“Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan and Canada are not operationally constrained by revenues when it comes to federal government spending. In other words, such governments do not need taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency.” Investopedia
Of course governments are not ‘constrained’ by revenues. They have always been able to “print as much as they need”.
Modern Monetary Theory is not ‘modern’. Far from it.
In the late eighteenth century, France was deeply in debt. A general lack of capital and confidence had taken its toll and the economy was lacking in signs of activity. Growth was stagnant.
The conditions were such that it would be reasonable to expect a return to better times without interference by government. Unfortunately, that would require patience and restraint by the politicians. Most politicians cannot resist the cries of “do something”. Even if the cries are non-existent, the government will hear them.
A finance committee in the National Assembly in 1790 said that “the people demand a new circulating medium…the circulation of paper money is the best of operations…it is the most free because it reposes on the will of the people…it will bind the interest of the citizens to the public good.”
And what better way to encourage support for printing worthless paper money than to appeal to the French people’s patriotism: “Let us show to Europe that we understand our own resources; let us immediately take the broad road to our liberation instead of dragging ourselves along the tortuous and obscure paths of fragmentary loans.”
Rather than exercising patience and restraint, the French government was headed in the opposite direction. A call to action had been sounded.
There was strong resistance to this effort, but it was not enough to stem the tide of enthusiastic support for it. Fundamental economics and historical experience were ignored in favor of the rallying cries of politicians and others.
The first issuance of paper money in France under its constitutional government was announced in April 1790. The supposed backing, or security, for the paper money was based on confiscated property of the French National Church.
In addition, the notes paid interest of 3% per annum. As such, they were expected to “soon be considered better than the coin now hoarded..” (‘coin’ meaning gold).
Initial effects of the paper money were quite positive, and any ill effects would likely not have been felt to the degree that befell France and exacerbated the effects of a very bloody revolution just a few years later IF the government had left well enough alone.
But, after spending the proceeds, the government again found itself in dire straits, and another issue of paper money was thought necessary. Plaintive cries of resistance were countered with a sophisticated oratory that emphasized the stability and security of the proposed currency.
Also, at this time, there were predictions that paper currency would be more desirable to hold than gold, and that gold would soon lose all its value.
A bill authorizing the issuance of another version of paper notes was passed in September 1790, only five months after the initial issuance. This time the notes bore no interest. The security of land backing was considered highly adequate.
The circulation of the new notes was expected to handily outclass its supposedly inferior competition, i.e., gold and silver. Oh, and by the way, this particular issue of new notes was twice as large as the first.
A third issue was approved in June 1791; and a fourth followed in Decmeber of that same year. Both issues were approved quickly and with much less fanfare and very little obvious opposition.
Part of the reason for less outspoken resistance to the new issues of paper money can be likened to the response of a first-time user of drugs. Once the pleasing effects have been felt and then subside and disappear, the desire for another fix becomes stronger. Also, the effects of subsequent fixes do not yield the same quantifiable benefits as before. Hence, it requires more of the drug, or money/credit to yield similar results as previously recognized.
This is exactly why governments and central banks find it impossible to back away from creating more inflation. So the cycle continues until outright rejection occurs. Or, the addict dies from the cumulative negative effects.
Another reason for the relative ease that accompanied further new issues of paper money by the French government was that the lack of patriotism imputed to opponents became synonymous with treason.
The threat of the guillotine may have deterred noticeable opposition to the new issues, but it did not stop the deleterious effects that descended on France as a result of the deluge of paper money. Prices of everything became enormously inflated. In less than five years, basic necessities such as flour (to cook with) and wood (to heat your home) increased in price by more than one-hundred fold, and in some specific cases, as much as two-hundred fifty or more.
There was one thing, though, that did not reflect anything close to a proportionate increase in price. The wages of laborers by the summer of 1792 were no higher than they were four years earlier.
Makers of manufactured goods stopped producing and laid off workers. Fundamental economic activity weakened and became non-existent. The price of gold in francs went up by a multiple of 288. That is the equivalent of gold going from $1300.00 per ounce currently to more than $370,000.00 per ounce by the end of 2023.
The issues of paper money continued. Speculation and trade in real property and specie (gold and silver) was rampant. There were, however, brief periods of time when the value of the French currency rose.
The long-term decline of the U.S. dollar over the past century is marked by similar periods of stability and an increase in value. But they do not last.
In an effort to support the value of its worthless paper currency, and force the desired economic activity and responses, the French government levied progressively higher taxes against the wealthy. The wealthy were married and unmarried men with various levels of income deemed to be excessive. Sound familiar?
Some of the rich hid their wealth or fled the country. Fines, imprisonment in irons, and death awaited those who refused to accept the worthless paper money in trade or for repayment of existing debts. Price fixing was attempted, too. Remember wage and price controls imposed under President Nixon?
And mobs threatened shopkeepers and store owners by demanding and taking what they wanted. And the mobs targeted anyone who had anything to do with money.
All the while, the French government continued to proclaim the soundness of the worthless paper by pointing out that it was backed by the security of confiscated lands. How often have we been told that the national debt is not a problem because we owe it to ourselves? Or that the U.S. dollar is backed by our productive economy?
France had experimented with paper currency seventy years earlier and it had failed miserably. Those in favor of this new walk on the wild side pointed to the backing of the confiscated lands and also the support of the people under its new constitutional government as factors which would prevent a similar failure. They were wrong.
And when the folly was finally recognized officially, various attempts were made to correct the errors. A new paper money “fully secured and as good as gold” was authorized. The new money would not be backed by gold, however. It was secured by public real estate.
The connection to gold was made by claiming that the new paper money had a value that was fixed at a specific percentage of gold. The claim was meaningless and ineffective.
The amount of the new paper was equal to the total of all previous issues. All issues circulated side by side. Both old and new money sank to about two percent of their original nominal value.
The U.S. dollar today is worth two percent of its former value of one hundred years ago. The French government in the 1790s eclipsed the value of their paper money by a similar percentage in only five years.
Paper money has a history of dismal failure at every turn. Whether it was France in 1720 or 1790; or the United States in our country’s early history; or the Southern Confederacy during the Civil War. We have seen its flaws and failures made clear in Germany in the 1920s, and more recently in Zimbabwe and Venezuela.
The definition of MMT above seems to distinguish between the money borrowed by government as contrasted with money printed. There is no difference.
When the U.S. Treasury borrows money, it issues securities that are I.O.U.s printed on paper. Those Treasury ‘bonds’ and ‘notes’ are just as worthless and irredeemable as paper currency itself.
The bonds and notes become part of the circulating medium of money and purchasing power as soon as they are issued. They are accepted as collateral for new loans of digital money that continue to inflate the supply of money and credit.
And the money that is received by the government in exchange for the Treasury securities that it issues is spent almost immediately and is back in circulation in short order.
The continual issuance of Treasury securities by the United States government meets the definition of inflation. Inflation is the debasement of money by government.
And the practice of fractional-reserve banking exacerbates and compounds the debasement. Inflation never stops.The debasement of money by governments and central banks is ongoing and non-stop.
Governments act and administer according to their own need for survival. They act, in conjunction with their central banks, in their own self-interest.
Today’s intentional destruction of the U.S. dollar has been in motion since the inception of the Federal Reserve in 1913. And it won’t stop until the currency is completely worthless, regardless of how long it takes.
The end result is an economic depression. The effects of that depression will be proportionate to the harm inflicted by the paper currency and will reflect the extent to which fundamental economics have been ignored and abused.
The reason that the end place of all paper money (currency, government bonds and notes, and digital/electronic equivalents of the same) is the scrap heap is because all paper currencies have no inherent or intrinsic value. All of them are substitutes for real money, i.e., gold.
(Historical facts cited in this article are taken from the book “Fiat Money Inflation In France” by Andrew Dickson White)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!