Richard Wolff’s Trajectory beyond MMT into SMR

Author Govert SchullerPosted on May 19, 2019March 4, 2024Categories Monetary ReformTags Economics, MMT, Monetary Reform, Politics

Introduction

Recently I watched two episodes of the progressive Thom Hartmann Program in which the host discussed banking and Modern Monetary Theory (MMT) with the Marxist economist Richard Wolff [1, 2]. Following are the pertinent points I came away with, which developed into a little article, in which I will try to make the case that, when Wolff found in MMT the correct theory of banking and money, he actually went beyond MMT. He did so by discerning some of the theory’s obvious policy implications, which people promoting Sovereign Monetary Reform (SMR)–which is a competing monetary theory focused on a radical reform of the monetary system–would heartily agree with.

Many persons in the comments section stated that both Hartmann and Wolff did not really understand MMT. For example the most stinging (pun intended) came from John B, commenting that

Prof Wolff knows very little about MMT or the functional operation of the banking system. As an academic, he should be conscious that one should not talk ‘authoritatively’ on a specialty discipline that one has not adequately researched[2].

This lack of understanding might be a surprise because both Wolff and Hartmann have had encounters with one of MMT’s spokespersons, Stephanie Kelton, and I assume that they have read some relevant literature.

Where Wolff is Right

Maybe it is most fair to say that Wolff’s understanding of MMT is half wrong and half right. He is right to state that, in order to originate loans, “banks do not depend on other people’s money”[2]. Banks can just credit the deposit account of their client when they sign up for a loan. This is basically the credit creation theory of money and banking.  Its truth is now admitted by central banks like the Bank of England [3] and empirically tested by the economist and central banking expert Richard Werner [4].

He is also right in the idea that the government can fine-tune the economy by increasing and decreasing the supply of money in circulation. This idea goes back to the theory of “functional finance” pioneered by Abba Lerner [5] and incorporated by MMT [6].

He also thinks that when government can create its own money it can drastically decrease its debt burden. He also correctly observed that leaving the money supply “in the hands of people who look at it as a source of private profit is a recipe for the disasters”[2] of the 2007/8 Global Financial Crisis which necessitated massive government bail-outs.

On all these points there is quite some agreement between the experts, MMT and the sovereign money reformers like Dr. Joseph Huber, Dr. Patricio Laina and the good folks at organizations like the American Monetary Institute (AMI), The Alliance for Just Money (AFJM) and the International Movement for Monetary Reform (IMMR).

Where Wolff is Wrong

Wollf is mistaken though when he ascribes to MMT the position that it is wrong to leave the power of money creation with banks and have that power transferred back to the government to put it under democratic control. The position of MMT is to leave the privilege of bank credit creation with the banks, while it assumes that the government already has the power to create money, unrestricted by any funding through taxation or selling bonds.

People promoting SMR will agree with Wolff that the money creation power should be transferred from the banks to the government. In the USA there exists a bill, the NEED Act, exactly proposing that [7]. And SMR disagrees with MMT’s position that taxes and bonds do not finance government spending and that government can just spend money under the existing rules and laws [8].

The Conflation and Confusion of Theories

The three main theories on money and banking all came into play in these conversations between Hartmann and Wolff, but were not sufficiently differentiated and separately evaluated. Hartmann, with his example of a $1m deposit becoming the basis to create $10m extra in loans seems to conflate the credit creation theory and the deposit multiplier theory. The credit creation theory basically says that bank credit money can be created out of nothing and that, at the end of the day, reserve requirements will be easily provided by the central bank. What drives the loan creation process is the demand for loans coupled to the banks’ evaluation of their profitability. Apparently the supply of money is not an issue.

The deposit multiplier theory posits a tight correlation between reserve requirements and the money supply. The often used example is from a 1961 FRB of Chicago publication in which an initial deposit of $10,000 and a reserve requirement of 10% can theoretically balloon into $90,000 in loans and investments. This happens when, in multiple stages, the bank loans out 90% of its deposit ($9,000), which will find its way first into the bank account of the borrower and from there into the account of the entity providing the merchandise or service for which purpose the loan was originated. The bank holding the second account in question can then originate a loan of $8,100, being the 90% allowed of the $9,000 deposit. This process can then be duplicated multiple times [11].

What Hartmann thinks is that a bank can just create $10m out of nothing based on a $1m deposit and an implied 10% reserve acquirement. This unrealistic scenario is not covered by any of these theories and looks more like a conflation of the credit creation theory and the deposit multiplier theory.

Wolff then corrects Hartmann with explaining the old and discredited financial intermediation theory of banking according to which banks make their profit by lending out money for a higher interest rate than they themselves pay to attract depositors. In this theory banks do not create nor multiply the money supply and merely mediate between those who have money to lend and those who desire money to borrow.

From MMT to SMR

Interestingly Wolff made these comments in the April 11, 2019 Hartmann program on the banking system and took them back again in the May 2, 2019 program on MMT. In the second program he first again explained the financial intermediation theory with the narration that first the money supply is created by the Federal Reserve and then banks can lend most of this money out again. Then, by explaining MMT’s research on how banks really operate, he switched to the credit creation theory as the correct one.

When a bank issues a loan nowadays, all that it does is create an account for the recipient of the loan and then the bank deposits into that account the amount of money that they had lend to the borrower. In other words, the bank is not dependent on other people putting deposits in . . . [2].

It looks like that Wolff had done some homework on MMT and was converted from the refuted financial intermediation theory to the credit creation theory. At the same time he did some suplemental thinking or reading over and beyond MMT, because he incorrectly projects behind MMT “the critical impulse” that “we should never have and we should not now put the control of the money supply so utterly into the hands of the banks” and mistakenly thinks that therefore MMT proposes that “we should have the creation of money brought back under the complete control of the government”. I am not sure where he might have found these ideas, but they are positions SMR is promoting and to which MMT is actually explicitly hostile to [9].

Conclusion

In short, the SMR crowd should be elated that Wolff, after learning some MMT and thereby switching from the old financial intermediation to the correct credit creation theory, apparently went beyond MMT by thinking through the policy implications of the credit creation theory and thereby arrived at a position with which SMR is quite in agreement, i.e. “we should have the creation of money brought back under the complete control of the government”.

This position might have been foreshadowed in Wolff’s book Capitalism’s Crisis Deepens in which he made the statement that to “ignore alternatives to private megabanks condemns us all to longer lasting, more socially costly, and recurring crises”[10].

Govert Schuller
Naperville, May 19, 2019

Sources

[1]. “Richard Wolff Explains How the Hell our Banking System was Put Together“. YouTube. Uploaded by Thom Hartmann Program, 11 April 2019.

[2]. “The Truth About Modern Monetary Theory (w/ Richard Wolff)“. YouTube. Uploaded by Thom Hartmann Program, 2 May 2019.

[3]. McLeay, Michael & Radia, Amar & Thomas, Ryland. 2014a. “Money Creation in the Modern Economy”. Monetary Analysis Directorate. Bank of England Quarterly Bulletin (Q1, 2014): 14-27.

[4]. Werner, Richard A. 2016. “A lost century in economics: Three theories of banking and the conclusive evidence”. International Review of Financial Analysis, 46 (July 2016): 361-379.

[5]. Lerner, Abba P. 1943. “Functional Finance and the Federal Debt“. Social Research, 10/1 (Feb): 38-5.

[6]. Bell [Kelton], Stephanie. 2000 “Do Taxes and Bonds Finance Government Spending?” Journal of Economic Issues, 34/3: 603-620.

[7]. H.R.2990 – National Emergency Employment Defense Act of 2011 (NEED Act). 112th US Congress (2011-2012).

[8]. Huber, Joseph. 2019a. “Modern Money Theory revisited – still the same false promise“. Sovereign Money, March 2019. Also here.

[9]. Mitchell, William. 2019. “The conga line of MMT critics – marching into oblivion“. Bill Mitchell – Modern Monetary Theory. 7 March 2019.

[10]. Wolff, Richard. 2016. Capitalism’s Crisis Deepens: Essays on the Global Economic Meltdown 2010-2014. Chicago: Haymarket Books. Page 117.

[11]. Nichols, Dorothy M. & Gonczy, Anne Marie L. 1961-1994. “Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion”. Chicago: Federal Reserve Bank of Chicago.