Modern Monetary Theory part 1: currency debasement

MMT advocates currency debasement. Proof of this is given by the MMT proponents (the ‘MMTers’) themselves by their proposing the use of taxation to then control inflation.

That is the very first point about MMT that should be grasped. Currency debasement occurs by ‘printing money’. The MMTers say that the Government monopoly on the currency issue means it can print money to finance its own expenditure. Then tax can be used to control inflation.

You may have seen this written as the breakthrough idea – that Governments actually are not bound by the need to finance expenditure via borrowing and/or taxation. The deficit doesn’t matter, they say. This is meant to be the whole new (hence ‘modern’ nomenclature) understanding. I hate to pour cold water on the naming of the theory, but currency debasement is not new or modern. It is as old as currency itself. From shaving off the outer thin layer of the coinage in Roman times to melt down the silver while the coin retained its face value, to printing counterfeit bank notes, to quantitative easing – currency debasement has been a problem ever since day 1.

To explain why the MMTers want to be able to print money (in fact, it is all done electronically these days), you need to understand what value money has, or rather, what value people believe money has. Consider the following hypothetical case: There is a society where the money supply is $1 trillion. It is held in coins, notes, bank deposits etc. Now, the Government decides to double the quantity of money to $2 trillion. It is to be done on one day – all money balances are to be doubled, all coin and paper notes doubled in quantity and distributed to the holders all at once on one day. The money supply doubled and the relative share of the money supply in the hands of the people remained the same. There was no more productive land, or labour, or technical know-how, or bread or guns or butter or Tesla cars or yachts. The people knew that they were no richer or poorer by having double the money because the value of the monetary unit halved, while the quantity doubled and hence prices doubled.

In the above case, nothing has actually changed other than the unit of account. So that would not be of any use as a government policy to raise living standards. Clearly, this hypothetical case study of printing money is not what the MMTers actually want. They want the printed additional money to retain the value of the current money. This is achieved by stealth. Since it is impossible to double the money supply instantly, as in the case study, an increase in the supply filters through the economy over time. The value of the first extra dollar is the same as how people value all dollars. The second one loses a fraction, and so on, until eventually, the community gets to realise the value of money has fallen, prices adjust and we move on. But the first user of that first additional money was stealing from other people – using counterfeit money is stealing, right? They passed it off to buy goods and services as if it had the same value as existing money.

Money does not create wealth. Therefore, printing more of the stuff does not create more wealth.

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