This working paper is an INTRODUCTION to Collected Works of Warren Mosler

Research Fellow, Global Institute for Sustainable Prosperity


The Purpose of this paper is to demonstrate clearly that every country can realize the optimum productive potential of its real resources with an appropriate monetary system and measures. The Collected Works of Warren Mosler is a compilation of Mosler's work on the operational realities of money and the monetary system, which got the name Modern Monetary Theory (MMT) subsequently. It is collated under various relevant topics, with his simple, penetrating revelations bringing out the truths of profound significance about misused monetary measures and the real economy. Mosler has brought a totally new perspective to the way the economy is understood by revealing how fundamental misunderstandings of the real economy have resulted in deprivation and economic suffering for billions of people. For each topic, he offers practical policy options based on alternate undistorted operational realities of the current monetary system that are needed to achieve full employment, price stability and productivity. In the process, he exposes many of the artificial nominal constraints put forth to prevent real economy's productive performance, and ultimately, the economic wellbeing of all. He calls these 'innocent frauds,' which are defined in his book: The Seven Deadly Innocent Frauds of Economic Policy.

Keywords: Modern Money Theory; Budget Deficits; Sovereign Debt; Warren Mosler; MMT; Fixed Exchange Currency; Floating Exchange Currency; Job Guarantee

JEL Codes: B52; D42; E4; E12; E42; E58; E62; H62; H63

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This working paper is an INTRODUCTION to Collected Works of Warren Mosler

Research Fellow, Global Institute for Sustainable Prosperity

The Purpose of this paper is to demonstrate clearly that every country can realize the optimum productive potential of its real resources with an appropriate monetary system and measures.

Birth of Collected Works of Warren Mosler and its presentation

Mosler has been extremely active in promoting Modern Monetary Theory (MMT is a description of how the monetary system actually works; it describes how money & monetary system operates under the present currency regime and it shows that Government’s purchases/spending has to be kept at a level to purchase/procure the full employment level of output at current price, unlike the fixed exchange rate currency era under which government spending has to be restricted to the extent of gold or foreign currency reserves to which the currency is pegged and unemployment is the evidence that the currency monopolist is restricting the currency supply) through twitter posts, interviews, seminars, paper presentation, policy papers and various other fora, including meeting policy makers throughout the world. Soft Currency Economics and The 7 Deadly Innocent Frauds of Economic Policy are the earliest books authored on MMT by Mosler. I, myself, have benefited from his vast, varied, and comprehensive posts and contributions, which led me to the current project of collecting and presenting, within a single space, Mosler’s collective works with the author’s approval. When I started collating the data and organizing them under various topics, I was amazed at the value and opportunity his blog posts and replies hold for learning. The Collected Works of Warren Mosler will prove a major turning point in economics, policy making and governance for the wellbeing of humanity. It is presented under various topics of interest and those not covered under the topics are listed under the General category. At Warren’s suggestion, posts are presented chronologically under each of the topics. In addition, selected posts are presented at the top for each topic before the year listing. The Collected Works compiles Mosler’s works relating to MMT, including twitter posts and responses, policy papers, presentations, interviews, research papers, working papers, notes, white paper and podcasts. We could come out with a second volume and also a printed book

Let us go ahead and explore his works; however, before we begin, let us first acquaint ourselves with some basic insight and familiarity into the terms used for making further reading both meaningful and easier. Let us do that, starting with these questions: what is money? Are there different categories of money? Who creates the money? How does it enter the economy? What are the different monetary systems/regimes? Do policy options differ from regime to regime? Once we’ve considered these questions, we are well placed to explore the monetary operation of governments, central banks, reserves, and institutional structures as well as how free the free market is and how money is created and reaches people. Approaching Mosler’s work, through this trajectory, will hopefully aid the reader in acquiring a richer, more informed understanding of how money works in the real world.

In real economies that do not use money, there is no unemployment; monetary measures are the culprit

In the pre-money economy, anybody willing to work could work. Given the availability of vast resources and tecnological development in the modern economy, the minimum one could ask for is a decent living condition that meets the basic requirements for eveyone. Economic development is defined as a sustained improvement in the quality of life and living standards of each and every individual. But, we are dealing with a system in which a small segment of people amass their material wealth with the resources, and at a social cost. Society’s focus on income and wealth instead of consumption is taking it in the wrong direction, wasting vast resources, which include the years of legislative hours, policymaking & productive labour of billions of people, in false pursuit of vain glory..The real resources (people, land, plant and machinery and other material resources) which could be put to productive use, are what really matters to the economy. Instead, we see the adoption of abstract measures such as “deficit, debt, and debt ceiling. In money-using economies, money is used to measure and express, in nominal monetary units, the value of work, goods, services, other real outputs and real resources. However if these nominal monetary measures deprive people of their work, then this function of the monetary economy itself becomes counterproductive, raising questions about its continued usage. Let me reiterate here that this is not the primary function of money, despite it also serving this function. As Professor Paul Davidson states, there is never an unemployment problem in real economies that do not use money or among herds of animals or schools of fish.

What is money; all the evidence about the origins of money points to state involvement and its decision in what functions as money

What is money and where did it come from? We all know the traditional answers to these questions. We were told that our forefathers were inconvenienced by barter until they spontaneously hit upon the idea of using tobacco, furs, huge rocks, and shells as media of exchange; over time, greater efficiency was obtained with coined precious metals, and market efficiency was enhanced by free banks, which substituted paper money backed by precious metal reserves; Governments came along, monopolizing the mints, creating central banks that debased the currency, and interfering with the invisible hand of the market; this finally resulted in abandonment of commodity money, substitution of fiat money, and central bank-induced inflation. The problem is that this money story imagined by the Paul Samuelsons and George Selgins simply never existed. There is no evidence of barter-based markets (outside trivial prisoner-of-war cases), and all the evidence about the origins of money points to state involvement. This is not to say that there have never been private monies. From the beginning, the government played an important role in determining what would function as money (Modern Money by L. Randall Wray).

Coins - pay tokens, State's debt, tax credit; State mints its own money to spend

Coins appear to have originated as government "pay tokens". Coins, then, were mere tokens of the crown's debt, like the tally. But why on earth would the crown's subjects accept hazelwood tallies or token coins? Mitchell Innes supplies the answer: The government, by law, obliges certain selected persons to become its debtors. This procedure is called levying a tax, and the persons, thus forced into the position of debtors to the government, must in theory seek out the holders of the tallies and acquire from them the tallies, by selling to them some commodity in exchange, for which they may be induced to part with their tallies. When these are returned to the government treasury, the taxes are paid. (Innes, 1913, p. 398). It was likely recognized from the very beginning that the purpose of the coin was to give the population a convenient means for paying taxes. Use of these early coins as a medium of exchange was probably an "accidental consequence of the coinage", and not the reason for it. So, from the very beginning, coins were intentionally minted to provide "state finance" (Modern Money by L. Randall Wray, Working paper No.252. September 1998). In other words, the state intentionally minted its own money to spend.

Ability of State to impose tax debt and misplaced focus of economists

The inordinate focus of economists on precious metal coins and market exchange is then misplaced. The key concept is debt, and specifically, the ability of the state to impose a tax debt on its subjects; once it has done this, it can choose the form in which subjects can "pay" the tax. Certainly the government's tokens may also serve as a medium of exchange, but this derives from its ability to impose taxes, and indeed is necessitated by imposition of the tax (if one has a tax liability but is not a creditor of the crown, one must offer things for sale to obtain the crown's tokens). (Modern Money Theory, L. Randall Wray). So, the state defines money as that which it accepts in payment of taxes.

One cannot conceive of Stateless money; monopolist of currency creates unemployment, by design, by imposing tax liability

Money is a creature of the State; at least in the case of modern money, one cannot conceive of Stateless money (“Money and Taxes: The Chartalist”, L. Randall Wray). The State Money view has important policy implications. Money is a Government liability, an IOU, and a tax credit, and Government through its agents, is the sole creator of its tax credit/currency. The money story begins with the Government imposing a tax liability, payable in its own currency, therefore creating a scarcity for the currency of which it is the monopoly supplier. This, in turn, creates sellers of goods and services that need the Government's spending of the currency to pay their taxes. In this process, by imposing tax liability, the Government creates unemployment by design and provisions itself. Once the state imposes a tax on its citizens, payable in a money it creates, it does not "need" the public's money in order to spend; rather, the public needs the government's money in order to pay taxes. This means that the government can "buy" whatever is for sale in terms of its money merely by providing its money. (Modern Money by L. Randall Wray). Therefore, the only constraint for a Government is the availability of real goods and services for sale, as it is not financially constrained.

State needs real resources, not tax money; money a “real resource transfer mechanism”

The state does not need “tax money” to spend; it needs real resources. A welfare state in particular needs an army, public school teachers, a police force, food inspectors, and any other resources necessary to fulfil its public purpose. In a way, the modern state, as in ancient Greece, continues to serve a redistributive function in the economy, where it collects real resources (labor) from the private sector, and then redistributes them back to the private sector “more equitably” in the form of infrastructure, public education, health, government research and development, and via any other social welfare functions voters have asked it to fulfil. The role of taxation in modern market economies remains the same as in ancient times: it is not a “funding mechanism,” but a “real resource transfer mechanism”. Far from being a simple medium of benign exchange, the history of money as a creature of the state indicates that it is instead a means of distribution, a tool of transferring real resources from one party to another, subject to the power relationship of the specific historical context - (Pavlina 2016) (Money, Power, and Monetary Regimes).

No reason for the unemployed human resources not to be deployed productively; operational realities differ for monetary regimes

As money is a creature of the State, there is no reason for the unemployed human resources to be kept idle, as

  1. it allows the unemployment created by tax liability, by design, remains unreversed.
  2. the monetary system is meant to serve everyone, and it cannot keep certain segments as sacrificial lambs
  3. the optimum productive capacity of the economy remains unrealized

Then, why is the Government not employing all available human resources and how does it get away with it? Is it the monetary regime that restricted currency creation?

Exchange Rate Regimes

Exchange rate regimes are typically divided into broad categories like Fixed Exchange Rate Regime and Floating Exchange Rate Regime. The economics that apply to convertible currency-fixed exchange rate systems such as the gold standard bear no relation to those of the fiat currency-flexible exchange rate systems prevailing in most economies today (Gold standard and fixed exchange rates – myths that still prevail Bill Mitchell, 2009).

Fixed Exchange Rate Regime — Gold Standard

When we talk about the gold standard we are referring to the system that once regulated the value of currencies around the world in terms of a certain amount of gold. During the 19th and 20th centuries, it was the major way that countries adjusted their money supply. How does it work? First, a currency might be valued for its intrinsic value (so gold or silver coins). This is a pure commodity currency system. In the 18th century, a shortage of silver proved problematic for the commodity, which led to central banks issuing paper money backed by gold. So the idea was that a currency’s value can be expressed in terms of a specified unit of gold. So we might say that a unit of paper currency (a dollar note) might be worth X grains of gold. To make this work, there has to be convertibility which means that someone who possesses a paper dollar will be able to swap it (convert it) for the relevant amount of gold (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009)

Central bank (CB) had to maintain stores of gold sufficient to back the circulating currency and fund trade imbalances

Britain adopted the gold standard in 1844 and it became the common system regulating domestic economies and trade between them up until World War I. During this period, the leading economies of the world ran a pure gold standard and expressed their exchange rates accordingly. For example, say the Australian Pound was worth 30 grains of gold and the USD was worth 15 grains, then the 2 USDs would be required for every AUD in trading exchanges. The monetary authority agreed to maintain the “mint price” of gold fixed by standing ready to buy or sell gold to meet any supply or demand imbalance. Further, the central bank (or equivalent in those days) had to maintain stores of gold sufficient to back the circulating currency at the agreed upon convertibility rate. Gold was also considered to be the principle method of making international payments. Accordingly, as trade unfolded, imbalances in trade (imports and exports) arose and this necessitated that gold be transferred between nations (in boats) to fund these imbalances. Trade deficit countries had to ship gold to trade surplus countries. In another example, assume Australia was exporting more than it was importing from New Zealand. In net terms, the demand for AUD (to buy the exports) would thus be higher relative to supply (to buy NZD to purchase imports from NZ) and this would necessitate New Zealand shipping gold to Australia to fund the trade imbalance (their deficit with Australia). This inflow of gold would allow the Australian government to expand the money supply (issue more notes) because they had more gold to back the currency. This expansion was in strict proportion to the set value of the AUD in terms of grains of gold. The rising money supply would push against the inflation barrier (given no increase in the real capacity of the economy) which would ultimately render exports less attractive to foreigners and the external deficit would decline. From the New Zealand perspective, the loss of gold reserves to Australia forced their Government to withdraw paper currency which was deflationary – rising unemployment and falling output and prices. The latter improved the competitiveness of their economy which also helped resolve the trade imbalance. But it remains that the deficit nations were forced to bear rising unemployment and vice versa as the trade imbalances resolved (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

Fixed Exchange Rate Regime — Monetary policy became captive to the amount of gold that a country possessed

The proponents of the gold standard focus on the way it prevents the government from issuing paper currency as a means of stimulating their economies. Under the gold standard, the government could not expand base money if the economy was in trade deficit. It was considered that the gold standard acted as a means to control the money supply and generate price levels in different trading countries which were consistent with trade balance. The domestic economy however was forced to make the adjustments to the trade imbalances. Monetary policy became captive to the amount of gold that a country possessed (principally derived from trade). Variations in the gold production levels also influenced the price levels of countries. In practical terms, the adjustments to trade that were necessary to resolve imbalances were slow. In the meantime, deficit nations had to endure domestic recessions and entrenched unemployment. So a gold standard introduces a recessionary bias to economies with the burden always falling on countries with weaker currencies (typically as a consequence of trade deficits). This inflexibility prevented governments from introducing policies that generated the best outcomes for their domestic economies (high employment). Ultimately the monetary authority would not be able to resist the demands of the population for higher employment (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

World War I interrupted the operation of the gold standard — UK abandoned the gold standard in 1931

The onset of World War I interrupted the operation of the gold standard and currencies were valued by whatever the specific government wanted to set it at. The ensuing 25 odd years saw significant instability with attempts to go back to the standard in some countries proving extremely damaging in terms of gold losses and rising unemployment. The UK abandoned the gold standard in 1931 as it was facing massive losses of gold. It had tried to maintain the value of the Pound in terms the pre-WW I parity with gold but the war severely weakened its economy and so the pound was massively over-valued in this period and trade competitiveness undermined as a consequence (“Gold standard and fixed exchange rates – myths that still prevail”, Bill Mitchell, 2009).

Fixed Exchange Rate Regime — Gold replaced by US$ — Bretton Woods System was introduced in 1946

After World War II, the IMF was created to supercede the gold standard and the so-called gold exchange standard emerged. Convertibility to gold was abandoned and replaced by convertibility into the USD, reflecting the dominance of the US in world trade (and the fact that they won the war!). This new system was built on the agreement that the US government would convert a USD into gold at $USD35 per ounce of gold. This provided the nominal anchor for the exchange rate system. The Bretton Woods System was introduced in 1946 and created the fixed exchange rates system. Governments could now sell gold to the United States treasury at the price of $USD35 per ounce. So, now a country would build up USD reserves and, if they were running a trade deficit, they could swap USD (drawing from their USD reserves) for the local currency. (“Gold standard and fixed exchange rates – myths that still prevail”, Bill Mitchell, 2009).

Fixed exchange rate system rendered fiscal policy relatively restricted

The fixed exchange rate system however rendered fiscal policy relatively restricted because monetary policy had to target the exchange parity. If the exchange rate was under attack (perhaps because of a balance of payments deficit) which would manifest as an excess supply of the currency in the foreign exchange markets, then the CB had to intervene and buy up the local currency with its reserves of foreign currency (principally $USDs). This meant that the domestic economy would contract (as the money supply fell) and unemployment would rise. Further, the stock of $USD reserves held by any particular bank was finite and so countries with weak trading positions were always subject to a recessionary bias in order to defend the agreed exchange parities. The system was politically difficult to maintain because of the social instability arising from unemployment. So if fiscal policy was used too aggressively to reduce unemployment, it would invoke a monetary contraction to defend the exchange rate as imports rose in response to the rising national income levels engendered by the fiscal expansion. Ultimately, the primacy of monetary policy ruled because countries were bound by the Bretton Woods agreement to maintain the exchange rate parities. They could revalue or devalue (once off realignments) but this was frowned upon and not common. Whichever system we want to talk off – pure gold standard or USD-convertible system backed by gold – the constraints on government were obvious. The gold standard as applied domestically meant that existing gold reserves controlled the domestic money supply. Given gold was in finite supply (and no new discoveries had been made for years), it was considered to provide a stable monetary system. But when the supply of gold changed (a new field discovered), then this would create inflation. (“Gold standard and fixed exchange rates – myths that still prevail”, Bill Mitchell, 2009).

Central Bank could not expand their liabilities beyond their gold reserves

So gold reserves restricted the expansion of bank reserves and the supply of high-powered money (Government currency). The CB thus could not expand their liabilities beyond their gold reserves (although it is a bit more complex than that). In operational terms, this means that once the threshold was reached, the monetary authority could no longer buy any government debt or provide loans to its member banks. As a consequence, bank reserves were limited and if the public wanted to hold more currency, the reserves would then contract. This state defined the money supply threshold. Some gymnastics could be done to adjust the quantity of gold that had to be held. But overall the restrictions were solid. The concept of (and the term) monetisation comes from this period. When the government acquired new gold (say by purchasing some from a gold mining firm) they could create new money. The process was that the government would order some gold and sign a cheque for the delivery. This cheque is deposited by the miner in their bank. The bank then would exchange this cheque with the CB in return for added reserves. The CB then accounts for this by reducing the government account at the bank. So the government’s loss is the commercial banks reserve gain. The other implication of this system is that the national government can only increase the money supply by acquiring more gold. Any other expenditure that the government makes would have to be “financed” by taxation or by debt issuance. The government cannot just credit a commercial bank account under this system to expand its net spending independent of its source of finance. As a consequence, whenever the government spent it would require offsetting revenue in the form of taxes or borrowed funds (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

Bretton Woods collapsed in 1971 – US suspended US$ convertibility

Ultimately, Bretton Woods collapsed in 1971. It was under pressure in the 1960s with a series of “competitive devaluations” by the UK and other countries who were facing chronically high unemployment due to persistent trading problems. Ultimately, the system collapsed because Nixon’s prosecution of the Vietnam war forced him to suspend US$ convertibility to allow him to net spend more. This was the final break in the links between a commodity that had intrinsic value and the nominal currencies. From this point on, governments used floating exchange rate fiat currencies as the basis of the monetary system (“Gold standard and fixed exchange rates – myths that still prevail”, Bill Mitchell, 2009).

Floating Exchange Rate Regime - Fiat currency

The move to floating exchange rate currencies fundamentally altered the way the monetary system operated even though the currency was still, say, the $AUD. This system had two defining characteristics: (a) non-convertibility; and (b) flexible exchange rates. You need to recognise this major shift in history before you can understand why the economic policy ideas that prevailed in the previous monetary systems (based on convertibility) are no longer applicable. You cannot assume that the logic that applied in the ‘fixed exchange rate-convertibility days’ translates into the floating exchange rate currency era. The fact is that it doesn’t. What I call neo-liberal macroeconomic reasoning is really the sort of reasoning that prevailed in the days prior to floating exchange rate currency. While there were debates about how to conduct macroeconomic policy in those days, there were some obvious key constraints that I have outlined above. This is irrespective of whether you want to call yourself a Keynesian or a Monetarist. The shift in history also renders most of the textbook economics outdated and wrong in terms of how they depict the operations of the floating exchange rate fiat monetary system. When I talk about modern monetary theory, I refer to the floating exchange rate fiat monetary system. In doing so, I recognize that when Bretton Woods collapsed, a fundamental shift occurred in history; one that has dramatically altered the opportunities available to sovereign governments (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

Under a floating exchange rate monetary system, “state money” has no intrinsic value

First, under a floating exchange rate monetary system, “state money” has no intrinsic value. It is non-convertible which means that you can take a $AUD coin to the government and in return you will get a $AUD coin back. There is no responsibility to do more. So for this otherwise “worthless” currency to be acceptable in exchange (buying and selling things) some motivation has to be introduced. That motivation emerges because the sovereign government has the capacity to require its use to relinquish private tax obligations to the state. Under the gold standard and its derivatives, money was always welcome as a means of exchange because it was convertible to gold which had a known and fixed value by agreement. This is a fundamental change (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

How much the national government spends is entirely of its own choosing. There are no financial restrictions on this capacity

Second, a government is revenue independent as the monopoly issuer of its fiat currency, which is not limited by the commodity (gold) backing it. It can spend however much it likes, subject to there being real goods and services available for sale. This is a dramatic change. Irrespective of whether the government has been spending more than revenue (taxation and bond sales) or less, on any particular day, the government has the same capacity to spend as it did yesterday. There is no such concept of the government being “out of money” or not being able to afford to fund a program. How much the national government spends is entirely of its own choosing. There are no financial restrictions on this capacity. This is not to say there are no restrictions on government spending. There clearly are – the quantity of real goods and services available for sale including all the unemployed labour. Further, it is important to understand that while the national government issuing a floating exchange rate currency is not financially constrained, its spending decisions (and taxation and borrowing decisions) impact the interest rates, economic growth, private investment, and price level movements. We should never fall prey to the argument that the government has to get revenue from taxation or borrowing to “finance” its spending under a floating exchange rate currency system. In the past, it had to under a gold standard (or derivative system) but not under a floating exchange rate currency system. Most commentators fail to understand this difference and still apply the economics they learned at university which is fundamentally based on the gold standard/fixed exchange rate system. Under a floating exchange rate currency system, if the government sets limits on its spending – for example, a rule restricting real growth of spending to be two percent – then this is purely voluntary. It might be a sensible rule given the scale of nominal demand relative to real capacity but it is purely voluntary. These rules, however, usually arise from some mis-perception that the size of the budget deficit is a concern or the growth in public debt is a concern. Neither are particularly relevant to anything germane (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

In a floating exchange rate currency system, government borrowing doesn’t fund its spending

Third, in a floating exchange rate currency system, the government does not need to finance spending in which case the issuing of debt by the monetary authority or the treasury has to serve other purposes. One function of government debt is to allow the CB to maintain its target interest rates by providing investors with an interest-bearing asset that drains the excess reserves in the banking system that result from deficit spending. If these reserves were not drained (that is, if the government did not borrow), then the spending would still occur but the overnight interest rate would plunge (due to competition by banks to rid themselves of the non-profitable reserves) and this may not be consistent with the stated intention of the CB to maintain a particular target interest rate. Importantly, the source of funds that investors use to buy the bonds is derived from the net government spending anyway (that is, spending above taxation). The private sector cannot buy bonds in the floating exchange rate currency unless the government has spent the same previously. This is a fundamental departure from the gold standard mechanisms where borrowing was necessary to fund government spending given the fixed money supply (fixed by gold stocks). Taxation and borrowing were intrinsically tied to the government’s management of its gold reserves. So in a floating exchange rate currency system, government borrowing doesn’t fund its spending. But it has historically helped the CB curtail interbank competition which allows the CB to defend its target interest rate (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

Monetary policy is freed from defending some fixed parity & thus Government spending can target full employment

The flexible exchange rate system means that monetary policy is freed from defending some fixed parity and thus fiscal policy can solely target the spending gap to maintain high levels of employment. The foreign adjustment is then accomplished by the daily variations in the exchange rate (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

Different monetary regimes have different operational realities

The two monetary systems are very different. You cannot apply the economics of the gold standard (or USD convertibility) to the modern monetary system. Unfortunately, most commentators, professors, and politicians continue to use the old logic when discussing the current policy options. It is a basic fallacy and prevents us from having a sensible discussion about what the government should be doing. All the fear mongering about the size of the deficit and the size of the borrowings (and the logic of borrowing in the first place) are all based on the old paradigm. They are totally inapplicable to the floating exchange rate monetary system (“Gold standard and fixed exchange rates – myths that still prevail,” Bill Mitchell, 2009).

The Paradigm Constraint

In no case must the government fund itself in its own currency. Spending is limited by what is offered for sale, not by revenues. Taxes function to create a need for currency, so the government can use currency to purchase real goods and services. Borrowing functions to allow excess currency created by deficit spending to earn a positive rate of interest. Deficits pose no funding risk since borrowing need only take place after spending, and only to support and maintain a desired interest rate. Interest rates and prices are subject to exogenous control by the issuer of the currency.

There is no evidence that government understands this paradigm. Government budgeting assumes the paradigm that dollars must be raised through taxing or borrowing to fund expenditures at market prices. The monopolist (the government) has decided to let market forces price its product (dollars). Therefore, it must constrain the quantity of spending to maintain sufficient unemployment and excess capacity to prevent a decline in the value of its product (inflation) (Full Employment AND Price Stability, Warren Mosler).

The government, as employer of last resort, is not a new concept. What prevented such policies from being viable and sustainable in the past — the gold standard and other fixed exchange rate policies- are long gone. We currently have a monetary system that can accommodate both full employment and price stability on a permanent basis (Full Employment AND Price Stability, Warren Mosler).

Limit to Government spending is the Appropriation Bill passed by the legislature & real resource availability

Government through its agents is the sole creator of its currency. Totally ignoring that, the Government believes, its spending is funded by tax revenue and borrowing, because of the accounting practices, carried forward from a different currency exchange regime. Government, the monopolist of currency, doesn't need to collect back or borrow its own currency to spend. This accounting practice and the consequent operating procedures are applicable in fixed exchange currency regime. Under a fixed exchange regime, the Government spending is constrained. But, now, most of the countries follow floating exchange currency regime. This doesn't constrain currency creation. Once the budget & appropriation bill are passed by the legislative body of the country, the treasury issues fiat (fiat means order) to create currency to that extent. That is why it is called fiat currency. So, the limit to currency creation for government spending under the floating exchange currency regime is only the legislative body's approval. Real limit is what is offered for sale, including human labour.

This gives supreme power & freedom to the Government to create as much currency as it needs to deploy all its employable resources, so that it could provide decent living conditions to all its people.

Inflation caused by unproductive spending, corruption, higher prices paid by Government & positive policy rate

The other concern raised by all against Government spending is inflation caused by higher Government spending. If all those spending are deployed to produce goods & services, then this higher spending cannot be a cause for inflation, as it increases both the aggregate demand and supply. The spending can always be structured to set right the supply demand mismatch, even at micro level, to address inflation arising from that, including seasonal food inflation.

Critical challenge to Government spending is corruption and pilferage which has to be plucked totally. Substantial portion of this spending could be sucked out by corruption, particularly in less developed countries. If this is not eradicated, it will only enrich corrupt people, depriving productive utilization of government spending, thereby contributing to inflation. A highly decentralised developmental model may be very helpful to address this problem and also offer good vehicle to deploy resources productively.

As the monopolist of currency, the Government is the price setter. The policy rate adds to price increase and then if the Government also pays the higher price whenever there is a temporary price-hike, it makes the price increase permanent. Government can always bring the price-hike back to normal, by paying only the normal price, as it is a monopoly supplier of currency and also a major buyer. Also, the Government can set the policy rate, being a monopolist. Natural rate of interest is zero and by keeping the policy rate at 0, the Government will not contribute to price increase due to the positive policy rate and need not provide higher income for those who already have money, being the net payer of interest to the economy.

Governments as a policy always keep unemployment at a particular level

Lack of understanding of what causes inflation under floating exchange regime has pushed the Governments and their CBs to adopt NAIRU, the non accelerating Inflation rate of unemployment, as protection and weapon against price increase. That is, Governments think, if more people are employed, which will increase the overall purchasing power and demand, it could lead to price increase. So, Governments as a policy always keep unemployment at a particular level to reduce demand and prevent price increase. In advanced economies, unemployment could be lower but substantial in numbers. In emerging and poor countries, as the informal sector is large, unemployment and underemployment are always very high. Globally, the above wrong policies affect a massive number of people, keep them as poor. These policies are not only exploitative and unnecessary, they are also flawed and inapplicable, as they were formulated for a different context and regime.

Inapplicable policies take everyone on the wrong direction; for decades, entire government machinery and human endeavour is on the wrong path

Economic policies and operational realities meant for a different currency exchange regime, lack of understanding of the present regime, and possible policy options are preventing Governments from achieving full employment and optimum economic development. Also, these inapplicable policies have taken Governments in the wrong direction, involving years and years of legislative hours, ill-suited implementation involving enormous government machinery throughout the country, wasting all the resources spent. It keeps enormous productive resources, including human resources, idle, thereby imposing misery & suffering on vast number of people.

Statement of facts and assumptions based on those facts are true in a particular context. So, when the context changes, the facts and assumptions also change. Policies based on assumptions like ‘Government needs to tax and borrow first before it can spend'. 'Government debt is too large to pay back', 'Government could become insolvent', 'Government is a price taker with respect to policy rate & what it pays for its purchases', 'trade deficit & currency depreciation affects ability to import', 'exports are benefits' & 'imports are loss' may be appropriate in fixed exchange currency regime. These assumptions, however, are not only wrong under the floating exchange currency regime, they are also used to justify and practice anti-people policies. This is achieved without opposition from common people since the above assumptions once held true during an earlier, different monetary regime. The problem is that people missed the point when these operative assumptions ceased to make sense under a floating exchange regime.

Warren Mosler showing the operational realities of floating exchange regime

These innocent frauds were brought to the fore by Warren Mosler during the early 90s. He pointed out the simple fact missed by most economists and policymakers — that the Government, through its agents, is the sole creator of its currency, and in so doing, showed the world that the monopolist of currency has to spend currency, first, for borrowing to take place and for taxes to be paid in that currency; taxes create a demand for the Government’s currency; bond sales by the Government are not really a borrowing operation but rather are used to drain excess reserves from the banking system; the Government cannot run out of its own currency; and government ought to provide jobs at minimum wages to fight unemployment (Randall Wray, 2020). Mosler also reminded that the Government is the price setter as explained above and rate hike adds to inflation. Finally, he demonstrated that a country’s imports are a benefit, while exports represent a loss.

Banking as explained by Mosler

As we read earlier, the money story, begins with tax liability. The Government imposes tax liability in its currency, the money of account (whether it is linked to gold, silver, another currency or it is a fiat paper money) is chosen by the Government. Government issues its currency through its agents, supports the payment system with unlimited reserves as lender of last resort, formulates and practices monetary and fiscal policies, sets the interest rate, enforces the economic policies, rules, regulations and even the accounting practices. In short, the Government sets the institutional structure for the economy to operate. And within this institutional structure, “free market” and private sector function.

Central Bank and commercial banks are, functionally, regulated agents of Parliament/Congress

Commercial banks are functionally Government agents – Central Bank (CB) chartered, supervised, and fully regulated, from the loans they are allowed to make, to management which the CB can remove or replace at will, all as per the Acts of Parliaments/Congress, etc. as is the CB (Warren Mosler, 2020). CB is created to segregate the functions of currency issued from the Government, supervise and control commercial banks, act as banker to Government and commercial banks, manage monetary policy, and be the sole supplier of banker’s money (reserves which are used as money to transact among banks and between the Government and its CB). The commercial banks are required to keep reserve accounts at the CB. These reserves are liabilities of the CB and function to ensure inter-bank settlement (payment) system functions smoothly. Reserves are sold or lent by the CB to commercial banks against treasury securities.

Banks as Government agents create money whenever they lend

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money (Money creation in the modern economy by Michael McLeay, Amar Radia and Ryland Thomas, Bank of England, 2014).

In addition to money created by Government spending, bank lending also creates money as shown above. When a bank originates a loan to a firm or a household, it is not lending reserves or deposits. Bank lending creates its own deposits. Banks make loans independent of reserve positions, then during the next “reserve accounting period”, borrow any needed reserves.

This does not deny that banks still require funds in order to operate. They still need to ensure they have reserves. It just means that they do not need reserves before they lend. Deposits are one source of available funds that the bank has to ensure that its role in the settlement process is not compromised which would require borrowing from the CB (Bill Mitchell, 2011).

Central Bank as lender of last resort supplies reserves whenever there is shortfall in the overall reserves of the banking system

When a loan is sanctioned and disbursed, the borrower account is credited with deposit equal to loan amount, against the loan document executed by him or her. When the borrower spends that deposit by issuing cheque to a beneficiary, the cheque goes for payment clearance (if the beneficiary has his account with a different bank), clubbed with the other cheques presented for clearance. At the inter-bank central clearing house, where the settlement takes place in reserves, the cheques issued for and against the borrower’s bank would be netted, if it has more cheques written for it than against it, then its net reserve position will be in surplus. For the same amount, there will be corresponding debits to accounts of other banks at the CB. If the net reserve position is in deficit and the bank doesn’t borrow the reserves in the overnight market from other banks that have excess reserves, then the bank is overdrawn in its reserve account, which is booked as a loan from the CB.

Bank lending is capital constrained not reserve constrained

CB is, and can only be, the follower, not the leader when it adjusts reserve balances in the banking system. The role of reserves may be widely misunderstood because it is confused with the role of capital requirements. Capital requirements set standards for the quality and quantity of assets that banks hold. Reserve requirements, on the other hand, are a means by which the CB controls the price of funds which banks lend. The CB addresses the quantity and risk of loans through capital requirements, it addresses the overnight interest rate by setting the price of reserves (Soft Currency Economics, Warren Mosler, 1995).

To summarise, a bank’s ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. The bank expands its balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The major insight is that any balance sheet expansion which leaves a bank short of the required reserves may affect the return it can expect on the loan as a consequence of the “penalty” rate the CB might exact through the discount window. But it will never impede the bank’s capacity to effect the loan in the first place. So it is quite wrong to assume that the CB can influence the capacity of banks to expand credit by adding or draining reserves to or from the system (Bill Mitchell, 2013).

If “economic activity is too slow”, then the CB can do very little to expand private credit other than to cut interest rates. The availability of reserves will not increase bank lending. This is the old-fashioned money multiplier version of banking where there the “money supply” is some multiple of the monetary base (provided by the CB) (Bill Mitchell, 2013).

It is also clear that higher capital requirements and more attention to “off-balance” sheet activity is now necessary. In a system where the capital requirements are too low, the public exposure to bank failure is that much higher and the moral hazards are high. While the best option is to nationalise the banking system and make it 100 % focused on public purpose, the more realistic case is to ensure private banks have adequate buffers to insulate the system from panic. That will reduce profitability (narrowly defined) but enhance social returns (Bill Mitchell, 2013).

The inelastic nature of the demand for bank reserves leaves the CB with no control over the quantity of money, it controls only the price

Bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return on an asset and the fed funds rate is wide enough, even a bank deficient in reserves will purchase the asset and cover the cash needed by purchasing (borrowing) money in the funds market. The inelastic nature of the demand for bank reserves leaves the CB with no control over the quantity of money. The CB controls only the price (Soft Currency Economics, Warren Mosler, 1995).

CB maintains the overnight interest rate, the price of money

The CB maintains the overnight interest rate, the price of money, by adding and draining reserves. Government spending, taxation, and borrowing also add and drain reserves from the banking system and, therefore, are part of that process. The imperative behind CB borrowing is to drain excess reserves from the banking system, to support the overnight interest rate. When the banks are short in required reserves, the CB has no choice but to add reserves back into the banking system, to keep the funds rate from going, theoretically, to infinity. Added reserves in excess of required reserves drive the funds rate to zero since reserve requirements essentially do not change until the following accounting period. That forces the Fed to sell securities, i.e., drain the excess reserves just added to maintain the funds rate above zero (Soft Currency Economics, Warren Mosler, 1995).

The size of CB’s purchases and sales of government debt are nondiscretionary & so the impossibility of monetisation

As long as the CB has a mandate to maintain a target CB funds rate, the size of its purchases and sales of government debt are not discretionary. Once the CB funds rate is set, the CB’s portfolio of government securities changes only because of the transactions that are required to support the funds rate. The CB's lack of control over the quantity of reserves underscores the impossibility of debt monetization. The CB is unable to monetize the federal debt by purchasing government securities at will because to do so would cause the funds rate to fall to zero. If the CB purchased securities directly from the Treasury and the Treasury then spent the money, its expenditures would be excess reserves in the banking system. The CB would be forced to sell an equal amount of securities to support the CB funds target rate. The CB would act only as an intermediary. The CB would be buying securities from the Treasury and selling them to the public. No monetization would occur (Soft Currency Economics, Warren Mosler, 1995).

To monetize means to convert to money. In a broad sense, federal debt is money, and deficit spending is the process of monetizing whatever the government purchases. Monetizing does occur when the CB buys foreign currency. Purchasing foreign currency converts, or monetizes, that currency into dollars. The CB then offers Government securities for sale to offer the new currency just added to the banking system a place to earn interest. This often misunderstood process is referred to as sterilization (Soft Currency Economics, Warren Mosler, 1995).

Monetary constraints of a target CB funds rate dictate that the government cannot spend money without borrowing (or taxing) – it is not to acquire money to spend

The government spends money and then borrows what it does not tax, because deficit spending, not offset by borrowing, would cause the Fed funds rate to fall. Government spending does not change the monetary base when reserves move simultaneously in equal amounts and opposite directions. The CB does not have exclusive control of reserve balances. Reserve balances can be affected by the Treasury itself. When either government entity sells government securities reserve balances decline. When either buys government securities (in this case the Treasury would be retiring debt) reserves in the banking system increase. The monetary constraints of a target CB funds rate dictate that the government cannot spend money without borrowing (or taxing), nor can the government borrow (or tax) without spending. The financial imperative is to keep the reserve market in balance, not to acquire money to spend (Soft Currency Economics, Warren Mosler, 1995).

Government spending is all done by data entry on its own spreadsheet.

Most of the modern money is created electronically through keystrokes. When Government spends, it didn’t take currency and shove it into a computer. All it did was change a number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system. Government spending is all done by data entry on its own spreadsheet called “monetary system”. Currency creation and transfers are entries in the spreadsheet maintained at CB and their member banks. These are the realities of how modern money & the monetary system operate in the floating exchange regime. When government spends, it just changes numbers up in our bank accounts. More specifically, all the commercial banks we use for our banking have bank accounts at the CB called reserve accounts. Foreign governments have reserve accounts at the CB as well. These reserve accounts at the CB are just like checking/current accounts at any other bank. When government spends without taxing, all it does is change the numbers up in the appropriate checking/current account (reserve account) at the CB. This means that when the government makes a $2,000 Social Security payment to you, for example, it changes the number up in your bank’s checking/current account at the CB by $2,000, which also automatically changes the number up in your account at your bank by $2,000 (7 Deadly Innocent Frauds of Economic Policy, 2010). Government spending adds reserves to the banking system.

Treasury security is nothing more than a savings account at the CB

A Treasury security is nothing more than a savings account at the CB. When you buy a Treasury security, you send your dollars to the CB and then some time in the future, they send the dollars back plus interest. The same holds true for any savings account at any bank. You send the bank dollars and you get them back plus interest. Let’s say that your bank decides to buy $2,000 worth of Treasury securities. To pay for those Treasury securities, the CB reduces the amount that your bank has in its checking/current account at the CB by $2,000 and adds $2,000 to your bank’s savings account at the CB (7 Deadly Innocent Frauds of Economic Policy, 2010). Government borrowing drains reserves from the banking system.

When the government does what’s called “borrowing money,” all it does is move funds from checking/current accounts at the CB to savings accounts (Treasury securities) at the CB. And what happens when the Treasury securities come due, and that “debt” has to be paid back? The CB merely shifts the dollar balances from the savings accounts (Treasury securities) at the CB to the appropriate checking/current accounts at the CB (reserve accounts) (7 Deadly Innocent Frauds of Economic Policy, 2010)

    Operational realities described in the above three paragraphs are:
  1. Government spending and borrowing are all done by data entries in the spreadsheet at the CB
  2. Government spending adds reserves to the banking system and borrowing drains reserves from the banking system.
  3. Added reserves have to be drained to maintain the target CB funds rate, otherwise, it will fall to zero. Borrowing is the part of ‘maintaining funds rate’ process

It is very clear that availability of currency is not an issue for the currency issuer, as it can always spend by issuing its own currency (it is done by data entries in the spreadsheet at the CB). As described in detail and summarised under ‘The Paradigm Constraint’, taxes and borrowing serve other purposes, not to acquire money to spend, as modern Governments pay for their expenditures by issuing their own liabilities. If Government spends $1,000, taxes $900 and borrows $100, you could say that Government collects the $900 & $100 and then spends that $1000 or you could say that Government spends $1000 and then collects the $900 & $100. What difference does it make to a currency issuer? Constraints of maintaining target CB funds rate dictate that the government cannot spend money without borrowing (or taxing). Government spending has to be offset by taxes and borrowing to maintain control of the Fed funds rate. Balancing of the budget happens for a reason, but it is portrayed differently. Economists, not coming out of fixed exchange regime paradigm, say that Government spends tax and borrowed money. Those who understand the operational realities of floating exchange regime state that Government spends by issuing its own money.

We dedicate this work to the common man and we wish that every country will utilize the favourable floating exchange rate currency regime with appropriate policy measures to realize the optimum productive potential through full employment and price stability. We hope that this introduction is helpful to the reader so that he or she may benefit from this book. You are welcome to write to us with your feedback and suggestions.

Rajendra Rasu


Mosler, Warren. 1995. Soft Currency Economics. West Palm Beach, FL: AVM.

Mosler, Warren. 2010. The Seven Deadly Innocent Frauds of Economic Policy. Guilford, CT: Valence Co

Mosler. W. 1997-98. “Full Employment and Price Stability.” Journal of Post Keynesian Economics 20(2).

Wray L. R. 1998. Modern Money, Levy Economics Institute Working Paper No. 252

Tcherneva, Pavlina R. 2016. Money, Power, and Monetary Regimes, Levy Economics Institute Working Paper No. 861.

Mitchell, W. 2009 “Gold standard and fixed exchange rates – myths that still prevail.”
Blog: http://bilbo.economicoutlook.net/blog/?p=2562.

Michael McLeay, Amar Radia and Ryland Thomas. 2014. Money creation in the modern economy. Bank of England Quarterly Bulletin, Q1.