Humans beings invented money from nothing, and yet we can’t live without it. From the evolution of paper money and rise of stock exchanges to the ‘cypherpunks’ who developed cryptocurrencies, money occupies a place in history like no other. As a means assigning an agreed value to natural resources and human inventions, it is irrevocably tied to the social struggles of each historical age.
In Money: the True Story of a Made-Up Thing, journalist and podcaster Jacob Goldstein charts the history of a commodity, exploring its origins and ubiquity before looking at a potentially radical future. Money works, he points out, because we all agree to believe in it. In the future, however, we might be prepared to look at money in a very different way.
“Money may feel inevitable, but it is a choice, or a set of choices,” says Goldstein. The future may lead us to a world without cash and without banks – one where governments print money and give it to everyone who wants to work.
What follows is his account of Modern Monetary Theory and what it would imply for the world.
In early 2019, Alexandria Ocasio-Cortez, a newly elected congresswoman, started proposing massive new government projects – including a promise of a government job for any citizen who wanted one. People asked her how the government would pay for it. Maybe we’ll tax the rich, she said. Or maybe, she suggested, we can just spend the money and not worry about how to pay for it. She wasn’t being glib; she was drawing on a weird new way of thinking about money that had quietly been gathering steam for decades.
It’s called Modern Monetary Theory, and while its intellectual roots go back a century or so, we can start the story in the early 1990s when a hedge fund manager named Warren Mosler flew to Rome to meet with the Italian finance minister. Mosler had noted that he could borrow money (Italian lira) from Italian banks and turn around and lend it to the Italian government for a higher interest rate. It was a free, guaranteed profit – as long as the Italian government didn’t default on its debts.
Mosler had come to believe that most people fundamentally misunderstood how money worked. They were still stuck in a gold standard world. He pointed out that a country that prints its own fiat currency, and borrows in that currency, never needs to default. It can always print more money to pay its debts.
Printing more money can sometimes lead to inflation, Mosler knew. But it doesn’t always lead to inflation. He thought the essential thing for understanding an economy was not how much money the government was printing, but what was going on in the real world. Did everyone who wanted a job have a job? Were all the factories and offices operating at full capacity? Only if those things were true and the government kept putting more money into the economy would it start driving prices up and create inflation.
But what if the economy wasn’t operating at full capacity? In that case, as the government put more money into the economy and started buying stuff, it would drive businesses to hire more workers.
Unlike most foreign investors, Mosler wasn’t trying to convince the finance minister to cut spending. He wanted to convince the minister that Italy could just print money. The minister agreed. Mosler borrowed the lira from Italian banks, then turned around and loaned it to the Italian government. The Italian government paid the money back, with interest. Mosler made millions of dollars for his hedge fund.
In the United States at the time, Congress and the president were raising taxes to fight the budget deficit. Mosler, like a lot of rich people, didn’t like higher taxes. But added to this basic dislike, he now had a bigger theory of why they were unnecessary. Inflation was low; there were unemployed workers in America; rather than raising taxes, the government could simply spend more money.
The very idea that the government needs to tax citizens to spend money is backward, Mosler argued. This money that the government is collecting in taxes – where does it come from? What is the origin of a dollar? A dollar enters the world, Mosler said, when the US government buys something and the US Treasury puts dollars into the bank account of the seller. This is how dollars get out into the world in the first instance. When the government collects taxes, it is just taking back dollars it originally created.
Mosler funded a few fringe economists who were working on similar ideas, and who came up with a name for this way of looking at the world: Modern Monetary Theory or MMT for short.
In the mid-1990s, a young economist named Stephanie Kelton studied at one of the programmes funded by Mosler. She was interested, but sceptical. She wanted to understand how government spending really worked. Not the theory, but the thing itself. She spent months studying the arcane details – reading Fed manuals, talking to people whose job was to move money in and out of government accounts at the Treasury department. Where does the money come from? Where does it go? Her conclusion: the government creates dollars – puts new money into circulation – by buying stuff. It takes money out of circulation by taxing or borrowing.
For Kelton and her colleagues, the implications were huge. They shouted from the rooftops that we could worry about deficits much less, and much less often. With this abundance, they said, the government could do much more. Perhaps most important, they argued, the government could and should offer a job to any American who wanted one. If inflation starts to rise, the government can cool things off by raising taxes to take money out of the system.
But no politician really seemed to go all the way with MMT. That would mean not only saying the government should spend a lot more money, it would mean saying that if too much spending does create inflation, Congress should raise taxes to pull money out of the system and cool things down.
Traditional economists have questioned many of the MMT arguments. Lots of people disagree with its fundamental tenets. But that last point – the idea that we should trust governments to fight inflation – may be the hardest part to swallow.
The way we do money now is undemocratic. Politicians appoint central bankers to control a nation’s (or a continent’s) money. And then, to a large extent, the politicians leave the central bankers alone. If the central bankers want to create trillions of dollars and bail out shadow banks in a crisis, they can.
MMT says it doesn’t have to be this way. Money can be more democratic. We don’t have to throw people out of work to fight inflation. But to do that, we’d have to decide that we trust ourselves – that we trust our elected representatives – to control money itself.
Jacob Goldstein co-hosts Planet Money, a business podcast, and previously worked as a reporter for the Wall Street Journal and the Miami Herald
Money: The True Story of a Made-up Thing is published by Atlantic Books
