The notion that governments rely on the tax revenues derived from individuals and businesses and thus cannot simply “print more money” to solve budgetary issues is orthodox in popular thinking. The idea is so pervasive that proposals for new tax cuts or new public services programmes are invariably met with demands that they are funded by tax increases or spending decreases elsewhere. In the United Kingdom, the Institute for Fiscal Studies has become the de facto inspector of all fiscal plans proposed by political parties; their unfavourable assessment of the September 2022 mini-budget brought about the lack of market confidence that precipitated the downfall of the Truss ministry.[i] Bidding to seem fiscally responsible in this way, governments frequently prioritise debt reduction, either via expenditure-cutting austerity measures, as initiated by the UK Coalition government of 2010-2015,[ii] or revenue-raising tax increases. Politicians do not accept the idea that we can rely on money produced by central banks. Modern monetary theory (MMT), however, posits that many governments already do, and should more wholeheartedly, rely on the money created by their central banks. While not a panacea for every government’s fiscal issues, MMT could make economies more productive, ensure the effective funding of public services and make inroads to solving economic problems, such as unemployment and underemployment, with wide-reaching social impacts in currency-issuing nations with stable economies.
It is first necessary to define what would be meant by a government “relying solely” on money created by the central bank. Under the orthodox view, governments are thought to “rely” on the taxation of their citizens in that governments are thought to require the pounds or dollars which they derive from taxation at the end of each financial year. Such a perspective was encapsulated by British Prime Minister Margaret Thatcher when she, in a speech at the 1983 Conservative Party Conference, proclaimed that “the State has no source of money other than money which people earn themselves.”[iii] Under this perspective, a government’s reliance on the central bank denotes a blanket influx of “unearned” money that causes inflation.
The universality of the idea that government revenues precede expenditures has impacted our vocabulary. References to money as having a “life cycle” or being “in circulation” can obfuscate the fact that money is initially created by the central bank that creates it. In the United States, the Federal Reserve is the sole entity permitted to issue United States dollars. If the United States federal government owes a debt in US dollars, its monopoly over currency creation grants it the capacity to pay this debt with money it has created. In this sense, governments that issue fiat currencies already solely rely on the money printed by their central banks; spending conducted by the United States federal government relies on the initial creation of money by the central bank.
Therefore, when we refer to a country “relying solely” on money created by the central bank, we should instead refer to a shift in perspective, rather than a tangible shift in the technicalities of how the United Kingdom’s government sources, for instance, the money to spend £153 billion on the NHS in a financial year.[iv] A government only “relies solely on money created by its central bank” when the lay public, economists and politicians reach the consensus that government spending relies on money created by the central bank. Such acknowledgements would amount to a sizeable advantage: a government relying solely on the central bank is unrestrained by the amount of money it generates from taxation and is instead only restrained by the gross productivity of the economy.
This novelty of this approach highlights the first disadvantage of the government beginning to rely solely on money created by the central bank. Under the orthodox view, individuals, acting both as consumers and voters, believe taxes support our standard of living by providing the capital necessary to hire employees and maintain infrastructure for essential public services. However, under MMT, taxes support our standard of living by removing money from circulation and maintaining the purchasing power of firms and individuals. If the government were to rely solely on money created by the central bank, it would be necessary for the electorate to share in the perspective that deficit spending is not an inherent negative and that it is not fiscally irresponsible for the government to print and spend new money. At present, 57% of Americans believe that reducing the budget deficit should be a top priority of the federal government.[v] The popularity of this belief rests on the assumption that the United States’ government’s accumulation of debt will hinder its ability to fund public services in the future. Given the popularity of this belief, a political group promoting MMT would likely lack the political capital necessary to see their goals of deficit spending and inflation-targeting taxes enacted. MMT requires a fundamental wide-reaching shift, brought about by persistent public education and information campaigns, in how individuals view governmental fiscal policies to be sustainable in the long term.
Almost immediately after beginning to rely on the central bank, there would likely be much political advocacy for an increase in the rate at which money is created and spent. The resultant disadvantage, and the most oft-touted criticism of MMT, is that these new high levels of spending could lead to hyperinflation. The influx of new money, without a corresponding increase in the volume of goods and services available for purchase, leads to an increase in prices. In the infamous case of Zimbabwe, the creation of additional currency accompanied a period of economic stagnation after the agricultural industry faltered as a result of farm seizures.[vi][vii] This contributed to inflation reaching a year-over-year inflation rate of 3713.9% by April 2007 and 8.97 × 10^22 by November 2008.[viii] Given that hyperinflation is a demonstrable potential drawback of government reliance on currency creation, it is necessary for proponents of MMT to demonstrate how widespread acceptance of their perspective would avoid it. Proposing MMT in The Deficit Myth, economist Stefanie Kelton adopts Abba Lerner’s idea of functional finance[ix], arguing that governments should have active, interventionist fiscal policies; governments should use whatever method of taxation or expenditure is necessary to reach economic outcomes. In regard to achieving price stability, Lerner argued that governments should only raise taxes once inflation manifested within an economy. Therefore, if an increase in government expenditure increased the real productivity of an economy and avoided the problem of “too much money chasing too few goods”,[x] tax increases would not be necessary. Under MMT, the only stipulation to government spending is that economic productivity increases in turn.
Government reliance on money created by the central bank is advantageous in that it prioritises making the economy more productive. This increased productivity increases standards of living both directly, by making a greater volume of wealth available, and indirectly, by fighting inflationary pressure. Having adopted the perspective that currency-issuing governments can fund public programmes without first generating tax revenue, government fiscal policy turns to prioritise fighting inflationary pressure. This effort is twofold. Taxation is implemented to control the amount of money chasing goods. Conversely, government spending is deployed with the intention of improving the primary factors of production. Government subsidisation of tertiary education in science and engineering improves the quality of the labour that designs and constructs new technology products. In addition to the private benefit for the individuals who receive this training, government spending here creates an external benefit as the public has access to a wider variety of high-quality goods and services. Similarly, government subsidisation of clean energy generation has the marginal benefit of maintaining a healthy labour force, while improving productivity directly by creating new, or expanding existing, industries. Given that government reliance on the central bank relies on an expanding economy, the increased productivity engendered by government spending creates a positive feedback loop. Government spending allows for economic growth; economic growth, in turn, allows for government spending.
In addition to creating a perpetually more productive society, government reliance on the central bank can serve to create a healthier, more cohesive society. The unleashing of government spending can bring about effective funding of valued public services and work programmes. Eliminating involuntary unemployment and maintaining vital public services facilitates government efforts to achieve desirable non-economic outcomes, such as high life expectancy, low child mortality rates and low levels of social alienation. Granted the confidence to spend money without the constraint of generating money from National Insurance contributions, for example, the United Kingdom government could hire the requisite number of healthcare professionals and invest in the necessary infrastructure to maintain the National Health Service as it currently exists. Provided that civil servants do not fundamentally change how healthcare is funded in the UK, funding from the central government will continue to be necessary to fund NHS services. Given this, government reliance on the central bank could facilitate the United Kingdom’s efforts to create a healthier population.
Proponents of MMT also typically argue for a federal jobs guarantee on the grounds that it is an opportunity to “transform… human idleness [to]... build an economy that is … more resilient and more environmentally and ecologically sustainable”.[xi] Given economic issues associated with guaranteeing jobs for all adults, the job guarantee proposal should be replaced by public works programmes that reduce but do not aim to eliminate unemployment. The social benefit derived from using government expenditure to create jobs for all outweighs any economic drawback incurred. In promising to eliminate unemployment by guaranteeing jobs at a wage prior to determining the justification for such jobs, we guarantee that the government will create jobs that meet no prior indicated market demands. Additionally, the job security implied by “job guarantee” necessarily means that the negative incentive of losing one’s job would not be available to encourage diligent work.
However, the creation of public works programmes fulfils the goal of reducing unemployment, while avoiding the inefficiency intrinsic to guaranteeing that jobs will always exist. Public works programmes, such as the construction of transportation infrastructure, can also serve as investments in factors that would facilitate economic development, fighting inflationary pressure. In addition to this, public works programmes, compared to jobs guarantees, grant the government some bargaining power to make poor performers redundant. The most significant benefit of a central bank-funded public works programme is that it challenges the social problems of alienation from one’s community and thus mitigates a byproduct: crime. In a 2019 article for the Journal of Economic Behavior and Organisation, Laura Pohlan found that “job loss has detrimental effects on… social integration… and mental health.”[xii] Exclusion, through no fault of one’s own, from labour for one’s living necessarily isolates unemployed people, increasing the chances that an unemployed person becomes disillusioned with established authorities, including agents of law enforcement. In addition to this, by closing legitimate pathways to income creation, unemployment makes the attainment of income via other means seem more viable. By creating public works programmes that reduce unemployment, government reliance on the central bank promotes social cohesion and mitigates crime.
While government reliance on the central bank can assure confidence in the viability of public services, promote economic growth and facilitate the achievement of positive health and social outcomes, it should not be viewed as a solution to all fiscal problems any government might face. It is vital to stress that only governments that issue their own currencies can benefit from reliance on the creation of money by the central bank. Subnational governments and national governments that use, rather than issue their own currency, such as France or Germany are thus excluded from such discussions. Moreover, we must remember that, under MMT, government spending remains constrained by the productive capacity of their economy; MMT does not allow for reckless spending. Crucially, however, government reliance on money created by the central bank enables expenditure to be directed to ensuring the future productivity and prosperity of a nation, enabling the development of a more prosperous economy.
It is first necessary to define what would be meant by a government “relying solely” on money created by the central bank. Under the orthodox view, governments are thought to “rely” on the taxation of their citizens in that governments are thought to require the pounds or dollars which they derive from taxation at the end of each financial year. Such a perspective was encapsulated by British Prime Minister Margaret Thatcher when she, in a speech at the 1983 Conservative Party Conference, proclaimed that “the State has no source of money other than money which people earn themselves.”[iii] Under this perspective, a government’s reliance on the central bank denotes a blanket influx of “unearned” money that causes inflation.
The universality of the idea that government revenues precede expenditures has impacted our vocabulary. References to money as having a “life cycle” or being “in circulation” can obfuscate the fact that money is initially created by the central bank that creates it. In the United States, the Federal Reserve is the sole entity permitted to issue United States dollars. If the United States federal government owes a debt in US dollars, its monopoly over currency creation grants it the capacity to pay this debt with money it has created. In this sense, governments that issue fiat currencies already solely rely on the money printed by their central banks; spending conducted by the United States federal government relies on the initial creation of money by the central bank.
Therefore, when we refer to a country “relying solely” on money created by the central bank, we should instead refer to a shift in perspective, rather than a tangible shift in the technicalities of how the United Kingdom’s government sources, for instance, the money to spend £153 billion on the NHS in a financial year.[iv] A government only “relies solely on money created by its central bank” when the lay public, economists and politicians reach the consensus that government spending relies on money created by the central bank. Such acknowledgements would amount to a sizeable advantage: a government relying solely on the central bank is unrestrained by the amount of money it generates from taxation and is instead only restrained by the gross productivity of the economy.
This novelty of this approach highlights the first disadvantage of the government beginning to rely solely on money created by the central bank. Under the orthodox view, individuals, acting both as consumers and voters, believe taxes support our standard of living by providing the capital necessary to hire employees and maintain infrastructure for essential public services. However, under MMT, taxes support our standard of living by removing money from circulation and maintaining the purchasing power of firms and individuals. If the government were to rely solely on money created by the central bank, it would be necessary for the electorate to share in the perspective that deficit spending is not an inherent negative and that it is not fiscally irresponsible for the government to print and spend new money. At present, 57% of Americans believe that reducing the budget deficit should be a top priority of the federal government.[v] The popularity of this belief rests on the assumption that the United States’ government’s accumulation of debt will hinder its ability to fund public services in the future. Given the popularity of this belief, a political group promoting MMT would likely lack the political capital necessary to see their goals of deficit spending and inflation-targeting taxes enacted. MMT requires a fundamental wide-reaching shift, brought about by persistent public education and information campaigns, in how individuals view governmental fiscal policies to be sustainable in the long term.
Almost immediately after beginning to rely on the central bank, there would likely be much political advocacy for an increase in the rate at which money is created and spent. The resultant disadvantage, and the most oft-touted criticism of MMT, is that these new high levels of spending could lead to hyperinflation. The influx of new money, without a corresponding increase in the volume of goods and services available for purchase, leads to an increase in prices. In the infamous case of Zimbabwe, the creation of additional currency accompanied a period of economic stagnation after the agricultural industry faltered as a result of farm seizures.[vi][vii] This contributed to inflation reaching a year-over-year inflation rate of 3713.9% by April 2007 and 8.97 × 10^22 by November 2008.[viii] Given that hyperinflation is a demonstrable potential drawback of government reliance on currency creation, it is necessary for proponents of MMT to demonstrate how widespread acceptance of their perspective would avoid it. Proposing MMT in The Deficit Myth, economist Stefanie Kelton adopts Abba Lerner’s idea of functional finance[ix], arguing that governments should have active, interventionist fiscal policies; governments should use whatever method of taxation or expenditure is necessary to reach economic outcomes. In regard to achieving price stability, Lerner argued that governments should only raise taxes once inflation manifested within an economy. Therefore, if an increase in government expenditure increased the real productivity of an economy and avoided the problem of “too much money chasing too few goods”,[x] tax increases would not be necessary. Under MMT, the only stipulation to government spending is that economic productivity increases in turn.
Government reliance on money created by the central bank is advantageous in that it prioritises making the economy more productive. This increased productivity increases standards of living both directly, by making a greater volume of wealth available, and indirectly, by fighting inflationary pressure. Having adopted the perspective that currency-issuing governments can fund public programmes without first generating tax revenue, government fiscal policy turns to prioritise fighting inflationary pressure. This effort is twofold. Taxation is implemented to control the amount of money chasing goods. Conversely, government spending is deployed with the intention of improving the primary factors of production. Government subsidisation of tertiary education in science and engineering improves the quality of the labour that designs and constructs new technology products. In addition to the private benefit for the individuals who receive this training, government spending here creates an external benefit as the public has access to a wider variety of high-quality goods and services. Similarly, government subsidisation of clean energy generation has the marginal benefit of maintaining a healthy labour force, while improving productivity directly by creating new, or expanding existing, industries. Given that government reliance on the central bank relies on an expanding economy, the increased productivity engendered by government spending creates a positive feedback loop. Government spending allows for economic growth; economic growth, in turn, allows for government spending.
In addition to creating a perpetually more productive society, government reliance on the central bank can serve to create a healthier, more cohesive society. The unleashing of government spending can bring about effective funding of valued public services and work programmes. Eliminating involuntary unemployment and maintaining vital public services facilitates government efforts to achieve desirable non-economic outcomes, such as high life expectancy, low child mortality rates and low levels of social alienation. Granted the confidence to spend money without the constraint of generating money from National Insurance contributions, for example, the United Kingdom government could hire the requisite number of healthcare professionals and invest in the necessary infrastructure to maintain the National Health Service as it currently exists. Provided that civil servants do not fundamentally change how healthcare is funded in the UK, funding from the central government will continue to be necessary to fund NHS services. Given this, government reliance on the central bank could facilitate the United Kingdom’s efforts to create a healthier population.
Proponents of MMT also typically argue for a federal jobs guarantee on the grounds that it is an opportunity to “transform… human idleness [to]... build an economy that is … more resilient and more environmentally and ecologically sustainable”.[xi] Given economic issues associated with guaranteeing jobs for all adults, the job guarantee proposal should be replaced by public works programmes that reduce but do not aim to eliminate unemployment. The social benefit derived from using government expenditure to create jobs for all outweighs any economic drawback incurred. In promising to eliminate unemployment by guaranteeing jobs at a wage prior to determining the justification for such jobs, we guarantee that the government will create jobs that meet no prior indicated market demands. Additionally, the job security implied by “job guarantee” necessarily means that the negative incentive of losing one’s job would not be available to encourage diligent work.
However, the creation of public works programmes fulfils the goal of reducing unemployment, while avoiding the inefficiency intrinsic to guaranteeing that jobs will always exist. Public works programmes, such as the construction of transportation infrastructure, can also serve as investments in factors that would facilitate economic development, fighting inflationary pressure. In addition to this, public works programmes, compared to jobs guarantees, grant the government some bargaining power to make poor performers redundant. The most significant benefit of a central bank-funded public works programme is that it challenges the social problems of alienation from one’s community and thus mitigates a byproduct: crime. In a 2019 article for the Journal of Economic Behavior and Organisation, Laura Pohlan found that “job loss has detrimental effects on… social integration… and mental health.”[xii] Exclusion, through no fault of one’s own, from labour for one’s living necessarily isolates unemployed people, increasing the chances that an unemployed person becomes disillusioned with established authorities, including agents of law enforcement. In addition to this, by closing legitimate pathways to income creation, unemployment makes the attainment of income via other means seem more viable. By creating public works programmes that reduce unemployment, government reliance on the central bank promotes social cohesion and mitigates crime.
While government reliance on the central bank can assure confidence in the viability of public services, promote economic growth and facilitate the achievement of positive health and social outcomes, it should not be viewed as a solution to all fiscal problems any government might face. It is vital to stress that only governments that issue their own currencies can benefit from reliance on the creation of money by the central bank. Subnational governments and national governments that use, rather than issue their own currency, such as France or Germany are thus excluded from such discussions. Moreover, we must remember that, under MMT, government spending remains constrained by the productive capacity of their economy; MMT does not allow for reckless spending. Crucially, however, government reliance on money created by the central bank enables expenditure to be directed to ensuring the future productivity and prosperity of a nation, enabling the development of a more prosperous economy.
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| The Bank of England/ Picture is the copyright of Charlie Bibby/FT |
[i] Adams, Stuart et al.
“Mini-Budget Response” https://ifs.org.uk/articles/mini-budget-response
[ii] Osborne, George and HM Treasury, “2010 to 2015
government policy: deficit reduction”, https://www.gov.uk/government/publications/2010-to-2015-government-policy-deficit-reduction
[iii] Thatcher, Margaret, “Speech to Conservative Party Conference” : https://www.margaretthatcher.org/document/105454
[iv] NHS England, “NHS Budget”:
https://www.england.nhs.uk/publications/business-plan/our-2022-23-business-plan/our-funding/
[v] Van Green Ted, “6
facts about Americans’ views of government spending and the deficit”:
https://www.pewresearch.org/short-reads/2023/05/24/6-facts-about-americans-views-of-government-spending-and-the-deficit/
[vi] Pearce, “Mugabe’s Costly Congo Venture”, http://news.bbc.co.uk/1/hi/world/africa/611898.stm
[vii] Meldrum,, “Africa needs more courage, says Mugabe”, https://www.theguardian.com/world/2006/feb/21/zimbabwe.andrewmeldrum
[viii] Hanke and Kwok, , “On the Measurement of Zimbabwe’s
Hyperinflation” https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/5/cj29n2-8.pdf
[ix] Kelton, “The Deficit Myth: Modern Monetary Theory and
How to Build a Better Economy”, p.62
[x] Barth and Bennett, “Cost-push versus Demand-pull
inflation: Some Empirical Evidence,”
[xi] ^ p. 254
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