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After the Bretton Woods system ended in 1971, most industrialized nations’ currencies went from being fixed or “pegged” to gold to the “floating” currency regime that exists today. The value of the U.S. dollar, yen, euro, Canadian dollar and the Australian dollar was valued in terms of their demand domestically and in international markets, which brought forth a new economic reality that left many people struggling to understand.
By the 1980s, a new wave of economists, led by Randall Wray, Paul McCulley, and Stephanie Kelton among others, began to interrupt the post-Bretton Woods world economy through a chartalist and post-Keynesian lens in what became known as “Neo-Chartalism,” but is now known more commonly as “Modern Monetary” or Modern Money Theory” or MMT. The MMT theory/philosophy consciously “builds on the insights” of Keynes, Knapp, and other early twentieth-century chartalist economists. <ref> Wray, L. Randall. <i> Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems.</i> Second Edition. (London: Palgrave Macmillan, 2015), p. 1</ref> The core concept of this philosophy is that governments that mint and print their own money, and do not peg it to another currency or commodity, can never be insolvent. These currencies are described as “sovereign currencies” because they derive their value from the sovereign governments that print them.
MMT furthers Knapp’s earlier argument that the tax system gives value to a fiat money system. The sovereign currency is needed to pay taxes, which in turn creates a demand for the currency. <ref> Wray, pgs. 49-54</ref> Knapp directly influenced the idea of sovereign currency, but other MMT elements are clearly taken from Keynesian economics.
Low-interest rates were one of the linchpins of Keynes’ ideas, and they are in MMT as well. The theory holds that low-interest rates drive investment and keep money circulating throughout the economy in a process known as “velocity.” Keynes and MMT proponents believe that central banks should play a direct role in keeping interest rates low through various measures, including money printing, quantitative easing, and purchasing bonds. <ref> Fontana, Giuseppe. “The Role of Money and Interest Rates in the Theory of Monetary Policy: An Attempt at Perspective.” <i>History of Economic Ideas</i> 19 (2011) pgs. 123-5</ref>
MMT adherents also follow Keynes with the idea that not only should the central government play a role in keeping unemployment low, but that low unemployment is more important than controlling inflation. Spending increases consumption, which in turn creates more jobs and higher incomes. <ref> Wray, p. 23</ref> Although inflation may result from more government spending and lower interest rates, low unemployment and higher wages means that the population will be able to withstand the price increases better. Wray has admitted that inflation is certainly a potential problem of following MMT policies. Still, he points out that cases of truly economic crippling “hyper inflation” “hyperinflation” are sporadic throughout history. Weimar Germany, America during the American Revolution, and Zimbabwe are the three best-known cases, which Wray notes were all accompanied by extreme political instability and general bureaucratic incompetence. <ref> Wray, pgs. 258-62</ref>
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