The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 3)

By Iain Dooley

Logical conclusions

I hope by now you have been able to come to terms with the fact that currencies are always created by a sovereign and their value is driven by the willingness of the sovereign to accept the currency in payment of taxes.

In fact the “one sovereign, one currency” rule has been almost universal for thousands of years, except for one notable case and that is the Euro. This is basically why the Euro has been such a disaster, and why economists such as Wynne Godley were able to produce such prescient predictions of it’s failure.

So now we can use this simple fact to derive logically some of the obvious statements made by MMT.

1. The government should always spend to maintain full employment

Governments create money to move resources to the public purpose.

When we have people who are willing and able to work and where there is useful work to do in the public purpose it is insane for the government not to hire those people.

Think about the chore cart: would you ever claim that because a certain number of ticks weren’t redeemed this week that you would not issue more ticks to get chores done?

Think about a football game: would they ever stop the game and leave the players idle because they had awarded too many points?

Lunacy. Sheer lunacy.

2. The government cannot borrow its own currency

A unit of currency is nothing more than an acknowledgement of a contribution. It is basically a tax credit. A voucher issued by the government.

If I were to borrow a voucher that I issued, I would have to provide a receipt which would be equivalent to the original voucher.

In other words, since all government money is already a liability of the government, it cannot borrow it back.

This can be tricky to visualise so I created this video demonstrating how this works:

3. The government can never run out of money, but it can run out of resources

This is pretty simple. If we only have 2 kids we can’t just write down a million ticks and get more chores done. The limit of our spending is the capacity of the kids we have to do chores.

As I alluded to earlier this is also why the government needs to deficit spend. In a sophisticated economy, not everyone works for the government, and not everyone spends all their income.

If the government taxes back all the money it spends all it’s doing is destroying all the money it created by spending.

You should be able to see pretty clearly then that the government could sustainably run a deficit forever, so long as total spending doesn’t exceed the capacity of the society to produce goods and services (which would be inflationary).

4. Gold is never money, Bitcoin is never money

They are commodities and they can be used as money. If a government was stupid or ignorant enough then they could use gold or bitcoin to create their currency, but that currency would then suffer all the problems I enumerated above with fixed exchange rates and commodity monies.

5. Post money society is a reversion to the stone age

When people get fed up with how our economic and political structures work, particularly with growing inequality, they talk about creating an “alternative to money” (and many people see bitcoin or some other similarly misguided technology as the solution to that).

This is nothing more than the “poker chip” example I gave above. Without an obligation in common to a sovereign there can be no such thing as a successful currency.

So anyone talking about a “post money society” are really just talking about a society without a sovereign. Any such society will not have liquidity and a society without liquidity can’t undertake complex social projects such as building the internet and roads and stuff so it basically limits us to the type of technology available to stone age societies.

I don’t think there’s anything wrong with stone age societies, by the way. I think that they may well be much happier than we are, but I just wanted to make it clear that there is no “alternative to money”. Money is by definition liquidity provided to a community by a common obligation to a sovereign and is synonymous with sovereignty.

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