M. leprae,
the bacterium responsible for leprosy, is believed to have spread from
East Africa through the Middle East, Europe, and Asia by the 5th century
before reaching the rest of the world more recently. Historically, leprosy was believed to be extremely contagious and divinely ordained, leading to enormous stigma against its sufferers. Other severe skin diseases
were frequently conflated with leprosy and all such sufferers were kept
away from the general public, although some religious orders provided
medical care and treatment. Recent research has shown M. leprae
has maintained a similarly virulent genome over at least the last
thousand years, leaving it unclear which precise factors led to
leprosy's near elimination in Europe by 1700. A growing number of cases
following the first wave of European colonization, however, led to increased attention towards leprosy during the New Imperialism of the late 19th century. Following G.A. Hansen's discovery of the role of M. leprae in the disease, the First International Leprosy Conference held in Berlin in 1897 renewed interest and investment in the isolation of lepers throughout the European colonial empires. Although Western countries now generally treat cases of leprosy individually on an outpatient basis, traditional isolated colonies continue to exist in India, China, and some other countries.
Names
In medieval Latin, a place for the isolation and care of lepers was known as a leprosaria, leprosarium, or leprosorium, names which are sometimes used in English as well. The Latin domus leprosaria was calqued in English as leper house, with leper colony
becoming by far the most common English term in the 1880s as the
growing number of leprosy cases were discussed within the context of European colonialism. Less common synonyms include leper asylum, leper lodge, and leper hospital. Other names derive from the figure of Lazarus in one of Jesus's parables, treated by the Catholic Church during the Middle Ages as a historical figure and as the patron saint of both lepers and the CrusaderOrder of Saint Lazarus, who administered the leper colony in Jerusalem before spreading to other locations. This caused leper colonies to also be known as lazar houses and, after the leper colony and quarantine center on Venice's Sta. Maria di Nazareth, as lazarets, lazarettes, lazarettos, and lazarettas. The name leper or leprosy villageis sometimes used for colonies in China, a calque of the Mandarin name máfēngcūn(t麻風村,s麻风村).
Although not all of the skin diseases (kushtha) discussed in the Indian Vedas and the Laws of Manu were leprosy, some of them seem to have been, with the disease appearing in the subcontinent by at least 2000BC. The Indian religious texts and laws did not organize formal leper colonies but treated those afflicted with the disease as untouchableoutcastes, forbidding and punishing any marriage with them while they suffered from the disease, which was considered both contagious and a divine punishment for sins of the sufferer's current or former life.
In legend, even kings were removed from power and left to wander in the
forests while suffering from leprosy, although their position could be
restored in the event of their recovery, whether through divine
intervention or Ayurvedic herbal remedies such as chaulmoogra oil. Similarly, the ancient Persians and Hebrews
considered certain skin diseases to render people unclean and unfit for
society, without organizing any special locations for their care; it
seems likely, however, that the references to "leprosy" in the Old and New Testaments of the Bible are the result of a misunderstanding produced by the Septuagint's Greek translation and subsequent Latin translations like the Vulgate and originally referred to a variety of conditions such as psoriasis
before becoming associated with leprosy centuries later. This confusion
of terms—and the related divine opprobrium—was then translated into Islamic medicine in the 9th century. The introduction of leprosy to southern Europe was blamed on the armies of Alexander and Pompey; ancient Greek and Roman doctors did not blame divine punishment and advocated various treatments but still usually advised that lepers be kept out of cities. Some early Christians sought to emulate Jesus's example by personally ministering to lepers or communities of lepers, activity recorded in hagiographies like StGregory's life of StBasil.
Leprosy seems to have reached the rest of Europe during late Antiquity and the early Middle Ages, with the imperial Church reducing formal restrictions on lepers while setting aside funds for leprosaria where clerics would treat the afflicted. Such leper houses are documented at St-Oyen in 460, Chalon-sur-Saône in 570, and Verdun in 634; their management was often provided by monastic orders. The area of modern Belgium alone may have had as many as 700 or 800 prior to the Crusades. Christian folklore misunderstood the parable of Lazarus and Dives as a historical account and took the sore-covered beggar in the story as StLazarus, patron of lepers; the military orderStLazarus was established to care for lepers in Crusader Jerusalem
and subsequently operated other leprosaria around Europe. Some colonies
were located on mountains or in remote locations to ensure isolation,
some on main roads, where donations would be made for their upkeep.
Others were essentially hospitals within major cities. In 1623 the Congregation of the Mission, a Catholicsociety of apostolic life founded by Vincent de Paul,
was given possession of the Priory of St. Lazarus, a former leper house
in Paris, due to which the entire Congregation gained the name of
"Lazarites" or "Lazarists" although most of its members had nothing to
do with caring for lepers.
Debate exists over the conditions found within historical
colonies; while they are currently thought to have been grim and
neglected places, there are some indications that life within a leper
colony or house was no worse than the life of other, non-isolated
individuals. There is even doubt that the current definition of leprosy
can be retrospectively applied to the medieval condition. What was
classified as leprosy then covers a wide range of skin conditions that
would be classified as distinct afflictions today. Some leper colonies issued their own money or tokens, in the belief that allowing people affected by leprosy to handle regular money could spread the disease.
Today leper hospitals exist throughout the world to treat those
afflicted with leprosy, especially in Africa, Brazil, China and India.
Political aspects
Laoe Si Momo (Spring Water) leper colony was founded on August 25, 1906, in the Batak region of Sumatra,
10 kilometers from Kaban Jahe. Within five months it was home to 72
people affected with leprosy and by April 1921 colony included 280. The
patients lived in small houses.
In 2001, government-run leper colonies in Japan
came under judicial scrutiny, leading to the determination that the
Japanese government had mistreated the patients, and the district court
ordered Japan to pay compensation to former patients.
In 2002, a formal inquiry into these colonies was set up, and in March
2005, the policy was strongly denounced. "Japan's policy of absolute
quarantine... did not have any scientific grounds."
The inquiry denounced not only the government and the doctors who were
involved with the policy, but also the court that repeatedly ruled in
favor of the government when the policy was challenged, as well as the
media, which failed to report the plight of the victims.
The concept of the trillion-dollar coin was reintroduced in March 2020 in the form of a congressional proposal by congresswoman Rashida Tlaib during the shutdown caused by the COVID-19 pandemic in the United States. Tlaib sought to fund monthly $2,000 recurring stimulus payments until the end of the pandemic.
The idea gained further traction in late 2021 with propositions by Bloomberg journalist Joe Weisenthal amongst others, amidst the United States debt-ceiling crisis of 2021.
Legal basis
Common obverse of American Platinum Eagle
coins, a platinum commemorative United States coin that has been issued
in denominations of up to $100 under the authority of 31 U.S.C. Section
5112
The issuance of paper currency is subject to various accounting and
quantity restrictions that platinum coinage is not. According to the United States Mint, coinage is accounted for as follows:
Since Fiscal Year (FY) 1996, the Mint has operated under
the United States Mint Public Enterprise Fund (PEF). As authorized by
Public Law 104-52 (codified at 31 U.S.C.§ 5136),
the PEF eliminates the need for appropriations. Proceeds from the sales
of circulating coins to the Federal Reserve Banks (FRB), bullion coins
to authorized purchasers, and numismatic items to the public and other
customers are paid into the PEF and provide the funding for Mint
operations. All circulating, bullion and numismatic operating expenses
and capital investments incurred for the Mint's operations and programs
are paid out of the PEF. By law, all funds in the PEF are available
without fiscal year limitation. Revenues determined to be in excess of
the amount required by the PEF are transferred to the United States
Treasury General Fund as off-budget and on-budget receipts. Off-budget
receipts consist of seigniorage, the difference between the receipts
from the Federal Reserve System from the sale of circulating coins at
face value and the full costs of minting and distributing circulating
coins. Seigniorage is deposited periodically to the General Fund where
it reduces the government's need to borrow.
The concept of striking a trillion-dollar coin that would generate one trillion dollars in seigniorage,
which would be off-budget, or numismatic profit, which would be
on-budget, and be transferred to the Treasury, is based on the authority
granted by Section 31 U.S.C.§ 5112 of the United States Code
for the Treasury Department to "mint and issue platinum bullion coins"
in any denominations the Secretary of the Treasury may choose. Thus, if
the Treasury were to mint one-trillion dollar coins, it could deposit
such coins at the Federal Reserve's Treasury account instead of issuing
new debt.
31 U.S.C. 5112(k) as originally enacted by Public Law 104-208 in 1996:
The Secretary may mint and issue bullion and proof
platinum coins in accordance with such specifications, designs,
varieties, quantities, denominations, and inscriptions as the Secretary,
in the Secretary's discretion, may prescribe from time to time.
In 2000, the word "bullion" was replaced with "platinum bullion coins". According to the United States Mint: “A bullion coin is an investment-grade coin that is valued by its weight and fineness of a specific precious metal.”
Platinum bullion coins can, by this statute, be minted in any
denomination, whereas coins in any other specified metal are restricted
to amounts of $50, $25, $10, $5 and $1.
The concept of minting a very high denomination coin relies on the
platinum clause as a loophole for the executive branch to raise revenues
without congressional oversight.
Philip N. Diehl, former director of the United States Mint and with Republican Congressman Michael Castle co-author of the platinum coin law, has said the procedure would be permitted by the statute. Castle says he never intended such a use. The platinum coinage provision was eventually passed by a Republican Congress over the objections of a Democratic Treasury in 1996.
Laurence Tribe, a constitutional law professor at Harvard Law School,
said the legal basis of the trillion-dollar coin is sound and that the
coin could not be challenged in court as no one would have standing to do so.
Emergence of the concept
The
idea for the Treasury Department to mint a coin and send it to the
Federal Reserve to pay off the debt was first popularized by Populist Party presidential candidate Bo Gritz in 1992. As a standard part of his stump speeches, he would hold up a five-inch example coin.
The specific concept was first introduced by Carlos Mucha, a lawyer who
commented under the name "beowulf" on various blogs. "Beowulf" outlined
the idea in a series of comments on Warren Mosler's
blog in May 2010, noting that "Congress has already delegated to Tsy
[Treasury] all the seigniorage power authority it needs to mint a $1
trillion coin". Beowulf also drew attention to the concept on the blog of economist Brad Delong in July 2010 and in a legal analysis blogpost of his own in January 2011,
but it was not until July 2011 that the use of the concept as an
unorthodox method of resolving the debt-ceiling crisis came to the
attention of the financial press and mainstream media blogs. At that time, the idea found some support from legal academics such as Yale Law School's Jack Balkin. Once the debt ceiling crisis of the summer of 2011 was resolved, attention to the concept faded.
The concept gained renewed and more mainstreamattention by late 2012, as the debt-ceiling limit was being approached again. In early January, the economist Paul Krugman endorsed the idea
and asserted that opposition to the idea was coming from people
unwilling to admit the truth that "money is a social contrivance". His endorsement attracted considerable media attention. Former Mint director Diehl was widely cited in the media debunking criticisms of the coin and its basis in law.Congressman Jerry Nadler endorsed the idea, and it was featured in the international press by January 4, 2013.
"Beowulf" would later tell Wired magazine that the coin idea came from a December 2009 Wall Street Journal article that talked about how several people were able to generate frequent-flyer
miles at no cost by ordering coins from the U.S. Mint with a credit
card offering mileage rewards, then depositing the coins at a bank to
pay off the credit card debt. He also said that he was inspired by the 2008 book Web of Debt by Ellen Brown, which cited a former Washington official who said the government could order the minting of large coins to pay off the national debt.
"Beowulf" said the trillion-dollar coin idea is more rightly attributed
to a small discussion group than to an individual, adding that the
group was "just in it for the lulz" (i.e., for personal amusement).
Analysis and reaction
Some commentators have argued that although the concept may be strictly legal, it would weaken the checks and balances
system of U.S. government, even if the spending that the coin would
allow was already authorized by Congress. Opinion columnist Megan McArdle
wrote that "minting a $1 trillion coin neatly end-runs GOP
obstructionists, but only by proving that the president himself has
little respect for the institutional restraints on his office." Felix Salmon,
another journalist, wrote that the concept "would effectively mark the
demise of the three-branch system of government, by allowing the
executive branch to simply steamroller the rights and privileges of the
legislative branch." Salmon said that he does not agree with what
Congressional Republicans are doing, but that they have a right to do
that, and that the president should not use the trillion-dollar coin
option to circumvent them. He said, "Yes, the legislature is behaving
like a bunch of utter morons if they think that driving the US
government into default is a good idea. But it's their right to behave like a bunch of utter morons."
On the other hand, many economists and business analysts endorsed
the coin as a way to counter threats by congressional Republicans to
force the country into default by refusing to raise the debt limit. Paul Krugman
said (in 2013), "So minting the coin would be undignified, but so what?
At the same time, it would be economically harmless – and would both
avoid catastrophic economic developments and help head off government by
blackmail." He also declared the trillion-dollar coin debate to be "the
most important fiscal policy debate of our lifetimes".
On January 7, 2013, Republican congressman Greg Walden announced he would introduce a bill to close the platinum coin loophole.
Rep. Walden said that the intention is to "take the proposal off the table." New York representative Jerry Nadler opposed the bill and said that the idea remains a valid option.
On January 12, 2013, the Treasury and Federal Reserve announced they would not mint a platinum coin, and five days later, Senate Minority Whip John Cornyn (R-Texas) announced that Senate Republicans would end their threat to block an increase in the debt ceiling.
In January 2023, Treasury Secretary Janet Yellen said that minting a trillion dollar coin was not on the table as a solution to the 2023 United States debt-ceiling crisis and possible U.S. default on its debt, because the Federal Reserve would be unlikely to accept it, calling it "a gimmick".
In May 2023, Paul Krugman commented: "As for claims that [Fed Chair
Jerome] Powell would refuse to accept the coin, or the Supremes would
block premium bonds — well, nobody knows. But my guess is that nobody
wants to be the guy who destroys the world economy."
Premium bonds have been touted as a possible alternative to the
trillion dollar coin, and an alternative to congressional action raising
the debt limit.
In April 2023, Bloomberg News reported that a poll of 1,212
people was conducted in March 2023 to gauge the support for the U.S.
Treasury minting the $1 trillion platinum coin to pay off the country's
debt obligations. The poll results showed that 14% supported the coin's
minting, 37% opposed it, while 49% have no opinion or were undecided.
The Federal Reserve's purchase of the trillion-dollar coin would be analogous to the securities purchases that are part of quantitative easing (QE), in both cases adding to the monetary base, which is the sum of currency in circulation and bank reserves, i.e. the liabilities of the Federal Reserve. Commercial bank reserves would increase as the Treasury spent the proceeds from the coin's purchase by the Federal Reserve.
This would generate the accounting change at the Federal Reserve of
moving funds from the Treasury's deposits at the Federal Reserve to
commercial banks' deposits at the Federal Reserve ("bank reserves"), a
transfer from one Federal Reserve liability category to another. This
is no different than the normal process by which checks from the
Treasury clear in the banking system. There is a common misconception
that banks can loan out these reserves to customers, thereby increasing
the money supply, potentially too rapidly, causing the economy to overheat, and adding to inflation and increasing expectations of future inflation.
For example, Jaret Seiberg of the Washington Research Group stated,
“the $1 trillion coin would expand the money supply by a considerable
amount, which could spark serious inflation...this economic chaos could
worsen the economic downturn, which would further weaken credit
conditions and impose higher losses on banks.”
In April 2011, a paper published by the St Louis Federal Reserve Bank
said, "some believe QE will sharply increase inflation rates; however,
these fears are not consistent with economic theory and empirical
evidence – assuming the Federal Reserve is both willing and able to
reverse QE as the recovery gains momentum." The paper added that "if the
public trusts that the increase in the monetary base QE creates is only
temporary, then they will not expect rapid inflation in the near
future. These expectations collectively influence actual pricing
behavior and, in turn, actual inflation."
The Federal Reserve could ensure that commercial banks do not lend out
excess reserves by paying interest on their reserves at the Fed, so that
the return commercial banks receive on them is greater than they could
receive from alternative uses. Finally, in the case of the coin, the Federal Reserve could also sterilize the government's spending of the coin by selling other assets from its balance sheet on a dollar-for-dollar basis, in which case the effect on the monetary base should net to zero.
If the debt ceiling were lifted, the Treasury could use borrowing to
buy the coin back from the Federal Reserve and return it to the Mint to
be melted.
Independence of the Federal Reserve
Although
the Federal Reserve had already indicated on December 12, 2012, that it
wished to expand its balance sheet by another $1.02 trillion throughout
2013 via its ongoing purchases of U.S. Treasuries and government-sponsored mortgage-backed securities, Greg Ip has argued that if the Fed's balance sheet were expanded for ostensibly fiscal policy reasons instead of monetary policy reasons, that could constitute an imposition on the independence of the central bank.
Ip suggested that any such imposition could be avoided if the
additional trillion in coinage were issued directly to the public (in
more useful smaller denominations) instead of deposited with the Fed. In May 2010, there was $40.4 billion in coin in circulation and about another $900 billion in banknotes.
Former U.S. Mint Director Edmund C. Moy voiced doubts to TheStreet.com
about whether the Federal Reserve could buy the coin, noting also that
under the current system for initiating orders for coinage, the order
might have to be placed by the current Fed Chair, or by one of the 12
Presidents of the regional Federal Reserve Banks.
Former Director Diehl disagreed with Moy concerning a platinum bullion
coin but agreed with Moy that a platinum coin would be a problem for the
Fed. Diehl reiterated his view that "I certainly think [minting a
trillion-dollar coin] is inferior to raising or eliminating the [debt]
limit, but it's far better than defaulting and suffering the
consequences of doing so."
Single and split tally sticks in the Swiss Alpine Museum – similar items may have been used in debt based economic systems thought to pre-date the use of coinage.
Credit theories of money, also called debt theories of money, are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view.
Proponents assert that the essential nature of money is credit (debt),
at least in eras where money is not backed by a commodity such as gold.
Two common strands of thought within these theories are the idea that
money originated as a unit of account for debt, and the position that money creation
involves the simultaneous creation of debt. Some proponents of credit
theories of money argue that money is best understood as debt even in
systems often understood as using commodity money. Others hold that money equates to credit only in a system based on fiat money, where they argue that all forms of money including cash can be considered as forms of credit money.
The first formal credit theory of money arose in the 19th century. Anthropologist David Graeber
has argued that for most of human history, money has been widely
understood to represent debt, though he concedes that even prior to the
modern era, there have been several periods where rival theories like metallism have held sway.
Scholarship
Four
Interrelations in theory of "credit mechanics": Fundamental differences
are relations in payment flows after given loans by commercial banks to
nonbank sector.
According to Joseph Schumpeter, the first known advocate of a credit theory of money was Plato. Schumpeter describes metallism as the other of "two fundamental theories of money", saying the first known advocate of metallism was Aristotle. The earliest modern thinker to formulate a credit theory of money was Henry Dunning Macleod (1821–1902), with his work in the 19th century, most especially with his The Theory of Credit (1889).
Macleod's work was expanded on by Alfred Mitchell-Innes in his papers What is Money? (1913) and The Credit Theory of Money (1914),
where he argued against the then conventional view of money arising as a
means to improve the practice of barter. In this alternative view, commerce and taxation created obligations between parties which were forms of credit and debt. Devices such as tally sticks were used to record these obligations and these then became negotiable instruments which could function as money. As Innes puts it in his 1914 article:
The Credit Theory is this: that a
sale and purchase is the exchange of a commodity for credit. From this
main theory springs the sub-theory that the value of credit or money
does not depend on the value of any metal or metals, but on the right
which the creditor acquires to "payment," that is to say, to
satisfaction for the credit, and on the obligation of the debtor to
"pay" his debt and conversely on the right of the debtor to release
himself from his debt by the tender of an equivalent debt owed by the
creditor, and the obligation of the creditor to accept this tender in
satisfaction of his credit.
Innes goes on to note that a major problem in getting the public to
understand the extent to which monetary systems are debt based is the
challenge in persuading them that "things are not the way they seem".
Since the late 20th century, Innes' credit theory of money has been integrated into Modern Monetary Theory. The theory also combines elements of chartalism, noting that high-powered money is functionally an IOU from the state,
and therefore, "all 'state money' is also 'credit money'". The state
ensures there is demand for its IOUs by accepting them as payment for
taxes, fees, fines, tithes, and tribute.
In his 2011 book Debt: The First 5000 Years, the anthropologist David Graeber
asserted that the best available evidence suggests the original
monetary systems were debt based, and that most subsequent systems have
been too. Exceptions where the relationship between money and debt was
less clear occurred during periods where money has been backed by bullion, as happens with a gold standard.
Graeber echoes earlier theorists such as Innes by saying that during
these eras population perception was that money derived its value from
the precious metals of which the coins were made,
but that even in these periods money is more accurately understood as
debt. Graeber states that the three main functions of money are to act
as: a medium of exchange; a unit of account; and a store of value. Graeber writes that since Adam Smith's time, economists have tended to emphasise money as a medium of exchange. For Graeber, when money first appeared its primary purpose was to act as a unit of account, to denominate debt. He writes that coins were originally created as tokens which represented a unit of account rather than being an amount of precious metal which could be bartered.
Economics commentator Philip Coggan holds that the world's current monetary system became debt-based after the Nixon shock, in which President Nixon suspended the link between money and gold in 1971. He writes that "Modern money is debt and debt is money". Since the 1971 Nixon Shock, debt creation and the creation of money increasingly took place at once. This simultaneous creation of money and debt occurs as a feature of fractional-reserve banking.
After a commercial bank approves a loan, it is able to create the
corresponding amount of money, which is then acquired by the borrower
along with a similar amount of debt.
Coggan goes on to say that debtors often prefer debt-based monetary systems such as fiat money
over commodity-based systems like the gold standard, because the former
tend to allow much higher volumes of money to circulate in the economy,
and tend to be more expansive. This makes their debts easier to repay.
Coggan refers to William Jennings Bryan's 19th century Cross of Gold speech
as one of the first great attempts to weaken the link between gold and
money; he says the former US presidential candidate was trying to expand
the monetary base
in the interests of indebted farmers, who at the time were often being
forced into bankruptcy. However Coggan also says that the excessive
debt which can be built up under a debt-based monetary system can end up
hurting all sections of society, including debtors.
In a 2012 paper, economic theorist Perry Mehrling notes that what is commonly regarded as money can often be viewed as debt. He posits a hierarchy of assets with gold at the top, then currency, then deposits and then securities. The lower down the hierarchy, the easier it is to view the asset as reflecting someone else's debt.
A later 2012 paper from Claudio Borio of the BIS made the contrary case that it is loans that give rise to deposits, rather than the other way round.
In a book published in June 2013, Felix Martin argued that credit based
theories of money are correct, citing earlier work by Macleod:
"currency ... represents transferable debt, and nothing else". Martin
writes that it's difficult for people to grasp the nature of money,
because money is such a central part of society, and alludes to the
Chinese proverb that "If you want to know what water is like, don't ask
the fish."
In 2014, Werner found:
…that
it has been empirically dem- onstrated that each individual bank
creates credit and money out of nothing, when it extends what is called a
‘bank loan’. The bank does not loan any existing money, but instead
creates new money. The money supply is created as ‘fairy dust’ produced
by the banks out of thin air.
Advocacy
The
conception that money is essentially equivalent to credit or debt has
long been used by those advocating particular reforms of the monetary
system, and by commentators calling for various monetary policy responses to events such as the financial crisis of 2007–2008.
A view held in common by most recent advocates, from all shades of
political opinion, is that money can be equated with debt in the context
of the contemporary monetary system. The view that money is equivalent
to debt even in systems based on commodity money
tends to be held only by those to the left of the political spectrum.
Regardless of any commonality in their understanding of credit theories
of money, the actual reforms proposed by advocates of different
political orientations are sometimes diametrically opposed.
Advocacy for a return to a gold standard or similar commodity based system
Former US presidential candidate Ron Paul has spoken out against fiat money, partly on the grounds that it encourages the buildup of debt.
Advocates from an Austrian School, right-libertarian
perspective often hold that money is equivalent to debt in our current
monetary system, but that it need not be in one where money is linked
to a commodity, such as a gold standard.
They have frequently used this view point to support arguments that it
would be best to return to a gold standard, to other forms of commodity
money, or at least to a monetary system where money has positive value.
Similar views are also occasionally expressed by conservatives. As an example of the latter, former British minister of state The Earl of Caithness made a 1997 speech in the House of Lords where he stated that since the 1971 Nixon shock, the British money supply
had grown by 2145% and personal debt had risen by almost 3000%. He
argued that Britain ought to move from its current "debt-based monetary
system" to one based on equity:
It is also a good time to stand
back, to reassess whether our economy is soundly based. I would contest
that it is not ... as it is debt-based ... a system which by its very
actions causes the value of money to decrease is dishonest and has
within it its own seeds of destruction. We did not vote for it. It grew
upon us gradually but markedly since 1971 when the commodity-based
system was abandoned...We all want our businesses to succeed, but under
the existing system the irony is that the better our banks, building
societies and lending institutions do, the more debt is created ...
There is a different way: it is an equity-based system and one in which
those businesses can play a responsible role. The next government must
grasp the nettle, accept their responsibility for controlling the money
supply and change from our debt-based monetary system. My Lords, will
they? If they do not, our monetary system will break us and the sorry
legacy we are already leaving our children will be a disaster.
In the early to mid-1970s, a return to a gold-anchored system was
advocated by gold-rich creditor countries including France and Germany.
A return has repeatedly been advocated by libertarians, as they tend to see commodity money as far preferable to fiat money.
Since the 2008 crisis and the rapid rise in the price of gold that soon
followed it, a return to a gold standard has frequently been advocated
by goldbugs.
From centrist
and left-wing perspectives, credit theories of money have been used to
oppose the gold standard while it was still in effect, and to reject
arguments for its reinstatement. Innes's 1914 paper is an early example
of this.
Advocacy for expansionary monetary policy
From a moderate mainstream perspective, Martin Wolf
has argued that since most money in our contemporary system is already
being dual-created with debt by private banks, there is no reason to
oppose monetary creation by central banks in order to support monetary policy such as quantitative easing.
In Wolf's view, the argument against Q.E. on the grounds that it
creates debt is offset by potential benefits to economic growth and
employment, and because the increase in debt would be temporary and easy
to reverse.
Advocacy for debt cancellation
Arguments for debt forgiveness have long been made from people of all political orientations; as an example, in 2010 hedge fund manager Hugh Hendry, a strong believer in free markets, argued for a partial cancellation of Greece's debt as part of the solution to the Euro crisis.
But generally advocates of debt forgiveness simply point out that debts
are too high in relation to the debtors’ ability to repay; they don't
make reference to a debt-based theory of money. Exceptions include David Graeber
who has used credit theories of money to argue against recent trends to
strengthen the enforcement of debt collection, such as greater use of
custodial sentences against debtors in the US. He also argued against
the over-zealous application of the view that paying one's debts is
central to morality, and has proposed the enactment of a biblical style Jubilee where debts will be cancelled for all.
Historically, debt theories of money have overlapped with chartalism and were opposed to metallism. This largely remains the case today, especially in the forms commonly held by those to the left of the political spectrum. Conversely, in the forms held by late 20th-century and 21st-century advocates with a conservative libertarian perspective, debt theories of money are often compatible with the quantity theory of money and with metallism, at least when the latter is broadly understood.
MMT is opposed to the mainstream understanding of macroeconomic theory and has been criticized heavily by many mainstream economists. MMT is also strongly opposed by members of the Austrian school of economics, with Murray Rothbard
stating that MMT practices are equivalent to "counterfeiting" and that
government control of the money supply will inevitably lead to hyperinflation.
Principles
MMT's main tenets are that a government that issues its own fiat money:
Can pay for goods, services, and financial assets without a need
to first collect money in the form of taxes or debt issuance in advance
of such purchases
Cannot be forced to default on debt denominated in its own currency
Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment
Recommends strengthening automatic stabilisers to control demand-pull inflation, rather than relying upon discretionary tax changes
Issues bonds as a monetary policy device, rather than as a funding device
The first four MMT tenets do not conflict with mainstream economics
understanding of how money creation and inflation works. However, MMT
economists disagree with mainstream economics about the fifth tenet: the
impact of government deficits on interest rates.
Knapp wrote in 1905 that "money is a creature of law", rather than a commodity. Knapp contrasted his state theory of money with the Gold Standard view of "metallism",
where the value of a unit of currency depends on the quantity of
precious metal it contains or for which it may be exchanged. He said
that the state can create pure paper money and make it exchangeable by
recognizing it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices".
Alfred Mitchell-Innes wrote in 1914 that money exists not as a medium of exchange but as a standard of deferred payment, with government money being debt the government may reclaim through taxation. Innes said:
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" are referenced by John Maynard Keynes in the opening pages of his 1930 Treatise on Money and appear to have influenced Keynesian ideas on the role of the state in the economy.
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.
Lerner said that responsibility for avoiding inflation and depressions
lay with the state because of its ability to create or tax away money.
Hyman Minsky seemed to favor a chartalist approach to understanding money creation in his Stabilizing an Unstable Economy, while Basil Moore, in his book Horizontalists and Verticalists, lists the differences between bank money and state money.
In 1996, Wynne Godley wrote an article on his sectoral balances approach, which MMT draws from.
Rodger Malcolm Mitchell's book Free Money (1996) describes in layman's terms the essence of chartalism.
Pavlina R. Tcherneva has developed the first mathematical framework for MMT and has largely focused on developing the idea of the job guarantee.
Bill Mitchell, professor of economics and Director of the Centre of Full Employment and Equity (CoFEE)
at the University of Newcastle in Australia, coined the term 'modern monetary theory'. In their 2008 book Full Employment Abandoned, Mitchell and Joan Muysken
use the term to explain monetary systems in which national governments
have a monopoly on issuing fiat currency and where a floating exchange
rate frees monetary policy from the need to protect foreign exchange
reserves.
Some contemporary proponents, such as Wray, place MMT within post-Keynesian economics, while MMT 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, perhaps with gold.
In the complementary view, MMT explains the "vertical"
(government-to-private and vice versa) interactions, while circuit
theory is a model of the "horizontal" (private-to-private) interactions.
By 2013, MMT had attracted a popular following through academic blogs and other websites.
In 2019, MMT became a major topic of debate after U.S. Representative Alexandria Ocasio-Cortez said in January that the theory should be a larger part of the conversation.
In February 2019, Macroeconomics became the first academic textbook based on the theory, published by Bill Mitchell, Randall Wray, and Martin Watts.
MMT became increasingly used by chief economists and Wall Street
executives for economic forecasts and investment strategies. The theory
was also intensely debated by lawmakers in Japan, which was planning to
raise taxes after years of deficit spending.
In June 2020, Stephanie Kelton's MMT book The Deficit Myth became a New York Times bestseller.
In 2020 the Sri Lankan Central Bank, under the governor W. D.
Lakshman, cited MMT as a justification for adopting unconventional
monetary policy, which was continued by Ajith Nivard Cabraal. This has
been heavily criticized and widely cited as causing accelerating
inflation and exacerbating the Sri Lankan economic crisis.
MMT scholars Stephanie Kelton and Fadhel Kaboub maintain that the Sri
Lankan government's fiscal and monetary policy bore little resemblance
to the recommendations of MMT economists.
Theoretical approach
In sovereign financial systems, banks can create money, but these "horizontal" transactions do not increase net financial assets
because assets are offset by liabilities. According to MMT advocates,
"The balance sheet of the government does not include any domestic
monetary instrument on its asset side; it owns no money. All monetary
instruments issued by the government are on its liability side and are
created and destroyed with spending and taxing or bond offerings." In MMT, "vertical money" enters circulation through government spending. Taxation and its legal tender enable power to discharge debt and establish fiat money
as currency, giving it value by creating demand for it in the form of a
private tax obligation. In addition, fines, fees, and licenses create
demand for the currency. This currency can be issued by the domestic
government or by using a foreign, accepted currency.
An ongoing tax obligation, in concert with private confidence and
acceptance of the currency, underpins the value of the currency. Because
the government can issue its own currency at will, MMT maintains that
the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment,
and not a means of funding the government's activities by itself. The
approach of MMT typically reverses theories of governmental austerity. The policy implications of the two are likewise typically opposed.
Illustration of the saving identity with the three sectors, the computation of the surplus or deficit balances for each and the flows between them
MMT labels a transaction between a government entity (public sector) and a non-government entity (private sector) as a "vertical transaction". The government sector includes the treasury and central bank.
The non-government sector includes domestic and foreign private
individuals and firms (including the private banking system) and foreign
buyers and sellers of the currency.
Interaction between government and the banking sector
MMT
is based on an account of the "operational realities" of interactions
between the government and its central bank, and the commercial banking
sector, with proponents like Scott Fullwiler arguing that understanding
reserve accounting is critical to understanding monetary policy options.
A sovereign government typically has an operating account with
the country's central bank. From this account, the government can spend
and also receive taxes and other inflows.
Each commercial bank also has an account with the central bank, by
means of which it manages its reserves (that is, money for clearing and
settling interbank transactions).
When a government spends money, its central bank debits its
Treasury's operating account and credits the reserve accounts of the
commercial banks. The commercial bank of the final recipient will then
credit up this recipient's deposit account by issuing bank money. This
spending increases the total reserve deposits in the commercial bank
sector. Taxation works in reverse: taxpayers have their bank deposit
accounts debited, along with their bank's reserve account being debited
to pay the government; thus, deposits in the commercial banking sector
fall.
Virtually all central banks set an interest rate target, and most now
establish administered rates to anchor the short-term overnight
interest rate at their target. These administered rates include interest
paid directly on reserve balances held by commercial banks, a discount
rate charged to banks for borrowing reserves directly from the central
bank, and an Overnight Reverse Repurchase (ON RRP) facility rate paid to
banks for temporarily forgoing reserves in exchange for Treasury
securities. The latter facility is a type of open market operation
to help ensure interest rates remain at a target level. According to
MMT, the issuing of government bonds is best understood as an operation
to offset government spending rather than a requirement to finance it.
In most countries, commercial banks' reserve accounts with the
central bank must have a positive balance at the end of every day; in
some countries, the amount is specifically set as a proportion of the
liabilities a bank has, i.e., its customer deposits. This is known as a reserve requirement.
At the end of every day, a commercial bank will have to examine the
status of their reserve accounts. Those that are in deficit have the
option of borrowing the required funds from the Central Bank, where they
may be charged a lending rate (sometimes known as a discount window or discount rate)
on the amount they borrow. On the other hand, the banks that have
excess reserves can simply leave them with the central bank and earn a support rate from the central bank. Some countries, such as Japan, have a support rate of zero.
Banks with more reserves than they need will be willing to lend to banks with a reserve shortage on the interbank lending market.
The surplus banks will want to earn a higher rate than the support rate
that the central bank pays on reserves; whereas the deficit banks will
want to pay a lower interest rate than the discount rate the central
bank charges for borrowing. Thus, they will lend to each other until
each bank has reached their reserve requirement. In a balanced system,
where there are just enough total reserves for all the banks to meet
requirements, the short-term interbank lending rate will be in between
the support rate and the discount rate.
Under an MMT framework where government spending injects new
reserves into the commercial banking system, and taxes withdraw them
from the banking system,
government activity would have an instant effect on interbank lending.
If on a particular day, the government spends more than it taxes,
reserves have been added to the banking system (see vertical transactions).
This action typically leads to a system-wide surplus of reserves, with
competition between banks seeking to lend their excess reserves, forcing
the short-term interest rate down to the support rate (or to zero if a
support rate is not in place). At this point, banks will simply keep
their reserve surplus with their central bank and earn the support rate.
The alternate case is where the government receives more taxes on
a particular day than it spends. Then there may be a system-wide
deficit of reserves. Consequently, surplus funds will be in demand on
the interbank market, and thus the short-term interest rate will rise
towards the discount rate. Thus, if the central bank wants to maintain a
target interest rate somewhere between the support rate and the
discount rate, it must manage the liquidity in the system to ensure that
the correct amount of reserves is on-hand in the banking system.
Central banks manage liquidity by buying and selling government
bonds on the open market. When excess reserves are in the banking
system, the central bank sells bonds, removing reserves from the banking
system, because private individuals pay for the bonds. When
insufficient reserves are in the system, the central bank buys
government bonds from the private sector, adding reserves to the banking
system.
The central bank buys bonds by simply creating money – it is not financed in any way.
It is a net injection of reserves into the banking system. If a central
bank is to maintain a target interest rate, then it must buy and sell
government bonds on the open market in order to maintain the correct
amount of reserves in the system.
MMT economists describe any transactions within the private sector as "horizontal" transactions, including the expansion of the broad money supply through the extension of credit by banks.
MMT economists regard the concept of the money multiplier, where a bank is completely constrained in lending through the deposits it holds and its capital requirement, as misleading.
Rather than being a practical limitation on lending, the cost of
borrowing funds from the interbank market (or the central bank)
represents a profitability consideration when the private bank lends in excess of its reserve or capital requirements (see interaction between government and the banking sector).
Effects on employment are used as evidence that a currency monopolist
is overly restricting the supply of the financial assets needed to pay
taxes and satisfy savings desires.
According to MMT, bank credit should be regarded as a "leverage" of the monetary base
and should not be regarded as increasing the net financial assets held
by an economy: only the government or central bank is able to issue
high-powered money with no corresponding liability.
Stephanie Kelton said that bank money is generally accepted in
settlement of debt and taxes because of state guarantees, but that
state-issued high-powered money sits atop a "hierarchy of money".
Foreign sector
Imports and exports
MMT proponents such as Warren Mosler say that trade deficits are sustainable and beneficial to the standard of living in the short term.
Imports are an economic benefit to the importing nation because they
provide the nation with real goods. Exports, however, are an economic
cost to the exporting nation because it is losing real goods that it
could have consumed. Currency transferred to foreign ownership, however, represents a future claim over goods of that nation.
Cheap imports may also cause the failure of local firms providing
similar goods at higher prices, and hence unemployment, but MMT
proponents label that consideration as a subjective value-based one,
rather than an economic-based one: It is up to a nation to decide
whether it values the benefit of cheaper imports more than it values
employment in a particular industry.
Similarly a nation overly dependent on imports may face a supply shock
if the exchange rate drops significantly, though central banks can and
do trade on foreign exchange markets to avoid shocks to the exchange
rate.
Foreign sector and government
MMT
says that as long as demand exists for the issuer's currency, whether
the bond holder is foreign or not, governments can never be insolvent
when the debt obligations are in their own currency; this is because the
government is not constrained in creating its own fiat currency
(although the bond holder may affect the exchange rate by converting to
local currency).
MMT does agree with mainstream economics that debt in a foreign
currency is a fiscal risk to governments, because the indebted
government cannot create foreign currency. In this case, the only way
the government can repay its foreign debt is to ensure that its currency
is continually in high demand by foreigners over the period that it
wishes to repay its debt; an exchange rate collapse would potentially
multiply the debt many times over asymptotically, making it impossible
to repay. In that case, the government can default, or attempt to shift
to an export-led strategy or raise interest rates to attract foreign
investment in the currency. Either one negatively affects the economy.
Economist Stephanie Kelton explained several points made by MMT in March 2019:
Under MMT, fiscal policy
(i.e., government taxing and spending decisions) is the primary means
of achieving full employment, establishing the budget deficit at the
level necessary to reach that goal. In mainstream economics, monetary policy
(i.e., Central Bank adjustment of interest rates and its balance sheet)
is the primary mechanism, assuming there is some interest rate low
enough to achieve full employment. Kelton said that "cutting interest
rates is ineffective in a slump" because businesses, expecting weak
profits and few customers, will not invest even at very low interest
rates.
Government interest expenses are proportional to interest rates, so
raising rates is a form of stimulus (it increases the budget deficit and
injects money into the private sector, other things being equal);
cutting rates is a form of austerity.
Achieving full employment can be administered via a centrally-funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice versa.
Under MMT, expansionary fiscal policy, i.e., money creation to fund
purchases, can increase bank reserves, which can lower interest rates.
In mainstream economics, expansionary fiscal policy, i.e., debt issuance
and spending, can result in higher interest rates, crowding out
economic activity.
Economist John T. Harvey explained several of the premises of MMT and their policy implications in March 2019:
The private sector treats labor as a cost to be minimized, so it
cannot be expected to achieve full employment without government
creating jobs, too, such as through a job guarantee.
The public sector's deficit is the private sector's surplus and vice
versa, by accounting identity, which increased private sector debt
during the Clinton-era budget surpluses.
Creating money activates idle resources, mainly labor. Not doing so is immoral.
Demand can be insensitive to interest rate changes, so a key
mainstream assumption, that lower interest rates lead to higher demand,
is questionable.
There is a "free lunch" in creating money to fund government
expenditure to achieve full employment. Unemployment is a burden; full
employment is not.
Creating money alone does not cause inflation; spending it when the economy is at full employment can.
MMT says that "borrowing" is a misnomer when applied to a sovereign
government's fiscal operations, because the government is merely
accepting its own IOUs, and nobody can borrow back their own debt instruments.
Sovereign government goes into debt by issuing its own liabilities that
are financial wealth to the private sector. "Private debt is debt, but
government debt is financial wealth to the private sector."
In this theory, sovereign government is not financially
constrained in its ability to spend; the government can afford to buy
anything that is for sale in currency that it issues; there may,
however, be political constraints, like a debt ceiling
law. The only constraint is that excessive spending by any sector of
the economy, whether households, firms, or public, could cause
inflationary pressures.
MMT economists advocate a government-funded job guarantee scheme to eliminate involuntary unemployment. Proponents say that this activity can be consistent with price stability
because it targets unemployment directly rather than attempting to
increase private sector job creation indirectly through a much larger
economic stimulus, and maintains a "buffer stock" of labor that can
readily switch to the private sector when jobs become available. A job
guarantee program could also be considered an automatic stabilizer to the economy, expanding when private sector activity cools down and shrinking in size when private sector activity heats up.
MMT economists also say quantitative easing is unlikely to have the effects that its advocates hope for.[68]
Under MMT, QE – the purchasing of government debt by central banks – is
simply an asset swap, exchanging interest-bearing dollars for
non-interest-bearing dollars. The net result of this procedure is not to
inject new investment into the real economy, but instead to drive up
asset prices, shifting money from government bonds into other assets
such as equities, which enhances economic inequality. The Bank of England's analysis of QE confirms that it has disproportionately benefited the wealthiest.
MMT economists say that inflation can be better controlled (than by setting interest rates) with new or increased taxes to remove extra money from the economy. These tax increases would be on everyone, not just billionaires, since the majority of spending is by average Americans.
Comparison of MMT with mainstream Keynesian economics
MMT can be compared and contrasted with mainstream Keynesian economics in a variety of ways:
Topic
Mainstream Keynesian
MMT
Funding government spending
Advocates taxation and issuing bonds (debt) as preferred methods for funding government spending.
Emphasizes that government fund spending by crediting bank accounts.
Purpose of taxation
To pay down debt from central banks loaned to the government at
interest, which is spent into the economy and the taxpayer needs to
repay.
Primarily to drive up demand for currency. Secondary uses of
taxation include lowering inflation, reducing income inequality, and
discouraging bad behavior.
Achieving full employment
Main strategy uses monetary policy;
central bank has "dual mandate" of maximum employment and stable
prices, but these goals are not always compatible. For example, much
higher interest rates used to reduce inflation also caused high
unemployment in the early 1980s.
Main strategy uses fiscal policy; running a budget deficit large enough to achieve full employment through a job guarantee.
Inflation control
Driven by monetary policy; central bank sets interest rates consistent with a stable price level, sometimes setting a target inflation rate.
Driven by fiscal policy; government increases taxes on everyone to remove money from private sector. A job guarantee also provides a NAIBER, which acts as an inflation control mechanism.
Setting interest rates
Managed by central bank to achieve "dual mandate" of maximum employment and stable prices.
Emphasizes that an interest rate target is not a potent policy. The government may choose to maintain a zero interest-rate policy by not issuing public debt at all.
Budget deficit impact on interest rates
At full employment, higher budget deficit can crowd out investment.
Deficit spending can drive down interest rates, encouraging investment and thus "crowding in" economic activity.
In addition to the other stabilizers, a job guarantee would increase deficits in a downturn.
Criticism
A 2019 survey of leading economists by the University of Chicago Booth's Initiative on Global Markets
showed a unanimous rejection of assertions attributed by the survey to
MMT: "Countries that borrow in their own currency should not worry about
government deficits because they can always create money to finance
their debt" and "Countries that borrow in their own currency can finance
as much real government spending as they want by creating money". Directly responding to the survey, MMT economist William K. Black said "MMT scholars do not make or support either claim." Multiple MMT academics regard the attribution of these claims as a smear.
The post-Keynesian economist Thomas Palley has stated that MMT is largely a restatement of elementary Keynesian economics, but prone to "over-simplistic analysis" and understating the risks of its policy implications.
Palley has disagreed with proponents of MMT who have asserted that
standard Keynesian analysis does not fully capture the accounting
identities and financial restraints on a government that can issue its
own money. He said that these insights are well captured by standard
Keynesian stock-flow consistent IS-LM models,
and have been well understood by Keynesian economists for decades. He
claimed MMT "assumes away the problem of fiscal–monetary conflict" –
that is, that the governmental body that creates the spending budget
(e.g. the legislature) may refuse to cooperate with the governmental body that controls the money supply (e.g., the central bank). He stated the policies proposed by MMT proponents would cause serious financial instability in an open economy with flexible exchange rates, while using fixed exchange rates
would restore hard financial constraints on the government and
"undermines MMT's main claim about sovereign money freeing governments
from standard market disciplines and financial constraints".
Furthermore, Palley has asserted that MMT lacks a plausible theory of inflation, particularly in the context of full employment in the employer of last resort policy first proposed by Hyman Minsky and advocated by Bill Mitchell
and other MMT theorists; of a lack of appreciation of the financial
instability that could be caused by permanently zero interest rates; and
of overstating the importance of government-created money. Palley
concludes that MMT provides no new insights about monetary theory, while
making unsubstantiated claims about macroeconomic policy, and that MMT
has only received attention recently due to it being a "policy polemic
for depressed times".
Marc Lavoie
has said 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, which is what Palley calls "the problem of fiscal–monetary conflict".
New Keynesian economist and recipient of the Nobel Prize in Economics, Paul Krugman,
asserted MMT goes too far in its support for government budget
deficits, and ignores the inflationary implications of maintaining
budget deficits when the economy is growing. Krugman accused MMT devotees as engaging in "calvinball" – a game from the comic strip Calvin and Hobbes in which the players change the rules at whim. Austrian School economist Robert P. Murphy stated that MMT is "dead wrong" and that "the MMT worldview doesn't live up to its promises".
He said that MMT saying cutting government deficits erodes private
saving is true "only for the portion of private saving that is not
invested" and says that the national accounting identities used to
explain this aspect of MMT could equally be used to support arguments
that government deficits "crowd out" private sector investment.
The chartalist view of money itself, and the MMT emphasis on the importance of taxes in driving money, is also a source of criticism. In 2015, three MMT economists, Scott Fullwiler, Stephanie Kelton, and L. Randall Wray, addressed what they saw as the main criticisms being made.
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