Trying to Clarify Modern Money Theory

coinsmedievalModern Money Theory is about how our monetary system works in the complicated real world – with a central bank, government spending of new money, private bank lending leveraged off the government “base” money, and the central bank and government kept separate by complicated rules allegedly to ensure “sound” money.  It is such a convoluted subject that there are about as many accounts of how it works as there are “experts”.  MMT cuts through a lot of that to a story that makes good sense and is quite contrary to a lot of things said by politicians and mainstream economists.  So MMT seems to be a very good thing.

Yet the most accessible book on the subject, Modern Money Theory by L. Randall Wray, concludes with the Chapter What is Money? that I find to be convoluted and confusing.  Much of it is built on the assertion that “goods cannot buy goods”, which I find mystifying.

Recently one of the MMT people, J. D. Alt, posted on the MMT blog New Economic Perspectives.  He was addressing a comment on a previous post, but in responding he used the example of two villages that would like to build a road between them.  This is the kind of simple example I like to use, and it is also an example that illustrates (to me) a confusion that lingers in MMT – that only money emanating from the complicated machinery of modern central banks etc. can facilitate the project.

I immediately saw that Alt’s example could be used to illustrate alternatives that start from (I think) a clearer picture of money.  Specifically, the villagers could do the job without money, or they could issue their own form of money to facilitate the obligations involved.  So I wrote an article in response, in hopes of getting it posted on NEP.

I sent it to Wray, asking if he would post it on NEP.  Short version – he gave me the brush off.  I’m starting from “the wrong end of the horse”, don’t know what I’m talking about, blah blah.  So I’ll post my article here.  I’ll start with the essential part of Alt’s post.

There is another possibility, however, for understanding how the road from village A to village B can be built. Assuming the road-building materials and tools are available somewhere close to the villages—the gravels and shovels and rakes—and assuming the labor needed to build the road is available as well, and furtherassuming the citizens want a road to connect village A and village B, it then becomes clear the only thing needed to make the road happen is enough DOLLARS to buy the materials, rent the tools, and pay the labor.

Given the situation just described, it is absurd on its face to visualize the road-building materials lined up in piles along the intended route, the tools laid out upon the ground in front of the men and women who want to provide their labor—and imagine the work cannot proceed for lack of Dollars. Here we are, ready to go, but all we can do is sit on the ground and WAIT for someone to find the Dollars to pay us. Ho-hum. And if we don’t find the Dollars pretty soon, the labor will just wander away and climb back in the trees where it came from.

But this is, if we could only see it, the very reason Dollars were invented—so we DON’T have to wait.

What do I mean by that? I mean this: it is nonsensical to imagine that the number of Dollars available is what determines what people can accomplish. Instead it is what people can accomplish that determines how many Dollars exist. This is the essential dynamic of Modern Money systems. Modern Money is the unique social invention that enables nations of people—so long as the real resources and citizen’s labor are available̶—to collectively build national goods and services. It has nothing whatsoever to do with the amount of capital the individuals of the society possess at any given point in time (in spite of what Thomas Pikkety tells us.) It has everything to do with what people collectively decide needs to be done, and what real resources are actually available to do it with.

How can this possibly be? How, operationally, can the potential accomplishments of people determine how many Dollars are available to pay them to actually implement those accomplishments? In a nutshell, the answer has four parts:

  1. The people decide to form a nation and become its citizens, agreeing to abide by the rules they, the citizens, collectively impose on themselves as a nation.
  1. The nation (the collective form of the citizens) establishes a Central Bank and a Treasury—and then simultaneously does two things: (a) it issues a national currency (money created by fiat, or “fiat money”) and (b) it imposes a tax on the citizens which can ONLY be paid with the national currency.
  1. Having agreed to abide by the rules (which now include paying taxes) the citizens become willing to provide the nation (the collective form of the citizens themselves) with goods and services in exchange for the fiat money they need in order to pay their taxes. Subsequently, the citizens use that same fiat money as the means of measuring the value of goods and services produced and exchanged privately amongst themselves as well—(i.e. the fiat money becomes the unit of exchange in the nation’s private economy.)
  1. The nation’s Central Bank and Treasury now have the task of continuing to issue the national currency—and collecting it back in taxes—in quantities as needed to match the actual potential and need the citizens have for producing goods and services. If the citizens have an actual need and potential for production for which there is not enough currency, the Central Bank and Treasury will simply issueand spend the required currency into existence by purchasing the goods and services, or otherwise causing them to be purchased. If the citizens have too much currency relative to what they are actually capable of producing (rising prices) the Treasury will increase the currency it collects back in taxes, re-establishing the balance.

Complicated, yes?  Alt makes some excellent points, such as that the amount of work to be done should determine the amount of money in existence, not vice versa.  However he makes the supply of the required money into a saga.  Now here’s my article.

J. D. Alt’s post A Fallacy of Composition creates and opportunity to clarify the nature and role of money, and the conditions that are required for it to work, as presented in Wray’s Modern Money Theory1 (especially Chapter 8) and Alt’s Diagrams for Dollars2.

Alt’s post does make one central point with which I totally agree:  the amount of work we want to do should determine the amount of money there is.  The present pathological system gets this the wrong way around, so the (insufficient) amount of money determines the amount of work done, thus leaving many people out of work even though there’s plenty to do.  (Actually there’s far more money and near-money in existence than we really need, but evidently it’s in the wrong hands and being used for the wrong things.)

However I think MMT can be clarified at a more basic level, the nature and role of money.  I write as a scientist who has been investigating economics for fifteen years3.  Perhaps I am missing something, but I think rather I am not burdened with the many misconceptions of an economics education that I have to unlearn.   These comments grow out of my recent book (referring to the deluded mainstream) Sack the Economists4.  A slightly longer version can be found in the earlier manuscript The Nature of the Beast5.

Alt considers two villages, A and B, whose residents would like to have a road joining their villages.  He supposes that all materials, tools and labor are locally available.  He says “the only thing needed to make the road happen is enough DOLLARS to buy the materials, rent the tools, and pay the labor”.  He then describes the usual MMT formula for supplying money – a centralised government, fiat issue and spending by the government, and taxes that must be paid in official money.

However there are other possibilities, three of which I will illustrate here.  (These should be understood as parables that illustrate points, rather than as having any historical accuracy or as being necessarily practicable for any actual communities.)

First, the job could be done without any money.  People could just contribute their labor, and perhaps materials, to the task.  An example familiar to many North Americans would be a barn raising, practised in traditional communities like the Amish.  However many other traditional communities undertake communal projects, and never have the need of money to do them.

A requirement for this to work is that there be sufficiently strong bonds of trust and obligation with the community.  Such bonds cannot be as strong in large, mobile societies where our innate social behaviours cease to be as effective in maintaining the bonds.  This is especially so in modern Western societies where the neoliberal ideology explicitly denigrates such bonds.  However that doesn’t mean moneyless projects can’t ever be done, or could not be done if we rebuilt stronger local communities.

The second possibility would be for the work to be done by some of the people in the villages, and for them to be compensated by the rest of the villagers.  One way to do this would be for the non-working villagers to issue IOUs for goods or services they could provide, and for these IOUs to be paid to the workers.  The workers subsequently could present the IOUs to their issuers and thus claim goods or services as payment for their work.

These IOUs would effectively be money.  This may be clearer if you consider workers Fred and Joe and non-worker Mary.  Suppose Fred holds an IOU from Mary, but he would rather have a pig from Joe than the eggs Mary has offered in her IOU.  If Joe knows and trusts Mary, he might be willing to accept Mary’s IOU from Fred as payment for his pig.  Joe could then present the IOU to Mary, who would redeem her promise by supplying eggs to the holder of her IOU.

If Joe did not happen to want Mary’s eggs, then he might still trade her IOU for something else, and her IOU might continue to circulate in this way through the community until it reaches someone who does want her eggs.  Then the IOU’s role as money is even clearer.

The third possibility is the same as the second in essence, but it supposes there is a regularised system for issuing IOUs.  Suppose one of the villages has established a Mutual Credit Union6, which will function like a community bank.  Anyone may open an account with the MCU and withdraw some standardised notes that are effectively IOUs to the community:  I, the withdrawer and issuer, owe the community goods or services to the value of this note (say, $10).

The MCU of course keeps track of everyone’s account.  It may have limits on withdrawals and it may charge a fee for the service it provides. (This fee is NOT the same as charging some arbitrarily determined interest rate.  A fee might also be charged on positive balances, which would discourage hoarding, i.e. keep the money from sitting in a liquidity trap, and thus enable the money to do its job of facilitating exchange.5)  When someone sells something (provides goods) in return for some of the notes, they may deposit their notes at the MCU, where their debit balance will be reduced, corresponding to their reduced debt to the community.  In other words an account at the MCU would function much like a line of credit or a credit card.

Now, to get the road built, the non-workers can simply withdraw some notes from the MCU and pay the workers.  The workers can then use the notes as they wish, trading notes with each other or with non-workers.  These notes function the same as the IOUs of the second example, but here their role as money, to facilitate exchange, is quite close to our familiar form of money.


Those are my three variations on Alt’s example.  They enable us to clarify some things about money.  I will call the kind of money illustrated here token money, as distinct from, say, a commodity like tobacco that is used as money.  Token money has no significant value of its own.

The purpose of money is to facilitate exchange.  I have argued elsewhere4 that this ought to be its only function, otherwise we get some of the major pathologies of our present system, such as a malfunction on Wall Street bringing Main Street down with it.  (Briefly, if we supplied money separately from “investment”, as in the MCU example, then an investment failure need not shrink the money supply and choke the business-as-usual economy.  That of course would be a big change from the present system, but once we get over the shock of hearing it we might come to realise its desirability.)

E. C. Riegel7, an obscure but penetrating thinker noted by Thomas Greco6, coined the term split barter for the function that token money performs.  It allows barter to be split into two parts:  I exchange my note for your goods, then you can exchange the note with someone else for other goods.  We do not have to have matching wants, as in normal barter.  This concisely encapsulates the power of token money.

The nature of token money is that it signifies an implicit social contract.  The contract says “the issuer owes the community goods or services to the value of this token”.  The contract thus involves a debt, the issuer’s debt, as is stressed in MMT.  It also involves a complementary claim, the bearer’s claim on goods or services of the community.

There is no commodity backing the value of token money.  It does not need to be backed by gold.  It is backed, in essence, by the social bonds of the community in which it operates, bonds that ensure the implicit contract is fulfilled.

In a larger society, where social bonds are weaker, it may be considered advisable to back the money with force.  This is how our present sovereign money systems are backed – by the requirement that taxes be paid in sovereign money, as MMT explains, a requirement that can be backed by force if necessary.  However in a fairly stable society social bonds may suffice much of the time – most people understand that their cooperation with the system is necessary, and they “do the right thing”.

It might be argued that even in a traditional community social bonds are backed by the threat of force, and so the value of money is also back by force, or by fiat.  I think it is more accurate to say that our innate social behaviours do most of the work, and the threat of force is reserved for bringing into line the few who stray.

I would describe the present sovereign money systems as centralised, fiat money systems.  The MCU described above would be a decentralised system, not requiring a central bank to issue it.  Nor does it require government fiat to maintain its value or integrity.  (“Fiat” means decree, so the fact that fiat money can be used in payment is decreed by a government.)  There is no reason a community cannot decide for itself what the unit of value is, and thus it would not be a fiat system either.  Thus there are more possibilities than MMT usually discusses: centralised or decentralised, fiat or non-fiat.

It is said or implied in MMT that government fiat is necessary for money to have and retain value.  There may be a practical necessity for fiat in a large modern society, but fiat is not central to the nature of money.  The essence of token money is the social contract it betokens.  The question of whether that contract will be fulfilled by the parties involved is a practical question whose answer depends on the nature of the community involved.


My example in which the work is done without money or local IOUs would seem to contradict the claim by Wray in his MMT Primer that production always begins with money.  The latter view is implicit in Alt’s example, where everything and everyone sits idle until a national government is formed and central fiat money is issued.  Then, finally, the villages can get on with their project.

Coming from a farming family, as I do, I know farming neighbours commonly help each other out.  Their attitude is: you just get on and do what needs to be done.  They would just laugh at the idea that the job has to wait until someone supplies them with pieces of paper that get passed around and end up back where they came from.

This claim, that money precedes production, seems to come from the assertion that “goods cannot buy goods”, attributed to Clower, 19658, discussing Keynes.  I confess to being mystified by this statement, and it leads into what I find to be a convoluted and confusing discussion in Wray’s Chapter 8.  Perhaps Minsky9 was correct in his assessment that Keynes did not have all his ideas sorted out, and that The General Theory was therefore unnecessarily confused.  Minsky’s presumption seems to have allowed him to arrive at important new insights.  Perhaps we should allow that the “greats” (Keynes, Schumpeter, Marx, whoever) were still confused about some things, especially regarding money.  I think “goods cannot buy goods” would be one of them.

To take a simple parable from my book, if Tom is good at growing wheat and Jane is good at raising pigs, it makes sense for each to do what they are good at and then to exchange some wheat for a pig.  They gain more value by specialising and then exchanging.  Isn’t that supposed to be Adam Smith’s (far from unique) central insight?  It means exchange is the fundamental economic act.

Without exchange, there are just individual producers, and no economy.  With exchange, there is a network of producers, a community, a society.  In this view, an economy is an emergent property of a community or society, and a society is an emergent property of a group of interacting people.

Direct barter is limited, as we all know, because the barterers need to have matching wants.  A less limited option is indirect barter.  Perhaps Tom doesn’t want a pig, he wants some potatoes from Harry.  He might still accept the pig from Jane, and then exchange the pig for potatoes with Harry.

Historically, grain, tobacco and other goods have been used to facilitate exchange, according to the histories I’ve read10.  We can regard their use as an extension of indirect barter.  Thus I, a non-smoker, might accept tobacco in the hope that I could exchange it for something I do want.  If tobacco is commonly used in this way, then my hope is more likely to be fulfilled.

We might also call tobacco in this role “commodity money”, because it facilitates exchange.  It is not necessary, as Wray supposes, that all relative values of all available goods be known in advance, nor that there be any central authority decreeing tobacco’s use as money.  The relative values will be determined exchange by exchange – a pig for some tobacco, tobacco for some wheat, and so on – just as they are when token money is used.  (And if the tobacco is traded at full value, there is no debt.)

These examples, which seem to have some historical validity, involve goods buying goods.  Tom’s wheat buys Jane’s pig (and vice versa).  A pig buys tobacco, tobacco buys wheat.  So, as I said, I am mystified why this should be regarded as impossible.  (Unless it hangs on the semantics of “buy”, something we usually do with money, but then it would just be a tautology.)

Allowing that goods can buy goods does not mean money is just a “neutral veil”, the delusion of the neoclassicists (Wray, Chapter 8).  The reason is precisely that token money involves debt.  Debt connects the present with the future, when the debt is to be redeemed.  The future is unknown (despite another neoclassical delusion).  Therefore debt brings risk.  That is the key property of token money.  That is reason token money profoundly changes the dynamics of economies, and creates the potential for booms (when too many promises have been made) and busts (when promises can’t be fulfilled).  The resulting dynamics are being explored and demonstrated by Steve Keen11.

MMT has focussed on explaining the role of central banks and governments, and has done an excellent job.  However to get to the basics of money and its role in our society we cannot think only or mainly in terms of the present central fiat money system, which brings all its complications into play, and potentially confuses everything.  If we use simpler, more basic examples of money then things may be a lot simpler, as my examples may illustrate.

1Wray, L.R., Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. 2012: Palgrave Macmillan.

2Alt, J.D., Diagrams and Dollars: Modern Money Illustrated. 2014, Amazon, Kindle Edition.

3Davies, G.F., Better Nature. Better Nature, 2009. Posted,

4Davies, G.F., Sack the Economists, 2013, Canberra, ACT, Australia: BWM Books, 238 pp.

5Davies, G.F., The Nature of the Beast: how economists mistook wild horses for a rocking chair. 2012: Electronic copy available from 233 pp.

6Greco, T.H., Jr., New Money for Healthy Communities. 1994, Tucson, AZ: Thomas H. Greco, Jr., P.O. Box 42663, Tucson AZ 85733.

7Riegel, E.C., Flight From Inflation. 1978, Los Angeles: The Heather Foundation, Box 48, San Pedro, CA 90773.

8Clower, R., The Keynesian counter-revolution: A theoretical appraisal, in The Theory of Interest Rates, F.H. Hahn and F.P.R. Brechling, Editors. 1965, Macmillan: London. p. 103-125.

9Minsky, H.P., John Meynard Keynes. 2008: McGraw-Hill.

10Rowbotham, M., The Grip of Death. 1998, Charlbury, Oxfordshire: Jon Carpenter Publishing.

11Keen, S., Debunking Economics: The Naked Emperor Dethroned? Second, revised and expanded ed. 2011: Zed Books.



12 thoughts on “Trying to Clarify Modern Money Theory

  1. susieq777

    Ooh, an economics porn post – cool. Might have to come back and reread as the budget looms to aid in my sanity. I’m not au fair with the complexities of economics because it bores the shit out of me, being as it is an indication of it’s being usurped by the greedy to make it a wall instead of a bridge, as you’ve so eloquently described here. Thanks for sharing your insights


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  3. Mike Hall

    Sorry, but this is a total fail. You simply cannot say anything of relevance trying to compare a modern monetary & macro economic system involving millions of people, most often living in large cities with two farmers swapping produce.
    LETS schemes might be close to some of what you describe, but these have proved to be failure even at your ‘villages’ scale.
    It seems to me you hanker after some romantic notion of a simple life that has never really existed except perhaps in the fantasies of people who read something like Seymour’s ‘Self Sufficiency’ and decided their lives needed nothing more. Even then, it becomes a effort of gargantuan proportions to totally exclude from their consciousness the origin of everyday items their lives depend on but whose manufacture are a complete mystery to them. Including things like the computer your article was written on and the electricity that magically arrives to power it.
    I am mystified as to why they can do this whilst often paying enormous attention to the ‘holism’ of their immediate natural environment whilst ignoring much of the rest of human activity on the planet.
    Really very ill thought article. Surprising, as you appear otherwise to (rightly) reject the micro foundation ‘representative’ all-knowing agent (etc) based mainstream economics that its adherents absurdly consider ‘macro’.


  4. Geoff Davies Post author

    Mike – what “seems” to you is incorrect. I simplify to understand, not because I want to live a bartering life.

    It is a routine approach in science to reduce a complicated system to the simplest possible version, then to add back the complications to as to understand their effect. There will be emergent phenomena that don’t exist at the simple level, but the underlying properties of money will not have changed, they will just be yielding additional phenomena in the more complicated system.

    Anyway, it’s what JD Alt did, with his two villages, and Wray evidently thinks that’s fine whereas he thinks my version is not. It’s that difference of interpretation I want to understand.


  5. Lyonwiss

    “Money cannot exist without government” is laughable to me. May be “modern” in MMT means “with government”. But this still doesn’t help with understanding “money” as in “ancient money”. Money is money, modern or ancient. MMT to monetary economics is perpetual motion machine to physics.


  6. Lyonwiss


    “…everything will be clearer…” – yes, that MMT is badly misguided. Even the title of the article is naive “ME/MMT: The Currency as a Public Monopoly”. On the contrary, currency is public slavery, used to rob and enslave ordinary citizens. The conclusion of your linked article reads:

    “MEMMT presumes the role of government is to establish and sustain public infrastructure for public purpose, and that the currency is a tool of government for the promotion of public purpose. Accordingly, what MEMMT offers are fiscal and monetary proposals that sustain employment opportunities for anyone willing and able to work, and that optimize real terms of trade, all in support of real standards of living.”

    It’s all academic nonsense. The public infrastructure in the US now has never been worst relative to government spending. Take a look at many US cities e.g. Detroit – they are in shambles. Currency has been “a tool of government for the promotion” not of public interest, but special interests such as big banks and big business, creating increasing wealth inequality and hidden unemployment.

    In fact, the US government did and already does “what MEMMT offers” as “fiscal and monetary proposals”. Trillions of dollars of quantitative easing and Obama fiscal stimulus, funded with the fiat money that MMT loves to throw around, have produced negative one percent GDP growth in the recent quarter.

    The standard of living for most people in the US has been falling for years, with record numbers without full-time employment and record numbers on food stamps. The US government has been pursuing MMT-type of monetary Keynesianism which will lead soon to economic collapse:


  7. Thomas Colignatus

    Dear Geoff,

    (1) I would equate token and fiat money. (a) An IOU by a private person also has a “decree” by that private person, (b) Money by government also has a token quality, and not just the purpose of collecting taxes. Thus, I use fiat money also in the sense of token money, though the relevant case is government fiat, see my paper “Money as gold versus money as water”:

    (2) I understand “goods cannot buy goods” as a tautology indeed. The word “buy” presumes the use of money and the storage of value by means of money. Otherwise one uses the word “barter”. It is a real pity that such confusions are generated, it is wholly unnecessary and creates a lot of needless work.

    (3) The idea of using that village to understand how fiat / token money works is okay up to some level. Once you are up to the regional level or the modern economy, then you arrive at the mechanism that investments indeed can be blocked when the money isn’t there. Bank credit is no longer sufficient nowadays and we need National Investment Banks (see above paper).

    (4) I am amazed that Wray did not provide you with these answers. I haven’t read his book but if some chapters are unclear then you should welcome your criticism and use it for a next edition.




  8. johnhenry

    Wray was right to brush you off until your comprehension of MMT is more sound. Early in your article you present your main beef: ” This is the kind of simple example I like to use, and it is also an example that illustrates (to me) a confusion that lingers in MMT – that only money emanating from the complicated machinery of modern central banks etc. can facilitate the project.”

    MMT explains how money creation *does work*…not just in the U.S., but in any sovereign country that issues it’s own currency. Our laws governing money creation, bank regulation, etc are just as unnecessarily complex as the rest of our laws. Due in part to to the fact that, like our body of laws in general, many are leftover from decades past(gold standard era).

    I’ve read the MMT literature and to me it’s clear that just because the theory accurately describes the current complicated machinery of modern central banks, that does not necessarily mean it *condones* the complexity, it merely describes it. As Wray often reiterates, anyone can create money, the problem is getting it accepted. This is perfectly in line with your sentiment that money *can be* created by those (villagers) who’d like to create it to achieve their common purpose.

    Your article *explores* some different ways the villagers could choose to govern themselves and provide for that common purpose. I don’t see anything in those examples that conflicts with MMT, despite your perception of a conflict.


  9. allcoppedout

    MMT and Positive Money have been around in one form or another for 100 years – Knapp, Weber, Soddy and even some industrialists and BoE people. MMTers don’t take critique well. I’m reminded of the cold fusion stuff – there’s some really bad work about hardly admitting the long history and with no advance on providing the cheap muons needed to make the process work. We don’t need the debt money or the banks, but I suspect getting rid of them equates to ridding ourselves of the Mafia. The world of power needs more discussion to expose more than just the money ideology. I suspect MMT hasn’t worked out what a radical threat to inheritance, military domination (a key hidden feature of neo-classical fanatics), work ethic and much more that it must become. Economics is a religious control fraud (akin to Bill Black’s constant warning on ‘hollowing out’). MMTers may be unconsciously copying much from the old priests and a positivistic notion of science as value-free. “Money” may need much more analysis than these ‘theories’ have given it, much as cold fusion chemists should have spent more time with some very basic physics.

    The layman may be shocked that 97% of money is created as debt by banks, that tax doesn’t fund public spending – but this is as far from science as ‘earth, wind, fire and water’. As scientists, key data is that road ain’t getting built, key questions whether money has anything to do with this, economics reasoning or a poison oracle … and soon we are nihilistic heretics. MMT is being sold as a turnkey franchise in monetary policy and its owners are after followers, not questioners. You ain’t much of an economist Geoff – but this is a compliment. You might wonder what money would be if we couldn’t spend it – easy enough – and then work back to some new notions of what it is, how this is supported, by what and so on.



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