Unemployment is a Political Choice

I read this article on SBS news today. It is to do with our pernicious system of ‘mutual obligations’ needed to be performed in order to receive the below poverty line unemployment benefit of $46 a day. The ALP is ‘wiping’ the demerits accrued under the previous government and ‘tweaking’ the points based system. The advocacy of the Australian Unemployed Workers Union (AUWU) is highlighted in the article.

But Unemployed Workers Union spokesperson Jeremy Poxon said it was “incredibly disappointing” the new government had maintained its support for mutual obligations, and not removed them completely. ***
“The problem is this new system will just immediately start forcing people to accrue demerits again in huge numbers.” 

The commentary from the AUWU is juxtaposed against the Australian Council of Trade Unions who said

ACTU assistant secretary Scott Connolly said the union welcomed the Albanese government’s new approach to “helping people get back to work.”

The commentary from the ACTU is more than disappointing. It ignores the frame that unemployment is systemic, a political choice and chosen by the government of the day and places the fault of the unemployment onto the individual who needs ‘help to get back to work’

I don’t deny there are those who need assistance in getting back to work. However, a system that cuts people from a below poverty line payment for not seeking work that doesn’t exist in enough numbers is a sad reflection on how we treat some of the most vulnerable people in society. There is little change in the new governments attitude to the unemployed.

Counting the Unemployed under a Policy of Full Employment

I’ve ordered a copy of Inventing Unemployment by Anthony O’Donnell. Unemployment as we know it is a relatively new concept. In his conversation piece he says;

As I outline in my book, Inventing Unemployment, before the second world war censuses tended to divide the population differently – into breadwinners and dependants. 

A breadwinner who wasn’t employed would be recorded as a breadwinner rather than unemployed (with their usual occupation noted). 

That’s probably because until the 20th century, irregular work was the norm.


The way we conceive unemployment and count it started in 1947 in Australia and a quarterly survey counting a labour force and dividing it into ’employed’ and ‘unemployed’ started in the September quarter 1959.

It was the post war consensus that gave rise to full employment policies, and albeit under a ‘male breadwinner’ model aimed to ensure

This policy for full employment will maintain such a pressure of demand on resources that for the economy as a whole there will be a tendency towards a shortage of men instead of a shortage of jobs.


The quote above is from the Australian 1945 tax white paper written by H.C Coombs who would later become Governor of the Commonwealth Bank and serve a variety of roles within the Australian public service. His essay From Curtin to Keating is well worth a read to see his views on the demise of full employment policies.

The way the framework for counting the unemployed was devised operated under different policy settings where the Government would ensure spending in aggregate would aim to ensure there were more jobs than needed to match the workforce preferences. Menzies in 1961 match the then opposition ALP promise to increase the deficit and bring the unemployment rate back below two percent.

I have included a historical graph of the participation rate going back to August 1966. The participation rate rate is the number of people employed or seeking work. You can see under full employment policies (and male breadwinner model) the participation rate for males was higher. The rise in female participation rate is a result of changing social attitudes towards women in the workforce. It used to be the case for instance women were no longer allowed to work once they were married. That is why the female rate is lower in August 1966 than 2022.


The way we count the unemployed hasn’t changed but a policy of ensuring more hours of work available than those seeking work isn’t in place today. That change of policy has to do with the way economists view the role of fiscal policy. Within the public discourse today you will hear aims of ‘reducing the deficit’ and needing to ‘pay down debt’. Over the full employment era government ‘budgets’ were referred to as full employment or high employment budgets. The fiscal position was not an aim of itself. I’ve wrote what fiscal policy *should* be about in the below posts and the demise of Full Employment here.
Budgets Should Target Socioeconomic Well-Being.
What is the purpose of fiscal policy?

What Causes Unemployment?

When economist speak about spending needing to increase they are referring to several aggregates that make up Gross Domestic Product. These are Government Spending (G), Investment (I), Consumption (C), and Exports (X). Reasons are given for why one sector can/ can not increase or what incentives should be made to increase one aggregate over another. However, spending in aggregate is the aggregate of G, I, C, and X and whether it is sufficient with Full Employment.

Depending on your theory of macroeconomics there are different ways of thinking about Government Spending. These are a bit like religions and economists pick and choose different aspects from different schools of thoughts.

Keynesians/Post Keynesians – budget deficit are warranted to maintain full employment but should be balanced over the business cycle. Governments invest in productive infrastructure and grow GDP to shrink debt:GDP ratio over time.

Monetarist/New Keynesians – aims for budget surpluses, strong incentives for private enterprises, governments should eliminate debt, remove fiscal policy as primary tool of economic management, focus on monetary policy.

Modern Monetary Theorist – Governments that issue their own currency face no insolvency constraint. They can purchase whatever is for sale. Fiscal positions are outcomes and shouldn’t be targets. Monetary policy is a poor tool for controlling aggregate spending.

While there is different thinking with the role of government spending and the definition of what constitutes full employment, there is consensus unemployment arises as a lack of insufficient spending.

Enter the MMT Money Story

MMT places the tax liability as the foremost thing a currency issuing government needs to do to have its currency accepted. The tax liability causes unemployment and government spending alleviates the unemployment. It is always within the governments power to increase its spending and purchase what is for sale, including idle labour. Thus unemployment is a political choice.

That is what is meant by ‘tax liability’ creating a demand for a governments unit of account. It is a coercive mechanism.

(2002) where she describes Colonial Africa as an illustration of a tax driven currency.

“Historians of the African colonial experience have often remarked on the manner in which the European colonizers were able to establish new currencies, to give those currencies value, and to compel Africans to provide goods and services in exchange for those currencies.”

Tcherneva cites Sticher (1985) [In Malawi there was an] 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].

Tcherneva, P., Monopoly Money: The State as a Price Setter, Oeconomics Volume V, winter 2002

Further evidence of taxation driving a currency can be found during the colonisation of Nyasaland.

It is sometimes forgotten that the plantation sector in Nyasaland dates from as early as the 1890s. During the early years of colonial occupation, most officials shared the opinion of Sir Harry Johnston, the first Commissioner and Consul General, that “the one hope of this, country lies in plantation work and in the cultivation of coffee, tobacco, sugar, etc., for which cheap labour is necessary”.3 Some 800,000 acres were alienated to settlers in the Shire Highlands, the most fertile and densely populated area in the country; hut tax was introduced from 1891 as a means of introducing “the native labourer to the European capitalist”4 and coffee was grown with such success that in 1900 a thousand to exported worth 62,00 making Nyasaland the centre of European agricultural enterprise in Central Africa”

McCracken, J.,Peasants Planters and The Colonial State: The Case of Malawi, 1905-1940; Journal of Eastern African Research & Development, Vol. 12, 1982, pp. 21-35


Unemployment is caused by a lack of spending in aggregate. Currency issuing governments can always hire the unemployed, thus making unemployment a political choice. If the vast majority of the population understood that we could begin to dismantle pernicious unemployment system that punishes people for a failure of our governments to create enough work for all.

Comments from ACTU on ‘helping people get back to work’ are not helpful unless they are backed by a call to abandon targeting of fiscal positions and have a full employment policy. There seems to be little understanding from the ACTU leadership unemployment and underemployment is one of the largest factors that act as wage suppression. As there are more people seeking work, employers have their pick of employees. It is a disservice to the workers they represent. Though workers have come harder to find for some sectors, there are still just under 1.4million under-utilised workers in Australia.

Solidarity with under-utilised workers would call for an end to mutual obligations, an abandoning of fiscal targets, lifting the unemployment rate to at least $88 a day, a full employment policy that guaranteed more hours of work available than demanded and the implementation of a Job Guarantee.

Budgets Should Target Socioeconomic Well-Being.

It is custom in Australia to make an event around the various state/territory and federal budgets. In the past achieving some fiscal ratio has been seen as ‘responsible’ In 2016 Economics professor Ross Garnaut stated (source)

These measures should be backed by moderate and gradual cuts in spending, and moderate and gradual tax increases to repair the budget.

Post COVID, the framing when discussing a budget, has moved from achieving a fiscal outcome (balanced/surplus) to targeting a particular employment rate within a framework called the ‘natural accelerating inflation rate of unemployment’ (NAIRU)

I wrote a little more on this in my post The Mainstream are Trying to Stay Relevant and Modern Monetary Theory and The Job Guarantee. I have rejected the NAIRU as a nonsense concept. It effectively uses the unemployed to discipline the rate of inflation, to which you can use a ‘buffer stock of employed’ to achieve the same end.

As a society we literally leave masses unemployed because economists believe unemployment must not fall below this NAIRU rate. Costs of unemployment are huge:

  • loss of current output
  • social exclusion and the loss of freedom
  • skill loss
  • psychological harm, including increased suicide rate;
  • ill health and reduced life expectancy
  • loss of motivation
  • the undermining of human relations and family life;
  • racial and gender inequality
  • loss of social values and responsibility.

Even ‘the left’ have changed the framing for how they think about governments fiscal positions.

In 2019 the ACTU was concerned with excessive debt levels. I wrote a critique Solving inequality requires getting macro right!

“Globally most respected economic institutions believe the risk of recession has increased and some pundits fear “winter is coming”.……Stimulus measures by the Chinese authorities will exacerbate already excessive debt levels and add to vulnerabilities

The report continued to discuss Australia and the ‘limited’ tools in response to the ‘economic challenges’ we face.

Economic fear is mounting and because of very high debt levels and limited scope for expansive monetary policy governments have limited tools in responding to these challenges

Post COVID ‘we are no longer discussing ‘fiscal repair’ and the treasurer wants an unemployment rate ‘comfortably under 6 percent’ (source) Further articles are stating the unemployment rate could’ve been much lower with headlines like ‘Reserve Bank and Treasury admit ‘full employment’ is not what they thought it was. And it’s held the country back’

Although the NAIRU framing is still incorrect. And the left still talk about currency issuing governments as ‘borrowing’ to invest!

The ACTU report on the upcoming federal budget still says

The government has ample fiscal capacity to manage those deficits moving forward, thanks to record-low interest rates and the actions of the Reserve Bank (whose bond purchase program has supported low interest rates and facilitated the government’s fiscal response to the pandemic).

“Borrowing to finance long-lived, productive investments is the exact same rationale that leads other parts of our economy – notably businesses and households – to also take on debt.”

For a Stronger, Balanced and Inclusive Recovery, April 2021, p36-37

The report suffers as a result of that illogic. The Federal Government issues the Australian dollar. It must spend first (that is logic101). It is nothing like a household or business that must borrow to finance expenditure in excess of what it earns. The fiscal position is residual. It needs to satisfy the savings desires of the non-government sector if we desire full employment (more jobs advertised than demanded)

I gather that I am a nobody but when I was discussing modern monetary theory with ‘progressive’ institutes such as the Australia Institute (affiliated to the organisation that helped prepare the ACTU report) or PerCapita, I would cop hostility from people within those institutes for articulating

  • Government debt was an after the fact operation and a tool of monetary policy (interest rates) (there is no need to issue it) It doesn’t fund a currency issuing governments ability to spend.
  • The unemployment rate is a political choice; Governments can always purchase idle labour. They issue the currency and;
  • A Job Guarantee is a replacement of the NAIRU framework

I have been called ‘simplistic and naive’ and accused of being ‘anti-tax’ because I stress the purpose of taxation (or bonds) are not a funding mechanism. Which I wrote about here and in various other places throughout this blog.

I have some people write to me now asking for further explanation and I can direct them to appropriate sources. The blog is not intended as an education resource but to document my own understandings of macroeconomics and the impacts how a flawed framework leaves us materially poorer as a society.

I recently attended a Northern Territory budget briefing with Treasury officials. I was disappointed to the whole approach that the government was taking to the budget. The reality is the NT Government is a currency user (the largest source of its revenue being the GST)

Though the framework it is taking to the budget process and the policies of wage freezes and cuts too spending will ensure the most vulnerable in our society suffer.

The spending measures taken in the budget are aimed at subsidising private investment (tourist vouchers, local jobs fund) and not at direct job creation. The public sector has a wages freeze and staffing caps.

Budget paper two says (source)

The 2021‐22 Budget includes investment aimed at accelerating economic recovery through a $120 million expansion of the Local Jobs Fund and additional funding to support growth and development of new and existing industries recommended by the Territory Economic Reconstruction Commission. 

When I pressed the treasury officials for more detail on that programs, they were described as measures that subsidised businesses to employ people. When I asked why there were no direct job creation programs the answer was because The Government doesn’t want to do that and that they were more interested in subsidising private investment.

I prodded with further questions on debt, the RBAs Quantitative Easing program (which means the states/territories owe dollars to the RBA) and the inadequacy of relying on a consumption tax to fund the majority of our public expenditure. Treasury agreed the GST was not fit for purpose though insisted the largest priority must be getting rid of public debt (according to treasury that means wage freezes, staffing caps and subsidies to private business)

The GST is a consumption tax (at a federal level) that then is hypothecated amongst the states/territories. It is a terrible way to determine funding to these jurisdictions who are required to have the revenues to deliver healthcare and educational systems because of the structure of how we are federated and the responsibilities within the constitution. States and Territories have the responsibility for those services while the federal government issues the currency.

By using a consumption tax to hypothecate the revenue allocated that is then used to deliver the above services is what requires the states/territories to issue bonds (and thus make interest payments)

If the non-government sector desires to save more and thus reduce consumption then the collection of GST falls (relative to GDP) and the states/territories have less to spend and either need to make up the shortfall by issuing bonds or raising taxes.

The states don’t have the power to impose income taxes and they’ve been reliant on increasing stamp duties and in some cases payroll taxes. (Two taxes that are not efficient and are not achieving much in terms of socioeconomic outcomes)


Discussion of government budgets has moved to needing to spend more but are still within a framework that Governments must tax, borrow or print in order to spend. At a federal level that is false. In terms of the states/territories we need to be questioning just how fit for purpose the funding mechanisms to deliver public services are.

While it is pleasing to see the public discourse move to discussing employment levels this is still operating under a NAIRU framework. A mythical number that is not known by anybody. This has been the definition used for full employment for the past 40 or so years and any progressive should reject it.

Full employment is a society as one in which there are more jobs on offer than people seeking them, so that work providing a secure dignified existence may be easily obtained by all.  

(Beveridge, 1944, Full Employment in a Free Society)

Why Universal Free Childcare is Possible

This is a thing that has dropped off radar. How quickly the public discourse moves. On Thursday 2 April, 2021 The Australian Government announced (temporary) free childcare for the covid pandemic.

It is no secret the spending of governments lifted by hundreds of billions of dollars and yet no extra taxes were raised and our central bank, the Reserve Bank began purchasing treasury securities (bonds). Effectively what we call government debt is now owned by the RBA instead of private financial interest. I’ve written about spending operations and money here, here, here and here. I make no secret that this understanding derives from Modern Monetary Theory which is a lens that allows you to understand the way our monetary system operates and requires you to implement a values system on top of that understanding.

How did the government provide the funding to make childcare free?

There are some technical arrangements in how the Federal Government funded the temporary free childcare.

First we need to make a distinction between types of appropriation bills. We have annual appropriations or special appropriations. The annual appropriations provided funding for specific purposes and are bills presented in the budget papers (usually in May each year) Special appropriations are funding mechanism within acts to provide funding for specific things. Usually using a spending on a rule principle rather than having a specified amount (e.g unemployment benefits – if you meet the criteria set out in the legislation you are eligible to receive payment) You can read more about the detail here

The Parliament of Australia (source) reported that

“Until 6 April 2020, the Australian Government provided both child care fee assistance to families and direct assistance to services. Most of the assistance was delivered through a fee assistance payment: the Child Care Subsidy (CCS). 

The CCS was means tested with rates of payment based on family income, hours of care used, type of care used, and parents’/carers’ level of work, training or study. Families received a percentage of the fees charged or the hourly fee cap (an amount set by the government)—whichever was lower. The percentage received was determined by the family’s income and the hours subsidised determined by the parents’/carers’ level of work, training or study. 

The payment was paid directly to providers to be delivered to families in the form of a fee reduction”

The Australian Government then passed the Child Care Subsidy Amendment (Coronavirus Response Measures No. 2) Minister’s Rules 2020. The Parliament of Australia reported (source)

Under the new funding arrangements, the CCS system is suspended and child care services will receive a weekly ‘business continuity payment’ equivalent to 50 per cent of fees charged (up to the CCS hourly fee cap) for sessions of care in the fortnight preceding 2 March 2020 (17 February 2020 to 28 February 2020). The payment for vacation care services will be based on the first fortnight of revenue in the school holidays between Term 3 and 4 of 2019. This will mean services can receive a payment worth up to half of their pre-pandemic fee revenue.

The amendment is complex to read without context of the act it amendments but in brief the Child Care Subsidy amendment amends section 205A(1) for the ‘circumstances in which a continuity payment can be made’ and 205A(2) ‘the method to determine a payment amount’ of the New Tax System (Family Assistance) Act 1999.

Childcare services also had access to the JobKeeker payment, an additional stream of funding in the form of a wage subsidy.

“While the new funding arrangements will only cover a portion of child care providers’ previous earnings, other government support may be available, particularly the proposed JobKeeper Payment. The JobKeeper Payment will help to cover eligible child care providers’ wage costs.”

We can see in the Family Assistance Act 1999, there are special appropriations that ‘appropriate’ funding for a specific purpose. The Child Care Subsidy Amendment (Coronavirus Response Measures No. 2) Minister’s Rules 2020 made changes to the rules so instead of paying providers a fee subsidy (reducing the amount parents made) they implemented a ‘business continuity payment’ forgoing the need for user pays charges.

How The Australian Government makes a payment

It is important to note that the appropriation doesn’t allow the funding to be spent. That comes from the Public Governance, Performance and Accountability Act 2013 (which you can trace back to the Audit Act 1901) and section 51;

(1) If an amount is appropriated by the Parliament in relation to a Commonwealth entity, then the Finance Minister may, on behalf of the Commonwealth, make the appropriated amount available to the entity in such instalments, and at such times, as the Finance Minister considers appropriate.
(2)  However, the Finance Minister must make an amount available if:
(a)  a law requires the payment of the amount; and
(b)  the Finance Minister is satisfied that there is an available appropriation.

There is nothing within legislation that states prior funds need to be found. A consolidated revenue fund (CRF) exists as a ‘conceptual’ account under section 81 of the constitution (any ‘money’ held by a government entity is deemed to form part of the CRF)

The Reserve Bank of Australia holds Offical Public Accounts (OPA) with numbers in them but they do not form part of the money supply. You can think of the OPA as a record of what has been taxed and spent. The RBA statistics on monetary aggregates do not count government holdings as part of the money supply. In table D3 the notes state; (source)

The sum of currency and transaction deposits does not add exactly to M1, which is due to a small portion of currency which is estimated to be held by non-residents and/or the government (these sectors are not included in the monetary aggregates). This estimate is based on those sectors’ relative shares of transaction deposits in all transaction deposits

What About Inflation?

The ABS tells us ‘the Consumer Price Index (CPI) is a measure of household inflation and includes statistics about price change for categories of household expenditure’

The graph below shows the inflation rate per quarter from Dec 2011 to Dec 2020. (source)

The ABS data for the reference period ending June 2020 said under it’s key statistics

  • The Consumer Price Index (CPI) fell 1.9% this quarter.
  • Over the twelve months to the June 2020 quarter the CPI fell 0.3%.
  • Most significant price fall was Child care at-95.0%.
  • Most significant price rise was tobacco at +2.7%.

Childcare falls under furnishings, household equipment and services group. A further analysis of that group says

The impact of making childcare free, in terms of not charging user pays fee is what caused the CPI to record a negative result. That period also sustained mass job losses (which had deflationary pressure on wages) – we shouldn’t think of inflation as good or bad. It is more complex than a rise being good or a fall being bad.


Now if we put all this together we can begin to understand the statement ‘taxes don’t fund expenditure’ (the currency issuer spends first) The idea that public provisioning is a ‘cost‘ then is erroneous. The government needs no prior funds before it spends. Free childcare benefited thousands of Australians. It was made possible by a legislative change in how funding was determined and paid out.

We can question the composition of childcare services by which I mean who owns the centres – we can look at the low pay in childcare services and the why these services should be run for profit. I would determine that it is best to run childcare services as a public good and attach a service to every primary school in the country. You would then hire workers in low paid private for profit centres and lift pay.

Once you break the myth that governments need to find tax dollars – a retort is usually ‘printing money’ is inflationary. Take a deep breath and appreciate that printing money doesn’t apply to any spending operation. You can see above that the government spends in the same way irrespective of revenue or bond issuance.

It is better to think of inflation as a conflict. As firms hike their prices – workers look to increase wages – something has to ameliorate that conflict. Nationalisation of industries are part of ending that conflict. It removes a financial cost from the individual and it marshals real resources (in this case labour) for a public benefit – the provisioning of childcare.

Word War II and Post War Reconstruction

As part of a project into the history and development of Australian currency I have written a little more of the events that took place over WWII that led to Australia’s post war reconstruction. The events start at the end of the thirties and go through to just before the Commonwealth Bank was created and a Central Bank in 1945.

The Commonwealth Bank Act 1945 repealed the previous Commonwealth Bank Act 1911-1943 and recreated it as a central bank. A well known public servant H.C Coombs was largely responsible for the rationing system over the war and the creation of Australia’s post war reconstruction. He trained as a secondary teacher but over the 1930’s received his PhD in economics and went on to work in various capacities for the Commonwealth Government.

If you can obtain a copy of his book Trial Balance (now out of print) he details these extraordinary events and the shift in thinking not only of a defunct economic paradigm that was used over the 1930’s but also in society more broadly.

The finished paper will be a more coherent narrative some of which feature in the following posts and more!

Currency Issuing Governments Finance Themselves
A History of Australian Coinage and Note Issuance- Part 1
History of Australian Currency – More Detail
Let’s have a rational debate on government spending.
The Mainstream are Trying to Stay Relevant

Preparations for WWII and War Rationing

Various financial statements and budget speeches in 1939 and 1940 were stating that with a given workforce and existing pattern of technology and industrial organisation there was a maximum real Gross National Product (GNP) which would for practical purposes be reached when available labour was fully employed. 


The National Security Act 1939 had given powers to The Governor General to make regulations for securing the public safety and the defence of the Commonwealth and the Territories of the Commonwealth, and in particular— (h) for preventing money or goods being sent out of the Commonwealth except under conditions approved by any Minister of State; as well as other mechanisms to make provision for the Safety and Defence of the Commonwealth and its Territories during the present state of War. 

This act in conjunction with the changes to the Commonwealth Bank amendments 1929, in effect abandoning a gold standard allowed for the Commonwealth to implement a system of rationing.  There was contention within the Fadden Government. 

By 1941 preparations were being made for a wartime economy. Chairman of the Financial and Economic Committee Lyndhurst Giblin had been in contact with Keynes regarding propositions that if the war effort was to be accomplished an additional transfer of resources amounting to 10 per cent of the total available would from civil to war purposes had to be achieved. 

In a response to Giblin, Keynes had replied

to deprive the economic system of the freedom represented by uncontrolled prices through rigorous price control supplemented necessary by rationing and by strong propaganda in favour of increased saving out of the margins of income preserved in favour of individuals by price fixing policy.  (Coombs, 1981 p.11)

In a statement submitted to cabinet Fadden regarding his budget proposal submitted

There is a physical limit to our resources of manpower, equipment and materials and…the new programme will impose a severe strain on those resources. Last year (40/41) 15% of National Income was devoted to the war effort; this year (41/42) it would be 23%. The transfer of resources to achieve this must mean a substantial fall in civil production. The financial measures chosen must be designed to effect the necessary transfer. (Coombs, 1981 p.12)

In terms of an economic strategy the Finance and Economic Committee was preparing for a system of rationing as per the correspondence between Giblin and Keynes.  There was awareness that rationing as a result of trade restrictions and production would need to occur. As a result of this Keynes had pointed out to Giblin ‘fairness of distribution social security would necessitate rationing’ In February of 1941 the Committee advised ‘Direct rationing or restriction of supplies of specific goods or services, chosen because the resources they use are most adaptable to war purposes.’ (Coombs, 1981 p.12) 

‘There was a view within the Committee that direct rationing to consumers appeared inevitable and that plans to introduce and organise it should be prepared in secret by the Department of Customs’ (Combs, 1981 p.13)

The ABS 1301.0 Year Book Australia No. 35 1942-43 Commonwealth Food Control (1939-49 WAR) notes; 

‘Australia began in 1938 to prepare for food control in the event of war, not only to safeguard her economy, in which exports have always occupied an important place, and to protect primary producers against market collapse, but also to ensure that essential supplies moved quickly to the United Kingdom. Plans were laid then for mass marketing to replace individual enterprise, and understandings were reached that as far as shipping was available, the United Kingdom would take the export surpluses of most of our principal foods.’

The Year Book Australia 1944-45 notes the reasoning for rationing. 

‘War conditions necessitated civilian rationing of clothing and certain foodstuffs in Australia. The main reasons for clothing rationing were the serious falling off in imports, increased Service demands, and reduced labour for local production of textiles and making up of garments. The supply to the United Kingdom and the Australian and Allied Services of maximum quantities of foodstuffs necessitated the rationing of sugar. butter and meat, while reduction in imports, consequent upon enemy occupation of Java, necessitated the rationing of tea. In addition to the controls exercised by the Rationing Commission, rationing of certain other commodities is directed by other departments, e.g., petrol, tobacco, liquor, etc.’ (ABS 1301.0 Year Book Australia,Clothing and Food Rationing, 1944-45)

As the concern built within the Committee around the Fadden Government’s failure to implement rationing measures onto the civilian population and the political constraints within the Parliament, the Fadden Government’s 1941/42 budget failed to pass the House of Representatives. Two independent members of the House, Alexander Wilson and Arthur Coles crossed the floor.  Fadden resigned from office and the support of the two independent members of the house gave support to John Curtin and Ben Chifley delivering  the ALP under Curtin and Chifley Government. 

By 8 May 1942 Prime Minister Curtin had announced Australia would enter a system of rationing and by 17 May 1942 a Rationing Committee was formed. It was decided that a coupon system be introduced with interim arrangements being proposed before clothing supplies were depleted. (Coombs, 1981 p.20-21) 

A coupon system was devised in respect of Clothing, Food and Petrol. 

‘Coupon Rationing. After examination of the systems of rationing operating in other countries, it was considered that coupon rationing was preferable to a system of consumer registration, since it allows consumers to purchase from any retailer and also provides a comparatively simple control of traders’ replenishment of stocks by means of the passage of coupons to their suppliers. Food coupons are provided in the general Food Ration Book issued each year.’  (ABS 1301.0  Year Book Australia,Clothing and Food Rationing, 1944-45)

This coupon system would last throughout the war and was the means by which Australian citizens would obtain essential goods and services. The Food Ration Book provided each year per household negated the need to spend currency that was earned. 

Australia’s Post-War Reconstruction

Following the end of the war the Government was seeking a means to continue it’s control over the economy with similar wartime powers.  A failed 1944 referendum sought an insertion of a Chapter 1A in the constitution 

6oA.—(i.) The Parliament shall, subject to this Constitution, have power to make laws for the peace, order and good government of the Commonwealth with respect to—
(i) the reinstatement and advancement of those who have been members of the fighting services of the Commonwealth during any war, and the advancement of the dependants of those members who have died or been disabled as a consequence of any war ;
(ii) employment and unemployment;
(iii) organized marketing of commodities ; etc…  (ABS 1301.0 Year Book Australia No.35 1942-43 p.65-66)

The failed referendum required another means to continue the Full Employment achieved over the war. 

There was a shift in thinking as a new economic paradigm emerged. The collective conscience within our society was driven largely by remembrance of what was experienced over The Depression, what was possible as seen over the war and a desire to maintain the same level of production during peacetime. Within academia, elected representatives and a new generation of public servants – Keynes’ General Theory gave them the authority to implement what only a decade prior was seen as ‘radical’.

These events led through to the 1945 Tax White Paper on Full Employment and The Commonwealth Bank Act 1945 which created the Commonwealth as a central bank. Coombs in his text Trial Balance writes

‘Generally the functions of a central bank are: to print and control the issue of legal tender notes; to hold the country’s international reserves of gold and foriegn currencies; to act as banker to other banks, holding deposits from them; to exercise control over banks’ lending policies; to act as banker for governments and their major agencies, and frequently to arrange their borrowing; and to influence the policies of non-bank financial intermediaries which make loans.’ (Coombs, 1981 p.142)

A position that was resisted by capital for decades was finally defeated and our elected representatives had more discretion on controlling an interest rate and fiscal policy (having been subject to various impediments prior) to achieve their socio-economic outcomes.

The Mainstream are Trying to Stay Relevant

I’ve read a few articles over the last few days that discuss full employment and how we voluntarily keep hundreds of thousands unemployed. It is a welcome change to the doom and gloom messages we have paraded about debts burdening our grandchild or insolvency if we spend too much. That narrative should be well and truly dead! I recall asking myself questions on what government debt is and why does a government need to borrow if it issues the currency in my senior years of school as I stared outside the window wishing I could be doing something more exciting.

This article from the ABC has Ross Garnaut plugging his latest book. The article details what economist call the Natural Accelerating Inflation Rate of Unemployment (NAIRU) Apart from being completely useless as a metric to measure against because you can never know what it is until you get there, it is still being used as a framework amongst the mainstream.

“Professor Garnaut says Australia’s policymakers have repeatedly miscalculated the NAIRU in recent years, meaning they have often suspected the economy is getting close to full employment when it is far from that point.”

So the fallacy that our economic superiors have just made a horrible mistake and needlessly left hundreds of thousands without jobs is paraded over the more accurate description that Unemployment is a political choice. Currency issuing governments can always purchase what is for sale, including idle labour. When economist think about costs (actual economist, not the frauds you read in the mainstream media) They are refereeing to real resources. People, raw materials, physical infrastructure, social impacts etc…And the cost of unemployment always far outweighs the cost of inflation. There are serious consequences as a result of involuntary unemployment. Loss of income, social exclusion, physical and mental health impacts, relationship breakdowns, poverty.

The mainstream narratives of deficits being a negative continue…

“At current levels of economic activity, having several hundred thousand people unnecessarily unemployed holds annual gross domestic product [GDP] down about $50 billion below what it could be, and, all other things being equal, raises Australia’s public deficits by nearly $20 billion each year.”

The deficit itself is irrelevant in determining a governments ability to spend. It is the residual number and accounts for the savings desires of the non-government sector. As an accounting rule it has to equal the non-government sectors savings. The question we should be asking is whether the fiscal balance is enough in achieving full employment and whether we have organised ourselves in a way that serves a public purpose. That is how much of the labour force do want engaged in public provision, what are the services we want delivered and what do we leave to private enterprise?

The article then continues to describe bond issuance and whether the Government should allow ‘the market’ to ‘fund’ deficits or whether The Reserve Bank should ‘fund’ the deficit spend. I wrote why that thinking was wrong here. I’ll reiterate parts of it below.

The Australian Government spends via an appropriation bill (through the parliament) and the finance minister then approves the transaction and someone within the Department of Treasury uses a computer to mark up the relevant exchange settlement account (ESA). These are accounts that financial institutes hold with the RBA. The smokes and mirrors of issuing bonds is irrelevant to the spending operation.

Intrinsically for a financial institution to purchase a bond the ESA’s have to be marked up first. So the act of issuing a bond changes the portfolio mix within the RBA’s system. ESAs are drained and dollars are added to a securities account. (The latter earns interest)

Now that the RBA is purchasing bonds it effectively owns the ‘debt’ that the Treasury is issuing so the Treasury can pay the RBA (via an appropriation bill) who then pays it to the Treasury. *eye roll* The whole operation is a charade to confuse the masses that all this somehow matters and great minds are at work pondering over these dilemmas to help save humanity.

Garnaut does state “I’d say, let’s take away their free lunch.” Huzzah! stopping the issuance of government debt is sensible. It is an unneeded operation that has its origins under a gold standard and necessary within the Bretton-Woods system. (a discussion for another time)

However Garnaut shoots himself in the foot and shows his interest in maintain the current class structures.

“The circumstances call for an Economic Stability Board, with power to constrain demand by fiscal as well as monetary means — to place a surcharge on major taxes if that serves better than raising interest rates.”

‘Independent boards’ are usually a mechanism to depoliticise a process the minister would rather not be responsible for and take away democratic accountability.

Under Garnaut’s thinking this operates under a NAIRU paradigm. The ‘independent’ board would have the power to raise and lower taxes (as well as interest rates) if it felt the employment rate and wages growth was too high or low and it would force the unemployed onto a substance payment in their pursuit of a desired rate of inflation.

“Professor Garnaut has also thrown his support behind the idea of a guaranteed basic income for practically all adults, paid at the same level as the dole

Basic incomes should not be part of a progressive agenda. (Though we need a welfare system that cares for those in need)

We are more than just consumption units and there is value in contributing within our abilities. We should be aiming to eliminate involuntary unemployment and underemployment.

A Job Guarantee scheme forms a replacement for the NAIRU and replaces it with a Non Accelerating Buffer Employment Ratio (NAIBER). The social policy manifestation of the NAIBER is the JG.

It serves the purpose of disciplining an inflation rate to a politically acceptable rate (Would you be bothered if inflation was 4% and you had less people in a JG over a 3% inflation rate?)- It isn’t ideal but it is a hell of a lot better than using an unemployed buffer stock. It isn’t there to create masses of minimum wage jobs.

It is the role of Government to use their spending capacity to create career public service jobs and act as competition to the private sector; eliminating lousy employers by ensuring enough high paid career positions matching people’s skillset are on offer.

The linked to article above and Garnaut’s mention of an independent fiscal and monetary board reminded be of the 1924 amendments to the Commonwealth Bank Act. A friend told me not everybody reads various pieces of banking legislation and their amendments from a century ago, so I will describe it here.

By 1923 under the Bruce Government (Nationalist), the responsibility for note issuance was transferred to the Commonwealth Bank (previously under Treasury) and maintained in the note issuance department. Changes were made to the Commonwealth Bank Act in respect to note issuance in 1924  ‘(1) The Bank shall be managed by a Board of Directors composed of the Governor and seven other Directors. (2.)   Subject to this Act, the seven other Directors shall consist of— (a) the Secretary to the Treasury ; and (b) six other persons who are or have been actively engaged in agriculture, commerce, finance or industry.’

The Governor of the board was a banker by the name of Sir Robert Gibson. A staunch deflationarist (wage cuts, cut deficits) and was responsible for inviting another banker Sir Otto Niemeyer to Australia over the Great Depression. The Sydney Morning Herald reported regarding the changes to the board ‘ …the board, although permitted to decide all other questions by a majority of votes, will not be allowed to determine questions relating to the note issue unless the determining majority includes two of the following, namely the Governor, the secretary to the Treasury, and the two directors appointed because of their knowledge of the currency’ (SMH, 14/ 6 /1924:15-16) The Governor wasn’t required be answerable to the Government of the day unless legislation compelled them. (Which didn’t exist) And unless the ‘radical’ Labour Party was in Government and controlled both houses this was an improbability. A constraint that we will witness over the depression when the Scullin Government tries to spend and lower the unemployment rate.

At the request of Gibson to observe the current Australian economic situation, Otto Niemyer, an official from the Bank of England along with Professor T.E. Gregory of the London from the School of Economics arrive in Australia on 14 July, 1930. Niemeyer  had tabled the below plan that was rejected by most Australian economists across the political spectrum.   

The Niemeyer plan (Parliamentary Papers 1929-31, vol.2, No. 81, p. 45) called for 1. Budgets to be balanced at any cost in human suffering. 2. Cessation of overseas borrowing until the then short-term  indebtedness had been dealt with. 3. No public works, which would not pay for interest and  sinking funds on loans, to be put in hand. 4. All interest payments to be credited to a special account  in the Commonwealth Bank, to be used only in favor of  the bond-holders. 5. Monthly accounts to be published in Australia and overseas, showing summaries of revenue and expenditure, also state of short-term debt and loan account.  

As the Labour Government of Scullin was wrestling with The Depression the note issuance board was denying the Government additional expenditure. In March of 1931, the Treasurer presented to The House a bill relating to the issue of a fiduciary currency. 

These fiduciary notes were to be called Treasury Notes as opposed to an Australian Note (notes issued under the Commonwealth bank act 1920 in pursuance of the Australian Notes Act 1910-1914) and differed in that there was no need to hold gold reserves in relation to their note issue. The Bill specially stated ‘Treasury Notes shall not be deemed to be Bank notes within the meaning of the Bank Notes Tax Act 1910’

The bill also made provision for Treasury Note issuance of £18million, six million of which was for the purposes of the Wheat Act 1931 and the remaining twelve million on providing employment for reproductive works.  These ‘reproductive works’ would be made by appropriations of any Acts or by means of loans to the States, local governments or other corporations approved by the Governor General.

During the second reading of the bill Australian Labor Party member for Bendigo, Richard Keane stated ‘This Government has made endeavours to obtain money, but has been thwarted in its attempt by the Commonwealth Bank and other authorities’ (House of Representative Hansard, No.13, p.577, 1931)

The Commonwealth Bank Act in 1924, as described above, had put in place approval of note issuance (and thus the ability for Treasury to spend without borrowing) to a seven member board.

With The Depression and many unemployed the Labor Government was looking for a means to directly decrease unemployment.

‘In this country we have an army of unemployed totalling about 300,000; loan expenditure has been reduced from £43,000,000 to £14,000,000, and the Government last year made a grant of £1,000,000 for the relief of unemployment.’ (House of Representative Hansard, No.13, p.578, 1931)  Keane makes mention ‘We on this side of the House take the view that, orthodox methods having failed, it is necessary to adopt what may be regarded as unorthodox proposals.’ and points to ‘…the fact that for many years Great Britain has had Fiduciary issue of £260,000,000’ (House of Representative Hansard, No.13, p.577, 1931) 

Theodore’s efforts on a Fiduciary Note failed in the Senate. Economist in Australia, despite the rejection of the Niemeyer Plan still necessitated wage cuts were necessary. Yet at the February 1931 Premier’s conference there was such disagreement amongst economist who were in charge of tabling a report it was never released to the public.

The Treasurer E. G. Theodore and Scullin repudiated the report: they would not have it signed by their public servants. Gibson then refused to sign it. The report was never issued. (Coleman, 1959, p.119) [Gibson was an economist within the Australian Government that would come round to the emerging Keynesian consensus rested by his collegaues]

With Theodore’s Fiduciary Notes bill thwarted, The Copland Plan was devised.  The Plan though proved unpopular with the electorate. 

It recommended a reduction in the deficit from £39m to £11m, to be secured by a £13m reduction in outlays, £12m increase in taxes, and £3m from reduced interest. There was to be a 20 per cent cut in expenditure, and a 15 per cent reduction in interest payments.….

…a deal specifying how the pain would be shared out; it sought to establish agreement by observing measures of equality of sacrifice. Australian bond holders, public servants and pensioners were all to take a cut. (Bond holders experienced the heaviest proportionate contraction in incomes: legislative fiat reduced interest on government debt by 22.5 per cent.) This universal sharing of the pain made it universally unpopular. (Coleman, 1959 p.120)

Figures within the ALP such as Curtin argued Labor should surrender Government rather than implement The Copland Plan. Though the plan was adopted. The Labor Party split and delivered a majority Government to Joseph Lyons United Australia Party (UAP), a key figure responsible for orchestrating the failed bills, leaking information to London financial interests, and leaving the ALP to assist in forming the UAP. 

The events of the economic malpractice continued and the Australian population was forced to endure the 1930’s with unnecassary levels of unemployment. As economist argued over how much to cut spending and wages by or whether to increase public expenditure masses of people needlessly suffered.

The ‘independent’ board under Gibson responsible for the note issuance desired real wage cuts and had no concern for the well being of the population! That is very well articulated in the Niemeyer Plan and we needn’t experience anything that atrocious again!

Read Chapter 6 of Giblin’s Platoon by Coleman et al., for an account of the economic disagreements that ensured over the 1930’s


So as the mainstream economist try to stay relevant by saying ‘Oh hey turns out there isn’t a need to issue debt’ despite the messages they’ve been pushing on balanced budget nonsense for decades. They’re trying to maintain current pools of unemployment and using them in a fight against inflation by offering them meagre subsistence living instead of what we desire, a job that is meaningful and allows us to contribute to society. All while attempting to ensure we have depoliticised technocratic bodies instead of democratic accountability. That doesn’t work for the EU and it won’t work here.

This article was on edited on 29/03/21 to fix a grammatical error.

E is for Effort

Alan Kohler wrote his first piece for The New Daily. It’s a rather optimistic piece where he says thankfully we haven’t entered a long depression as many feared. Irrespective of labels and what you define 2020 as, it has demonstrated that currency issuing governments always have financial capacity to deal with a collapse in spending.

First, 2020 wasn’t the beginning of another Great (Long) Depression, as understandably feared in March.

Why not? Because after the GFC, monetary authorities (central banks) decided to do whatever it takes to combat recessions.

Central Banks (The Reserve Bank in Australia) have the powers to deal with monetary policy. That is interest rates. They choose a ‘target rate’ for banks to loan to each other. In the same way you have an account with a bank, that financial institute has an account at the central bank (these are called exchange settlement accounts [ES]). These accounts need to be positive at the end of each day. If a bank is short it will borrow from another bank with surplus reserves. This is the rate the central bank aims to set. Currently the offical rate is 0.1% in Australia. Though the actual rate is much lower because of the banks QE program (more on that below)

What is Quantitate Easing?

As described above financial institutes hold exchange settlement accounts with the Reserve Bank of Australia. I’ve describe detail of various operations here, here and here. The RBA not only is able to set the rate of interest banks loan to each other (Cash rate) it can also set the yield on any Government bond. It currently has a target of 0.1 percent on 3 year Australian Government Securities (bonds)

What does this mean? As treasury spends via fiscal policy it adds reserve to the system by marking up these exchange settlement accounts. It is then a choice to issue a bond. These are offered for various lengths 1, 3, 5 year etc…by The Australian Office of Financial Management. The RBA has purchasing these bonds on the secondary market. So the steps are

  1. Treasury spends by marking up accounts at the RBA
  2. AOFM issues bonds – in Australia they are called Australian Government Securities (AGS). Financial Institutes purchase these from currency in their ES Accounts
  3. This operation drains ES Accounts and adds them to securities accounts
  4. The RBA has then been buying AGS to lower their yields and ensure the target rate on a 3 year AGS is 0.1 percent. You can read about it here

It is important to note that when the RBA is purchasing bonds it is switching the asset portfolio. More reserves in ES Accounts as it purchases back AGS that have been issued by the AOFM and it now ‘owns’ bonds that were issued by treasury.

This is usually called ‘money printing’ however by definition all spending by treasury is ‘new’ money entering the financial system.

Treasury spends via appropriation bills and the central banks use a computer to mark up the relevant bank account. This process is the same irrespective of past fiscal positions. It’s ‘cost’ in terms of the real resources used is the same irrespective of the interest rates. 

Bond issuance (govt debt) is an after the fact operation. It switches currency in reserve accounts (that financial institutes hold with the reserve bank) to securities accounts (which earns interest).

There isn’t a need to issue debt. Ask yourself where financial institutes obtain currency to purchase bonds? 

Treasury departments hold public accounts with the central bank. These are purely there to record the transactions that take place. The balance in that account is irrelevant to the governments ability to spend.

Seeing the powers that central banks have is to target an interest rate and NOT direct fiscal policy, there is very little they can do to deal with collapses in spending. The mainstream parade that interest rate movements will encourage or discourage spending. That is ridiculous. The manipulation of a rate banks loan to each other or a yield on a bond in no way encourages or discourages investment. The power lies with fiscal policy and that is held by treasury.

So, massive fiscal stimulus (which should really be called compensation) followed massive monetary stimulus from central banks – that is, money printing and rate cuts to zero and below.

It is true treasury engaged in spending to a level most of us haven’t seen before. None of this was financed by central bank operations. None. Bond issuance intrinsically has to work after the fact the issuer has spent. The fact interest rates are 0 or the RBA is purchasing bonds via QE program is irrelevant in treasury’s ability to spend.

Businesses are getting ready to catch that money and transfer it to their own bank accounts: Private sector job vacancies in Australia rose 24.2 per cent between August and November to a record high of 228,800.

That’s only a quarter of the 942,100 people still unemployed – but even in good times there are usually three unemployed people for every vacancy.

Obviously you are going to have a large increase in job vacancies when you emerge from a lockdown. That figure isn’t telling us much. It’s just a big number. The reality is there are still millions of under and unemployed. This is a policy setting by the government of the day. The Australian Government as a monopolist of The Australian dollar can always purchase idle labour. It chooses the unemployment rate.

The savings ratio is the inverse of consumption expenditure. Obviously when the lockdown happened people couldn’t spend and that caused the unemployment in the tourism, hospitality, arts sectors etc…It doesn’t tell us much more than that.

Meanwhile, the Reserve Bank is still pumping cash into the system.

In December it bought $20 billion worth of government bonds, bringing the total bought in 2020 to more than $100 billion, using freshly created money. That’s about half what the government actually issued.

Central banks pumping money into the system is, as descried above, switching currency in accounts at the Reserve Bank of Australia. It’s a smokescreen. QE has had The RBA purchasing bonds that are issued by the AOFM. Now treasury ‘owes’ money to the RBA. Yet within the mainstream media there is no acknowledgment that all spending has to originate from treasury as it marks up an account at the central bank. That is what the banks use to then purchase bonds!

Australia is only half pregnant with MMT because the RBA governor Philip Lowe insists that there is no such thing as a free lunch. Meanwhile governments elsewhere are munching on cost-free cash for lunch.

This is one of those myths that gets paraded around to invoke a fear of inflation. If we keep spending and if we continue to ‘fund’ treasury, eventually we will impoverish future generations and there will be inflation.

News flash: We have literally seen the Australian Government spend billions of dollars from nothing – we have seen the RBA engage in bond buybacks (QE) to expand the balance sheets of the banks and we had deflation.

Kohler gets that correct

Maybe the bill will be presented later in the form of inflation, as Dr Lowe confidently predicts, maybe not. But central banks have been printing money for 10 years so far and inflation hasn’t stirred.

I don’t describe it as ‘printing money’ but his comment that what central banks told us, that inflation will stir as a result, is spot on.


The policy prescriptions that you can advocate are thus different by viewing government spending through the lens that issuers spend first and tax and issue bonds after the fact.

The policy positions we need to wind down support measures (unemployment benefits) are shown to be purely spiteful. They ignore that governments choose the unemployment rate and can always purchase idle labour. We thus force people into poverty and punish them as a result of failed government policy to ensure enough jobs.

The positions taken by the mainstream economics that we should ‘spend now because rates are low’ are wrong too. Watch as they begin to attack government spending again at the first chance they can. We should spend as much as is politically desired on public infrastructure and full employment. Removing the lens that taxes fund our expenditure (rather than government spending funding our ability to pay tax) and ending the nonsense that states ‘bond issuance (government debt) ‘funds’ the government’ allows us to have better, more truthful discourse on the public services we should be providing.

A History of Australian Coinage and Note Issuance- Part 1

This is a project I’ve been working on tracing the legislation that has created Australian currency. There is information a colleague and I are uncovering on a 1893 Queensland Notes bill, that was the model used on The Australian Notes act.

The early days of federation money was defined as British or Australian coins – with specified ratios of gold, silver and bronze. The introduction of Australian Note issuance banned private promissory notes and allowed the Australian Government greater spending power by only requiring the government to hold 1/4 of the notes on issue in gold reserves.

There was opposition to the Fischer governments plan to introduce Australian notes with Mr Kelly, the member for Wentworth stating

“It seems to me like breaking a butterfly on a wheel to put the forms of the House to this test in order that we may be able to argue whether we should defray the cost of setting up a printing mill for shinplasters….”

A shinplaster is a banknote or promissory note with little or no value. These are similar arguments used today to demonise public spending. These comments where in relation to the requirement to keep less gold in relation to note issuance – though the subtext is in ending the private banks ability to profit from their unchecked ability to issue bank notes.

I’ve detailed the legislative history through 1909 – just before 1920 when the Commonwealth took over note issuance.

I also hope to write on the history of Treasury Bills – These were issued at interest via the colonies and the newly formed Commonwealth Government and served different purposes throughout history depending on the make up of the legislation. But more on that another time….

This is a draft of the early stages of a larger project where I hope to show an overview of Australian currency history from a Chartalist perspective.

The aim is to demonstrate the history of Australian currency has been ‘tax driven’ looking through various legislation and detailing the history of currency issuance, its link to taxation,  the history of banking and credit issuance and the establishment of central banking from an Australian perspective. 

While different monetary systems have been in effect from the gold standard, the Bretton-Woods system of fixed exchange rates and now a fiat currency, these have been institutionalised arrangements.  Australian currency and credit has always been subject to instruments of the state.

Keynes (p.4 1930) In his treaties on money is influenced by the earlier works of Innes (1913) and Knapp (1924) 

The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time—when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least.”

Lerner (p.313 1947) on gold  writes “Its [currency] transformability into gold and the guarantee of this possibility of gold backing are nothing but historical accounts of how acceptability came to be established in certain cases. These were possibly the only ways in which general acceptability could be established prior to the development of the well organised sovereign national states of modern times.”

Australian currency has its origins in the Coinage Act of 1909. Section 5 of the act created legal tender;

Legal tender

Cf. ib. s. 4.

5.—(1.) A tender of payment of money, if made in coins which are British coins or Australian coins of current weight, shall be a legal tender—

While section 6 prohibited other coinage;

Prohibition of other than official coins.

Cf. 33–4 Vic. c. 10 s. 5.

6. No piece of gold, silver, copper, or bronze, or of any metal or mixed metal, of any value whatever (other than a British or Australian coin), shall be made or issued as a coin or as a token for money, or as purporting that the holder thereof is entitled to demand any value denoted thereon.

The schedule within the act specified the dimensions and volumes of metal required in the minting of coins. These schedules were revised in 1936 and 1947 to change the ratio of gold, silver and bronze within the makeup of coins. 

In 1910, with hostilities from the opposition the Labor Fischer government passed the Australian Notes Act of 1910.  The member for Wentworth, Mr Kelly objected with the following statement.

We ought further to be informed what guarantees the public will have that this particular method is not being adopted for the purpose of raising money without paying interest thereon by a Government which refuses to borrow

House of Representative Hansard No.#30, 1910 p.690

It was common for states and the newly formed federal government to issue treasury bills in order to obtain gold. This of course meant interest payments.

The Australian notes act provided for note issuance to be linked with gold reserves. Under section 8, disposal of proceeds of issue notes, part 2 reads;

Part of the moneys standing to the credit of the Australian Notes Account shall be held by the Treasurer in gold coin for the purposes of the reserve provided for in section nine of this Act. 

While the gold reserve is under section 9 of the act. 

Gold reserve.

9.—(1.) The Treasurer shall hold in gold coin a reserve as follows:—

(a) an amount not less than one-fourth of the amount of Australian Notes issued up to Seven million pounds; and

(b) an amount equal to the amount of Australian Notes issued in excess of Seven million pounds.

(2.)  In ascertaining the amount of Australian Notes issued, the amount of Notes which have been redeemed shall not be included.

Notes that had been redeemed (taxed) were no longer necessary to link to the nation’s gold supply effectively deleting the currency from existence.  This meant the nation’s note issuance was tied to the quantity the Australian government held in gold.  Note issuance below seven million pounds required a quarter to be held in gold reserves while anything over seven million required full gold reserves.  

Furthermore the intent of the Notes act limited the supply of note issuance to seven million pounds. The member for Calare Mr. Thomas Brown during the second reading made comment. 

The proposal now before us is that the Commonwealth shall issue notes to the amount of £7,000,000,

House of Representatives Hansard No. 32, p1464

The responsibility of note issuance now solely rested with the Treasury. Just after a year later the act was amended on 22 December 1911 to remove the requirement to equivalent gold for note issuance above seven million pounds. 

Amendment of s. 9.

2.   Section nine of the Australian Notes Act 1910 is amended by omitting sub-section (1.) therefrom and by inserting in its stead the following sub-section:—

“(1.) The Treasurer shall hold in gold coin a reserve of not less than one-fourth of the amount of Australian Notes issued.”

During the second reading to the house Mr Fischer the Prime Minister affirmed 

The principle of the Bill is practically embodied in the statement that if any person or corporation desires to have Commonwealth notes, application will have to be made at the Treasury, and a deposit made in gold of their face value.

House of Representative Hansard No. #32, p.1228

The commentary continues that the act’s intent isn’t to stop private credit issuance of the banks.  

It is not intended to prohibit the banks from issuing notes, but a charge is made on all such notes issued, and the money placed to the credit of the community. Heretofore the private banks practically had the unlimited right to issue notes free of charge, and the State was expected or asked to “guarantee these notes in times of crisis. The Government proposal is safeguarded. 

House of Representative Hansard No. #32, p.1228

Curiously, the Australian Notes Act 1910 prohibited the circulation of State and Bank note issuance

No State Notes to be circulated after a proclaimed date.

4.—(1.) From and after six months after the commencement of this Act—

(a) a bank shall not issue, or circulate as money, any note or instrument for the payment of money issued by a State and payable to bearer on demand; and

(b) a note or instrument for the payment of money issued by a State and payable to bearer on demand shall not be a legal tender.. 

Quite clearly, the Commonwealth Government was looking to be the sole monopolist of note issuance within  the newly formed federation and to stop the issuance of notes from banks. On 10th October 1910,  after  the passing of the Australian Notes Act on 16th September, the Fischer Government passed the Bank Notes Tax Act 1910

Imposition of bank note tax.

4.  A tax at the rate of Ten pounds per centum for each year (including the year in which this Act commences) is imposed in respect of all bank notes issued or re-issued by any bank in the Commonwealth after the commencement of this Act, and not redeemed.

The changes in the legislation from 1920 onwards detail the Commonwealth Bank takeover of note issuance in 1920 with changes to the legislation in 1929 that allowed the government with written notice return holdings of gold to the Commonwealth as well as banning the export of gold.

The changes in 1929 are juxtaposed against the attempts of some within the Labor Party to establish a central bank (that forces financial institutes to hold accounts with the central bank) and the failed Central Reserve Bank Bill in 1929-30 and the Fiduciary Notes Bill of 1930-31. (Fiduciary note isn’t linked to gold)

It appears the 1929 changes as well as changes made to the Commonwealth Bank Act in 1931 and 1932 to allow for a reduction in gold reserves and allow for English Sterling to be used as reserves were concessions to the failed bills.

This the same era when the ALP had their three way split, Lyons formed the United Australia Party, with other fiscally conservative MPs. The result of limiting spending prolonged the depression.

Jack Lang who was dismissed as Premier of NSW, advocated for abandoning the gold standard and replacing it with a ‘goods standard’ went on to form Lang Labor.

I hope to detail the above events in more detail as well as the ascent of the Commonwealth Bank Act 1945 that created it as a central bank, rescinding the Commonwealth Bank Act 1911-1943.

The 1945 Act makes no mention of needing to keep reserves in relation to note issuance and it was the same time as the world established the Breton-Woods system of fixed exchange rates. Australia was officially off a gold standard.

It wasn’t until 1965 that Australia abandoned the final vestiges of the gold standard with its introduction of the Currency Act brought in the Australian dollar and rescinding the coinage act of 1909-1947.

Currency Issuing Governments Finance Themselves

There have been a lot of stories in the media around the debt and the ‘cost’ future generations will bear as a result of the spending required during the covid-19 crisis.

Each and everyone of these sports the same neoliberal garbage that taxes need to rise and suggest tax changes that work in favour of capital. Some more left leaning economist state things like we will to ‘invest’, in a financial sense, as a nation and ‘value add’ to our exports or we ‘borrow against future productive capacity’. This language is tied up in the neoliberal assumption governments need to find tax dollars in order to spend or need bond markets to borrow from.

For reasons perhaps of ignorance, it appears financial commentators haven’t yet grasped there have been different types of currency systems. There has been a gold standard, a system of fixed exchange rates, and fiat currencies, the latter of which we operate under today.

There were a number of economists during the mid-twentieth century that expressed under a fiat currency we were not restricted by tax collection. The below is a quote by Chairman of the NY Federal Reserve in an article from the American Affairs Journal.

The necessity for a government to be prepared to tax in order to maintain both its independence and its solvency still holds true for state and local governments, but it is no longer true for most national governments. Two changes of the greatest consequence have occurred in the last twenty-five years which have altered the position of the national state with respect to the financing of its requirements. The first of these changes is the gaining of vast new experience in the management of central banks. The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold or into any other commodity.

Ruml, B. The New Economic Insight, American Affairs Journal 1950

Under a gold standard governments promised gold in exchange for their currencies. The standard was adopted by the UK in 1844 and was the system used up until WWI. Countries would express the ‘value’ of their currencies in terms of gold. $1 may equal 30 grams of gold. The monetary authority could set it at whatever it liked. Domestically it needed to ensure sufficient gold reserves to back the currency in circulation.

It was the principle method for making international payments. Trade deficit countries would have to ship gold to trade surplus countries.

Say NZ ran a current account deficit against Australia. NZ would literally ship the equivalent gold on ships to the surplus country. This would have effects on the money supply expanding (without an increase in productive capacity) and the loss of gold reserves for the trade deficit country would force a country to withdraw currency domestically (decrease spending/increase taxes) which is deflationary and cause unemployment and falling output.

The economist Bill Mitchell described the system as such

This inflow of gold would allow the Australian government to expand the money supply (issue more notes) because they had more gold to back the currency. This expansion was in strict proportion to the set value of the AUD in terms of grains of gold. The rising money supply would push against the inflation barrier (given no increase in the real capacity of the economy) which would ultimately render exports less attractive to foreigners and the external deficit would decline.

From the New Zealand perspective, the loss of gold reserves to Australia forced their Government to withdraw paper currency which was deflationary – rising unemployment and falling output and prices. The latter improved the competitiveness of their economy which also helped resolve the trade imbalance. But it remains that the deficit nations were forced to bear rising unemployment and vice versa as the trade imbalances resolved.


During the gold standard era countries balanced their external account (trade or what call today the current account) to maintain their gold reserves. In the meantime trade deficit countries experienced domestic sessions and rising unemployment.

WWI interrupted in the gold standard and currencies were valued at whatever each country wanted to set it at. Some tried a return to the gold standard – some floated their currencies – the USA had a floating exchange rate in 1945 before deciding to go with the Bretton Woods System in 1946.

After the WWII (where countries abandoned the gold standard) Western countries formed the International Monetary Fund and created the Bretton Woods System.

This was a system of fixed exchange rates. Rather than convert directly to gold, countries converted their currencies to US dollars and the US government would convert $USD35 to an ounce of gold.

This was the nominal anchor for an exchange rate system. Countries would then build up USD reserves. If running trade deficits, they would intervene in foreign exchange markets to ensure their currency remained at the agreed parity (running down US dollar reserves) Other options would be to reduce imports (usually via tax cuts/decreased public expenditure to cut spending), increase exports (a loss of a real good or service) or alter monetary policy (interest rates) to attract foreign investment.

Monterey policy was about helping target the agreed exchange parity. It meant fiscal policy (in contrast to a fiat currency) was more restricted.

The fixed exchange rate system however rendered fiscal policy relatively restricted because monetary policy had to target the exchange parity. If the exchange rate was under attack (perhaps because of a balance of payments deficit) which would manifest as an excess supply of the currency in the foreign exchange markets, then the central bank had to intervene and buy up the local currency with its reserves of foreign currency (principally $USDs).

This meant that the domestic economy would contract (as the money supply fell) and unemployment would rise. Further, the stock of $USD reserves held by any particular bank was finite and so countries with weak trading positions were always subject to a recessionary bias in order to defend the agreed exchange parities. The system was politically difficult to maintain because of the social instability arising from unemployment.

So if fiscal policy was used too aggressively to reduce unemployment, it would invoke a monetary contraction to defend the exchange rate as imports rose in response to the rising national income levels engendered by the fiscal expansion. Ultimately, the primacy of monetary policy ruled because countries were bound by the Bretton Woods agreement to maintain the exchange rate parities. They could revalue or devalue (once off realignments) but this was frowned upon and not common.


Let’s take a step back in time and look at the history of The Bank of England. This was the world’s first central bank. Created in 1694 . The BoE website says

The Bank of England began as a private bank that would act as a banker to the Government. It was primarily founded to fund the war effort against France. The King and Queen of the time, William and Mary, were two of the original stockholders.


One could make the assumption the reason for private bankers holding shares in that original entity was to profit every time the government spent. There would be an accounting arrangement whereby the Treasury issued gilts (we call them bonds, treasuries or securities) the BoE would hand over £ and the bankers in turn would ‘own’ the government debt collecting the repayments. The bank was always governed under Government legislation and it was nationalised (removing the private stock holders) in 1946.

Pre-1844 any private bank could issue their own banknotes. Customers would deposit gold in a private bank and receive a ‘note’ that specified the amount. It was until 1725 that the BoE began to issue their own partially notes for amounts of £20 and upwards. These partially printed notes increased in denominations of £10, up to £90 and a bank cashier could increase the value of the note in writing by a maximum of £9 19s 11d

For the uninformed there were 12d to a shilling and 20s to the pound. You could further divide pence into farthings and there were 4 farthings to the pence. For the sake of staging it the (d) symbol for pence comes from the Roman ‘denarius’ a coin used in the Roman Empire.

Up until 1844 private banks had the ability to issue their own notes. The Bank of England began to open its own branches in 1826 as a result of banking crisis in the 1820’s that saw many country and provincial banks fail. The BoE website states:

One of the main reasons for establishing branch banks was to enable us to take further control of the banknote circulation, in order to prevent another crisis.


In 1844 (the formalisation of the gold standard) the UK Parliament introduced The Bank Charter Act which formalised the issuance of banknotes in the UK. It started to place restrictions on private banks issuing their own notes and stopped new banks from issuing their own notes.

In 1931 the BoE suspended the the Gold standard as confidence collapsed as a result of the depression, the Bank lost much of its reserves. The simplest way to spend when you don’t have gold in a currency system backed by gold is to remove the gold standard.

Governments that issue their own currency have always been able to finance themselves, even under a gold standard. Over the period of WWI the BoE issued war bonds to ‘finance’ the war. The public didn’t buy enough war bonds and the BoE used its own gold reserves to purchase treasury war bonds. I suppose this was to remain the rouse that governments are ‘borrowing’

In January 1915, the Treasury prohibited the issue of any new private securities without clearance, and UK investors were banned from buying most new securities (Morgan (1952)).  As the war dragged on, and capital became increasingly crucial to the Allies, the net would tighten further. And this episode was to be the first of several instances during the war where the Bank used its own reserves to provide needed capital.


Over the period 1797 – 1821 the UK entered a period known as ‘The Restriction’ As a result of the panic over the war there was a rush on withdrawals of gold and the BoE reserves depleted by £14 million. They suspended the convertibility of gold as they entered a war with France.

To try to preserve the already depleted gold reserves, the Prime Minster, William Pitt the Younger, placed a Privy Council Order on the Bank of England, ordering it to stop paying notes in gold.


The power of the state by legislation ended a system that restricted supply of currency to gold and by legislative fiat they had a free floating exchange rate giving them the capability to invest in their productive capacity. In this case to fund war efforts against Napoleon.

A fiat currency is a currency that a government issues is not convertible (to gold) and floats it on foreign exchange markets.

The float allows a government to target domestic policies such as full employment without the need to worry about ensuring the exchange rate remains at an agreed parity. It means rather than needing to find foreign currency to purchase back its own currency to defend the exchange rate, it is the exchange rate that takes the hit. It means it doesn’t need to ensure gold reserves to the currency in circulation.

The modern fiat currencies began when Nixon ended the Bretton Woods System in 1971 and no longer promised gold in exchange for US dollars. Australia floated its dollar in 1983.

You can appreciate that under previous regimes like the gold standard, taxation ensured the spending the government did was offset to ensure the currency in circulation was in line with the supply of gold. Under a fiat currency the obligation to watch a gold supply is no longer there. The government can purchase whatever is for sale in the currency it issues. There is no need to find gold.

These types of monetary regimes are different. There is no point applying ‘gold-standard/fixed exchange rate’ thinking to a modern day fiat currency. Under a fiat currency a governments limit to spending is limited by the available real resources. There is no need to defend an exchange rate or maintain a gold supply.


Over the 19th century The British Government (through its agent the BoE) started to crack down on private note issuance (under a gold standard) to stop prevent financial crisis. Similar things where done in the USA and Australia to ensure ‘integrity’ of the financial system. It was the nation state that held power (and still does) not the financial sector and private bankers.

Australia used its wartime powers to establish a central bank and forced financial institues to hold exchange settlement accounts with the Commonwealth Bank (and in 1959 handed the role over the newly created Reserve Bank of Australia) This allowed the Commonwealth Government to have control of monetary policy (the overnight interest rate).

Broadly speaking we can divide monetary systems into two types

  1. Gold standard/fixed exchange rates – where governments promise a commodity (such as gold) for a fixed value or they agree to maintain a particular exchange rate. These systems place institutional restrictions on governments spending because they have agreed or promised gold or a foreign currency in exchange for their currency of issue.
  2. Fiat currencies – these allow governments to spend up to the productive capacity of the economy.

Today treasury departments have accounts with their central bank. There is usually an institutionalised accounting arrangement where by when the government taxes the equivalent tax collection is marked up in the ‘offical account’ if the account is short a department within treasury will auction bonds to make up the difference between what it has taxed and what it has spent. However, bonds can only be purchased with reserves which are the result of previous deficits.

The flow (deficit) is then represented as a stock (debt). Under current institutionalised arrangements you can view the debt as every dollar that has been spent and not taxed back. It is the savings of the non-government sector.

The British government through this crisis has done away with the bond market and have used Ways and Means facility (W&M)

The Ways and Means (W&M) facility functions as the government’s overdraft account with the Bank of England (the Bank), i.e. the facility which enables sterling cash advances from the Bank to the government.


Sovereign currency issuing governments would all have overdraft facilities with their central banks. But why go through the rouse of pretending a currency issuer needs to find funds. Combine the operations of the central bank and treasury and credit the relevant bank account and do away with the bond market all together. All reserves within the financial system are a result of government deficit spending as it is. Why hand out corporate welfare?

Hopefully this little bit of history can help you understand how different currency systems operate and see that the a currency issuing Government can do away with the bond market all together.

© Jengis 2020

The Mythology of Printing Money Part II

This is a follow up from yesterday’s post and aims to dispel the myth of the term ‘printing money’ and the orthodox understanding of inflation. The end looks at what happened in Venezuela and Zimbabwe and identifies the cause of hyperinflation as minimal productive capacity and minimal capacity to purchase imported products. They are supply side constraints and you can’t purchase things you can’t make or have access to!

In part 1 The Mythology of Printing Money we covered how the term ‘printing money’ doesn’t apply to any spending operation in a fiat currency, looked at how all Federal Government spending was an appropriation bill and the operations of treasury and the central bank marking up an account. You may also wish to read the prequel in this series How loans create deposits and why we should have public banking…

All spending by the currency issuer can be considered new currency. This can be a difficult concept to wrap your ahead around at first. You need to break the myth that a government is like a household. It is not. It is an issuer of the currency and can be considered more like a scorekeeper.

When you are watching the football the umpire gives an instruction to mark the scores up when a try is scored. Theses ‘points’ don’t come from anywhere, they are keystroked into existence. The deduction of the points scored don’t give the umpire an ability to award more points.

It can come as a shock when someone hears for the first time ‘taxes don’t fund expenditure’ Please read these posts.
1. Money is a creature of the State
2. The Story of Money

The purposes of bond issuance (Government Debt) isn’t too ‘fund’ expenditure but is used as a tool for liquidity management. The RBA needs to ensure there is sufficient liquidity in the Exchange Settlement Accounts so Authorised Deposit Taking Institutes can pay each other at the end of each day. As banks create loans, they need to be able to pay each other. This is what they use their ESAs for. The image below shows how bond issuance (called Australian Government Securities) move reserves in the system from ESA to securities accounts.

  1. Governments spend by marking up the appropriate account
  2. Bonds are issued voluntarily to match deficit spending changing the portfolio mixture. 
  3. The RBA uses its Domestic Market Operations to ensure there is liquidity in the system so ADIs can pay each other. (see image above)
  4. The RBA uses a corridor system to defend an interest rate.

The RBA from 20 March has embarked on Quantitative Easing (QE) – sometimes this is called ‘printing’ money. In the image above we can see when treasury issues AGS it takes reserves from ESAs and places them in AGS accounts. There is what is called a primary bond market. There is a list of approved ADIs that can participate in this first round of issuance to purchase AGS and they can then trade them in what is called the secondary bond market. It’s important to note that QE is the RBA specifying a yield on a AGS maturity. You purchase AGS for a specified amount if time. For example a three year maturity. As the demand for AGS increases it raises the price and lowers the yield.

QE undermines the target rate when it chooses a particular maturity, in this case three years and purchases as many AGS as necessary to meet its target, which is currently 0.25%, its purchases increase reserves in ESAs and the target rate falls until it hits zero. If you’ve understood the corridor system, the current floor rate of reserves is 0.1% so the QE program undermines the target cash rate. *

To date since the 20 March the RBA has bought $25,000,000,000 (that is billion) of AGS it holds on its book. Upon maturity of those AGS, the RBA deletes funds from the OPA. *

There is often a mistaken belief that banks loan out reserves. Previously during the GFC we had all sorts of predictions of inflation taking off, banks increasing their lending, predictions of additional Government spending causing inflation and none of that came to fruition. This is because orthodox economics prescribes to the loanable funds theory that states banks loan from a limited pool of savings and as governments increase their expenditure it raises rates and increases the price which leads to inflation. This is not what happens, Government spending adds to reserves, decreasing the interest rate and banks create deposits when they loan to credit worthy customers.

You can see Alan Kohler on ABC News come to that realisation. The intro to the segment starts with ‘Is it something we can afford [stimulus]? and where does all the money come from?’ and in his concluding remarks Kohler says ‘What Dr. Lowe won’t be keen to do is give politicians the idea there’s a magic pudding – of printed money. There sort of is, just don’t tell politicians’

There you have it, there are no printing presses in any of that.

  1. Treasury deficit spends adding to reserve levels
  2. AGS are issued (voluntarily) to match the deficit
  3. RBA uses its domestic market operations to ensure there is liquidity
  4. RBA is currently purchasing AGS at three year maturites to lower the yield. The debt is now owned by the Government.

It is simpler to simply deficit spend and ignore all the accounting practices that are there in issuing AGS. They serve as a mechanism to deliver unearned income to already wealthy investors. These are the very same people that object to increases in welfare payments and public expenditure in general.

Disappointedly, I heard this radio interview on Radio National fear mongering around debt and deficit with language like ‘we’ve gone from balanced budgets to a blowout in debt and deficits’ and ‘will see the budget deficits balloon…’ This is language the invokes an unnecessary fear and that government spending at some point needs to rein its spending in or we all suffer. This crisis shows we always need government spending.

The interview continues with a nonsense analogy that previous generations had to pay for WWII spending. No they didn’t. There was no scarcity of jobs after the war. Governments used their fiscal positions to maintain full employment and seldom did it rise above 2%. Menzies almost lost an election in the 60’s and was forced to raise the deficit and bring unemployment below 2 per cent.

At the end of the interview Fran Kelly and senior business correspondent Sheryle Bagwell discuss the Governments QE program and how the RBA is purchasing Government bonds. They very clearly make the distinction that they are purchasing bonds on the secondary market and not directly from the Government [treasury]

‘If The RBA brought them directly that would be known as helicopter money, it would basically be firing up the printing presses to fund government deficits…lazy governments could really get used to that’

  1. Governments don’t fund deficits they are a result of spending more than taxation.
  2. Dollar for dollar Government Deficits have to match the non-government surplus.
  3. Whether the RBA purchases bonds on the primary or secondary market, the end result is the same. The bonds sit on the RBA balance sheet and at maturity treasury instructs the RBA to pay itself the face value and interest.
  4. The reason the RBA purchases bonds on the secondary market is that it allows investors to purchase bonds on the primary market and then make a capital gain when that bond is then brought by the RBA.

Stop it with the nonsense printing money analogy! There are no printing presses, there are no helicopters, the government is continuing to spend in the same way it always has, it instructs the central bank to mark up the relevant bank account after an appropriation bill has passed.

Inflation is excess spending (from any source) in excess of the productive capacity of the economy and the economy’s ability to absorb the additional spending. Currency issuing governments have an no financial constraint (they never need to find an income) but they are restricted by what is available for sale.

Yesterday I was involved in this Twitter exchange with Professor of economics Richard Holden from the UNSW.

The orthodoxy usually talks about deficit spending but budget balancing over the cycle. Holden in his tweet states ‘We can borrow at almost zero interest’

The Government never borrows, it spends adding to reserve levels of ESAs and bond issuance shifts those reserves from that account to securities account. The difference between that and a term deposit is that you can buy and sell access to those securities accounts.

If Holden understood that he wouldn’t feel the need to then respond back with the typical fear mongering around inflation ‘tell that to Venezuela or Zimbabwe‘ invoking hyperinflation fear!

Japan, The USA, The European Central Bank and now Australia has been purchasing bonds off the secondary market (QE) and holding treasury bonds on their books, paying the interest to themselves and there has been no outbreak of inflation.

Amongst the orthodoxy they’ll make the case prescribing to the Quantity Theory of Money. ‘the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.’

The federal reserve (USAs central bank) says

‘The money supply is the total amount of money—cash, coins, and balances in bank accounts—in circulation.

Looking at the data for Recent balance sheet trends and the Selected liabilities at the Federal Reserve they note

On the liabilities side of the Federal Reserve’s Balance sheer, the amount of currency outstanding has continued to rise gradually, but reserve balances (deposits of depository institutions) have increased dramatically relative to the prior financial crisis’


The orange line is the increase in deposits of financial institutions in the US equivalent of exchange settlement accounts. Clearly, there has been no great inflationary outbreak, at least never in my life time. Since the GFC the Federal Reserve has embarked on several QE programs the latest of which has seen their purchases of bonds increase from $US700bn to an unlimited number of bonds. This swaps an asset of a bank (the bond) into currency in its exchange account and the bond is held with the central bank.

So we can put increases in the money supply, ‘printing money’ and an inflation outbreak to rest. It’s not a thing.

There are other factors that contribute to inflation and even hyperinflation. The first step is understanding what economist call ‘cost-push’ inflation.

This differs to the demand side in that it is the price level of a good or services increases either via an imported price (something the national government can’t control) or domestically via a fall in production and productive capacity.

Fadhel Kaboub at the Global Institute for Sustainable Prosperity in the linked news article below says

MMT points to a different primary cause of inflation in developing countries: not domestic spending, but foreign debt and a resulting lack of “monetary sovereignty.”

Why Government Spending Can’t Turn the U.S. Into Venezuela, In these Times, 7 January 2019; http://inthesetimes.com/article/21660/united-states-venezuela-modern-monetary-theory-trade-deficits-sovereignty

A country that is monetarily sovereign issues its own currency and floats it on an exchange rate.

There are some countries which use a currency they don’t issue, such as the eurozone countries and there are countries that fix their exchange rates to maintain a parity to another currency.

Countries that don’t issue their own currency, like the eurozone, are reliant on taxes and bond markets to fund public expenditure.

Countries that fix their exchange rate have to ensure foreign currency reserves to maintain the peg. Countries then need to obtain foreign currency either by purchasing it on foreign exchange markets (FOREX) using their own currency or through exporting goods and services.

Provided spending doesn’t outpace an economies productive capacity you won’t have a period of accelerating inflation.

Any country that issues its own currency can purchase what is for sale in the currency it issues. This includes idle labour. A country that issues its own currency always chooses the level of unemployment.

That doesn’t mean because a country at full employment is materially prosperous. You need to consider the skills of the labour force, the raw materials it can access and what it is able to produce.

For a country that relies on imported products, they are reliant on their exchange rate or exports to be able to obtain foreign currency and purchase the goods and services they are unable to produce domestically.

Exports are a loss of a good or service, it is something a nation exchanges for a foreign currency, it means unless you are able to produce an excess of that product you are depriving your citizens of the use and instead giving it to foreigners.

For developing countries, the problem begins with trade deficits and resulting debt owed in foreign currencies.

Those deficits are the product of fundamental economic shortcomings, themselves often a legacy of colonial rule. Postcolonial countries are typically unable to produce enough food and energy to meet domestic need, and they face structural industrial and technological deficiencies. Because of this, they must import food and energy, along with essential manufacturing inputs. For example, Venezuela lacks refining capacity, so—while it exports crude oil—it must import more expensive refined oil, contributing to trade deficits.

Importing more than they export causes these countries’ currencies to depreciate relative to major currencies. With a weaker currency, new imports (like food, fuel and medicine) become relatively more expensive. This imbalance is the real driver of inflation, and often of social and political unrest.

The International Monetary Fund (IMF) historically steps in at this point with emergency loans coupled with painful austerity measures. To get out of IMF conditions, even progressive policymakers typically prioritize acquiring foreign currency reserves in order to honor external debt payments. They promote tourism (tourists bring foreign currency) and design agricultural and manufacturing policies to support export industries. Meanwhile, industries that would build self-sufficiency (and thus fix the trade imbalance), like food crops for domestic consumption, receive little government support. All of this decreases self-sufficiency and reinforces the dependence on foreign goods that caused the debt in the first place.

Why Government Spending Can’t Turn the U.S. Into Venezuela, In these Times, 7 January 2019; http://inthesetimes.com/article/21660/united-states-venezuela-modern-monetary-theory-trade-deficits-sovereignty

Venezuela had external debt denominated in US dollars and little productive capacity to satisfy the needs of its population. It has nothing to do with Government spending or ‘printing money’ but sanctions imposed upon it that reduce self-sufficiency. A more just world would cancel debt denominated in an external country, aid the country in building productive capacity to be self-sufficient and have the US purchase Venezuelan bolívar on FOREX markets to maintain the currency between a certain range so they can purchase imported products.

Professor Bill Mitchell has detailed post on hyperinflation in Zimbabwe where he identifies one of the major causes of the inflationary outbreak to a fall in the nations productive capacity. In Zimbabwe’s case their agricultural production, that also happened to be one of the nations largest employers.

The problems came after 2000 when Mugabe introduced land reforms to speed up the process of equality. It is a vexed issue really – the reaction to the stark inequality was understandable but not very sensible in terms of maintaining an economy that could continue to grow and produce at reasonably high levels of output and employment.

The revolutionary fighters that gained Zimbabwe’s freedom from the colonial masters were allowed to just take over productive, white-owned commercial farms which had hitherto fed the population and was the largest employer. So the land reforms were in my view not well implemented but correctly motivated.


The output of the nation was decimated and it saw soaring unemployment levels, to over 80%. How do you reduce the demand for food without forcing people to remain malnourished and even starve?

The central bank was using its foreign reserves to purchase food supply, limiting the capacity of other industries like manufacturing on FOREX markets to purchase foreign currency and ending up in the situation where they couldn’t operate their plants. Mitchell goes on

The situation then compounded as other other infrastructure was trashed and the constraints flowed through the supply-chain. For example, the National Railways of Zimbabwe (NRZ) has decayed to the point the capacity to transport its mining export output has fallen substantially. In 2007, there was a 57 percent decline in export mineral shipments (see Financial Gazette for various reports etc).

Manufacturing was also roped into the malaise. The Confederation of Zimbabwe Industries (CZI) publishes various statistics which report on manufacturing capacity and performance. Manufacturing output fell by 29 per cent in 2005, 18 per cent in 2006 and 28 per cent in 2007. In 2007, only 18.9 per cent of Zimbabwe’s industrial capacity was being used. This reflected a range of things including raw material shortages. But overall, the manufacturers blamed the central bank for stalling their access to foreign exchange which is needed to buy imported raw materials etc.

The Reserve Bank of Zimbabwe is using foreign reserves to import food. So you see the causality chain – trash your domestic food supply and then have to rely on imported food, which in turn, squeezes importers of raw materials who cannot get access to foreign exchange. So not only has the agricultural capacity been destroyed, what manufacturing capacity the economy had is being barely utilised.


A country like Australia has none of these issues. Fears of hyperinflation are unwarranted. Mitchell describes the situation in Zimbabwe as a result of a supply side collapse, a 45% fall in agricultural capacity, difficulty in obtaining imported materials forcing manufacturing to lay idle and compounding that with a Government interested in spending for political favours while your nations productive capacity has collapsed

“Further, the response of the government to buy political favours by increasing its net spending without adding to productive capacity was always going to generate inflation and then hyperinflation. “



  1. Money is a creature of the state. All Government spending by a monetary sovereign is an appropriation bill through the relevant legislature.
  2. Tax liabilities serve the purpose of creating a demand for an otherwise useless currency.
  3. Government debt is issued after the fact a currency issuer has spent. It moves currency from reserves into a securities account.
  4. Deficits are a result of spending (and aren’t funded) and have a corresponding surplus in the non-government sector. This is an accounting rule and simple 7th grade algebra.
  5. Printing money – referred to by the orthodoxy as the central bank purchasing bonds from the treasury (QE) is not inflationary. Increases in the money supply (Quantity Theory of Money) have not resulted in any outbreak of inflation despite governments embarking on these since the Global Financial Crisis.
  6. Government deficits pushing rates up (Loanable funds theory) and contributing to rising interest rates and therefore costs and inflation is not a thing. Governments have run deficits, larger ones since the GFC and inflation has not happened. That is because loans create deposits.
  7. Hyper-inflationary episodes in Zimbabwe and Venezuela are supply side collapses and those nations had little domestic productive capacity, had debt in foreign currencies, depreciating exchange rates (where they couldn’t purchase imports) and no ability to obtain foreign currency without adhering into bullshit IMF rules to loan them foreign currency under conditions that impose austerity by mandating selling public assets to private corporations and aiming for budget surpluses.

Hearing economists peddle misunderstandings on the way the monetary system functions, like the many I’ve documented over these lasts two posts, continues to reinforce a neoliberal paradigm that will undermine progressive aims.

We shouldn’t have to moderate demands based on a misunderstanding that we need to find the dollars.

Currency issuing governments can always purchase what is for sale in the currency they issue and deploy those resources for a public purpose.

We have seen this during the covid-19 crisis the Australian Government double the rate of the JobSeeker payment (despite 25 years from both parties claiming it was unaffordable), they have temporarily nationalised private hospitals with a $1.3bn takeover, they have made childcare free. It is never an issue of finding the money but whether we have the resources to create the public services we desire.

Old paradigms take time to shift and you can see the economic orthodoxy feeling threatened. Richard Holden, despite pushing progressive aims and goals, is stuck under an economic paradigm that has no empirical evidence.

He felt the need to respond to an amateur that questioned where do financial institutes obtain Australian dollars to purchase Australian Government Securities? and brought up arguments of hyperinflation by referencing Venezuela and Zimbabwe.

I think that is a sign that the orthodoxy knows it is losing power. It is a choice to make that paradigm shift, admit your understanding was wrong and use MMT as a lens to advocate for your values.

*Edit: The initial publication of this made an error and said upon maturity of AGS the RBA credited the OPA. It is in fact upon maturity, the RBA deletes funds from the OPA. These are a liability of the RBA. and their deletion matches the deletion of the bonds, which are assets.

It was also picked up that there was bad phrasing and it was clarified that QE drives rates to zero (or the current floor which is 0.1% in Australia) and this has also been edited. The initial publication mistakenly said the current target rate was zero. It is not, it is 0.25%

Many thanks to Steven Hail for picking up the errors.

© Jengis 2020

The Mythology of Printing Money

Since the beginning of the corona virus Governments around the world have began to spend huge sums without a call from anyone on ‘How are you going to pay for it?’ In a recent 730 interview the reporter asked the question on how a sovereign currency issuing government would ‘pay for’ its spending down the track.

LEIGH SALES:  Has any thought been given yet as to how Australia will ultimately pay for this or is that to be worked out down the track?

JOSH FRYDENBERG:  This will be paid back for years to come. There’s no secret in that and of course, we will enter into discussions with the credit rating agencies over due course.


When I’ve publicly stated currency issuing governments have no intrinsic financial constraint the retort back is usually something like ‘if you print money you just get inflation’

This post will look at the way in which currency issuing governments spend, how ‘printing money’ does not apply to any spending operation, look at what government debt is.

The first thing to note is that there is a difference between a currency issuer and a currency user.

  1. The Australian Government is a currency issuer. It is a monopolist of the Australian dollar – It faces no insolvency risk
  2. As a monopolist over the currency it always has the capacity to spend (that is not a call for unlimited spending)
  3. Regardless of past deficits or surpluses the Australian Government spends in the same way every time. – There is an appropriation bill that passes through the legislature, Treasury instructs the Australian Office of Financial Management to give the Reserve Bank an instruction to credit the relevant bank account(s)

The very concept of saving for an issuer of a currency is ridiculous. Savings are the act of forgoing current expenditure and are used to spend at a later date. When you issue a currency you always have the ability to spend.

We can conceptualise the process from the above figure. Like you have an account with your bank, your bank referred to as, Authorised Deposit Taking Institute (ADI) has an account with the Reserve Bank of Australia. They care called Exchange Settlement Accounts (ESA). All Federal Government spending marks up reserve levels of ADIs and those ADIs credit the relevant account holder.

Taxation has the opposite effect. Demand deposits decline and Reserve levels also decline. It means less spending power for currency users.

There are institutionalised arrangements where The Australian Government holds an Offical Public Account with the RBA, however this is merely an accounting arrangement and the numbers within the OPA are not included in the money supply. The image below is a screenshot from the notes of the RBAs data on the financial aggregates of the Australian economy.

There are two options for a Government to adjust aggregate spending levels. Fiscal Policy (Spending and Taxing) and Monetary Policy (Interest Rates)

We have seen how Government spending adds to reserve levels and taxation does the opposite. What Government spending also does is effect the RBAs target rate. This is the interest rate that you hear about on the first Tuesday of every month and it is the rate ‘targeted’ for ADIs to loan to each other using their Exchange Settlement Accounts (ESA)

One of the purposes of bond issuance is to defend an interest rate. As noted above all Federal Government spending increases reserves with ADIs.

As government spending adds to reserves and increases their level it pushes interest rates down and as taxation removes reserves it pushes rates up.

Obviously fiscal policy can not be used to defend a particular target rate as it would cause all sorts of havoc. It is the RBAs job to ensure the levels of reserves are right so banks lend to each other at the target rate.

Bonds are used to drain and add liquidity. When a bond is issued (sold) it drains reserves. It is the equivalent of an ADI moving dollars from their ESA (The account used to pay other ADIs) to a securities account, an account which earns interest.

The opposite happens when bonds are purchased by the RBA. It moves dollars from the ADIs security account to their ESA. Bond issuance doesn’t alter the supply of funds but merely the portfolio mix.

The activities of Treasury and The RBA need to be very closely co-ordinated to ensure the payment systems functions.

The RBA needs to ensure sufficient reserve levels so ADIs can pay each other. Remember loans create deposits and spending and taxing by the treasury can have huge fluctuations in the levels of reserves.

Rather than relying on bond issuance to ensure a particular target rate is achieved the RBA uses what is called the corridor system. You can watch this video of Katherine from the Domestic Market Operations department at the RBA to understand how it works. Thank you Katherine.

Once you take into consideration the corridor system, bond issuance becomes about liquidity management and ensuring there are sufficient reserves so ADIs can pay each other and our payment system functions.

The RBA will always have an option for an ADI to ensure their ESAs are positive. If they are short of reserves they can borrow from the ‘penalty window’. This is where the RBA acts as a Lender of Last Resort and loans the required reserves to the ADI.

In no way does the bond issuance ‘fund’ the ability of a currency issuer. There isn’t really a reason for treasury to match deficit spending with bonds either. It just means the RBA may have to enter into more repurchase agreements to ensure there are sufficient reserves in the system. Because bond issuance moves dollars into securities accounts, draining reserves, the RBA then enters into what is called repurchase agreements (repos) where it issues bonds and then buys them back the next day with an interest rate to add to reserve levels.

What does all this have to do with ‘printing’ money. I am never too sure what people mean when they use this term.

  1. Governments spend by marking up the appropriate account
  2. Bonds are issued voluntarily to match deficit spending changing the portfolio mixture.
  3. The RBA uses its Domestic Market Operations to ensure there is liquidity in the system so ADIs can pay each other.
  4. The RBA uses a corridor system to defend an interest rate.

The very concept of borrowing for a currency issuer or using ‘this record period of low rates’ to invest is non-sensical. There is no borrowing or debt in the same way it applies to a household. Deficit spending adds to reserves and that deficit spending is what gives ADIs the ability to purchase bonds and that is what we refer to as Government debt!

In The Canberra Times Adam Triggs wrote an article Before anyone asks: no, Australia does not have a debt problem. It starts with an incorrect understanding of macro and uses neoliberal or fake knowledge.

The article states that the increased costs of government spending in normal times don’t apply to these pandemic times. That’s ridiculous, there is no real cost to government spending, it marks up accounts using a computer. Costs are real resources. Environmental damage, loss of habitat, climate change, individual hardships, unemployment, mental and physical health etc…

The author outlines three reasons in the risk of this ‘pandemic’ spending.

“The first is the potential for increased government spending to “crowd out” the private sector. When governments run budget deficits they are borrowing money from investors, money which is no longer going to other worthy investments. Increased demand on the limited pool of savings, in normal times, means higher interest rates”

The above quote is straight out of the loanable funds theory that states there is a limited pool of savings that banks loan from and Government spending in excess of taxation then uses that limited pool and pushes rates up. That is simply not true. I outlined in a previous post on how loans create deposits and above have described the process of how the RBA ensures sufficient reserves to ensure ADIs have sufficient reserves to pay each other. The loanable funds theory is on of those neoliberal myths that is used to demonise public spending. I like to use this thing called observation of reality. We can very clearly see through the GFC and now this crisis, deficit spending has increased and we have record low interest rates. You can see central banks around the world set interest rates every month, there is no natural reason they will suddenly increase and governments will be powerless to stop it.

“The second potential cost of increased government spending is the future cost of paying interest on that debt.

The ‘debt’ are securities account that ADIs hold at the RBA. If you don’t like Government debt, don’t issue it.

Furthermore, the RBA announced it will engage in Quantitate Easing – a process where it chooses a particular treasury maturity (say three year bonds) chooses a yield it desires and begins purchasing those bonds from the market. Central Banks around the world have engaged in this practice since the GFC. Many central banks now hold treasury bonds. It is the treasury choosing to issue a bond, an investor buys that bond, it is then purchased by the central bank (with a capital gain for the investor) and the interest payment is then paid from treasury to the central bank who then credits the treasury account.

The third cost of increased government spending is that it can be unsustainable (meaning it can cause problems if that level of spending continues) or can destabilise financial markets.

Government spending can never become unsustainable. It is a currency issuer and literally as infinite financial capacity. Why are financial markets an indicator of sustainability? Fiscal policy shouldn’t be there to appease financial markets, who desire less public expenditure and the ability to make more profits, it should be there to ensure our own well being. You judge fiscal policy based on how well the bottom of the income spectrum is doing and whether we have our desired levels of public services and are reaching our goals to mitigate against climate change.


It is pathetic that the vast majority of financial journalists/commentators get the very fundamentals of the way government spending works wrong.

Adam Triggs in The Canberra Times, Leigh Sales in her interview with the Treasurer, Jessica Irvine in the Sydney Morning Herald who said “These surplus funds can then be used to pay down any existing debt.,”

No, currency issuers can always spend regardless of past deficits or surpluses. Government Debt are bonds purchased by Financial institutions who obtain Australian dollars from Federal Government deficit spending. Surpluses are not savings. It is the government spending less than taxing and removing reserves.

Lenore Taylor of The Guardian who wrote “The country will be deeply in debt, as will many households.The Taylor article makes an argument “Having seen the life-saving benefit of our public health system, there will surely be enormous pressure to fund it better in the future.” I agree with the overall spirit of the article. However, we won’t achieve greater levels of public services and spending, if we continue to frame economics using a neoliberal perspective.

For an accurate discussion of how our monetary system operates listen to this discussion between financial journalist, Alan Kohler and Emeritus Professor Bill Mitchell.

In term of the term ‘printing money’. It doesn’t apply to any spending operation.

  1. All spending by a currency issuer is an authorisation bill through the relevant legislature.
  2. There is then an instruction from somewhere within treasury to the central bank to mark up the relevant account.
  3. ‘Government debt’ or treasury bonds are then issued.
  4. Taxes are there to remove spending power and create non-inflationary space for public expenditure as well as creating a demand for a currency. See The Story of Money and Money is a creature of The State

© 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.”


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. 


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…


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!

Solving inequality requires getting macro right!

The ACTU last year in April released this report into inequality in Australia. It starts with the statement “Extreme inequality – which is what we are now experiencing in Australia – slows economic growth, creates social havoc and undermines faith in our political institutions.” Which I wholeheartedly agree with. In this post I aim to show why the report is flawed and how that can lead to flawed policy proposals.

The report in its summary recommends policy reform:

  1. Ensuring that real wages rise in line with national productivity improvements through the introduction of a new Living Wage, tackling insecure work, restoring penalty rates for 700,000 low paid workers, raising public sector wages and reform the collective bargaining system so it can deliver rising living standards;
  2. Making sure everyone pays their fair share of tax including corporations and the wealthiest members of our society. This includes reforms to capital gains, negative gearing and family trusts;
  3. Lifting the very poorest Australians out of dire poverty including through an increase in Newstart and an increase in the aged pension for those without adequate superannuation;
  4. Increased expenditure on health and education;
  5. A comprehensive Jobs Plan to reduce underemployment and unemployment; and,
  6. Measures to tackle excessive corporate power. The Banking Royal Commission has shown the extent of corporate excess and law breaking. Australia is also littered by firms with oligopoly power in certain sectors. Stronger competition policy is required to ensure people are not being ripped off by excessive prices.

Point 1 is what used to happen through institutionalised arrangements in Australia. I quoted in this post that the attack to decouple this arrangement began in the mid seventies were The Age newspaper quoted Friedman as saying .”….led the professor to opine that our long cherished arbitration system ‘seems to be highly unfortunate’ in the way it sets wages…”

Productivity is output level per hour worked. So for every hour, if you output $X, you need $X in wages in order to purchase that output. Real wages (wages adjusted for inflation) need to rise in line in productivity increases in order for the wages share of national income (GDP) to increase. Real wages can continue to grow below productivity but it means a growing share of the output we produce with our labour goes to profits. Arrangements that make bargaining difficult, make wage rises harder to negotiate and Government policy to cut spending and therefore public sector wages and employment (surplus) contribute to this.


The above graph is what has happened with the real wage and productivity levels since 1980 to 2009. There hasn’t been substantial change over the past decade to 2020 and share of wages is at historic lows.


When wages fail to grow with rising productivity levels it means we need credit to purchase the output our labour produces and in Australia we have seen record levels of rising household debt. One of the highest in the OECD.


Pre 1980s capitals dilemma was how do you ensure workers can still purchase what they produce and suppress wages. Thus began a process of breaking institutionalised arrangements around wages growth with productivity, ending full employment policies and allowing a reserve army of labour, deregulating and privatising financial services (e.g the commonwealth and various state banks), and what I think is the key contributing factor, leaving fiscal policy out as a tool and using the analogy that a government is like a household and a surplus obsession and fear mongering around debt and deficit.

One of the analogies used to ensure public spending remains low is the household metaphor, which assumes the currency issuing Governments face the same constraints as a household and a ‘surplus’ is desirable.

Under a fiat currency, that is clearly non-sensical. A currency issuing government promises nothing in return for the currency it issues (not in gold or a foreign currency) and it can spend regardless of past deficits or surpluses. As a monopolist over the currency it can always purchase whatever is for sale in the currency it issues.

When we look at sector balances, assessing the macroeconomy as a relationship between three sectors (Government, private domestic and Foreign sector), accounting wise the total sum has to add to zero. For example if the government spends 100 and taxes 30 we record that as a deficit of -70 though that +70 has to sit somewhere. All deficits go somewhere but the question that should be asked is where and for whom?

Looking at the data for sectoral balances in Australia we get the below picture.

Image from this lecture:

The period of government surpluses in Australia was a result of private sector deficits. The hallmark of ‘good’ fiscal policy isn’t whether a particular fiscal outcome is reached. It is a meaningless irrelevant statistical artefact. It is whether we have our resources, including labour all in use, whether we a meeting our objectives in terms of ecological limits, and we should judge fiscal policy based on how well the bottom of the income spectrum are doing.

Point 3 relates to increasing Newstart and the aged pension for those without adequate superannuation.

Increases to the unemployment benefit need us to assess why unemployment exists in the first place.

Unemployment is a systemic issue that can ALWAYS be resolved by the government of the day. Involuntary unemployment is not an issue that is beyond us to solve. The Government of the day chooses the level of unemployment because it can always purchase whatever is for sale in the currency it issues. We can still have generous unemployment benefits, a welfare system that ensures for those unable to work are provided with living wages, guaranteed housing, and other public provisioning.

Keynes noted in his General Theory of Money, Employment and Interest, that it was aggregate spending levels that determined economic activity, and that inadequate spending levels could lead to high periods of unemployment. 

From a national accounting perspective at the macro level the sources of income are Government Spending (G), Investment (I), Consumption (C) and Exports (X). Are all these sources of expenditure sufficient to full employment?

Modern Monetary Theory will note that as a monopolist of the currency, the federal government can always purchase whatever is for sale in the currency it issues and thus can always employ any idle labour. It is a political choice. The Government of the day chooses the unemployment rate.

Unless we ensure more job vacancies advertised than demanded, we will not have enough work for all those that desire to work. As a society we can not achieve equality, fairness and a public purpose unless that is what we set out to do.

Precarious work conditions exist because we have laws in place that allow such conditions to exist. People don’t have enough to retire on because we have a system that places retirement on the onus of the individual and leave retirement up to the speculations and abstractions of ‘the market’.

It is often overlooked that a Governments spending is representative of a socio-economic agenda. For as long as a society has the real resources to implement its desired policy objectives, these objectives are achievable.

Rather than ‘force’ people to save for retirement, we need to acknowledge the superannuation was set up under the false premise that currency issuing governments need to save. Saving is the act of forgoing current expenditure to spend at a later date. It applies to a user of a currency. A public pension doesn’t have to be a minimal subsistence living. The impacts of the spending whether from a public pension or a private super account are exactly the same. It is a question of whether we have the available real resources to purchase when that spending occurs.

The challenge with providing for an ageing population is not financial, it is rising dependency ratios as a larger percentage of the population exits the workforce and we need to ensure our productivity levels increase to maintain our same standard of material well-being. Current policy that seeks to cut government spending (surplus) and leave youth underemployed or unemployed jeopardises increases in future productivity. That is lost skills, trades and professions we have by leaving youth idle. These will be people we need to provide for elder Australians as they age; In terms of the services they will need to ensure they are cared for in their homes, in terms of services they will need to feel included within the communities they live, the services they will need to maintain their residences, the services they will need in terms of their health, services they will need in the event they are no longer able to stay at home and need greater care. These are the challenges we face with an ageing population not some non-issue finding the ‘money’ nonsense. Obsessions with fiscal balances undermine the very issue we are supposed to be solving. And we are the poorer for it. (In terms of real resources)

A system of subsistence public pensions leaves those that have been out of the workforce at a disadvantage, particularly women, those on low incomes usually in precarious work, and those vested in the system to speculations and the expectations of unearned income.

The early classical economists distinguished between the use of earned and unearned income. From Michael Hudson’s Killing the Host

The guiding principle was that everyone deserves to receive the fruits of their own labor, but not that of others. Classical value and price theory provided the analytic tool to define and measure unearned income as overhead classical economics. It aimed to distinguish the necessary costs of production – value – from the unnecessary (and hence, parasitic) excess of price over and above these costs. This monopoly rent, along with land rent or credit over intrinsic worth came to be called economic rent, the source of rentier income. An efficient economy should minimize economic rent in order to prevent dissipation and exploitation by the rentier classes. For the past eight centuries the political aim of value theory has been to liberate nations from the three legacies of feudal Europe’s military and financial conquests: land rent, monopoly pricing and interest.

Distinguishing the return to labor from that to special privilege (headed by monopolies) became part of the Enlightenment’s reform program to make economies more fair, and also lower-cost and more industrially competitive. But the rent-receiving classes – rentiers – argue that their charges do not add to the cost of living and doing business. Claiming that their gains are invested productively (not to acquire more assets or luxuries or extend more loans), their supporters seek to distract attention from how excessive charges polarize and impoverish economies.

Australia’s superannuation plays into the concept of deriving rentier income, a concept that was thought as immoral and landed power in the hands of a ruling feudalist class during the enlightenment era. A system that was discussed in Moral Philosophy classes during the 19th century. (Moral Philosophy is what encompassed economics).

Today in economics courses concepts of rentier income and earned and unearned income are not discussed or their use in amassing political power for a financial services sector and the bankers and CEOs of major corporations. Why should we be ‘forced’ to guarantee an unending flow of dollars to a sector that is immoral, bloated and seeks to extract the value of our labour in order to engage in speculative activity on share markets, currency exchanges, housing and anything else our society financialises.

This brings me to another criticism within the ACTU report;

The ACTU also supports the right of all Australians to derive income from investments and accumulate wealth. These are fundamental and desirable attributes of a market based economy.”

This fails to define a difference between types of income. Earned and unearned income. You should not, in any moral society, be able to derive an income and amass wealth because of monopoly rents.

Joesph Stiglitz describes economic rents as;

The term ‘rent’ was originally used to describe the returns to land, since the owner of the land receives these payments by virtue of his or his ownership and not because of anything he or she does. The term was then extended to include monopoly profits (or monopoly rents)— the income that one receives simply from control of a monopoly— and in general returns due to similar ownership claims. Thus, rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth, as a by-product of their taking away from others. A monopolist who overcharges for her or his product takes money from those whom she or he is overcharging and at the same time destroys value. To get her or his monopoly price, she or he has to restrict production.


It is obscene that a ACTU report into worker inequality would not make a distinction between these two types of income and outright say we need to tax; rents, capital gains, share dividends at a higher rate than that of wages if we are serious about delivering wealth to the labouring class and reducing our levels of inequality.

The report states other incorrect information such as;

“Globally most respected economic institutions believe the risk of recession has increased and some pundits fear “winter is coming”.……Stimulus measures by the Chinese authorities will exacerbate already excessive debt levels and add to vulnerabilities

How can a stimulus measure exacerbate debt levels? The Chinese Government issues its own currency. A simple understanding of double entry book keeping will show dollar for dollar the Chinese government deficit is equal to the non-government sector surplus which would reduce private sector debt levels, all other things equal.

The idea that somehow the Chinese Government ‘borrows’ its own currency is nonsensical. It offers investors a bond and moves money from a reserve account at the central bank to a securities account at the central bank. The latter pays interest. It is an entirely voluntary choice.  Where do financial institutes obtain Chinese yuan from to buy government debt? 

Any government that issues its own currency can always deal with any financial crisis no matter what the size.

The below statement is in relation to Australia.

“Economic fear is mounting and because of very high debt levels and limited scope for expansive monetary policy governments have limited tools in responding to these challenges.”

The statement above discusses monetary policy (interest rates) The evidence is clear. Monetary policy is an ineffective way to stimulate aggregate demand. It is blunt, you can’t control where the spending goes and you are relying on already indebted households to go further into debt to spend.  

The report ignores fiscal policy (spending and taxation decisions) For a currency issuing government it is a tool that is unlimited. It is constrained by what is available for sale. What limited tools is the report referring to? Monetary policy has a limit, which is zero. Then it is a useless way to try and direct spending where you need it to go.


I’ve run out of time to discuss all the points above but I’ve given an overview of why I think the report is flawed.

An incorrect understanding of macro leads to incorrect policy prescriptions and the non-sensical idea that somehow a currency issuing government is constrained by revenue. It is never nor can it ever be short of the currency it issues. We have a series of analogies and metaphors in place that are there to ensure, despite the real resources exisiting we can’t deploy them for a public purpose.  This includes the government is like a household, mortgaging our future and leaving our children in debt, budget black holes that need to be filled, deficit spending / government spending is inflationary, pulling out a credit card from the bank of China etc…I hope to write a post on each of these analogies and state why they are wrong.

Money is a creature of the State

I’ve had a number of friends that have been encouraging me to write a blog for at least a few years now. This is my attempt at a blog.

For the last five years I’ve been informally studying Modern Monetary Theory. I became captivated by the elegance and internal consistency of the body of work. The captivation went so far that I named a fighting fish (the one pictured on the main blog page) after a well known MMT academic. I did so because the fish happened to sit under one of Randall Wray’s books on my bookshelf. Irrelevant to the topic at hand but Randy (the fish) spends his life in the Darwin Festival office.

I looked after Randy the fish over the Christmas/New Year and he reminded me of one of the first papers I read while learning MMT. “The Credit Money and State Money Approaches” by L.Randall Wray.

Orthodox economist will tell a simplistic story about barter and ‘money’ evolving out of that.

A credit approach to money stems from the work of an economist Alfred-Mitchell Innes where he emphasises credit and debt are the same thing but from a different view point. David Graeber’s book, Debt:The First 5000 years is recommended if you wanted to delve into detail about credit and debt relations throughout history and I might write more about on what debt is at a latter date. Simply put think of it as ‘Someone else’s debt is someone else’s asset.’

The State Theory of Money comes from the work of Georg Friedrich Knapp where he states “Validity by proclamation is not bound to any material” That is a states currency gains its value from the liability enforced in that same unit of account.

Wray in the conclusion of his paper writes there is an integration between the creditary and state money approaches. I’ll discuss the state money approach first.

…the state chooses the unit of account in which the various money things will be denominated. In all modern economies, it does this when it chooses the unit in which taxes will be denominated and names what is accepted in tax payments. Imposition of the tax liability is what makes these money things desirable in the first place. And those things will then become the money-thing at the top of the “money pyramid” used for ultimate clearing.

L. Randall Wray, The Credit Money and State Money Approaches, Center for Full Employment and Price Stability, University of Missouri-Kansas City.

An easy way to think about that is to first distinguish between a Currency Issuer and a Currency User.

Say you want chores completed around your house and you offer your business cards in exchange for household chores. Why would your children desire your business cards?

The MMT money story states the tax liability comes first, followed up by government spending, so the people can meet the liability imposed and taxation comes after the fact the currency issuer has spent.

In the business card example sighted above, you would impose a tax of say 30 cards a month and without payment at the end of each month there would be consequences. It’s the coercive power of the state that drives the value for the currency.

Soon the kids are doing chores, earning their cards (that only you issue) and they develop a market and trade cards with each other getting their siblings to do chores when they’d rather not. You tell the kids that if they want to snack between meals and have desert there is charge, denominated in business cards.

There is a limit to the kids spending because eventually they have to earn more to pay their taxes and be able to eat desert and snack between meals.

Think of the snacks and desert as a fee imposed to gain access to things you may want to limit. Breakfast, Lunch and Dinner involve no exchange of cards and are akin to a public service – they can always be provided by you, provided you have the food to cook!

Going back to Wray’s conclusion and discussing the creditary money approach.

The private credit system leverages state money, which in turn is supported by the state’s ability to impose social obligations mostly in the form of taxes. 

L. Randall Wray, The Credit Money and State Money Approaches, Center for Full Employment and Price Stability, University of Missouri-Kansas City.

You may have heard loans create deposits. The Bank of England in this paper says;

‘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

That is the bank creating itself an asset which becomes the borrowers liability.

There are several different ‘money things’ we refer to as money:

1. Physical notes and coins
2. Reserves – like you have an account with the bank, your bank has an account with the central bank. They use this account to settle payments with each other.
3. Bonds – What we refer to as Government debt. Banks exchange their reserves to purchase these and they earn interest and the face value paid upon maturity, similar to what you would do with a term deposit account
4. Demand deposits – what you see when you check your online bank account.

And I’ll write more about these in the future.

Federal Government spending adds to reserves and then is placed in a demand deposit. Banks create demand deposits and need to ensure their reserves are in surplus at the end of each day. It is the central bank’s job to ensure there are sufficient reserves for financial institutes to pay each other otherwise the payments system would grind to a halt. Banks are reliant on the consolidated government (treasury and the central bank) to add to those reserves.

What we call ‘money‘ is a social construct. Each of the numbered points above are created using different ‘mechanisms’. What matters is whether we have the real resources (labour, skills, raw materials) to provide for our society. There are only political constraints that stop a currency issuer from deploying real resources for a public purpose.

I recently attended the Sustainable Prosperity Conference in Adelaide. It was great to meet people I’ve linked in with through social media and meeting several of the keynote speakers whose work I have been reading. This lecture was put on by the university of Adelaide for the Harcourt Lecture an annual talk featuring a prominent economist. This year it was Stephanie Kelton and is an excellent introduction to modern monetary theory and understanding economics.

© Jengis 2020