Monetization, Maturity Tranformation, and MMT

In a previous post on Origins of Central Banking the history of  creation of Bank of England was described. In this post, we discuss the deeper lessons to be learned from this history, and how this supports the MMT view of the world. We also clarify and make explicit some key aspects of the banking process embedded in this history.

Monetization of Debt & Maturity Transformation: Crucial concepts, relevant today, to understand how banking works. King William borrowed GBP 1.2 million from BoE. The “loan” should be understood as a  maturity transformation  – a key to how banks work, even today. Assume for simplicity that BoE does not actually have ANY gold in its possession. It makes a loan to King William III (KW3) of gold (which it does not have) by opening an account in the name of KW3, and promising to honor all checks written by KW3. Now BoE has made a Loan which will mature in 5 years, so this is a long maturity loan. In order to honor incoming checks, BoE will borrow gold short term from Gold Dealers XYZ and pay off, in gold, anyone who presents checks written by KW3. We can simplify the picture by assuming that BoE borrows only on an overnite basis, but does so continuously every day, in quantities required by the demands presented to it. So, the long-term loan five-year loan is transformed into a sequence of over-nite loans; this is the “maturity transformation”. But why would BoE want to do this? Because it gains great benefits by “monetizing” the debt. The monetization occurs when BoE issues paper notes of GBP 100 each, for any purpose whatsoever. On the face of the note, it is written that BoE promises to pay the holder of the note GBP 100 worth of gold upon presentation of the note. This promise of BoE is BACKED by a Sovereign Guarantee – that is the promise of KW3 to pay BoE 1.2 million pounds 5 years from now.

House of Smoke and Mirrors! The surface appearances are so radically different from the underlying reality! Let us analyze in greater detail what appears to happen, and contrast it with what actually happens. On the surface, it appears that KW3 needed gold of 1.2 million GBP, and BoE had this gold, which it gave to KW3 as a loan. It will make profits from the interest payments on the loan on an annual basis – collecting taxes on behalf of the King for this purpose. At the end of five years, BoE will get back the gold that it gave to the King. This is a standard interest-based loan. This understanding of how banks operate reflects the “Financial Intermediation” theory which is faithfully depicted in textbooks, and shapes thinking of conventional economists (like Krugman) about how the world of finance works. Now let us look at what really happens, in order to be able to admire the amazing audacity and cunning of the financiers – no wonder they rule the world today.

BoE lends KW3 1.2 million GBP with nothing in its pockets! They simply open an account and put an entry in the ledger in the amount, showing the KW3 has a deposit of this amount. They borrow gold as needed to pay off incoming checks in gold. Of course, to be able to borrow, they need to have good credit. This creditworthiness is achieved partly because they have their own reserves of gold. But an important additional factor is the “monetization”: The counterpart to this deposit of 1.2m GBP in the name of KW3, is an incoming payment, due in five years, of 1.2 million GBP of gold. This is an IOU note by KW3 where KW3 promises to BoE 1.2 million five years from now. Now this promise of the King is the asset which BoE will monetize. BoE can create 1.2 million GBP worth of paper notes, all of which are backed by a sovereign guarantee. A 100 GBP note issued by the BoE is actually a promise to pay the owner of the note from the gold which the KW3 will pay the bank five years from now – this is the sense in which the note is backed by the sovereign guarantee.  However, the owner of the note might have an urgent need; he may not want to wait for five years to be paid in gold. No problem! Anyone who presents the note for encashment receives gold which BoE borrows in order to honor its long term guarantee. Once this system is operational and working smoothly, owners of the notes issued by BoE think of them as being “as good as gold”. The Bank of England honors all requests to convert notes into gold smoothly and quickly, without a hitch. People stop converting notes to gold because everyone is confident that this can be done. Once confidence in the promise of BoE is established, the BoE is in a position to print gold, because its notes are considered as being equivalent to gold by the public.

This is the bonanza for Bank of England – it acquires the ability to print notes which are considered as equivalent to gold by the public. The initial confidence in the notes is generated by the sovereign guarantee, and is reinforced by the ability of BoE to encash these notes for gold on demand. This ability depends on gold reserves at BoE and also on its ability to borrow gold as needed from other sources. Once it prints 1.2m GBP worth of paper notes backed by sovereign guarantee, it has already created 1.2m GBP of the (non-existent) gold that it loaned to King William — it does not need to get the money back, because it already created it!. This is why the BoE stated that the loan can be rolled over indefinitely. That is, at the end of five years, King William can (and will) say that I don’t have the 1.2million to pay you back, so give me another loan of 1.2million (plus accumulated interest) which is due in another five years. The BoE happily obliges the King by giving him a loan on paper which the king immediately surrenders to the bank as repayment of the initial loan, and the whole cycle repeats.

But this is not all; the implications of this heist of power of money creation are far more radical. No one is watching how much money is created by the Bank of England. Technically, it can only print 1.2 million GBP which are backed by the sovereign guarantee. However, as we have seen, this sovereign guarantee is an illusion – the King will never actually pay any gold to the Bank of England. What enables the bank to print notes is the confidence of the public that the notes are as good as gold. The BoE can print a lot more than 1.2 million pounds. The original loan to the King becomes only a side-show; the interest payments are also a side-show. The real game is that the power of creation of money has been transferred from the sovereign to the bank. Furthermore, this authority is enshrined in the law, in a charter signed by the King of England.

So, let us take a step back from the detailed analysis of this amazing theft, where the BoE actually stole the power of money creation from the sovereign state of England. Let us look at the bigger picture. The BoE not only gave KW3 the money that he needed, they also gave him a promise to provide him with all funds that he might need in the future. The principal of the loans that they would give to the King would never be paid back; the Bank would only collect the interest on the loans. The entire principal of the first loan (and any subsequent loans) stays at the bank in the form of an IOU from the King, and serves as a sovereign guarantee which authorizes the Bank to issue notes which are backed by a promise of the King. But the trick goes deeper, because this promise is actually an illusion – the king will never pay. So whereas the public trust in money created by the Bank of England is apparently based on the sovereign guarantee, it is actually based on something rather different. It is based on the ability of the Bank of England to smoothly and quickly convert notes to gold on demand. Once public confidence in this ability is established, only a small amount of gold is needed by the Bank of England, since confidence creates the impression that the paper is good as gold.  Secure in the knowledge that paper can be converted to gold on demand, people rarely actually do so since paper is much more convenient to carry and store than gold. Complications in this basic story created by international trade will be discussed later.

For a more detailed history of the origins of Bank of England, see my previous post on Origins of Central Banking. Understanding this history is extremely helpful in understanding the central claims of Modern Monetary Theory. The BoE can make any amount of loans to the King of England, and never require repayment from him because they can monetize all sovereign debt. They can convert the IOU of the King to money and use it for their own purposes. This power of monetization means that the IOU of the King itself is the money. We could take away the smoke and mirrors, and the king could issue his own IOU directly (without incurring interest payments on loans from BoE). The money would be fiat currency and circulate by sovereign authority – the law makes it legal tender. Here the widespread myth, still widely believed, that money must be backed by gold, is of great value to the financiers who possess gold (which the king does not). The King’s fiat currency is not backed by gold, but the BoE can issue currency which appears to have gold backing. So, it seems that the BoE currency is more “sound” to a public conditioned to believe that money is gold. In fact, using fractional reserve methods, the BoE currency is also unsound in the sense that there is never enough gold to back all of it.  In the final analysis, money is about trust and confidence. This trust and confidence can be created by a variety of tricks. In small communities, trust can be created by character – the movie “It’s a Wonderful Life” shows the central importance of trust, and its relationship to the viability of banking.

The central message of MMT is that once the illusion of gold is removed from the picture, money is valued because everybody has confidence in it. This confidence can be safely created by sovereign authority. The King, or the state, can create any amount of money, without limits. There is no issue of sustainability of deficit. Creation of money has powerful effects on the economy, and printing too much money would definitely cause inflation, so it would never be advisable to freely print money. But the state does have the power to do so, and the state will never have to “pay back” for money it created today. The focus should shift from the wrong question of how the government can generate revenue to finance its spending, to the right question of what are the effects of money creation by the sovereign state? By analyzing the impact of money creation on employment, inflation, debt, we can figure out the right amount to create. The conventional idea of “neutrality of money” embodied in Real Business Cycles and DSGE models is a major obstacle in the path asking the right questions, because these theories say that the quantity of money does not matter.

An important side note here is that international trade matters a lot. As long as the paper circulates within the British empire, conversion to gold or otherwise does not make difference. As long as the gold is within the Empire, the BoE will be able to borrow it temporarily to meet its daily needs. But if the notes are used to purchase foreign goods, and foreigners demand gold in return for notes, gold will flow out of the empire, and this can create problems. We ignore these issues for the moment; these will be discussed in greater detail later. My talk at the State Bank of Pakistan provided an introduction to basic MMT concepts, to people schooled to believe in other theories of money:

Another similar introductory talk on MMT is Key Insights from Modern Monetary Theory”  This post analyzed the opening shots in a battle which has raged through centuries, determining the fates of millions of lives: The Battle for the Control of Money.” Today, this battle threatens the future of mankind on this planet. The central strategy in this battle is deception and creation of illusions. This is captured in the following scene from the Wizard of Oz — Dorothy and her team quake with fear in front Oz, the mighty and powerful, until Toto lifts the curtain behind which the magician is hiding. As Ellen Brown has pointed out in her wonderful book on The Web of Debt, the Wizard of Oz is actually an allegory about the powers of money creation, with OZ standing for ounce, as in a gold ounce.  If we have correct understanding of how the system works to provide massive benefits to creators of money, who get to mint money for free, we can easily fix it. So this understanding must be denied. Multiple myths are created which prevent understanding. The most basic of these is the myth of neutrality of money. If money itself does not matter, than what does it matter how it is created. The second myth is that banks do not create money, the banking system as a whole does, widely taught in textbooks even today. The third myth is the money multiplier story, according to which the amount of money in the system is just a fixed multiple of the high powered money created by the Central Bank. Increasingly powerful attacks, together with damaged credibility after the Global Financial Crisis, has led to a confession: The Truth is Out: Banks Create Money  The confession may be motivated by the need to regain credibility and hence to manufacture new myths to replace the old ones. The central question to ask about money is: “Who Creates It?”. As recent papers by Bank of England clarify, it is the private banks, and now, far more important, the shadow banks. It is these shadowy financial institutions which run the world today, by the power of the money that they create.

60 thoughts on “Monetization, Maturity Tranformation, and MMT

  1. Is there any way to shorten and simplify this story? I agree with all you’re saying, in principle, but I could hardly make it through this explanation, which seems to suffer from the autistic nature of much of economic analysis today: the explanations can only be understood by other economists. I think until we learn to explain the stories of what’s with the economy in terms ordinary people can understand, there is no hope for change.

    Best regards, Rick Casey Fort Collins, Colorado

    On Wed, May 29, 2019 at 12:38 AM WEA Pedagogy Blog wrote:

    > Asad Zaman posted: “In a previous post on “Origins of Central Banking” the > history of creation of Bank of England was described. In this post, we > discuss the deeper lessons to be learned from this history, and how this > supports the MMT view of the world. We also clarify and” >

    1. Thanks for this feedback Rick. This is actually a fragment of a lecture to my graduate students in a Ph.D. level course on macroeconomics. I wish I could simplify it further, I dont know how — maybe with more practice I’ll learn

    2. You are not alone! The system has been designed to make the average person feel inadequate – better leave it to the experts. MMT is absolutely no help here. Books, thousands of lengthy blogs and a refusal of MMT proponents to engage with other schools of thought such as sovereign monetary reform, requires that MMT be taken on faith. Monetary reform is simple, intuitive, straightforward, logical and accessible.

  2. Bravo, Asad!!! I am not an economist, and your way of reaching an understanding of why MMT is correct is different from mine. I arrive at the same conclusion you do. It’s as if we have reached the waterfall by different paths. I hope your pathway will bring others who are still trapped in the mainstream whirlpool.

  3. The power to create money is not the only problem. The form, character and pattern, i.e. the paradigm of money created is even more important and problematic especially when it is monopolistically enforced and controlled by a self interested agent and only in the form of Debt. The question before us is how, where and at what point in the economic process can a new monetary and financial paradigm be implemented so as to resolve the generally agreed upon problems of individual and systemic monetary scarcity and the tendency for the present system to be price and asset inflationary.

  4. I find this entire discussion fascinating. Since anthropologists have explained the creation and use of money in precisely this way for over 100 years. Why are economists so dimwitted? Or, maybe it’s the result of economists spending so little time examining empirical data — observing events and people doing whatever it is they choose to do.

    1. If you read the writings and speeches of the architects of the current system you’ll find that the system was deliberately made opaque – that strategy has worked wonderfully. Economists who teach monetary reform are in danger of losing their positions – its just not done. Money is considered to be a neutral medium with no significant role in the economy.

  5. The history of most of (probably all) Latin American countries tend to contradict MMT. I explain: we have always had to fight against pervasive inflation. Money printing has been a permanent threat to economic stability, growth and development. Whilst there several causes for our problems, a tendency from governments to print too much money has been a permanent liability. May be this paragraph synthetises some of the problems plaguing LA: “An important side note here is that international trade matters a lot. As long as the paper circulates within the British empire, conversion to gold or otherwise does not make difference. As long as the gold is within the Empire, the BoE will be able to borrow it temporarily to meet its daily needs. But if the notes are used to purchase foreign goods, and foreigners demand gold in return for notes, gold will flow out of the empire, and this can create problems. We ignore these issues for the moment; these will be discussed in greater detail later”. Waiting for further explanation.

    1. William – you have it backwards – cause and effect. Money printing is always the RESPONSE to hyperinflation and a damaged currency and economy. (sorry for caps, no underline)

  6. Its always enjoyable to see when the light bulb goes on in a person’s head, that Eureka moment. Welcome aboard, Asad. Monetary reformers have understood this process of bank-money creation for decades – has nothing to do with MMT.

    Asad glosses over one critical notion, that the King (the government) could bypass the entire smoke-and-mirrors and create money needed to support a nation. Here’s the problem, and its a problem MMT brushes under the rug, it is currently illegal to do so. Without specific legislation that 1) empowers the government to create money and 2) takes away that power from banks to do so, nothing will change.

    This what sovereign monetary reform organizations such as,,, etc are striving for. For instance, in the US, there is specific legislation introduced in 2012 (HR 2990 – the NEED Act) that provides the mechanism to accomplish this.

    MMT is fine for a modern day interpretation of the inner workings of our byzantine financial system, but it provides little guidance on how to actually implement sovereign money creation. In fact, many proponents are perfectly fine with the system that Asad describes.

  7. Asad you analysis is quite illuminating. My understanding is that MMT does not object to private bank created money. In this post it would seem you are being more consistent with the sovereign money movement – similar to sentimentents and discussion in an post several years old with Steve Zarlenga – Having said that I agree with some top economists that ultimately there is little difference between the two groups.

    1. Asad – As with many MMT sites – it seems any critiques are censored. What is the fear of open discussion.

      1. I, and fellow editors, manage this site. I am not aware of any censorship. Furthermore, this is not an MMT website — We are eclectic in our approach. I taught a course on MMT, and find it very useful as a set of tools to organize thinking about macro issues — Although it seems clear to me personally that private bank creation of credit is not a good thing, I think MMT just teaches us how the system works, without making such value judgments. Once we know how it works, it is possible to design a system that would work fairly well even WITH private creation of credit. But also, the Chicago Plan approach offers a feasible alternative. In fact, once we understand the mechanics of the banking system, we realize that there is no such thing as a private bank. It is only extensive government support which enables private banks to survive — thus governments have it in their power to exercise as much authority as they like over private banks.

      2. “…thus governments have it in their power to exercise as much authority as they like over private banks.” Yes, Asad, agreed. The problem is governments often refuse or are unable to regulate such banks for the welfare of the commons. Sometimes institutional and institutional entanglements make this difficult, for actual or fear of push back or even punishment. Also, the socialization of many in government stands in the way. For example, many members of government have learned, formally and informally that persons like Rockefeller and Getty are the creators of America. Their needs must come first, always.

      3. Yes. Those who view bank regulation as the “solution” don’t take into account that the banking industry is too powerful to submit to sweeping regulations. In addition, the concept of forcing banks to create money for purposes that don’t return a profit, such as repairing infrastructure, goes against the foundational motivation for any corporation. The regulations needed would be complex and ultimately circumvented. Too big to fail is a fact of life.

        In reality, a financial corporation does not also need the power to create money – their job should be as intermediaries, not creators. Take that power away and the need for regulation is greatly reduced, many of the perverse incentives are gone

      4. Paul and Asad, why do banks exert such effort to win these fights, to push people and institutions out of their way, no matter the consequences? For profit, of course. But profit is a human invention. It has a long history of re-invention and re-re-invention many times over. What’s important for the banks, and for all capitalist corporations and firms is to “show a profit.” Except of course when winning the battle at hand requires the bank, corporation, etc. “not show a profit.” So, ultimately the purpose of profit is to protect the survival of the bank, corporation, etc. Profit is one tool put to that end. That means profit is re-invented, re-interpreted, re-engineered in whatever direction and in whatever form serves this end. We defeat banks, etc. by using this revolving invention, profit against them. After all they and most corporations manipulate their accounting and thus their profit regularly. Believe it or not, that’s still illegal. With prison sentences up to 10 years. This is hard ball, folks. We need to accept that and join the game in earnest. One example. We fought PG&E once over the need for a large (half billion dollars) increase in rates. When PG&E calculated its return (profit) the result was negative. When staff (that’s me and 5 other guys) calculated PG&E’s profit it was double the rate allowed by regulators. Once we figured out how PG&E was hiding the profits, it was not difficult to arrange a rate decrease and extra spending on climate change problems and customer services with PG&E. Don’t you just love it when they blink first?

      5. Ken Z. wrote, ” This is hard ball, folks. We need to accept that and join the game in earnest.” Who is we. Ken? I think the attack must come from outside of academia (Asad Zaman excepted). As AA reminds us, “Half measures will avail you nothing.” When the man on the street can easily see the truth about the economy, is shown that Margaret Thatcher was totally wrong, and that MMT offers a real basis for an economy that minimizes inequality, poverty, and austerity, then we will be on the road to survival. Just my $0.02

      6. People tend to impart more to MMT than it really is. MMT doesn’t claim to be a solution to anything – instead, it purports to paint a picture of how the current system works. The only feature tacked on that could be seen as part of a solution is the Job Guaranty program that some proponents of MMTpropose, not so much for the good of society, but as a buffer to stabilize the economy.

      7. Profit is the economic manifestation of a human flaw. It is said, on the other hand, that the main human trait is cooperation and societies based upon cooperation rather than greed and self interest, thrive. I think changing the money system is a first step toward instilling that positive side of human nature into our society. Without out it, greed will rule the day.

      8. According to Karl Polanyi’s analysis in the Great Transformation, it was the creation of three artificial commodities — a market for labor, market for land, and an artifical commodity of “money” that were at the heart of market societies, where everything, including human lives and mother earth, is for sale. This is at the root of our modern problems, and is not easy to reverse

      9. Yes, not easy to reverse. If, on the other hand, avoid difficult solutions, we are destined to continue to fail.

      10. Figure out the what and how of paradigm change. Every attempt at regulation and reform beneath that level of mental analysis will fail. Economists and economic oundits have to come to that conclusion before any progress let alone any actual action will take place.

      11. The paradigm shift has occurred in the past – the Greenback dollar was not created by banks but by the government – it not only funded the Civil War but the printing of money did not lead to inflation – a typical retort of the nay sayers. Sovereign money has also be studied and promoted by some the most esteemed economists of the early 1900’s in the US. What needs to be done is to address the economic amnesia that seems to plague the “experts”

      12. @Paul Lebow

        Yes Lincoln’s Greenbacks were sovereign monetary gifting, but only to enterprise. If we gifted money directly to the individual and then reciprocally back to enterpises at retail sale which is the terminal ending point of the productive process for every consumer item you consequently double both everyone’s purchasing power and the actually available money for every enterprise’s goods and services. Because retail sale is also the terminal expression point for any and all forms of inflation (it has to be because it’s where production becomes consumption) a 50% discount at that point does the impossible from an orthodox profit making economic stand point, namely it beneficially integrates price deflation into profit making economic systems. As the primary signature of paradigm changes is inversion of present paradigmatic realities the 50% discount/rebate policy at retail sale fits that bill perfectly. The policy is the very expression of the new paradigm of Abundantly Direct and Reciprocal Monetary Gifting.

  8. If the banking industry is too powerful to submit to regulations, than how do you propose to take away their power to create money? Ultimately, it boils down to politics, which is a game of catch as catch can. What MMT does is allow you to focus on where the power is – see the Wizard of Oz clip in the post. What can be done, is a pragmatic issue.

  9. Asad, I’ve read an enjoyed Ellen Brown’s book. The author’s (Frank Baum) family, vehemently denies there is any connection with the money system – I don’t buy it.

    Yes, its a fight against the banking industry either way. But changing the money system is a fundamental change – a complex network of regulations is a bandaid. Our problem is systemic. If your read the 2012 bill HR2990, you’ll see how straightforward the restructuring is. The construct that MMT purports to describe is purely that, a construct. It has survived (barely) up until now because it is propped up by ignorance among economists and policy makers as well as a vested interest of a vast financial industry that needs to perpetuate itself.

    Having said that, the banking industry will do very well under monetary reform, acting as intermediaries and making profit based upon their skills at underwriting.

  10. The chairman of Bank of America (two chairmen back) shared this with me 15 years ago. He said, don’t worry about profit. It doesn’t matter. As money come through I grab a slice for myself. I pay stockholders whatever keeps them out of the business of the company. And I go on living a pleasant and rich ($ and other things) life.

    Many COEs, CFOs, etc. have forgotten this advice. They now steal more than the arrangements can stand.

    The banks will do whatever is asked of them within the limits of protecting their money, however that’s calculated and their protected status. To break those the entire banking system would need to be re-arranged. Which fight do you want?

    As to academics fighting either of these battles, that’s not going to happen in most instances. Some academics are involved in efforts to change the current dominant concepts in the academic field of economics. Attending AEA meetings I have only twice seen AEA members make any big commotion about the “problems” of the field or making corrections. Institutional momentum is difficult to change. Particularly when so many stand to lose if changes are made. Plus, for nearly 100 years in the US the institutions intended to carry the load on questioning academics about their impacts on everyday Americans have been attacked, reduced, and sometimes even destroyed. Depending on whether the academics in question support or attack the existing “money machine.”

    And to provide a cover for all of this, the “money machine” there is “the market.” Another, cultural artifact. It certainly exists. But it’s not what the media, the polls, politicians, or even the public are told it is. Like profit, it’s a tool used to protect the advantages (almost all wealth) of those who control the invention and use of money. In times past other tools were used to protect land owners, business owners, estate owners, members of aristocracy, monarchs, etc. so they too could maintain their advantages. No matter how it’s considered removing these advantages involves explosions, internal or external, or both. History shows that again and again. It’s only a matter of degree. How big will the explosions be?

    1. Profit isn’t nearly as important to private banking as power. To command the towering height of a paradigm/entire pattern is ultimately empowering. Giving a single business model both the money creating and paradigmatic power over the most potent and so important factor in economics is so titanically stupid that it has escaped the awareness of the erudite for over 5000 years. It’s time for change. Models are complex; paradigm changes are single concepts that are operationally simple and yet of such resolving depth that upon seeing them and their effects one usually asks, “Yes, why didn’t I see that before?” Thats the tricky thing about increases in the level of consciousness which is a characteristic of paradigm changes.

      1. So true. Remember the Berlin Wall. Remember prohibitions on gay marriage.It may only take on more GFC to do it. Trouble is that climate chaos will get us all before then.

    2. I’ve heard that for an academic economist, focusing on the money system is a death sentence for their career.

  11. Every culture organizes life around a few simple principles, activities, and beliefs. The other institutions and activities of the society hang from that core like branches from a tree trunk. These central acts, institutions, and values form what Ruth Benedict—arguably the most perceptive American anthropologist of the 20th century—called a “cultural configuration.” What’s called paradigms here are some of the branches of the western cultural configuration. One such branch, money must meet the needs of the configuration. So, above all else for current western society money is the source of status, prestige, power (political and physical), security, and individual identity. The Beatles were wrong. Money can buy love. H.L. Hunt and Ted Turner both said it, money is just a way to keep score. Money tells you how attractive, important, well adjusted, influential, feared, and loved you are. In short, money identifies who you are. Over the millennia money has served many purposes beyond these, consistent with the cultural configuration of the time, and an almost endless list of objects have served as the physical face of money (e.g. salt, corn, gold, silver, diamonds, cloth, almonds, tea, dried fish, tobacco, rice, etc.). And tied to all this, money is also the means used to purchase and sell everything from humans to every sort of commodity. But identifying money as the thing that makes members of society rich or poor is too simplistic. Naming money the most flexible cultural invention of humans is justified. Plus, money has a normative dimension. It places some people and items above others and elevates some actions above others. Money today can have two sources, banks and other private money creators, and governments (sovereign money). Which serves best the needs of the cultural configuration is an empirical question. Historically, the answer most common is sovereign money. To paraphrase A.H. Quiggin from “A Survey of Primitive Money: the Beginnings of Currency,” Everyone, except an economist, knows what “money” means, and even an economist can describe it in the course of a chapter or so. To say economists are clueless about money goes too far. But to say economists seem mostly unacquainted with money is not. Economists’ understanding of money is historically and culturally shallow.

    1. I disagree somewhat with your emphasis. Yes money has all those attributes, but its real role with respect to the survival of a society is as a medium of exchange. It is the vita and only link between what we create and what we need.

      Mainstream economists recognize that money needs to be addressed of course, but traditionally consider it to be a passive player. In reality, a dysfunctional money system will destroy an economy. People sometimes use the very apt analogy that money is the life-blood of an economy.

      1. Paul, you say money “…is the vita and only link between what we create and what we need.” That’s absurd. What about the basic emotions, love and hate? What about life and death? What about community and the common good? What about war and peace? They’ve all at one time and another, one place and another linked what humans create and what humans need?

        Money is created by humans and then used by humans. It is never passive. Life-blood of the economy, yes. But the economy is created by humans via culture. Which means money is important as a tool for art, religion, family life, crime, marriage, etc. As I noted, money is one of the most flexible inventions of humans.

        I’m sure you’re correct that mainstream economists take money as mostly a “medium of exchange.” The other 99.99% of people on earth disagree. Which should tell you how disconnected economists are from their supposed object of study.

      2. Money allows the “love” to flow between members of society, I don’t see how what I said excludes any of the interactions you described. Money represents a voluntary claim that we have on each other as members of society. When I have money, I have access to what you create. Our current money system has led to a gross imbalance and distortion, giving certain members of society an unjust and undeserved claim on the rest of us while starving the majority of access to the money they need to live happy comfortable lives.

      3. Money allows the “love” to flow between members of society, I don’t see how what I said excludes any of the interactions you described. Money represents a voluntary claim that we have on each other as members of society. When I have money, I have access to what you create. Our current money system has led to a gross imbalance and distortion, giving certain members of society an unjust and undeserved claim on the rest of us while starving the majority of access to the money they need to live happy comfortable lives.

      4. Paul, despite the “commonsense” notion that “a dollar is a dollar is a dollar,” everywhere we look people are constantly creating different kinds of money. Anthropologist and historians have examined in detail and over many years the remarkably various ways in which people identify, classify, organize, use, segregate, manufacture, design, store, and even decorate monies as they cope with their multiple social relations. It is a powerful ideology of our time, promoted heavily by economists that money is a single, interchangeable, absolutely impersonal instrument–the very essence of our rationalizing modern civilization. That money is primarily, some say only, a neutral medium of exchange. When money is viewed this way, we miss the delightful variety of ways people create money each day to meet the demands of their daily lives. In this way money is made into the colorless and flat thing Georg Simmel portrayed it as at the turn of the 20th century. In doing this we hide the collective life of humans. Something I feel pleases economists, since they seem to fear all aspects of humans’ culture and history.

      5. This is precisely the point. Money is looked at from a reductionistic economic standpoint when it needs to be viewed from a fully integrative sociological, anthropological, economic AND spiritual-psychological one. Keeping the mass of the populace in a state of individual income scarcity via a monetarily austere system acculturates insecurity and strongly tends to trap people below the upper levels of Maslow’s self actualization pyrimidal model. If we’d instead create individual and systemic monetary grace as in abundance and security with the new insight that you can create exactly that plus beneficial price deflation with a 50% discount/rebate policy at the point of retail sale, that barrier would be removed and with the additional acculturation of even a modicum of wisdom in the form of counseling regarding the plethora of positive and constructive purposes other than and in addition to employment who knows what kind of a “Golden Age” might result?

      6. Chdwr – I lost you about halfway through the paragraph. I can agree with the first sentence.

      7. Chdwr, you might take note of three classes of money invented during the multiple depressions that hit the US between 1870 and then the big one in 1929. These are social workers’ consumerist welfare money, unemployment money (later formalized by Federal law), and private social welfare agency money.

      8. Ken – I can’t disagree. I am really refering to US money, sanctioned and supported by the state. There are other forms of money that serve specific purposes, but as a democracy, we should at least have control and sovereignty over our US legal tender. This should not be the prerogative of private banking industry.

      9. Ken – I can’t disagree. I am really refering to US money, sanctioned and supported by the state. There are other forms of money that serve specific purposes, but as a democracy, we should at least have control and sovereignty over our US legal tender. This should not be the prerogative of private banking industry

      10. Paul, it seems our emphasis is different. The US mint still makes US sovereignty money, but it hasn’t controlled it for over 25 years. Also, cash money is seldom used today by most Americans. The exception being working-class Americans. Most use by banks and other financial institutions and by the elites are digital. I agree that the welfare of the American people is not helped by private banks having control of most of these digital transactions and having the sole ability to support or quash anyone’s claims to monetary security. Money’s place in American society has been overwhelmed by one version of that place. The version from the the financial and wealth elite, supported my most economists. In simpler terms, there is an effort to destroy any other versions of money, wealth, and welfare that conflict with this one.

      11. Ken – By law, the US government can not create money, except for coins. Even cash – which are NOT US Notes, but Federal Reserve Notes, are actually purchased from the BEP by the Federal Reserve member banks using bank-created money. This has been a fight since the beginning with Hamilton and the banking interests winning out. The NEED act, HR2990 from 2011 would reverse that. All money would be created by the Treasury and none by banks.

      12. Paul, I know the law. That dose not make the situation right. The US Treasury controls the printing of money in the United States. However, the Federal Reserve Bank has control of the money supply through its power to create credit with interest rates and reserve requirements. Since credit is the largest component of the money supply by far, colloquially people talk about the Federal Reserve increasing the money supply as printing money.

        So here’s the situation. The Treasury, controlled by the President prints money. The Federal Reserve, supposedly independent creates debt and credit, and hypothetically lending requirements. And they both search constantly for a way to screw the other. What a way to bake cookies. I believe even Hamilton would be appalled by what’s happening of late. My personal position is private banks are not needed. All private bank charters should be cancelled. I think permanently. Barring an emergency that at this moment I can’t imagine, If the US is to survive we must return democracy and democratic oversight to the remaining banking industry, as quickly as possible.

  12. Systemic monetary scarcity traps the individual in the lower levels of Abraham Maslow’s hierarchy of human needs, i.e. in the pursuit of physical security needs. This problem is eliminated by a discount/rebate monetary policy at retail sale. That policy is the very expression of the new monetary and economic paradigm and with such a secure monetary and economic infrastructure mankind would be free to pursue the higher levels of Maslow’s hierarchy (the psychological and self actualization needs). Wisdom is the integrative mental process. Integrate the insights of sociology, anthropology, economics and psychology-spirituality-natural philosophy. What’s not to like about such a policy, program and paradigm?

    1. Don’t know Maslow but from your description it sounds like you agree the current money system does not allow members of society to satisfy those basic needs.
      I don’t think a “rebate” is the way to go. In my opinion I feel providing people with income as well of some those needs via the state, such as health care and education, is the most efficient path.

    2. Chdwr, I fear the new “paradigm” you propose may have some negative consequences. First, workers may become depressed and feel unfulfilled, because they no longer have what they consider is meaningful and useful work, in terms of the needs of the entire collective of humans. Second, if important jobs aren’t fulfilled in part or in whole, it will fall to government to finds ways to fix this problem. Have not looked closely enough to know what the options might be, but there probably aren’t many to choose from.

      1. It may pay to step back to look at what ‘meaningful work’ means. There is a large segment of the workforce who receives a pay check without contributing to society. At some point in the future, automation will free up people to the point where we may not need full employment. On the other hand, we desperately need to be able to shift these low value jobs to high value, such as healthcare professionals, teachers, caregivers, tradespersons. It is said that the financial sector ravaged the scientific and technology community, luring smart people into the financial “casino” industry.

      2. Paul, I agree significant changes in American culture are in the offing regarding work, self-independence, personhood, the ranking of valuable jobs. The result of automation, a swing toward authoritarian government, and a reopening of the racial and class divisions present in the US since its founding. Add to this that American institutions, after years of systematic attacks are no longer able to deal with these problems. I’m concerned there may soon be no place soon for ordinary workers, particularly when robots take the jobs. And no money for them, either.

      3. Ken – you may be right. On the other hand, if you look at the demographics, the right wing may have reached its pinnacle, a culmination of a carefully thought out, systematic and sinister strategy that began in the 1970’s. They are tapping into the fear and ignrorance of a segment of our population – as all fascists do. The ramifications and reverberations of this strategy may continue for the next generation, but millennials aren’t buying it (when they’re not playing video games 🙂

      4. Thats why in my book I suggest a cooperative effort between the clergy, helping professions and the government to help acculturate the populace to leisure (which is not idleness, but rather self chosen and directed activity) and also to help them find positive, constructive and meaningful purposes including and in addition to employment. Better to do so now rather than wait for the almost inevitable social disaster of not doing so as AI puts a large percentage of the populace out of work.

      5. Chdwr, can’t disagree with your conclusions. The US is on the edge of disaster, or worse.

      6. As a card carrying member of the baby boomer generation, I am disgusted with my cohorts in congress. Its not the racist, xenophobic fascistic politicians I fear, but the centrist spineless people we have in the Democratic party. Hopefully the kids will realize that they’ve been screwed and will rise up to clean up the mess we’ve made.

    3. Chdwr, the best way to control people is with fear. It’s far superior to physical or even psychological force. And the most effective kind of fear is the fear losing everything you have, including your identity. That’s what happens when you are cut off from money. By unemployment, poor health, political exile, criminal prosecution, etc. Current Republicans are masters of creating this kind of fear. As Megan Rapinoe said today in the Washington Post to Trump: ‘Your message is excluding people.’ She’s correct. It’s actually quite simple to exclude, isolate, and eventually alienate selected portions of the US population. So, that in a relatively short period their un-Americaness is widely accepted. It’s the perfect solution for the financial, racial, and wealth elites in the US. Pretend those who oppose your ways of life and their impacts on the nation don’t exist. And get everyone else to go along with you. It’s basic interrogation writ large. I’m not certain even anthropology, sociology, etc. can defeat, perhaps not even reveal such effective propaganda. Particularly funded at the scale now seen in the US.

  13. If you read my book you’ll see that, amongst other policies, regulations and structural changes, I also advocate a universal dividend of $1000/mo at the age of 18 ($1500/mo for married people with children). With the 50% discount/rebate policy that translates into $2000/mo or a guaranteed income of $24k/yr and $36k/yr for married people with childen. In other words a childless couple would have a guaranteed income of $48k/yr before they did a lick of work and a family with kids would have $72k/yr. Inflation? Not with the 50% discount/rebate policy at retail sale because it is the terminal ending point of the entire economic process for every consumer item which also means it is the terminal summing point for all costs including profit for every consumer item and finally is also the terminal expression point for any and all forms of inflation. Garden variety “monetary” inflation is never more than a low single digit percentage because technologically advanced capital intensive economic systems are very costly which prohibits enterprise from raising their prices very much and thus risking losing market share. If you have 3% inflation you just make the discount percentage to the consumer 53% and everyone’s purchasing power still doubles. Lots of other benefits also are enabled with the new monetary and economic paradigm of Direct and Reciprocal Monetary Gifting.

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