Understanding Modern Monetary Theory

Posted on 15. Nov, 2011 by in Blog

Ladies and Gentlemen in Pawnland!

Enjoy this read, it is a real education in the world of our FIAT currency and more, hope you enjoy the read – Jerry Whitehead

Understanding Modern Monetary Theory, part one

Submitted by admin on Tue, 07/20/2010 – 12:42

The purpose for this set of two flyers is to describe what can be done when a sovereign nation restores its ability to issue fiat debt free money. A very important point to remember here is that the US already has a fiat based currency. “Fiat,” as a word means “by declaration.” The odd pieces are that although the U.S. has had a fiat currency since 1971 and the banking management practices reflects that fact, the conduct of fiscal policies continues to assume that we are still operating with a gold based currency and that we have to borrow our money into existence.

Monetary reform is an important agenda for ethical, economic, and political reasons and to undo the privatized franchise by which our economy has been based upon a debt based currency. Ending the enormous unearned profits acquired by the means of the privatization of our sovereign currency is important The resistance to monetary and fiscal reform is based upon the fear of established interests of losing both the private control that the monetary franchise allows and the enormous profits that result from that private control. The primary policy conclusion that comes out of this analysis is perhaps shocking, but it can be stated simply: It is possible to have truly full employment without causing inflation.”

A number of concepts that are important in the current economic debate. When these ideas are looked at from the perspective of modern monetary theory and functional finance, they take on implications different from the privatized and gold era perspective. The list of concepts includes government deficits, the value of the currency, monetary policy, government bond sales, employment policy, exogenous pricing versus endogenous pricing, the tax liability validation of fiat currency, and using employer of last resort labor as a valuation buffer. This process further presents a series of definitions including “state money,” “commodity money,” “fiat money,” “bank money,” “the monetary unit of account,” and “full employment.”

The nature of the of money that circulates within a sovereign economy makes a major difference in how monetary and fiscal policies are structured. The conventional concept of money includes the assumption that money is based upon the value of precious metals and thereby there is an intrinsic scarcity. Because the need for currency often surpasses the availability of that currency, on a one for one basis, there are certain ways that the apparent amount of money in circulation can exceed the actual amount precious metal available. The actual value of modern money is determined by that which is accepted in the payment of taxes by the sovereign government. The second characteristic of money is under a fiat system which is useful is that it is used as a unit of accounting.

Under the specie convention and different regulatory standards specie based currency can be leveraged. The k through 12 version will allow nine dollars of debt based money to issued for every one dollar held on deposit. The amount of money or specie held in reserve is described as the reserves for whatever type of money or bond are issued Under certain extreme and even questionable situations the leveraging ratio can be as much as 1 “real” Dollar to 70 dollars or more of leveraged, ie fictional money.

Under the specie era model it is assumed that the rate of debt being created is more that the amount of funds being deposited and then used as reserves. Under the same specie era model the institutions of central governance are assumed to operate similar to how an ordinary household would sustain. Funding of programs and projects are then believed to happen by a process of either collecting taxes and/or borrowing money from privately held banks. before programs and projects are funded. Under the simple version of this specie model when an individual or a government borrows money from a bank the amount that is paid back over time is actually the principle and the interest. The principle was fictional debt based money that was leveraged into service. The interest percentage, however it is calculated, only represents a small portion of the short term profit for the bank. As a loan’s interest is compounded over time, the original principle will dwindle as the interest rate adds to the running principle.

A related piece is that mortgages do not represent loans from banks or mortgage companies. It is your signature on the mortgage contract which makes a mortgage contract valuable. Under a fiat and debt based currency, money is put into circulation largely by making a ledger entry into a loanee’s account. This is partly possible because a majority of our “currency” in circulation is actually neither paper currency or coinage. Under a fiat system currency cannot not be directly converted into precious metal anymore than buying it at the current market value which as a commodity it value is determined by supply and demand.

Another detail is that the banking reserve process does not operate according to the fractional reserve principles as defined that was used while specie and debt monetary model operated. The scarcity of gold has in a sense been replaced by a scarcity of loan applications that are judged to be a profitable risk. What actually happens under a privately controlled monetary system is that a loan application is reviewed based upon whether it represented an good opportunity for a banking investment on some basis. and then after approving the loan the bank borrows funds from the central bank, in the case of the US it is the US Federal Reserve, to cover the reserve requirements. Because the US Federal Reserve is now operating under a zero interest rate policy (ZIRP). this money is being put into circulation on a even higher net leverage ratio. The ZIRP is a significant side issue in this context, because the central bank has no requirement.

Given that the US congress voted in 1913 to both set up the US Federal Reserve and turn over the issuance and management of the economy in large part to the privately owned corporation the US Federal Reserve, this decision could in principle be reversed as being un-Constitutional, which it is. The problem is that these finance sector corporations by having the power to create fiat money on their own authority their corporate “free speech” is potentially endless as contributions to the political campaign funds, and thereby their influence upon politicians will always be greater than the free speech of natural citizens, until this franchise is removed.

Taxation at the federal level within the principles of fiat sovereign currency is largely a method of controlling the excess accumulation of wealth. When taxes are collected by the U.S. I.R.S. those amounts are simply deleted from the tax payer’s accounts. Again, under the specie based currency, those taxes were held and then disbursed for Federal government programs and projects. And again, to remind you, we do not currently have a specie based currency, so it ends up being fairly ignorant to continue imagine that the current fiat currency serves in the same way a specie based currency.

So the deficit terrorism threatening austerity and even deeper privatization is based upon a specie era monetary model, and is thereby false and clearly a fear tactic based upon disinformation.

Because we could be operating under a sovereignty based version of fiat currency, we could have the government act in a counter cyclical way to increase the demand for goods and economic exchanges by putting currency into circulation through the funding of projects and programs directly. Part of the problems of debt based money is the enormous profits being made off of a social institution to facilitate exchange. Another is that the expansion of currency in circulation is that debt based money is erased from people’s accounts once the loans are either paid off or defaulted on. Debt based currency is not designed to serve in a relatively permanent fashion to maintain the illusion of scarcity.

Based on understanding how sovereign fiat money actually is used would allow the Federal government to extend funding to states on a per capita basis for the construction of roads, mass transit, bridges and other “hard” infrastructure to put people back to work which would increase demand for products. This same process can be applied to social infrastructure such as national health care, education, and pensions. Further, an employer of last resort (ELR) process could be established, whereby individuals who wanted to work could be provided a living wage for advancing any number of needed projects toward building communities. This would remove the expense of funding most unemployment benefits and most social welfare. This would also support the cultivation of a work ethic and of being involved in some sort of productive process. This could also be used to incubate new industries until that establish a virtuous process of productivity and trade.

The ELR process would also have other benefits. At the level of economic models labor would no longer be treated as a commodity without any connection to the consumer demand represented by labor as participants in an economic process. As productive industry is able to re-establish itself, the need for ELR labor will diminish greatly, and people can be hired into expanding productive activities.

Banking would be largely reduced to a social utility, where it could actually participate in the development of productive industries, rather than basing its profits on the degree to which wealth could be extracted from a community.

When we align the nature of our economics and the capacities of modern money with the policies of governance as a socializing agenda significant changes will be possible. This change will require reform and education on several levels. In effect the precious metal era economics tends to be structured to serve concentrations of private interests, particularly as in the cynical version of the “golden rule,” which is “those who have the gold make the rules.” One of the major contradictions of conventional economics is that the actual banking and monetary processes operate much closer to a chartalist view of money than to precious metal centered assumptions. This includes the leveraging allowed by way of the legitimization of the fractional reserve process which in other contexts would be described as a fraud.

this part one of a two part set of flyers

this was based upon a review by Tadit Anderson
of Understanding Modern Money by L. Randal Wray

Sincerely – 

Jerry Whitehead 

Pawnshop Consulting Group, Inc.








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