First Ask Yourself: Where Does Money Come From?

Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy

Modern Monetary Theory begins with a deceptively straightforward statement: the national economy doesn’t essentially resemble your household budget. MMT then extrapolates outward to “prove” that conventional neoliberal economics doesn’t describe the world accurately, and therefore standard budgeting precepts don’t apply. A longtime Distributist myself, I anticipated cheering this insight. Then I saw the appalling brass tacks.

Professor Stephanie Kelton didn’t originate MMT. It actually originated from a retired Wall Street investor who claimed to realize an underlying truth that generations of economists had missed. Kelton has, however, contributed to the discipline, and helped it establish a theoretical veneer that passes muster in academia. Like me, she abandoned neoliberalism in her youth when its theoretical underpinnings failed to result in testable real-world outcomes.

That said, Professor Kelton and I have reached different subsequent conclusions. Her discipline, Modern Monetary Theory, relies upon “fiat currency,” money which derives its value from the government body issuing it. Monetary value, MMT contends, derives from law. Her analysis scarcely mentions the floating value of goods, services, and human labor. To understand MMT, we must examine Kelton’s premise that governments requisition money into existence ex nihilo.

Kelton is right that money doesn’t come into existence when ordinary citizens pay their taxes. But she’s also wrong: the government doesn’t spend money into existence either. Money comes into existence when banks make loans against their reserve capital; that’s why the American economy contracted violently in 2008 when banks began going under. With nobody to create new money, the existing pool began drying up.

Banks’ role in creating money often gets overlooked. Currency—paper money—is issued by the Federal Reserve, which looks deceptively like a government office. After all, its leadership is appointed by the President and confirmed by the Senate. But the Federal Reserve is a public-private hybrid, and actually owned by American banks. Indeed, to receive legal status as a “bank,” institutions must own voting stock in the Federal Reserve.

Dr. Stephanie Kelton

Before banks collaboratively formed the Federal Reserve in 1913, American banks issued their own currency. Unfortunately, without centralized control, some banks issued excessive currency to falsely pay down their own debts. As historian Paul Kahan writes, bank recklessness created recurrent financial panics. American banks organized the Federal Reserve, and transferred partial authority to the federal government, to restrain their own worst impulses. For nearly 100 years, that worked.

An economy isn’t a mathematical construct, friends. It’s the system of exchanges, gifts, and debts that control our daily, dirty world. The thought experiments Kelton devises to fortify her argument are specious, because they have prior limits. The larger economy doesn’t essentially resemble a game of Monopoly, because in Monopoly, there’s only one bank, and only one city to spend money. Land and housing prices are predetermined and cannot float. I cannot negotiate based on supply and demand, or take my Monopoly money to another Monopoly town for improved competitive value.

I cannot muster a point-for-point refutation of Kelton’s thesis; that exceeds the scope of a 750-word review. But neither can I seemingly read two pages of Kelton’s book without setting it down in frustration because she says something transparently incorrect. Her economic analogies rely on closed-loop systems without floating exchange rates: sports scores, improv comedy, household allowances. One recalls right-wing YouTubers basing their economic analyses on in-game transactions in Fortnite.

Like other economic analyses, including the Laffer Curve or Marxist surplus value, MMT only has value to the extent that its theoretical calculations accurately predict real-world outcomes. And the theory’s fundamental precept, that the state should print more dough, should raise alarm bells for anybody who’s read the history of Weimar Germany. Coincidentally, German economic history doesn’t even merit an entry in Kelton’s index.

Please don’t misunderstand me. The status quo is deeply insufficient and, like Kelton, I’m eager for another approach, one that doesn’t rely on permanent shortages and wage theft. Neoliberal capitalism has been a massive global catastrophe, which is why innovators worldwide look for alternative models in everything from Marx to Mondragon. The damage is too real and painful to excuse continued indolence. We need to fix the underlying system now.

Kelton says plenty I support, like that inflation is more indicative of economic health than deficits, or that public debt doesn’t essentially resemble private debt. But her preliminary assumption, about where money originates in today’s economy, is a thought experiment, not evidence. Without that, her subsequent hypotheses simply slap patches on capitalism’s leaking hull, when our modern economy actually needs an entirely new vessel.