Tuesday, March 27, 2012

Scott Fullwiler on currency sovereign as "monopolist"

Promoted from the comments:

STF said...



I’m not sure how any non-MMT economists are interpreting the MMT view of “monopoly money” (and I don’t really care—there are blogs by MMT economists that can answer and authoritatively discuss that question rather easily for those interested, so I’m not quite clear on why there’s any interest in relying on secondary sources), but here’s what it actually means:

1. By virtue of naming the thing that settles a tax payment (i.e., reserve balances in the US, which provide the final settlement of tax payments; while the IRS and govt accept checks drawn on private bank accounts, these are not what is actually transferred to the Treasury’s account at the Fed), there is a demand created for this particular “thing.” Note that this is ‘sufficient’ to create such a demand, though not necessarily ‘necessary AND sufficient’ for doing so. Also, ‘naming the thing that settles a tax payment’ presumes tax payments can be enforced—i.e., in a democracy, the people in the aggregate have submitted to this. It’s a state theory of money, not a theory of the state (that would be the realm of politics and political theory, by the way).

2. If the “thing” that settles tax payments is also something that the govt itself can create costlessly (i.e, via keystrokes), then there is no limit to the govt’s operational ability to spend, and neither tax revenues nor bond sales actually finance the government’s spending. Further, the govt’s “money” is its own liability in this case (as opposed to if it were to name gold as the “thing”) and also an asset of the non-govt.

3. The state can set the bid and the ask for its liabilities and thereby control the interest rate on its own liabilities (i.e., the federal funds rate in the US). Other rates will generally arbitrage to varying degrees against this rate, but the state can only set these other rates in a more precise manner by actively entering those markets. So, there is a monopoly over the “own” interest on the state’s liabilities, but not necessarily on other rates.

continued below due to character limit



STF said...


continued from above


4. The state can set the price that it will pay to purchase goods and services, and this will have some effect on the aggregate price level. How much depends on how significant the state’s purchases are relative to purchases others make. (In the case of the Job Guarantee, for instance, this effect wouldn’t be overly strong—the stabilization effect on aggregate prices in that case comes mostly from the functional finance nature of the spending on the program. Setting the JG wage has the effect of not pushing up private sector wages, but it does not itself mean private sector wages won’t rise—that effect will mostly be tempered by the countercyclical spending on the program, and even then there are other things in the economy that can affect costs and prices. The claim is that the JG will not be inflationary and will be somewhat stabilizing, not that it will set the aggregate price level—and again, even in that case the effect is through functional finance, not setting the wage.) So, “monopoly” here is simply monopoly over the prices of the things it buys or sells, which in the real world states often don’t exercise at any rate.


5. The state cannot directly control the quantity of non-state liabilities (such as bank liabilities) that circulate as media of exchange. And it shouldn’t try (those that think it should try are called Monetarists, or at least traditional Monetarists). This is quite clear in Randy Wray’s first book, Money and Credit in Capitalist Economies, as well as in the horizontalist/circuitiste literature that we largely agree with. So, there is no “monopoly” of non-government monies. They have always existed—Randy’s very clear that private credit money pre-dated state money—and are created endogenously.


6. The state cannot directly control the quantity of state liabilities circulating. As we’ve noted many times, the government’s deficit is endogenous—attempting to balance the budget or run a surplus in a recession, for instance, could lead to even larger deficits.


7. So, overall, beyond the fact that it is not operationally constrained given 2 above, the state's "monopoly" is generally a monopoly over the price of its own money--the interest rate on its money--and the price of things it purchases or sells. Nothing more than that. Nothing less, either.


Hope this helps some.


Scott Fullwiler
March 27, 2012 1:03 PM


Scott comments further and responds to some comments, too. Click on this link March 27, 2012 1:03 PM to get to the comment section there.

10 comments:

wh10 said...

Thanks for this Scott. It was always pretty obvious there was this level of specificity behind the term "monopolist."

Ralph Musgrave said...

I don’t agree with No.5, which starts “The state cannot directly control the quantity of non-state liabilities (such as bank liabilities) that circulate as media of exchange. And it shouldn’t try (those that think it should try are called Monetarists…”

First, the state will never TOTALLY supress this form of money, but it can more or less prohibit it. China tries to do this, e.g. see here:

http://www.guardian.co.uk/world/2012/mar/21/wu-ying-death-row

Also I’m not sure that those who believe in this probation are called Monetarists. They are called “advocates of full reserve banking”, I think.

Money is anything that is WIDELY ACCEPTED in payment for goods and services. Even if privately created money is banned, there will always be a few liabilities being traded or bartered, etc. But these forms of money are not WIDELY ACCEPTED. They are a very poor form of money compared to official state money, like U.S. dollars, which are accepted without question by every single business and household in the U.S.

Plus it’s not too difficult for the state to supress private money: any bank that starts engaging in fractional reserve in an economy which is supposed to run along full reserve lines cannot help coming to the notice of the authorities.

Dan Kervick said...

I’d just like to suggest a few of my own thoughts on this issue of the nature of the government currency monopoly:

1. Commercial bank money, i.e. deposit balances, are IOUs. They are IOU’s for the money issued by the US government.

2. The previous statement can be easily proved by going to your bank, and asking for US government currency in exchange for your demand deposit balance. Your bank is required by law to give it to you.

3. Some of these bank IOUs are redeemable on demand; others are interest-bearing IOUs redeemable only under more restricted conditions and according to specific time schedules.

4. The US government has no corresponding liability. If I take $1000 in cash to a Fed office and ask that they exchange it for a Bank of America deposit, they are under no obligation to do so. However, Bank of America itself will be perfectly happy to take my US government cash in exchange for a Bank of America deposit balance.

5. This isn’t just a hierarchy of acceptability, in which the government’s liabilities happen to be more generally and confidently accepted than the banks’ liabilities. It is an asymmetrical hierarchy of legal obligation. Banks are legally required to convert their IOUs to US government dollars; the US government is not legally required to convert its dollars – physical currency and reserve balances – into commercial bank IOUs.

6. The fact that commercial bank IOUs are liabilities for US government dollars, that means that when they issue these IOUs, they have incurred a debt for a product whose production they don’t control. They might never have to redeem some given IOU since the customer might hold it or roll it over indefinitely, but if they do have to redeem it then that means they have to procure some of that government product in some way.

7. The fact that bank deposits are liabilities for US government dollars is not dependent on the fact that the FDIC guarantees bank deposits. Even if there were no such guarantee, bank deposits would still by law be liabilities for US government dollars. It’s just that bank customers would face more risk of bank insolvency – with the banks sometimes unable to pay the thing that their IOU is an IOU for, and with the government not legally committed to stepping in and paying for them.

8. The government’s dollars – currency and reserve balances - are also designated by the honorific title “liability”. But they are a funny sort of liability: if I take a $100 of US currency to the Fed, all they are required to give me for it is some other amount of US currency. It’s a completely different matter from the banks’ liability.

Dan Kervick said...

[... cont.]

9. Under the gold standard, US government money issue was much more like commercial bank currency issue. It was a liability for a product that the US government did not control, and that had to be procured from another source at some substantial real cost, and held in reserve. But the current money issued by the US government is only a liability for more currency. The money is mainly produced by the US government, electronically and out of thin air, at virtually zero cost.

10. The fact that the government’s dollars are at the foundation of the hierarchy of financial obligations does not mean that the government controls the extent to which banks create their IOUs – i.e. deposit balances. The government does control what those IOUs are IOUs for – they are liabilities for US government dollars. But it doesn’t control how many are created. That’s mainly up to the issuers and their customers.

11. The government could more firmly and tightly control the creation of commercial bank deposits via lending if we wanted it to. It has that power. But right now it doesn’t do that.

12. Because the government doesn’t control the creation of commercial bank deposit balances, and doesn’t control the private spending decisions of the customers who own these balances, and who exchange those deposit balances for goods and services, it does not set the prices in the markets in which goods and services are exchanged for bank deposit balances (and that means most markets). No monopoly producer of any product sets the price for IOUs for that product. As Warren Mosler has written:

any monopolist controls two prices

1. the ‘own rate’ which is how his thing exchanges for itself (the interest rate in this case)
2. how it exchanges for other goods and services

13. If there was a monopoly producer of cola soft drinks, and people were in the happen of creating IOUs for cola soft drinks and exchanging those IOUs for goods and services, then the cola company could control the rates at which it exchanged its cola for other things, but it couldn’t control the rates at which other people exchanged IOUs for cola soft drinks for other things.

14. In the cola monopoly world, real cola and IOUs for cola would be denominated in the same unit of measure – ounces of cola – but they would clearly be different kinds of things. Similarly, a US government dollar is a different kind of think from the IOU’s for US government dollars that commercial banks issue.

15. We could live under a system in which banks literally created their own base money, instead of IOUs for the government’s money. Under such a system Bank of America would create a demand deposit for you, and you could always demand that they redeem that deposit in units of Bank of America notes or scrip; but they would have no obligation to give you US government currency. Your willingness to accept such money would depend entirely on the degree to which that money might me generally acceptable in the economy. Since banks are competing private enterprises, we can imagine some banks would refuse from time to time to take other banks’ money. That would be inconvenient.

16. Under such a system, converting a Bank of America deposit balance into a SunTrust deposit balance would be like foreign exchange: banks who accepted each others’ money would probably keep accounts at each other’s banks, and exchange their money with one another according to floating daily exchange rates. There would be inconvenient additional financial costs. We could live under such a free banking system, but we don’t. Instead, Bank of America deposits and SunTrust deposits are both IOUs for US government dollars. There is no exchange rate when making a payment out of one bank account into a competing bank account, and payments are made from one bank to another via their reserve accounts at the Fed, in a reserve base currency that both banks use.

Tom Hickey said...

All good points, Dan. IIRC, Chris Cook distinguishes between the deposit as an accounting entry and the money thing that corresponds to it when spent, which is either cash or reserves transferred interbank if payment is by check or electronic transfer - at least for all transactions that are not netted. Banks are permitted to create credit money but not the money thing that may be needed for final settlement. Their only option in such cases is to obtain the money thing from its only source, the monopoly provider of the currency, either as cash or reserves.

Dan Kervick said...

Tom, I see it the same way. I think it's important to keep in mind that the Fed is not just a really big bank whose money creation is no different in kind than a commercial bank's money creation. These banks are all part of a single legally integrated system, whose components are arranged in a hierarchical and asymmetric relationship to one another, with the Fed at the top.

Sometimes I hear people say things like, "Banks electronically credit accounts by creating those credits unilaterally out of thin air, just like the Fed does. So the fact that the Fed can create money by marking up accounts doesn't mean it has monopoly powers that the banks lack. It just means the Fed is bigger."

But I think this kind of statement is missing something important about the legal and institutional status of those account credits. When a bank creates those credits, it puts itself in hock for something it doesn't control. Not so the Fed.

jown said...

Thank you Scott.

Do you have a "top ten" for the circuitiste literature? I got through Dr. Wray's Levy 'Bears & Bulls in the Circuit' and want more.

Also got your SFM/SAM/Fed piece; I am looking forward to getting through that(looks so rad). Great work. Thank you. Please keep at it!

Dan Kervick said...

Ralph, I would agree that the government could suppress and restrain the expansion of bank money in various ways.

Where the monetarist go wrong, I think, is in their suggestions that the government doesn't just have the latent ability to suppress the creation of bank money, but also has the ability to stimulate the creation of more bank money by supplying more reserves to banks.

Unforgiven said...

Banks have the ability buy obligations with varying terms from the borrower and commonly pay for it with their own obligation (to the Fed) with easier terms.

Kind of reminds me of curbstoners.

Tom Hickey said...

Dan K, what a lot of people seem to be missing in this debate is Minsky's observation that credit money is pro-cyclical and tends to excess and correction, whereas government money is counter-cyclical and mitigates the correction. Warren discovered this on his own. This is a key element of MMT's approach.

The problem is that the way counter-cyclical policy is now structured it is oriented chiefly to supporting the credit structure rather than addressing the debt issue, as Steve Keen and Michael Hudson hammer on, for example, and much louder than the MMT economists in my view. Not that the MMT economists miss it, they are just not as vocal about it, e.g., calling for debt restructuring and even a jubilee in major crises like this one.