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Modern Money

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Author Info
L. Randall Wray (The Jerome Levy Economics Institute)

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Abstract

All modern economies have a "chartalist" or "state" money, as acknowledged by Friedrich Knapp and J.M. Keynes. In this paper, I examine the "history" of money to shed light on its origins. I also examine in detail the views of those who accepted the chartalist, or state, approach to money, from Adam Smith to Knapp and Keynes, with some discussion of the views of Hyman Minsky and Abba Lerner. This is then linked to Lerner's "functional finance" approach to money and government spending. I next explore the implications of "modern money" for government policy, and show see that much economic analysis reaches erroneous conclusions because it fails to recognize the nature of modern money. The state "defines" money when it chooses that in which taxes must be paid. Government spending is the most important determinant of the supply of base money; government deficits are the most important source of net money holdings. This stands in stark contrast to traditional analysis, for fiscal policy is the primary determinant of the money supply. On the other hand, monetary policy determines the short term interest rate. Because government deficits increase bank reserves, monetary policy is required to offer an interest-earning alternative to excess reserves; essentially, monetary policy consists of sales of government bonds (by the Treasury and Central Bank) to "drain" excess reserves in order to hit the interest rate target established for monetary policy. Thus, bond sales are not a part of fiscal policy, nor are they needed to "finance" government deficits. This analysis then leads to several interesting policy conclusions regarding importance of government deficits and debts, as well as proposals to promote full employment.

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Paper provided by EconWPA in its series Macroeconomics with number 9810002.

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Length: 26 pages
Date of creation: 15 Oct 1998
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Handle: RePEc:wpa:wuwpma:9810002

Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 26; figures: included
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E - Macroeconomics and Monetary Economics

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  1. Hernando Matallana, 2009. "The Struggle Over the Real Wage In the Monetary Production Economy," DOCUMENTOS CEDE 005271, UNIVERSIDAD DE LOS ANDES-CEDE. [Downloadable!]
  2. Strachman, Eduardo, 2009. "Implementing inflation targeting in Brazil: an institutional analysis," MPRA Paper 15131, University Library of Munich, Germany, revised May 2009. [Downloadable!]
  3. William F. Mitchell & Warren B. Mosler, 2001. "Fiscal Policy and the Job Guarantee," CEPR Discussion Papers 441, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
  4. Bertocco Giancarlo, 2006. "Some observations about the endogenous money theory," Economics and Quantitative Methods qf0602, Department of Economics, University of Insubria. [Downloadable!]
  5. L. Wray, 2006. "Keynes's Approach to Money: An Assessment After Seventy Years," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(2), pages 183-193, June. [Downloadable!] (restricted)
  6. C. Sardoni & L. Randall Wray, 2007. "Fixed and Flexible Exchange Rates and Currency Sovereignty," Economics Working Paper Archive wp_489, Levy Economics Institute, The. [Downloadable!]
  7. Eric Tymoigne, 2006. "An Inquiry into the Nature of Money: An Alternative to the Functional Approach," Economics Working Paper Archive wp_481, Levy Economics Institute, The. [Downloadable!]
  8. Mathew Forstater, 2002. "“Jobs for all”: Another dream of the rev. Dr. Martin Luther King, Jr," Forum for Social Economics, Springer, vol. 31(2), pages 45-53, March. [Downloadable!] (restricted)
  9. Marc Lavoie, 2001. "Endogenous Money in a Coherent Stock-Flow Framework," Macroeconomics 0103007, EconWPA. [Downloadable!]
    Other versions:
  10. Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2007. "Cracks in the Foundations of Growth: What Will the Housing Debacle Mean for the U.S. Economy?," Economics Public Policy Brief Archive ppb_90, Levy Economics Institute, The. [Downloadable!]
  11. L. Randall Wray, 2006. "Social security in an aging society," Review of Political Economy, Taylor and Francis Journals, vol. 18(3), pages 391-411, July. [Downloadable!] (restricted)
  12. Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2007. "The Effects of a Declining Housing Market on the U.S. Economy," Economics Working Paper Archive wp_506, Levy Economics Institute, The. [Downloadable!]
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