In 1943, the chairman of the NY Fed backed Modern Monetary Theory: “Taxes for Revenue Are Obsolete”

Modern Monetary Theory is the latest incarnation of chartalism, the economic theory that holds that government spending — and a federal jobs guarantee — doesn’t create inflation, so long as the spending is on things that the private sector isn’t buying: if a factory can produce ten widgets but is only producing five because that’s all the public sector wants to buy, the government can put in an order for five more widgets, putting more workers to work, without driving up the price of widgets.

That is, government spending (which it pays for by simply minting as much money as it needs) doesn’t create inflation, provided there are idle resources (workers, physical plant) for the government to spend on.

If the number of dollars in circulation does rise to the exceed the supply of goods and labor, and inflation starts to rise, governments tame inflation by imposing taxes, which reduce the supply of money and stabilize prices.

This runs counter to the neoliberal monetary theory, which holds that people have money from their businesses and labor, and then government takes it away from them to provide services. In MMT (and in reality), money only comes into existence when governments “deficit spend” on some good or services. Only governments are allowed to issue money, after all, so it follows that all money enters the system when the government spends it into existence.

The government can issue as much money as it needs to in order procure the services it need (cops, bureaucrats, teachers, tax collectors, soldiers, as well as hospitals, schools, roads and tanks), provided it isn’t bidding against the private sector for those goods and services (when governments have to bid against the private sector, such as during WWII, it needs to tax money out of existence and use other techniques like selling “War Bonds” to reduce the amount of money in circulation in order to tame inflation).

The way the government gets people to sell their labor and goods for the money it issues is by imposing a tax liability on them: every year, you have to send some dollars to the government or it will punish you. This means that everyone now needs dollars and will work for them. This is the origin of “employment” (people willing to work for dollars) and “unemployment” (people who need dollars but can’t find anyone to sell their labor to).

The government spends money into existence and taxes it out of existence. If the government balanced its budget — that is, if it spent exactly as much as it taxed — there would be no money left in the private sector’s hands. The public’s assets are the government’s debts. All money comes from government spending and circulates until governments tax the money out of existence, so if the government spends and taxes equally, there will be no money left in existence for you and me to have.

This may sound like a radical idea, but it’s been around for a hell of a long time and its underlying premises (like the fact government spends money into existence, rather than taxing to pay for itself) are widely accepted even in orthodox economic circles.

As evidence, consider Taxes for Revenue Are Obsolete, a speech given by New York Fed chair Beardsley Ruml to the American Bar Association in 1943, explaining the lessons of war spending for tax policy:

Ruml says that taxes serve four purposes:

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

Some of Ruml’s speech could be a direct quote from one of today’s MMT advocates, like this: “The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and, therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy.”

If you want to learn more about MMT, the MMT Podcast’s two-part interview with Warren Mosler is really excellent: Part 1, Part 2.

And even more on point to the context of Ruml’s talk, this Cowboy Economist rebuttal to Ken Burns’s belief that “the American people single-handedly financed World War Two is both funny and edifying:

Here are some earlier posts about MMT:

Modern Monetary Theory: why government spending isn’t like household checkbooks

A thorough defense of Modern Monetary Theory

The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and, therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy.

The second principal purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax, and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. It is important, here, to note that the estate and gift taxes have little or no significance, as tax measures, for stabilizing the value of the dollar. Their purpose is the social purpose of preventing what otherwise would be high concentration of wealth and income at a few points, as a result of investment and reinvestment of income not expended in meeting day-to-day consumption requirements. These taxes should be defended and attacked it terms of their effects on the character of American life, not as revenue measures.

The third reason for federal taxes is to provide a subsidy for some industrial or economic interest. The most conspicuous example of these taxes is the tariffs on imports. Originally, taxes of this type were imposed to serve a double purpose since, a century and a half ago, the national government required revenues in order to pay its bills. Today, tariffs on imports are no longer needed for revenue. These taxes are nothing more than devices to provide subsidies to selected industries; their social purpose is to provide a price floor above which a domestic industry can compete with goods which can be produced abroad and sold in this country more cheaply except for the tariff protection. The subsidy is paid, not at the port of entry where the imported goods are taxed, but in the higher price level for all goods of the same type produced and sold at home.

The fourth purpose served by federal taxes is to assess, directly and visibly, the costs of certain benefits. Such taxation is highly desirable in order to limit the benefits to amounts which the people who benefit are willing to pay. The most conspicuous examples of such measures are the social security benefits, old-age and unemployment insurance. The social purposes of giving such benefits and of assessing specific taxes to meet the costs are obvious. Unfortunately and unnecessarily, in both cases, the programs have involved staggering deflationary consequences as a result of the excess of current receipts over current disbursements.

Taxes for Revenue Are Obsolete [Beardsley Ruml/Federal Reserve Bank of New York]