Economic Reform Australia Blog

Is MMT irreconcilable with NCT and Sovereign Money?

It is unfortunate that the advocates of MMT (modern monetary theory) and various monetary reform movements including  NCT (new currency theory) and Sovereign Money misunderstand each other’s positions. There are important truths in each viewpoint, and I do not see a necessary contradiction between the main thrusts of their respective stories.

A very interesting paper published in Real World Economics Review [1] by Prof Joseph Huber – a primary advocate of NCT – takes MMT to task on several matters, even though he agrees with some of their analysis.  In my opinion Huber’s primary criticism of MMT is unjustified and the assertions and arguments he has given in this regard are flawed. To critique Huber’s paper  in detail would require considerable effort, however I would like to draw attention here to one section where his assertions struck me as being obviously incorrect.  Let me quote the section:

“ Don’t let yourself be fooled. The biggest part of government expenditure is funded by taxes. Tax revenues represent transfers of already existing money. The money that serves for paying taxes is neither extinguished upon paying taxes, nor is it created or re-created when government spends its tax revenues. In actual fact, this is all about simple circulation of existing money. “

The MMT position that the government injects new money into the real economy when it spends, and withdraws money from the real economy when it taxes and borrows, implies that Treasury’s general account with the central bank (CB) is not actually composed of money at all and is therefore merely an operating account.

This rings true because it is not difficult to see why the credits held in Treasury’s general account cannot be regarded as money, in any sense of the word.  One of the characteristics of an entity which is entitled to be called “money” is that it is used by a set of marketplace players and may be loaned and transferred between those players.  Thus, for example, the credits that banking institutions maintain within their CB accounts (reserves, or exchange settlement funds) must be regarded as a form of money because – apart from satisfying the usual criteria of medium of exchange, store of value, and unit of account – may be loaned between those players and directly transferred between their respective CB accounts.  However the credits held within Treasury’s account with the CB are never loaned out or transferred to any other institution under any circumstances.  When the central government spends, new bank credit money is created by the payee’s bank and matching new reserves are created in that bank’s CB account.  Reserves are not transferred, because the definition of reserves excludes Treasury deposits.

[1] <http://www.paecon.net/PAEReview/issue66/Huber66.pdf>

John Hermann