Economic Issues

A Message to the Green Party National Committee and Howard Switzer Regarding Monetary Reality

Recently, the Green Party of Tennessee posted this and also the first reply (timestamped 12:38 PM) to a comment by Sylvia Saadati on that post. My message below is a critical reply to the main text of this comment, excluding the final portion about AMI. It breaks that paragraph up into its component statements for purposes of a more systematic critique. Here is the full quote:

“True, the US should be but is not monetarily sovereign, despite what our Constitution says, the FED Reserve act ceded the money power to the privately controlled banking system which is why we have so much debt and why the concentration of wealth to a few. Reagan did not change the law. That was proposed in 2010-11 (NEED Act HR2990) but never got out of committee, to reclaim our national monetary sovereignty. The links Grumbine provides are just MMT "confusury" (economic double-speak in defense of usury) from what I've been able to ascertain, not fact. Of course, any propaganda must have an element of truth in it and MMT is not a specific thing. Can you provide me with what Reagan allegedly did to reclaim our national monetary sovereignty? If we are monetarily sovereign why do we have any public debt? I believe this subject is vital to democracy and we should not let a bunch of clowns like SG muddy the picture. Read at monetary.org and Positive Money UK if you wish to learn what is going on in that regard. Just a couple of examples. MMT says "Congress creates money when it spends." That is how it is supposed to work, very simple right? But that is a myth, Unfortunately Congress must have money to spend and it borrows the money it spends from the private banking system through an intentionally convoluted system, which is why, along with compounding interest, we have a public debt and why it continually increases. MMT is a banking theory of money as opposed to a monetary theory of money. 

AMI (American Monetary Institute) - Monetary Reform and Solutions to the Financial Crisis

The American Monetary Institute is a publicly supported charity founded in 1996. The real outcomes in society – whether there will be general economic justice or corrupt financial privileges for the few – are usually determined by the structure of a society’s monetary system.

monetary.org”

And here are the component statements and my replies.

“True, the US should be but is not monetarily sovereign, despite what our Constitution says, the FED Reserve act ceded the money power to the privately controlled banking system which is why we have so much debt and why the concentration of wealth to a few.”

My reply:

  1. Congress does not have the authority to repeal the Constitution.
  2. The Fed Reserve Act delegated to the Federal Reserves Banks the power to create Government money as reserves and to issue the currency. But it allowed the Treasury to keep the power to create the paper money the Fed would issue, and the coins for the Treasury to issue.
  3. Congress delegating its authority to the Fed is not the same as its ceding its authority to the Fed, since “ceding” means giving up own ownership of that authority. Congress hasn’t done the latter and still has the authority to constitutionally revoke through mere legislation what it has given to the Fed, at any time. This may not be a political reality, but it is, nevertheless, a legal reality which neither the Fed nor the banking system can change.
  4. You say the banking system is “privately controlled.” But what do you mean by that? Do you mean that the “private banking system” including the Federal Reserve, has the power to create money delegated and revocable by the Congress, at any time? If so, then how do you account for the Board of Governors, certainly a Government agency, rather than a private entity? How can it be part of a “private banking system”?

    And, if it is not, then how can the banking system be “privately controlled” when the Board of Governors, a Government Agency, has the clear authority, given by Congress, to set down the operating rules and procedures for the whole banking system including the 12 regional Fed banks?
  5. When you say “which is why we have so much debt and why the concentration of wealth to a few” I think that is one hypothesis about the cause of the growth of private debt to the astronomical levels we see now. But, I can see another explanation and that is that private debt is so important today because the Congress has legislated fiscal policies that fail to provide most of the American people enough net financial assets through deficit spending to allow households to save 6% or so of GDP every year for the past 35 – 40 years. Had we followed such a fiscal policy household would not have felt the need to incur the bank-related debts they have incurred. Why is your explanation revolving around the “money power” being controlled by “the private banking system” a better explanation than mine?

“Reagan did not change the law. That was proposed in 2010-11 (NEED Act HR2990) but never got out of committee, to reclaim our national monetary sovereignty.”

My reply:

  1. You’re right. Sylvia was mistaken in her attribution of Reagan as responsible for monetary sovereignty as I defined it in my reply to her.
  2. And you’re right that a change in the law was introduced into Congress by Dennis Kucinich in 2010. However, from the MMT point of view, the reform proposed in the NEED Act, was not needed for the purpose of “reclaiming our national monetary sovereignty” since going off the gold standard, allowing our currency to float on international exchanges, and continuing to allow the Fed and the Treasury in combination to create money in the Treasury spending account in order to spend Congress’s mandated appropriations, was enough to do that.
  3. I understand that you don’t agree with this view. But, please explain why you don’t agree when it’s plain that the Congress today has the power, if it likes, to accompany its appropriations bills with an order to the Fed Board of Governors to order the New York Fed to immediately fill the Treasury spending account there with the sum of money specified in its appropriation bills each year. Do you really doubt that is the case?
  4. If you don’t, then please tell me how Congress can still have that power if it is not monetarily sovereign? And if you do, then please tell me how “the money power” in the hands of the “private banking system” could stop this from happening if progressives take over the Congress and the Presidency and wish to pass legislation specifying appropriations bills containing such a provision?
  5.  Are you really saying that the Board of Governors and/or the “private” New York Fed could disobey such a law passed by Congress?

“The links Grumbine provides are just MMT "confusury" (economic double-speak in defense of usury) from what I've been able to ascertain, not fact. Of course, any propaganda must have an element of truth in it and MMT is not a specific thing. Can you provide me with what Reagan allegedly did to reclaim our national monetary sovereignty? If we are monetarily sovereign why do we have any public debt?”

My reply:

  1. The first sentence in the above is just labeling and does not say why “MMT” is “confusury.” Labeling without providing any reasons for the label is a form of invalid argument that is thousands of years old. Its age does not provide any weight to the label used. In other words, if you want people to believe your claim, then you have to explain why MMT is “confused” and “propaganda.” And btw, you’re right that MMT is not a specific thing. It’s an approach to economics that contains many specific assertions of different kinds.
  2.  You’re also right that Reagan did nothing to reclaim our monetary sovereignty. Sylvia, a commenter, who likes what MMT has to say, but is in no way a well-known MMT writer or economist, was mistaken in naming Reagan as the President who did that. It was Nixon who did that, 10 years before Reagan became the President. Her mistake doesn’t constitute proof that “MMT” is “confusury.”
  3.  Lastly, your question: “If we are monetarily sovereign why do we have any public debt?” can be answered simply. We have public debt, because the Congress has chosen, partly out of ignorance, and partly out of malevolence, not to mandate the Fed to mark up the Treasury spending account at the New York Fed whenever it passes an appropriation.

    Many in Congress surely know that the Congress can cause the Fed to fill Treasury’s account with reserves to spend mandated appropriations, but they don’t want to do that because they want to have a continuing rationalization of why they cannot deficit spend to solve many of the problems that beset most of the people and our nation as a whole.

    In addition, since 1996, the Treasury has been given the authority to avoid issuing any more debt subject to the limit, by minting one ounce (1 oz.) platinum coins with whatever face value the Secretary of the Treasury chooses to place on them. By depositing such coins in the Mint’s Public Enterprise Fund (PEF) account, the Treasury could force the Fed to fill that account with newly created Government reserves.

    And following that, the Treasury has the further authority to sweep the seigniorage reserves in the PEF account into its own spending account at the Fed bank (The seigniorage is the difference between the Face value(s) of the coins credited to the PEF and the cost of producing the coins and transporting them to the New York Fed.) So, for example, the Treasury has had the authority since 1996 to have the Mint create a $100 Trillion coin and after depositing it in the Mint’s PEF account to sweep that account for the nearly $100 Trillion of seigniorage that would have been in it. (See this kindle e-book for details: http://amzn.to/Z7kG5q)

    Had the Treasury done that, and used the proceeds to deficit spend Congressional appropriations, and pay off the debt instruments existing in 1996, then all the “national debt” of the US would have been paid back with the exception of those debt instruments that had a longer pay back period than 20 years, a very small amount that I haven’t bothered to look up. So, the bottom line here is that under current law, the Congress and the Executive Branch both have the authority to repay all our “public debt” subject to the limit without issuing new debt at any time or raising taxes one penny over their present level.

    It would be unwise of either of them to either legislate or implement repaying any of such debt before it falls due because that would be inflationary, but that doesn’t change the fact that beginning the repayment without further taxing or selling debt instruments, either wisely or unwisely, is within their combined authority, and does not depend on the Fed itself except insofar as it must obey orders from either to place the necessary reserves in the Treasury spending account.


“I believe this subject is vital to democracy and we should not let a bunch of clowns like SG muddy the picture.”

My reply:

  1. I believe this subject is vital to democracy as well, and I am the Real Progressives designee for Director of its Democracy Knowledge area with RP’s Policy Pillar. So we are both concerned about democracy. But there is a big difference in our commitment to democracy. I don’t think democracy is advanced by arguments using labeling to discredit someone who disagrees. That is neither civil discourse nor rational argument.

    Democracy needs both of those to thrive. Rational discourse can involve naming things for what they are, or “labeling”, but calling someone a clown or labeling a group as full of clowns requires explanation at least and some discourse. Casual labeling without justification isn’t what progressives who believe in democracy ought to do.

“Read at monetary.org and Positive Money UK if you wish to learn what is going on in that regard. Just a couple of examples. MMT says "Congress creates money when it spends." That is how it is supposed to work, very simple right? But that is a myth, Unfortunately Congress must have money to spend and it borrows the money it spends from the private banking system through an intentionally convoluted system, which is why, along with compounding interest, we have a public debt and why it continually increases. MMT is a banking theory of money as opposed to a monetary theory of money. http://www.paecon.net/PAEReview/issue66/Huber66.pdf

My reply:

  1.  Some MMTers do say “Congress creates money when it spends” and when they do that I think they oversimplify to communicate to people who are not interested in the monetary details of what goes on. Nevertheless, the simplification they use in communicating in blogs and presentations to general audiences isn’t what they say to academic audiences.

    In academic circles MMT economists know very well that spending is “funded” by Congressional appropriations in the precise sense that once appropriations are made the Treasury has the authority to and must secure the reserves it needs to spend from the Fed, and then must spend those reserves only according to the dictates of the appropriations bills legislated by Congress.

    So, whether or not “. . . Congress borrows the money it spends from the private banking system through an intentionally convoluted system . . . “ depends on the details of whether the money Treasury spends under Congressional mandates is borrowed from the “private banking system” or not. MMT provides the following explanation of why it is not borrowed money, created by private banks, that Treasury spends.
  2.  Treasury has its reserves in a number of different places. As we’ve seen, it has reserves in its Mint PEF account, and its main Treasury spending account. These two places are at the New York Fed and its reserves in these two accounts are high powered reserves in the sense that they are Government money that the Government must honor in payment of tax debts and that must be used to settle other legal debts, such as court judgments, as well.

    The Treasury, however, also has money in commercial bank accounts, known as Treasury Tax and Loan accounts. The reserves in these accounts were credited to those commercial accounts from tax payments and sales of debt instruments sold by the Treasury Department. According to MMT, the primary way in which the Treasury fills its spending account is to call on the Fed to “transfer” reserves from its commercial accounts to its spending account. Another way in which it can get reserves into its spending account is, as I have said, to sweep seigniorage into its spending account from the PEF.

    What happens using the first method is that, in response to Treasury’s order, the Fed causes the commercial bank depositories to mark down Treasury’s reserve credits in its commercial accounts, and once this done, it then marks up Treasury’s primary spending account. The marking down process is the Fed destroying Treasury private bank reserves in the private sector accounts. And the marking up process is the Fed creating entirely new Government high-powered money reserves in Treasury’s spending account.

    Such reserves are the only kind of reserves that Treasury is allowed by law to spend into the economy. And those reserves also by law can only be created for it by the New York Fed itself because that’s where Treasury’s spending account is. They cannot and are not created by a private commercial bank using money created as part of its lending process.

    What happens with the second method is that the Treasury orders the Fed to “sweep” the seigniorage in its PEF into the Treasury spending account. Here the marking down/marking up process does not change the nature of the reserves involved. The reserves in the PEF account are already Government money reserves, created by the Fed when it credited the Mint’s PEF account. And the reserves it newly creates in the Treasury spending account when it marks up that account with the seigniorage are also high-powered Government money reserves that Treasury can use to spend into the economy including repaying its debt instruments and interest earned by them when its scheduled payments fall due.
  3.  So that’s it! Whenever the Treasury calls on the Fed to fill its spending account with reserves it can then legally spend into the economy, the Fed does the same thing. First, it gets reserve credits marked down (destroyed) from either Treasury’s commercial private sector accounts, or from its Mint PEF account. And second, it marks up Treasury’s spending account with reserves it newly creates that Treasury can then legally spend into the economy.

    So, prior to spending Congressional mandates, and provided it needs more funds placed into its spending account to implement that spending, Treasury acts to get the Fed to create new high-powered Government money reserves in its spending account. It always spends those reserves into the economy and never the reserves it gets either from its Mint PEF account or the reserves it either taxes or “borrows from the private banking system.”

To conclude this critique: as MMT writers often say, neither revenue from federal taxes, nor revenue from federal borrowing finances or “funds” federal spending. How can that revenue fund Treasury spending into the economy when it is destroyed by the Fed before it reaches the Treasury spending account?

What does fund it is the combination of congressional appropriations and the newly created reserves in the Treasury spending account that the Treasury department itself causes the New York Fed to create there through its use of lawful procedures. So, unless one believes that the New York Fed, as well as the other Fed regional banks, are themselves “private banks”, one must conclude that the Federal Government is a monetary sovereign creating its own Government reserves anew prior to spending them into the economy, and that the private banks are not monetarily sovereign.

I know that some critics of MMT, including AMI supporters, claim that the Fed regional banks are private because they are companies whose issued stock is owned by the big banks. But even if one makes that argument and is prepared to explain away the facts that: (1) the private “owners” of the Fed have no freedom to determine whether or not the Fed complies with policies laid down by the Board of Governors, (2) the Fed banks must return 94% of their operating profit to the Treasury each year and use the rest for future operations; and (3) the Fed exists solely at the pleasure of Congress; one cannot explain away the fact that the Fed must (4) obey lawful Treasury orders to fill its spending account with newly created high-powered Government money when it has to spend its congressional mandates.

The convoluted procedures Treasury uses to make this happen are of no ultimate consequence. The fact is that the Fed has no choice in the face of current law and Treasury lawful orders. In the face of these, the Fed regional banks, including the New York Fed, are not sovereign when it comes to creating money.

Whether private or public, neither a Fed bank, nor the Fed’s Board of Governors,  can deny the sovereign will of Congress as it is being implemented by the Treasury. It must create the necessary reserves in the Treasury spending account, whenever Congress mandates spending requiring those reserves, and Treasury pushes the right buttons to force the Fed to create them in its spending account.

So, as progressives, we need to recognize that we ought not be sidetracked by distractions or false causal theories about our ills being primarily due to our economy being based on "private bank debt money" rather than "public bank-sovereign money." In both cases, it's the high-powered public money created by the Federal Reserve System that is at the foundation of the economy.

We do have much too much private debt and much too little equality in widely distributed net financial assets. The primary remedy for that, however, is fiscal policy emphasizing a great deal of Federal deficit spending providing net financial assets to the large majority people who don't have very much of those assets. To get that we need a Congress and an Executive Branch that wants to legislate for public purpose and real solutions to our problems that will benefit most of our people.

So, our problem is getting that kind of Congress and Executive Branch again and throwing people who don't fit that bill out of Congress and the Presidency until we get that. It is not passing a bill to reform the monetary system that will deliver no immediate short-term benefit for the people who will elect us. As the old saying goes: “first things first!”

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