly pricing power economically viable. Simply stated: monopoly pricing power is only possible because the state converts the excess profits resulting from monopoly prices into interest paying public debt. As Stephanie Kelton writes, “the government is the currency issuer, and so it obviously is not really “borrowing” even when  it requires itself to issue Tbills.”

The state issues the treasuries not because it must borrow to operate, but because it must borrow to subsidize the rate of profit.

Not surprisingly, Kelton is now Chief Economist, U.S. Senate Budget Committee, where she is educating dumb congresspersons on the basic facts of modern money theory. If Washington runs deficits, it is not because it needs the money, but because Nancy Pelosi (estimated wealth at $200 million) and Darrell Issa (estimated wealth in excess of $1 billion) need more riskless assets to put the wealth they can’t invest productively.

As Wikipedia explains:

“The conclusion that MMT draws from this is that it is only possible for the non government sector to accumulate a surplus [i.e., an excess of accumulation over productive investment] if the government runs budget deficits. The non government sector can be further split into foreign users of the currency and domestic users.

MMT economists aim to run deficits as much as the private sector wants to save and for real resources to be fully used e.g. full employment. As most private sectors want to net save and globally, external balances must add up to zero, MMT economists usually advocate budget deficits.”

To make this as simple as possible: Capitalists need someplace to park their excess capital and the state provides this service by running deficits. The state then pays interest on the debt, which adds to the profits of the capitalists — a return they could not get if they held their excess capital in a dead hoard of gold.

Modern money and US wars of aggression

Now here is the bonus point for modern money: In return for this service to the capitalist of generating riskless financial assets for them to hide their dead capital from devaluation, Washington get to consume the excess capital unproductively to build the largest military in human history.

Confused by this? Why doesn’t Washington ever have to pay back its debts?

Because the capital cannot be invested productively, so its owners never ask for it back, but simply roll it over into new loans to the state. New masses of excess capital are created every day and these new masses must be lent to the fascist state as well because they cannot be invested — think of the billions Apple is sitting on. On the other hand, Washington, having borrowed the excess capital from Apple, never has to repay it, but simply must pay interest on it to Apple.

Now, MMTers could have used their knowledge of how “modern money works” to expose this scam, but they have chosen instead to lobby for more of it.