Why You Can't Print Money
I was wondering the other day, what one thing I wished everyone understood about economics. This is the thing.
One of the fundamental underpinnings of Modern Monetary Theory (MMT), or more accurately “Lunatic Horseshit Theory,” is the idea that the government has a monopoly on creating money. This is not true. You already know this is not true. It is fairly simple to demonstrate that it is not true, once you understand one simple fact. But I’ll use an example from MMT to illustrate this.
MMT adherents will tell you that if you took your tax payment to the IRS in cash, they would take the cash and record that your payment was made and then the cash would (or at least could) simply be thrown in a shredder because they can just make more of it. And this is true, but the problem is that they think the cash is money.
The cash is not money. It is currency. The state does not have a monopoly on creating money. They have a monopoly on printing currency.
Currency is a ticket you can redeem for money. The money does not physically exist. It is data in a computer, these days, and before there were computers it was an entry in a ledger. And before there were ledgers, the money was the currency - the currency itself was an object of value, like a gold or silver coin.
MMT adherents are upset that the currency has no inherent value anymore, and think that because the currency no longer has inherent value, they can do all kinds of crazy things (lunatic horseshit!) because they don’t know how the currency gets its value. It’s productive to think about the currency as tickets, because we understand some basic facts about tickets.
You may have tickets and say “these are good seats.” But the tickets are not the seats. You are not carrying the actual seats around with you. The seats are somewhere else, and you have to go where the seats are to redeem the ticket for the seats.
But! You can give the tickets to someone else, and they can go redeem the tickets for seats. The tickets don’t care who has them. You can trade the tickets for something else that you want more than the seats. You may give someone tickets to a concert in exchange for a stack of CDs. Then you get the CDs, and that someone can go redeem the tickets for seats at the concert.
More importantly, if you throw the tickets in the shredder, nothing happens to the seats. The seats are fine. The seats are still there and someone could sit in them at the concert. But without the tickets, nobody will. They will sit there empty and nobody will receive the value of those seats. But what do you think happens when you redeem your tickets for the seats and go sit in them?
That’s right. The venue takes your tickets, leaving you with a stub as a keepsake, but the actual part of the ticket you could redeem for a seat gets torn off and probably tossed in a shredder. It doesn’t matter, because you’ve received the seat that your ticket entitled you to receive. The ticket no longer has any value.
You can print all the tickets you want, it won’t put seats in the theatre. And if you properly record each seat you sell, when you run out of seats, it doesn’t matter if you still have tickets. You can’t sell them. There’s no seat for them to be redeemed for.
Currency is exactly the same. Currency carries value, but you have to put value into it. When you go to a financial institution and ask for $300, they will give you what amounts to tickets for $300, and they will record in your computer data that you took $300. They will subtract that $300 from your account. That is the $300 this currency represents. It has been removed from the available money supply so nobody else can have it. Nobody else can get tickets for the same seats.
When you then take these tickets to another financial institution, and present them to that institution with the direction to put $300 in your account there, they will dutifully take your tickets and put them away and record that $300 on your account balance. The currency now doesn’t have any value. You have extracted the value from it. If it is destroyed, nobody loses anything.
The money is just the number on your account balance. Going back to the MMT example, when you take your cash to the IRS and they record that your payment was made, that was the money. Once it’s recorded, the currency is just worthless pieces of paper. It doesn’t matter what happens to the currency. What matters is the record.
Unlike tickets, the currency can be reused. So they’ll probably set it aside to be used for something else. But when they use it, they’ll update the record. If they give tickets for $200 to someone, they’ll take $200 out of an account somewhere.
What the system runs on is trust. We trust everyone in every financial institution everywhere to accurately remove money from the correct accounts when they hand out tickets, and accurately add money to the correct accounts when they collect them. And as long as this is broadly true, the system works.
We also have systems to check their work, to audit the accounting trail, to identify and correct errors, and to prosecute deliberate fraud. As long as these systems operate fairly well, any errors in this system are going to remain small and manageable.
And the way we keep them working fairly well is for all the individual institutions checking them to be in competition with one another. There are rules, and these institutions have to follow them, and if one of them tries to break the rules a half dozen other institutions are going to take issue with it. They’ll still try - in any cooperative scenario, it is objectively to your advantage if everyone follows the rules except you - but they’ll get caught.
The only thing the government has a monopoly on is printing tickets. The tickets aren’t money. They’re just the mechanism we use to track money across institutions over time.
They’re not even the only mechanism - there are also cheques, both personal which are calculated when presented (money comes out of one account and goes into another at the same time), and cashier’s which are calculated like cash (money comes out of one account immediately, and goes into another account later). Any institution, public or private, can do its own accounting - shuffling the numbers around and only using official government tickets when necessary.
This does, of course, beg the question of where the numbers come from in the first place. Which is a fair question, but I will deal with that next time.