Cambridge Journal of Economics 2016, 40, 1297–1316

doi:10.1093/cje/bew015
Advance Access publication 6 June 2016

Modern Money Theory and the facts of

experience
Yeva Nersisyan and L. Randall Wray*

This paper discusses Modern Money Theory (MMT) with a particular focus on
the role of the state in its monetary system and the nature of money. It addresses
the main differences between the orthodox, heterodox and MMT approaches to
monetary theory while reconciling endogenous money theory with the state money
approach. By emphasising the symmetry between how banks create money as they
finance private spending and how the government creates money when it finances
its own spending, we clarify some of the misconceptions surrounding MMT while
showing that it is more consistent with the facts of experience. Furthermore, we
argue that MMT’s insistence that government spending or lending must precede
bond sales is consistent with the Keynesian emphasis on effective demand as the
driving force behind income and saving. We delve into MMT’s implications for
monetary and fiscal policy, with a particular focus on the eurozone. We conclude
our paper by discussing two proposals of ‘monetary cranks’: narrow banking and
government issue of debt-free money. This allows us to re-emphasise MMT’s views
on the nature of money.

Key words: Modern Money Theory, State theory of money, Endogenous money,
Sovereign currency, Eurozone
JEL classifications: B5, B22, E40

1. Introduction
I shall argue that the postulates of the classical theory are applicable to a special case only and
not to the general case, the situation which it assumes being a limiting point of the possible posi-
tions of equilibrium. Moreover, the characteristics of the special case assumed by the classical
theory happen not to be those of the economic society in which we actually live, with the result
that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.
(Keynes, 1964 [1936], p. 3)

Following Robbins (1984), Goodhart (2009) points his finger at four of the worst fea-
tures of orthodox monetary theory: (i) IS–LM analysis in which government controls
the money supply and markets set the interest rate; (ii) the deposit multiplier deus ex
machina; (iii) the New Monetary Consensus with its Taylor rule, its notion of a natural
rate and the transversality (no default) assumption; and (iv) the ludicrous Robinson

Manuscript received 25 June 2015; final version received 20 April 2016.

Address for correspondence: Yeva Nersisyan, Department of Economics, PO Box 3003, Lancaster, PA,
Franklin and Marshall College, USA; email: yeva.nersisyan@fandm.edu

* Franklin and Marshall College (YN), University of Missouri–Kansas City and Levy Economics
Institute of Bard College (LRW).
© The Author 2016. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.
All rights reserved.
1298   Y. Nersisyan and L. R. Wray
Crusoe story of money’s origins. He laments the disconnect between ‘economic gen-
eralisations and reality’. He concludes his paper:
John Hicks (1969), at least in his later years, argued that monetary economics needed to be
firmly grounded on a knowledge of historical and institutional fact. Yet in recent decades the
suggestion that Prof. X took an institutional approach to monetary analysis was sufficient to cast
his/her reputation into outer darkness. Only small groups of mainly heterodox (and of various
hues of post-Keynesian views) economists have bothered much to relate theory to reality. Why
this has been so, I do not know. That it has been so, as I have sought to document, is not a good
advertisement for this subsector of our profession. (Goodhart, 2009, p. 828)

In recent decades, heterodoxy has made great progress in reuniting theory and the
facts of monetary experience. We have in mind especially the French–Italian circuit,
Post Keynesian endogenous money and Minskyan financial instability approaches.
The first replaces the textbook circular flow diagram—in which spending is magically
financed out of income flows that are themselves financed by spending in an illogical
infinite regress manner—with a more realistic circuit beginning with bank lending.
The second throws out the deposit multiplier in favour of an infinitely elastic supply of
reserves with accommodating banks. The money supply is endogenous while interest
rates are exogenous. The third puts default risk, uncertainty and instability back into
the theory, replacing equilibrium with history.
However, heterodoxy remains unnecessarily weak in a number of areas:
   (i) the role of the state in its monetary system;1
  (ii) the evolution, and the nature, of money;2
(iii) interest rate theory;3
(iv) exchange rates, current account balances and international finance;4 and
  (v) sectoral financial balances, more generally.5
Each of these topics by itself requires more treatment than we could provide in a single
article. Here we outline the direction that Modern Money Theory (MMT) has taken
in some of the above areas, with the hope that this will spur further work to reconcile
heterodox theory and reality. We devote the next section to the analysis of the role of
the state in the monetary system and the nature of money, since these bring out the
biggest differences among the orthodox, heterodox, and MMT approaches. We use the
hierarchy of money and the money pyramid as a starting point for reconciling the state,
credit and endogenous money theories.

1
 See Goodhart (1998), Ingham (2000, 2004B, 2004C), Bell (2001) and Wray (1998, 2012).
2
 See Innes (1913, 1914), Ingham (2000, 2004A, 2004B, 2004C), Henry (2004), Gardiner (2004) and
Hudson (2004).
3
  Horizontalism provides the most popular explanation of interest rates. The base rate is set by the central
bank while short-term interest rates are determined in a Kaleckian markup approach. The expectations
theory is invoked to explain longer-term rates. Keynes’s liquidity preference theory plays a sideline role, at
best. Some horizontalists reject Keynes’s theory of interest rates entirely, as the version presented in chapters
13 and 15 of the General Theory (Keynes, 1964 [1936]) seems to adopt a fixed money supply (see Moore,
1988). In horizontalism, money demand is largely interpreted as a theory of demand for finance (‘money on
the wing’) rather than as a stock held (to satisfy disquietude). While we also see Keynes’s exposition in those
chapters as problematic, his preferred approach in chapter 17 provides a coherent exposition of asset pricing
that is consistent with endogenous money (see Kregel, 1988, 1997; Wray, 1992A, 1992B; Brown, 2003–04;
Fullwiler, 2006, 2008; Fullwiler et al., 2012.)
4
 See Wray (2005) and Sardoni and Wray (2007).
5
 See Godley (1999) and Godley and Wray (1999).
 Modern money theory and the facts of experience   1299
In the third section, we discuss the theoretical implications of MMT and suggest
that endogenous money theory and the circuit provide a useful point of entry for Post
Keynesian economists into MMT. We emphasise the symmetry between how banks
create money as they finance private spending and how government creates money to
finance its spending. By pointing out the similarities, we demonstrate that the endog-
enous money theory and the state theory of money are not contradictory, but rather
complement one another to build an understanding of our modern monetary system.
We also emphasise in this section that MMT’s analysis of government finances is con-
sistent with the Keynesian emphasis on effective demand as the driving force behind
income, while the alternative view on government finances espoused by mainstream as
well as many Post Keynesians is not.
We devote the fourth section to discussion of the fiscal and monetary policy implica-
tions of MMT. We use the example of the eurozone to demonstrate the negative con-
sequences of divorcing fiscal and monetary authorities. Since this issue of the Journal
deals with ‘monetary cranks’, we use the final section of our paper to analyse two
current ‘crank’ proposals: narrow banking and ‘debt-free’ money. Our friendly critique
provides the opportunity to summarise MMT’s approach to the nature of money and
to contrast it with that of the ‘cranks’.
In summary, we argue that MMT—by providing a more complete picture of how
money is created in modern capitalist economies that is grounded in historical and
institutional analysis—extends endogenous money theory, integrating it with the
state money approach, and provides a coherent alternative to mainstream macro-
economic theory. At the same time, we demonstrate that it is not only consistent
with Keynes’s own view of money, but is consistent with Keynes’s theory of effective
demand.

2.  The role of the state and the evolution of money

2.1 Where is the state?
The macro textbook traditionally begins with the consumer maximising utility subject
to budget constraints; slowly other sectors are added, with government spending and
taxes only introduced later. Like the household, the government is subject to a budget
constraint, according to which it finances spending through taxes, borrowing or—God
forbid—printing money. Somehow, GDP gets produced, factors of production are paid
income and output is circulated for a number of chapters without reference to money
or banks, which are finally added with central bank high-powered money (HPM) that
can be multiplied through lending. There is an uneasy relation between spending and
the velocity of money, since with the usual upward-sloping LM curve6 (representing
rising velocity with a fixed money supply) there is no determinant relation between the
amount of money required to circulate a volume of GDP; at a sufficiently high interest
rate, a small amount of money could do triple and quadruple duty, speedily running
through hand after hand.
Heterodox approaches begin instead with bank lending, often a function of the wage
bill. The demand for loans is accommodated as ‘loans create deposits’; when loans are

6
 Some Post Keynesian economists still use the IS–LM framework, although even Hicks eventually
became ‘dissatisfied’ with it (see Hicks, 1980–81). MMT rejects the IS–LM framework, following the gen-
eral framework adopted by Keynes and Post Keynesians.
1300   Y. Nersisyan and L. R. Wray
repaid, the deposits are destroyed. The central bank is introduced not to control the
money supply, but to provide reserves for clearing. As the monopoly supplier, it sets
the interest rate on reserves, which becomes the base rate.
Where is the state? Mostly absent in Post Keynesian approaches to money. Certainly,
heterodoxy has made major contributions to ‘political economy’ and the role of the
state in the economy. What we are concerned with here, however, is the role of the
state in the monetary system. While heterodoxy rejects the typical view of a central
bank controlling bank lending, essentially substituting an interest rate target in place
of a money target (which can be done even within an LM framework), the state’s role
in the monetary system is limited.
Indeed, the state, itself, is a user of the monetary system. With some exceptions,
heterodox economists share with orthodoxy the belief in a government budget con-
straint, albeit with more tolerance for budget deficits financed by some combination
of central bank printing of money plus lending by bond markets. The state is thereby
subject to the whims of bond vigilantes plus the willingness (and legal authority) of an
independent central bank to buy Treasury debt. Much is made of legislated strictures
that require the Treasury to have deposits in its account before cutting cheques and
that prohibit purchase by the central bank of the Treasury’s new issues. The Treasury’s
finance is subordinated to central bank independence and the private sector’s willing-
ness to save in the form of Treasury debt.
This lacuna is strange given Keynes’s own beliefs, as well as reality. Keynes explicitly
adopted Knapp’s (1973 [1924]) ‘chartalist’ or state theory of money in the Treatise on
Money (Keynes, 1976 [1930]). Long before that, he had reviewed for the Economic Journal
an obscure 1913 article published by A. Mitchell Innes in the Banking Law Journal. In
that article, Innes skewered the orthodox barter-based story of money, offering instead
a synthesis of a state money approach (apparently unaware of the work of Knapp) and
a credit money approach. Together with a companion 1914 article in the same journal,
Innes’s contributions might be the clearest statement on the nature of money while positing
a robust alternative to orthodoxy’s narrative on money’s origins. It is probable that Innes’s
arguments led to Keynes’s ‘Babylonian madness’, a period in which he also speculated on
money’s nature and origins—leading to his Treatise on Money (Ingham, 2000).
Subsequent research by numismatist Philip Grierson (1975, 1977, 1979), soci-
ologist Geoff Ingham (2000, 2004A, 2004B, 2004C, 2013), anthropologist David
Graeber (2011) and legal historians such as David Fox (2008) at Cambridge and
Chris Desan (2014) at Harvard reached conclusions consistent with the early specu-
lation by Knapp, Innes and Keynes. It is remarkable that except for the developers
of MMT, along with a few others—Goodhart (1998), Ingham and Michael Hudson
(2004)—heterodox economists have been reluctant to incorporate modern findings in
their approach to money. Indeed, there are still heterodox economists who see the gold
standard as a ‘commodity money’ and who largely accept the orthodox framework in
which a ‘fiat money’ replaced the commodity money standard only relatively recently
(Moore, 1988; Chick, 1986).
By contrast, Keynes (1976 [1930]) insisted that money has been a state money for
the ‘past four thousand years, at least’—the source of the ‘modern’ in MMT.7 The

7
  It is applicable only to the ‘modern’ period, the past 4,000 years; anthropological and historical analysis
has continually pushed that back, but we cannot be sure of the precise nature of money’s origins, which
pre-date writing.
 Modern money theory and the facts of experience   1301
state not only writes the dictionary (chooses the money of account), but also reserves
the right to name the thing (the ‘money thing’ or ‘money token’) that answers to the
description. A  state that issues its own money token denominated in its money of
account, accepts it in payment, determines what must be done to obtain it and imposes
obligations denominated in its money of account, certainly is not subject to the whims
of bond vigilantes, independent central bankers, savers or private banks.
Indeed, the whole orthodox/heterodox story has got it upside down if Knapp, Innes
and Keynes are right. The facts of experience tell us that money begins with the state.

2.2  The hierarchy of money

MMT’s emphasis on the role of the state in the monetary system may be misinter-
preted as downplaying the importance of bank money and other privately created
money ‘things’ or ‘tokens’. But this is not the case. After all, some of the economists
who developed MMT were also involved in the development of the endogenous money
theory (Wray, 1990). Instead, MMT attempts to create a more complete heterodox
monetary theory by bringing in the state.8 Despite its emphasis on the role of the
state in the monetary system, MMT does not imply that states are all powerful or that
they face no constraints. The strength of the state varies considerably across time and
space. Even if we confine our discussion to modern wealthy and developed capital-
ist economies, states face internal political constraints, resource constraints, external
constraints and self-imposed constraints. Self-imposed constraints range from pegged
exchange rates (promises to convert their currency on demand to foreign currencies
or—in the past—to gold) to internal operating procedures (Sections 3 and 4).
MMT emphasises that all money is credit money, even the money of the state. Thus, it
is consistent with the credit theory of money and endogenous money espoused by most
Post Keynesians. Arguably, it presents a more complete picture of how money enters the
economy, compared with endogenous money theory, since it applies to not only bank
IOUs, but also other privately created IOUs, as well as those of the public sector.
Not only does the MMT story fit the facts of experience better, it also provides a
much neater logic. It does not need to imagine a pre-existing market economy based
on barter—which also requires a pre-market specialisation of labour to produce what
it does not want in order to exchange it for something it does want (for a more detailed
discussion, see Levine, 1983; Foley, 1989). Nor do we need an impossibly difficult
evolution from a variety of commodities used for exchange to selection of a single
commodity to serve as the most efficient one (see Klein and Selgin, 2002). We do
not need haggling and higgling to determine prices and money’s acceptance does not
require trust or infinite regress arguments (I accept currency because I think Billy Bob
will). Instead, the money of account is chosen by some central authority and its use
is ensured by denominating the population's obligations to the authority in the same
unit. The means of payment, denominated in the money of account is issued by the
authority and accepted in payments to it. The prices are originally established by the
authorities and provide the conditions that encourage development of production for
market to obtain the means of payment (see, e.g., Hudson, 2004). As Goodhart (2009,
p. 828) summarises: ‘Money was invented as a social, and governmental, phenomenon,
not as a means of reducing transactions costs in markets. The invention of money

8
  Parguez and Seccareccia (2000) have also tried to bring the state into the theory of the circuit.
1302   Y. Nersisyan and L. R. Wray
probably pre-dated the development of formal markets; thus money facilitated the rise
of markets, rather than vice versa.’
MMT employs the concept of a hierarchy of money found in Minsky (2008 [1986]),
Foley (1989) and Bell (2001) to demonstrate that the creation of money in the economy
is a hierarchical process. Since money is an IOU, rather than a commodity, anyone can
create money by issuing an IOU, as Hyman Minsky (2008 [1986]) claimed. But not eve-
ryone’s IOU enjoys the same level of acceptability. We thus arrange the various sectors
of the economy into a pyramid based on the level of acceptability of their liabilities. The
state’s liabilities (currency and reserves) occupy the top tier, while bank ‘money’ (notes
and deposits) is below the state’s ‘money’. The liabilities of other financial institution are
below ‘bank money’ in the pyramid, often payable in bank deposits. Lower still, we find
the liabilities of non-financial institutions. And at the bottom we might find the IOUs of
households—again normally payable in the obligations of financial institutions.
While households can issue IOUs, they must get their IOUs accepted by banks and
other financial entities to obtain access to bank money and, through that, state money.
The same applies to firms. Even though firms can sell their IOUs, such as bonds and
commercial paper to households, this process is intermediated by a financial firm, such
as an investment bank, that may place them into the market. The investment bank, in
turn, often requires access to bank credit to be able to warehouse those securities.9
Banks have an easier time finding acceptors for their liabilities, partially because
millions of households and firms owe payments to banks. As Minsky states: ‘Demand
deposits have exchange value because a multitude of debtors to banks have outstand-
ing debts that call for the payment of demand deposits to banks. These debtors will
work and sell goods or financial instruments to get demand deposits’ (Minsky, 2008
[1986], p. 258). But the state itself plays an important role in making bank IOUs spe-
cial. First, the Fed stands behind banks to ensure par clearing, making the deposits of
a small midwestern bank as good as those of the Bank of America. Second, we accept
bank IOUs as nearly equivalent to those of the state because banks promise to convert
their liabilities into the state’s at par. But such a promise would not be sufficiently cred-
ible without backing from the government through deposit insurance. For example,
before the financial crisis, money market mutual funds (MMMF) in the USA were
making similar promises, but the run on these funds during the crisis demonstrates
that without government backing such promises are questionable. Only when the Fed
opened its lending facilities to money market funds and the Treasury temporarily guar-
anteed MMMF liabilities did the run stop.10
The deposit flight from banks in the periphery countries of the eurozone is a good
example of the importance of state guarantees in creating uniform bank money. Due
to the lack of centralised deposit insurance in the EMU, German bank liabilities are

9
  An historical example of banker acceptance leading to the circulation of non-bank liabilities is the bill
of exchange, which could circulate as ‘gilt-edged’—as ‘good as gold’—in payment once endorsed by several
banks.
10
 We do not imply that only banks can create private liabilities to serve as money tokens. Instead, MMT
recognises that other financial institutions, such as shadow banks, also enhance the liquidity of the liabili-
ties of firms and households (see Kregel, 2010, 2012B). What we emphasise is that the specialness of bank
liabilities stems to a large degree from the backing of the state. After all, in the ‘free banking’ era in the USA
there was no such thing as ‘bank money’. Instead, there were many bank moneys—each bank issued its own
banknotes when it made loans, but these were not necessarily accepted at par. Only after banks were brought
under the purview of the federal government and with the emergence of the Fed (and, later, deposit insur-
ance) did a uniform ‘bank money’ eventually emerge.
 Modern money theory and the facts of experience   1303
seen as superior to those of Greek and Spanish banks. The perceived risks of hold-
ing periphery bank deposits are not necessarily due to the safety and soundness of
particular banks, although that may play a role in some instances. Rather, they reflect
the perceived differences in the ability of the governments of the periphery countries
versus the German government to support their banking systems in a crisis—although
a firm commitment by the ECB to stand behind all member nation banks could elimi-
nate perceived risks.
A sovereign government, according to MMT, occupies the top tier of the money
pyramid. It is easy for it to find acceptors, because many of us owe payments to it.
MMT has emphasised the importance of taxes, in particular, in driving demand for
the state’s IOUs in the modern period. As Innes recognised, the state created demand
for its money by imposing an obligation that could only be discharged by presenting
the IOUs of the state:
The government by law obliges certain selected persons to become its debtors. It declares that so-
and-so, who imports goods from abroad, shall owe the government so much on all that he imports,
or that so-and-so, who owns land, shall owe to the government so much per acre. This procedure
is called levying a tax, and the persons thus forced into the position of debtors to the government
must in theory seek out the holders of the tallies or other instrument acknowledging a debt due by
the government, and acquire from them the tallies by selling to them some commodity or in doing
them some service, in exchange for which they may be induced to part with their tallies. When
these are returned to the government treasury, the taxes are paid. (Innes, 1913, p. 398)

Even though bank money can be used as a means of final settlement in private transac-
tions, thus making it highly acceptable, today it usually cannot serve that purpose in
transactions with the state. The government could choose to accept private bank notes
in payment and then might even stamp them for reissue in its own spending; it can
even accept foreign coin and use it in payment. Such behaviour is no longer common,
but is ultimately the prerogative of the state. In the past, states spent their metallic
coins, notes, tablets and tally sticks into existence; and then collected them in payment.
The word, revenue, originally came from Latin (revenire, meaning return) through old
French (revenue, meaning returned) to old English (revenue). What was returned? The
state’s own debts. We still use the term ‘tax return’ from which (much of) the state’s
revenue derives. However, today, states do not usually spend coins and notes into exist-
ence, nor accept tax payments in those forms—unlike in the historical past. Rather, all
payments—both by and to government—are made through banks.11
Critics of MMT make much of the fact that modern Treasuries do not spend directly
by issuing money tokens. Instead, they make and receive payments through their central

11
 For an example of direct payment through note issue by government, let us look to the American
colonies that were prohibited by England from issuing coin, so as to protect the king’s monopoly of coin-
age. To increase fiscal capacity, the colonial governments began to issue paper money. The Currency Acts
that allowed the Treasury to issue notes also imposed new taxes that would be of sufficient size and would
be imposed over a period long enough so that all the notes could be redeemed. The colonial government
understood that the purpose of the taxes was to ‘redeem’ the currency, by accepting paper money in pay-
ment of taxes. When the notes were redeemed in tax payment, the government would burn them. Grubb’s
(2015) careful research shows that most taxes were paid using the paper money and most paper money was
‘redeemed’ in tax payment: ‘A redemption tax of 10,327£VA was collected, of which 2,527£VA was in spe-
cie that was explicitly set aside in a dedicated account to be used to redeem notes brought to the Treasury.
The rest of the tax payments were burnt, implying that those tax payments were made in notes. Therefore,
76 percent of this tax was paid in notes, and 24 percent was paid in specie’ (Grubb, 2015, p. 29). So, three-
quarters of taxes were paid by ‘redeeming’ the notes in tax payments and a quarter in coin. The remainder
would continue to circulate.
1304   Y. Nersisyan and L. R. Wray
banks, which are purportedly independent. This is taken as proof that the state must
be placed within a banking money circuit, much like a household or firm. Its spending
must be approved by bankers, including the central bank representatives of private
banking interests. The central bank, not the state (let alone the Treasury), sits at the top
of the money pyramid; indeed, the state does not warrant a place at the monetary table.
While this might be an accurate representation of the political economy of decision
making, it is not a good description of the monetary system or of government finances.
State money has existed for several millennia (4,000  years according to Keynes,
but probably more like 6,000  years); banks developed much later and only gradu-
ally as capitalism replaced feudalism. Central banking came even later, only near the
end of the seventeenth century (with the USA finally creating one in 1913!). States
(and their predecessors) managed without banks for thousands of years and today the
central banks and private banks operate within state money systems—with the state
choosing the money of account and with currency and reserves occupying the top spot
in the money hierarchy. Governments use the state money system to move resources
to the ‘public purpose’ (or, at least, to the perceived interest of those in power). The
evidence—such as it exists—indicates that (i) markets followed the creation of money
and establishment of price lists by authorities, which turns the barter story on its head,
and (ii) state money comes before bank money. Extrapolating backward from current
arrangements creates a false history. Does that matter? The current paralysing fear of
budget deficits and the perceived threats that ‘bond vigilantes’ might suddenly exert
fiscal discipline on debtor governments would seem to suggest that it does. The false
history and false stories about the role of the government in the monetary system have
affected the perception of policy space available to sovereign governments.

3.  MMT’s implications for understanding the role of the state in monetary
systems
3.1  State finance
Within a monetary circuit, banks create the deposits that finance private spending. But
how does the government spend? The orthodox/heterodox belief is that the state turns
to its central bank and to private banks to provide the state’s finance. However, modern
central banks cannot directly provide the finance as they are prohibited from lending to,
or buying bonds from, the Treasury. That leaves the private banks in charge. Yet modern
banks no longer issue notes to be used in payments and state Treasuries do not have cur-
rent accounts at the private banks that would allow them to spend.12 How then do banks
finance government spending? We must look at ‘how the government really spends’,
which is precisely what MMT has done since the 1990s (Wray, 1998; Bell, 2000).
While it was obvious 200 years ago that the national Treasury spent by issuing cur-
rency, and taxed by receiving its own currency in payment, that is no longer clear.
There are now two degrees of separation between government and its citizens that
obscure reality, since private banks handle payments to and by the general public while

12
  The US federal government does have accounts at a large number of private banks, but it cannot spend
out of these and therefore transfers deposits to the Fed before spending. It does this even if the government’s
budget is balanced, meaning that it is not a simple matter of the Treasury ‘spending’ the tax receipts that flow
into its accounts at private banks—something it cannot do.
 Modern money theory and the facts of experience   1305
the central bank handles payments to and by the Treasury. MMT has delineated the
steps in detail, showing that ‘cutting a government cheque’ to make a payment requires
about half-dozen steps that involve the balance sheets of the Treasury, the central bank
and special private banks (in the USA this includes both commercial banks and dealer
banks), as well as Treasury deposits at the central bank and at private banks, Treasury
bonds and central bank reserves (Fullwiler et al., 2012; see also Tymoigne, 2016). At
the end of the spending process, the private banks will be left with some combination
of more reserves and more bonds.
Note that Treasury spending would lead to an increase in reserves and bonds even
if the Treasury had ample deposits at the central bank before cutting the cheque. Economists
may look at the increase in reserves and conclude that the central bank ‘monetised’
the Treasury’s spending as it was ‘financed’ by central bank liabilities (reserves). On
the other hand, the increase in bonds held by the private sector leads them to con-
clude that Treasury’s spending was financed by ‘borrowing’. Yet, even if the Treasury
had tax ‘revenue’ funds in its account at the central bank before cutting the cheque,
Treasury spending would still lead to an increase in bonds and reserves. In other words,
even when the spending is ‘tax financed’, it is also—usually—simultaneously ‘money
financed’ and ‘bond financed’. As Tymoigne and Wray (2013) have pointed out, this is
because all three forms of finance are normally used whenever government spends, but
at different steps of the spending process. We will not repeat the analysis made there, as
well as in Tymoigne’s article in this issue. In some respects, the complicated procedures
have developed because of the restrictions imposed (Treasury must use deposits at the
central bank and cannot sell bonds directly to the central bank to obtain them), but also
to minimise effects on banking system reserves that would make it harder for the central
bank to hit its interest rate target (Bell, 2000). To understand that, all one needs to do is
to look at an old money and banking textbook, which shows that government spending
increases HPM (mostly reserves, but cash holdings could rise) by the same amount.
Taxes reduce HPM by the same amount. Hence, deficit spending increases net HPM
by an equal amount. Normally, this increases excess reserves.
MMT argues that bond sales by the Treasury are functionally equivalent to bond
sales by central banks: both remove excess reserves that would place downward pres-
sure on overnight rates. Purchases of bonds by the Fed add reserves to the banking
system, preventing overnight rates from rising. Hence the Fed and Treasury cooperate
using bond sales/bond purchases to enable the Fed to keep its funds rate on target.
Moreover, the government logically cannot sell bonds unless it has first provided the
currency and reserves that banks need to buy the bonds, either through spending or
lending the HPM into existence. Much like the relation between taxes and spending—
with tax collection coming after spending—we should think of bond sales as occurring
after government has already spent or lent the currency and reserves, since purchase of
bonds by either a bank or a bank’s customers leads to a debit of bank reserves by the
central bank, which cannot be debited unless they exist.
Understanding the ultimate effects of Treasury spending, taxing and bond sales
and also understanding the details of the coordination among the Treasury, central
bank and private banks, MMT sometimes simplifies and generalises by consolidating
the Treasury and central bank into a ‘government’ balance sheet.13 It may seem that
13
  Note that MMT does not always consolidate the Treasury and the central bank. Many of the MMT
contributions analyse the operations between the Treasury and the Fed (see, e.g., Wray, 1998; Bell, 2000;
Bell and Wray, 2002–03; Fullwiler, 2003, 2005; Fullwiler and Wray, 2011; Tymoigne in this issue).
1306   Y. Nersisyan and L. R. Wray
consolidation brushes over the operational realities of Treasury spending, but in truth
we are trying to elucidate—simply—the final effects of government spending while
leaving in the background the roundabout ways in which the monetary authority cre-
ates the liabilities that are necessary for the fiscal authority to carry out what Congress
or Parliament has instructed it to do. This is especially important since the manner in
which the government spends is obscured by self-imposed constraints.
Regarding the non-government sector, consolidation has no consequence since all
transactions between the central bank and Treasury are ‘internal’ to the government
sector. Hence MMT sometimes proceeds from government spending directly to the
final balance sheets of the government and non-government sectors, leaving out the
half-dozen intermediate steps that enable the spending to occur (based on current insti-
tutionalised procedures). What we find is that the result is the same as if the Treasury
had directly spent HPM into existence and then drained excess reserves through bond
sales. Consolidation simply allows us to observe that government spending is always
‘financed’ by the issuance of new government IOUs. This exercise is especially illustra-
tive in the case of tax payments, as it shows that taxation simply means debiting gov-
ernment IOUs (the ‘return’ of tax return) that take the form of central bank reserves.
Critics argue that this is misleading—it makes it appear that the Treasury is not sub-
jugated to the whims of central bankers and bond vigilantes. And yet those intermediate
steps do not provide an opportunity for vigilant banks, the central bank or bond vigilantes
to prevent the Treasury from spending. Most of the procedures are adopted to allow the
central bank to hit its target. Others are designed to ensure cheques clear and that dealer
banks can buy new bond issues (as is required of them). Short of bouncing Treasury
cheques or leaving the banking system short of reserves, there really is no way to stop the
Treasury from spending according to the budget authority provided to the administra-
tive branch. If the central bank were to start bouncing Treasury cheques, clear lines of
sovereign authority of government over its central bank would certainly be established.14
Arguing that the central bank can prevent the sovereign from spending is equivalent to
arguing that the central bank can prevent private banks from lending by refusing to pro-
vide reserves. Both of these arguments require implausible behaviour by the central bank,
one of whose primary functions is to ensure par clearing. Current practices developed
to facilitate smooth functioning of the payments system, requiring that the central bank
provide reserves for interbank clearing and for clearing Treasury payments.

3.2  Symmetries: MMT, endogenous money and Keynesian economics

As endogenous money literature recognises, banks operate in a similar manner. They
lend their own IOUs into existence and accept them in payment. There is symmetry:
sovereigns spend first, then tax. In that sense, they do not use tax revenue in order
to spend.15 To say that the government needs to tax or borrow funds, i.e. have funds,
before it can spend is akin to saying that banks need deposits to be able to make
loans.

14
  In the UK, the Bank of England is clearly an agency of government; in the USA, the Fed has occasion-
ally been explicitly subjugated to the Treasury, e.g. during both world wars.
15
  As Beardsley Ruml, chairman of the Federal Reserve Bank of New York, put it in his article, ‘Taxes for
Revenue are Obsolete’: ‘Final freedom from the domestic money market exists for every sovereign national
state where there exists an institution which functions in the manner of a modern central bank, and whose
currency is not convertible into gold or into some other commodity’ (Ruml, 1946, pp. 35–6).
 Modern money theory and the facts of experience   1307
This does not mean that sovereigns can stop taxing, however. One of the purposes
of the tax system is to ‘drive’ the currency. As explained above, the acceptability of the
state’s debt is driven largely by the need to make payments to the state. Taxes and other
obligations create a demand for the currency that can be used to make the obligatory
payments. Moreover, MMT does not claim that creating demand for the sovereign’s
currency is the only function of taxes. We recognise that taxes can be used for other
purposes, such as making income distribution more equal and to discourage certain
behaviours.
While symmetry exists between government currency issue and private bank issue of
notes or deposits, there is also a difference. Government imposes an obligation on (at
least some) citizens. Private banks rely on customers voluntarily entering into an obli-
gation (i.e. they decide to become borrowers). We can all choose to refuse to become
borrowers, but as they say, the only thing certain in life is ‘death and taxes’—these are
much harder to avoid. Sovereign power is usually reserved to the state.16 This makes
the state’s obligations—currency and reserves—almost universally acceptable within
its jurisdiction.
MMT’s approach is consistent with Keynes’s explanation of causation. Most hetero-
dox economists accept the Keynesian view that investment spending precedes, indeed
creates, saving—rejecting the loanable funds view that saving finances investment.
There is also some recognition that if we add a government sector, deficit spending
also generates saving (or, as in the Kalecki equation, it generates profit). If we are
consistent, then we should not argue that saving can be used to finance government’s
deficit spending (no more than we can argue that saving finances investment)—the
deficit spending has to come first. Bond sales must be seen as the second step in the
Keynesian saving sequence, i.e. as a portfolio allocation decision, not a financing oper-
ation—deficits create saving, a portion of which can be held in the form of Treasury
bonds. In that sense, bond sales do not finance deficit spending as the income needs to
be created before it can be saved in the form of bonds.
The Keynesian logic is consistent with the reality. Like investment, government
spending ‘finances itself’ in the sense that the spending creates saving realised initially
in the form of HPM, some of which can be allocated to bond sales. Even if operating
rules might require a bond sale before the Treasury spends, the central bank provides
reserves either through the discount window or in an open market operation to allow
the Treasury to sell a bond before moving deposits from a private bank to the central
bank. HPM is created by the central bank not to monetise the Treasury’s spending, but
to minimise the reserve effects of the Treasury’s transfer of deposits from a private
bank to the central bank. The ‘saving’ that finally will be allocated to a new Treasury
bond issue will not exist until the Treasury has spent.

4.  MMT and policy implications

4.1 Fiscal policy
The implications of the above analysis for fiscal policy are pretty straightforward.
Spending by sovereign government—whether deficit, balanced budget or surplus
16
  Similarly, in a company town, workers might be paid in company script accepted in the company store.
The monopoly owner of the water, power or food supply also has a degree of sovereign power, allowing it to
name what must be presented in payment to obtain a necessity.
1308   Y. Nersisyan and L. R. Wray
spending—is always financed through issuing IOUs of the state. Following Abba Lerner
(1943), MMT has advocated using the principles of functional finance as opposed to
sound finance. A balanced budget or a deficit/surplus of a particular magnitude should
never be a policy target. Rather, fiscal policy should aim for full employment without
regard to effects on the budget.
More specifically, MMT has favoured using a targeted demand approach (see
Tcherneva, 2011, 2012), rather than the blanket spending approach advocated by
many Keynesians. If the goal of fiscal policy is to prevent involuntary unemploy-
ment, MMT suggests that the best way to accomplish this is by directly hiring
unemployed workers. We have long advocated creating a job guarantee (JG) pro-
gramme, which will provide full employment with enhanced price and financial
stability (see Wray, 1998; Mosler, 1997–98; Mitchell and Muysken, 2008). A  JG
programme has at least two advantages over discretionary fiscal policy. First, once
put in place, the programme becomes an automatic stabiliser. When the private
sector lays off workers, government hires them. In recovery, the private sector hires
them back, by offering better wages, benefits or opportunities. Thus we do not need
to wait for stimulus bills to go through a lengthy political process to stabilise the
economy. Government simply provides funding to hire all who want to work—the
size of the deficit that results from this is not important, according to the principles
of functional finance.17
Second, a JG programme will not be inflationary as it operates according to the
buffer-stock principle. The government ‘buys’ labour when there is a surplus, i.e. in a
recession, thus putting a floor under the price of labour. In a recovery, the private sec-
tor taps workers from the JG pool dampening wage pressures. Finally, as Minsky (2008
[1986]) argued, the JG promotes financial stability. Rather than relying on the usual
business-friendly Keynesian policies (that usually consist of tax incentives or subsidies
to promote investment) to stabilise the economy, the JG relies on countercyclical and
public spending directed where it is needed most. Minsky argued that a government-
led expansion is more sustainable than one led by private sector spending, some of
which would be financed by debt.

4.2 Monetary policy
MMT has demonstrated that the Treasury and the Fed necessarily cooperate in mon-
etary and fiscal policy. As explained above, bonds sales, even if by the Treasury, are a
part of monetary policy, not fiscal policy. Indeed, the central bank’s ability to achieve
its interest rate target depends on the Treasury’s cooperation. In this regard, MMT
suggests rethinking the traditional distinctions between fiscal and monetary policy that
are based on the entity conducting the operation (Fullwiler, 2015). Instead, we should
classify policy according to its impact on the economy. Announcing an interest rate
target and utilising the means to achieve it (bond sales and purchases) fall within the
realm of monetary policy, while actions that increase the non-government sector’s net
financial wealth are fiscal policy (ibid.).
The central bank is the Treasury’s bank, making and receiving payments on its
behalf. At the same time, the central bank handles much of the private payments made.

17
  We leave to the side exactly how the programme will be run, including who will do the hiring. See Wray
(2012) for details.
 Modern money theory and the facts of experience   1309
Total payments made in the USA daily amount to, literally, trillions of dollars. Post
Keynesians have long emphasised that central banks must accommodate private bank
demand for reserves, but have generally ignored the impacts of fiscal operations of gov-
ernment—which is by far the largest entity in the economy. As Fullwiler (2003) argues,
the Fed’s main preoccupation is the payments system—ensuring trillions of dollars of
payments are made daily without a hitch and with minimal impact on market interest
rates. This laser-like focus on daily payments ensures that the Fed is not and cannot be
‘independent’ of the Treasury (Bell, 2000; Bell and Wray, 2002–03). The ‘facts of expe-
rience’ demonstrate that separation of ‘monetary policy’ and ‘fiscal policy’ between the
central bank and the Treasury is a mirage.

4.3 Eurozone
From the beginning, MMT adopted a position close to that of Goodhart (1998)
and Godley (1992, 1997): the EMU’s design is fundamentally flawed. Unlike many
other critics—who focused on the independence of the ECB to adopt tight mon-
etary policy or on the tight Maastricht criteria—we emphasised the attempt to
divorce the member states from sovereign currency as the main problem. We argued
that either a deep recession or a serious financial crisis would create challenges that
individual member nations would not be able to meet. Bell (2002) argued early on
that there would be ‘convergence going in, and divergence going out’: while interest
rates would converge towards German rates, they would diverge as markets realised
that members no longer had the fiscal sovereignty to deal with crisis. As Goodhart
has argued, it is not a coincidence that we generally observe the ‘one nation, one
currency’ rule around the globe today and back through history. The EMU was the
biggest exception to that rule and the system now faces a crisis that it seems inca-
pable of resolving.
The EMU’s problems became manifested in (not caused by) current account defi-
cits across—especially—the currently troubled periphery. Indeed, some see these
deficits as the cause of the problem. MMT, however, notes that within the ‘dollar
monetary union’ of the USA, some states run chronic current account deficits and
others run surpluses. As in the case of the EMU, current account deficits tend to
drain jobs. However, US federal government’s fiscal transfers help to move income
and jobs back to the deficit states. A properly constructed monetary union would use
the central government’s ability to run deficits to ensure full employment across all
member states. We do not, of course, mean to imply that US fiscal policy approaches
that ideal, but it certainly a better job than does the EU Parliament or the Troika.
Asking a state like Mississippi to adopt austerity to close a current account deficit
would only create more poverty. While it is true that US states are under great pres-
sure (both by markets and by requirements of their own state constitutions) to run
balanced budgets, the spending by federal government (well over 20% of US GDP)
helps to relieve such constraints. The EMU area has nothing equivalent to this.
We argue that in both the USA and the EMU, the financial crisis resulted from
excessive private sector debt that resulted from runaway private financial systems over
the previous decade. What was different, however, was the ability to respond: EMU
members were constrained in a manner that the USA was not. When the crisis did
hit, EMU members were responsible not only for their own social safety nets, but
also for their banks. In the case of the USA, much of the social spending comes from
1310   Y. Nersisyan and L. R. Wray
Washington (which also adopted an $800 billion fiscal stimulus that included some
spending for jobs). More importantly, the bailout of the US banking system was han-
dled by the Treasury and the Fed. In the EMU, attempts to rescue troubled banks blew
up national government budget deficits. Now members have to tighten their belts in
the face of continuing depression-like circumstances.18
To some extent, the obsession with fiscal rectitude and balanced budgets stems from
a misunderstanding of money and government finances. If one believes that the gov-
ernment should only spend what it receives in taxes, then separating the Treasury from
the central bank seems to be an optimal strategy as this constrains the government’s
ability to spend.19 Given the set-up, no euro nation should ever have run chronic defi-
cits of any size; none should have run up any significant debt ratio. It follows from
the perspective of Godley’s 1999 sectoral financial balances, that in an environment
of large current account deficits and small government deficits or even surpluses (as
in Spain), the private sector had to do the deficit spending in many of the member
states—running up large debts that were unsustainable.
The eventual intervention of the ECB further validates the claims of MMT. Despite
the numerous bailout programmes and loans from the IMF, Germany and France,
markets were still charging high interest rates for lending to Greece, Spain and other
periphery nations. The euro crisis was only ‘tamed’ when the ECB agreed to intervene
and buy government bonds on the secondary market. However the actions taken so
far are not a substitute for a fully sovereign government with the fiscal authority to
respond. ECB operations can affect interest rates and can substitute the ECB’s more
liquid liabilities for those that are less liquid. Nevertheless, unless the ECB stands
ready to facilitate greater spending by member nations—in a manner similar to the
way that the Fed stands ready to make payments for the US Treasury—recovery from
the crisis is unlikely.

5.  MMT and monetary cranks

Horatio: He waxes desperate with imagination.
Marcellus: Let’s follow. ’Tis not fit thus to obey him.
Horatio: Have after. To what issue will this come?
Marcellus: Something is rotten in the state of Denmark.
Horatio: Heaven will direct it.
Marcellus: Nay, let’s follow him.
(Hamlet, Act 1, Scene 4)

Marcellus is right, something is rotten. In the aftermath of the Great Recession, we wax
‘desperate with imagination’, seeking explanation, solution, retribution! Our banking
regulators and supervisors failed us in the run-up to the crisis, they failed us in the
response to the crisis and they are failing us in the reform that we expected in the
aftermath of the crisis. Heaven will not save us, either. The invisible hand is impotent.
In times like these, we thrash about, desperate for ideas, for imagination, for leader-
ship. There is nothing unusual about that, as the New Palgrave entry monetary cranks

18
  As Forstater noted in 1999, in EMU countries, ‘market forces can demand pro-cyclical fiscal policy
during a recession, compounding recessionary influences’ (Forstater, 1999, p. 33).
19
 We are not trying to downplay the importance of other reasons for the eurozone institutional arrange-
ments, such as class  conflict between workers and capitalists, or the neoliberal agenda of destroying the
European ‘welfare state’.
 Modern money theory and the facts of experience   1311
makes clear. Many of the proffered reforms are bandied about again and many of
20

them are on the right track—sensible ideas rejected by the mainstream and labelled
‘crank’ to discredit them. There are two kinds of ‘cranky’ ideas rising in popularity in
the aftermath of the global financial crisis (GFC). One set would attempt to constrain
private banking with reforms to create ‘narrow’ or ‘100% reserve’ banking; another set
seeks to assign money creation to the sovereign authority—returning to ‘greenbacks’
or turning to ‘debt-free money’. At the limit, the two approaches come together as
‘private money creation’ is eliminated and entirely replaced by government money
creation to finance its spending. That would essentially resurrect Milton Friedman’s
pre-monetarist ‘monetary and fiscal framework’ (Friedman, 1948).
The 1930s idea behind narrow banking was to restrict banks to prevent another
run-up in speculative fever. Narrow banks would issue deposits but could not make
loans. To protect deposits, they would hold only the safest assets—such as govern-
ment treasuries plus central bank reserves—carving space in the financial sector for
a perfectly safe payments system.21 So far as it goes, this is sensible and alternatively
could be achieved with a government-run postal savings system. However, note that
even during the GFC there was no run on US bank deposits, which were protected by
deposit insurance (the situation in the UK was somewhat different until it adopted full
insurance—no rational person will accept 90% coverage in crisis). From that vantage
point, narrow banking aims to fix what is not broken.
However, others—such as Martin Wolf—are (rightly) horrified at the shenanigans
perpetrated by banks, so another goal is to stop money creation ‘out of thin air’ that
finances rising debt that cannot be serviced. As Wolf argues, private commercial banks
would only be allowed to: ‘loan money actually invested by customers. They would be
stopped from creating such accounts out of thin air and so would become the interme-
diaries that many wrongly believe they now are’ (Wolf, 2014). This is similar to Islamic
banking, which prohibits interest but allows profits on lending. The commercial banks
(but not narrow banks) would intermediate between savers who deposit funds and
investors who borrow them. On the surface, this—too—appears sensible.
However, from the discussion above, it should be clear that this is based on a funda-
mentally flawed view of saving–investment and deposit–loan relationships. If we really
did limit our finance to saving and our loans to deposits, then we would run our
economy into the ground. Saving is a two-step decision: a decision to NOT spend and
then a decision to hold saving in some form. Only a portion of saving will ever make
it into our intermediaries to finance loans.22 Each period, the amount saved, lent and
then spent would probably decline (due to leakages) (see Kregel, 2012A).
To prevent that, we could grow government (‘thin air money creation’) to fill the
demand gap, as in Friedman’s proposal. Government deficits create net money and
saving and hence the ‘investments’ needed by commercial banks to lend. This is some-
thing Friedman seemed to recognise, as his proposal would have had all government
spending financed by ‘money creation’ so that budget deficits would increase the net
money supplied by government. This is also what the ‘debt-free money’ supporters
seem to have in mind. Government would directly spend ‘greenbacks’ to finance its
spending and some of these would be saved and invested in commercial banks.
20
 See Clark (1987).
21
  For more on the history of the Chicago plan, see Phillips (1995).
22
  Some portion will go into narrow banks (which must hold 100% reserves), some portion will go into
commercial banks and some portion will go ‘under the mattress’ in the form of currency.
1312   Y. Nersisyan and L. R. Wray
Let us set aside the narrow banking proposal and focus on the debt-free money
proposal in which government would bypass the banking system and directly spend
its own notes in all payments. The idea is that it would no longer ‘borrow’ by selling
bonds—all spending would be ‘money financed’ as in Friedman’s proposal. However,
as we have discussed above, ‘greenbacks’—like all currency—are liabilities of the issuer.
Unlike bills and bonds, however, they do not promise to pay interest. Presumably,
excess ‘greenbacks’ are deposited in banks, which receive reserve credits. If this creates
excess reserves in the system, there will be downward pressure on overnight rates. To
keep its target rate above zero, the central bank will need to pay interest on reserves
or the Treasury will have to offer interest-paying obligations, which violates the policy
under consideration.23
The point is that the ‘debt-free’ money will not remain debt-free for long unless
the central bank wants to offer a zero interest rate policy (ZIRP) forever. Many who
advocate MMT also support ZIRP forever, as did Keynes (in his call to euthanise the
rentier class by eliminating a reward to those who hold riskless assets). However we do
not need ‘debt-free’ money to eliminate government payment of interest; all we need to
do is adopt ZIRP and stop draining reserves by offering treasuries. Logically, sovereign
government spends first, then taxes or sells bonds. The bond sales serve the operational
purpose of keeping interest rates on target. If we target a zero interest rate and stop
issuing bonds, we will have already achieved what ‘debt-free money’ advocates want:
elimination of interest payments. Yet the currency spent by government and accumu-
lated as net financial assets will not be ‘debt-free money’, but liabilities of the central
bank (in the USA, Federal Reserve notes and reserves) and the Treasury (coins).
There are several ways to accomplish this, all of them technically easy. For exam-
ple, Congress amends the Federal Reserve Act, dictating that the Fed will keep the
discount and Fed funds rate targets at zero. It simultaneously mandates that the Fed
will allow zero-rate overdrafts by the Treasury on its deposit account up to an amount
to allow Treasury to spend budgeted funds. While this may not be politically easy, it
will be no more difficult than mandating that government spending will henceforth be
made in ‘debt-free money’. And it is at least operationally coherent.
In any case, it is hard to believe that budget deficits will normally be sufficiently large
to supply the ‘intermediaries’ with the greenbacks needed to finance useful private
activity if we were to simultaneously adopt greenbacks plus narrow banks. We need
that ‘thin air’ money creation to keep the lending, spending and growing on pace.
At least some of it needs to come from the private sector fulfilling the private pur-
pose. While we agree with the modern monetary ‘cranks’ that something is rotten in
Denmark, we think there is still a role to be played by private banking. Private creation
of money is more elastic in the sense that it is better able to respond to the needs of the
economy. When firms want to spend more, they ask for more credit and if banks pro-
vide that credit, the economy can expand. When firms are uncertain about the future
and will not invest, they may pay back their loans, thus shrinking the quantity of money
in the economy. Hence private money expands and contracts with economic activity,
which is a desirable feature of our monetary system. While private credit creation may
accelerate the boom–bust cycle more than we would like, we may want to leave to the
‘banking ephor’ some of society’s resources for pursuit of private activity.

23
  QE has taught us that we can just leave excess reserves in the banking system and keep rates on target
by paying a support rate on reserves.
 Modern money theory and the facts of experience   1313
Further, as Minsky always said, ‘everyone can create money’ and it is hard to see
how private IOUs denominated in the money of account can be eliminated. Private
credit instruments that circulate and facilitate commerce and industry do not originate
solely with banks proper. The rise of shadow banks in the modern era demonstrates
that the private sector will innovate and create liquid financial instruments in search
of greater profits.
The government should, however, guide this process to ensure that liquidity creation
in the economy does not become speculative. We can, and should, determine which
of those IOUs warrant special protection by government through deposit insurance
and access to the lender of last resort. And any issuer of such IOUs should be sub-
ject to very close supervision and regulation. At a minimum, such institutions should
be forced to return to good underwriting and should hold loans to maturity—rather
than passing them like hot potatoes to patsies—in order to incentivise risk assessment.
Bringing banks under tighter control by the government is the right solution, as it
allows for greater public control over private money creation.
Some ‘cranks’ advocate a bigger role for public banks, including state development
banks. We think this is a good idea and point to a proposal Minsky co-authored that
would have created a system of community development banks (see Minsky et  al.,
1993). However we also note that putatively ‘private’ banks are really public–private
partnerships if they are protected and regulated by government. We need to put more
of the ‘public’ in the public–private partnership, ensuring that their activities actually
serve a public purpose. It is obvious that many—perhaps even most—of the activities
pursued by the biggest global banks in recent years have served little public purpose
and often have operated against the public interest as they laundered drug money,
financed terrorists, rigged markets and facilitated tax evasion. All of these activities
should be prosecuted to the fullest extent of the law, with top management fired and
punished on conviction.
MMT is consistent with much of heterodoxy on the view of regulating and supervis-
ing private banking. Indeed, understanding MMT makes it easier to formulate such
policies, without fear of budget deficits should expansionary fiscal policy become nec-
essary to compensate for constraints imposed on private lending or to rescue troubled
institutions. MMT makes it clear that affordability is not the issue for governments
operating with their own sovereign currencies.

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