Understanding Modern Monetary Theory part two
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 legal tender. This establishes a ranking of convertibility that places the currency in which payment of taxation is accepted as the highest form. Knapp's concept of money is what the sovereign concept of money evolved toward nearly seventy five years after the publication of Knapp's theory. Knapp also recognized the probable difficulties of trade between sovereign nations.
It is the state that determines what thing or token will be accepted in the payment of taxes or as currency. State money is identified as taking three forms, commodity(usually specie based), fiat money, and managed money, the last two also combine as representative 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 is chosen by the state, which is free to choose that which will qualify as money ('the thing' that answers to the description). This supersedes 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.' ... '[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' (from John Maynard Keynes )
The endogenous approach to money supply 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.
Hyman Minsky presents a successive nesting process of bank monies which rely on 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.
An interesting piece of actual history is a comparison 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 been more determined by the functional versus dysfunctional natures of the widely different monetary and fiscal policies than even the military strategies resulting in massive casualties. This bit of history establishes the validity of fiat currency, the "Greenback," by the Union both during the US Civil war, then upto 1869, and then from 1884 forward.
It is necessary to compare "conventional" wisdom regarding these issues to the examination of these utilities as they are used which turns conventional wisdom upside down. Abba Lerner approached 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. A similar analysis can demonstrate the inadequacy of monetary policies and how the banking actually operates as an institution.
The logic of the employer 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.
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.
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 sovereign 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 return on investment. It is also an extremely unproductive use of capital relative to the entire economy. It serves a fictional function other than acting as a wealth extraction process. Relying on a privatized central banking process to control hazardous driving by the application of monetary policy changes has 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.
this is part two of a two part set of flyers
this was based upon a review by Tadit Anderson
of Understanding Modern Money by L. Randal
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