Table Of ContentA Great Leap Forward
Heterodox Economic Policy
for the 21st Century
Randall Wray
Professor of Economics
Bard College, and Senior Scholar
Levy Economics Institute
NY, United States
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Acknowledgment
IwouldliketothankChiaraZoccaratoforheressentialcontributionsinbringingthis
projecttocompletion.Itisnoexaggerationtosaythatthisbookwouldneverhave
seenthelightofdaywithoutherhelp.Chiaraselectedthetopics,helpedtoarrange
the sequencing, and provided invaluable advice on the structure of the arguments
made.Sheeditedallthedraftsaswellasthefinalproofsandputtogethertherefer-
ences. Her uncompromising passion for the issues raised in this book was an
inspiration.
ix
Introduction
As anundergraduate Istudied psychology andsocialsciencesdbutnoeconomics,
whichprobablygavemeanadvantagewhenIfinallydidcometoeconomics.Ibegan
my economics career in my late 20s studying mostly Institutionalist and Marxist
approacheswhileworkingforthelocalandstategovernmentsinSacramento.How-
ever,IdidcarefullyreadKeynes’sGeneralTheoryatSacramentoStateandoneof
my professorsdJohn Henrydpushed me to go to St. Louis to study with Hyman
Minsky, the greatest Post-Keynesian economist. As I pursued my PhD, I focused
onPost-Keynesianeconomics,integratingthiswiththeInstitutionalistandMarxist
approaches Ihad studied earlier.
IwrotemydissertationinBolognaunderMinsky’sdirection(butalsobenefitting
fromworkingcloselywithJanKregel),focusingonprivatebankingandtheriseof
what we called “nonbank banks” and “off-balance sheet operations” (now called
shadow banking). While in Bologna, I met Otto Steigerdwho had an alternative
to the barter story of money that was based on his theory of property. I found it
intriguing because it was consistent with some of Keynes’s Treatise on Money
thatIwasreadingatthetime.Also,IhadfoundKnapp’sStateTheoryofMoneyd
cited in both Steiger and Keynesdso I speculated on money’s origins (in spite of
Minsky’swarningthathedidnotwantmetowriteGenesis)andtheroleofthestate
in my dissertation that became a book in 1990dMoney and Credit in Capitalist
Economiesdthat helped to develop what is known as the Post-Keynesian endoge-
nous moneyapproach.
Whatwaslackinginthatliteraturewasanadequatetreatmentoftheroleofthe
stateinourmonetarysystemdwhichonlyplayedapassiverole,supplyingreserves
asdemandedbyprivatebankers.ThatiswhatbecamethePost-Keynesianaccommo-
dationistorHorizontalistapproachtomoney.Therewasnodiscussionoftherelation
of money to fiscal policy at that time. As I continued to read about the history of
money, Ibecame more convinced that we need to putthe state at the center.
Fortunately,Iranintotwopeopleintheearly1990sthathelpedmetoseehowto
do it.
First therewasWarrenMosler,abondmarkettrader,whomImetonlineinthe
PKTdiscussiongroupdoneoftheearliestonlinediscussiongroups.Heinsistedon
viewing money as a tax-driven government monopoly. Second, I met Michael
Hudson at a seminar at the Levy Economics Institute, who provided the key to
help unlock what Keynes had called his “Babylonian Madness” perioddwhen he
was driven crazy trying to understand money’s origins in Mesopotamia. Hudson
arguedthatmoneywasaninventionoftheauthoritiestobeusedforaccountingpur-
poses.So,overthenextdecadeIworkedwithahandfulofpeopletoputthestateinto
monetarytheory.This is what became Modern MoneyTheory.
Asweallknow,themainstreamwantsasmallgovernment,withacentralbank
thatfollowsarule(initially,amoneygrowthratebutnowsomeversionofinflation
targeting). Thefiscal branchofgovernment is treated likea householdthatfaces a
xi
xii Introduction
budgetconstraint.ButthisconflictswithInstitutionalisttheoryaswellasKeynes’s
own theory. As the great Institutionalist J. Fagg Fosterdwho preceded me at the
University of Denver (my first teaching position)dput it: whatever is technically
feasibleisfinanciallyfeasible.Howcanwesquarethatwiththebeliefthatsovereign
government is financially constrained? And if private banks can create money
endogenouslydwithoutlimitdwhy is government constrained?
Mysecondbook,in1998(UnderstandingModernMoney),providedadifferent
viewofsovereignspending.Ialsorevisitedtheoriginsofmoney.BythistimeIhad
discoveredthetwobestarticleseverwrittenonthenatureofmoneydbyA.Mitch-
ellInnes.1LikeWarrenMosler,Innesinsistedthatthedollar’svalueisderivedfrom
the tax that drives it. And he argued this has always been the case. This was also
consistent with what Keynes claimed in the Treatise, where he said that money
has been a state money for the past four thousand years, at least. I called this
“modernmoney”withintentionalironydandtitledmy1998bookUnderstanding
Modern Money as an inside joke. It only applies to the past 4000 years. That is
“modern.”
Surprisingly, this work was more controversial than the earlier endogenous
money research. In my view it was a natural extensiondor more correctly, it was
the prerequisite to a study of privately created money. You need the state’s money
beforeyoucanhaveprivatemoney.Eventuallyourworkfoundacceptanceoutside
economicsdespeciallyinlawschools,amonghistorians,andwithanthropologists.
Forthemostpart,ourfelloweconomists,includingtheheterodoxones,attacked
usascrazy.Manystilldo,althoughModernMoneyTheory(MMT)isnowdiscussed
inall the major newspapers and bypoliticians around theworld.
I benefited greatly by participating in law school seminars (in Tel Aviv,
Cambridge, England, and Harvard) on the legal history of moneydthat is where I
met Chris Desan and later Farley Grubb, and eventually Rohan Grey (who helped
found the Modern Money Network). Those who knew the legal history of money
had no problem in adopting MMT viewsdunlike economists, who generally
workwithhighlyabstractmathematicalmodelsandhavelittleunderstandingofhis-
tory, law, orthe real world.
AsastudentIhadreadalotofanthropologydasmostInstitutionalistsdo.So,I
knew that money could not have come out of tribal economies based on barter
exchange. David Graeber’s2 highly popular book insisted that anthropologists
have never found any evidence of barter-based markets. Money preceded market
exchange.
Studyinghistoryalsoconfirmedourstory,butyoumustcarefullyreadbetween
thelines.Mosthistoriansadoptmonetarismbecausetheonlyeconomicstheyknow
is Milton Friedmandwho claims that money causes inflation. Almost all of them
1Mythirdbook,CreditandStateTheoriesofMoney(2004)republishedtheoriginalarticlesbyInnes
aswellasahalfdozennewarticlesonthetopic.
2Debt:TheFirst5000Years,byDavidGraeber,MelvilleHousePublishing2011.
Introduction xiii
alsoadoptacommoditymoneyviewdgoldwasgoodmoneyandfiatpapermoney
causes inflation. If you ignore those biases, you can learn a lot about the nature of
moneyfromhistorians.
Farley Grubbdthe foremost authority on early American Colonial currencyd
provedthattheAmericancolonistsunderstoodperfectlywellthattaxesdrivemoney.
EveryColonialActthatauthorizedtheissueofpapermoneyimposedaRedemption
Tax. The colonies burned all their tax revenue. Again, history shows that this has
always been true. All money must be redeemeddthat is, accepted by its issuer in
payment. As Innes said, that is the fundamental nature of credit. It is written right
there in the early acts by the American colonies. Even a gold coin is the issuer’s
IOU, redeemed in payment of taxes. Once you understand that, you understand
the nature ofmoney.
So, wewerewinning the academic debates, across avariety of disciplines. But
wehadahardtimemakingprogressineconomicsorinpolicycircles.BillMitchell
in Australia, WarrenMosler, Mat Forstater (my colleague at the University of
Missouri-Kansas City [UMKC]) and I used to meet up every year or so to count
the number of economists who understood what we were talking about. It took
overdecadebeforewegotuptoadozen.IcanremembertellingPavlinaTcherneva
(my student at UMKC and now my colleague at Bard College) back around 2005
that Iwas about ready togiveitup.
But in 2007, Warren, Bill, and I met to discuss writing an MMT textbook. Bill
and I knew the odds were against usdwe thought it would be for a small market,
consistingmostlyofourformerstudents.Still,wedecidedtogoforit.Hereweared
another dozen years laterdand the textbook was published. The first printing sold
out immediately. Alexandria Ocasio-CortezdAmerica’s breakout political star
who is destined to become President somedaydwas tweeted holding up a copy of
thetextbook.MMTiseverywhere.ItwasevenfeaturedinaNewYorkercrossword
puzzle in August 2018. You cannot get more mainstream than that. We originally
titledourtextbookModernMoneyTheory,butwedecidedtojustcallitMacroeco-
nomics. There is no need to modify that with a subtitle. What we do is Macroeco-
nomics. There is no coherent alternativetoMMT.
A couple of years ago PIMCO’s3 brains, Paul McCulley told me: “You won.
Declare victory but be magnanimous about it.” After so many years of fighting,
both ofthose are hard to do.Wewon. Be nice.
Let me finish with 10 bulletpoints of what I include inMMT toset the frame-
work for the bookthat follows:
1. What is money? An IOU denominated in a socially sanctioned money of
account.Inalmostallknowncases,itistheauthoritydthestatedthatchooses
themoneyofaccount.ThiscomesfromKnapp,Innes,Keynes,GeoffIngham,
andMinsky.
3Thebiggestbondtradingfirmintheworld.
xiv Introduction
2. Taxes or other obligations (fees, fines, tribute, tithes) drive the currency. The
abilitytoimposesuchobligationsisanimportantaspectofsovereignty;today
states alone monopolize this power. This comes from Knapp, Innes, Minsky,
and Mosler.
3. Anyonecanissuemoney;theproblemistogetitaccepted.Anyonecanwritean
IOUdenominatedintherecognizedmoneyofaccount;butacceptancecanbe
hard toget unlessyou have the state backingyou up. This is Minsky.
4. The word “redemption” is used in two waysdaccepting your own IOUs in
paymentandpromisingtoconvertyourIOUstosomethingelse(suchasgold,
foreigncurrency, orthe state’sIOUs).
Thefirst is fundamental and true ofall IOUs. All ourgold bugswhowant to
returntoagoldstandardmistakenlyfocusonthesecondmeaningdwhichdoes
notapplytothecurrenciesissuedbymostmodernnations,andindeeddoesnot
apply tomost ofthe currenciesissued throughouthistory. This comes from
InnesandKnapp,andisreinforcedbyHudson’sandGrubb’swork,aswellas
byMargaret Atwood’sgreatbook: Payback:Debtand the shadow side of
wealth.
5. Sovereign debt is different. There is no chance ofinvoluntarydefault on a na-
tional government’s debt so long asthe state only promisesto accept its cur-
rencyinpayment. It could voluntarily repudiate itsdebt, butthis is rare.
6. Functionalfinance:Financeshouldbe “functional” (toachievethe public pur-
pose),not“sound”(toachievesomearbitrary“balance”betweenspendingand
revenues).Mostimportantly,monetaryandfiscalpolicyshouldbeformulated
to achievefullemployment with price stability.This is credited toAbba
Lerner, whowas introduced into MMT byMat Forstater.
7. TheJobGuaranteeisacriticalcomponentofMMT.Itanchorsthecurrencyand
ensuresthat achieving fullemployment will enhanceboth price and financial
stability. This comes from Minsky’searliest work onthe employer oflast
resort,fromBillMitchell’sworkonemployedlaborbufferstocks,andWarren
Mosler’sworkon monopoly price setting.
8. Capitalist economies are naturally unstabledsubject to boom and bust and to
occasional financial crises. Sowe need Minsky’sanalysis offinancial insta-
bility.Here Ido not really mean justhis financial instability hypothesisdfor
whichheis justlyfamous.Imeanhis whole bodyofwork andespecially the
research line thatbeganwith his dissertation written under Schumpeter up
throughhisworkonMoneyManagerCapitalismattheLevyInstitutebeforehe
died.
9. The government’s debt is our financial asset. This follows from the sectoral
balances approach of WynneGodley,whowas ourcolleague at the Levy
Institute.Wehavetogetourmacroeconomicsaccountingcorrect andGodley
helps ustodo that. Minskyalways used totell students: go home and do the
