Why monetary reform is not easy to bring home to economists

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huber quote neutrality of money

Why do most mainstream economists not recognise the relevance of monetary reform? Prof Joseph Huber discusses this in the new passages of his paper entitled “Sovereign Money in Critical Context”:

Neutrality of money

Why do most mainstream experts not recognise the relevance of monetary reform? By mainstream economics I mean neoclassical equilibrium theory and Neokeynesianism, or to put it differently, American textbook standard economics. By these standards, money does not appear to be particularly important. Mainstream economics for the most part rests on the assumption of neutrality of money. Making money may actually be seen as the major motive driving the economy. But the economy as such is conceived of as a system of production factors, employed for producing output, and for exchanging the output on markets that are seen as huge barter systems. The function of money in this is to mediate and thus facilitate exchange. Exchanging products and services for money overcomes the otherwise existing constraint of coincidence of wants in time and place. Beyond this, however, money is considered to be of little importance. As John Stuart Mill put it in the middle of the 19th century, money seems to be just a veil over the economy with no structural impact on it. Rapid changes in the money supply represent what economists call a shock. This may, for example, boost inflation, but markets are supposed to be resilient and are expected to rebound to a state of equilibrium.

If one believes in this doctrine of neutrality of money, then of course dysfunctions of the money system are not an obvious subject of concern, despite all financial crises. As a consequence, mainstream economists find it difficult to see why monetary reform might be of relevance. Economic textbooks may well have 600–1,000 pages, but the passages on the monetary system usually count 10–20 pages―which is even a lesser percentage than the fractional reserve base in the present banking system.

There are exceptions, i.e. neoclassical economists who in a way recognised the non-neutrality of money, in particular Irving Fisher as well as the Early Chicago School (Simons, Knight, Viner, P.Douglas, and others), lateron Maurice Allais and Milton Friedman. But that was in the 1930–60s.

Schools of thought that consider money and banking to be non-neutral, are those beyond the mainstream, in particular the Austrian School and Neoaustrians today, who represent a distinct form of classical and neoclassical thinking, as well as Keynesianism and its offspring.[3] However, their specific understanding of non-neutrality is not always obvious.

The Austrian School and the Neoaustrians, from Menger and Mises to Hayek and Huerta de Soto, consider gold-based currencies as neutral, and thus desirable from their point of view, whereas fiat money created by central banks and banks is seen as non-neutral. Deliberate additions to the money supply are supposed to distort price relations and patterns of allocation and distribution. The Austrians, however, never explained how to verify undistorted price relations. Furthermore, they do not give due consideration to the sphere of the economy where structural changes and disproportional trends on monetary grounds can best be shown, i.e. the financial economy, in particular housing and stock bubbles.

Keynes also intended to analyse modern economies as monetary economies. He adopted a number of elements of an advanced understanding of modern money and banking, he supported chartalism (i.e. the state theory of money), and established the research program of a monetary theory of production. The latter can be seen as an alternative program to the Austrians’ capital theory of production. The slogan ‘Money matters’ was coined by Friedman but could equally have been originated by Mises or by Keynes.

In Keynesian lineage, it is the Monetary Circuit Theory where the view of monetary non-neutrality is most advanced today. In the framework of the present fractional reserve system, Circuitists emphasize the ‘power of banks’. The banking industry is seen in a superordinate, powerful and privileged position – superordinate because modern economies, before being able to transact goods and services at all, rely on the prior creation of primary credit and financing; powerful because this gives a high level of economic clout and political influence; and privileged because this enables the banking and financial industries to appropriate a significant share of the economic product, a share that is widely seen as incommensurate with the services provided by this industry.

Assumption of functionality of the existing money system 

Many economists today, basically from all schools of thought, question various aspects of banking and the financial economy, but stop short of recognising the monetary system as the root cause of those questionable aspects.

The historical Currency School towards the middle of the 19th century was the first to attribute financial instability and crises systematically to an overshooting, sometimes also shrinking, supply of bank money.
The Austrian School in the decades around and after 1900 held a similar opinion on the dysfunctions of reserve banking, but blamed them all on central-bank interference and government meddling, while seeking salvation in free banking on a renewed gold standard. They reject any idea of chartalism. Today’s Neoaustrians still haven’t got a clue about the legal and institutional foundations of modern monetary economies.
Keynesianism and the various currents of Keynesian filiation, by contrast, might have been expected to be responsive to criticism of the monetary system. In general, however, this is not the case. Schools of Keynesian descent describe the monetary system not always in an entirely accurate way; or they come up with reinterpretations of the monetary system, such as those put forward by Modern Money Theory (MMT), that are problematic and misleading in their own way.[5]

Keynes and mainstream-assimilated Neokeynesianism partially lagged behind their own insights in that their views are based
– on the category of loanable funds rather than primary credit creation, i.e. saying that ‘investment equals savings’ rather than ‘investment equals some part of the savings obtained on the secondary capital market plus additional bank money created by primary bank credit or primary bank purchases of securities’.[6]
– on the money or credit multiplier model, while in actual fact it is about a system which fractionally re-finances the facts pro-actively created by the banks
– on the assumption that reserve positions or base-rate policies are effective tools of monetary policy.

Keynes, moreover, did not systematically explain economic crises by over-investment and over-indebtedness, or say, in Marxist terms, over-accumulation of stocks of capital exceeding current profits that could service these stocks. Keynes, following Gesell, saw the main culprit in liquidity preference, formerly called hoarding of money, as if it were still about a cash-based economy. In the General Theory the equation of ‘investment = savings’ reappeared as a central element. In a fiat-money bank-credit economy, however, this applies only partially, i.e. it applies to secondary on-lending of demand deposits, but in no way to bank credit and bank purchases of securities. Holding liquidity rather than spending it became a central concern in Keynesian crisis theory through to Circuitism. It may have contributed to paving the way for seeing perpetual deficit spending and debt accumulation as an expression of ‘functional finance’ (Lerner).

Even where Postkeynesianism and its offshoots describe the contemporary monetary system in an accurate way under operational aspects, they apparently consider the system to be functional rather than dysfunctional. In other words, they do not attribute financial instability and crises to the monetary system of fractional reserve banking. Accordingly, they see no reason to think about monetary reform.

Here, too, there are individual exceptions. One is James Tobin, who developed an approach to ‘narrow banking’ different from, yet similar to, 100%-reserve banking.[7] Tobin, very Keynesian in this, thought of a 100%-coverage of deposits by sovereign bonds. Another exception is Hyman Minsky and the financial instability theory. Credit and debt bubbles not only feed from secondary on-lending of existing money, but prior to this from primary bank credit ever more adding to overshooting money supply. Accordingly, Minsky at one time (in connection with the final repeal of the Glass-Steagall Act in the 1990s) thought about a special arrangement of separate banking, namely the separation of money and payment services from the lending and investment business of banks, in order to restrict the power of banks to create primary credit (bank money).[8] It would seem, however, that Minsky did not give further consideration to that idea. Instead, he promoted the idea of the state as ‘employer of last resort’. This in fact comes down to the Keynesian concept of compensatory government expenditure aimed at creating jobs (active labour market policies) or creating additional demand that is expected to result in jobs.

Wrong identity of money and credit 

Both Tobin and Minsky stayed within the conceptual limits of a split-circuit system based on deposits and reserves. They did not overcome this horizon in favour of a single-circuit plain sovereign-money system beyond bank money and reserves. This hints to another reason why the mainstream and economics of Keynesian descent consider the present money and banking system to be functional: neglect of the difference between a split-circuit reserve system and a single-circuit money system, or to put it differently, their apparent inability to dissolve the wrong identity of money and credit as already criticised by the historical Currency School. The confusion of token fiat money and bank credit is a core element of banking doctrine.

As a consequence, commentators overlook the fact that money creation and money lending/spending are two different functions, but carried out uno actu in the present credit-money or debt-money system based on fractional reserves. The wrong identity of credit and money also leads critics to deny that in a modern money system the money base or money supply in circulation can be debt-free (not, of course, the loans or securities issued by use of that money). As long as economists stick to the absolutised axiomatic identification of money with credit, their  support for monetary reform is likely to be lukewarm at best.

Partial rather than full chartalism

Apart from deeming the present system functional rather than dysfunctional, there are further explanations for the prevailing intransigence regarding criticism of fractional reserve banking. One such further explanation is partial chartalism, in contrast to complete or full chartalism. Full chartalism includes the three monetary prerogatives of
1. currency (determining the official unit of account)
2. money (creating and issuing the means of payment denominated in that currency)
3. seigniorage (taking the benefit from creating and issuing new money).

Partial chartalism dates back to the ‘state theory of money’ by Knapp (1905). The name of the theory is somewhat misleading because most people will take it for a ‘theory of state money’ which however it isn’t. According to Knapp, a currency needs to be backed by the power of a stable nation-state, otherwise it won’t succeed. The doctrine, however, does not demand that the money, the regular means of payment, must be state money issued by a state agency such as the treasury or the central bank. For money to gain the status of an official means of payment, it suffices that the tax office or the courts accept, or even demand, to be paid in that money. Partial chartalism keeps national, state-guaranteed currencies, but cedes the creation and control of money (means of payment) as well as seigniorage-like privileges largely to the banking industry. Knapp, much like his contemporary Mitchell-Innes, were typical ‘national liberals’ of the 19th century. They saw bank money as a benign and under-control part of what they took for a sovereign currency system. Keynes and his heirs – including Postkeynesians as well as Circuitists and MMTers – have retained such a position of partial chartalism up to the present day. Consequently, sovereign-money reform does not make sense if today’s bank money is mistaken for a subset of sovereign money.

As regards MMT, an additional reason for their intransigence is their version of Postkeynesian sector balances.[9] Models of public-private sector balances were originally devised for spotting imbalances.[10] In MMT, however, the meaning of imbalances is re-interpreted and includes a tendency to fuse fiscal with monetary functions. MMT contends that sovereign debt poses no problem because it equals private fortunes (strangely enough, not asking whose). Moreover, government expenditure (public-sector expenditure) is identified with sovereign-money creation, while private payments to the public sector (taxes) are reinterpreted as the deletion of sovereign money, analogous to paying back credit to banks.

If public debt and public expenditure equal sovereign-money creation, and if a sovereign government allegedly can create as much of it as it deems decent, then it seems to follow that a sovereign government is always solvent and need not default. Deficit spending and sovereign debt thus appear to be monetarily and financially irrelevant and economically only beneficial, while monetary reform, again, appears to be irrelevant and unnecessary.


[3] Marxism, by the way, even where preoccupied with financial capitalism, made no significant contribution to monetary theory. Not sufficiently understanding the links between money and finance seems to be part of the legacy of neoclassical economics as much as of the political left, since Marx, in the third volume of Capital, in vain tried to come to grips with the controversy over currency and banking theory and their relevance to the economy.

[4] Graziani, Augusto 1990: The Theory of the Monetary Circuit, Économies et Sociétés, Monnaie et Production, 7/1990, 7–36 (8, 29). ―2003: The Monetary Theory of Production, Cambridge University Press, 58–95.

[5] For critical discussions of MMT see Lavoie, Marc 2011: The monetary and fiscal nexus of neo-chartalism. A friendly critical look, University of Ottawa, Dep. of Economics, available at www.boeckler.de/pdf/ v_2011_10_27_lavoie.pdf. – Roche, Cullen 2011: A Critique of MMT, Modern Monetary Theory, http://pragcap. com/mmt-critique, September 7th, 2011. –Fiebiger, Brett 2011: MMT and the ‘Real-World’ Accounting of 1-1>0, PERI Working Paper Series No.279, University of Massachusetts Amherst. www.peri.umass.edu/ fileadmin/pdf/working_papers/working_papers _251-300/WP279.pdf. – Walsh, Steven and Stephen Zarlenga 2013: Evaluation of Modern Money Theory, http://www.monetary.org/mmtevaluation. – Huber, Joseph 2014: Modern Money and Sovereign Currency, real-world economics review, no.66, 2014, 38–57.

[6] Both Michael Kumhof and Steve Keen have recently published articles on this subject:  Kumhof, Michael and Szoltan Jacab 2014: Models of Banking. Loanable Funds or Loans that Create Funds? International Monetary Fund, Working Paper, 30 July 2014. – Keen, Steve 2014: Endogenous Money and Effective Demand, Review of Keynesian Economics, Vol.2, No.3, Autumn 2014, 271–291. – Reply to Keen in the same issue by Lavoie, Marc 2014: A Comment on ‘Endogenous Money…’, 321–332.

[7] James Tobin 1987: The Case for Preserving Regulatory Distinctions,Challenge 30(5):10–7, available at https://www.kansascityfed.org/publicat/sympos/1987/S87TOBIN.PDF. A similar narrow banking approach was proposed by John Kay 2009: Narrow Banking. The reform of banking regulation, publ. by the Centre for the Study of Financial Innovation, London.

[8] Jan Kregel 2012: Minsky and the Narrow Banking Proposal, Public Policy Brief, Levy Institute of Bard College, No. 125, 2012, 4–8.

[9] Cf. Wray, Randall 2012: Modern Money Theory, Palgrave/Macmillan. -Mosler, Warren 1995: Soft Currency Economics, www.gate.net/~mosler/ frame001.htm. – Tcherneva, Pavlina 2006: Chartalism and the tax-driven approach, in: Arestis, Philip / Sawyer, Malcolm (eds.), A Handbook of Alternative Monetary Economics, Cheltenham: Edward Elgar, 69–86. -Fullwiler, Scott T. / Kelton, Stephanie / Wray, L. Randall 2012: Modern Money Theory: A Response to Critics, http://papers.ssrn. com/sol3/papers.cfm? abstract_id= 2008542.

[10] Cf. Wynne Godley and Marc Lavoie 2007: Monetary Economics, London: palgrave/macmillan.






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  • Simon

    A bit like a bridge engineer denying the existence of gravity.

  • JohnB

    The cited source [5], while it points out bad phrasing and
    counterproductive narrative from MMT’ers, it actually trips up over that
    bad phrasing/narrative and misinterprets/misrepresents MMT entirely in
    many respects – focusing on ancillary problems with how it’s presented
    (particularly on ‘debt’), and trying to use that to brush off the whole

    Some of the criticism of Post-Keynesians has similar problems too.

    sometimes poor narrative is its own worst enemy really – and I say this
    as someone who is fully supportive of MMT – they really need to work
    out kinks in the narrative, which just serve to mislead/confuse even
    very intelligent people, and trigger a cognitive dissonance that repels
    them from the framework entirely.

    Also: Personally, I am a supporter of both MMT and banking reform; they aren’t mutually exclusive.
    It is a topic I think MMT’ers should address more though – I’ve not yet heard prominent MMT arguments for or against it.

    • RJ
      • JohnB

        MMT’ers are not homogenous – their primary policy proscription is better banking regulation, but the framework underpinning MMT is compatible with monetary reform.

        MMT has both a descriptive (how economies work) and proscriptive (what policies to enact) side; the descriptive side is compatible with anything, that proscriptive side varies depending on which MMT’ers you talk/listen to.

        • stf

          Thx for support. On banking regulation, see all kinds of stuff from Kregel, Wray, and Tymoigne at Levy Institute. Dozens of publications since 2007. Also, book by Wray Tymoigne on Money Manager Capitalism.

          • stf

            This isn’t even the work by Bill Black.
            Clearly, MMT has written a ton on financial system regulation.
            I’m not with you on policy advice varies depending on which MMTer. Perhaps around the edges, but not at the core whatsoever.

          • stf

            “This isn’t even to mention the work by Bill Black”

          • JohnB

            Ya I agree with you there (just finished Black’s “Best way to Rob a Bank” book recently ;)), the core of MMT largely supports banking regulatory reform, but on the ‘descriptive’ (instead of proscriptive) side, I think MMT is compatible with monetary reform.

            Yes though, the vast majority of MMT’ers support regulatory reform instead – I still think MMT and monetary reformists are compatible, and able to bridge efforts though.

  • RJ

    I’m pleased that PM has published an article that includes a section on MMT

    Because this is almost correct. And key to what I believe PM is trying to achieve

    — that a sovereign government is always solvent and need not default.
    — while monetary reform, again, appears to be irrelevant and unnecessary.

    But only a monetary sovereign Govt (like the UK). That is the Govt have their own central bank (it excludes all the euro countries). Bonds are denominated in their own currency. And the currency floats (unlike Argentina at times) or countries on the gold standard in the past.

    But this is not correct

    1 MMT contends that sovereign debt poses no problem. NO NO NO. For a start it must be a monetary sovereign country (see above) issuing debt in their own currency. And within reason otherwise it causes inflation and exchange rate movements.

    2 MMT contends that sovereign debt poses no problem because it equals private fortunes. Near but not correct. Correct is Government $deficit = non government $surplus (net financial assets) is correct. The only way the non govt sector can save is for someone else to take on debt. Better govt debt than non govt debt for the little person

    • JohnB

      Here also, to back some of the points on government debt regarding inflation, is a good article with a handy table, showing MMT policy views on fiscal funding, through use of government debt vs use of direct money creation:



      The MMT view, is that government debt is MORE inflationary, than direct money creation, due to requiring interest payments – it also views retiring all present government debt through money creation, as either non-inflationary (relative to government debt), or even deflationary (if retiring privately held debt).

      • RJ

        I have never seen an article on MMT on retiring all govt debt through money creation. It isn’t possible anyway

        What would eb the JE

        DEBIT Govt debt
        CREDIT ??????????????????????

        And this The MMT view, is that government debt is MORE inflationary, than direct money creation, Where did you read this? I doubt on a reputable MMT site

        • JohnB

          There should be a ‘show more’ button, to see the full comment – it has a link to the original article (from probably the most active MMT-related site):

          • RJ

            As I previously explained,
            this is the operational equivalent of quantitative easing (QE). The
            purchase of Treasury securities by the Treasury would retire the
            securities and leave banks holding reserve balances

            This does nothing at all to reduce Govt debt. It just means the debt would be converted from bonds to reserves. The debt would still exist. Likewise if a £100 billion coin was issued. The debt still exists but it is held as a 100 billion coin rather than bonds or reserves

          • JohnB

            It’s unhelpful to mix different definitions of debt here (that’s one thing I agree with, on criticisms against MMT’s narrative); public debt is interest-bearing, but if you want to define created money as a ‘debt’ (which I think would just confuse people unnecessarily), the important point there is it is not interest bearing.

          • RJ

            It is debt though. But its simple been transferred from interest bearing debt to interest free debt. And this would create a huge problem for the holders of this debt (like say pension funds). If the Govt stops paying interest on their debt. Then pension funds are much worse off. So debt free money (if this is what it means = nil interest debt) will just smash the elderly. Esp if inflation runs at say 3%. Their pension savings will decrease by 3% every year

          • JohnB

            No, it just means the pension funds will have to invest the money into something that is actually productive, instead of getting the ‘free-lunch’ of government bond interest payments, while not taking any associated investment risk which justifies the reward.

    • ianb

      Hi – a friend of mine said something like your point 2 to me recently, i.e. that MMT’s vision of sectoral balances, where pvt sector surplus = govt debt, is misleading. Can you expand on this?

      • RJ

        Why did your friend think it was misleading. Key to understanding all of this is understanding double entry bookkeeping. And the relationship of one companies entries (or Govt or a person if they did account) to another company etc. Because one companies/ Govt revenue is another companies/ Govt expense. So Govt expenses that are not recovered by tax = non Govt Revenue

        • RJ

          And the other point is that monetary sovereign Govts have there own bank account (BoE / Fed etc) and there is no limit to the amount they can spend (too much though can cause inflation or currency depreciation). These Govt create new money when required as required (reserves) by journal entry automatically whenever they spend. THEY DO NOT BORROW MONEY. They create new money. Many economists are hopelessly confused by this point. And a final point. Euro countries are now no longer monetary sovereign

          • JohnB

            While, if you look at the accounting operations involved with government spending, this is technically true for the US, it is also the perfect example of just how counterproductive MMT’s narrative is, and how it instantly triggers cognitive dissonance in people and repels them before there is even a chane to convince them.

            When people hear you say that the US government currently spends money by creating it, you have instantly lost the chance of convincing probably 90% of people, that it is true – because they won’t take you credibly after that, it will sound like something from the Flat Earth Society.

            This narrative also leads MMT supporters, into the trap of applying this narrative to countries other than the US – where this is not true – and then when they lose any debates using this narrative, it will trigger doubt for them.

            This narrative, requires people to look at the complex accounting operations that take place when the US government spends money, which means it is not suitable for explaining MMT to most people, as they will view that complexity with confusion/suspicion.

            So it’s better to discard with that narrative, and treat the US government as if it is presently spending based upon taxes or debt issuance, and say it is possible to switch-over to funding via money creation, with taxation removing money from circulation.

            This is a very important (in my view anyway) example, of how MMT needs to iron-out/dump the counterproductive kinks in its narrative, which drive people away – it may be technically true, but it won’t win anybody over.

          • RJ

            “When people hear you say that the US government currently spends money by creating it,”—– BUT this is factual. And this is what the banks do. They create new money when people loan money.

            “where this is not true” . It is true. And if you understood basic double entry bookkeeping you could verify it for yourself.

            “switch-over to funding via money creation”, So the UK and UK Govt currently create new money when they spend. This is how the current system works at this very moment in time. But you want to change to a completely new system that does basically the same thing. Just because you do not understand how the current system works. And it will be too hard to explain it to people.

          • JohnB

            I think you’re mixing up my reply a bit – I agree it is ‘technically’ true in the case of the US government, and I think this is simply down to a quirk in the way they have organized the accounting.

            I don’t think this is true for the UK – can you provide a credible source, authored by a prominent MMT writer, who specifically says this is true in the context of the UK? (even going so far, as stepping through the accounting?)

            The problem with MMT, is it is almost always written from a US perspective – and there are likely to be differences between the accounting for the US and for the UK.

            My understanding of the US accounting, is that government is credited with money first, and then is legally obliged to issue bonds after-the-fact – so it’s technically true – in that the money creation happens first – but this is nothing more than an interesting quirk in the accounting, which is a bad narrative for trying to convince people.

          • RJ

            “more than an interesting quirk in the accounting” I’m assure what you mean by this. Monetary sovereign Govt create money (reserves) when they spend and then drain these reserves by issuing bonds. The bond issue is to clear excess reserves. QE however is a swap where central bank reserves (created by a journal entry) are used to buy back the bonds from banks. That’s why banks currently hold a massive value (as an asset) of excess reserves. NB QE is called money creation because it creates new bank money = reserves (not our money). It is used to buy back Govt/treasury bonds.

          • JohnB

            The quirk in the accounting, is that with the US, the crediting of government with money happens first, and the bond issuance happens afterwards – as you describe.

            So it is logically true, that money is ‘created’ there and then drained in equal amount after an extremely brief period – but while this is the case with the US, I’m not sure it is the case with the UK or other countries (i.e. they may issue the bonds first, and use the money from that for spending).

            In the US, money-creation/spending first, bonds/money-draining second – in other countries (even monetarily sovereign ones), I think it may be bonds first, spending second.

            They both have the same end-result, but nearly everybody understands it as working in the second way (bonds first, spending second), and I think that may be the case for non-US governments, so it is bad narrative to confuse people by saying it works the first way, as it will make them reject the idea.

            If you just skip all of the confusing details there, and tell people that government finances can be reformed so that bonds are not used, and government directly spends with money creation, and removes money from circulation with taxes to prevent inflation, then you have a chance at getting farther with them.

          • RJ

            Different approaches will work with different people. I like the MMT approach. MMT is based on facts supported by clear evidence not half truths or falsehoods based on ignorance of the banking and treasury payments system. (And the role of and importance of debt) One falsehood being the UK Govt Govt will not be able to pay its bills (it will always be able to pay its bills as it creates the money (reserves) as required by journal entries. Or a half truth at best is the UK Govt borrow money (it creates new money automatically whenever a bill is paid). Or a falsehood is Govt debt will have to be paid back by future generations (Govt debt never has to be paid back. It will simple be rolled over.) And should never be reduced as increasing Govt debt means a wealthier non Govt sector, reduced Govt debt makes us all poorer. Once I understood this I completely changed my view on austerity. And Govts running a deficit. We currently need more Govt need not less.

          • GWHodgson

            It’s not helpful to imply that those who object to the US-centric description of government finance display “ignorance of the banking and treasury payments system”. The UK system for funding government is outlined in this article from the Bank of England’s Quarterly Bulletin of June 2014. Tax receipts and proceeds from bond and bill sales are paid into the government’s bank account (removing reserves from the banking sector) and surplus cash is lent back out again through the money market (restoring reserves to the banking sector). This was covered in detail in “Where Does Money Come From?”

          • RJ

            Thanks for posting this. Interesting is the point about notes being a liability of the central bank (page 2). Notes then are not debt free. Notes have value only because they are backed by the Govt. And can be used to pay tax.
            Re ignorance. I gave examples of this. I did not include anything about US-centric etc.

          • RJ

            Interesting book. But what put me off reading it was this
            “Fiscal policy does not in itself result in an expansion of the money
            supply. Indeed, the government has in practice no direct involvement in
            the money creation and allocation process. This is little known, but has
            an important impact on the effectiveness of fiscal policy and the role
            of the government in the economy.”
            This is what I would call a half truth. And seems to contradict what he wrote before this

          • RJ

            I will try to find an example of UK accounting. But why do you think the UK treasury would be different to the US treasury

          • solutrean

            RJ. Should not your first paragraph regarding what the banks do read. “They create new money when people BORROW money?” The loan is an asset of the bank and a liability of the borrower. The money that is created is a liability of the bank and an asset of the borrower.

  • RJ


    1 Government $deficit = non government $surplus (net financial assets)

    2 Operationally, government spending is not inherently revenue constrained. Any such constraints are necessarily self-imposed.

    3 In the banking system, the causation runs from loans to deposits, that is,

    ‘loans create deposits.’

    4 The Fed is the monopoly supplier of net reserves to its banking system, and,

    therefore has no option but to set at least one interest rate.

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