Different definitions of money

Modern Monetary Theory

History of Coinage

Modern Monetary Theory

Principles of modern monetary theory
The role of taxes in MMT
Review of MMT

Principles of modern monetary theory

To conclude this section on the various monetary theories, let's examine Modern Monetary Theory (MMT), an economic approach admired by many modern economists.

Modern Monetary Theory (MMT) holds that a state with its own sovereign currency (such as the USA, Canada or Japan) can never run out of money, since it can always issue more money to finance its spending. According to this theory:

Money is a creation of the State, not a limited resource
Taxes and borrowing are not used directly to finance public spending, but rather to regulate inflation, influence economic behavior, and maintain demand for the national currency.
The real limit to government spending is inflation, not the budget deficit or public debt.
If the newly created money is channelled into sectors that can absorb it, there will be no inflation.
The government must therefore adjust its spending according to the real resources available (manpower, industrial capacity, natural resources) to avoid excessive inflation.

The role of taxes in MMT

A common question is, "If a state can create money, why pay taxes?" MMT provides a specific answer. While a modern fiat system technically has no limit on money creation other than inflation, MMT argues that taxation is a primary tool for managing that risk. By removing money from the economy, taxes can compensate for new money creation and prevent inflation. In this view, taxes function as a mechanism to control aggregate demand and inflation.

Regarding the absorption of new money, consider the example of the United States directing trillions of dollars to the military industry. This spending does not necessarily cause inflation because the military-industrial complex has the productive capacity to absorb those funds.

Conversely, if a government were to double the budget for roads construction but faced a limited supply of resources and contractors, this would create scarcity. The price of labor and materials would rise due to market forces of supply and demand. MMT posits that if the state could direct new money exclusively to sectors with available capacity, it would not cause inflation. A common critique, however, is that in practice, such targeted spending is difficult, and inflation often results.

In conclusion, MMT asserts that the state can use its money-creating capacity to achieve full employment and finance social and ecological investment, while controlling inflation through appropriate fiscal policy. This goal of managing unemployment and financing public investment while controlling inflation is also shared by Keynesian economists, who typically focus on managing interest rates and fiscal policy to achieve these ends.

Review of MMT

Modern Monetary Theory (MMT) is only applicable to a small number of countries that possess true monetary sovereignty, defined as the ability to issue debt in their own currency. This theory is difficult to apply to import-dependent economies, which must maintain international confidence in their currency to manage trade.

True monetary sovereignty requires a country to be able to finance its debt in its own currency. This allows a nation to manage its imports without needing to borrow in foreign currency, a condition met by only a handful of countries.

For example, the economist Stephanie Kelton, author of "The Deficit Myth" and a prominent proponent of MMT, has noted that countries like the United States, Japan, Canada, Australia, and the United Kingdom possess this capacity and therefore cannot run out of money.

A primary criticism of MMT is its limited applicability; it is a functional framework only for countries with monetary sovereignty. This creates a two-tiered global system. Sovereign currency issuers can, in theory, create currency with less fear of domestic inflation, effectively exporting that inflation to other nations. This dynamic, often described as an "exorbitant privilege," resembles a form of monetary colonialism, where global demand for a currency allows its issuer to print money with fewer immediate consequences.

Furthermore, MMT requires a significant degree of centralized economic planning. To manage inflation, the state must effectively control and allocate real resources, including labor, raw materials, and industrial capacity. and to manage inflation. This necessity for central planning is another key point of critique for the theory.