Let’s have a rational debate on government spending.

Twitter is full of comments around MMT being something you do – rather than something that is, We have articles like ‘Don’t let the Reserve Bank just give the Government money’ and articles that the leader of the opposition tells shadow cabinet to find cuts and spending offsets ahead of campaign.

The foundations of MMT are quite simple. Currency issuing governments spend via appropriation bills, the spending is authorised and the relevant account at the central bank is marked up. That bank then credits the appropriate customer. Irrespective of past fiscal positions or the balance the government runs or the bonds they choose to issue, this process doesn’t change. There should be nothing controversial about that. That is the way government spending operates.

The idea that somehow our treasury departments are at the mercy of central bankers or bond market traders is ridiculous. We have seen the Australian government spend some $200bn over covid and central banks around the world have been purchasing debt on what is called the secondary market. (referred to as Quantitative Easing)

I won’t walk through the whole process here you can read this post and this post. The crux of it is the Australian government creates the dollars via appropriation bills. The finance.gov.au website says there are two types of appropriations:

annual appropriations—a provision within an annual appropriation Act or a supply Act, that provides annual funding to entities and Commonwealth companies to undertake ongoing government activities and programs

special appropriations—a provision within an Act (that is not an annual appropriation Act or a supply Act) that provides authority to spend money for particular purposes (e.g. to finance a particular project or to make social security payments). Special accounts are a subset of special appropriations.

And continues with ‘While appropriation Acts authorise the drawing of money from the CRF [consolidated revenue fund]*, they do not authorise the spending of that money. Legislative authority is required for the Commonwealth to enter into arrangements to spend relevant money for a particular purpose.’

*The CRF is a ‘conceptual’ account created under the Australian constitution. All ‘money’ irrespective of where it is, exists within the CRF. A group of accounts the Australian government holds at the Reserve Bank are known as the offical public accounts (OPA) The numbers in these accounts do not form part of the money supply.

Think of the CRF as a transactional account that records what has been spent and what has been taxed. The numbers in it aren’t what can be spent. The authorisation of spending that comes after the appropriation is found in the Public Governance, Performance and Accountability Act 2013. It has its genesis in the Audit Act 1901. I am working through understanding and detailing the changes. Today the PGPA Act of 2013 under section 51 says

(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.

The UK for example has its origins in the Exchequer and Audit Departments Act 1866 where the first three subsections state:

(1) This section applies in respect of sums which Parliament has authorised, by Act or resolution of the House of Commons, to be issued out of the Consolidated Fund.
(2) The Comptroller and Auditor General shall, on receipt of a requisition from the Treasury, grant the Treasury a credit on the Exchequer account at the Bank of England (or on its growing balance).
(3)Where a credit has been granted under subsection (2) issues shall be made to principal accountants from time to time on orders given to the Bank by the Treasury.

If you want further evidence that bond issuance or taxes are irrelevant to government spending the UK Government used what they call the Ways and Means facility. They describe it ‘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.’

The UK Treasury scrapped the issuance of bonds entirely.

“HM Treasury and the Bank of England (the Bank) have agreed to extend temporarily the use of the government’s long-established Ways and Means (W&M) facility.”

As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19.

It is coaxed in language to give readers the idea bonds are used to fund spending in ‘normal’ circumstances.

‘The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations.’

The markets never ‘fund’ treasury operations. The appropriation bills do that. The authorisation of the spending marks up an account at the central bank and this is what gives the banks the ability to purchase bonds. It doesn’t matter what the past fiscal positions are. What matters is spending today and whether there are available real resources.

What has been happening with QE is that the debt management departments of treasury have been issuing bonds, having financial institutes buy them and the central banks have been buying them a week or so later. The UK stopped with this whole charade for a while on April 9 2020

So when stuff.co.nz writes

Purchasing debt (issued in the form of bonds) on the primary market means that instead of purchasing bonds from third parties like banks and investors, the Reserve Bank would buy the bonds directly from Treasury itself. One part of the Government would buy bonds issued by another part of the Government, cutting out the middleman. It’s a big move.

They have no clue what they’re talking about. Bond issuance funds nothing. Bond issuance switches currency in reserves to securities accounts. The latter is interest bearing. Though now the interest is paid from the treasury arm to the central banking arm of the government and the central banking arm then credits the treasury. Apparently ending this will be a great cause of concern.

But Treasury’s biggest concern was that skipping the secondary market would give New Zealand a bad reputation as it would look like the Reserve Bank was simply printing money for the Government to spend.

What is so difficult for financial journalist Thomas Coughlan to grasp. Financial institutes in New Zealand obtain NZD in their reserve accounts at the Bank of New Zealand via the NZ Treasury marking up the account. The dollars come from the appropriation bills. There are no printers, just keystrokes.

All this reminds me of when the Australian Government introduced its own notes.

In 1910 when the Australian Government banned private bank note issuance and issued its own via treasury there were objections. The hansards record the member for Wentworth, Mr Kelly ‘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, p.690, 1910)

There you have it, the same old arguments because some capitalist lose their free lunch. They’d rather keep the way spending works in the dark to demonise public expenditure, collect their interest bearing assets (bonds), watch governments cut public expenditure, privatise public assets, and maintain a desperate pool of workers that work for desperate wages.

And Australia’s opposition party plays into the narrative. The second article quotes that “Two shadow cabinet members, speaking on the condition of anonymity, told The Age and the Herald emphasising budget repair at a time when the Coalition government was prepared to spend billions sent “mixed messages” and “lacked imagination”.

And whoever those mysterious shadow ministers are, are correct. We have witnessed the largest government spending since World War Two and much of the arguments that demonise public spending are the same now as they were for the last century. It is getting tiresome.

But the status quo in the ALP remains. Richard Marles writes

“As Anthony has made clear, all policy proposals should consider options to minimise the fiscal impact and/or be fully offset by savings within respective portfolios,”

That is all from me!

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.

Conclusion

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.