Compendium: Theories of Money (Pt. I of II)

Competing Theories of Money have proliferated in the Western world when the concept of Currency became grew increasingly important since the Renaissance. In addition to the Theories of Value that argued for different ways to determine how much something should be worth, the Theories of Money follow a similar logic but in regards to the Value of a Currency. Here, the real question is the basis by which the Value of any given amount of a Currency should be judged. There have been three primary variations of a Theory of Money.

Arguably the more common method, especially since the death of Bretton Woods, has been the idea of judging the Value of a Currency against the Value of another Currency or a basket of different Currencies. This is tied to the Purchasing Power Parity (PPP) of any Currency.

Bimetallism once determined the Value of a given amount of Gold or Silver based on their Weight and Fineness. The heavier and finer a unit of Gold or Silver are, the more valuable they can be. It was from there that when somebody decided to exchange Gold or Silver for Kapital, the Weight and Fineness influenced how much Kapital could be gained from the transaction.

For Chartalism, or Currencies pegged to Schuld, there have been three common methods and each of them have influenced the methodologies of both Monetarism and Modern Monetary Theory (MMT) as byproducts of post-Bretton Woods conditions. Those three methods are the “Quantity Velocity,” “Cash Balances,” and “Income-Expenditures.”

The Quantitative Velocity method was advocated by Milton Friedman as part of promoting Monetarism. It argues that changes in the Value of a Currency is influenced by the changes in its Price. Any changes are affected by the quantitative magnitude of Kapital in existence. To increase the Price meant depreciation by expansions of the Money Supply; to decrease the Price meant appreciation by contractions of the Money Supply;

The Cash Balances method is similar to the Quantitative Velocity method, except it differs by focusing more on the national income. It claims that the Value of a Currency is affected by the Incentives of Supply and Demand. The Incentives here are related to the quantitative magnitude of the goods and services on demand and also the timing of when those transactions occurred. These Incentives also impact whether there is a supply of idle Kapital in existence or the inexistence of Kapital in the economy that is contributing to the national income of the economy;

And the Income-Expenditures method was advocated by John Maynard Keynes as the Keynesian explanation on how the Value of Currency is determined. Although it believes that the Value is affected by the quantitative magnitude of the Money Supply, it also argues that the Value itself cannot be readily defined by a correlating relationship with its Price as the Quantitative Velocity method implies. Any changes in the Price level are influenced by concurring changes in Income and Expenditures from the Supply and Demand for goods and services.  

Given Monetarism’s relationship with the Quantitative Velocity of Money, it becomes almost natural to ponder over where MMT stands regarding those Theories of Money. This is important since the Work-Standard does not advocate for any of these existing Theories of Money, preferring instead to rely on its own understandings more applicable to the conditions of Socialism as opposed to Liberal Capitalism. I have consulted a threepart series of arguments against MMT that were posited by Nick Johnson, a British developmental economist from a blog called “The Political Economy of Development.” I have condensed the crux of Johnson’s arguments in order to buttress the Work-Standard’s own arguments against MMT.

According to Professor Michael Hudson in his J is for Junk Economics, “money’s main function is to denominate debts” and its “defining characteristic” is the willingness by governments to accept it as payment for taxes or fees. Money can be created by the government by running budget deficits which are spent into the economy, or it can be created by private banks which have been “granted…the money-creating privilege.” Furthermore, Hudson argues that “money is a legal creation, not a commodity like gold or silver” which is given “value by accepting it in payment of taxes and fees”.

This idea is in contrast to Marx who argued that commodity money emerged prior to credit money via its use in the process of exchange and that the state monopoly over money creation came much later historically.

Anwar Shaikh, in his book Capitalism, sides with Marx and against the version of monetary history propounded by MMT, which he refers to as neo-Chartalism. Chartalism is another name for the state theory of money of Innes and Knapp. According to Shaikh, today’s Chartalists dubiously project their version of the state’s relationship to money back for thousands of years in order to reinforce their claims about MMT:

“[T]hey conflate payment obligations with debt, so that blood-price, bride-price and even taxes become debt. Then debt is central from the start, and when the state takes over coinage, state money is treated as a form of debt.”

It is noteworthy that Johnson mentioned the “State Theory of Money” of Georg Friedrich Knapp from the Prussian Historicist School of Economics as being related to the “Credit Theory of Money” of Alfred Mitchell-Innes. Currencies issued by the State are unfortunately issued by government fiat, meaning the only thing backing its Value is Schuld (Debt/Guilt) and the State’s ability to maintain the Value of its Currency. There is a reason why a Fiat Currency is consistently described as being “backed by Full Faith and Credit.”   

What most analyses of MMT do not consider is how well MMT is worthy of preparing the nation-state for life-or-death Total War (like in World Wars I and II) or the overall conditions of “Total Mobilization” (toward a Four-Year or Five-Year Plan, combating Climate Change and Pandemics, achieving rapid technological breakthroughs, and strategic maneuvers that would crush lesser Currencies with Hyperinflation). The implications of the State and Credit Theories of Money on the financing of wars are reflective of how the European nation-states gradually abandoned Bimetallism, then the Gold Standard and finally adoption of the Schuld Standard through Fiat Currencies between the late 19th and early 20th centuries. Schuld, like Gold and Silver, proved more of a hindrance than a benefit to waging Total War, let alone sustain Total Mobilization toward the realization of commonly-shared goals.  

For MMT, when the economy is at less than full employment, and there is therefore economic ‘slack’ or spare capacity, the government should use fiscal policy to increase demand, as long as this does not create undesirable levels of inflation. MMTers tend to argue that fiscal policy should play more of a role in stabilising the economy and achieving full employment than it currently does (although the recent response to the pandemic in the presence of very low interest rates has called forth dramatic fiscal action).

Mainstream economics has in recent decades argued that monetary policy administered by independent central banks should be the main policy tool for stabilising the economy, with fiscal policy playing more of a role when the economy is at the zero lower bound (ZLB) in terms of interest rates, and demand remains insufficient or there is still significant unemployment.

MMTers say that fiscal policy should be used more of the time as a tool for stabilising the economy, and achieving and sustaining full employment. A lesson from recent decades in the case of the US is that relying on monetary policy and worrying (some of the time at least) about the government deficit has led to unsustainable rises in private debt. When the private sector begins to attempt to reduce its debt levels, or deleverage, rather than spend on consumption or investment, this reduces aggregate demand and acts as a drag on the economy, slowing growth and raising unemployment.


MMTers argue that fiscal policy should be used to stabilise the economy at all times and that it is more effective than monetary policy alone. Since the private sector as a whole tends to run a surplus of income over expenditure (and savings over investment) for much of the time, the public sector needs to run a deficit so that net private savings are spent rather than merely leaking from the economy and reducing output and employment. Historically under capitalism, government surpluses have been rare, and have often been associated with private sector deficits and debt accumulation followed by financial crises. So too much of a focus in government policy on austerity and ‘paying down debt’ can be extremely damaging.

This MMT fiscalism is reminiscent of the Keynesian consensus which dominated post-war policymaking in many advanced countries until it was abandoned following the stagflation of the 1970s. It also draws on aspects of post-Keynesian thinking. Post-Keynesians are the more radical leftist followers and developers of the ideas of Keynes himself, and MMT is in some ways a relatively recent offshoot of post-Keynesianism.

The emphasis in MMT is on sufficient government spending to achieve and sustain full employment, and generally keeping interest rates low. In the absence of low policy-induced short term and long term interest rates, it is quite possible that larger budget deficits can crowd out private spending, such as borrowing for investment. This is only really a concern if the economic value created by increased public borrowing and spending is less than the value that would have been created by the private borrowing and spending that it replaces. Some right wing economists might argue that this is always the case, and that government spending is always less productive than private spending. But this is ideological nonsense. A huge backlog of spending which improves decaying infrastructure funded either by ‘crowding out’ private spending due to rising interest rates, or by raising taxes which reduces private spending directly, certainly has the potential to raise productivity and economic performance over a number of years. It could very well ‘crowd in’ productive private sector activity by reducing the costs of doing business and raising investment opportunities.

The implications of MMT being tied to wars is related to how Johnson stated how it does not rely on the usual methods of “borrowing, taxing, and issuing government bonds.” Rather, it relies on the literal creation of Currency on an industrial scale. Here, the concept of Kapital being abstract and divorced from the national economy is reflected when Johnson wrote the following in Parts 2 and 3:

In MMT, the government need not fund increased spending through taxing or borrowing and issuing bonds. It can in theory fund it through direct money creation. After all, MMTers argue, private banks create money in the form of credit. Some of this funds productive investment, but in recent decades plenty has funded financial asset inflation, which has destabilised the economy and increased the inequality of income and wealth. Why should not governments create money to spend on public goods such as improved infrastructure, health, education and training?

Again, for MMT, the constraint on such schemes is the potential for rising demand-side inflation. Once more, it is important to debate the theory and history of inflation to assess the limits on public money creation. Since the 2008 financial crisis and recession, the practice of quantitative easing by central banks has kept interest rates low, reducing public and private debt burdens. But it has largely boosted the prices of financial assets rather than the real economy, benefiting Wall Street rather more than Main Street. Richard Koo, in his books on BSRs, has shown that broad measures of money creation in the US and elsewhere since QE was initiated have grown slowly, since households and firms have been paying down debt rather than borrowing to spend. History seems to show that in this kind of situation, government fiscal expansion is much more effective in generating and sustaining spending when the private sector is not doing its usual job. This does not necessarily support MMT theories as a whole, as Koo’s theory of BSRs is specific to a particular economic context.


MMTers argue that the state can achieve and sustain full employment through judicious policy interventions. But history seems to show that while this may be possible even for lengthy periods, it is difficult to make it permanent. Michal Kalecki, who independently developed his own theory of aggregate demand at the same time as Keynes, argued that one should distinguish between achieving and sustaining full employment. Achieving it through active fiscal policy to expand demand may well be possible, but it would tend to shift the balance of power in the labour market away from employers and towards workers by removing the effectiveness of the sack in disciplining the workforce. Captains of industry and other elites would generally dislike this state of affairs and turn against full employment as a goal of policy, even if it created an economic boom with high business profits. Kalecki made this argument in the 1940s, and it proved extraordinarily prescient in pointing to the abandonment of Keynesianism in the 1970s and 80s.

What MMT seems to neglect is the non-linear dynamics and the political economy of full employment. It attributes a certain passivity to workers and ignores conflict between social groups and classes. Sustained full employment, while it might potentially go a long way to reducing poverty and economic misery under capitalism, may so change society and social relations that powerful interest groups will turn against it. Kalecki argued that if full employment was to be sustained under capitalism, then society would need to evolve towards more consensual arrangements which take account of workers’ increased bargaining power. The economies of northern Europe are perhaps the best example of this kind of social corporatism, in which powerful trade unions negotiate over wages and working conditions with employers and the government. However even these economies have experienced periods of substantial increases in unemployment.


MMT argues that inflation is the main constraint on government policies which expand demand in order to achieve full employment and other progressive social and economic goals. It adopts a mix of demand-pull and cost-push explanations of inflation. Firstly, excess demand when the economy is already at full employment will push up prices and wages. Secondly, workers can bid up wages in response to cost increases elsewhere in the economy which are tending to reduce their standard of living, which can lead firms to increase output prices. If workers respond by pushing for higher wages once again, a wage-price spiral can ensue. Since the late 1970s it has become a goal of conservative policy in many countries to reduce this effect via weakening the power of organised labour, rather than via a more consensual approach.

Based on all of the descriptions given by Johnson, it is tenable to argue that the Theory of Money advocated by MMT is related to the Income-Expenditure methodology of Keynesian economics. Like Monetarism, MMT is fixated on the magnitude of Kapital in existence, rather than the functions of true Geld (Money) in its force and mass as in the Work-Standard. MMT has demonstrated how abstract the concept of Kapital has become under Liberal Capitalism, where it has become possible to create Currency divorced from the everyday realities of the national economy. It is discernible based on the overemphasis that MMT places on fiscal policy to the exclusion of monetary policy, as if to assume that the Central Bank itself is nothing more than an isolated entity at the mercy of commercial banks and financial markets. It is also evident in how in it treats the economic and financial as being separate from the political, where the State is treated no differently than another Individual who is nothing more than the sum of its own parts as a Cartesian Self instead of a Jungian Self that exists as part of a Totality.  

The Work-Standards rejects all of these methods as being epochs of an earlier moment. They are insufficient for the Work-Standard, which requires its own conception of a Theory of Money. Its Theory of Money is one where there is always a Jungian Synchronicity between the financial and the economic and driven by both the State and the Totality–the people of the nation–which is Constitutionally obligated to hold the State accountable. This Theory of Money’s purpose is far more than just ensuring pointless “job guarantees” but a lifelong devotion to Vocational Civil Service to All for All and to become capable of surviving the conditions of Total Mobilization alongside the Figure of the Arbeiter. It never needed the Incentives of Supply and Demand, only the Intents of Command and Obedience from true Socialisms.

Categories: Compendium, Economic History, Philosophy

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