Changes

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 the value of certain commodities. The ancient Lydians were the first people to use coins as a form of currency and as store of value, which was a major step toward money as it is known today. After the Lydians, silver became the type of metal most people used to mint coins, but gold was always the reserve and what “backed” the money. Even after paper money became the norm in the modern period, gold still backed most economies and was convertible in paper currency, and vice versa, in many countries into the twentieth century. But gold as the standard backing a national currency officially ended when American President Richard Nixon terminated the Bretton Woods financial regime in 1971. From that point forward, historians and economists, as well as laypeople, have repeatedly asked: what is the value of money?

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 default is nearly impossible, but inflation can be a problem. The origins of these ideas date 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 a number of Keynesian economic ideas and modify them to produce what is today known as Modern Monetary Theory.

[[File: Keynes_1933.jpg|300px|thumbnail|left|John Maynard Keynes in 1933]]

Modern Monetary Theory can be traced back to an early twentieth century idea known as “chartalism.” German economist Georg Friedrich Knapp first articulated chartalism in papers and finally his 1924 book <i>The State Theory of Money</i> as the idea that fiat money has value because it is needed to pay taxes. <ref> Polillo, Simone. “Money, Moral Authority, and the Politics of Creditworthiness.” <i>American Sociological Review</i> 76 (2011) p. 439</ref> Outside of economist circles, chartalism did not gain much traction because gold was still being used by most nations to back their currencies. But the world wars changed the world’s economic order and how the leaders of nations would come to view the concept of money.

In a somewhat ironic historical turn, although Keynes was theoretically opposed to tying a nation’s currency to the value of gold, he was one of the key architects of the Bretton Woods system, which essentially was the world’s attempt to revive the gold standard. Keynes would have preferred not using gold to determine currency exchange rates, but relented due to political pressure. <ref> Conway, Ed. <i> The Summit: Bretton Woods, 1944: J.M. Keynes and the Reshaping of the Global Economy.</i> (London: Pegasus Books, 2014), p. 124</ref> The Bretton Woods system would continue the use of gold as a determination of the value of money, but the foundations for Modern Monetary Theory had poured.

[[File: Federal_Reserve_Bank.jpg|300px|thumbnail|left|The Federal Reserve Bank in New York, New York]]

After the Bretton Woods system ended in 1971, most of the 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 Australian dollar were 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.

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 be the result of more government spending and lower interest rates, low unemployment and higher wages means that the population will be able to better withstand the price increases. Wray has admitted that inflation is certainly a potential problem of following MMT policies, but he points out that cases of truly economic crippling “hyper inflation” are extremely rare throughout history. The cases of 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>

In the midst of the collapse of the Bretton Woods financial system, economists, bankers, financiers, and government leaders scrambled to understand their new economic reality. One of the primary theories that developed was 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.

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