5. Conclusion
/93/ All in all, what are the important aspects which New Currency Theory (NCT) and Modern Money Theory (MMT) agree or disagree upon? On financialisation, disequilibrism and sector balances, some rapprochement may be possible. MMT and NCT also share a description of how the present system of fractional reserve banking works, including a shared criticism of the misleading understanding of the role of deposits and savings as a prerequisite for credit and investment, as well as a refutation of the textbook model of the credit multiplier.
Even that, though, is not too much common ground, since the assessment of fractional reserve banking comes from opposite directions. MMT considers banks' credit and deposit creation still as a process of leveraging of central-bank base-money (high-powered money). The central bank is supposed to exert control over monetary processes through base-rate and interbank-rate policies. This in turn serves to justify MMT's presumption that modern nation-states are in command of a sovereign-currency system (chartal money). Banks are portrayed as well-intentioned intermediaries between government and central bank, as well as between government and taxpayers.
Basically, MMT sees no structural problem with the present money and banking system, which it believes to be functional and benign. The only reform idea it sets forth now and then is to let the central bank directly buy government bonds, since government and central bank are considered to represent a monetary policy unit anyway.[1] MMT does not recognise any need for monetary reform. Actual problems are not denied – how could they be – but are not systematically analysed either. If problems are considered at all, they are treated in a rather orthodox way, i.e. analysed as financial-market problems or behavioural problems, not as problems rooted in the monetary system of fractional reserve banking.
NCT's analysis is different. There may pro forma still be a two-tier mixed system of sovereign currency and bank money. De facto, however, this has grown into a near-complete banking system. Banks have the de facto monopoly of bank money (demand deposits). /94/ They fully control the entire process of money creation, whereas government, far from being monetarily sovereign, is deeply indebted to and dependent on the banks. The most important function of the central bank has become to be the 'bank of banks', i.e. willing lender of least reserves and last resort in the service of banking interests. Most nation-states may have a currency of their own. The treasuries still deliver coin, as the central banks deliver banknotes and reserves; but, besides these representing the residual part of the money supply, they do this reactively on proactive bank demand. The nations operate on bank money, not sovereign money. The reality of fractional reserve banking has become one of state-backed rule of the big banking industry. Since there is no effective control of the money supply, least of all through money and capital markets, the system is highly dysfunctional and harmful to the economy in that it recurrently creates inflation, asset inflation, financial bubbles, over-investment and over-indebtedness, banking crises and currency crises. Bank money is quintessentially instable and unsafe money.
On balance, MMT turns out to be a new banking teaching rather than the state theory of sovereign currency which it pretends to be. A strong expression of MMT's banking stance is its insistence that all money is credit and debt. MMT even reinterprets the entire history of money in order to 'prove' this―which involves neglect of about 2,600 years of traditional coin currencies which were spent into circulation as genuine seigniorage free of debt. To NCT the false identity of money and credit is the very root cause of the system's dysfunctions. This is a core component of any currency teaching: currency creation ought to be separate from credit and finance.
MMT holds that a sovereign state with its own currency and central bank has monetary sovereignty and must not bother about spending its own money. NCT holds that it ought to be this way indeed, but is not so today. Furthermore, NCT adds an important conditionality to this, which MMT does not care about: ... to not bother about spending its own currency as long as this keeps within the limits of stability and is justified by economic results. Lerner-like rhetoric about functional finance sounds similar, but MMT never makes an effort to explain what those limits are and what the criteria are for identifying when lines are crossed. /95/ MMT leans on sector balances but does not apply to it any criterium of equilibrium, or acceptable disequilibrium.
NCT, by contrast, adheres to the desirability of sound finances and having a stable currency. Monetary reform is designed to achieve just that, including sound public finances at a largely reduced level of public debt. MMT, by contrast, maintains that the idea of sound finances would not apply to public households. MMT thus irritatingly deemphasises government deficit and debt, as well as foreign-account deficit, even reassessing them as benign. Running deficits and debt at the expense of other nations happens as a matter of fact. But no economics so far has declared this to be a positive model case.
MMT's categories of sector balances – public, private, foreign – remain simplistic and actually misleading as long as they do not incorporate in each sector Hudson's distinction between a FIRE subsector, which can indirectly contribute to productivity, and a real-economic subsector which can immediately be productive.[2] Such disaggregation, however, would do away with MMT's pet idea that central bank and government belong in one and the same category; which in turn would question MMT's view of banks as 'intermediaries', and finally the entire presumption of the present system being one of sovereign currency.
Today, monetary sovereignty is something which has to be recaptured from the banking industry. Regaining control of the currency and repossession of the complete monetary prerogative is a task of constitutional importance, a legal imperative, and a fundament of any stable economy.
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[1] Fullwiler/Kelton/Wray 2012 6, Wray 2012 204, 98, 183.
[2] FIRE = Finance, Insurance, Real Estate.