ABOUT MMT AND GOLD
According to MMT (Modern Monetary Theory), there are “four essential requirements that qualify a national currency as sovereign”.
Those four requirements include:
- the National government chooses a money of account in which the currency is denominated;
- the National government imposes obligations (taxes, fees, fines, tribute, tithes) denominated in the chosen money of account;
- the National government issues a currency denominated in the money of account, and accepts that currency in payment of the imposed obligations; and
- if the National government issues other obligations against itself, these are also denominated in the chosen money of account, and payable in the national government’s own currency.
We listed the above requirements and talked about ‘sovereign currencies’ in the article MMT – Variation On A Theme.
But, there is a fifth (important) requirement regarding MMT and a National government which issues a sovereign currency. That requirement is stated quite clearly by L. Randall Wray, who is one of the leading spokespersons in behalf of MMT:
“Strictly speaking, if a country adopts a gold standard or “dollarizes” it does not have what we define as a sovereign currency because it has agreed to exchange its currency for gold or dollars at a fixed exchange rate.”
Mr. Wray goes on to explain that any agreement to exchange a national currency for gold or dollars at a fixed exchange rate negates its status a a sovereign currency because “its obligation really is to deliver gold or dollars in payment.”
Mr. Wray says further “a nation with a floating exchange rate clearly does not commit government to deliver gold or foreign currency at a fixed exchange rate – so meets our definition of a sovereign currency.”
GOLD AS MONEY IS A RESTRAINT ON GOVERNMENT
In its simplest, and purest form, the monetary history of our country and the world was based on the exchange of gold, or money. Which is what gold is: real money, original money.
The use of paper receipts representing gold held in storage was a matter of convenience. They were accepted as instruments of trade because they represented wealth in the form of a historically proven store of value…
“The first gold coins appeared around 560 B.C. Over time it became a practice to store larger amounts of gold in warehouses. Paper receipts were issued certifying that the gold was on deposit. These receipts were negotiable instruments of trade and commerce which could be signed over to others. They were not actual currency but are a presumed forerunner to our modern checking system.” …History Of Gold As Money
The reason for the “fifth requirement regarding MMT” and the status of sovereign currency is to preclude the restraints that the use of gold as money places on a government as regards its spending and money creation; which also limits its power.
In our own country’s history, those restraints and limitations provoked two significant historic actions by two different US presidents:
- In 1933 President Roosevelt issued an executive order “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”.
- In 1971, President Nixon suspended convertibility of the US dollar into gold by foreign nations.
President Nixon’s action confirmed what was already known at the time; that the United States considered itself a sovereign nation and that the US dollar was a sovereign currency.
MMT – UNITED STATES IS A SOVEREIGN NATION
As a sovereign nation, and with the help of the Federal Reserve, the United States government would continue to spend (and lend) money – US dollars – into existence; which is the exact embodiment of MMT…
“unlike a household the state cannot run out of money (and) it can always meet its own obligations in so far as they are denominated in its own currency”
Under current monetary practice, the supposition is that government funding is sourced from 1) taxes, other fees and obligations; and 2) borrowing remaining shortfalls via the issuance of US Treasury bonds and notes, i.e., monetizing the debt.
Modern Monetary Theory says that government spending by a sovereign nation is not limited or delayed by the timing and amount of taxes collected; nor is government debt necessary.
In reality, the US government seems to act as if it already practices MMT in theory; at least as it regards the presumption that it can spend whatever it wants and needs, if circumstances warrant and if desired.
Proponents of MMT are vocal in their assertions that MMT “could work under the right conditions”; and that there are practical constraints and reasonable limits to its effective use which are based on common sense and “targeted” spending.
MMT in actual application, though, might strip away the last vestige of fiscal restraint on a government which has assumed authority to create and spend money beyond reasonable standards, self-imposed or not.
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!