Modern Money Theory: How I Came to MMT and What I Include in MMT

L. Randall Wray | October 1, 2018

My remarks for the 2018 MMT Conference, September 28-30, NYC.

I was asked to give a short presentation at the MMT conference. What follows is the text version of my remarks, some of which I had to skip over in the interests of time. Many readers might want to skip to the bullet points near the end, which summarize what I include in MMT.


As an undergraduate I studied psychology and social sciences—but no economics, which probably gave me an advantage when I finally did come to economics. I began my economics career in my late twenties, studying mostly Institutionalist and Marxist approaches while working for the local government in Sacramento. However, I did carefully read Keynes’s General Theory at Sacramento State and one of my professors—John Henry—pushed me to go to St. Louis to study with Hyman Minsky, the greatest Post Keynesian economist.

I wrote my dissertation in Bologna under Minsky’s direction, focusing on private banking and the rise of what we called “nonbank banks” and “off-balance-sheet operations” (now called shadow banking). While in Bologna, I met Otto Steiger—who had an alternative to the barter story of money that was based on his theory of property. I found it intriguing because it was consistent with some of Keynes’s Treatise on Money that I was reading at the time. Also, I had found Knapp’s State Theory of Money—cited in both Steiger and Keynes—so I speculated on money’s origins (in spite of Minsky’s warning that he didn’t want me to write Genesis) and the role of the state in my dissertation that became a book in 1990—Money and Credit in Capitalist Economies—that helped to develop the Post Keynesian endogenous money approach.

What was lacking in that literature was an adequate treatment of the role of the state—which played a passive role—supplying reserves as demanded by private bankers—that is the Post Keynesian accommodationist or Horizontalist approach. There was no discussion of the relation of money to fiscal policy at that time. As I continued to read about the history of money, I became more convinced that we need to put the state at the center. Fortunately, I ran into two people that helped me to see how to do it.

First, there was Warren Mosler, who I met online in the PKT discussion group; he insisted on viewing money as a tax-driven government monopoly. Second, I met Michael Hudson at a seminar at the Levy Institute, who provided the key to help unlock what Keynes had called his “Babylonian Madness” period—when he was driven crazy trying to understand early money. Hudson argued that money was an invention of the authorities used for accounting purposes. So over the next decade I worked with a handful of people to put the state into monetary theory.

As we all know, the mainstream wants a small government, with a central bank that follows a rule (initially, a money growth rate but now some version of inflation targeting). The fiscal branch of government is treated like a household that faces a budget constraint. But this conflicts with Institutionalist theory as well as Keynes’s own theory. As the great Institutionalist Fagg Foster—who preceded me at the University of Denver–put it: whatever is technically feasible is financially feasible. How can we square that with the belief that sovereign government is financially constrained? And if private banks can create money endogenously—without limit—why is government constrained?

My second book, in 1998, provided a different view of sovereign spending. I also revisited the origins of money. By this time I had discovered the two best articles ever written on the nature of money—by Mitchell Innes. Like Warren, Innes insisted that the dollar’s value is derived from the tax that drives it. And he argued this has always been the case. This was also consistent with what Keynes claimed in the Treatise, where he said that money has been a state money for the past 4,000 years, at least. I called this “modern money” with intentional irony—and titled my 1998 book Understanding Modern Money as an inside joke. It only applies to the past 4,000 years.

Surprisingly, this work was more controversial than the earlier endogenous money research. In my view, it was a natural extension—or more correctly, it was the prerequisite to a study of privately created money. You need the state’s money before you can have private money. Eventually our work found acceptance outside economics—especially in law schools, among historians, and with anthropologists.

For the most part, our fellow economists, including the heterodox ones, attacked us as crazy.

I benefited greatly by participating in law school seminars (in Tel Aviv, Cambridge, and Harvard) on the legal history of money—that is where I met Chris Desan and later Farley Grubb, and eventually Rohan Grey. Those who knew the legal history of money had no problem in adopting the MMT view—unlike economists.

I remember one of the Harvard seminars when a prominent Post Keynesian monetary theorist tried to argue against the taxes drive money view. He said he never thinks about taxes when he accepts money—he accepts currency because he believes he can fob it off on Buffy Sue. The audience full of legal historians broke out in an explosion of laughter—yelling “it’s the taxes, stupid.” All he could do in response was to mumble that he might have to think more about it.

Another prominent Post Keynesian claimed we had two things wrong. First, government debt isn’t special—debt is debt. Second, he argued we don’t need double entry book-keeping—his model has only single entry book-keeping. Years later he agreed that private debt is more dangerous than sovereign debt, and he’s finally learned double-entry accounting. But of course whenever you are accounting for money you have to use quadruple entry book-keeping. Maybe in another dozen years he’ll figure that out.

As a student I had read a lot of anthropology—as most Institutionalists do. So I knew that money could not have come out of tribal economies based on barter exchange. As you all know, David Graeber’s book insisted that anthropologists have never found any evidence of barter-based markets. Money preceded market exchange.

Studying history also confirmed our story, but you have to carefully read between the lines. Most historians adopt monetarism because the only economics they know is Friedman–who claims that money causes inflation. Almost all of them also adopt a commodity money view—gold was good money and fiat paper money causes inflation. If you ignore those biases, you can learn a lot about the nature of money from historians.

Farley Grubb—the foremost authority on Colonial currency—proved that the American colonists understood perfectly well that taxes drive money. Every act that authorized the issue of paper money imposed a Redemption Tax. The colonies burned all their tax revenue. Again, history shows that this has always been true. All money must be redeemed—that is, accepted by its issuer in payment. As Innes said, that is the fundamental nature of credit. It is written right there in the early acts by the American colonies. Even a gold coin is the issuer’s IOU, redeemed in payment of taxes. Once you understand that, you understand the nature of money.

So we were winning the academic debates, across a variety of disciplines. But we had a hard time making progress in economics or in policy circles. Bill, Warren, Mat Forstater and I used to meet up every year or so to count the number of economists who understood what we were talking about. It took over decade before we got up to a dozen. I can remember telling Pavlina Tcherneva back around 2005 that I was about ready to give it up.

But in 2007, Warren, Bill and I met to discuss writing an MMT textbook. Bill and I knew the odds were against us—it would be for a small market, consisting mostly of our former students. Still, we decided to go for it. Here we are—another dozen years later—and the textbook is going to be published. MMT is everywhere. It was even featured in a New Yorker crossword puzzle in August. You cannot get more mainstream than that.

We originally titled our textbook Modern Money Theory, but recently decided to just call it Macroeconomics. There’s no need to modify that with a subtitle. What we do is Macroeconomics. There is no coherent alternative to MMT.

A couple of years ago Charles Goodhart told me: “You won. Declare victory but be magnanimous about it.” After so many years of fighting, both of those are hard to do. We won. Be nice.

Let me finish with 10 bullet points of what I include in MMT:

  1. What is money: An IOU denominated in a socially sanctioned money of account. In almost all known cases, it is the authority—the state—that chooses the money of account. This comes from Knapp, Innes, Keynes, Geoff Ingham, and Minsky.
  2. Taxes or other obligations (fees, fines, tribute, tithes) drive the currency. The ability to impose such obligations is an important aspect of sovereignty; today, states alone monopolize this power. This comes from Knapp, Innes, Minsky, and Mosler.
  3. Anyone can issue money; the problem is to get it accepted. Anyone can write an IOU denominated in the recognized money of account; but acceptance can be hard to get unless you have the state backing you up. This is Minsky.
  4. The word “redemption” is used in two ways—accepting your own IOUs in payment and promising to convert your IOUs to something else (such as gold, foreign currency, or the state’s IOUs).

The first is fundamental and true of all IOUs. All our gold bugs mistakenly focus on the second meaning—which does not apply to the currencies issued by most modern nations, and indeed does not apply to most of the currencies issued throughout history. This comes from Innes and Knapp, and is reinforced by Hudson’s and Grubb’s work, as well as by Margaret Atwood’s great book: Payback: Debt and the Shadow Side of Wealth.

  1. Sovereign debt is different. There is no chance of involuntary default so long as the state only promises to accept its currency in payment. It could voluntarily repudiate its debt, but this is rare and has not been done by any modern sovereign nation.
  2. Functional Finance: finance should be “functional” (to achieve the public purpose), not “sound” (to achieve some arbitrary “balance” between spending and revenues). Most importantly, monetary and fiscal policy should be formulated to achieve full employment with price stability. This is credited to Abba Lerner, who was introduced into MMT by Mat Forstater.

In its original formulation, it is too simplistic, summarized as two principles: increase government spending (or reduce taxes) and increase the money supply if there is unemployment (do the reverse if there is inflation). The first of these is fiscal policy and the second is monetary policy. A steering wheel metaphor is often invoked, using policy to keep the economy on course. A modern economy is far too complex to steer as if you were driving a car. If unemployment exists, it is not enough to say that you can just reduce the interest rate, raise government spending, or reduce taxes. The first might even increase unemployment. The second two could cause unacceptable inflation, increase inequality, or induce financial instability long before they solved the unemployment problem. I agree that government can always afford to spend more. But the spending has to be carefully targeted to achieve the desired result. I’d credit all my Institutionalist influences for that, including Minsky.

  1. For that reason, the JG is a critical component of MMT. It anchors the currency and ensures that achieving full employment will enhance both price and financial stability. This comes from Minsky’s earliest work on the ELR, from Bill Mitchell’s work on buffer stocks and Warren Mosler’s work on monopoly price setting.
  2. And also, for that reason, we need Minsky’s analysis of financial instability. Here I don’t really mean the financial instability hypothesis. I mean his whole body of work and especially the research line that began with his dissertation written under Schumpeter up through his work on Money Manager Capitalism at the Levy Institute before he died.
  3. The government’s debt is our financial asset. This follows from the sectoral balances approach of Wynne Godley. We have to get our macro accounting correct. Minsky always used to tell students: go home and do the balance sheets because what you are saying is nonsense. Fortunately, I had learned T-accounts from John Ranlett in Sacramento (who also taught Stephanie Kelton from his own, great, money and banking textbook—it is all there, including the impact of budget deficits on bank reserves). Godley taught us about stock-flow consistency and he insisted that all mainstream macroeconomics is incoherent.
  4. Rejection of the typical view of the central bank as independent and potent. Monetary policy is weak and its impact is at best uncertain—it might even be mistaking the brake pedal for the gas pedal. The central bank is the government’s bank so can never be independent. Its main independence is limited to setting the overnight rate target, and it is probably a mistake to let it do even that. Permanent ZIRP (zero interest rate policy) is probably a better policy since it reduces the compounding of debt and the tendency for the rentier class to take over more of the economy. I credit Keynes, Minsky, Hudson, Mosler, Eric Tymoigne, and Scott Fullwiler for much of the work on this.

That is my short list of what MMT ought to include. Some of these traditions have a very long history in economics. Some were long lost until we brought them back into discussion. We’ve integrated them into a coherent approach to Macro. In my view, none of these can be dropped if you want a macroeconomics that is applicable to the modern economy. There are many other issues that can be (often are) included, most importantly environmental concerns and inequality, gender and race/ethnicity. I have no problem with that.


3 Responses to “Modern Money Theory: How I Came to MMT and What I Include in MMT”

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  1. Comment by Ralph MusgraveOctober 2, 2018 at 3:25 am   Reply

    I agree with most of that. Just one quibble as follows. I’m not sure that a good argument for ZIRP is that letting interest rates rise above zero increases “the tendency for the rentier class to take over more of the economy.” That’s a very POLITICAL point. Strikes me a better and strictly ECONOMIC point is as follows.

    Interest rates can only rise above zero if the state issues so much base money (or “business cards” to use Warren Mosler’s analogy) that that results in excess demand and the state has to borrow some of that money back so as to suppress demand. That “promp excess demand, and then suppress the excess” is a blatant self-contradiction. I.e. the state should issue enough base money to bring full employment at a zero rate of interest. Period. A classic example of that self-contradiction is taking place in the US right now: i.e. Trump is running too large a deficit with the result that the Fed looks like clamping down on the resulting excess demand with interest rate hikes.

    As for other reasons for state / government borrowing (e.g. to fund infrastructure), they are largely nonsense, and for reasons I set out in section 2 here:

  2. Comment by Michael HudsonOctober 2, 2018 at 8:35 am   Reply

    The Sumerian origin of money is not merely for accounting, but specifically for accounting for DEBT — debt owed to the palatial economy and temples.
    I make that clear in my Springer dictionary of money that will come out later this year: Origins of Money and Interest: Palatial Credit, not Barter

  3. Comment by LR Wray — October 2, 2018 at 11:48 am   Reply

    Thanks Michael; that is what I meant and I look forward to your piece.

    Ralph: I’m surprised that after so many years of following MMT you still think a government borrows its own currency (and think that could reduce inflation pressure).

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