I have read an interesting reports in the last months that demonstrate there is a…
Reading Beardsley Ruml carefully
Many social media commentators that have become interested in Modern Monetary Theory (MMT) regularly cite sections of the article written by businessman and former Chairman of the Federal Reserve Bank of New York Beardsley Ruml – Taxes for Revenue Are Obsolete – which appeared in the January 1946 edition of the American Affairs journal. The article was actually a speech that he made “before the American Bar Association during the last year of the war”. Some claim that the content provides an early underpinning for Chartalism, upon with MMT is, in part, derived. I disagree. If you read his work carefully, rather than selectively quoting convenient sentences, and, that work includes his more substantial book that was published in 1945 and from which the article cited above was derived, you would get no MMT succour. He was basically lobbying for zero corporate taxation and he expressed rather orthodox views about fiscal policy at the time, which are very non-MMT in substance.
The historical context
Beardsley Ruml argued that his insights on tax were of relevance because of “two changes of the greatest consequence” that had “occurred in the last twenty-five years” that “substantially altered the position of the national state with respect to the financing of its current requirements.”
These changes were:
… the gaining of vast new experience in the management of central banks … [and] …
the elimination, for domestic purposes, of the convertibility of the currency into gold.
In 1933, the US President Roosevelt abandoned the gold convertibility of the US dollar with the introduction of the – Gold Reserve Act – that became operational on January 30, 1934.
It forced the US Federal Reserve Bank to hand over all its gold and gold certificates to the US Treasury and prevented any financial institutions, including the Treasury from converting US dollar bills into gold.
Public holdings of gold stocks were also largely made illegal and a fixed exchange price of $US20.67 per ounce of gold was paid as part of the surrender deal.
The motivation for the legislation was the Great Depression, which followed the 1929 share market crash.
The chaos (bank failures, business collapses, etc) cascaded into a deep depression as households and firms preferred to hoard gold rather than spend.
Under the gold standard that was in operation at the time as part of a global agreement, nations could not inject more liquidity into their economies unless they acquired more gold, given the strict relationship between the two.
In 1931, Great Britain was the first nation to retreat from the standard and introduced its own fiat currency.
The system then collapsed a few years later when the US also withdrew, although many other nations had followed the example set by the British.
The motivation for the US to abandon the gold standard was to allow the central bank to increase US dollar liquidity in the system
There was a lot more happening at the time, particularly as the Gold Act was quickly followed bu the – Banking Act of 1935 – which reformed the way the Federal Reserve interacted with the US Treasury.
But analysing all those things would take us too far away from the topic for today.
The point is the Beardsley Ruml was presenting his speech in a post Gold Standard, pre-Bretton Woods environment, which is not dissimilar to the fiat currency era that we know of today.
The point about taxes
The excitement that MMT proponents found in Beardsley Ruml’s speech related to his questioning of “Why does the government need to tax us at all?”
He noted that the “obvious answer is, of course, that taxes provide the revenue which the government needs in order to pay its bills.”
He also noted that:
The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government.
And the reason he drew that conclusion related to those two “changes”, noted at the beginning (above).
The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes.
In keeping with the narrative style of his time, Beardsley Ruml was in tune here with the writings of Abba Lerner on ‘functional finance’.
Taxes were not necessary to “provide the revenue which the government needs in order to pay its bills” so the only reason for imposing them lies in the functions they serve in advancing, in Ruml’s words “public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”
Please read my blog post – Functional finance and modern monetary theory (November 1, 2009) – for more discussion on this point.
Those functions included:
1. “to help stabilize the purchasing power of the dollar”.
2. “To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes”.
3. “subsidizing or in penalizing various industries and economic groups” – that is, a resource allocation impact.
4. “To isolate and assess directly the costs of certain national benefits, such as highways and social security” – he used the hypothecated social security system as an example to “limit the benefits to amounts which the people who benefit are willing to pay.”
Given all this, selectively read, it was no surprise that MMT proponents saw something kindred in what Beardsley Ruml wrote.
A basic MMT proposition is that – Taxpayers do not fund anything (April 19, 2010).
It should be noted before I proceed that Beardsley Ruml’s basic intention in this address was to make a case to reduce the “federal tax on corporate profits”, which he labelled “The Bad Tax”.
He didn’t like any taxes on corporations during a “peacetime”.
He thought all the impacts of corporation income taxes were bad.
1. They are passed on to consumers (higher prices), the corporation’s own workers (lower wages), shareholders (lower returns).
2. They distort management decision-making.
3. They result in “double taxation” – reducing distributable profits and then reducing the benefits from the dividends.
He called for this “evil tax” to be abolished and the functions of taxation noted above be achieved through taxes on individuals.
So while his agenda is not one that I would endorse, it doesn’t negate the resonance with MMT in this narrow sense.
But think again
Imagine, that instead of focusing on the taxation discussion above, I had tweeted (across two Tweets given character limits) the following and added the handles of known MMT types:
If we look at the financial history of recent years it is apparent that nations have been able to pay their bills even though their tax revenues fell short of expenses. These countries whose expenses were greater than their receipts from taxes paid their bills by borrowing the necessary money. The borrowing of money, therefore, is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.
Would there be a constant focus on Beardsley Ruml, as if he is some kind of MMT genius?
His speech was clearly a political lobbying effort on behalf of the corporate sector to reduce company taxes.
The question that the last quotation poses is whether he really understood the implications of the US going of the Gold Standard in the 1930s?
He used that as a justification for his views on taxation, but, if he really had an understanding of what the shift to fiat currency after 1933 and before the Bretton Woods meant, then he would not have written that governments could “obtain the necessary means for the payment of their bills”.
That is the antithesis of MMT.
The fact that MMT proponents selectively use Ruml to justify the main MMT propositions is the worry.
We need to be careful in who we align ourselves with.
Beardsley Ruml’s 1945 book
I have just finished reading Beardsley Ruml’s book – Tomorrow’s Business – which was published by Farrer and Rinehart in 1945.
His speech on taxes was revisited in the book.
I wonder how many of those who continually cite Beardsley Ruml have read that book.
He considered “business” to be more than a supplier of “goods and services” but “also as a source of order and of freedom”.
He saw the primary purpose of “business” was “make a profit” and not “to give people useful work to do.”
Business is a “private government because the rules it makes within the law are final and are not reviewable by any public body.”
He also considered that business was “one among many” private governments: trade unions, the church and the family, are similarly ‘private governments’.
And all have to be regulated by the state in some way to ensure that freedom is advanced.
His views on trade unions were symptomatic of his pro-business approach.
But, while he did not express an anti-union view in the book, he did claim that “trade union organization today is chaotic” which has “not been able to resolve its inner ideological and power conflicts”, which suppress individual worker freedom.
He was against the creation of “union shops” (where workers had to join the union) because:
… the rule-makers of the labor union do not rule by consent of the employees … [and that the] … labor leadership is not competent to use this great power wisely.
He thought that the trade unions would abuse their role as private governments and impinge on profits, to which he said that:
… the higher the profits the better.
And it was in that context that he advocated the abolition of company taxes.
But for the purposes of this blog post, the relevant parts of his book are Chapter 3 – “Fiscal Policy and Private Business”.
Beardsley Ruml’s very non-MMT on fiscal policy
He recognised that the realisation of company profits required an “adequate flow of purchasing demand”:
… it is only through the flow of purchasing power that the nourishment of business by business profits can be accomplished.
Principally, this would be achieved by the lending activities of private banks, which create “a mighty river of purchasing demand which rises and falls as a a result of a hundred million private, free decisions.”
But, occasionally, government intervention is required to meet “ups and downs of business activity”:
It is now generally recognized that the national budget must be called on to support purchasing power on the down side of a business cycle.
The national ‘budget’ should support profit creation because it:
… has a decisive effect upon the level of demand, both by influencing the quantity of purchasing power available and by causing changes in its rate of flow – upon the rate at which purchasing power becomes purchasing demand.
But, according to Beardsley Ruml, how the ‘budget’ was financed impacted on this.
Imagine, I tweeted this:
If the deficit is financed by loans from commercial banks or from the Federal Reserve banks, purchasing power will be increased. But if the borrowing comes in the form of the sale of governmtnt bonds to private investors, the federal deficit will take away from purchasing power in the hands of the public an amount equal to the quantity that the deficit has created. A surplus in the budget will take away from purchasing power if the surplus is used to retire government debt held by commercial banks or by the Federal Reserve banks; but, if it is used to retire government debt held by the public, the retirement of this kind of debt adds as much purchasing power to the amount in the hands of the public as the creation of a surplus in the budget had taken away.
How many MMT proponents would get excited about that and started retweeting it furiously or including it in books and papers?
Not many I imagine.
He also considered government expenditure could “affect unfavorably the outlook for private risk-taking … because of impaired confidence” and reduce spending.
This is a sort of crowding out idea – that government spending could “weaken … the stream indirectly by more than they can add to it directly”.
He also raised alarm about the “interest on public debt”, which would have to be “covered by taxation” and further undermine the overall spending in the economy.
In that vein:
One of the great problems of postwar fiscal policy will be so to manage the national debt that interest payments and amortization do
It here that massive contradictions emerge.
He talks about “the need for taxes seems greater than ever” when government debt has to be paid back and serviced during its period of maturity.
He talks about rolling over debt when it matures and this:
… refunding operation again provides the money which the government needs – and, again, the need for present taxes is avoided …
How do you reconcile that with his claim that taxes are not necessary?
What Ruml was advocating was not that taxes do not fund anything but that he only wanted taxes on individuals not corporations.
Those who use Ruml as a source of MMT wisdom have missed this point entirely.
I am not reading much MMT into any of his work.
How about you?
But all of this led Ruml to advocated balanced fiscal positions over the economic cycle such that when the economy was strong, the government should run large surpluses and pay off the outstanding national debt.
That is not an MMT position.
The MMT position is that the goal of fiscal policy is not to achieve any particular fiscal position at any point in time, but, rather to allow the position to adjust to non-government spending and saving decisions in order to maintain full employment and price stability.
That requirement, in certain contexts, may require a continuous and quite large fiscal deficit.
It might, also, in different circumstances, require continuous fiscal surpluses.
Beardsley Ruml was also against major public works programs, which he considered to be impractical ways of stabilising the non-government spending cycle because they “require long and detailed planning, legal investigations, and, in many cases, enabling legislation by state and local governments”.
He considered the public works efforts during the Great Depression to be wasteful and the public employment programs worthy of the “public ridicule and abuse” they received.
He concluded that:
The idea of using standard public works as a way of supporting purchasing power in time of depression had failed.
The only justification for public works is “to stabilize the construction industry” rather than any generalised counter-cyclical stabilisation function.
I found it interesting reading Beardsley Ruml’s book, which provides his overall thesis on fiscal policy rather than relying on a few sentences from his speech, which was railing against taxes.
I am currently in day 4 of a 14-day quarantine in Melbourne after I escaped Newcastle last week. I had planned to fly from here to do public speaking events in other states that had closed their borders to NSW given the virus outbreak there.
At the time of my escape south, I would have been able to fly from Melbourne over the next few weeks to honour these commitments
But the virus spread from NSW to Victoria and the borders were then closed to that state.
So I am stuck.
Best laid plans.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.
This Post Has 28 Comments
Stephanie Kelton frequently quotes Beardsley Ruml, as do other MMT proponents.
So, some disagreement here?
“He called for this “evil tax” to be abolished and the functions of taxation noted above be achieved through taxes on individuals.
So while his agenda is not one that I would endorse, it doesn’t negate the resonance with MMT in this narrow sense.”
There’s not a lot about specific taxation in MMT literature, but this is one that Randy Wray echoes, and follows from Minsky and Ruml:
Modern Money Theory, LR Wray, 2015 pp155
In Lane and Wray, ‘Why President Biden Should Eliminate Corporate Taxes To Build Back Better’, 2021 they state:
Quite a lot of this is influenced by the particular structure of the US tax system and is cushioned by the ‘exhorbitant privilege’ the US has – which isn’t the “reserve currency” of myth, but the fact that the US has so many other countries in the world who have chosen to operate their economies as currency users of the USD. That allows the US to export its unemployment to other parts of the USD currency zone – much as Germany has within the Eurozone.
Those of us in the UK and AUS need a different approach to taxation that better fits the constraints of a self-contained currency zone.
Personally I agree with both Randy and Bill, the corporate income tax should be scrapped as it is a pathetic ineffective tax, but corporations should still be taxed. And the reason for that is something called “tax salience”.
Finkelstein, ‘E-Ztax: Tax Salience and Tax Rates*’, 2009
You don’t want individuals to see taxation. If they do they can and will vote to remove it. Corporations don’t vote.
Thanks, Bill. At least one academic is prepared to do their proper job of reading original sources.
@William, expecting delivery of Deficit Myth today having been told often that it’s so much better than Reclaiming…
I’m intending to write something on taxation in UK. I won’t bore you here with my theories of different taxes, but I am trying to find a justification for taxing corporates. I think it is something to do with creating a level playing field. Some businesses are inherently more profitable than others and can therefore consume more non-renewable resources than others.
@ Neil Wilson Thanks. Interesting. ‘You don’t want individuals to see taxation…. they… will vote to remove it’. As with so much else, it depends on people’s education and outlook, which unfortunately are being narrowed rather than broadened. Also as with financial tax proposals, regulation (on wage disparities) would seem to me a way to get around tax ineffectiveness.
Bill notes: Thanks PatrickB for the typo watch!
The fact that Rumi had an incomplete understanding of the implications of his mostly accurate description (that the actual purpose of federal taxes is not to finance government spending) does not negate that limited understanding. Of course he wasn’t MMT. It hadn’t been developed yet. He was pre-Bill, Warren, Randy, et al. His loss, but our gain to the extent that we can see the beginnings of someone “getting” a pretty basic point about the nature of sovereign fiat currency.
Now, if Beardsley had bern able to talk to pre-conception or baby Bill, perhaps he could have seen his inconsistency about borrowing and interest. We’ll never know.
MMT, as we know, is more than this observation. But without that basic understanding of the nature of a sovereign currency you can’t derive the rest of MMT. Step by step – like science.
As for his ultimate pro-business orientation, so what? Even if people have a full MMT understanding, they will differ in what they want society and government to do, illogical as it may seem to us who are “right”.
We’re all of Abba Lerner’s writings set to music?
Hmmm, I’m not sure where Rumi would have stood on MMT!
Perhaps we could ask Bill to get digging…? ; )
@Lyle re: ‘Even if people have a full MMT understanding, they will differ in what they want society and government to do, illogical as it may seem to us who are “right”.’ They may differ in wants regarding the balance of public to private output, but if they are still pushing things like the nairu and crowding out, then you know they are doing so to slant the economy in favour of the wealthy at the expense of the less wealthy rather than achieving efficient optimal output.
The political economy & context of the times that Ruml said that is interesting. However, for our MMT pedagogical purpose it doesn’t matter much.
Even former RBA Governor MacFarlane says MMT is correct but he also uses the term funded & unfunded in relation to operations where those terms are misnomers. He does broadly say MMT is correct and specifically that the spending comes first.
This is analogous to the Ruml quote. It comes from an authority figure involved in central bank operations.
To quote your own words that are most relevant & could be easily overlooked given the rest of the subject matter is about the person’s agenda:
That is exactly the point.
Just as MacFarlane talks about how monetary operations worked prior to 82 & how they work currently. MacFarlane has a preference for how it is done now. That is similar to a political choice. As you & I know it doesn’t make that much of a difference (and we would probably prefer the former) but that’s not the point.
The endorsement (intended or otherwise) of MMT concepts is the point from someone that would be considered attached to the field, broadly speaking, of monetary & institutional economics.
Always important to read the primary texts.
I myself have referred to Rumi.
Must be more careful.
Dear Lyle (at 2021/07/19 at 10:45 pm)
The point is illustrated in this logic flow:
1. Taxes don’t fund government spending
2. But government spending has to be funded by debt issuance.
3. But rising debt issuance creates problems – must be paid back and serviced.
4. Taxes have to be raised to pay off the debt.
5. Therefore, taxes ultimately fund government spending.
The problem is that Ruml did not make the break that a fiat currency issuing government does not need to be funded in these ways.
Just because one agrees with one thing a person said or wrote it doesn’t mean you have to agree with everything they said or wrote. In this case it shows that an economist from an earlier era came to a similar conclusion to MMT on the basic capabilities of currency issuing governments. It helps demonstrate it’s not just a convenient idea dreamt up out of nowhere but a concept, or variation on a concept, that others have also reached in the past. One can always point out the limit of one’s agreement in as much or little detail as the situation requires.
Pythagoras was an early proponent that the earth was a sphere, I could quote him as an early source on that concept to a flat earther without having to accept metempsychosis (reincarnation), of which he was a leading exponent, nor does the fact that he didn’t get the shape exactly right nullify his validity as an early proponent of the concept.
Dear Bob (at 2021/07/20 at 10:59 am)
Thanks for your comment.
Your example about Pythagoras is not apposite. Whatever else Pythagoras believed in is irrelevant to whether his views on the Earth’s characteristics were internally consistent.
The point I was making about Ruml is that he was internally inconsistent about the characteristics of a fiat currency issuing government without gold convertibility.
That is a different matter to whether he was religious or not, for example.
“These countries whose expenses were greater than their receipts from taxes paid their bills by borrowing the necessary money. The borrowing of money, therefore, is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.”
The trouble is that countries do borrow the money – and therefore this description is accurate from a particular point of view, even for sovereign nations.
Borrowing is taking something with the intention of giving it back at some point in the future. That’s all it means. So we create two institutions, then one institution – the Treasury – takes the liabilities of the other institution – the Central Bank – with the intention of giving them back at some point – should the private sector spend their savings and generate the necessary taxation to eliminate the overdraft.
That’s borrowing. I have that argument with the BBC every month when they talk about how much the government is borrowing. And their statement is that HM Treasury is taking something with the intention of giving it back. In other words they revert to the dictionary definition to justify.
Now of course the propaganda intent is to suggest scarcity – but that is an inference the reader is making. The writer can simply say the reader is reading the words incorrectly and filtering it through their own prejudices. Here’s the Beeb wriggling on the hook.
The government sector does borrow, because there are loan relationships that pop up. That’s how it spends every day – by borrowing the funds if and as required. But it is of no consequence because there is no control function. Whatever loan relationships there are, are on terms dictated by the borrower, not the lender. And, of course, when you consolidate the institutions, as MMT does, they mostly disappear.
One alternative way of presenting MMT rather than saying that government doesn’t borrow, is to say that the loan is on terms dictated by the borrower and cannot be refused by the lender. It is that inversion of the expected power relationship that changes the game. As the Don, the government makes banks offers they cannot refuse.
From the quotes above it looks like Ruml had fallen for the bond illusion, or hadn’t foreseen the rise of the repo market. In reality, purchasing power is reduced by bond sales only in the same way that purchasing power is reduced if you move money from a current account to a deposit account. You don’t intend to use it as it is ‘savings’, but there is no systemic bar on using it.
IIRC Keynes, Lerner et al. were all entranced by the bond illusion – hence the War Bonds idea in “How to pay for the war”, etc.
How many mainstream economists still believe bonds have a control function like Ruml?
Regarding Beardsley Ruml’s 1946 article “Taxes for Revenue are Absolute” I’ve noticed on several occasions that Randy and Stephanie have used it as a justification of MMT’s proposition that federal taxes do not fund anything. However, I think that they do that by isolating a selective passage and ignore Ruml’s main argument about taxation, which he states that serves the following purposes:
-Increasing equality in income distribution
-Incentivize production and consumption, and
-Direct payment for services provided to individual beneficiaries.
While he considered the first to be the single most important function of federal taxes, he also makes an argument against the imposition of corporation taxes and advocated their complete abolition.
He argued that government spending can be financed by taxes (!) and/or bonds issuing but the latter option would eventually drive up interest rates, would make borrowing problematic and in the end taxes would increase. These conclusions are in sharp contrast to MMT’s propositions that not only taxes are not needed to fund fiscal deficits but also bonds issuing could be eliminated, if so desired.
That single question Ruml asked during his speech “why does government need to tax us at all?” is a giveaway in itself that he didn’t have even part of a seed of MMT in his head at all, because it shows he was ignorant of the fact that taxes payable in the sovereign currency creates the demand for the currency.
What his head did seem to bear the seed for was what has become mainstream ‘thought’ today.
He wasn’t wrong about the purpose of “business” being ” the pursuit of profit” for the owners. That’s the main legal obligation of corporations after all. Not the highest of moral principles, but if corporate managers hadn’t lost sight of the long term, and stopped as many seem to have done, the practice of reproducing the conditions for future profitability through the process of useful innovation (with the common good in clear focus), retooling, and ongoing education of the workers, pursuit of profit wouldn’t have become an obstacle to progress.
@ Neil Wilson, you wrote, “From the quotes above it looks like Ruml had fallen for the bond illusion, or hadn’t foreseen the rise of the repo market. In reality, purchasing power is reduced by bond sales only in the same way that purchasing power is reduced if you move money from a current account to a deposit account. You don’t intend to use it as it is ‘savings’, but there is no systemic bar on using it.”
I think you are wrong there. Actually there is a ‘systemic bar on using it’ in the context of a Gov. bond, in that for you to spend it, you have to sell the bond to someone who is, therefore, choosing to save the money.
Or, you could use the bond as colateral at a bank and get a loan and then spend the amount of the loan. But, then you must start paying back the loan.
Please explain if you think I’m wrong.
Hey so it’s the same thing as citing Minsky and Lerner or Kalecki
They each had insights that we can say forms core MMT propositions but each one f’d up some stuff and revised and backed away later in ways not consistent with previous positions. But we don’t throw the baby out with the bathwater, right. We appreciate the particular points we know to be true and point out the problems with their later revisions. But if Ruml goes IMHO by same logic so do the “giants” whose shoulders MMT stands on. Having said all that, seems important that Bill wrote this post. I’m not about to read Ruml’s book. He clearly jacked up his previous views and you cannot reconcile both. I had no idea. But maybe take it easy? Could be read as a snooty attack on allies, who maybe don’t know any better, and mistake lies with the 1st and 2nd generation MMT’ers in first place for not vetting Ruml 10 to 12 yrs ago when we first started seeing this promoted.
Dear Charles Haydn (at 2021/07/21 at 1:51 pm)
Thanks for your comment.
However, it is not the “same thing as citing Minsky and Lerner or Kalecki” and “each one f’d up some stuff and revised and backed away later in ways not consistent with previous positions”.
I will leave Minsky to one side as I have written about his work previously. Do a search if you want to read those posts.
Where can you demonstrate that Abba Lerner and/or Michał Kalecki was internally inconsistent in their writing and analytics and where they “backed away”?
I don’t think you can.
My objection to Beardsley Ruml is two-fold: (a) on a values plane – he was a lobbying for deals for business; (b) on a logical consistency plane – where a deeper reading of his broader work – not just a short speech he made to lobby for abolishing business taxes – leads one to suspect his ‘taxes are obsolete’ claim was not anything to do with the way Modern Monetary Theory thinks but rather a crude way of getting a special deal for the corporate sector, in which he was a major player. After all, he considered taxes would have to pay for any debt the government issued. That is the antithesis of MMT.
“Actually there is a ‘systemic bar on using it’ in the context of a Gov. bond, in that for you to spend it, you have to sell the bond to someone who is, therefore, choosing to save the money.”
There’s a guarantee of liquidity in the Gilt market via the GEMMS. They always have to stand ready to buy any and all Gilts on offer.
That is backed by a standing reverse repo facility from the Debt Management Office.
Even if somebody is just cashing in Gilts because they don’t believe in them any more, it causes an increase in reserve assets in the banking system which DMO has to neutralise by … selling them a Gilt.
If you net it all off, then when you cash in a Gilt, the bank doing the cashing ends up with a Gilt as an asset, which is then discounted into the liquidity required to do the cashing. The result is an expanded bank balance sheet. As ever loans create deposits, which is the ‘choosing to save’ bit you need to square the circle.
As ever, there isn’t a fixed amount of money. It grows and shrinks as required to get the job done.
“if corporate managers hadn’t lost sight of the long term”
Corporate managers who have lost sight of the long term would be eliminated by those that haven’t – if we stopped propping up failing firms who cry “what about the jobs” at the first sign of trouble.
If we’re to have market capitalism then failing firms must die and die quickly. If the market keeps burning its seed corn, then you have to ask if the market approach is appropriate for that niche.
So that sentence was poorly written as each case is different and I’m embarrassed by it. 🙂
Thank you for saving me on Minsky, but with Lerner he screwed up on interest rates. Kalecki worried about budget balances in the appendix to Political Aspects of Full Employment. This is from memory. I had negative reaction to Kalecki bc of that and Kelton told me to chill out and recognize that while not perfect he advanced understanding.
Feel like same applies to Ruml but again I wouldn’t know that without this post.
@ Neil Wilson,
OK, that applies to the UK only.
What is the ratoio of UK bonds/gilts sold per year to US bonds and treasuries sold per year.
I guess it is 1 to 10.
So, world wide, the US dominates the gov. bond market. I don’t think that in the US the Fed. buys every bond that comes up for sale because its owner wants to buy something.
Besides which, if I understood your reply, the sale of guilts buy someone who changed their mind and wants to but something (and stop saving), still were causeing someone to save somewhere.
And yes, bank loans add to the money supply. This is not thought to cause inflationary preasures (IMO) because the loans are profitable for the rich and economists therefore, will *not* see the loans as inflationary. In the same way the $2 T given to corps in the US in the spring of last year, was not seen as inflationary, then. Now, it is lumped in with all the other covid spending as part of the “inflation *has* taken off already and *will* get worse unless the Gov. does XXX”, narative we are seeing now.
“And yes, bank loans add to the money supply.”
They are not bank loans per se at that point. A Gilt is technically a loan from the bank to the National Loans Fund.
A banks deposit either with the Bank of England in the form of reserves, or with HM Treasury in the form of Treasury Bills/Gilts. But it’s a loan on terms dictated by the borrower.
As I said earlier government is the Don, and it makes offers to banks they cannot refuse.
“And yes, bank loans add to the money supply.”
I don’t understand how they do that as loans are being constantly repaid. Surely only central banks create net new money and add to the money supply.
“I don’t understand how they do that [add to the money supply].”
Sure you do. There’s a time lag. A loan creates a deposit, adding to the M1 or M2 (not M0). The deposit gets spent around between players in the economy, enabling business. When the loan eventually gets repaid, the M1/2/? shrinks back down.
Mel, I get that, but other loans are being repaid and cancelling money all the time, so one new loan will be lost in the noise.
“Mel, I get that, but other loans are being repaid and cancelling money all the time, so one new loan will be lost in the noise.”
It’s even more interesting than that.
If a loan is issued, then it will instantly pay off an equivalent amount of other loans issued – unless somebody saves in the spending chain.
Just as with taxation where government spending will instantly generate the same amount of tax – unless somebody saves in the spending chain.
The desire to net save doesn’t just create a government deficit, it creates an ever increasing growth in net loans issued. In general the young take on the loans and the old hoard the savings.
The sequence to look for is “LPMVYBG” at the Bank of England: “Monthly amounts outstanding of monetary financial institutions’ sterling loans to private sector (in sterling millions)”
Other than the last year it’s a steadily growing amount.