Monetary reform and MMT agree on many things – but for one irreconcilable difference

ABOVE: Image of one dollar “Greenback”, first issued in 1862. From Wikipedia (public domain)

By Jeff Epstein, Citizens’ Media TV on Twitter and Facebook
Copy edited by Ben Szioli
Technical assistance, AMI: Dan Sullivan
Technical assistance, MMT: Joe Firestone


Monetary Reform

The book that “launched monetary reform” is The Lost Science of Money by Stephen Zarlenga, who passed away in 2016 at the age of seventy-six. Monetary reform is represented by organizations such as the American Monetary Institute (AMI) in the United States, Positive Money in the UK, Sensible Money in Ireland, Monetative in Germany, and Monetary Modernisation in Switzerland.

In 2010, the Green Party of the United States codified monetary reform into its economic justice platform. This can be seen in sections I.14 (search for “Greening the Dollar”) and M.

Modern Monetary Theory

Modern Monetary Theory (MMT) was founded in the 1990s by hedge fund manager Warren Mosler. The ideas in his 2010 book The Seven Deadly Innocent Frauds of Economic Policy have been adapted and developed by many economists and experts, resulting in twenty-five years of scholarship.

MMT is currently experiencing a surge in popularity led by the election of United States Representative Alexandria Ocasio-Cortez.

Monetary reformers (MRs) and Modern Monetary Theory (MMT) agree that both federal governments and commercial (privately owned, for-profit) banks create money. Banks create money by offering loans to their customers, immediately putting borrowers into private debt for the entire value of the loan, plus interest.

Money is also created by federal governments – for example, by the US Congress. However, this money is different than bank-created money because it does not leave the recipient in private debt. Once this money is received, usually through a paycheck, it can be spent, invested, saved, or stored under a mattress. Aside from the portion taxed back by the government, there are no strings attached.

Congress is authorized to create currency by the “coinage clause” in the Constitution (Article 1, Section 8, Clause 5): “Congress shall have power to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” As Harvard professor Robert Natelson emphasizes, multiple Supreme Court cases confirm the power of Congress “to coin” money – a verb – as opposed to the noun, a metallic “coin.” This means that Congress is not restricted to creating only coins.

To be technically correct, Congress “appropriates” money by indicating in each bill how much is necessary to make that bill a reality. Once the bill is passed into law and the budget is approved, the central bank of the US (the Federal Reserve or “the Fed”), in collaboration with the Treasury, actually creates the money. The Fed does this by literally pressing keys on a computer, increasing the amount of “reserves” in the Treasury’s spending account (which is at the Fed). The Treasury, which is part of the executive branch, then creates the money by spending its reserves, transferring them into the non-government bank accounts of those receiving the money.

A bank’s reserves are nothing more than the contents of its own bank account at yet another bank. This “bank’s bank” is called the central bank, which in the United States is the Fed.

In the United States, MRs and MMT agree that through self-imposed rules such as the debt ceiling, Congress has mostly restricted its own ability to create money for new programs. MR and MMT also agree that a major reason Congress chooses this is because it has been captured by lobbyists and big-money donors.

In the view of MRs, however, any questions related to coinage, how much money the federal government can or does create, or ownership of the Fed all pale in comparison to the crisis of bank-created money. This is the fundamental disagreement between MR and MMT: MRs believe that nothing is more important than ending the ability of commercial banks to create money.

MRs believe that this problem was created by the 1913 Federal Reserve Act (and before it, the “Crime of 1873“) giving commercial banks the unlimited ability to give out loans – unchecked, irresponsibly, and on a massive scale. Banks lend money to increase their profits, which means that increased bank lending is often incompatible with the public good. Because of this out-of-control lending, MRs say the influence of commercial banks on our economy dwarfs that of the federal government. According to research by AMI scholar Steven Walsh, with assistance from Zarlenga (original emphasis):

We need bank money before anyone can get cash, buy government bonds, or pay taxes. Thus banks have total control over our money supply: nobody (including government) can get any money unless a bank decides to make a loan or purchase.

MMT fails to realize that this vast power is in private hands, not in the hands of society through government.

MRs believe that the only way to solve this problem is to reform the banking system, the most important aspect of which is to end the ability of commercial banks to create money. This would be done by implementing “full-reserve banking,” which only permits banks to lend out what they have in reserves. Full-reserve banking would give the federal government power over how much banks can lend, since only the government can increase or decrease bank reserves.

AMI’s ideal reform is defined by the NEED Act, which is based on the 1933 Chicago Plan. Congressman Dennis Kucinich sponsored the NEED Act in 2011, but the bill had no co-sponsors and was not introduced on the House floor.

While MMT acknowledges corruption and the need for some level of banking reform (such as described by MMTers Mosler, William Black, Michael Hudson, and economist Bill Mitchell [one, two, three]), it does not prescribe reform before implementing new programs. This is because MMT asserts that the existing power of Congress to create currency is all that is necessary to get started – and that bank-created money does not override this potential. According to some prominent MRs, this stance is an egregious oversight. For example, here is AMI’s Walsh:

These are existential threats to our economy and society that MMT fails to address….

[MMT] proposes putting an ambulance at the bottom of the cliff whenever there’s a[n economic] crash, instead of preventing them happening.

AMI member and Green Party economic advisor Howard Switzer stated even more strongly (in a comment on this 2018 video) that MMT is “anti-government pro-bank nonsense” and “a Magical Mystery Tour spreading confusury; economic double-speak in defense of usury.”

MMT has its own criticism of monetary reform, for example, from economist L. Randall Wray in a 2017 interview with Steve Grumbine of Real Progressives. Wray (between the forty-three and fifty minute marks in the linked video) said that monetary reformers have yet to fit their ideas into accounting, which he asserts is a critical step in determining which economic theories lie behind it. He continued:

…I’m not sure they’re capable of doing it. So you have to try to reconstruct what must be a coherent way of presenting what they’re presenting in a non-coherent way. So that’s what we’ve been trying to do. A lot of it is not coherent. The balance sheets don’t balance. They’re saying a lot of nonsensical things that just aren’t possible…. They completely misunderstand how the government spends, and the reality is it already does what they want.

The crux of the disagreement between MRs and MMT is irreconcilable. Both MRs and MMT agree, however, that we must restore the full ability of Congress to create currency and reduce the power of banks enough to prevent sabotage (which, as seen in its one page summary, the NEED Act does simultaneously). At that point, the chances of implementing programs for the many without causing out-of-control inflation will greatly increase. Modern Monetary Theory says we’re already there; monetary reformers say we can only get there after banking is overhauled.

Appendix: To Learn More

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