Job Guarantees aren’t all the same

There’s been a number of articles I’ve read over the last few days on what we should do and what has been done in regards to people’s employment and well-being.

This article on giving rooms to the homeless reported by the BBC has shown the power governments hold and that it is not a lack of capacity to solve these issues but a political and collective will.

With reports that unemployment could reach more than 2 million people as a result of covid-19 lockdown and corporations standing down staff in the 1000’s we have calls for basic incomes and ‘jobs guarantees’ that lack commitment to an understanding that unemployment is a structural issue caused by a lack of spending in aggregate and a system of full employment as envisioned under the UN Charter of Human Rights, which states Article 23 states (1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment, and what the Civil Rights movements fought for, a Job Guarantee. It is concession to the neoliberal orthodoxy that Full Employment would be desirable but it is not possible. The orthodoxy has conceded that ‘financing’ such a goal is not an issue, with governments in many countries doubling the unemployment benefit despite calls of it being unaffordable and announcing other spending measures. It is clear currency issuing Governments face no insolvency constraint and financing of all currency issuer spending is an appropriation bill through the relevant legislature. Even CNBC admits it.

There’s a number of macroeconomic arguments and social arguments we can use in favour of a Job Guarantee. The term has recently been used to characterise something that it is not.

The United Workers Union recently called for

A jobs guarantee to be upheld by all employers; no layoffs during this time even if shifts are unavailable. Workers to resume work when shifts are needed again.
– An income guarantee payment of $740.80 per week (minimum wage) to everyone except those covered by the jobs guarantee, or others who have not been financially disadvantaged by COVID-19.

The latter is essentially a basic income for anyone with out employment while the ‘jobs guarantee’ call is a commitment that nobody is laid off. A call to continue to have these wages subsidised is conceptually the equivalent of paying an unemployment benefit at someone’s income or percentage there of. For the purposes of this crisis, it is a call to avoid income loss for workers that are stood down and hopefully they have employment to return too.

The call for wage subsidies is a sensible idea, especially during the cover-19 crisis as spending retracts. I would conceptualise it differently and call it a jobseeker payment (accessible to workers who have been stood down) at a replacement wage, for those on low incomes there would have to be a minimum payment. I would advocate that after the crisis anyone unemployed and seeking work should receive an unemployment payment at their replacement wage for a period of time while they sought another job.

Taking note of the basic income proposed, in the absence of a full employment policy, it is effectively a subsidy for low paid , shitty work. If you can only manage to scrounge a few hours a week and the rest of your income is ‘topped up’ by a welfare payment, we as a society are forgoing Full Employment and allowing capitalists to profit from precarious working conditions and low underpaid work. Where will jobs come from for those on a subsistence living that desire to work?

The phrase ‘jobs guarantee’ is not the same as a Job Guarantee which is an unconditional offer to anyone and able willing to work at socially inclusive living wage.

I’ve written about Full Employment and The Right to Work movement in the linked blog posts and here I hope to further explain a Job Guarantee as envisioned within a Modern Monetary Theory framework and further expand on the linked posts.

The Job Guarantee is a voluntary transitional program that is designed to create employment to suit the individual and work is there to fulfil a public purpose. It works alongside a national skills framework and the aim is to aid the JG worker to find higher paying employment. It allows statisticians to assess what skills are in what areas and assist policy makers in creating industry policies. It is not there to take away work from the mainstream public sector.

Inflation

A Job Guarantee is first and foremost a replacement for the Phillips Curve. In short the Phillips curve is the trade-off between unemployment and inflation and there is a conjecture that as unemployment rate falls, the general price level will increase. Today that is discussed as the Natural Accelerating Inflation Rate of Unemployment (NAIRU).

MMT looks at the Phillips Curve and identifies the unemployed as a buffer stock of unemployed to discipline the rate of inflation. It replaces it with a buffer stock of employed as an inflation anchor. Once in operation the JG pool would serve the same function as a NAIRU but without the social and health consequences unemployment brings. It is effectively a Non Accelerating Inflation Buffer Employment Ratio (NAIBER)

There’s a lot of misunderstandings to inflation and its causes within the public discourse (and even amongst academics) This is an attempt to give inflation an understanding to lay person terms and how a JG serves to discipline it.

When I say inflation I am talking about something very specific, that is a continuous increase in the general price level. The JG serves to discipline demand-pull inflation, so for the purposes of this discussion we will ignore cost-push. You can think of demand pull as spending ‘pulling-up’ the price. One off price rises are not inflation but they may lead to inflation if something does not ameliorate the conflict between wages and profit.

You need to appreciate that there is a distributional struggle [Conflict Theory of Inflation] over national income (GDP) between labour and capital.

We can view this conflict as perhaps leading to wage-price or price-wage spirals. As workers bid for nominal wages, capital seeks to maintain its profit and may increase prices and/or lay off workers to decrease costs as prices increase workers bid for more wages until the conflict is ameliorated.

Any Marxist will tell you, as well as an offical in the RBA that we cause unemployment to discipline the inflation rate. (NAIRU approach) The RBA would use wanky terms like adjusting aggregate demand (total spending) and they morally justify it to themselves by adhering to natural rates of unemployment and fear mongering over (alleged) a threat of inflation.

The JG is a buffer stock of employed that releases the JG worker when a better offer is made. It serves as a mechanism to ameliorate the conflict while maintaining price stability and full employment. It can not be inflationary as there has been no counter offer made once the worker is released. Purchasing workers from the bottom of the market can not be the source of inflation either as they have been rejected by the market. What purchasing the unemployed does is set a floor for wages.

The JG is an automatic stabiliser that adjusts spending levels to ‘loose’ full employment and it targets directly where the spending is needed (the unemployed) . It is described as ‘loose’ because ideally you want the JG pool as small as possible as we seek better employment opportunities for those workers.

The JG sets a floor for wages. If you think about the current floor for wages, it is $0. If you’ve been rejected by ‘the market’ the bid for your labour is zero. We then have pernicious welfare regimes that punish people into forcing them that take the shittiest job and the lousy wage and often risk their own lives! A JG, set at a socially inclusive wage, eliminates this as well as eliminating underpaid socially exclusive wage levels, it matches the desired number of hours demanded by the labour force and sets a living floor for wages. It effectively becomes the minimum wage and private employers are forced to compete with the JG.

Once the JG is in operation as workers leave the JG pool total spending increases (but government spending declines) as they leave the JG pool for better work. The reserve happens when workers enter the JG pool. Total spending decreases (Government spending increases)

The Social aspect of a Job Guarantee

There has been literature since the 1930’s on the ill effects that involuntary unemployment brings on the individual. This includes:

– loss of income
– impacts on mental and physical health
– deteriorating skills and loss of skills
– lack of motivation/self esteem
– family/relationship breakdown
– poverty for those reliant on workers income
– results in other social issue (e.g homelessness, increased crime etc…)

A Job Guarantee is designed to create work for the individual, rather than find a job that doesn’t match the skill set of the unemployed. The work would be of public benefit and assist the JG worker in up skilling and finding work in the private or mainstream public sector.

The types of work that can be done can include work in the arts. We could pay musicians to give workshops on band dynamics, pay them to create and assist in the organisation of community festivals, we can have arts programs where artists can paint murals in public spaces and aid others in their own skill development. Surfers could be paid to pass on surf life safety skills and teach others how to identify and avoid rips. They could take part in sand dune rehabilitation. There is massive potential to enlist thousands of unemployed in ecological restoration and plant trees along with other flora to mitigate against climate change. There are activities we consider community engagement that become paid employment. Running and participating in community gardens is one example.

By having a direct employment program we target money directly to the areas that need it (the unemployed/underemployed) and it has profound social transformative effects. It is a vehicle that begins to transform some of the structures and norms that produce and reproduce poverty and gender disparities.

Work matters, however broadly defined. Work empowers, enhances individual worth, and allows one to lead a richer life, gain new knowledge and skill, and contribute to self, family, and society. Work is life-affirming. While certain pursuits are solitary and individual, even they deliver benefits when performed as part of a greater community.

Tcherneva, P. What do poor women want?, 2012, Levy Economics Institute of Bard College
http://www.levyinstitute.org/pubs/wp_705.pdf

In the Paper by Tcherneva on the effects of a direct employment program, the Jefes program in Argentina. (A program targeted at poor women) she states

[paying] special attention to poor women’s narratives [we] showed that their first exposure to paid work significantly boosted their self perceptions, promoted collective and individual empowerment, and made important qualitative changes to their lives. Found that the socialization of women’s work increased the respect and recognition women received in their own families and in the community at large.

Tcherneva, P. What do poor women want?, 2012, Levy Economics Institute of Bard College
http://www.levyinstitute.org/pubs/wp_705.pdf

Conclusion

We need an understanding that unemployment is structural. It is caused by a lack of spending in aggregate. As a monopolist over the currency, the Australian Government can always purchase anything for sale in the currency it issues. It is a policy choice. The Government of the day chooses the rate of unemployment.

Basic incomes (and even Universal Basic Incomes) are an admission that full employment is no longer possible and if we were to have it we would be dealing with inflation.

The JG crushes that argument, argues full employment and price stability is possible and the broader literature shows work is important for a sense of self, recognition in the community, and leads to vastly improves self perceptions.


How loans create deposits and why we should have public banking…

I thought this post should explain in further detail, the nature of how financial institutions extend credit (by creating it) why I think it should be a public good and how it is possible to create affordable housing and ensure housing for all seeing how I called for 0 per cent home mortgages and the elimination of debt.

First we need to conceptualise two ‘spreadsheets’. One set of spreadsheets are the demand deposits you see in your bank account. The second set of spreadsheets are Authorised Deposit Taking Institutes [ADI] accounts at the central bank. In Australia these are referred to as Exchange Settlement [ES] accounts.

The important distinction to make is that we use the term money to refer to multiple money-things. When I use the term reserves I am referring to ‘money’ in ES Accounts at the central bank and when I use the term demand deposit, that is ‘money’ you see in your bank account and then we have physical notes and coins.

figure 1

In the graph above I have visualised this. Like you can open your online banking app and can view the demand deposits you have in your account, an Authorised Deposit Taking Institute [ADI] can log into the RBAs system and view the reserves they have in their system.

They are called demand deposits because if you go into the bank or use an ATM the bank provides you with the physical notes on demand. When you make an online payment for a bill or you transfer ‘money’ to a business or an individual, at the end of the day ADIs will exchange reserves with each other to settle payments.

When ADIs request physical cash from the RBA, they must have reserves in their ES accounts. If they request $20 million, their reserves are debited by that amount and the physical cash is delivered. The reverse happens when they deposit the physical cash with the RBA and their ES accounts increase.

The Bank of England in its 2014 paper ‘Money Creation in the Modern Economy’ said this:

‘Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.’

When a loan or credit is issued an ADI (the green level in the above figure) uses a computer to mark up the size of the relevant account. More money is added to the demand deposit and both a liability (for the recipient of the loan) and an asset (it is an asset for the issuer of the loan) has been created.

The next step is to ensure there are sufficient reserves in the system so when the recipient of the loan makes a payment to a currency user that banks with a different bank, the ADI can make payment. It is the job of the central bank (which in Australia is the RBA) to ensure there is sufficient liquidity in the system which is a jargon way of saying it is the RBA’s job to ensure banks have sufficient reserves to pay each other.

Financial institutions have an unlimited ability to create credit, They lend to credit worthy customers and satisfy their reserve requirements at the end of each day. Each financial institution has an account with the central bank and these must be positive at the end of each day.  The question arises ‘How are reserves added too?

Reserves are added to in several ways. One way is through Federal Government spending. This is pretty logical and straight forward.

figure 2

When the Treasury spends there is an instruction from an official in that department (after an appropriation bill has passed) and the Australian Office of Financial Management records it and an instruction is given to the RBA to mark up the relevant ES account and the recipient of the new spending. The deficit spending at the end of each day is the new spending that has entered the system. A surplus does the opposite and there are less reserves.

The Governments deficit spending adds net financial assets to the system. There is no corresponding liability to the creation of this money unlike when an ADI issues a new loan.

Because the Federal Government spends and taxes which increases and decreases reserves one of the central banks jobs is to ensure liquidity in the payments system. That is, it is, it’s job to ensure there is enough dollars in ES accounts to ensure the payment system operates and ADIs can pay each other. The RBA website says this:

The Reserve Bank needs to transact in the domestic market almost every day to keep the supply of settlement funds at the right level. This is because transactions between the Reserve Bank’s customers and financial institutions (and their customers) change the supply of ES funds. As the Australian Government is a customer of the Reserve Bank, these gross flows can be very large. Expenditure and payments by the Government adds ES funds to the account of the recipient (or their financial institution), while receipts [taxes] have the opposite effect.– https://www.rba.gov.au/mkt-operations/dom-mkt-oper.html

At the commencement of each day the RBA will estimate the required amount of reserves needed in the payments system and it will conduct securities transactions to ensure all payments clear. ‘Securities transactions’ are jargon for buying and selling treasury bonds. They then have a second round in the late afternoon.

“Securities transactions are conducted almost every day in the ‘open market’ by the Reserve Bank. Each morning, the Reserve Bank announces its dealing intentions, inviting financial institutions to propose transactions that suit the Reserve Bank’s purposes. Counterparties are able to sell highly rated debt securities to the Reserve Bank either under repurchase agreement (repo) or outright sale.

Late each afternoon, the Reserve Bank announces whether an additional round of open market operations is required. Uncertainty in the timing of payments to, and from, clients that hold accounts with the Reserve Bank (mainly the Australian Government) can give rise to unforeseen fluctuations in ES funds during the day. The additional round gives participants the opportunity to either lend excess balances back to the Reserve Bank or borrow the shortfall on a secured basis.” – https://www.rba.gov.au/mkt-operations/dom-mkt-oper.html

When the RBA purchases a bond or another form of security it adds reserves to the system. Think of it as moving dollars from a term deposit (that has money locked away) to now having money you can spend in your transaction account. Selling a bond has the opposite affect. It removes dollars from ES accounts and places them in securities accounts that earn interest. It is similar to placing money into a term deposit account.

If any bank is short of reserves for the day there is an option to secure a loan from the RBA. It is called the ‘penalty window’ because it attracts a 25 basis point premium above the target cash rate (which you can learn about later)


When central bankers say reserves aren’t deposit constrained it is because under license, financial institutions have an unlimited capacity to issue credit that they then charge you the privilege for and a nations central bank will always ensure payments will clear.

It’s here where you need to make a distinction between earned and unearned income. Classical Economist had as a guiding principle that everyone deserved the fruits of their own labour and they developed analytical tools to develop ‘overhead’ costs. There aims where to distinguish between the necessary costs of production and value from the unnecessary and parasitic costs in production. These became economic rents. An efficient economy is about eliminating these economic rents that don’t add value. They are things like monopoly pricing, land rents, interest and forms of income where the earner hasn’t laboured to produce anything. They’ve extracted the value of your labour.

Along with claiming masses of unearned income, financial institutions, by their nature to issue credit hold tremendous power over the rest of the economy.

Giving private banks the ability to create credit gives bank an incomparable power over the rest of the economy. They don’t just control how much money is created but where this money goes. It gives private for-profit banks enormous power to determine the level of composition of investment, demand and production within an economy and the power to engineer credit driven booms (such as the housing market)

Mitchell, W., Fazi, T., 2017, ‘Chapter 10: The Case of Renationalisation’ ‘Reclaiming the State, Monetary Sovereignty: A Primer, Pluto Press, Archway Road, London. pp 255 – 259

By nature of how financial institutes operate they are guaranteed by public money. The RBA states:

Bank deposits become a risk-free asset for households and business in Australia because they have an effective government ‘guarantee’ (up to a limit) and receive the first claim on banks’ assets.

https://www.rba.gov.au/speeches/2019/sp-so-2019-12-16.html

Referencing ‘Reclaiming the State’ again:

Given the crucial and systemically relevant role banks play in the economy, they should be considered public institutions. Bank deposits are guaranteed by governments and financial institutions have access to unlimited government funds as the GFC clearly demonstrated

Mitchell, W., Fazi, T., 2017, ‘Chapter 10: The Case of Renationalisation’ ‘Reclaiming the State, Monetary Sovereignty: A Primer, Pluto Press, Archway Road, London. pp 255 – 259

Conclusion
There is tremendous scope for a progressive agenda to eliminate debts, unearned incomes, nationalise the banks and have them work for a public purpose. This could look like:

1. Forgiving student debt, excessive credit card debt (wages have been low for so many workers many survive off credit)
2. Removing interest paid off all home mortgages and setting the rate at 0
3. Putting in strict rules around loan to income ratios (keeping the cost of housing affordable)
4. Having non-recourse loans in place for investment properties. So if properties are sold for less than what was paid, the bank takes the hit.
5. Instituting a policy of having The Federal Government purchase empty places as well as building what is needed to have Guaranteed Housing accessible to all.
6. Tax changes such as taxing economic rents at a higher rate than wages.

The beginning of this post looked at the intrinsic nature of how credit is created. Using that as a lens brings up a lot of different policy options that under an incorrect frame seem unachievable.

There is no real cost to cancelling debts, you change some numbers in a spreadsheet and people then owe less from their wages. There’s a moral question to ask as to whether a private institution should be allowed to issue credit and have so much control over the control of how and where we allocate real resources, why we allow them to have control over our lives and take a portion of our wage (by being able to charge interest because of a privilege our laws give them).

© Jengis 2020

Economics and Language

With all the talk of ‘the economy’, spending collapse and an oncoming recession with the Prime Minister stating We cannot prevent all the many hardships, many sacrifices that we will face in the months ahead”  I thought it worth noting that yes it is possible to avoid any financial hardships and a recession.

The analogies we use to describe ‘the economy’ separate it as an abstraction from our own lives. Watching 730 I heard an economist state something along the lines of obviously ‘the economy’ takes a hit and health takes priority.

It may seem useful to separate ‘economic’ activity from our lives, health and social relations. That is a very arbitrary distinction and the reality is there is no separate sphere of economic life. Just because there is a health crisis does not mean workers need to lose income, it does not mean we have to have a recession. Currency issuing Governments can deal with any collapse in spending and avoid recessions.

This article on ABC News used classic neoliberal framing when it stated in regards to the measures put in place to stop the spread of covid-19

”Measures might include forgiving taxes, paying a fraction of wages (but also requiring employees to be paid less overall), mandating big temporary rent reductions (landlords are typically better placed to absorb losses than small businesses), providing loans and encouraging — or requiring — banks to suspend loan repayments and perhaps interest payments.”

This is the sort of strategy you would expect from right wingers and faux progressives. The Australian Federal Government is a monopolist of the $AUD. It can always make payment. A progressive response would nationalise industries that fail (e.g airlines) and nationalise banks, removing interest already paid off home loans, setting the repayments at 0 per cent and enact a Housing Guarantee for all. No worker should be forced to concede wages. A welfare system can easily pay replacement wages while we are in lock down.

I find it somewhat ironic that ‘progressives’ have argued for a $75 a week (later increased to $95) raise to Newstart (which still left the unemployed below the poverty line) and Governments since Howard have refused to raise it arguing it would ‘cost’ the budget. Suddenly we have an impending spending collapse where unemployment would sky rocket and all the questions of ‘how do you pay for it?’ disappear. The conservative Government increased Newstart by $360 a fortnight more than what those ‘progressives’ were calling for. The total for what is now the job seeker allowance is $1,115.70 a fortnight. Albeit a temporary six month measure. Change this payment to a basic income for anyone with no employment and institute a Job Guarantee at a living wage.

Progressives moderate demands based on nonsense that we need to ‘find tax dollars’ ‘tax the rich’ and ‘balance the books’. All federal government spending are instructions that mark up the size of bank accounts. Deficits are meaningless irrelevant statistical artifacts.

I thought it a worthwhile exercise to dissect the language we use when discussing economics and to help others purge neoliberal framing from their minds and use new frames. Using neoliberal framing merely reinforces it undermines the ambition within a progressive goal.

Household Analogy
The analogy that a Government is like a household that needs an income in order to spend or borrows in excess of taxation. The question posed for public expenditure is ‘How do you pay for that?’

What the GFC and now the Covid-19 pandemic demonstrate is that currency issuing governments always have spending power. They spend by appropriating a bill through the legislature and marking up numbers in a bank account. All the questions for on ‘pay for’s’ have remarkably disappeared. Government spending is more akin to a scorekeeper at a football match. They mark points up when a goal is scored. These numbers come from nowhere and they are not limited by the points they deduct.

Mortgaging the Future of our Children and Grandchildren / Racking up the Nations Credit Card
This is the analogy used when discussing Government debt. Federal Government debt (debt held by the currency issuer) is a different operation to a user of a currency. Currency issuers choose to sell bonds to match their deficit spending. Like you have an account with a bank your bank has an account at the central bank – when the currency issuer spends it adds to these reserve accounts. Financial institutions buy bonds from currency obtained through previous government deficit spending. It moves currency from their settlement accounts (accounts banks use to pay each other) into a securities account that earns interest. The national debt is nothing more than the amount spent into existence by the currency issuer. If you have a problem with interest; The answer is to not issue treasury bonds.

Deficit Spending
A deficit is the government spending more than it collects in taxes. Some 7th grade algebra shows you that the other side of the equation has to be in surplus. For example if the government spends 100 and taxes 50, we record that as a deficit of -50 however that +50 sits within the non-government sector. All deficits go somewhere.

The deficit itself is not a mechanism to finance something, it is merely the result of spending decisions and the non-governments net desire to save. (it might be in surplus depending on the current account) All spending by the Federal Government is funded by an appropriation through the legislature.

Printing money
Printing money is a term that doesn’t relate to any spending operation. Currency issuers spend in the same way regardless of whether a previous deficit or surplus has been run. They don’t spend the proceeds of tax collection or finance themselves via bonds. All these operations require deficit spending from the currency issuer to begin with.

All spending works as follows. There is an appropriation bill and an official in treasury instructs an account to be marked up and the central bank (which is part of the consolidated government) does so.

There are some institutionalsed arrangements where the treasury has numbers in the Official Public Account – this is important from an accounting perspective to show the amount that has been removed from the system. The numbers in the OPA are not included as part of the money supply.

Cost
This word gets thrown around and has a dual meaning. There is a financial cost (which is applicable to a user of a currency) and a cost in real resources. So to deal with mass pandemics, you need health workers, cleaners, enough respirators, hospital beds, etc… if any of these things are in short supply you need a strategy to ramp up production and ensure we have the real resources to deal with it. The cost is the labour power, skills and raw materials required to implement this. The financing by a currency issuer has no cost. It marks up accounts.

Welfare dependency / dole bludgers etc..
It is framed that people on welfare (usually the unemployed) are dependent on the ‘tax payer’. Unemployment is a result of insufficient spending. It is a political choice and the Federal Government as a monopolist of the $AUD can always purchase anything for sale in that currency, including idle labour.

This post here outline how the issuers spending creates employment and a lack of spending creates unemployment. In non-monetary based societies you don’t have unemployment or employment. Unemployment exists because we haven’t created enough opportunities for people to engage productively with our society.

Governments can always guarantee employment. Here is an example of the Victorian Government creating direct employment opportunities. It’s a small amount set aside, and $500 million won’t offset the income losses caused by the shutdown but you can easily extend this concept, fund it federally and use it as a transitory arrangement to aid workers seek better employment opportunities even when the crisis ends.

Conclusion
This idea that somehow employment needs to generate profits as a marker of efficiency and to ‘fund’ public expenditure is wrong. Provided the real resources exist, they can always be deployed for a public purpose. There are countless tasks that can be performed that make our communities more livable. From work in the arts, to rehabilitation of wetlands, restoring native flora, creating and maintaining public spaces – caring for the elderly etc…

When we talk of public services as a cost (rather than a benefit) we reinforce a framework that is morally bankrupt, views public spending as a real cost on individuals and we trap ourselves in circular arguments of needing rich people to fund our public services. Everyone needs deficit spending, including the rich.

© Jengis 2020

The Story of Money

It’s been a while since my last post. Writing a blog is much more intensive than I had anticipated. I have a new appreciation for anyone that can put out content on a regular basis, while maintaining a full time job and other commitments. I am endeavouring to post more frequently.

I recently had an interview on community radio 3CR based in Melbourne. The topic was “The Story of Money” and dealt with how currency did not evolve out of barter but always was a ‘creature of the state’. We attempted to break down many myths about how a country with fiat currency operates. The radio interview went to air last Friday and a podcast is available here.

One of the interesting things I’ve learned through studying the history of currency is how it functioned. Michael Hudson discusses the origins of money and interest over the Neolithic and Bronze Age as a provision of credit and not that as a system of barter that is commonly told.

“As a means of payment, the early use of monetized grain and silver was mainly to settle such debts. This monetization was not physical; it was administrative and fiscal. The paradigmatic payments involved the palace or temples, which regulated the weights, measures and purity standards necessary for money to be accepted. Their accountants that developed money as an administrative tool for forward planning and resource allocation, and for transactions with the rest of the economy to collect land rent and assign values to trade consignments, which were paid in silver at the end of each seafaring or caravan cycle.”

https://michael-hudson.com/2018/04/palatial-credit-origins-of-money-and-interest/

Once you understand that all ‘money’ is a liability or a debt (the numbers you see in your bank account are a liability for the bank and the numbers in your bank’s account at the central bank are a liability of the currency issuer [whom can always make payment]) you can understand how money came to be.

The origins of these accounting practices can be found in the Kingdom of Sumer. Sumer was a kingdom in Mesopotamia settled by humans around 4500 to 4000 B.C. The area is where strides in agriculture, textiles, carpentry, pottery and fermentation happened. The Sumerians were in control of the area by 3000B.C and their society was compromised of city states. Hudson writes

The origins of monetary debts and means of payment are grounded in the accounting practices innovated by Sumerian temples and palaces c. 3000 BC to manage a primarily agrarian economy that required foreign trade to obtain metal, stone and other materials not domestically available. 

https://michael-hudson.com/2018/04/palatial-credit-origins-of-money-and-interest/

This system of accounting was used to forward plan and ensure food, textiles, and housing for the population. It was large palatial institutions designed a system to keep track of the stocks and flows of production and trade.

…The first need was to assign standardized values to key commodities. This problem was solved by creating a grid of administered prices, set in round numbers for ease of computation and account-keeping. Grain was designated as a unit of account to calculate values and co-measure labor time and land yields for resource allocation involving the agricultural and handicraft sphere, as well as the means of payment. 

The second need of these large institutions was to organize means of payment for taxes and fees to their officials, and for financing trade ventures. Silver served as the money-of-account and also as the means of payment for trade and mercantile enterprise…

https://michael-hudson.com/2018/04/palatial-credit-origins-of-money-and-interest/

In my very first blog post I described the State Theory of Money where the work of Alfred-Mitchell Innes stated “Validity by proclamation is not bound to any material” That is a currency doesn’t have to be backed by any material but it derives it’s value because of the tax liability placed onto the communities in that society.

One way to understand taxes drive demand for a currency is to look at the experiences of European colonisation of African Nations that compelled Africans to provide goods and services to their European colonisers in exchange for the currencies the colonisers issued.

Prior to colonisation the Indigenous populations were non-monetary based societies engaged in substance living, largely could produce enough to provide for their communities and engaged in some internal trade. There was no reason to desire a European currency or any currency for that matter.

The excellent book by Sticher, Migrant Laborers (African Society Today) published in 1985 describes the imposition of a hut tax in Malawi being imposed by the British colonisers.

….imposition of a Sh.3 annual hut tax over the whole colony in 1896. This was a high figure for the northern areas. And undoubtedly stimulated further labor migration [to find work paying shillings]. In the south of Malawi, however, Africans preferred to meet the tax by [selling products]. Southern [European] planters therefore were short of labor and pressed for an even higher tax. As a result the tax was raised in 1901 to Sh.6, with a Sh.3 remission for those who could prove they had worked for a European for at least one month. This ‘labor tax’ had an immediate effect. The labor market in the south became flooded… Taxation, then, if it were high enough…could force men into wage earning

Taxation as a method of forcing out laborers but it did not distinguish between the various sources of the cash. Most Africans who could simply sold produce or livestock [to Europeans at administered prices] in order to pay the tax. But where Africans were poor in items to sell, or were distant from markets, taxation could produce laborers

Stichter, Sharon. Migrant Laborers. Cambridge U. Press, 1985. p26 – 28

The evidence is rather clear that from the Bronze age the early kingdoms devised a system of credits and debits to keep track of production and all the way to modern times it is the imposition of a tax liability that derives the value and demand of a currency.

Markets are then created post the tax liability and the spending. Polyani’s book ‘The Great Transformation: The Political and Economic Origins of our Times’ explains the market not as some natural state and economic rationality and market mechanisms for providing the basis of organisation, rather a market is based on communal patterns of organisation tied to our social structures.

The performance of all acts of exchange as free gifts that are expected to be reciprocated though not necessarily by the same individuals–a procedure minutely articulated and perfectly safeguarded by elaborate methods of publicity, by magic rites, and by the establishment of ‘dualities’ in which groups are linked in mutual obligations–should in itself explain the absence of the notion of gain or even of wealth other than that consisting of objects traditionally enhancing social prestige. . . . But how, then, is order in production and distribution ensured? . . . The answer is provided in the main by two principles of behavior not primarily associated with economics: reciprocity and redistribution. 

Polyani, K. The Great Transformation: The Political and Economic Origins of Our Time, Beacon Press 1957 (reprint 2nd Edition 2001)

Much of the orthodox text uses nonsense theories about human behaviour and rational expectations which attempt to ‘demonstrate’ that markets themselves find equilibrium and are self correcting. The empirical or anthropological evidence holds these theories to be nonsense. Exploring the concept that money evolved out of barter and ‘disrupted’ the market causing the system not to be able to correct itself is common amongst the orthodoxy that Government intervention should be kept to a minimum as it disturbs the ‘natural’ state of markets and the economy.

Thinking about a common problem, unemployment, the orthodox framework describes it as a problem of the individual and we have a framework of ‘full employability’ where we push the unemployed through ‘training’ because they aren’t skilled enough to have their labour demanded. The issue isn’t a lack of jobs per se but that the unemployed haven’t gained enough skill to have their labour in demand and have chosen leisure over employment.

The description above is of course complete bull. Anyone that views unemployment through a framework of an individual issue whereby the unemployed has chosen leisure over employment is clearly, in my mind, sociopathic.

Unemployment is always a result of insufficient spending. The imposition of a tax liability creates a demand for a currency, that spending sets the general price level and is used to purchase real goods and services created by the private sector into the public sector. Those that do not have the means to provision the government with a good or anyone else with the currency with a good need to sell their labour in order to obtain the currency and pay their taxes.

It is insufficient spending in aggregate that causes unemployment. Here it is important to realise taxation decreases someones income and thus the ability to spend is less causing further unemployment.

A view on what constituents aggregate demand is important. National Accounting statistics describe the sources of spending as; Government Spending, Consumption, Investment, Exports

The initial spend has to come from the currency issuer – this is Government Spending, the recipients of that income spend further and then those receiving income from that spending spend again – until such a state that a certain portion of the labour force is employed. Investment expenditure and Export expenditure is also income for someone or to some business and thus contributes to employment.

Within the cycle of spending there are what are called leakages – these are taxation, savings and imports. Taxes take away spending power, causing unemployment but allowing the Government to create the non-inflationary space to spend and acquire real goods and services. Savings and imports (which are a foreigners desire to save) is income not spent and thus can be thought of as contributing to unemployment. Keynes argued that Government Spending needs to equal full employment and the savings desires of the non-government sector.

Sectoral balances between the the Government and non-Government show that the Government deficit has to equal the Non-Government sector surplus. This is an accounting rule. If the Government spends 100 and taxes 30, we record that as a deficit of -70 but that +70 has to sit within the non government sector. It is income.

Unemployment is a result of insufficient aggregate demand (total spending) A currency issuer always chooses the unemployment rate. It is a political choice as the issuer of a currency can ALWAYS purchase whatever is for sale in the currency it issues. It uses the computer to mark up the size of a bank account and gives them a task to do!

Within an MMT framework a Job Guarantee is a superior automatic stabiliser (spending increasing/decreasing without a change in policy) that maintains ‘loose’ full employment and price stability. It is a superior inflation anchor than the current orthodox approach that uses unemployed to discipline the inflation rate. Spending at the bottom of the income spectrum can not be inflationary as inflation is excess spending beyond the productive capacity and the economies ability to absorb the additional spending. Purchasing the unemployed (those that have been rejected by the labour market, that is constructed from the Governments initial spend) can not be inflationary because there has been no competing bid for their labour. I’ll write in more detail on inflation at some future point.


The radio interview was a simplified explanation of the above. Many thanks to Anne for the edit making me sound coherent. It is an art form giving an interview.

It should be noted that the story of money is much much more complex. It involves different types of monetary regimes which you can divide into three types. A Gold Standard, Fixed Currency Exchange Rates and Fiat currency regimes. The latter is what we operate under today.

To further complicate things add a banking system to a monetary system and you have entities that are given license to issue credit and I dealt with this in my first blog post.

That is all from me for today!