“Whatever is technically feasible is financially possible." Finance limits individuals but not sovereign countries.
Some of the most frank evidence on banking practices was given by Graham F. Towers, Governor of the Central Bank of Canada (from 1934 to 1955), before the Canadian Government's Committee on Banking and Commerce, in 1939. Its proceedings cover 850 pages. Most of the evidence quoted was the result of interrogation by Mr. “Gerry” McGeer, K.C., a former mayor of Vancouver, who clearly understood the essentials of central banking. Here is an excerpt:
Q. So far as war is concerned, to defend the integrity of the nation, there will be no difficulty in raising the means of financing, whatever those requirements may be?
Mr. Towers: The limit of the possibilities depends on men and materials.
Q. And where you have an abundance of men and materials, you have no difficulty, under our present banking system, in putting forth the medium of exchange that is necessary to put the men and materials to work in defence of the realm?
Mr. Towers: That is right. (p. 649)
Q. Would you admit that anything physically possible and desirable, can be made financially possible?
Mr. Towers: Certainly. (p. 771)
“Whatever is technically feasible is financially possible"
When WW I began, Europe was on the gold standard, and experts predicted fighting would last only months because governments would run out of money. The pundits were wrong. It turned out that wars are fought with real resources and not with monetary abstractions. The belligerent countries simply suspended the gold standard and kept paying their soldiers and ordering armaments.
Today, we are no longer on the gold standard and central bankers admit there is no limit to government money creation. Former U.S. Federal Reserve Chairman Alan Greenspan has stated, "[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."
As a result of economic miseducation, a common response is that government deficit spending invariably leads to hyperinflation. However, the country with the highest debt-to-GDP ratio in the world today at over 200% is Japan. There is no inflation in Japan which now has buyers for its bonds even at negative interest rates.
According to economist William Mitchell, theories that predict deficits will automatically result in prices that leap out of control demonstrate "a mind-boggling failure to explain reality". The inflationary episodes of Zimbabwe and Weimar were the result not merely of printing money but of major disruptions in the supply capacity of the economy, which is not the situation today in advanced economies.
Today we suffer from excessive underutilization of resources including high levels of unemployment which many establishment economists describe as natural and inevitable. Fear of job loss helps keeps labour docile, wages low, and households indebted which may be of benefit to corporate and financial elites. But if the purpose of policy is to help the majority, we need to rethink what fiscal responsibility really means.
Sovereign governments that control their own currencies (which includes Canada, the U.S. and Japan but excludes those who use the Euro) cannot run out of their own money. Any commentator or politician who states that the federal fiscal cupboard is bare or that the federal government must balance its budget like a household are making false claims.
Governments which issue their own money always have the power to mobilize whatever resources are left unused by the private sector. For example, the unemployed can be offered community work through a Job Guarantee that would enable them to earn their keep and contribute to society. For monetarily sovereign countries, real fiscal responsibility means managing the economy for full employment, price stability and a sustainable environment, and has nothing to do with targeting budget balances or debt-to-GDP ratios. The pundits are wrong once again.
Essential insights of Modern Monetary Theory (MMT)
"The essential insight of MMT is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.
Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counterfactual."
"In 1971 the Nixon administration abandoned the gold standard and adopted a fiat monetary system, substantially altering what looked like the same currency. Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments. Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing will influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt."
A summary of MMT in plain language
• Why do we have a national currency?
National governments need a way to obtain resources to fulfill their goals. In most developed nations, this is typically done using money.
• What or whose money do governments use?
Governments create their own money. The basic formula to create a currency is: (i) decide on a national money unit (e.g. Japan called theirs the “Yen”; the U. S. the “Dollar”, etc.); (ii) the government issues various forms of money “things” denominated in that unit (Yen or Dollar bills, coins, or electronic bank credits); (iii) impose a broad-based tax that can only be paid using the government’s newly created money. And now the government can issue and spend its own money to obtain resources.
• Why is government money accepted and how does it have any value?
The tax obligation causes the government’s money to have value since businesses and households must obtain the government money in order to pay their taxes. Consequently, the currency becomes universally accepted in that economy.
• Does the government need to collect taxes before it can spend?
Note above how taxes simply return to the government the money it first created. The spending has to happen first since this is the only way the public can get what will be needed when payment must be made. But the government never needs our taxes in order to spend since it creates the money in the first place.
• If the national government doesn't need our taxes to spend, what are taxes for?
Taxes cause demand for the government’s money and so make it valuable to the public. Taxes also reduce spending power in the economy so that when the government buys necessary resources, it doesn’t create excessive inflation. Taxes also serve as a tool for public policy to provide incentives and disincentives to influence the private sector. Taxes can also be designed so users will pay for a particular service.
• If national governments can just create money, are there any limits to what they can spend?
Yes, governments can’t use their currency to buy what is not for sale in their own currency. Also the quantity of real domestic resources available will determine practically how much the government can spend (or how much more it must tax) in order to prevent inflation. Legislation also creates self-imposed limits.
• Can sovereign governments go bankrupt?
A nation that issues its own currency can never go bankrupt or be unable to pay its bills, as long as those bills are due in the money it creates. Governments that owe debt in a currency or commodity they don’t create can certainly become insolvent and default. So can governments who promise to exchange their currency for another currency they don’t control.
• Do governments borrow to fund their spending?
Since currency-issuing governments create money when they spend, they do not need to – and in fact can’t – borrow their own money. Government bonds can only be purchased with government money – money that has already been created. This means that government bonds are serving some other role in the economy aside from funding. The sale or purchase of bonds provides a mechanism for the central bank to manage interest rates by controlling the quantity of reserves needed by the commercial banking system (for inter-bank settlement). Bonds also conveniently provide a safe interest-earning way to save government money which is of especial benefit to commercial banks who hold the greatest quantity of government money in the form of reserves.
• Does the understanding of modern money affect public policy?
Sovereign nations that issue their own money are not constrained in the same way as currency users (such as provinces, businesses or individuals). This has a profound impact on the range of policy options available to such governments. An important example is unemployment: the federal governments can afford to ensure that everyone willing to work who is not needed by the private sector can get a job. The effects of doing so would provide better financial stability, eliminate substantial poverty, and help grow a green economy.
(Google “Job Guarantee” for full details of this proposal.)
For more background and many links, go to (or google):
Modern Monetary Theory in Canada
where you can read Warren Mosler’s
Seven Deadly Innocent Frauds of Economic Policy