This is a review of Understanding Modern Money by L. Randall Wray copyright 1998, as published by Edward Elgar Limited. The intent of this review is to add to the reviews of books available which cover monetary reform and related topics. As a side benefit, the people who read these reviews may be less confused and more informed about the potentials of monetary reform. Also they will realize particularly that there are choices exactly where most politicians and ideologically oriented economists claim that there are no choices aside from continuing with policies and priorities which serve a very specific and already wealthy minority.

In the preface Wray defines the purpose of this book as making the monetary ideas of neo-Keynesians and related economists "...clear to a reader with a strong, but not necessarily academic background in economics." Further, he declares his intention to synthesize "...theoretical and policy-oriented research that investigates modern money, government spending and deficits, inflation and employment into what is intended to provide a coherent and unified exposition. It is hoped that this present analysis is only the opening "salvo" of what may become a revolution in the way we think about the economy and especially economic policy. The primary policy conclusion that comes out of this analysis is perhaps shocking, but it can be stated simply: It is possible to have truly full employment without causing inflation." (pp vii to viii) Relative to these goals Wray for the most part succeeds. However by the required inversions of common specie era assumptions and by the density of the content readers may be required to repeat the effort to gain the maximum effects of this book.

Chapter one as the introduction covers a series of concepts that are important in the current economic debate. When these ideas are analyzed in from the perspective of chartalism and functional finance, they will often take on implications different from the conventional perspective. The list of concepts includes government deficits, the value of the currency, monetary policy, government bond sales, employment policy, exogenous pricing versus endogenous pricing, the tax liability validation of fiat currency, and using employer of last resort labor as a valuation buffer. Wray further presents a series of definitions including "state money," "commodity money," "fiat money," "bank money," "the monetary unit of account," and "full employment." He also suggests that a goal of full employment and zero unemployment is a more social use of fiscal policy, than the current assumptions and goals. He revisits and analyses these concepts more closely in the next chapter,

The second chapter is entitled "Money and Taxes: The Chartalist Approach." The nature of the form of money assumed to define and operate a sovereign economy makes a major difference in how monetary and fiscal policies are structured. The conventional concepts of money are generally based upon the assumption that money is based upon precious metals and thereby there is an intrinsic scarcity. Given the assumption built into specie era economics, it is difficult to validate the desired economic policy outcomes. The meaning of "modern" for Wray is toward how current (fiat) monetary concepts function and toward what their actual capacities are. The institutions of governance are assumed to operate by having a balanced budgeting process analogous to how households are expected to sustain themselves. Thereby government fiscal policies are politicized to conform to dated assumptions that favor a form of primitive accumulation named as capitalism. Under a privatized central banking process as defined by the US Federal Reserve and under similar franchises the money which the government is expected to use would be issued as debt based currency effectively borrowed into existence, and thereby accumulating interest which is then represents indebtedness under the privatized banking process.

When we align the nature of our economics and the capacities of modern money with the policies of governance as a socializing agenda will require significant changes. Though Wray doen't state it as such, this shifting of practice to reflect capacities and the public agenda will require reform and education on several levels. In effect the precious metal era economics tends to be structured to serve concentrations of private interests, particularly as in the cynical version of the "golden rule," which is "those who have the gold make the rules." One of the major contradictions of conventional economics is that the actual banking and monetary processes operate much closer to a chartalist view of money than to precious metal centered assumptions. This includes the leveraging allowed by way of the legitimization of the fractional reserve process which in other contexts would be described as a fraud.

Wray first derives the chartalist or token view of money from Adam Smith's description of the actual Scottish banking practices of his era. Wray then presents the state theory of money as developed by Georg Knapp as a more general version of what he describes as the current Chartalist approach. According to Wray, Knapp observes that debts are expressed in a unit of value. He then notes that Knapp also expresses value in its validity by proclamation. Both are a product of the nominalization by the state of the unit of account, and thereby all money is a token, or Chartal, means of payment established by the state.

Decisive in the process is that the state also defines the currency accepted by the state as payment in which taxation levies must be paid. The exchanges between private individuals is less important though significant in the taxation of those transactions, and as validated further as legal tender. This establishes a ranking of convertibility that places the currency in which payment of taxation is accepted as the highest form. Wray also notes that Knapp's concept of money is what the sovereign concept of money evolved toward nearly seventy five years after the publication of Knapp's interpretation and that Knapp also recognized the probable difficulties of trade between sovereign nations.

Wray next covers the treatment of monetary theory by John Maynard Keynes in which the primary concept of a theory of money is the 'money of account, ' which comes into existence as both debt and price contracts. Keynes, following Knapp that it is the state that determines what thing or token will be accepted in the payment of taxes or as currency. Keynes goes on to identify state money as taking three forms, commodity(usually specie based), fiat money, and managed money, the last two also combine as representative (aka chartal) money. Depending upon the state enfranchisement of centralized and member banks, state money, bonds, and securities would be used as the basis for held reserves. "In summary, with the rise of the modern state, the money of account (the description) is chosen by the state, which is free to choose that which will qualify as money ('the thing' that answers to the description). This supercedes legal tender laws -- which establish what can legally discharge contracts -- to define that which the state accepts in payment for taxes at its pay 'offices.'

The state is free to choose a system based upon commodity money, fiat money, or managed money. Even if it chooses a strict commodity system, the value of the money does not derive from the commodity accepted as money. '[f]or Chartalism begins when the state designates the objective standard which shall correspond to the money of account.' (Keynes quoted in Wray) '[M]oney is the measure of value, but to regard it as having value itself is a relic of the view that that the value of money is regulated by the value of the substance of which ut is made, and is like confusing a theater ticket with the performance' (Keynes quoted in Wray pp31-32).

Wray completes this chapter with a discussion of recent contributions in the chartalist tradition. He begins with a review an 'endogenous money' approach which he identifies as related to chartalism and his own perspective. The endogenous approach is characterized by two elements, first, that the supply of money expands to meet the demand for money, and second that the central bank exercises no direct or discretionary control over the quantity of money. It is only in the twentieth century that the majority of economists came to accept the "exogenous" view of money creation and that the central bank can directly control the quantity of money and can be assumed to be fixed so that it does not respond to demand.

Through the rest of the section Wray argues that both perspectives contribute to the understanding of the money supply process by focusing on different parts of the process. Wray acknowledges that under current standards most money is created as make loans, and in effect is destroyed as those loans are paid. He gives special attention to the view of Hyman Minsky which presents a successive nesting process of bank monies which concede to the primacy of state money. The emphasis of both Minsky and then Lerner are presented as focusing on how in a normally, well-working economy money is actually exchanged and tied to their acceptability by the state. The emphasis here is upon the functional nature of money, monetary policy, fiscal policy, taxation, and banking.

In the third chapter "An Introduction to a History of Money" he is to certain extent following in the common necessity of most texts covering money and banking that they address issues of historical precedents and innovations. Of the several books on this topic that I have read Wray's treatment is different and valuable in many ways, and it can be mis-leading at times. As a counterpoint, too often popular level authors often make a complete a complete hash of the histories of money,economy, and their relative evolution. The first section uses Innes's "What Is Money" (1913) and Wray explicitly refers to it as a "caricature," but useful. What makes Innes difficult to swallow for someone interested in monetary reform is that by itself it largely focuses upon the supposed debt origins of money. Wray's use of the Innes article is more about establishing the property of money as a means to establishing units of account, both debt based and debt free. He then develops various hypothetical scenarios based upon fragmentary historical data available to support the expectation of the state based nature of money actually being much older than recorded history could otherwise validate.

The most interesting piece of actual history is his summarization of the opposing monetary and fiscal policies of the Union as compared to the Conferation of southern states during the US Civil war. This comes by way of an analysis done by Abba Lerner. In short the results of that conflict seemed to have more determined by the widely different monetary and fiscal policies than even the military strategies resulting in massive casualties. The chapter is also used to establish the validity of fiat currency by the Union both during the US Civil war, then upto 1869, and then from 1884 forward. The rest sets the context to examine modern fiscal and monetary policy.

The fourth chapter covers government spending, deficits, and money, and essentially compares "conventional" wisdom regarding these issues to the examination of these utilities by Abba Lerner which turns conventional wisdom upside down. Lerner approaches these processes according to their actual effects, and it makes for a startling different view of the general processes. He does make a distinction between "fiat money" and "bank money." Fiat money as only being issued through spending by the government. Bank money as being issued by banks as a product of a contract of indebtedness to a bank. This is generally described elsewhere as debt based money. Fiat money in this context would be debt free money issued by a sovereign government.

Being that bank money is created upon the prospect of profitability, and then any necessary reserves are acquired after the fact. This clearly establishes an unstable process relative to the amount of which money is in circulation. To the extent that fiat money is spent into circulation to greater or lesser effect relative to the scarcity of currency within a community. To the extent that the leverage process would be abused both to put bank money into circulation and remove both it and the interest upon payment. It seems that the influence of Hyman Minsky's observations of the destabilization of an economy enters out of the innovation of unregulated financial instruments and from the deregulation of familiar instruments. In this context there should be a question regarding limiting the creation of bank money both by using fiat money to establish a general lack of currency scarcity and by regulation of the banking leverage ratios. The mechanism by which the amount of private savings that might be held, also effects the availability of credit. It seems that the deregulation of banking industry generally has favored the profitability of bank money over fiat money at the expense of the general population.

Much of what Lerner demonstrated came out of the financing and pricing of commodities and labor by the US government during World War II, and those economic lessons were soon dismissed. Another portion came from the interrelating of the financial spread sheets of the US Treasury and the US Federal Reserve. All this was supplemented by Lerner's study of the fiscal and monetary policies of both the Union and Confederate governments during the US Civil War. I think that generally it has been amply demonstrated that Minsky was entirely correct that economic stability cultivates economic instability. By extension it is probable that Lerner was also right about the capacities under the insights of functional finance. Economic illiteracy by multiple sources and the profitability of bank money obstruct change to a more functional basis. The obstructions to functional fiscal and monetary policies relative the benefits to the general population are primarily political. The fifth chapter on monetary policy uses a similar analysis to demonstrate inadequacy of monetary policies and how the banking actually operates as an institution.

In the remainder of the book Wray examines the logic of the employment of last resort processes as proposed by both Minsky and Lerner. In this context there is a huge positive potential in stabilizing both retail prices and wages in a down cycle period and to avoid the multiple negative effects of using unemployment as a weapon against unionization and the expectation of higher wages according to productivity. The core suggestions are revolutionary, in the sense of the over-turning of long held assumptions. I have difficulty believing that these "conventions" were sustained solely out of ignorance, but more likely as a form of oligarchic dysfunctional finance. Wray does not impute motive to the nature of conventional econo-theology, and it is perhaps not necessary.

The premise that labor should be a participant within an economy both as a producer and as a consumer, shifts the processes of economy from being privatized to being a fully public process. Counter cyclical employer of last resort paid on the basis of a living wage not based upon the errant piece of usury referred to as the Federal minimum wage. Because the nominal Federal minimum wage is substantially below the actual cost of a living wage, it represents a form of subsidy by the work force. The idea that in a down cycle period people might be productive in service to the community, rather than sustaining both a culture of idleness and idle profit is also revolutionary. Further, using the living wage as a basis of valuation of the currency is another major innovation and a humanization of economic processes.

At one point Wray softly suggests that reserve requirements might be treated as an additional option for control. He doe not explore this possibility with any sense of completeness. Given that the established privatization of debt based currency and the lack of an integrated control over the creation of debt based bank money, the current system permits multiple drivers. The use of reserves to leverage the production of debt based money needs to be integrated as part of a fully coherent set of macro-economic policies in service of the public interest. A full reserve structure for all bank lending is the necessary solution. Under the condition of an adequate distribution of state fiat money, debt based money would be not be necessary. Lerner's single driver metaphor can also be taken in the opposite direction toward the corporate takeover of the process of governance. This choice also offers a "single" driver for the most part, but it is exactly what we have now in the control of governance by corporations and particularly by the "finance" sector. This option is obviously hazardous because this particular driver is blind to every issue other than its own greed. It is also an extremely unproductive use of capital relative to the entire economy, and it is entirely fictional other than acting as a wealth extraction process. Reliance upon a privatized central banking process to control hazardous driving by the application of monetary policy changes has clearly been inadequate to limit primitive accumulation. Perhaps we can recognize this pattern by its current enactment in real time on a global scale.

Most of the changes necessary to making the economic processes functional require no specific reform, just changes in the way policy makers understand the capacity of the system they already have. The one large piece that is missing is an advocacy for the restoration of monetary sovereignty that was yielded in the establishment of the US Federal Reserve specifically to greatly eliminate the private franchise to create debt based money and to bring the control of central banking under the authority of the U.S. Treasury. The US Government must restore its ability to issue fiat and debt free money before Functional Finance can be made operational. In addition the deregulation banking and speculation must be restored and improved upon. Using Lerner's wisdom, going for a macro-economic drive requires that a coherent set of public policies be established to take control of the steering wheel and accompanied by knowing how the mechanism actually works and interacts with its environment. We will not have a coherent public agenda controlling the economy until the power to issue fiat and debt free money is restored to serve the public interest.

I believe that Understanding Modern Money as a title was intentional as a counterpoint to the now retired Modern Money Mechanics, once distributed by the Federal Reserve Bank of Chicago and used widely as a basis for teaching monetary principles. There are certain details which Wray does not fully develop, and perhaps given the economic history between the original publishing date of this book (1998) and now, he would now be more complete in his presentation. Apart from his incomplete application of the principles of Functional Finance to include monetary reform, I recommend this book as a substantial basis for a transition to understanding the nature of fiat, debt free money and its possibilities.

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