Milton Friedman’s 1948 Functional Finance Proposal

Milton Friedman’s 1948 article, “A Monetary and Fiscal Framework for Economic Stability” put forward a proposal according to which the government would run a balanced budget only at full employment, with deficits in recession and surpluses in economic booms. There is little doubt that most economists in the early postwar period shared Friedman’s views on that. But Friedman went further, almost all the way to Lerner’s functional finance approach: all government spending would be paid for by issuing government money (currency and bank reserves); when taxes were paid, this money would be “destroyed” (just as you tear up your own IOU when it is returned to you). Thus, budget deficits lead to net money creation. Surpluses would lead to net reduction of money

John Mauldin: The Matterhorn Interview

Investment advisor John Mauldin explains his attitude towards austerity measures; a return of the gold standard; the euro crisis; and the willingness to bailout everyone that makes capitalism and monetary systems stop working

Bond vigilantes and the currency relief valve

The last post by Randall Wray below is an interesting one because it points out how the world has changed since the end of the gold standard and why the sovereign debt crisis is centered in the euro zone.

While I have an Austrian bias overall, for me, MMT is the best way to think about nonconvertible floating exchange rate systems as distinct from fixed exchange rate, currency board, pegged and convertible systems. The difference is policy space and what I would call the bond vigilante relief valve

Running through Italian unilateral euro zone exit scenarios

A unilateral exit would be a devastating event for Italy and the euro zone. Inflation would be high but bank and national solvency issues would recede. If the exit were done under these nationalistic pre-conditions of redomination, most of the adjustment burden would fall on foreign creditors. Italy would become export competitive again and could focus on economic growth strategies instead of ones of fiscal adjustment

What They Are Doing?

The quantity of debt grows as the quality recedes. The problem of bad loans is no longer just the pre-2008 mortgages, CDOs, and LBOs. Debt issued after the bust is defaulting, such as Greek sovereign bonds, issued in June 2010. Some securities are born to part investors from their money, but it’s remarkable the extent and variety of such instruments issued in 2011. The world choked on similar bonds and derivatives only three years ago, many of which are still held at false prices on financial institutions’ books

How the Federal Reserve came into being

The question after the frightful period in 1907 was what to do to prevent another panic from causing a severe depression. Benjamin Strong, a senior executive at Bankers Trust and later the first President of the Federal Reserve Bank of New York, played a prominent role in the creation of the Fed and in its disastrous policy that led to the second Great Depression

IOUs Denominated in National Currency

On a floating exchange rate, the government’s own IOUs—currency—are nonconvertible in the sense that the government makes no promise to convert them to precious metal, to foreign currency, or to anything else. Instead, it promises only to accept its own IOUs in payments made to itself (mostly, tax payments, but also payments of fees and fines). This is the necessary and fundamental promise made: the issuer of an IOU must accept that IOU in payment. So long as government agrees to accept its own IOUs in tax payments, the government’s IOUs will be in demand (at least for tax payments, and probably for other uses as well)

Commodity Money Coins: Metalism versus Nominalism, Part Two

This week we examine coinage from Roman times to the present in Western society

The Gold Standard and Fiat Currency: Metalism vs. Nominalism, Part One

“Taxes drive money”—these “money things” are accepted because there are taxes “backing them up”, not because they have embodied gold. As promised, this week I will begin try to dispel the view that coins used to be commodity monies

The lessons of the crisis of 40 years ago

Andy Lees takes a sceptical view of fiat currency and the excess credit it has created over the past forty years and uses a few charts to demonstrate his points

Alternative Exchange Rate Regimes

Previous Modern Money primer blog posts were quite general and apply to all countries that use a domestic currency. It does not matter whether these currencies are pegged to a foreign currency or to a precious metal, or whether they are freely floating—the principles are the same. In this blog post we will examine the implications of exchange regimes for our analysis

Bretton Woods, R.I.P.

Richard Nixon unilaterally closed the gold window 40 years ago today. No longer would the U.S. permit other countries to exchange their dollars for gold and by breaking that link, he ended the Bretton Woods international financial regime and ushered floating exchange rates that characterize the modern era