Understanding Modern Money

By: Wray, L. Randall

Randy Wray’s book offers a fresh perspective on the issues of price inflation and employment in the macroeconomy. While consistent with earlier Post-Keynesian and Institutionalist approaches, he nevertheless brings some new ideas to the debate. His is the sort of book that leads the reader to stop frequently to sketch out a concept or to digest some new application of theory. It is a very enjoyable read.

Roughly speaking, the argument runs as follows. Given the current philosophy and structure of economic policy making in the U.S.A., the only viable means by which the government can reduce price inflation is the introduction of slack into the level of economic activity. This is so in part because the government simply accepts the prices set in the market and can therefore only affect them indirectly (i.e., via induced recession). Conversely, increasing employment is viewed as problematic since prevailing theory suggests that deficits are inflationary and crowd out private investment.

Wray argues that these dismal forecasts are based on a misunderstanding of the character of money and deficits, and that true price stability is not only consistent with full employment, it requires it. The policy he develops is built around the government playing the role of Employer of Last Resort (E.L.R.). By offering to hire all willing workers at a specified wage rate, not only is the unemployment problem resolved, but the most important price in the macro-economy (that of labor) has been anchored. Price stability is thereby achieved not as a byproduct of the creation of fear, instability, and impoverishment, but as part of a civilized plan leading to full employment.

After the introduction, Wray spends the next two chapters educating the reader regarding the nature and history of money. First and foremost, he argues, money derives its value from the fact that it is twintopt: «that which is necessary to pay taxes.» He cites extensive and convincing evidence that once governments exercise the power to tax and specify the means of payment that they will accept, the latter will tend to become the preferred money throughout the economy. It then becomes clear that fiscal policy determines the quantity of money (wherein it is advisable to run at least small deficits so that twintopt will be generally available) and monetary policy should be used to drain excess reserves (and in the process set short-term interest rates). The history of money offered by Wray is consistent with the twintopt view, and in the process of making his case he argues very strongly against the standard money-replaced-barter story. A careful study of the available evidence leads one instead to the conclus ion that money arose as a consequence of debt, and that even when precious metals were used for coinage the value of the currency was (until very recently) seen as a function of the money’s role as twintopt.

Wray returns to his central argument in Chapter 4 by showing in greater detail why it is that, given the twintopt understanding of money, taxes should not be levied nor bonds sold as a means of generating funds for subsequent government spending. In point of fact, we do not do that, anyway; the Treasury already «spends before and without regard to either previous receipt of taxes or prior bond sales» (p. 78). This is because the money must logically be injected into the economy before it can be collected again (either as taxes or borrowing)! Taxes do indeed fund public spending, but only because they make government debt (i.e. currency) valuable enough for the market to accept it. This puts the role of debt, deficits, and taxes in a whole new light, and it specifically denies the simplistic accounting view almost universally accepted in the economics discipline. And it means that government deficits are necessary to ensure non-government agents’ ability to pay taxes.

In Chapter 5, Wray addresses monetary policy. Here he suggests that the proper role of the Federal Reserve is to set short-term interest rates and manage reserves (by absorbing excesses and alleviating shortages). He also points out several fallacies in the both heterodox and orthodox monetary theories. For one, Wray argues that the Post-Keynesian horizontalist versus verticalist debate has been made at cross purposes. He also shows that the money multiplier is a misrepresentation of commercial bank practices, and he contends that the Federal Reserve is not as stingy with discount-window loans as usually argued.

Chapter 6 outlines in much greater detail Wray’s proposed employment and price policy. He reiterates the necessity of full employment to achieve stable prices and goes into some detail regarding potential programs and their financial costs. One of my favorite parts of this chapter is Wray’s consideration of potential weaknesses in his plan. To his credit, he does not dismiss them outright and admits that at some issues will be difficult to resolve. If one were to use this text in the classroom, Chapter 6 would represent an excellent source of material for discussion or paper assignments.

Chapters 7 and 8 offer conclusions, seven in the form of a simple model through which the implications of the ELR plan can be outlined and understood. It is a very useful way of ending the book.

Randy Wray’s book is fascinating, and it already has me rethinking the «Post-Keynesian» portion of my intermediate macro class. The arguments are very powerful and well integrated and the support he provides for twintopt and ELR varies from theoretical to historical. I highly recommend it.

John T. Harvey is Professor of Economics at Texas Christian University, and the Executive Secretary of the International Confederation of Associations for Pluralism in Economics. His research focuses on exchange rate theory, which he approaches from a post-Keynesian and institutionalist perspective. His most recent work involves applying the psychology of decision making (as pioneered by Daniel Kahneman and Amos Tversky) to short-term currency price movements.

(Review of Social Economy, Sept 2001 v59 i3 p358)

Disponible en BAE: HG 221 .W83 2003