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The idea of money and currency has existed since the dawn of civilization more than 5,000 years ago. Early currencies were somewhat crude and mainly just involved using standardized weights to determine certain commodities' value. The ancient Lydians were the first people to use coins as a form of currency and as a store of value, which was a major step toward money as it is known today.
Since modern economies are no longer backed by gold, questions concerning what currency represents and its value have led to some diverging and interesting theories. Most economists agree that modern economies operate under the idea of a “fiat currency,” which means that a currency has value because the government minting and printing the money says so. By the 1980s, a group of the world’s leading economists, led by Randall Wray among others, began advocating a theory known as “Modern Monetary Theory” or “Neo-Chartalism” to explain the post-gold economic order.
Modern Monetary Theory is complex, yet at the same time somewhat simple, as it argues several clear points: money’s value comes from the sovereign power that prints it; the sovereign can create money through printing, which is then needed by the citizens to pay taxes; the currency can “float” when it is not fixed to an exchange rate or commodity such as gold, and the default is nearly impossible, but inflation can be a problem. The origins of these ideas dated back to the early twentieth century and were later influenced by notable economist John M. Keynes, who argued that state spending, higher consumption, and low-interest rates were needed to keep unemployment low. In the 1980s, economists would take many Keynesian economic ideas and modify them to produce what is today known as Modern Monetary Theory.
====Chartalism, Keynes, and the Origins of Modern Monetary Theory====
Keynes mentioned the term “chartalism” in his works but expanded on the basic idea to include the government’s role in interest rates, employment, and consumption. Arguing that low interest and unemployment rates were the keys to a strong economy, Keynes believed that government spending should be encouraged if need be. Tying a currency to metal was an archaic idea. Keynes argued that “when employment increases, aggregate real income is increased.” <ref> Keynes, John Maynard. <i>The General Theory of Employment, Interest, and Money.</i> (Ware, United Kingdom: Wordsworth, 2017), p. 28</ref> Perhaps, more importantly, Keynes further wrote that low levels of employment were the result of higher amounts of consumption (spending) by the people of a particular country. <ref> Keynes, p. 91</ref>
Many of these ideas were advocated by Knapp and other early ChartalistsChartists. Still, Keynes took things a step further by reasoning that governments should play a more active role in controlling and lowering interest rates.
“The monetary authority easily controls the short-term rate of interest, both because it is not difficult to produce a conviction that its policy will not greatly change very shortly, and also because the possible loss is small compared with the running yield (unless it is approaching vanishing point). But the long-term rate may be more recalcitrant when once it has fallen to a level which, based on experience and present expectations of future monetary policy, is considered ‘unsafe’ by representative opinion.” <ref>Keynes, p. 176</ref>
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 “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>
====Conclusion====
In the midst of the Bretton Woods financial system collapse, economists, bankers, financiers, and government leaders scrambled to understand their new economic reality. One of the primary theories developed was the Modern Monetary Theory, which was heavily influenced by chartalist and Keynesian economic theories of the early twentieth century. MMT gradually became the leading economic theory of the industrialized world, although not all economists are necessarily on board.
A notable and influential group of economists led by James Rickards believe that MMT policies could be the death knell of the modern economies by creating unending cycles of deflation and inflation and that gold still has a place in modern economics. Another emerging group of economists believes that MMT places too much emphasis on the idea of money and that the concept of credit has all but replaced money in many countries.
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