When in November 2002 Ben Bernanke said all the Fed had to do was use this "printing press" thing to unlock some inflation, everyone just believed the man. No one would've dared disagree. For days, headlines blared approvingly over his confidence and brazenness. Confronted by a situation in which deflation was its ultimate danger, Bernanke wanted the world to know the Fed had the power, more importantly the will, to overcome any such challenge.
Many people are now catching on how the circumstances, like the truth, are at the very least much more complicated.
More than a decade of trying, the Federal Reserve as its counterparts around the world have been employing these printing presses oftentimes at great speed. They’ve realized their parts of the global economy have been stuck in the grips of great disinflation, to which they’ve been unable to author the key break from its halting grip.
Rather than facing up to the facts of the case, central bankers are now busily erasing their entire inflationary paradigm. Beginning with its presumed attachment to the labor force, the Phillips Curve, the Federal Reserve now says not only had it never achieved the inflation Bernanke had said was easily within reach, because it hadn’t succeeded, they must not know what they thought they knew – about the labor market.
Indeed, as full part of its grand strategy review begun in late 2018 and only completed in August this year, monetary policy in the US will no longer seek out “maximum employment” because, decade’s worth of undershooting inflation, they must not know what maximum employment really is. I’m not making this up.
Couldn’t the explanation be more fundamental, straightforward, therefore so much less needlessly convoluted?
Thwarted for so long even with balance sheets worldwide up into the trillions (with the Bank of Japan steadily closing in on three-quarters of a quadrillion), infallibility is no longer uniformly bestowed upon these allegedly wise monetary stewards. They have a printing press; do they possess the printing press?
In the United States, such a thing had never been centralized apart from periods of extreme emergency: greenbacks, the Civil War experiment with paper fiat a prime example. For the most part, under any variant of gold standard, currency issue and elasticity maintenance was the function of the private banking system.
Following the Civil War, as government greenbacks were increasingly retired, paper currency returned more exclusively to private banks – then the vast majority having been converted into national banks under the National Banking Act of 1863.
The catch, so far as the printing press might have been concerned, was that paper currency issued by national banks would have to be secured by US government issued debt (bonds) bought and then placed into deposit with the National Bank Administrator (the Comptroller of the Currency today). State-chartered banks still existed, and could still “print” their own currency, but under the ’63 Act such currency taxed at 10% was virtually eliminated.
This scheme had the effect of placing de facto national monetary policy into the hands of the Treasury Department. Currency still ultimately privately determined. Linked also to its mission for securing the nation’s gold reserves, as Milton Friedman and Anna Schwartz wrote in their 1963 book A Monetary History, this all:
“…had the effect of disposing the Treasury toward similar open market operations at times of financial strain, so that the Treasury assumed central bank functions, though it did so erratically and unpredictably.”
It continued throughout the national banking era of the latter 19th century right on into the early 20th until the installation of the Federal Reserve in 1913 – which took nearly a decade to accidentally rediscover the effects (scissor) of basically the same open market operations Treasury had run.
These kinds of transactions influence the so-called “base money” of the banking system; either the central bank or the government’s bureaucracy itself, when one sold bonds onto the open market it had the effect of reducing reserves of cash (or gold) held by the banking system thereby acting as a monetary restraint. Conversely, buying back Treasury bonds (using currency or gold taken in via taxation when the Treasury Department did this) would increase cash and gold available, loosening up currency and monetary elasticity.
The Federal Reserve on its own, by contrast, would conduct open market operations via the creation of bank reserves – the Fed’s currently presumed printing press. These are neither cash nor coin, rather an accounting entry satisfying legal requirements and therefore mimicking some of the properties of money and currency; certainly for minimum reserve requirements if little else.
Even in that day, however, half of minimum required reserves (and more than half of all reserves held) were met by correspondent balances held with approved reserve agents – the hierarchical private banks which made up the correspondent payments system which though much changed (wholesale interbank) survives today.
Monopoly on the creation of US dollars? Hardly.
This situation has bothered quite a few influential thinkers and observers, not least of them Karl Marx. Why give such authority and supremacy to banks? William Jennings Bryan famously decried these “Eastern Bankers” and the cross of gold they foisted upon the poor workers and farmers of the industrializing country.
Many wondered why the government would subvert its own power and authority. After all, by pain of prison or worse, the government forces taxation and more so defines the exact manner and nature of how such taxes should be paid. In doing so, it is the state which could seemingly define money itself.
This was the argument first advanced by George Knapp in his 1895 book The State Theory of Money. He and his advocates came to be known as chartalists; charta being the Latin word for token or ticket, anything that has no inherent value but is accepted as useful tender anyway.
In Knapp’s view, the charta came to be a useful token simply because the state said so. At the time, gold was money and paper was properly classified as mere currency, a derivative monetary format which, unlike charta, was conferred with meaning by its convertibility rights into commodity money.
Turning this on its head, Knapp wrote in his book that “money was a creature of law” so that all a government had to do was mandate the payment of taxes in whichever form best suited its purposes – even if it wasn’t commodity money. What naturally followed was that state expenses would be paid using the same tokens. Therefore, the real printing press should be conferred by taxation powers.
So, too, might this erase all prior notions of constraints; at least privately imposed monetary and financial constraints upon a government chartalists offered would be acting in the public good rather than consenting to the greedy rules set up by Eastern Bankers only to enrich themselves. The Gilded Age, its several depressions producing severe inequality, provided all the seeming “evidence” for at least the criticisms.
Knapp’s most famous influence, however, was on German monetary authorities, specifically Rudolf von Havenstein of the Weimar Republic’s Reichsbank. Everyone knows how this turned out simply because the word Weimar is seared into the collective global consciousness as equivalent to hyperinflationary collapse; the total social, economic, and political dissolution of an entire national existence.
There are still chartalists today anyway, those who bristle at their beliefs always being tied to the practice of Havenstein; practice they claim wasn’t truly responsible “state money.” The German School from which it sprang has long since rebranded.
It’s now known as Modern Monetary Theory, or MMT, though, again, its advocates aren’t exactly pleased with this name, either. Foisted upon them lovingly by supporters a long time ago, many admit their worldview isn’t truly modern, and more so vehemently object that it is anything like a theory.
They say it is established fact. Stephanie Kelton, a leading MMT intellectual, has said (2010):
“The ideas are not theoretical, and they aren't particularly modern. What we're doing is simply describing, operationally, the way government finance works. It's not a theory.”
This is factually true; but so what?
MMT, though, isn’t really supposed to be about money as it is the usual Keynesian designs upon “aggregate demand.” Where it differs from the standard neo-Keynesian theories of today is that MMT’ers don’t believe there should be any constraints on what the government can or should do to reach full employment, to bring about the “optimal” level of aggregate demand.
Yes, optimal level, the same high ideal which drove Rudy Havenstein to wreck Germany. As such, many if not the vast majority of its critics equate MMT with growing prospects for modern hyperinflation.
They are wrong.
MMT proposes excusing central bankers from their place atop the official pyramid of money authority. Or what they think is money authority. Instead, the Treasury Department will make monetary policy decisions and direct the central bank to create or retake as much base money as required to achieve Treasury’s economic goals for stable, maximum employment and aggregate demand.
This sounds familiar; using quite familiar econometric models to calculate the right, say, quantity of bank reserves, monetarily easing, if using slightly different means to achieve largely the same goals.
The key premise behind modern chartalism is, well, take it from Kelton:
“How does the government actually spend? It spends by writing checks on its account at the Federal Reserve Bank. What we see, and what we hear all the time is that the government is spending a hundred, taxes are ninety and it sells bonds equal to ten. So, what we see is an attempt to coordinate the government's spending with taxes and bond sales and it creates the illusion that what's happening is that the government is taking money from us and using it to pay for the things that it purchases. But that's not really what's going on… So what's happened at the end of the day? What are the effects of government spending? The monetary base increases. We call that `high powered money'. Those are the bank reserves.”
Long-time readers have no doubt rolled their eyes so hard both orbs have popped out of their sockets and are rolling around the floor beneath their scarcely contained contempt. Yep, “base money” equals “bank reserves.” Where’ve we heard that one before?
Now, the way in which MMT proposes to control monetary and financial, therefore economic, factors is not money printing and borrowing necessarily, rather it’s via a program they call a jobs guarantee (JG); or as former leading MMT proponent L. Randall Wray termed it, the employer of last resort program.
Central bankers no longer want anything to do with maximum employment, but MMT’s put it in its central focus the way it used to be for central bankers.
Pressing onward anyway, the way to achieve optimal aggregate demand is by ensuring all workers who want work can work. Faced with recessionary pressures of downturn, the private economy lays off workers and rather than the newly unemployed falling down on a safety net of unemployment insurance they are, Keynes building pyramids in the desert, hired immediately by the government at a living wage.
This, theoretically, by the way, creates a reserve of labor which the government then manipulates into the best economic situation possible; the optimal set of economic factors, including inflation. MMT’ers say that inflation is controlled not by taxation or monetary conjecture, rather by a sort of scissors policy in the labor reservoir; the private economy comes back, JG workers move back into it keeping wage rates under wraps.
The power behind it is, of course, the printing press which is why MMT includes “money” right in the term. It would take an enormous amount of government borrowing to maintain and manage a JG program especially in light of a private economy downturn suppressing tax receipts. But, breaking with traditional and neo-Keynesians, MMT doesn’t believe government borrowing is realistically restrained by anything than outdated tradition.
So long as the government prints money in its own currency - and chartalism says that’s what you do, you pick the currency so there can be no other - there are no limits to what can be achieved. As Wray once wrote, “A government which issues its own currency can always afford to hire unemployed labour.”
Look at Japan, they say. Massive debts, massive “money printing” to finance them, and no fiscal collapse, no hyperinflationary fire in sight even after three such decades of this. The problem was Rudy, they believe, not the German School.
However, if you’re using Japan as evidence for your theory…
Back to what Kelton said; base money. Among the fatal conceits MMT shares with neo-Keynesianism – as dutifully practiced in Japan all these years – is this self-imposed monetary blindness. They all assume bank reserves are base money when it is demonstrated worldwide that the modern reserve currency system has operated for more than half a century way, way outside the presumed government monopoly.
Eurodollar today means private, bank-centered money. A system that had little use for the government and Fed’s form of bank reserves, a fact which didn’t change, obviously, with the explosion of them post-2008.
Like MMT, Keyensians are adherents to the closed-system approach, what I like to call bathtubbers. They equate the domestic economy to a bathtub where the faucet is the only way in which water (money) may enter. It is merely assumed that cross-border links outside of specifically merchandise trade balances (current account) are relatively minor and in the end unimportant.
MMT dumps different color water into the same bathtub full of holes Ben Bernanke didn’t know were there, expecting the water color to be the difference also unaware of the holes.
None of them make room in their theories for something like a eurodollar system; they are unaware they need to factor for a true global currency and the system for it the size of which dwarfs (quantitatively, as well as qualitatively) their domestic money assumptions. In making no room for eurodollars in their theories, they make no room for real world practice, sharing the same with central bankers and neo-Keynesians (same thing).
Neither Kelton nor Wray (or any others) have said (that I know of) how their charta would either replace the eurodollar or successfully compete with it so as to either way remove the sources of deflation obviously stifling the real-world global economy. The fact it never comes up is all you need to know; MMT, at root, believes there is only one dollar which the government controls.
In other words, it proposes to supplant central bank monetary ignorance of the sources of these economic and more so monetary imbalances with Treasury Department monetary ignorance of the exact same. The descriptions of how Treasury pays its bills and uses the Fed are indeed accurate, but ultimately meaningless apart from this trivia.
If you don’t know how money really works outside the classroom, how in the world will you produce “optimal” outcomes starting from the same models and worldview of the same disinterested Economists thwarted in all these same ways.
Thus, the issue of inflation versus deflation, or aggregate demand, if you prefer, is still not one for authorities to decide. Try as they might over the last decade, and despite constant assurances that government can achieve this if only it puts its mind to it, MMT is little more than relocating the center of otherwise the same paradigm.
What Japan has shown all along is exactly this. Bank reserves are not “high powered money” or any real kind of money, and government expenditures are not on their own inflationary. Private money still determines everything.
Ben Bernanke once said all he had to do was use his printing press. Now that it hasn’t worked, because it hasn’t worked, MMT says all it has to do is use his printing press.
