At the federal level, the decision to do something is the funding. In the United States, this means the votes in each house of Congress and the President’s signature. As Clint Ballinger told me (in episodes 39 and 40 of Activist #MMT), “When the gavel hits the desk and they say we’re going to build a bridge, that’s the funding.”
The US dollar, U.K. pound, Canadian dollar, Australian dollar, and Japanese Yen (among others) are all fiat currencies. Fiat means by decision.
Related post: If federal taxes don’t pay for anything, then why do we pay them?
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This post was last updated February 23, 2021.
Disclaimer: I have studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for the MMT project. The information in this post is my best understanding but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.
When the gavel hits the desk
Once law, currency is issued by the central government (as specified in the new law) in order to communicate that decision to the non-government sector (meaning, those not in the government – in other words, us!). This is so they know what to do, what to do it with, and how and when to do it. (At tax time, that same currency serves as proof that it was done – or at least, someone did something.)
Knowing this, the “How’re you gonna pay for it?” question is revealed to be truly nonsensical (and the answer even more obvious: “It’s funded by the votes and the president’s signature”).
Taking it a step further, a federal representative expressing concern over inflation is nonsense on top of nonsense. (Setting aside that there is a big difference between Inflation the Boogeyman and inflation in reality.)
Do you want to do this program or not? Do you believe healthcare is a right for all or do you not? As a federal representative, you have access to almost any expert in the country. Have you had these experts analyze the practical, resource, and inflationary impacts of that program? What was their conclusion? Not knowing the answer can only mean that you have not asked the question. Therefore, how can we conclude anything but: you don’t care enough about the problem to even look into it?
Finally, we as citizens must use this knowledge to demand our representatives make different decisions. If they won’t do it, then perhaps we should replace them with someone who will – or become that someone who will.
Richard Murphy on MMT Podcast, episode 61, in July 2020, at around the 34-minute mark.
What Modern Monetary Theory says is, when the government decides to spend, it can spend. It says, “We want to buy a billion pounds worth of education” – which means paying teachers, in effect. So what happens is, it tells the Bank of England (BOE) to pay a billion pounds to teachers.
(Now, in practice what it actually does, the BOE transfers the money to Barclay’s, Lloyd’s, and HSBC, and whoever else, so the teachers can get money in their own accounts. Because we as individuals don’t have bank accounts with the BOE. The BOE transfers the money into those clearing banks which then give the money to teachers.)
All of this is a purely an electronic transaction. The government promises to pay the BOE a billion pounds, the BOE accepts the government at its word – and I think that’s a pretty fair thing for it to do. And the BOE says to, let’s call it Barclay’s, “We will pay you this amount of money so you can pay these teachers.” Barclay’s takes the BOE at its word. (And why wouldn’t it? Because the BOE is the only person who can create money in the UK, so they’re pretty good for cash.) Then Barclay’s pays the teacher. Then the teacher gives some of it straight back to the government in the form of tax. The rest they spend and some of the people who get that money pay tax, and it comes back. And so on.
This is the way in which money circulates around the economy. So, what effectively happens is, it is the decision to spend that creates money.
Top image: QuinceCreative on Pixabay (license)