水曜日, 5月 08, 2019

neochartalist


neochartalist


モズレー:
Soft Currency Economics II: The Origin of Modern Monetary Theory (英語) ペーパーバック – 2013/3/11 Warren Mosler  (著)
https://www.amazon.co.jp/Soft-Currency-Economics-II-MMT-ebook/dp/B009XDGZLI
Fiat money is a tax credit not backed by any tangible asset.

In the real world, banks make loans independent of reserve positions, and then during the next accounting period, they borrow any needed reserves. The imperatives of the accounting system, as previously discussed, require the Fed to lend to the banks whatever they need.


1. The inelastic nature of the demand for bank reserves leaves the Fed no control over the quantity of money. The Fed controls only the price.
 2. The market participants who have direct and immediate effect on the money supply include everyone except the Fed.

As long as the Fed has a mandate to maintain a target Fed funds rate, the size of its purchases and sales of government debt are not discretionary.


Under a fiat monetary system, the government spends money and then borrows what it does not tax, because deficit spending, if not offset by borrowing, would cause the Fed funds rate to fall.

The Federal government, on the other hand, is able to spend a virtually unlimited amount first, adding reserves to the banking system, and then borrow, if it wishes to conduct a reserve drain.

 Savings equals investment, but the act of investment must occur to have real savings. 

Once the government levies a tax, the private sector needs the government’s money so that it can pay the tax.
。。。。

Controlling the Fed Funds Rate 

The supply of reserves consists of three parts: vault currency, reserves supplied through fed open market transactions, and loans from the Fed's discount window (Figure 7). 

To the extent the Fed leaves the banking system short of reserves through open market operations, banks short of reserves try to borrow from each other and bid up the fed funds rate. As the spread between the fed funds rate and the discount rate widens more banks will borrow from the discount window. Borrowing from the discount window carries some administrative costs as well as a stigma of financial weakness. Nevertheless, as the funds rate rises higher and higher above the discount rate more banks will go to the window. Banks are, after all, profit making businesses and the financial incentives to borrow from the window increase as the spread between the funds rate and the discount rate widens. 

Figure 7 -Supply and demand curve for Reserves 

Figure 8 shows that when interest rates on fed funds rise above the discount rate, depository institutions borrow from the Fed. In other words, the Fed supplies the needed resources to the banking system by purchasing securities in the open market or lending at the discount window. By adjusting the composition of the reserves between borrowed and non-borrowed the Fed sets the spread between the fed funds and the discount rate. The Fed uses open market operations to adjust reserve balances so as to keep the banking system in a net borrowed position. To reduce the spread between the fed funds rate and the discount rate the Fed provides more unborrowed reserves through open market purchases. To increase the spread the Fed provides fewer unborrowed reserves which require banks to bid up the price of fed funds and borrow more heavily from the discount window. 

Figure 8 -Supply and Demand Curves for Reserves.


 The fed funds rate is closely watched by the trading desk of the Federal Reserve Bank of New York as the indicator of the reserve position of the banking system. Every depository institution with a reserve requirement ends its reporting period and must come up with its required reserves (an average for the period) by the close of business on every other Wednesday. A perceived surplus sends the funds rate plummeting downward; an expected shortage sends the rate shooting upward. Perceptions sometimes shift rapidly on Wednesday afternoon, the last day of the 14 day reserve accounting period. Figure 8 shows a case in which the supply of reserves exceeds the demand for reserves. 

Depository institutions have more non-borrowed reserves than they need hence the funds rate would fall sharply. In April 1979, for example, the rate fell from double-digit levels to 2 percent in one day.

 Open market operations are carried out by the Federal Reserve Bank of New York under the direction of the Federal Open Market Committee (FOMC). The voting members of the FOMC are the seven members of the Board of Governors of the Federal Reserve System, the President of the Federal Reserve Bank of New York, and four of the Presidents from the other eleven Federal Reserve Banks who serve on the FOMC on a rotational basis. The FOMC meet in Washington, D. C. about every six weeks to assess the current economic outlook. The FOMC votes on intermediate policy objectives and issues a directive to the trading desk manager of open market operations in the New York Federal Reserve Bank. The directive stipulates the target fed funds rate.





Knap クナップ 1842~1926 新歴史学派 貨幣国定説



Marc Lavoie argues that whilst the neochartalist argument is "essentially correct", many of its counter-intuitive claims depend on a "confusing" and "fictitious" consolidation of government and central banking operations.[13]

Marc Lavoieは、新造園主義者の主張は「本質的に正しい」が、直観に反する主張の多くは、政府と中央銀行業務の「混乱」および「架空の」統合にかかっていると主張している。 [13]

  1.  Lavoie、Marc、ネオチャタリズムの通貨と財政の関連性(PDF)
  2.  Lavoie, Marc, The monetary and fiscal nexus of neo-chartalism (PDF)
^
Kelton,  S.  (2010),  ‘Yes,  deficit  spending  adds  to  private  sector  assets  even  with  bond  sales’,17 November  2010,  http://neweconomicperspectives.blogspot.com/2010/11/yes-governmentbonds-add-to-private.html [転送先共にリンク切れ]

 Kelton, S.A  ., Wray,  L.R.  (2009),  ‘Can  Euroland  survive?’, Levy  Economics Institute  of Bard  College Public  Policy  Brief  #106,   http://www.levyinstitute.org/pubs/ppb_106.pdf
2:
The  monetary  and  fiscal  nexus  of  neo-chartalism:  A  friendly  critical  look 1 
The  global  financial  crisis  has  exposed  the  weaknesses  of  mainstream  economics  and  it  has given  a  boost  to  heterodox  theories,  in  particular  Keynesian  theories.  The  mainstream  view about  the  irrelevance  of  fiscal  activism  has  been  strongly  criticized  and  questioned  by  the  active use  of  fiscal  policy  in  the  midst  to  the  global  financial  crisis,  although  this  was  followed  by  a quick  turnabout  of  the  representative  economist  as  soon  as  a  deeper-than-expected  recession provoked  large  government  deficits  and  rising  sovereign  debt  ratios.  The  crisis  and  the generalization  of  social  media,  most  notably  the  multiplication  of  blogs  on  hyperspace,  has provided  more  room  to  enthusiastic exponents  of  alternative  economic  theories.  This  is the  case in  particular  of  neo-chartalism,  often  called  modern  monetary  theory,  or  MMT,  on  numerous blogs.   The  development  of  a  strong  neo-chartalist  identity,  by  economists  who  were  formerly associated  with  post-Keynesian  economics,  has  led  some  observers  to  wonder  about  the  links between  neo-chartalism  and  post-Keynesian  economics.  Heterodox  economists,  not  to  speak  of mainstream  economists,  have  also  found  some  of  the  claims  of  neo-chartalism  hard  to  swallow. The  purpose  of  this  paper  is  to  deal  with  these  two  issues,  most  of  the  analysis  however  being focused  around  the  questions  related  to  the  clearing  and  settlement  system  and  its  relationship with  the  activities  of  the  central  government. 2In  other  words,  neo-chartalists  have  put  forward propositions  that  go  beyond  the  strict  limits  of  monetary  policy,  such  as  propositions  to  solve the  unemployment  problem  while  safeguarding  price  stability,  but  these  other  propositions  will not  be  discussed here.   The  outline  of  the  paper  is  thus  the  following.  In  the  next  section,  I  make  a  brief introduction  to  neo-chartalism,  and  I  discuss  its  relationship  with  post-Keynesian  economics.  In the  second  section,  I  discuss  what  I  believe  to  be  some  of  the  more  controversial  statements  of neo-chartalism,  in relation  essentially  to  the  clearing  and  settlement  system. In  the  third  section, I  show  how  some  of  these  views  have  been  modified  over  time.  In  the  fourth  section,  I  discuss the  eurozone  setup  in  light  of  neo-chartalism.  I  conclude  by  claiming  that  neo-chartalism  is  truly part of post-Keynesian  economics. Neo-chartalism  and  its  links  with  post-Keynesianism To  their  credit,  proponents  of  neo-chartalism  have  managed  to  have  a  substantial  impact  on  the blogosphere,  with  several  non-academic  bloggers  (such  as  Naked  Capitalism)  now  endorsing fully  and  enthusiastically  the  ideas  and  claims  of  academic  neo-chartalists,  thus  succeeding  in 

1This  paper  was  first  presented  at  the  Third  International  School on  Keynesian  Macroeconomics  that  was held  in  Berlin,  July  31-August  6,  2011.  I  wish  to  thank  for  their comments  Gary  Dymski,  Eckhard  Hein, Keith  Newman,  Tom Palley,  Ramanan,  Louis-Philippe  Rochon  and  Mario  Seccareccia,  without  implicating them  for  the  statements  made  here. 2In  a  sense,  this  paper  is  an  extension  of  the  few  pages  that  I  devoted  to  modern  monetary  theory  in  my recent  survey  of  post-Keynesian  monetary  economics  (Lavoie  2011),  which  also  arose  from  a  presentation at  a  previous  Berlin  Keynesian  summer  school. 

the  task  of  taking  on  board  several  non-academic  scribblers,  despite  monetary  matters  being  a rather  arcane  subject,  a  result  that  had  evaded  post-Keynesians  so  far.  Even  Paul  Krugman,  on his  blog,  has  made  occasional  references  and  comments  about  MMT.  This  has  been  the consequence  of unrelenting  efforts  to  be  highly  active  on  blogs by  a few  individuals, in  particular Bill  Mitchell,  Warren  Mosler,  as  well  as  Randy  Wray  and  his  colleagues  at  the  University  of Missouri in  Kansas  City  (UMKC). 3  But  who  are  those  neo-chartalist  authors  and  why  the  reference  to  chartalism?    All postKeynesians  would  reject  the  idea  that  money  got  introduced  into  the  economy  as  a  way  to improve  upon  barter.  Neo-chartalists,  or  modern  chartalists,  argue,  following  Adam  Smith, Georg  Friedrich  Knapp  and  John  Maynard  Keynes,  that  the  State  determines  what  can  serve  as money,  and  it  enforces  this  decision  by  its  power  to  tax  people  and  to  require  payment  in  the currency  of  its  choice.  Thus  what  we  have  here  is  a  state  theory  of  money,  or  more  precisely  a taxes-drive-money  theory  (Wray  1998,  p.  18).  This  theory  is  called  chartalism  because  the definition  of  money  is  proclaimed  by  the  State,  and  the  ability  of  banks  to  produce  money  is granted  by  charters.    We  will  say  no  more  on  the  origins,  and  leave  this  controversial  issue  to specialists  and  historians. Who are  the  modern  chartalists  –  the  neo-chartalists?  The  head  office  of  the  group  may be  said  to  be  at  UMKC,  with  authors  such  as  Randall  Wray,  Mat  Forstater  and  Stephanie  BellKelton,  as  well  as  former  students  of  UMKC  such  as  Pavlina  Tcherneva,  Éric  Tymoigne  and  Felipe de  Rezende.  Another  important  location  is  the  Center  of  Full  Employment  and  Equity  (CofFEE) located  at  the  University  of  Newcastle  in  Australia,  with  its  prolific  director  Bill  Mitchell,  and acolytes  such  as  Martin  Watts  and  James  Juniper.  There  are  also  important  figures,  which  we may  consider  as  fellow  travellers,  such  as  Jan  Kregel,  Edward  Nell  and  Scott  Fullwiler,  with  the latter  intervening  quite  often  on  blogs  despite  having  none  of  his  own.  Besides  the  obvious authors  who  have  inspired  modern  chartalists,  Smith,  Knapp  and  Keynes,  it  may  be  said  that  the originators  of  modern  monetary  theory  are  Warren  Mosler,  Hyman  Minsky,  Abba  Lerner  and Wynne  Godley,  as  their  writings  are  often  invoked  by  neo-chartalists.  Despite  being  written  by  a non-academic,  Mosler’s  (1994)  paper  plays  a  crucial  role  in  the  story  being  told  here,  because Mosler  was  certainly  the  first  to  put  so  much  emphasis  on  the  analysis  of  the  clearing  and settlement  system,  providing  support  to  the  post-Keynesian  view  of  endogenous  money  in  so doing.  Finally,  as  written  by  Wray  in  a  draft  of  his  new  book,  “Others—some  of  whom  were initially  critical  of  certain  aspects  of  the  approach—have  also  contributed  to  development of  the theory:  Charles  Goodhart,  Marc  Lavoie,  Mario  Seccareccia,  Michael  Hudson,  Alain  Parguez,  Rob 

3See  Bill Mitchell,  or  his  Billy  Blog  :  http://bilbo.economicoutlook.net/blog/ Center of  the  Universe:  http://moslereconomics.com/ ; Warren  Mosler  and  his ; the  UMKC  academic staff  and  their New  Economic Perspectives  blog:  http://neweconomicperspectives.blogspot.com/ .  Several students  or  former  students at  UMKC  are  also  participating in  this  effort  at  influencing  the  blogosphere.  Randy  Wray  is  even  writing a Modern  Money Primer  (MMP)  on  line,  delivering a  chapter a  week  and  asking his  readers  to  comment  so as to  improve  the  book,  in  an  attempt  to  explain  MMT  in  simple  terms: http://neweconomicperspectives.blogspot.com/p/modern-money-primer.html .   

4:
Parenteau,  Marshall  Auerback,  and  Jamie  Galbraith”  (Wray  2011A).  It  should  thus  be  obvious, since  I  am  being  identified  with  the  development  of  some  aspects  of  modern  monetary  theory, that  I  have  much  sympathy  with  modern  monetary  theory,  although,  as  pointed  out  by  Wray,  I might  have  reservations  on  some  aspects.   What  are  the  main  concerns  or  features  of  modern  monetary  theory  as  presented  by neo-chartalist  authors?  We  may  say  that  they  are  four  main  topics.  The  first  topic,  already alluded  to,  is  the  question  of  the  origins  of  money  and  the  claim  that  money  is  a  creature  of  the State.  A  second  major  topic  is  the  proposition  that  the  State  ought  to  act  as  an  employer  of  last resort  (ELR),  providing  employment  to  anyone  willing  to  work  but  unable  to  find  work  in  the private  sector.  This  issue  is  also  related  to  the  question  of  how  to  achieve  full  or  very  high employment  without  generating  inflation,  as  neo-chartalists  argue  that  the  public  sector  can provide  a  buffer  of  employable  workers  when  the  private  sector  decides  to  hire  more  workers. There  is  thus  an  important  distinction  to  be  made  between  standard  expansionary  Keynesian fiscal  policies  and  employment  of  last  resort  policies  which  would  be  more  geographically located  to  the  areas  with  low  economic  activity.  A  third  topic  is  fiscal  policy.  Neo-chartalists  wish to  reassert  the  importance  of  fiscal  policy  relative  to  monetary  policy,  in  contrast  to  the neglected  role  that  it  plays  in  mainstream  macroeconomics.  As  part  of  this,  they  have resurrected  the  role  of  functional  finance,  in  contrast  to  sound  finance,  very  much  putting  forth the  work  of  Abba  Lerner  (1943).  They  also  make  an  extensive  use  of  the  three-balance  identity put  forward  most  notably  by  Wynne  Godley  (1999A)  and  the  New  Cambridge  school,  in  an attempt  to  show  that  the  domestic  private  sector  can  only  accumulate  financial  assets  if  the domestic  public  sector  accepts  to  go  into  debt  (or  if  the  country  has  a  positive  current  account balance,  in  an  open  economy),  thus  showing  that  public  debt  is  not  necessarily  an  evil.  A possible  fifth  topic  of  neo-chartalism,  because  of  its  links  with  the  work  of  Hyman  Minsky,  could be  the issue  of financial  instability, as well as its  causes and  remedies. While  all  these  themes  are  certainly  worth  investigating,  the  focus  of  the  present  paper will  be  on  the  fourth  broad  topic  addressed  by  neo-chartalists  –  the  study  of  the  mechanics  of the  clearing  and  settlement  system. 4These  mechanics  are  examined  in  light  of  the  relationship between  the  transactions  of  the  government  sector  and  the  monetary  system,  and  thus naturally  there  is  also  a  link  with  the  legitimacy  of  functional  finance.  Tied  to  the  mechanisms  of the  payment  system,  and  how  the  government  is  integrated  into  it,  is  the  question  of  the definition  of  a  sovereign  currency.  Neo-chartalists  argue  that  their  most  controversial propositions  only  apply  to  countries  with  a  sovereign  currency,  and  hence  the  definition  of  what a  sovereign  currency  is  takes  some  importance.    Another  related  neo-chartalist  theme  is  the determination  of  interest  rates,  in  particular  the  target  overnight  interest  rate,  since  some  neo

4A topic that  will need  to  be  tackled  in  the  future  is  the  implication  of  government  deficit  spending over the  long run,  when  the  economy  is  back  to  full employment,  in  an  appropriate  stock-flow  consistent framework.  A first  effort  at  this  can  be  found  in  Godley  and  Lavoie  (2007A),  Martin  (2008),  and  Pucci  and Tinel (2010).   

chartalists  argue  that  this  rate,  in  nominal  terms,  ought  to  be  zero  (Forstater  and  Mosler  2005). But  I won’t  discuss this  either.     Before  we  tackle  the  neo-chartalist  propositions  on  the  clearing  and  settlement  system and  their  implications  for  government  finance,  I  believe  it  is  worth  exploring  the  relationship between  post-Keynesians  at  large  and  neo-chartalists.  As  pointed  out  in  the  introduction,  most of  the main  neo-chartalist  authors  or  fellow-travellers  were  well-known  post-Keynesian  authors, but  on  blogs  they  seem  to  have  taken  an  identity  of  their  own,  sometimes  even  hinting  that post-Keynesians don’t  understand  or  even perhaps disagree  with them.  Furthermore,  there  is an element  of  distrust  with  regards  to  neo-chartalism  among  a  number  of  post-Keynesians,  as some  of  them  regard  several  neo-chartalist  propositions  as  being  overly  extreme,  while simultaneously  being  taken  aback  by  the  militant  behaviour  of  some  of  its  adherents  or advocates.  We  will  come  back  to  this  double  cause  of  mistrust.  Even  outside  observers  seem  to be  aware  of  some  tension  existing  between  neo-chartalists  and  (other)  post-Keynesians  as  the following  question,  found  on  a  blog  illustrates:  “There  seems  to  still  be  a  debate  within  the  postKeynesian  world  about  whether  chartalism  (of  which  I  am  still  very  sceptical)  is  in  competition with or in  conjunction  with  circuitism  (of  which  I believe)”  (Brazelton  2010).   The  response  of  Scott  Fullwiler  (2010),  certainly  one  of  the  most  articulate  proponents of  MMT,  was  quite  straightforward,  but  also  revealing:  “Where?  There  is  no  debate,  at  least among  actual  chartalists  and  actual  circuitistes,  that  I  can  see,  on  whether  bank  money  is endogenous/horizontal.  We  all  agree  on  the  monetary  circuit  or  endogenous  money.  In  fact, there's  very  little  difference  between  the  entire  paradigm  put  forth  by  chartalists  and circuitistes/horizontalists  like  Marc  Lavoie  and  Mario  Seccareccia”.  Fullwiler  here  denies  that there  is  any  major  disagreement  between  neo-chartalists  and  post-Keynesians,  but  he  is  careful to  point  out  that  those  he  has  in  mind  are  post-Keynesians  of  the  horizontalist  variety  or  else French  or  Italian  circuitists  of  the  French-Italian  school,  such  as  Alain  Parguez  presumably. Without  revisiting  the  whole  post-Keynesian  Horizontalist  vs  Structuralist  debate  on  money,  it  is worth  remembering  that  the  more  transparent  procedures  put  in  place  by  central  banks  over the  last  two  decades  have  vindicated  the  Horizontalist  position  (Lavoie  2005),  and  so  have  the studies  by  neo-chartalists  on  the  clearing  and  settlement  system  (Wray  2006). The  uneasiness  of some  post-Keynesians  to  accept  some  of the  neo-chartalist  arguments may  thus  be  attributed  in part to  their unwillingness  to  entertain the mechanics  of the  clearing  and  settlement system  and the Horizontalist  position. In  response  to  a  further  question  on  the  compatibility  between  neo-chartalism  and post-Keynesianism,  in  particular  the  scepticism  with  regards  to  neo-chartalism  expressed  by some  post-Keynesian  such  as  Steve  Keen,  himself  a  Minskyan,  Fullwiler  (2010)  reasserts  that there  is  no  significant  difference  between  the  endogenous  money  view  of  neo-chartalists  and that  of  Horizontalist  post-Keynesians:  “A  number  of  people,  Keen  included  used  to  think  there was  some  inconsistency  between  MMT/Chartalism  and  endogenous  money.  I  think  I've explained  it  enough  to  Keen  that  he  gets  that  there  is  no  inconsistency,  but  I'm  not  sure,  since many  on  his  site  still  say  that  sort  of  thing.  As  I  said,  though,  horizontalists  like  Marc  Lavoie  will 

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tell  you  we  are  using  basically  the  same  model  as  he  is  for  both  government  money  and  bank money”.  From  this,  it  should  be  obvious  by  now  that  if  I  have  objections  to  the  neo-chartalist views  on  money  creation  and  the  mechanics  of  the  payment  system,  they  don’t  arise  from questions  of  content but  rather from  questions  of form. Indeed,  we  can  certainly  say  that  neo-chartalists  share  many  common  elements  of monetary  theory  with  other  post-Keynesians,  more  precisely  with  the  Horizontalist  postKeynesians  and  the  circuitists.  We  can  simply  list,  without  commenting  much  further,  all  the elements  that  they  share  with  the  post-Keynesians.  First,  the  money  supply  is  endogenous. Second,  loans  make  deposits,  and  deposits  make  reserves  (Wray  2002,  p.  25).  Of  course,  as events  during  the  subprime  financial  crisis  have  demonstrated,  this  last  statement  is  only  true  in normal  times,  as long  as  the  target  rate  of interest  of the  central bank  is not  set  at  the bottom  of the  interest  rate  corridor,  delineated  by  the  rates  of  interest  on  credit  and  deposit  facilities  at the  central  bank.  Third,  central  bank  operations  are  essentially  defensive,  as  the  central  bank normally  attempts  to  set  the  supply  of  reserves  equal  to  the  demand  for  them.  Fourth,  the operating  target  of  the  central  bank  is  thus  the  overnight  rate  target,  not  the  supply  of  the money  stock.  All  these  points  were  made  quite  explicitly  by  Warren  Mosler  (1994,  p.  3)  when  he claimed  that  “monetary  policy  sets  the  price  of  money,  which  only  indirectly  determines  the quantity.  It  will  be  shown  that  the  overnight  rate  of  interest  is  the  primary  tool  of  monetary policy….  The  money  multiplier  is  backwards.  Changes  in  the  money  supply  cause  changes  in bank  reserves  and  the  monetary  base,  not  vice  versa”.  Fifth,  bank  credits  depend  on  the  creditworthiness  of  their  customers,  it  does  not  depend  on  the  availability  of  excess  reserves. 5Sixth, compulsory  reserves  are  means  to  smooth  the  demand  for  reserves  and  reduce  fluctuations  in overnight  interest  rates;  their  role  is  not  to  control  monetary  aggregates.  Seventh,  in  a  corridor system,  the  target  overnight  interest  rate  can  be  modified  and  the  target  rate  achieved  without any  change  in  the  quantity  of  reserves  (Fullwiler  2008).  And  finally,  the  ability  of  the  central bank  to  set  interest  rates  is  tied  to  the  fact  that  banks  must  settle  on  the  books  of  the  central bank,  a  feature  which  is  usually  presented  under  the  less  enlightening  claim  that  the  central bank  has a  monopoly  over  the creation  of  high  powered money.   Modern  monetary  theory  however  also  shares  some  additional  elements  with  French and  Italian  circuit  theory,  and  this  may  explain  why  a  circuitist  such  as  Alain  Parguez  became  so keen  in  endorsing  neo-chartalism  at  an  early  stage.  In  circuit  theory,  there  is  a  sequential  order in  which  various  agents  are  brought  into  the  monetary  circuit.  Firms  borrow  from  banks  and spend  first,  paying  out  wages  (and  dividends  on  the  previous  stock  of  shares);  then,  in  a  second stage,  they  obtain  the  means  to  proceed  to  the  final  finance  of  their  expenditures,  through product  sales  and  the  sale  of  financial  assets.  In  the  neo-chartalist  theory,  the  story  is  very similar.  The  (federal)  government  borrows  from  the  central  bank  and  spends  first,  and  then,  in  a second  stage,  it  secures  its  final  finance,  through  taxation  and  the  sale  of  financial  assets  to  the 5Krugman  (2011)  in  one  of  his  critique  of  MMT  certainly  did  not  get  this  when  he  wrote  that,  if banks have  access  to  more reserves,  “there  are  lending opportunities  out  there,  so  the  banks  won’t  leave  their newly  acquired  reserves  sitting idle; they’ll convert  them  into  currency,  which  they  lend  to  individuals”. 

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private  sector.  As  Pavlina  Tcherneva  (2006,  p.  70)  says,  “logically,  and  in  practice,  government spending  comes  prior  to  taxation”,  a  statement  which  can  also  be  found  in  the  writings  of  other neo-chartalists  such  as  Forstater  and  Mosler  (2005,  p.  537)  and  also  in  Parguez  (2002,  p.  88)  and Bougrine  and  Seccareccia  (2002,  p.  71).  Thus,  there  is  some  symmetry  to  circuit  theory  and  neochartalism.  In  circuit  theory,  consumers  cannot  buy  goods  until  they  get  paid.  In  neo-chartalism, households  cannot  pay  their  taxes  until  they  get  the  central  bank  money;  and  financial institutions  cannot  purchase  government  securities  until  they  obtain  the  reserves  to  buy  them.   There  is  a  degree  of  interdependence  between  circuitists  and  neo-chartalists,  and  indeed,  on occasion, neo-chartalists  cite  circuitist  writings to  support  their claims,  as in  Bell  (2003).     Notwithstanding  these  tight  links  between  neo-chartalists  and  other  post-Keynesians,  it needs  to  be  pointed  out  that  there  is  a  second  reason  why  a  number  of  post-Keynesians  may show  some  easiness  with  neo-chartalism  or  modern  monetary  theory.  Just  like  the  horizontalist version  of  post-Keynesian  monetary  theory  in  the  1980s  generated  a  response  from  those  who thought  that  its  positions  were  overly  extreme,  the  same  thing  has  happened  with  neochartalism  in  the 2000s.  I  have  counted  nearly  a  dozen  scholarly  critiques  of  neo-chartalism  over the years, the  more  general one  being  that  of Perry  Mehrling  (2000). Half of these  critiques  have focused  on  the  idea  of  the  State  as  the  employer  of  last  resort,  with  papers  by  Lopez-Gallardo (2000),  Aspromourgos  (2000),  Kadmos  and  O’Hara  (2000),  King  (2001),  Sawyer  (2003),  and Seccareccia  (2004).  The  other  half  of  the  critiques  focused  on  their monetary  views,  with  articles by  Parguez  and  Seccareccia  (2000),  Gnos  and  Rochon  (2002),  Rochon  and  Vernengo  (2003),  Van Lear (2002-03), and  Febrero  (2009).   While  criticisms  and  counter-criticisms  are  healthy  in  a  scientific  setting,  neo-chartalists occasionally  seem  to  over-react  to  criticisms,  blasting  away  even  people  that  are  essentially  on their  side.  For  instance,  I  thought  that  the  remarks  made  by  Eladio  Febrero    on  modern monetary  theory  were  worth  discussing  and  well  documented,  but  despite  Febrero  (2009,  p. 524)  concluding  that  “the  policy  implications  that  can  be  drawn  from  neo-chartalism  are essentially  correct”,  Fullwiler  rejected  the  paper  as  uninteresting  and  poorly  researched. 

6 Malcolm  Sawyer’s  (2003)  paper  was  also  subjected  to  a  strong  counter-attack  by  Mitchell  and Wray  (2005)  and  Forstater  (2005),  both  responses  claiming  that  Sawyer’s  critiques  were superficial  and  overly  relied  on  second-hand  views.  Even  eight  years  later,  some  of  the  ELR proponents  had  still  not  gotten  over  this  yet.  Following  criticisms  of  MMT  by  Paul  Krugman, where  Krugman  was  accused  of  misrepresenting  neo-chartalism  because  he  had  over-relied  on expositions  of  neo-chartalism  by  its  critics  instead  of  relying  on  the  original  MMT  works,  Sawyer was  once  more  accused  of  the same  methodological  mistake  in  a  neo-chartalist  blog. 7 6“The  Febrero  paper  is  absolutely  horrible.  No  chartalist  takes  it  seriously  because  it  is  a  complete misinterpretation  of  chartalism….  If he’d  read  the  chartalism  literature  instead  of  the  literature  critiquing chartalism,  he  might  have  noticed  that.”  (Fullwiler  2010). 7“This  sort  of  poor  scholarship  was  demonstrated  in  a  2004  article  by  Professor  Malcolm  Sawyer  in  the Journal  of  Economic  Issues  which  attacked  the  concept  of  a  Job  Guarantee.  He  chose  to  represent  the views  of  Professor  Randy  Wray  and  myself  by  quoting  secondary  sources  from  authors  who  were  not  only 

8:

Over  the years,  I  have  had  the  occasion  to  listen  to  many  of Malcolm  Sawyer’s  talks,  and I  can  testify  that  his  views  on  fiscal  policy  are  very  close  to  those  of  the  neo-chartalists.  Indeed he  is  one  of  the  few  economists,  or  even  heterodox  economists,  who  kept  endorsing  the  active use  of  fiscal  policy  and  who  gave  explicit  support  to  functional  finance,  as  the  neo-chartalists  do (Sawyer  2010).  His  views,  just  like  mine  or  those  of  neo-chartalists,  may  have  evolved  over  the last few  years, and  so  he  may  have  changed his mind  over  some  of  the things that  he  might  have said  back  in  2003,  especially  on  monetary  matters,  but  there  is  no  point  in  rehearsing  past disagreements  when  current  views  are  so  close. 8Debates  of  this  sort,  plus  the  aggressive reaction  of  some  non-academic  supporters  of  neo-chartalism  whenever  slightly  different  points from  their  cherished  views  are  being  made,  push  many  post-Keynesian  economists  to  become wary  or  even  fearful  of  neo-chartalism.  As  a  consequence  of  all  this,  readers  will  not  be surprised  to  notice  that  in  what  follows,  I  will  only  rely  on  primary  sources  of  neo-chartalism, and  mostly  abstain  from  citing  any  secondary  source!  Indeed,  interested  readers  should  check the  main  presentations  of  the  monetary  views  of  neo-chartalism  for  themselves,  such  as  Mosler (1994,  1997-98),  Wray  (1998,  2002),  Fullwiler  (2003,  2008),  Tcherneva  (2006),  as  well  as  the numerous  informative  blog  posts  of  Bill  Mitchell.     The  paradoxical  claims  of  neo-chartalism Neo-chartalists  and  the  UMKC  school  are  known  for  their  support  of  a  State  acting  as  an employer  of  last  resort  (ELR)  for  unemployed  workers.  This  policy  stance  is  also  known  as  a  job guarantee  program  or  as  a  buffer  stock  employment  program  –  the  names  used  at  the University  of  Newcastle,  where  such  ideas  were  being  developed  independently.  It  is  my understanding  that  the  emphasis  on  the  analysis  of  the  way  in  which  central  governments  could finance  their  expenditures,  thus  on  the  analysis  of  the  mechanics  of  clearing  and  settlement systems,  arose  because  of  the  desire  to  demonstrate  that  ELR  programs  could  always  be financed.    Neo-chartalists  wished  to  demonstrate  that  the  idea  of  functional  finance  could  be taken  very  seriously,  even if it  led  to  huge  deficits,  because  financing  large  deficits did  not  pose  a problem  for  central governments,  at  least  under  certain  conditions. 9 

critical of  our  work  (which  influenced  the  way  they  constructed  their representation  of  that  work) but  also failed  to  understand  our  work  (which  was  demonstrated  by  several  erroneous  claims  about  monetary economics)”  (Mitchell  2011A).  If  this  was  not  clear  enough,  Bill  Mitchell  had  another  go  at  Sawyer  a fortnight  or  so  later:  “Randy  Wray  and  I  became  entangled  in  an  academic  dispute  with  a  so-called progressive  English  economist  Malcolm  Sawyer  who  had  written  a  negative  piece  on  the  Job  Guarantee ....  Sawyer  presented  an  exposition  of  the  “Job  Guarantee”  based  on  the  way  it  had  been  represented  by our  critics  rather  than  relying  on  the  primary  sources  –  our  written  (and  well  published)  work”.  (Mitchell 2011B).
 8Sawyer’s  views  on  the  relationship  between  government  deficits  and  money  are  much  clearer  in  the response  to  his  critics  (Sawyer  2005),  where  his  position  turns  out  to  be  quite close  to  that  of  neochartalists,  whereas,  in  my  opinion,  his  views  on  the  same  topic were  rather  muddled  in  his  initial paper (Sawyer  2003).   9 I  realized  a  posteriori  that  this  was  already  my  opinion  when  I  reviewed  Wray’s  (1998)  book,  claiming then  that  the  objective  of  his  account  of  the  creation  of  money  was  “to  alleviate  the  fears  associated  with 

9:
Viewed from  this  angle,  the  main  line  of  neo-chartalism  can  be  seen as  a response  to  the standard  crowding-out  arguments,  according  to  which  government  deficits  will  either  lead  to uncontrolled  inflation  or  to  rising  interest  rates.  A  key  claim  of  neo-chartalism  is  that government  deficits  tend  instead  to  reduce  interest  rates,  or  more  precisely  tend  to  reduce overnight  interest  rates.  Thus  neo-chartalists  argue  that,  again  under  certain  conditions,  there cannot  be  any  financial  constraint  to  central  government  expenditures.  If  there  are  constraints, they  are  to  be  found  in  artificial  self-imposed  political  constraints,  or  in  supply-side  constraints, for  instance  when  some  event  has  destroyed  the  physical  capacity  to  produce  goods,  or  if  full employment  has been reached, in  which  case,  the ELR  programs can  be  phased  out  any  way. It  is  important  to  point  that  neo-chartalists  don’t  claim  that  their  proposals  are  valid everywhere  at  all  times.  They  claim  is  that  it  applies  for  nations  with  a  “sovereign  currency” (USA,  Canada,  Japan,  Australia)  (Wray  2002,  p.  24).  There  are  degrees  of  currency  sovereignty, the highest  being  a  country  where  the domestic currency  is  the unit of account,  where  taxes and government  expenditures  are  paid  in  this  domestic  currency,  where  the  central  bank  is unhindered  by  regulations,  where  the  public  debt  is  issued  in  the  domestic  currency,  and  where there  is  a  pure  floating  exchange  rate  regime. 10  In  particular,  it  should  be  pointed  out  that  neochartalist  authors  were  very  critical  of the  setup  of the  eurozone  and  the  euro  monetary  system, and  had  predicted  the  financial  problems  that  some  of  the  eurozone  countries  were  likely  to encounter,  precisely  because  these  countries  did  not  have  a  sovereign  currency  as  defined above  (because  the  European  central  bank  was  prevented  from  directly  purchasing  sovereign debt).  Thus  one  cannot  use  the  current  situation  in  countries  such  as  Greece,  Ireland  and Portugal,  or  even  Spain  and  Italy,  as  counter-examples  to  the  theories  advanced  by  neochartalists. As  mentioned  earlier  by  Fullwiler,  I  am  supportive  of  most  of  the  neo-chartalist arguments  that  deal  with  the  monetary  and  fiscal  nexus.  My  worry  however  is  that  neochartalists  are  so  keen  to  demonstrate  that  there  are  no  financial  barriers  to  running  ELR  or other  government  expenditure  programs  that  their  efforts  eventually  become  counterproductive.  My  experience  with  my  own  students,  left  on  their  own  to  read  articles  such  as  that of  Stephanie  Bell  (2000),  who  denies  that  taxes  and  bonds  finance  government  expenditures,  is 

government  deficits,  and  to  show  that  deficits  play  a  positive  role  within  capitalist  monetized  economies. Thus  the  possibility  that  an  ELR program might  generate large  government  deficits  cannot  constitute an objection  to  the  program”  (Lavoie  1999, p.  370).   10  Thus  neo-chartalists  are  in  favour  of  flexible  exchange  rates,  whereas  several other  post-Keynesians, but  certainly  not  all,  favour  instead  fixed  exchange  rate  regimes  –  another  motive  of  controversy! “In  a very  real  sense,  a  country  that  adopts  fixed  exchange  rates  surrenders  a  great  deal  of  its sovereignty….Those  heterodox  economists  who  simultaneously  adopt  an  ‘endogenous  money’  approach while  advocating  fixed  exchange  rate  systems  do  not  appear  to  recognize that  the  central  bank  will  not  be able  to  exogenously  administer  overnight  rates  in  such  a  system’  (Wray  2002,  p.  36).  Interest  rates become  endogenous  in  the  sense  that  the  target  rate of  the  central bank  is  likely  to  react  to  a  balance  of payment  deficit  (Wray  2006).  However,  when  countries  are  running external  surpluses,  there  is  no  such pressure,  as  the  Chinese  case  clearly  demonstrates,  and  hence,  in  my  opinion,  interest  rates  are  just  as “exogenous”. 

10:
that  even  open-minded  readers  are  left  puzzled.  While  some  apparent  paradoxical  neochartalist  statements  seem  worthwhile  making,  for  instance  the claim  that  the  government  does not  face  a budget  constraint  similar  to  that  of  households, that  running  budget  surpluses  will not ease  off  pressure  on  interest  rates  or  provide  the  private  sector  with  more  loanable  funds,  or that  running  budget  surpluses  now  will  not  help  to  deal  with  the  demands  of  an  ageing population  in  the  future,  other  claims  may  not  be  necessary,  once  these  first  three  statements are  accepted.  For  instance,  is  it  necessary  to  claim,  as  Wray  (2011B,  p.  158-9)  does,  that  the  role of  taxes  is  not  to  finance  government  spending,  that  the  federal  government  does  not  borrow funds  from  the  private  sector  to  finance  its  deficit,  or  that  persistent  budget  deficits  will  not burden  future  generations  with  higher  taxes?  Although  there  is  some  internal  logic  to  these statements,  as  we  shall  see  later,  such  paradoxical  claims  run  the  risk  of  overkill  in  trying  to convince  fellow  economists that  a central government  with a  sovereign  currency  does  not  face  a financial  constraint.  There  is  also  a  problem  of  terminology,  with  words  sometimes  taking  a slightly  different  meaning  from  their  usual accepted  use. 11 We  start  with  the  terminology  problem  which  is  easiest  to  settle.  Neo-chartalists  have come  to  speak  of  a  vertical  and  a  horizontal  component  of  money,  adding  that  the  horizontal component  was  some  leveraged  amount  of  the  vertical  component.  There  are  many  instances of  this:  “One  can  conceive  of  a  vertical  component  of  the  money  supply  process  that  consists  of the  government  supply  of  fiat  money;  money  drops  vertically  to  the  private  sector  from government….  On  the  other  hand,  the  bank-money-supply  process  is  horizontal;  it  can  be thought  of  as  a  type  of  ‘leveraging’  of  the  hoarded  vertical  fiat  money”  (Wray  1998,  p.  111);   “Horizontal  activity  represents  leveraged  activity  of  a  vertical  component  ….  The  creation  of bank  loans  and  their  corresponding  deposits  is  a  leveraging  of  the  currency….”  (Mosler  and Forstater  1999,  p.  168).  A  figure,  illustrating  this  leveraging  of  a  vertical  component  is  also presented  by  Wray  (1998,  p.  112)  and  by  Mitchell  and  Muysken  (2008,  p.  214).  The  use  of  this terminology  has  certainly  created  some  confusion  in  the  minds  of  heterodox  authors,  for instance  Keen,  as  is  evident  from  Fullwiler’s  comment  quoted  earlier,  as  well  as  Parguez  and Seccareccia  (2000,  p.  120)  and  Febrero  (2009).  Indeed,  heterodox  authors,  relying  on  the  book of  Basil  Moore  (1988),  usually  associate  a  verticalist  component  with  an  exogenous  money supply,  while  leveraging  is  associated  with  the  money  multiplier  story  that  Mosler  had  himself previously  discarded.  For those  who  have  spent  enough  time  reading  the  works  of neo-chartalist authors,  it  is  clear  that  these  authors  don’t  endorse  anything  close  to  exogenous  high  powered money  or  a  money  multiplier  mechanism.  Personally,  I  don’t  see  how  anything  can  be  gained  by making  references  to  vertical  components  or  to  leveraged  horizontal  components,  but  these expressions keep  being  used. They  ought  to  be  left  aside. 12   

11  Again,  I  have  realized  a  posteriori  that  I  expressed  a  similar  concern  in  Lavoie  (1999,  p.  371),  arguing that  “such  statements  are  logical; yet  they  are  misleading because  definitions  do  not  correspond  to common usage”. 12  Once  again,  in  Lavoie  (1999,  p.  371),  I  said  that  “if  bank  reserves  are  endogenous  to  their  required  level, then  the  expression  ‘leverage’  does  not  seem  appropriate”.  Why  not  use  standard  expressions  such  as outside  and  inside  money? 

11:
Another  problematic  statement  is  that  the  government  has  to  run  deficits,  at  least  over the long  run, for the  public  to  get  access  to  larger  cash  balances  (high  powered money). As Wray (1998, p.  123)  puts  it,  “persistent  deficits  are  the expected  norm”, that  is,  “normally, taxes in the aggregate  will  have  to  be  less  than  total  government  spending  due  to  preferences  of  the  public to  hold  some  reserves  of  fiat  money”  (Wray  1998,  p.  81).  If  the  government  was  running persistent  surpluses,  the  public  would  “run  out  of net  money  hoards”  (Wray  1998,  p. 79).  While  I would  certainly  agree  that  government  deficits  in  a  growing  environment  are  appropriate,  as  it provides  the private  sector  with  safe  assets,  which  can  grow  in  line  with private,  presumably  less safe,  assets,  it  is  an  entirely  different  matter  that  government  deficits  are  needed  because  there is  a  need  for  cash.  Even  if  the  government  keeps  running  balanced  budgets,  central  bank  money can  be  provided  whenever  the  central  bank  makes  advances  to  the  private  sector.  Wray  (1998, p.  79-80)  himself  recognizes  this,  as  he  later  adds  that  “a  surplus  on  the  Treasury’s  account  is possible  as  long  as  the  central  bank  injects  reserves  through  purchases  of  assets  or  through loans  of  reserves”.  Presumably,  what  he  has  in  mind,  as  we  will  see  soon,  is  that  total government  expenditures  include  “spending”  by  the  central  bank,  when  the  central  bank purchases  private  assets  or  claims  on  the  private  sector  and  adds  them  to  the  asset  side  of  its balance  sheet. But  this is  an  odd  way  to  define  government  spending. While  this  terminology  problem  is  easy  to  solve,  things  may  not  be  so  simple  with  the oft-made  statement  that  “government  spends  first”,  a  statement  that,  of  course,  has  some relationship  with  the  causal  sequence  mentioned  when  discussing  the  links  of  neo-chartalism with  circuit  theory.  This  expression  comes  back  like  a  leitmotiv  on  many  of  the  blogs  devoted  to modern  monetary  theory,  but  it  can  also  be  found  in  academic  writings:  “Government  spends simply  by  crediting  a  private  sector  bank  account  at  the  central  bank.  Operationally,  this  process is  independent  of  any  prior  revenue,  including  taxing  or  borrowing”  (Mitchell  and  Muysken 2008,  p.  209);  “The  government  spends  simply  by  writing  Treasury  cheques  or  by  crediting private  bank  accounts”  (Tcherneva  2006,  p.  78).  These  statements  are  at  best  misleading.  They skip  one  fundamental  step  that  makes  incomprehensible  the  leitmotiv  sentence  that “government  spends  first”.  Any  agent  must  have  funds  in  a  banking  account.  Before  being  able to  spend,  the  Treasury  must  somehow  replenish  its  deposit  account  at  the  central  bank  (or  at private  banks).   This  step  is  often  skipped  because  neo-chartalists  prefer  to  consolidate  the  central  bank and  the  federal  government  into  one  entity,  the  State.  Now,  in  itself,  such  a  consolidation  is  not illogical.  Other  authors,  such  as  Godley  (1999B),  have  on  occasion  consolidated  the  central  bank with  the  government.  But  such  an  integration  may  not  be  appropriate  for  the  purpose  at  hand, as  it  adds  to  confusion  to  a  reader  who  is  already  having  a  hard  time  understanding  the mechanics  of  the  clearing  and  settlement  system,  and  who  has  been  accustomed  to  distinguish the  government  and  its  central  bank.  Wray  has  been  a  leading  advocate  of  consolidation, believing  that  it  makes  things  simpler:  “The  only  logic  that  is  necessary  to  grasp  is  that  the  state ‘spends’  by  emitting  its  own  liability  …  by  crediting  reserves  to  the  banking  system”  (Wray  2002, p.  32).  But  he  has  himself  recognized  that  this  is  leaving  many  of  his  colleagues  confused:  “A central  bank  might  buy  treasury  debt  and  credit  the  treasury’s  deposit  at  the  central  bank,  but this  has  no  impact  on  banking  system  reserves  until  the  treasury  uses  its  deposits….  Hence, strictly  internal  actions  involving  only  the  central  bank  and  treasury  should  be  ignored,  which  is the  main  justification  for  consolidating  their  accounts  ….  Many  economists  find  all  this  very confusing….  “(Wray  2003,  p.  92). 13  So,  with  the  Treasury  and  the  central  bank  consolidated,  the first  step, the  sales  of  government securities  to  the central bank,  is being  skipped, since this is an internal transaction.   If  we  accept  to  consolidate  the  central  bank  and  the  government  into  one  entity,  then some  other  highly  controversial  claims  make  more  sense.  As  already  pointed  out  earlier  in  this section,  neo-chartalists  make  the  rather  surprising  claim  that  neither  taxes  nor  borrowing finance  government  expenditures.  This  claim  is  made  again  and  again:  “The  Treasury  does  not ‘need’ to  borrow  in  order  to  deficit-spend”  (Wray  1998, p. 117);  “Taxes  do  not  finance  spending” (Forstater  and  Mosler  2005,  p.  538);  “…  Neither  taxes  nor  bonds  really  finance  government spending,  on  any  reasonable  definition  of  the  term  ‘finance’”  (Bell  and  Wray  2002-03,  p.  269); “It  certainly  looks  as  though  the  purpose  of  taxing  and  selling  bonds  is  to  fund  expenditures…. Thus,  taxes  can  be  viewed  as  a  means  of  creating  and  maintaining  a  demand  for  the government’s  money, while  bonds …  are a  tool that allows  positive  overnight  lending  rates to  be maintained”  (Bell  2000,  p.  613-4);  “In  other  words,  government  spends  simply  by  crediting  a private  sector  bank  account  at  the  central  bank.  Operationally,  this  process  is  independent  of any  prior  revenue,  including  taxing  and  borrowing”  (Mitchell  and  Muysken  2008,  p.  209).  Again, I would  argue  that  such  claims  are  based  on  the  assumption  of  consolidation,  plus  the assumption  that  governments  sell  their securities  to  their central  bank. Table  1  illustrates  the  neo-chartalist  view  of  how  central  governments  can  finance  their expenditures  when  they  are  being  endowed  with  a  sovereign  currency.  The  first  step,  on  the first  row  of  the  table,  only  involves  the  government  and  the  central  bank,  as  the  Treasury  issues and  sells  securities,  which  are  purchased  by  the  central  bank.  This  is  the  step  which  is  often skipped  by  neo-chartalists since  they  consolidate  the  government  and  the  central  bank. 14  Here  it is  assumed  that  100  monetary  units  (dollars,  pounds  sterling)  are  being  newly  issued  and  sold. The  second  step  involves  the  private  banking  sector,  when  the  government  spends  the  100 monetary  units,  say  by  paying  its  civil  servants,  as  the  government  deposits  at  the  central  bank are  now  being  transferred  to  the  deposits  of  the  civil  servant  households  at  commercial  banks. As  these  payments  go  through  the  clearing  and  settlement  process,  commercial  banks  acquire settlement  balances  at  the  clearing  house,  which  will  then  need  to  be  deposited  as  balances  on their  account  at  the  central  bank  at  the  end  of  the  day,  thus  constituting  bank  reserves  of  100 monetary  units.    Unless  the  central  bank  conducts  some  compensating  operation,  there  is 

13  Indeed  many  economists  find  this  confusing,  and  many  others  think  it  is  a  mistake to  proceed  to  this consolidation,  such  as  Gnos  and  Rochon  (2002,  p.  54). 14  It  is  interesting to  note that  when  Mosler  (1994,  p.  13)  proceeds  to  a  similar  T-account  analysis,  his  first step  assumes,  and  rightly  so,  that  the  government  deposits  at  the  central bank  get  depleted  by  100 units. But  there  is  no  discussion  of  how  the  government  feeds  or  replenishes  its  account  at  the  central bank.  By contrast,  Bell (1999)  includes  the  first  step  in  her  Figure  1 which  very  much  resembles  Table  1. 

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nothing  that  the  commercial  banks  in  aggregate  can  do  to  get  rid  of  these  extra  reserves.  The third  step shown in  Table  1  is  the result  of  such  a  compensating  operation. We  assume  here  that households  wish  to  keep  an  additional  10  monetary  units  in  the  form  of  banknotes,  while keeping  90  units in the  form  of deposits.  We  also  assume  that  there  is a  10%  compulsory  reserve requirement  on  deposits  at  commercial  banks.  Once  households  have  taken  out  10  units  in  the automatic  teller  machines,  with  the  central  bank  providing  the  cash  needed  to  be  replaced, commercial  banks  are  still  left  with  90  units  of  reserves  and  hence  81  units  of  excess  reserves, which  will  be  wiped  out  by  in  the  present  case  by  open  market  operations,  the  commercial banks  deciding  to  acquire  81  units  of  treasury  bills  which  provide  them  with  an  interest  return, rather  than  holding  reserves  that  provide  no  return  or  a  return  which  presumably  would  be lower than  that  on  treasury  bills. 15 Table  1:  The  neo-chartalist  view  of  government  deficit-spending Central  bank Commercial banks Asset Liability Asset Treasury  bills +100 Liability Government  deposits +100 Treasury  bills +100 Deposits of banks Reserves +100 +100 Treasury  bills +1 9 Deposits  of banks  +9 B Household  deposits +100 Reserves  +9 anknotes  +10 Treasury  bills + 81 Household  deposits +90 The  surprising  result  of  such  a  process  of  government  deficit-spending  is  that  unless  the central  bank  engages  into  compensating  operations,  the  government  deficit  will  drive  down overnight  rates  of  interest,  or  as  Mosler  (1994,  p.  12)  puts  it,  “deficit  spending  …  would  cause the  fed  funds  rate  to  fall”.  I  must  admit  that  when  I  first  read  this  back  in  1995,  when  Pavlina Tcherneva,  who  was  then  Mosler’s  assistant,  sent  me  his  1994  paper,  I  thought  that  Mosler, despite  his  use  of  T-accounts,  was  another  one  of  these  monetary  cranks  that  Keynes  talked about  in  the  General  Theory.  We  are  so  much  accustomed  to  the  loanable  funds  approach  and to  the  IS/LM  framework,  where  an  increase  in  government  expenditures  tends  to  drive  up interest  rates,  that  it  is  difficult  to  get  away  from  this.    However,  a  proper  understanding  of  the payment  system  reveals  that  it  cannot  be  otherwise.  When  the  government  pays  for  its expenditures  through  its  account  at  the  central  bank,  settlement  balances  (reserves)  are  added to  the  clearing  system.  This  tends  to  reduce  the  overnight  rate,  as  banks  are  left  with  excess 

15  The  compensating operation  may  occur  through  a  repo  operation,  or  a  transfer  of  government  deposits from  its  accounts  at  commercial  banks to  its  account  at  the  central bank.  The central bank  may  also decide to  issue  its  own  bonds  to  wipe out  the  excess  reserves.   

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reserves  that  no  other  bank  wishes  to  borrow.  Keeping  the  rate  at  its  target  level  requires  a defensive  intervention  of the  central  bank. 16   It is  interesting  to  note  that  Joan  Robinson  made  the same  point  many  years ago,  so  that Robinson  could  be  considered  as  an  honorific  developer  of  modern  monetary  theory. 17  She  said: “A  budget  deficit  financed  by  borrowing  from  the  Central  Bank  has  effects  similar  to  those  of gold-mining….  For  the  Central  Bank,  in  lending  to  the  government,  increases  the  ‘cash’  of  the banks,  just  as  it  does  by  buying  securities  or  by  buying  gold….  The  increase  in  the  quantity  of money,  which  takes  place  cumulatively  as  long  as  the  deficit  is  running,  will  tend  to  produce  a fall  in  the  rate  of  interest”  (Robinson  1937,  p.  88).  Similarly,  Godley  and  Cripps  (1983,  p.  158) were  very  much  aware  of  the  relationship  between  the  government,  the  central  bank  and reserves:  “The  central  bank  has  to  fund  the  government’s  operations  but  this  in  itself  presents no  problems.  Government  cheques  are  universally  accepted.  When  deposited  into  commercial banks  the  cheques  become  ‘reserve  assets’  in  the  first  instance;  banks  may  immediately  get  rid of excess reserves  by  buying  bonds”  (Godley  and  Cripps 1983, p. 158). Naturally,  if  the  government  levies  taxes,  these  effects  go  in  reverse  gear.  As  the  taxes are  collected  and  the  proceeds  sent  to  the  account  of  the  government  at  the  central  bank,  the aggregate  amount  of  settlement  balances  held  by  banks  are  brought  to  a  negative  position  and hence  commercial  banks  lose  reserves,  driving  up  the  overnight  interest  rate. 18  It  thus  becomes easier  to  understand  Bell’s  claim,  already  mentioned,  that  “taxes  can  be  viewed  as  a  means  of creating  and  maintaining  a  demand  for  the  government’s  money,  while  bonds  ….  are  a  tool  that allows  positive  overnight  lending  rates  to  be  maintained”  (Bell  2000,  p.  613-4).  As  long  as  we accept  the  lessons  of  Table  1,  we  can  agree  that  the  government  can  initially  finance  its expenditures  by  selling  securities  to  its  central  bank.  Taxes  are  raised  to  restrain  aggregate demand,  while  government  securities  are  sold  to  the  private  sector  to  stop  overnight  rates  from falling  to  the  floor.  But  while  we  can  certainly  all  agree  on  these  consequences  of  such  a  setup within  the  clearing  and  settlement  system,  should  we  conclude  that  taxes  and  security  issues  do not  finance  government  expenditures?  Is  such  a  claim  helpful  in  understanding  the  financing process?  In  particular,  it  is  clear  that  for  the  government  to  proceed  with  its  expenditures, securities  must  be  sold  to  someone,  if  only  to  the  central  bank.  Also,  can  we  still  make  the  same claims  if  central  banks  cannot  directly  purchase  government  securities?  This  question  will  be tackled  in  the next  section.   The  more  interesting  lesson  that  arises  from  Table  1  is  that  the  central  government  of  a “sovereign”  nation,  meaning  here  a  nation  where  the  central  government  can  sell  its  securities 

16  This  is  why,  as  mentioned  earlier,  some  neo-chartalists  to  argue  that  the  ‘natural’  level of  the  overnight rate of  interest  ought  to  be  zero,  since,  without  defensive  actions  and  with  no  interest  payments  on reserves,  government  deficits  would  drive  down  the  overnight  rate to  zero.   17  Ed  Nell brought  this  fact  to  my  attention  during a  conference  in  honour  of  Alain  Parguez,  which  was held  in  Ottawa  in  May  2011. 18  A list  of  such  effects  is  provided  by  Bougrine  and  Seccareccia  (2002,  p.  69). 

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to  its  central bank,  can  always  finance  its expenditures or roll  over its  debt by  borrowing  from  its central  bank.  If  banks  don’t  want  to  hold  government  securities,  this  means  they  prefer  to  hold zero-interest  reserves  instead  of  assets  generating  interest  payments.  In  countries  where reserves  generate  interest  payments,  usually  close  to  the  interest  rate  paid  on  short-term Treasury  bills,  then  it  is  obvious  that  it  makes  little  difference  whether  the  debt  is  held  in  the form  of  bank  reserves  or  in  the  form  of  Treasury  bills  (agents  may  not  wish  to  hold  long-term bonds,  because  of  the  higher  risk  of  capital  losses).  Default  is  virtually  impossible,  and  this explains  why  interest  rates  on  government  securities  in  the  USA  and  Japan  are  so  low,  despite their  huge  public  debt.  Indeed,  at  the  time  of  writing,  soon  after  the  downgrading  by  Standard and  Poor’s  of  US  government  debt  on  August  6,  2011,  from  AAA  to  AA+,  yields  on  10-year  US government  bonds  actually  fell  to  2%,  whereas  these  yields  were  around  3.3%  a  few  months before  the  downgrade.  In  the  case  of  Japan,  which  Standard  and  Poor’s  had  downgraded  to  AA- on  January  27,  2011,  the  yield  on  10-year  Japanese  bonds  was  at  1%  despite  a  public  debt  to GDP ratio  exceeding  200%.  Obviously, markets  are  confident that  Japan  has the  capacity  and  the ability  to  make  interest  payments  on  whatever  amount  of  public  debt  its  government  can accumulate. This  however  is  not  the  case  for  several  eurozone  countries.  At the  same  time,  in  August 2011,  notwithstanding  the  lower  debt  ratios  in  some  of  the  European  countries,  yields  on  10year bonds in Greece,  Portugal and  Ireland, varied  between  10  and  15%,  and  they  were  between 3.1  and  5.2%  for  Italy,  Spain,  Belgium  and  France.  In  the  case  of  Canada,  with  admittedly  a  lower debt  ratio,  these  same  yields  were  at  2.4%.  What  difference  is  there  between  Canada,  the United  States  and  Japan  on  the  one  hand,  and  the  European  countries  within  the  eurozone  on the other?  This is  a  question  for the  next  section. Variations  on  the  neo-chartalist  main  story So  far  we  have  assumed  that  the  central  bank  was  free  to  purchase  government  securities  on the  primary  market,  or  else  was  allowed  to  make  direct  advances  to  the  central  government. But  what  if  this  is  not  the  case?  In  a  previous  paper  (Lavoie  2003),  I  argued  that  one  also  ought to  consider  a  “post-chartalist”  alternative  account,  where  the  central  government  would  start the  spending  process  by  issuing  securities  that  would  be  auctioned  to  the  private  sector.  Table  2 reproduces  the  same  three  steps  that we  observed  in  Table  1,  but  starting  this  time  around  with government security  sales  to  the commercial  banks. 19   Table  2:  The  post-chartalist  view  of government  deficit-spending Central  bank Commercial banks Asset Liability Asset Treasury  bills +100 Liability Government  deposits +100 Treasury  bills +100 Household  deposits 

19  I  have  recently  realized  that  Figure  2  of  Bell (1999)  very  much  resembles  Table  2. 

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+100 16 +19 Treasury  bills Deposits  of banks  +9 Banknotes  +10 Reserves  +9 Treasury  bills +81 Household  deposits +90 While  the  first  step  only  deals  with  the  security  sale,  as  was  the  case  in  Table  1,  as  a second  step,  I  assume  again  that  the  government  pays  its  civil  servants.  The  government balances  at  commercial  banks  are  then  brought  down  to  zero,  while  those  of  households  rise  by 100, as  shown in  the  second  row. We  may  further assume, as  in Table  1, that  households wish  to transform  10  units  of  their  deposits  in  the  form  of  banknotes,  and  that  banks  are  subjected  to  a 10%  compulsory  reserve  ratio  on  deposits.  To  acquire  the  needed  19  units  of  high  powered money,  banks  need  to  sell  19  units  of  treasury  bills  to  the  central  bank.  The  latter  needs  to accommodate,  because  the  central  bank  provides  all  cash  on  demand  and  must  remove  excess reserves  to  achieve  its  target  overnight  rate.  The  end  result  of  this  process,  shown  in  the  third row,  is  no  different  from  the  one  observed  in  Table  1.  The  commercial  banks  hold  81  units  of treasury  bills  and  the  central  bank  holds  19  units  of  treasury  bills,  which  correspond  to  the increase  in  the demand  for  central bank  money. While  the  end  result  of  these  two  processes  illustrated  by  Tables  1  and  2  are  identical,  if all  goes  well  (!),  the  processes  as such  are  different. Which  description  is the  most  likely?  Here  is what I  wrote  nearly  ten  years ago. Each  view  may  correspond  better  to  the  existing  institutional  arrangements.  In Europe,  with  the  new  European  Central  Bank,  central  governments  just  cannot sell  any  of  their  newly-issued  securities  to  their  national  central  bank  or  to  the European  Central  Bank.  They  must  sell  their  bonds  or  bills  to  the  private  banks. Similar  rules  apply  in  the  United  States.  “The  Federal  Reserve  is  prohibited  by law  from  adding  to  its  net  position  by  direct  purchases  of  securities  from  the Treasury  –  that  is,  the  Federal  Reserve  has  no  authority  for  direct  lending  to  the Treasury.  As  a  consequence,  at  most  the  Desk’s  acquisition  at  Treasury  auctions can  equal  maturing  holdings”  (Akhtar  1997,  p.  37).  Thus,  at  least  in  Europe  or  in the  United  States,  the  post-chartalist  view  may  seem  to  apply  best  on  this  issue (Lavoie  2003, p.  528)  .   Neo-chartalists  usually  give  the  USA,  or  Japan,  as  the  standard  example  of  a  nation  with a  sovereign  currency.  However,  even  the  USA  may  not  be  a  perfect  example  of  a  nation endowed  with  a  sovereign  currency.  The  USA  has  two  self-imposed  limits.  First,  the  Fed  can  only “buy  directly  and  hold  an  additional  3  billion  dollars  of  obligations  of  the  Government  for  each agreed  period…”. 20  This  means,  as  pointed  out  by  Akhtar  in  the  quote  found  above,  that  the  Fed can  mainly  purchase  federal  debt  on  secondary  markets,  and  not  on  the  primary  market.  Thus  it 

20  See  the  U.S. Code,  Chapter 31 Money  and  Finance,  # 5301.  Buying obligations  of  the  United  States Government  at  http://www.law.cornell.edu/uscode/usc_sec_31_00005301----000-.html

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would  seem  that  Table  2,  the  post-chartalist  view,  is  a  better  representation  of  the  American case.  Second,  as  most  people  are  now  aware  since  the  debt  ceiling  crisis  of  July  2011,  there  is  a limit,  set  by  Congress,  on  the  total  amount  of  debt  that  can  be  taken  on  by  the  US  government. This  ceiling  must  be  raised  periodically,  and  it  will  most  likely  generate  another  crisis  in  2013  or so.  These  limitations  are  recognized  by  Bell  and  Wray  (2002-03,  p.  270),  who  say  that  “most nations have  opted for self-imposed constraints. These  include  both ‘no  overdraft’  provisions for the Treasury  as well as  ‘debt  ceiling’  legislation”.    Despite  this,  Bell  and  Wray  (2002-03,  p.  266)  held  on  to  the  idea  that  Table  1  is  the  best representation  of  the  American  case,  and  criticized  those  who  brought  up  the  issue  of  these self-imposed  constraints,  putting  forth  the  view  that  consolidation  of  the  Fed  and  the government  allows  to  abstract  from  these  restrictions:  “Post  Keynesians  like  Lavoie  (2002)  and Van  Lear  (2002-03)  are  misled  by  formal  prohibitions  on  the  Treasury.  Yes,  the  Treasury  is prohibited  from  physically  ‘printing  money’  and  from  selling  bonds  directly  to  the  Fed….  We prefer  to  consolidate  the  Fed  and  the  Treasury,  and  leave  the minutiae  of  coordination  between them  to  the  side”. 21 Neo-chartalists  have  however  put  some  water  in  their  wine,  as  the  French  say,  now admitting  that  things  are  not  as  clear-cut  as  they  originally  had  it,  as  can  be  ascertained  by  the two  recent  blog  comments  from  neo-chartalist leaders  that are  shown below. The  first  comment recognizes  that  there  is  no  logical  necessity  in  arguing  that  government  spending  must  occur before  taxes  are  levied:  “I  have  always  bucked  the  tendency  of  many  on  the  MMT  side  to  argue that  the Treasury  sells  bonds  ex  post,  in  order  to  drain  excess  reserves….  My  position  has  always been  more  nuanced.  The  Treasury  coordinates  its  operations  (spending,  taxing  and  bond  sales) in  order  to  minimize  disruption  in  the  private  banking  system.  In  absence  of  coordination,  banks would  constantly  see  large  swings  in  their  reserve  holdings,  and  this  would  be  disruptive.  In essence,  it  would  force  the  Fed  to  intervene  on  a  much  larger  scale”  (Kelton  2010).  The  second comment  recognizes  that  the  US  government  may  need  to  borrow  from  the  private  sector before  it  can  spend.  So  it  is  not  clear  anymore  that  taxes  and  bond  issues  do  not  finance government  expenditures!  “The  easiest  thing  to  do  would  be  to  sell  them  [bonds]  directly  to  the Fed,  which  would  credit  the  Treasury’s  demand  deposits  at  the  Fed….But  current  procedures prohibit  the  Fed  from  buying  treasuries  from  the  Treasury…;  instead  it  must  buy  treasuries  from anyone  except  the  Treasury.  That  is  a  strange  prohibition  to  put  on  a  sovereign  issuer  of  the currency….  It  is  believed  that  this  prevents  the  Fed  from  simply  ‘printing  money’  to  ‘finance’ budget  deficits  so  large  as  to  cause  high  inflation»  [Wray  2011C).   What  seems  to  truly  happen  in  the  USA  is  thus  illustrated  by  Table  3  below,  which reproduces  in  T-accounts  the  sequence  most  recently  described  by  Wray  in  the  same  blog:  “So, instead,  the  Treasury  sells  the  treasuries  to  the  private  banks,  which  create  deposits  for  the Treasury  that  it  can  then  move  over  to  its  deposits  at  the  Fed.  And  then  ‘Helicopter  Ben’  buys treasuries  from  the  private  banks….  The  Fed  ends  up  with  the  treasuries,  and  the  Treasury  ends 

21  The  reference  to  Lavoie  (2002) is  in  fact  the  draft  version  of  the  published  Lavoie  (2003)  version. 

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up  with  the  demand  deposits  in  its  account  at  the  Fed  –  which  is  what  it  wanted  all  along,  but  is prohibited  from  doing  directly”  (Wray  2011C).  In  the  first  step,  as  in  Table  2,  the  government sells  its  securities  to  the  commercial  banks.  In  the  second  step,  the  government  deposits  are shifted  from  the  commercial  banks  to  the  central  bank,  thus  creating  a  negative  reserve  position for  banks.  The  central  bank  then  takes  defensive  compensatory  measures,  purchasing  back  the Treasury  bills  on  the  secondary  markets,  and  thus  eliminating  the  deficiency  in  bank  reserves  at the Fed.   Table  3:  The  modified neo-chartalist  view  of  government deficit-spending   Central  bank Commercial banks Asset Liability Asset Treasury  bills +100 Liability Government  deposits +100 Government  deposits +100 Bank  deposits Treasury  bills +100 Reserves 100100 Treasury  bills +100 Government  deposits +100 Treasury  bills Government  deposits 0 0 Government  deposits Reserves  0 Treasury  bills +100 Deposits of banks Reserves  +100 0 +10 0 Treasury  bills +19 Deposits  of banks  +9 Banknotes  +10 Household  deposits +100 Reserves  +9 Treasury  bills +81 Household  deposits +90 But  things  don’t  stop  there.  The  government  issued  securities  because  it  was  expecting to  deficit-spend.  There  are  thus  a  fourth  and  a  fifth  steps,  which  are  indeed  identical  to  the second  and  third  steps  described  in  Table  1.  As  Wray  (2011C)  continues,  “the  Treasury  then  cuts the  checks  and  makes  its  payments.  Deposits  are  credited  to  accounts  at  private  banks,  which simultaneously  are  credited  with  reserves  by  the  Fed….  This  tends  to  push  the  Fed  funds  rate below  the  Fed’s  target, triggering  an  open market  sale  of treasuries  to  drain  the  excess  reserves. The  treasuries  go  back  off  the  Fed’s  balance  sheet  and  into  the  banking  sector”.  This  is  shown  in the  fourth  and  fifth  rows  of  Table  3.The  Fed  will  keep  some  of  the  treasury  bills  if  there  is  an additional demand  for reserves  or banknotes,  as  was  previously  assumed. The  purpose  of  this  whole  exercise  is  to  show  that  there  is  no  point  in  making  the counter-intuitive  claim  that  securities  and  taxes  do  not  finance  the  expenditures  of  central governments  with  a  sovereign  currency.  Even  in  the  case  of  the  US  federal  government, securities  need  to  be  issued  when  the  government  deficit-spends,  and  these  securities  initially need  to  be  purchased  by  the  private  financial  sector.  It  seems  to  me  that  the  consolidation argument  –  the  consolidation  of  the central bank  with  the  government  –  cannot  counter  the fact that  the  US  government  needs  to  borrow  from  the  private  sector  under  existing  rules.  Thus,  if 

19:
even  the  USA  does  not  really  fit  the  bill, one  may  wonder  whether  there  is  any  other  nation  that corresponds to  the strictures  of  neo-chartalism. 22   Ironically,  there  is  another  country  which  more  closely  resembles  the  neo-chartalist depiction  of  Table  1.  Canada  looks  pretty  close  to  the  definition  of  a  country  with  a  sovereign currency,  but  “Canada  is  unique  among  the  sovereigns  investigated  in  that  the  Central  Bank  can participate  at  auction  without  restriction  and  not  as  an  add-on.  …The  Bank  of  Canada participated  up  to  15  per  cent  in  nominal  bond  auctions  and  up  to  25  per  cent  for  treasury  bill auctions.  During  the  evaluation  period,  the  Bank  of  Canada  participated  at  a  constant 10  per  cent  of  all  2-year  auctions  and  15  per  cent  of  all  5-year  auctions.  The  minimum  purchase by  the  Bank  of  Canada  changed  in  the  10-year  and  30-year  sectors  from  10  to  15  per  cent  in January  2008”  (Department  of  Finance  Canada  2011).  Furthermore,  to  keep  their  status, Canadian  primary  dealers  must  purchase  all  that  is  being  issued  on  the  primary  market,  at  least at  a  price  barely  lower  from  that  of  secondary  markets. 23  One  could  thus  argue  that  Canada  has the  highest  degree  of  currency  sovereignty,  since  its  central  bank  is  unhindered  by  regulations, its  public  debt  is  issued  in  Canadian  dollars,  and  its  exchange  rate  regime  is  of  the  pure  float  sort (the  central bank  has not  intervened  on  foreign  exchange  markets  since  the late  1990s). 24 Anyway,  regardless  of  the  precise  institutional  rules  that  exist  in  countries  such  as Canada  or  the  United  States,  it  seems  clear  that  in  these  countries  it  is  possible  for  the  central bank  to  set  interest  rates  and  even  long-term  rates  on  government  securities.  This  can  be  done by  announcing  the  target  long-term  rate  of  interest  and  announcing  the  potential  purchase  of unlimited  amounts,  ‘that  is,  if  the  Fed  desired  a  decline  in  treasury  rates,  it  could  only  be  sure  to achieve  this by  announcing  the  desired new  rate  and  standing  ready  to  buy  all treasuries offered at  the  corresponding  price’  (Fullwiler  and  Wray  2010,  p.  9).  To  those  who  object  that  this  would raise  the  amount  of  bank  reserves  and  produce  inflation,  the  answer  is  that  in  a  corridor  system where  the  target  interest  rate  is  the  floor  rate  (the  rate  paid  on  deposits  at  the  central  bank), the  size  of  bank  reserves  can  be  any  number,  as  has  now  been  demonstrated  during  the subprime  financial  crisis (Lavoie  2010). 25   Neo-chartalism  and  the  eurozone By  contrast  the  eurozone  countries  with  their  European  Central  Bank  (ECB)  and  their  sets  of national  central  banks  (the  Eurosystem)  have  a  rather  low  degree  of  currency  sovereignty,  if  at 

22  In  particular,  very  few  nations  are  allowed  to  borrow  in  their own  currency  on  international  financial markets,  so  this  restricts  the  number  of  eligible  sovereign  currencies. 23  I  am grateful to  Mathieu  Frigon,  from the  Canadian  Parliamentary  Library,  for  having brought  to  my attention  this  peculiar  feature  of  the  Canadian  debt  issuing process.   24  The  government  of  Canada  issues  some  bonds  in  euros  or  in  US dollars,  but  this  is  not  by  necessity; the purpose  is  to  cover  its  open  position  in  foreign  exchange  reserves. 25  Or  else  on  can  pursue  an  ‘operation  twist’,  with  the  central bank  buying long-term  securities  and simultaneously  selling short-term  ones. 

all.  Various  rules,  found  in  the  guidelines  and  procedures  of  the  European  Central  Bank  (ECB 2011),  and  which  go  as  far  back  as  the  1992  Maastrich  Treaty,  encumber  the  behaviour  of  the ECB  and  of  the  national central  banks.  They  cannot  make  advances  to  national  governments  and they  cannot  purchase  government  securities  on  primary  markets. 26  The  main  refinancing (liquidity  creating)  operations  of  the  ECB  and  the  national  central  banks  occur  in  the  form  of reverse  transactions  (repos),  or  more  simply  as  collateralised  loans.  Outright  transactions  on secondary  markets  (which  would  be  called  open  market  operations  by  anglo-saxon  economists) are  deemed  to  be  irregular  and  exceptional. 27  It  was  further  understood  that  the  ECB  and  the national  central  banks  would  not  conduct  open  market  operations,  and  hence  would  not purchase  government  securities  on  secondary  markets,  to  assist  eurozone  countries  that  would have  difficulties  in  servicing  their  debts  or  financing  their  deficits.  Finally,  although  the  European monetary  authorities  are  allowed  to  take  government  securities  as  collateral  when  providing liquidity  to  banks,  it  can  only  be  done  if  that  debt  is  highly  rated.  With  these  self-imposed restrictions  and  customs,  the  ECB  and  the  Eurosystem  is  a  pure  overdraft  system  --  a  system where  the  central  bank  only  provides  advances  to  the  commercial  banks,  holding  no government  securities  whatsoever.  Indeed,  for  the  first  ten  years  following  the  creation  of  the eurozone,  outright  holdings  of  government  debt  by  the  central  banks  of  the  Eurosystem  were equal to  nought. To  their  credit,  it  must  be  said  that  various  neo-chartalists  and  their  allies  have  from  the start  announced  that  the  eurozone,  as  set  up  and  described  above,  was  a  very  dubious institutional  experiment  (Wray  1998,  p.  92).  This  is  because  sovereign  debt  from  the  eurozone countries  was  no  longer  default  risk-free,  transforming  national  countries  into  the  equivalent  of local  governments.  Godley  (1992)  lamented  early  on  about  the  absence  of  a  powerful  fiscal federal  authority,  but  also  argued  that  the  inability  of  countries  to  take  advances  from  their central  bank  within  the  one-currency  European  Union  was  tantamount  to  reverting  to  the status of  a  local  government,  with  no  national  independence. 28  Bell  (2003)  explained  this  in  great detail,  adding  that  the  monetary  arrangements  of  the  eurozone  were  totally  inconsistent  with functional  finance  and  that  they  would  put  member  countries  at  the  mercy  of  financial  markets, forcing  them  to  adopt  austerity  measures whenever  their  fiscal  position  did  not  fit  the  desires  of financial  operators,  a  point  also  made  previously  by  Parguez  (1999).  More  recently,  Kelton  and Wray  (2009)  argued  that  the  rising  cost  of  credit  default  swaps  on  the  sovereign  debt  of eurozone  countries  was  justified,  as  these  countries  had  no  monetary  means  to  avoid  defaulting if self-reinforcing  fears led to  rising  bond  yields, since the  ECB would  not  intervene  and  purchase government securities. The  title of  their paper  –  can  Euroland  survive?  –  was  quite  on  the  dot,  at 

26  This  is  article  123 of  the  Treaty  of  Lisbon,  also  called  the  Treaty  on  the  Functioning of  the  European Union.  The  same  rule  can  be  found  again  in  article  21(1)  of  the  Statute of  the  European  System  of  Central Banks and  of  the  European  Central Bank  (protocol 4). See  European  Union  (2010). 27  See  ECB  (2011,  chapter 3). This  is  despite the  fact  that  article  18  of  the  Statute (European  Union  2010) sets  no  restrictions  on  operations  in  secondary  markets. 28  Indeed,  this  can  be  related  to  Godley’s  previous  claim  that  an  unhindered  central bank  “can  sell or  buy back  bonds  without  any  limit”,  giving it  the  potential power  “to  fix bond  prices  and  yields  unilaterally  an any  level”  (Godley  and  Cripps  1983,  p.  158).   

21:
a time  when markets  were  somewhat  worried but  still  calm,  as the  paper  was  written  before  the explosion  in Greek  and  Irish  bond  yields  that  occurred  at  the  beginning  of  2010.   I  must  admit  that  for  a  long  time  I  was  rather  sceptical  of  all  these  arguments,  believing that  the  European  politicians  and  central  bankers  would  abandon  their  dogma  and  change  their rules  when  events  would  force  them  to  realize  their  mistakes,  a  bit  like  what  happened  on  a world-wide  scale  at  the  end  of  2008  and  beginning  of  2009,  when,  faced  with  negative  growth rates,  all  governments  decided  to  embark  on  a  Keynesian  stimulus  program  despite  having sworn  their  attachment  to  sound  fiscal  policies.  In  the  subsequent  crisis,  European  central bankers eventually  changed  their tune  as well, somewhat, but  always  too  late,  when bond  yields had  already  reached  catastrophic  levels.  Indeed,  the  ECB  was  forced  to  override  its  own directives,  when  it  announced  on  the  10th  of  May  2010  that  it  would  proceed  to  purchase  Greek bonds on  secondary  markets  to  stop  bond  yields from  rising.  It was then claimed  by  the  ECB that exceptional  circumstances  in  financial  markets  were  hampering  the  monetary  policy transmission  mechanism,  jeopardized  the  policy  of  price  stability  (!),  and  hence  required  a temporary  securities  markets  programme  that  would  involve  outright  interventions  on secondary  securities  markets.  Similar  measures  then  had  to  be  taken  for  Portuguese  and  Irish bonds.  The  inanity  of  the  ECB  rules  were  exposed  again  when  on  the  8th  of  August  2011  the  ECB announced  that  it  would  also  proceed  to  purchase  Spanish  and  Italian  bonds,  again  to  avoid rising  yields.  Furthermore,  the  ECB  had  to  modify  its  eligibility  criteria.  The  required  rating  for repos  or  collateralized  credit  was  originally  A-.This  was  reduced  to  BBB-  in  October  2008,  with the  advent  of  the  subprime  financial  crisis.  Credit  rating  requirements  were  then  entirely suspended  for  securities  issued  by  the  Greek  government  in  May  2010.  The  same  change  was then  done  in  March  and  July  2011  for  securities  issued  by  the  Irish  and  the  Portuguese governments  respectively,  again  on  the  ground  that  “exceptional  circumstances”  were prevailing  in  the  financial  markets.  The  rating  requirements  had  to  be  dropped,  otherwise  the banks  of  the  concerned  countries  would  have  become  illiquid,  and  would  have  had  either  to proceed  to  fire  asset  sales  or  to  default  at  settlement  time,  thus  jeopardizing  the  entire eurozone  payment  system.  The  current  events  have  certainly  vindicated  the  fears  of  neochartalists  and  their allies.  What  is  the  eurozone  setup?  This  can  be  illustrated  with  Table  4,  assuming  again  that the  government  wishes  to  deficit  spend  100  monetary  units,  with  households  keeping  10  of their  additional  money  balances  in  the  form  of  banknotes,  and  with  banks  being  subjected  to  a 10%  reserve  requirement  ratio.  Assuming  that  each  national  central  bank  is  the  fiscal  agent  of the  government,  the  first  two  rows  of  Table  4  are  identical  to  those  of  Table  3,  as  the  funds obtained  from  the  sale  of  the  securities  are  brought  back  on  the  account  of  the  government  at the  central  bank. 29  In  the  third  row,  the  government  deficit  spends,  households  acquire banknotes,  and  the  central  bank  accommodates  the  demand  for  reserves  and  banknotes.  The third  row  shows  that  there  is  a  systemic  need  for  commercial  banks  to  borrow  from  their 

29  Article  21(2)  of  the  Statute (ECB  2011) specifies  that  national  central banks can  act  as the  fiscal  agent  of governments. 

22:
national  central  bank  since  central  banks  don’t  normally  purchase  government  securities  in either  the  primary  or  the  secondary  market. 30  The  last  row  of  Table  4  shows  that  commercial banks  need  to  borrow  the  reserves  that  they  hold  at  the  central  bank  and  the  banknotes demanded  by  their  customers.  This  means,  in  contrast  to  the  neo-chartalist  depiction  illustrated by  Table  1,  that  government  deficit-spending  will  tend  to  raise  overnight  interest  rates,  unless the  central  banks  proceed  to  liquidity-providing  operations.  Once  again,  it  needs  to  be  pointed out  that  this  feature  of  the  eurozone  system  is  in  no  way  detrimental  to  neo-chartalist  theory since  neo-chartalists  have  always  made  clear  that  the  eurozone  did  not  abide  by  the  conditions of a  sovereign  currency.   Table  4:  The  eurozone  case  of government deficit-spending National central bank Commercial banks Asset Liability Asset Treasury  bills +100 Liability Government  deposits +100 Government  deposits +100 Bank  deposits Treasury  bills +100 Reserves Household  deposits  0100100 Advances banks  +19 to  domestic Deposits  of banks  +9 Banknotes  +10 Reserves  +9 Treasury  bills +100 Household  deposits +90 Advances central bank  +19 from In  general,  we  know  that  the  European  central  bank  and  its  national  central  bank  will provide  central  bank  money  on  demand.  The  problem  in  the  eurozone  is  not  that  money  is exogenous. Money  there  is  clearly  endogenous. 31  The  problem  is entirely  linked  to  the  rules  that forbid  or  that  strongly  discourage  the  ECB  and  the  national  central  banks  of  the  eurozone  to purchase  government  securities  on  primary  or  secondary  markets.  As  shown  with  the  help  of simulations  in  Godley  and  Lavoie  (2007B),  interest  yields  of  the  securities  issued  by  the  various governments  of  the  eurozone  are  likely  to  diverge  unless  the  ECB  accepts  to  depart  itself  from the  securities  for  which  there  is  a  high  net  demand  on  private  markets  and  accepts  to  purchase the  securities  for  which  there  is  a  relative  lack  of  demand  on  private  markets.  In  other  words, the ECB has to  act  as a  residual buyer  or  seller  of eurozone  government securities, otherwise  the eurozone  governments  are  at  the  mercy  of  the  whims  of  the  financial  markets.  The  problem does  not  arise  from  the operations of  the  clearing  and  settlement  system  –  the TARGET2  system put  in  place.  That  system  was well  conceived. 

30  Credit  balances  in  central bank  money  held  by  commercial  banks “are  primarily  provided  by  the Eurosystem’s  monetary  policy  refinancing  operations”  (Bundesbank  2011,  p.  34). 31  Unless  credit  rating exigencies  on  the  collateral provided  for  overdrafts  at  the  central bank,  for  instance the  A-  rating mentioned  in  a  previous  footnote,  is  truly  enforced,  which  was  not  the  case  as soon  as  one sovereign  debt  rating dropped  below A-. 

23:
This  can  be  confirmed  by  the  analysis  of  the  capital  flight  out  of  the  Southern  countries towards  the  Northern  countries  of  the  eurozone  which  has  been  observed  with  the  advent  of the  global  financial  crisis.  This  capital  flight  is  generated  by  the  fears  of  default  on  the  sovereign debt  of  Southern  countries,  and  hence  by  the  fear  that  the  commercial  banks  in  these  Southern states  will  be  subjected  to  heavy  capital  losses  and  hence  are  likely  to  default  in  turn. 32  In addition,  some  deposit  holders  try  to  move  their  balances  from  Southern  to  Northern  banks  of the  eurozone.  It  also  turns  out  that  several  of  the  Southern  countries  currently  under  pressure from  speculators  experience  a  negative  current  account  balance  within  the  eurozone.  Normally, such  imbalances  would  be  absorbed  by  Northern  banks  granting  loans  to  Southern  banks  of  the eurozone,  and  this  would  be  done  seamlessly  as  long  as  the  borrowing  banks  remain creditworthy.  Indeed,  the  short-term  net  external  position  of  banks  acted  as  the  main  offsetting factor  in  the  balance  of  payments  within  the  eurozone.  What  is  now  happening  is  that  Northern banks  are  declining  to  provide  loans  to  the  Southern  banks  through  the  overnight  market  or other  more  long-term  wholesale  markets.    Still,  the  clearing  and  settlement  system  continues  to function. How  can  that  happen? Suppose  that  some  Italian  company  imports  goods  from  Germany  and  makes  its payment  through  its  Italian  bank,  say  the  Banca  Nazionale  de  Lavoro  (BNL).  The  payment  goes through  TARGET2,  and  ends  up  as  a  credit  on  the  account  of  the  German  exporting  firm  at  its German  bank,  say  the  Deutsche  Bank  (DB).  At  this  stage,  the  Italian  bank  has  a  debit  position  at the  Bank  of  Italy,  while  the  German  bank  has  a  credit  position  at  the  Bundesbank.  Furthermore the  Bundesbank  debits  the  account  of  the  Bank  of  Italy.  All  this  occurs  smoothly  as  national central  banks  of  the  eurozone  provide  unlimited  and  uncollaterized  lines  of  credit  to  each  other. All  these  debit  and  credit  accounts  are  recorded  on  the  first  row  of  Table  5. 33  However,  by  the end  of the  day,  national central banks  must  also  settle  with each  other. All  the  debits  and  credits are  netted  on  the  books  of  the  ECB,  where  each  national  central  bank  then  acquires  a  net position  vis-à-vis  the  rest  of  the  European  System  of  central  banks  (ESCB).  This  is  shown  on  the second  row  of  Table  5.  Furthermore,  most  likely,  the  Deutsche  Bank  will  use  its  positive  clearing balances  (or reserves)  to  reduce  its  overdraft position  vis-à-vis  the  Bundesbank. 34   It should  be  noted  that  there  is no  limit to  the  debit  position  that  a national central  bank can  incur  on  the  books  of  the  ECB,  that  is,  its  liabilities  with  respect  to  the  rest  of  the Eurosystem  are  not  limited.  “These  liabilities  can  be  carried  indefinitely  as  there  is  no  time prescribed  for  the  settlement  of  imbalances”  (Garber  2010,  p.  2).  Furthermore,  national  central 

32  In  the  case  of  Ireland,  the  fear  of  default  has more  to  do  with  the  fear  that  Irish  banks may  never recover  from  their bad  loans,  despite past bailouts  from  the  Irish  government. 33  I  am grateful to  Ramanan,  from  Mumbai,  for  the  many  email discussions  that  we  had  regarding the TARGET2  mechanism  as  well as  the  information  that  he  provided  me  with.  A short  paper  by  John Whittaker  (2011) was also  useful to  understand  the  eurosystem  payment  framework.  A paper  by  Bindseil and  König (2011)  was  also  later  brought  to  my  attention  by  Vincent  Grossman. 34  Indeed,  this  is  what  is  actually  happening. Advances  from  the  Bundesbank  to  the  German  banks have fallen  from  €250 billion  to  €100 billion  from the  beginning of  2007 to  the  end  of  2010 (Bundesbank  2011, p.  35). 

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banks  in  debit  are  charged  the  main  official  rate,  which  is  also  the  rate  gained  by  those  with claims  on  the  Eurosystem.    Thus  these  imbalances  can  go  on  forever,  as,  if  we  come  back  to  our example,  the  BNL  would  be  taking  advances  from  the  Bank  of  Italy  at  1.5%  (if  this  is  the  main refinancing  rate),  while  the  Bank  of  Italy  would  be  accumulating  liabilities  within  the  eurosystem at  the  same  pace,  also  being  charged  a  1.5%  interest  rate.  Thus,  if  there  is  some  lack  of confidence  in  the  system,  we  should  observe  an  increase  in  the  size  of  the  balance  sheets  of  the central  banks  of  the  countries  under  suspicion,  as  well  as  an  increase  in  the  size  of  the  balance sheet  of  the ECB. Table  5:  Eurozone  clearing  and  settlement system  without  active  overnight  markets Banca Nazionale del  Lavoro (B NL ) Bank of Italy (B I ) Deutsche  Bank (DB) Bundesbank (BB) ECB Asset Liability Asset Liability Asset Liability Deposit importer 10 Advance from  B S Advance to  B N L +10 Advance from +10 BB Reserves at BB +10 Deposit exporter +10 Asset S Advance  to B +10 Liability Deposit of DB +10 Asset Liability +10 Deposit importer 10 Advance from  B S Advance to  B N L +10 D ue  to  the eurosystem +10 Deposit exporter +10 Claims  on the Eurosystem +10 Debit position of B +10 I Credit position of BB +10 +10 Advance from  BB 10 Advance  to DB 10 Indeed,  and  here  we  can  see  one  way  of  regaining  some  currency  sovereignty  without disrupting  the  ECB  unwillingness  to  purchase  sovereign  debt,  a  government  that  is  under pressure  from  international  financial  markets,  having  trouble  in  getting  foreign  financial institutions  to  rollover  their  securities,  could  direct  its  domestic  publicly-owned  commercial banks  to  acquire  new  bond  issues  at  the  price  of  its  choice  (or  if  none  are  left,  it  could nationalize  some  private  banks  and  impose  the  same  instructions).  The  proceeds  of  these  sales, initially  held  as  deposits  at  the  domestic  bank,  could  be  used  to  redeem  the  securities  that foreign  banks  decline  to  roll  over.  At  the  end  of  this  process,  assuming  that  Italy  is  the  country under  financial  pressure,  as  it  was  during  the  summer  of  2011,  the  T-accounts  would  look  very much  like  those  of  the  last  line  of  Table  5.  The  Bank  of  Italy  would  provide  an  advance  to  the BNL  with  the  government  debt  as  collateral;  and  the  Bank  of  Italy  would  increase  its  liabilities towards  the  Eurosystem.  As  long  as  the  yield  on  securities  is  higher  than  the  main  official  rate, this is  a profitable  operation  for domestic  banks  (unless the  government defaults). But of course, as  the  neo-chartalists  would  argue,  it  would  be  much  simpler  if  the  ECB  and  the  national  central banks  could  purchase  sovereign  debt  on  a  regular  basis  or  at  least  whenever  their  yields  went out  of line. 35    

35  Another  option  would  be  to  issue  Eurobonds,  as  suggested  by  Yanis  Varoufakis,  from  the  University  of Athens,  and  also  by  the  financier  George  Soros. 

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Conclusion 
Neo-chartalism,  or  modern  monetary  theory,  has  gained  prominence  on  the  web,  and  it  has attracted  the  attention  of  several  non-economists  who  have  a  passion  for  monetary  matters. But  there  is also  a  great  deal of resistance  to  the  ideas  promoted by  neo-chartalists,  even among heterodox  authors,  as  some  of  the  claims  of  neo-chartalists  appear  rather  counter-intuitive  and as  these  claims  have  sometimes  been  defended  with  some  unscholarly  vigour.  The  resistance  to the  ideas  of  modern  monetary  theory  is  not  entirely  surprising,  because,  besides  its  novelty, modern  monetary  theory  is  compatible  with  the  Horizontalist  version  of  post-Keynesian monetary  economics,  which  also  encountered some  resistance  from  other  heterodox  authors.  

 This  article  has  focused  on  the  nexus  between  the  clearing  and  settlement  system  and the  financial  requirements  of  government  expenditures.  I  have  not  tried  to  go  beyond  this.  The main  message  that  I  wish  to  convey  is  that  the  neo-chartalist  analysis  is  essentially  correct.  In particular,  it  can  be  argued  that  the  framework  of  modern  monetary  theory  has  been  validated by  its  analysis  of  the  main  flaws  of  the  eurozone  setup,  much  before  these  flaws  became apparent  to  most  of  us  as  the  eurozone  entered  into  its  home-made  crisis  in  2010.  Once  again, the  main  flaw  of  the  euro  system,  as  I  see  it,  is  that  the  Eurosystem  is  a  pure  overdraft  system, with  the  ECB  being  prevented  (mainly  by  custom,  not  so  much  by  rules)  from  purchasing  and selling  government securities  as  it  sees  fit,  in  contrast  to  what  occurs  in  the  UK,  the  USA,  Canada or Japan. 36 

However,  in  my  opinion,  neo-chartalism  carries  some  excess  baggage,  which  must  be gotten  rid  of.  In  trying  to  convince  economists  and  the  public  that  there  are  no  financial constraints  to  expansionary  fiscal  policies,  besides  artificial  constraints  erected  by  politicians  or bureaucrats  that  believe  in  mainstream  theories  and  in  the  principles  of  sound  finance,  neochartalists  end  up  using  arguments  that  become  counter-productive.  There  is  nothing  or  very little to  be  gained  in  arguing  that  government  can  spend  by  simply  crediting  a  bank  account;  that government expenditures  must  precede  tax  collection;  that  the creation  of  high  powered  money requires  government  deficits  in  the  long  run;  that  central  bank  advances  can  be  assimilated  to  a government  expenditure;  or  that  taxes  and  issues  of  securities  do  not  finance  government expenditures.  All  these  counter-intuitive  claims  are  mostly  based  on  a  logic  that  relies  on  the consolidation  of  the  financial  activities  of  the  government  with  the  operations  of  the  central bank,  thus  modifying  standard  terminology.  I  believe  that  such  a  consolidation  leads  to  the avoidance  of  crucial  steps  in  the  analysis  of  the  nexus  between  the  government  activities  and the  clearing  and  settlement  system  to  which  the  central  bank  partakes,  and  hence  leads  to confusion  and  misunderstandings.  And  so  do  references  to  a  leveraged  vertical  component  of the  money  supply. 

36  In  other  words,  as  was  pointed  out  by  central  banker  Bini  Smaghi  (2011),  the  problem  with  the  ECB  is that  it  was  set  up  under  the  assumptions  that  financial  markets  are  always  right  and  hence  that  it  would never  face a  crisis. 

The  proponents  of  modern  monetary  theory  have  forced  post-Keynesians  to  dwell  into the  details  of  the  clearing  and  settlement  system,  and  to  take  into  consideration  the  role  of government  in  the  payment  system,  whereas  before  post-Keynesians  had  focused  almost exclusively  on  the  relationships  between  commercial  banks  and  the  central  bank.  Modern monetary  theory  is  thus  certainly  an  improvement,  but  it  must  get  rid  of  its  counter-productive statements  and  convoluted  logic  based  on  the  fictitious  consolidation  of  government  and  the central bank.   

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Forstater,  M.,  Mosler,  W.  (2005),  ‘The  natural  rate  of  interest  is  zero’,  Journal  of  Economic Issues,  29  (2),  pp. 535-542. Fullwiler,  S.  (2003),  ‘Timeliness  and  the  fed’s  daily  tactics’,  Journal  of  Economic  Issues,  37  (4), December,  pp. 851-880. Fullwiler, S. (2008), ‘Modern  central  bank  operations:  The  general  principles’, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1658232 Fullwiler,  S.  (2010),  ‘Re-viewing  chartalism/neo-chartalism,  comment’,  8  July  2010, http://econrevival.blogspot.com/2010/07/re-reviewing-chartalsim-neo-chartalism.html Fullwiler,  S.,  Wray,  L.R.  (2010),  ‘Quantitative  easing  and  proposals  for  reform  of  monetary procedures’, Working  paper #  645, Levy  Economics Institute  of Bard  College. Garber,  P.  (2010),  ‘The  mechanics  of  intra  euro  capital  flight’,  Deutsche  Bank,  10  December 2010,  http://fincake.ru/stock/reviews/56090/download/54478 Gnos,  C.,  Rochon,  L.P.  (2002),  ‘Money  creation  and  the  state  :  A  critical  assessment  of chartalism’,  International Journal of Political  Economy, 32  (3),  Fall, pp.  41-57.   Godley,  W.  (1992),  ‘Maastricht  and  all  that’,  London  review  of  Books,  14  (19),  8  October  1992, pp. 3-4. US and Godley,  W.  (1999A),  ‘Seven  unsustainable  processes:  Medium  term  prospects  and  policies  for the the World’, Levy Institute http://www.levyinstitute.org/pubs/sevenproc.pdf Strategic Analysis, January. Godley,  W.  (1999B),  ‘Money  and  credit  in  a  Keynesian  model  of  income  determination’, Cambridge Journal of  Economics,  23  94),  July,  pp.  393-411. Godley, W.,  Cripps, F. (1983),  Macroeconomics, London:  Fontana paperbacks. Godley,  W.,  Lavoie,  M.  (2007A),  ‘Fiscal  policy  in  a  stock-flow  consistent  (SFC)  model’,  Journal  of Post  Keynesian  Economics,  30  (1),  Fall, pp. 79-100. Godley,  W.,  Lavoie,  M.  (2007B),  ‘A  simple  model  with  three  economies  and  two  currencies: Euroland  and  the  USA’,  Cambridge Journal of  Economics,  31  (1),  January, pp. 1-24. Kadmos,  G,  O’Hara,  P.A.  (2000),  ‘The  taxes-drive  money  and  employer  of  last  resort  approach  to government policy’,  Journal of Economic  and  Social  Policy, 5  (1),  pp.  1-23. Kelton,  S.  (2010),  ‘Yes,  deficit  spending  adds  to  private  sector  assets  even  with  bond  sales’,17 November  2010,  http://neweconomicperspectives.blogspot.com/2010/11/yes-governmentbonds-add-to-private.html Kelton, S.A  ., Wray,  L.R.  (2009),  ‘Can  Euroland  survive?’, Levy  Economics Institute  of Bard  College Public  Policy  Brief  #106,   http://www.levyinstitute.org/pubs/ppb_106.pdf King,  J.E.  (2001),  ‘The  last  resort?  Some  critical  reflections  on  ELR’,  Journal  of  Economic  and Social Policy,  5  (2),  pp.  72-76. Krugman, P. (2011), ‘MMT again’, 15 August 2011, http://krugman.blogs.nytimes.com/2011/08/15/mmt-again/ Lavoie,  M.  (1999),  ‘Book  Review:  Understanding  Modern  Money’,  Eastern  Economic  Journal,  25 (3),  Summer,  pp.  370-372.   

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In macroeconomicschartalism is a theory of money which argues that money originated with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt,[1] and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue.

Contents

BackgroundEdit

Georg Friedrich Knapp, a German economist, coined the term "chartalism" in his State Theory of Money, which was published in German in 1905 and translated into English in 1924. The name derives from the Latin charta, in the sense of a token or ticket.[2] Knapp argued that "money is a creature of law" rather than a commodity.[3] Knapp contrasted his state theory of money with "metallism", as embodied at the time in the Gold Standard, where the value of a unit of currency depended on the quantity of precious metal it contained or could be exchanged for. He argued the state could create pure paper money and make it exchangeable by recognising it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices".[3]

Constantina Katsari has argued that principles from both metallism and chartalism were reflected in the monetary system introduced by Augustus, which was used in the eastern provinces of the Roman Empire, from the early 1st century to the late 3rd century AD.[4][5]

When Knapp was writing, the prevailing view of money was that it had evolved from systems of barter to become a medium of exchangebecause it represented a durable commodity which had some use value. However, as modern chartalist economists such as Randall Wray and Mathew Forstater have pointed out, chartalist insights into tax-driven paper money can be found in the earlier writings of many classical economists,[6][7] for instance Adam Smith, who observed in The Wealth of Nations:

A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince

— Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

Forstater also finds support for the concept of tax-driven money, under certain institutional conditions, in the work of Jean-Baptiste SayJ.S. MillKarl Marx and William Stanley Jevons.[7]

Alfred Mitchell-Innes, writing in 1914, argued that money existed not as a medium of exchange but as a standard of deferred payment, with government money being debt the government could reclaim by taxation.[8] Innes argued:

Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, and present it to the Treasury in liquidation of his legal debt. He has to redeem or cancel that portion of the debt...The redemption of government debt by taxation is the basic law of coinage and of any issue of government ‘money’ in whatever form.

— Alfred Mitchell-Innes, The Credit Theory of Money, The Banking Law Journal

Knapp and "Chartalism" were referenced by John Maynard Keynes in the opening pages of his 1930 Treatise on Money [9] and appear to have influenced Keynesian ideas on the role of the state in the economy.[6] By 1947, when Abba Lerner wrote his article "Money as a Creature of the State", economists had largely abandoned the idea that the value of money was closely linked to gold.[10] Lerner argued that responsibility for avoiding inflation and depressions lay with the state because of its ability to create or tax away money.[10]

Modern proponentsEdit

Economists Warren MoslerL. Randall WrayStephanie Kelton, and Bill Mitchell are largely responsible for reviving Chartalism as an explanation of money creation; Wray refers to this revived formulation as Neo-Chartalism.[11]

Mitchell, founder of the Centre of Full Employment and Equity or CofFEE at the University of Newcastle in Australia, coined the term Modern Monetary Theory to describe modern Neo-Chartalism, and that term is now widely used. Scott Fullwiler has added detailed technical analysis of the banking and monetary systems[12]

Rodger Malcolm Mitchell's book Free Money[13] (1996) describes in layman's terms the essence of Chartalism.

Some contemporary proponents, such as Wray, situate Chartalism within post-Keynesian economics, while Chartalism has been proposed as an alternative or complementary theory to monetary circuit theory, both being forms of endogenous money, i.e., money created within the economy, as by government deficit spending or bank lending, rather than from outside, as by gold. In the complementary view, Chartalism explains the "vertical" (government-to-private and vice versa) interactions, while circuit theory is a model of the "horizontal" (private-to-private) interactions.[14][15]

Hyman Minsky seemed to incorporate a Chartalist approach to money creation in his Stabilizing an Unstable Economy,[16] while Basil Moore, in his book Horizontalists and Verticalists,[17] delineates the differences between bank money and state money.

James K. Galbraith supports Chartalism and wrote the foreword for Mosler's book Seven Deadly Innocent Frauds of Economic Policy in 2010.[18]

CriticismEdit

The continued use of the Somali shilling as currency despite the lack of a functioning central government capable of raising taxes or a central bank to issue it has been cited as a counterargument to Chartalism.[19]  Bitcoin, a cryptocurrency not originated by a state, has also been cited as a counterexample.[20]

Paul Krugman, Kenneth RogoffLawrence Summers and most other economists have rejected MMT. In the IGM Forum survey on the subject, 97 % of economists opposed and 0 % supported the view "Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt", and 92 % opposed and 0 % supported the view "Countries that borrow in their own currency can finance as much real government spending as they want by creating money." The unanimity was exceptionally rare. The opponents included leading economists like Daron AcemogluBengt HolmströmAlberto AlesinaAngus DeatonOliver HartWilliam Nordhausand Emmanuel Saez.[21][22]

HarmsEdit

Economist Kenneth Judd (Stanford) wrote, that the government might do the trick once (paying its debt by creating money), but using it repeatedly makes it impossible to get new debt. Oliver Hart (Harvard) warned about hyperinflation. Steven Kaplan (Chicago) compared MMT to Venezuela and Zimbabwe, Markus Brunnermeier (Princeton) to Latin America and Weimar Germany.[21][22]

Lawrence Summers called Modern Monetary Theory voodoo economics and said that similar policies have led to hyperinflation in Latin America.[23] Also Janet Yellen warned about hyperinflation.[24]

Warren Buffett warns about MMT causing an inflationary spiral. According to him, it is not known, at which point the dangerous spiral starts, and it should not be tried.[25]

UnclarityEdit

Paul Krugman writes that MMT supporters even claim to have proven Keynesianism wrong but do not clearly express the difference between it and MMT. They also dismiss any attempts to make sense what they say. MMT is much the same as Abba Lerner's "functional finance" (1943), which was clear so that its problem can easily be perceived. Taking into account the tradeoffs between monetary and finance policy and the snowball effect, it appears that debt is actually a bigger problem than Lerner admitted. When r>g, debt/gdp grows acceleratingly without further measures.[26]

See alsoEdit

ReferencesEdit

  1. ^ Graeber, David (12 July 2011). Debt: The First 5000 YearsISBN 1-933633-86-7.
  2. ^ Knapp, George Friedrich (1924), The State Theory of Money, Macmillan and Company, p. 32
  3. a b Knapp, George Friedrich (1924), The State Theory of Money, Macmillan and Company
  4. ^ Stephanie A. Bell and Edward J. Nell, ed. (2003). The State, the Market, and the Euro: Chartalism Versus Metallism in the theory of money. Edward Elgar. ISBN 1843761564.
  5. ^ Constantina Katsari (2011). "Chpt. 7". The Roman Monetary SystemCambridge University PressISBN 0521769469.
  6. a b (Wray 2000)
  7. a b Forstater, Mathew (2004), Tax-Driven Money: Additional Evidence from the History of Thought, Economic History, and Economic Policy (PDF)
  8. ^ Mitchell-Innes, Alfred (1914). "The Credit Theory of Money"The Banking Law Journal31.
  9. ^ Keynes, John Maynard: A Treatise on Money, 1930, pp. 4, 6
  10. a b "Lerner", Abba P. (May 1947). "Money as a Creature of the State". The American Economic Review37 (2, ).
  11. ^ The Economist, 31 December 2011, "Marginal revolutionaries"neo-chartalism, sometimes called “Modern Monetary Theory”
  12. ^ http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=444041
  13. ^ Mitchell, Rodger Malcolm: Free Money - Plan for Prosperity, PGM International, Inc., paperback 2005, ISBN 978-0-9658323-1-1
  14. ^ "Deficit Spending 101 - Part 3" Bill Mitchell, 2 March 2009
  15. ^ "In the spirit of debate...my reply" Bill Mitchell, 28 September 2009
  16. ^ Minsky, Hyman: Stabilizing an Unstable Economy, McGraw-Hill, 2008, ISBN 978-0-07-159299-4
  17. ^ Moore, Basil J.: Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, 1988, ISBN 978-0-521-35079-2
  18. ^ Mosler, Warren: Seven Deadly Innocent Frauds of Economic Policy, Valance Co., 2010, ISBN 978-0-692-00959-8; also available in .DOC
  19. ^ https://jpkoning.blogspot.com/2013/03/orphaned-currency-odd-case-of-somali.html
  20. ^ https://www.forbes.com/sites/jonmatonis/2013/04/03/bitcoin-obliterates-the-state-theory-of-money/
  21. a b Romesh Vaitilingam (March 13, 2019). "MODERN MONETARY THEORY" (PDF)IGM Forum.
  22. a b "Modern Monetary Theory"IGM Forum. March 13, 2019.
  23. ^ https://finance.yahoo.com/news/larry-summers-modern-monetary-theory-mmt-grotesque-000909244.html
  24. ^ https://finance.yahoo.com/news/yellen-says-she-apos-not-104439955.html
  25. ^ https://www.bloomberg.com/news/articles/2019-03-15/buffett-no-fan-of-modern-monetary-theory-with-its-danger-zones
  26. ^ Paul Krugman (February 12, 2019). "What's Wrong With Functional Finance? (Wonkish)"The New York Times.