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Is MMT irreconcilable with NCT and Sovereign Money?

February 13, 2015

It is unfortunate that the advocates of MMT (modern monetary theory) and various monetary reform movements including  NCT (new currency theory) and Sovereign Money misunderstand each other’s positions. There are important truths in each viewpoint, and I do not see a necessary contradiction between the main thrusts of their respective stories.

A very interesting paper published in Real World Economics Review [1] by Prof Joseph Huber – a primary advocate of NCT – takes MMT to task on several matters, even though he agrees with some of their analysis.  In my opinion Huber’s primary criticism of MMT is unjustified and the assertions and arguments he has given in this regard are flawed. To critique Huber’s paper  in detail would require considerable effort, however I would like to draw attention here to one section where his assertions struck me as being obviously incorrect.  Let me quote the section:

“ Don’t let yourself be fooled. The biggest part of government expenditure is funded by taxes. Tax revenues represent transfers of already existing money. The money that serves for paying taxes is neither extinguished upon paying taxes, nor is it created or re-created when government spends its tax revenues. In actual fact, this is all about simple circulation of existing money. “

The MMT position that the government injects new money into the real economy when it spends, and withdraws money from the real economy when it taxes and borrows, implies that Treasury’s general account with the central bank (CB) is not actually composed of money at all and is therefore merely an operating account.

This rings true because it is not difficult to see why the credits held in Treasury’s general account cannot be regarded as money, in any sense of the word.  One of the characteristics of an entity which is entitled to be called “money” is that it is used by a set of marketplace players and may be loaned and transferred between those players.  Thus, for example, the credits that banking institutions maintain within their CB accounts (reserves, or exchange settlement funds) must be regarded as a form of money because – apart from satisfying the usual criteria of medium of exchange, store of value, and unit of account – may be loaned between those players and directly transferred between their respective CB accounts.  However the credits held within Treasury’s account with the CB are never loaned out or transferred to any other institution under any circumstances.  When the central government spends, new bank credit money is created by the payee’s bank and matching new reserves are created in that bank’s CB account.  Reserves are not transferred, because the definition of reserves excludes Treasury deposits.

[1] <>

John Hermann


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  1. One can define a spade, a diamond – but it’s still a spade. To claim that the TGA is not part of the definition of “reserves” is a meaningless argument. It exists within the reserve circuit. Of course it is not used for interbank loans, its the TGA account and that would be ludicrous. Transfers from the TGA to bank reserves is very real. Payments ARE made from the TGA account. In plain English from the Treasury’s website”

    “The TGA, also known as the Federal Reserve Account or the U.S. Government’s checking account, is used by the U.S. Treasury (Treasury) to make interest and redemption payments on Government obligations and to pay Government checks and other items drawn on this account”

    • Thanks to pslebow for these comments. I am well aware of the thrust of the argument just made, and it has been made by others. However I do not believe that this is a mere exercise in semantics. It certainly seems at first sight that Treasury credits are interchangeable with banking reserves. Three points need to be made here: (a) Treasury is not a bank and therefore does not need reserves (this has been acknowledged by pslebow), (b) unlike commercial banks, the federal government creates net financial assets when it deficit spends into the real economy (by contrast the Fed never creates net financial assets when it injects new reserves into the real economy – it either exchanges one asset for another asset or it creates both an asset and a liability of equal magnitude), and (c) Treasury securities may be thought of as a form of “broad” state fiat money, and banking reserves a form of “narrow” state fiat money. Taking into consideration the conjunction of these three features, it may be argued that the marking down of the TGA when Treasury spends is a rather sterile accounting exercise. A balance sheet (or operational account) is not the same as a transaction account, because for every bank as well any sovereign government its equity is not a form of money. Therefore money is not transferred when these institutions lend or spend into the real economy. But rather, new money is created in an account of the payee. And when the government taxes, money is destroyed from the real economy and the banking reserves that tag along with that money are also destroyed.

      • I appreciate your explanation but believe your distinctions are again, definitions. Aside from the arcane Fed/Treasury dance, there are real practical consequences and conditions which must be met before spending can occur. One of those is that spending can not exceed tax revenues plus money borrowed from the private sector. It may be laundered in the process but that’s what the statutes say. Having said that, the Treasury could create money as a pure asset (as it does with coins and according to Joe Firestone and other MMT proponents) but that would require an act of congress.

        It may be a “sterile exercise” but Treasury still must go through the motions with taxes entering one account and an equal amount of spending from the TGA leaving and entering the private sector as real money. To say the asset is created when the government spends ignores the legal basis that authorizes the government to spend based upon revenues collected. ALL transactions except bills and coins involve keystrokes.

        The concept of money “transfer” is an archaic holdover with images of Brinks armored trucks, as you well know. I’m not sure why you feel the need to bring in concepts such as narrow or broad money, operation vs. transaction accounts. These are all inside the “functional” black box. Its the inputs and outputs that have any practical meaning.

        Is it legally possible that the government can spend without the certainty that taxes recorded and the money borrowed to make up the shortfall will equal those expenditures? If so, give me instances.

  2. Over one financial year, federal government spending will equal taxation and other receipts plus Treasury securities issued. And irrespective of whether those securities are issued to the private sector, the public sector, or the central bank.

    It may be argued that money borrowed from the private sector by a sovereign government (one which creates and issues the nation’s currency), is not really a debt at all, notwithstanding that each government security has a date of maturity. Because – in the aggregate – such “debt” can always be effectively rolled over without difficulty (more securities can be issued as and when required to make up any shortfall), and the interest can always be paid without difficulty. The interest paid does not come from tax receipts, contrary to popular opinion. An aggregate debt which can always be serviced and never needs to be repaid is not really a debt at all. Moreover it can be regarded as a form of money. The other side of the deficit spending (which leads to the issuance of those securities) is the acquisition of a non-government financial surplus. The private sector requires such a surplus in order to save, invest and spend, and for the economy as a whole to prosper. As evidence of this assertion, the history of federal government budgeting reveals that attempts to run budget surpluses have always been followed by recession.

    The ability of a sovereign government to borrow directly from its own central bank (i.e. to have a line of credit) has been an established practice in countries other than the United States. And even in the U.S., there are ways of by-passing the existing legislative prohibition on direct borrowing – in order to achieve the equivalent of direct borrowing – if and when the need for doing so arises.

    • (Looks like my reply did not get received so I will try to recreate)

      I believe we are talking past each other – doesn’t help with understanding the differences.

      I understand that you are making the point that a government such as the US does not “need” to tax in order to spend. My claim is that currently, by law, the amount spent must equal the amount borrowed plus taxed. To achieve your vision would require legislation to either create a Platinum coin as proposed by Firestone and Kelton, or a more straightforward creation of fiat money as as an asset of the Treasury (as coins are) as proposed by the Chicago Plan, Frederick Soddy, AMI, Yamaguchi, Huber, etc. If this is not so, please explain why.

      MMT holds contradictory positions on banks depending on who you talk to and the context. On one hand Randall Wray and others claim that banks must be severely regulated and small post office banks or public banks are preferred. On the other hand, they scoff at the notion that a democratically appointed monetary commission can efficiently provide money in the economy where needed and banks, through the free market are the best route to take. MMT completely agrees with the notion that banks create most of the money in circulation but hedge when pressed by claiming that money is credit and not real money. If its not real, then why not donate your retirement savings and checking account. It is also curious that if, as MMT claims, the Fed creates the money or congress does or some other nebulous entity, how is that banks also provide 97% of the money in circulation?

      These dead ends, bifurcated logic and ambiguous semantics is why MMT is having such a difficult time gaining traction.

  3. Several points in response to the latest statement by pslebow:

    1. I did not say that a government does not need to tax in order to spend. Taxation is the usual route by which a lid can be kept on inflation, which would otherwise run away as a result of government spending.
    2. Irrespective of anything the law proclaims, spending must equal taxing plus borrowing – as a matter of simple logic.
    3. Not sure what is meant by “your vision”.
    4. State fiat money is being created all the time, and there is no need to advocate exotic instruments like platinum coins.
    5. I do not agree with everything that Randall Wray states or claims. In particular I do not accept the validity of the Mitchell Innes credit theory of money, Nor do I think (contrary to Wray’s claim) that this credit theory is essential to the main thrust of MMT. However the Knapp state theory of money is.
    6.The distinction you make between a monetary commission and a central bank is unclear.
    7. Not sure what you mean by “real money”.
    8. In the contemporary world, a central bank (in the U.S. the Fed) does not create most of the money in circulation, it creates state fiat money (banking reserves plus currency) – which amounts to only a small fraction of money used within the economy.

  4. OK, I mistook your position as supporting the MMT talking points. MMT claims that taxes do two things: drive the currency and temper inflation. Your comment that taxes are destroyed, however, is not effectively accurate. Taxes, because they must be recorded in the TGA account, and because all spending must come from that account, are effectively circulated back into the economy for public purpose. Its redistribution. We may not agree with how the money is redistributed.

    I’ll withdraw the “your vision” statement because, again, I lumped you in with Wray, Kelton and Mosler.

    Please explain in detail how “state fiat money is created all the time”. Who authorizes it? Who signs the document for the transfer of that money? What account receives the money? The reason I ask is because if you go to the Treasury website, all the accounts are meticulously enumerated.

    A monetary commission is an advisory body that congress has set up and agreed to abide by its recommendations on spending limits. It does not in any way determine fiscal policy. It also has the power to authorize the Central Bank to create fiat money for yearly distributions to the States based upon population and to lend to banks if there is a demand for loans over and above what the public is willing to provide as investments. A Central bank holds the Treasury’s accounts and oversees the clearing of electronic interbank transfers, etc.

    Real money – again, MMT attempts to downplay the money created by bank lending as not being real, but rather merely credit. The claim is that money created is a net zero since it is repaid and destroyed. If you are a scientist you know that one can charge a capacitor that will, overtime, discharge. Until it does however it can do quite a bit of real work. That initial loan or credit agreement is completely divorced from the money it creates as it propagates through the economy.

    I don’t understand what seem like contradictions between your point #4 and #8. Only the Mint can create coins and the Fed can create bills – but the government can’t live on coins and currency – so what’s the point?

  5. Further responding comments:

    1. The TGA account is a post facto record of the government’s spending, taxing (and other receipts), and borrowing. The TGA credits are not a form of money and cannot be transferred anywhere as such. For that reason it may be thought of as a balance sheet, but not a transaction account.
    2. State fiat money (currency and banking reserves) is created by an agency of the central bank (CB). It is created out of nothing when the CB (a) engages in monetary policy operations, including QE (b) lends to banks, (c) exchanges reserves for currency, when banks have more currency than they require – and vice versa when banks have less currency than they require to meet the needs of their depositors, (d) accommodates government spending by providing (creditary) reserves to the payee’s bank, (e) accommodates government lending (same process).
    3. I am unfamiliar with the existence and mode of operation of a monetary commission in the U.S.
    4. Bank credit money is real money because it fulfills all of the requirements for an entity to be described as money. It is true that it may be regarded as a proxy for currency, because a depositor may demand to have a withdrawal paid out in currency.
    5. I see no contradiction between #4 and #8.

    • 1. All bank accounts are records. The Treasury is authorized and required to make payments drawn on the appropriate TGA sub-accounts. Your attempt to distinguish between a “balance sheet” and “transaction account” really has no meaning in the context of my statement. The balance sheet must balance with taxes and borrowed money on one side, government expenditures on the other.

      2. Reserves never circulate in the real economy – so why are you even bringing this up? There is no correlation between reserves and the money supply in the economy. Reserves only serve for clearing purposes and for very weak control of incentives for bank lending and interest rates.

      3. Read the NEED Act sponsored by Kucinich in 2012 HR2990. Also, Joseph Huber’s latest book “Sovereign Money” is a very clear description of the current monetary system and how it should be changed.

      4. Agree with that

      5. The state fiat money you are referring to are reserves, liabilities. The Platinum coin is created as an asset of the government (as coins are today) and ultimately of the citizens of the government. That fiat asset, if created, would contribute to most of the money in circulation unlike the fiat money you are referring to.

  6. You are entitled to your opinion and this will be my last comment, as you seem to have your mind made up and are becoming antagonistic so there is no point in continuing this dialogue.
    1. Depository (or transaction) accounts are more than records — they contain money. However a balance sheet does not contain money, as that word is commonly understood. It may be defined as a statement of the assets, liabilities, and equity (or capital) of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period. A balance sheet generally changes and fluctuates over time. And importantly the entries within it do not satisfy any definition of money. For an entity to function as money, it must (amongst other things) be accessible to, accepted by, and used by a marketplace of players for transactional purposes and for paying debts and taxes.
    2. Reserves (exchange settlement funds, ESF) and bank deposits tag along with each other with every transaction involving banks. As the money supply expands, banks need more reserves in order to accommodate the increasing volume of cash withdrawals of their depositors (i.e. currency held by banks is basically interchangeable with ESF) and to some extent the transfer of deposits to the custody of other banks as the depositor spends. Some countries have no reserve requirements (the US is not one of them), but whether they do or not is irrelevant to the reason why ESF are required. It is inconvenient for banks to settle their accounts with each other using truckloads of cash every day.
    3. I have read some of the writings of Huber, and I do not agree with everything he has stated. I note that his qualifications are as an economic historian, not as an expert in accounting or financial practices.
    5. The platinum coin idea is interesting, but I do not think it will ever come to pass.

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