Modern Monetary Theory on money, sovereignty, and policy:

A Marxist critique with reference to the Eurozone and Greece

Costas Lapavitsas

SOAS, University of London

Nicolás Aguila

Centro Interdisciplinario para el Estudio de Políticas Públicas, Buenos Aires

Abstract

This article compares and contrasts MMT and Marxist monetary theory, focusing on the relationship of money to commodities, the role of state power in monetary processes, and the significance of global hierarchy for world money. Money is indeed a social relation, as MMT claims, but for Marxist theory capitalist money is specifically a relation of class, both domestically and internationally. The room for state policy is correspondingly constrained, not least because the international monetary system is hierarchical. These issues are placed in historical context by analysing a Greek plan for Eurozone exit during the crisis of the 2010s. It is shown that regaining monetary sovereignty was a demanding technical problem but also, and more fundamentally, a class issue embedded in relations of international subordination.

Keywords: Marx, Modern Monetary Theory, money, state, Greece, Eurozone

JEL codes: B14, B51, E40

1 1. Introduction

During the last two decades, Modern Monetary Theory (henceforth MMT) has won wide academic recognition and public influence. MMT has updated the Chartalist theory of money, originally proposed by Knapp, Innes, and Keynes, putting forth a notion of monetary sovereignty (Tcherneva, 2016; Wray, 2019). On this basis, it has advanced powerful criticisms of mainstream economics regarding monetary and fiscal policy (Tcherneva, 2006; Wray, 2014).

There are considerable areas of agreement between Marxist political economy and MMT but also profound differences. The critical discussion of MMT in this article aims to be constructive and in the spirit of common opposition to mainstream economics and economic policies. It focuses on the relationship of money to commodities, the role of state power in monetary processes, and the significance of global hierarchy for world money, all of which have consequences for monetary sovereignty. These seemingly abstruse issues are integral to state economic policy but are often side-lined by vocal critics of MMT keen to debate monetary and fiscal policy, particularly within the institutional context of the USA. Yet, the policy proposals of MMT are of a piece with its underlying theoretical understanding of money. A coherent critique must depart from first principles.

Marxist theory has a very different understanding of sovereignty from neo-Chartalism, and thus of the room for monetary and fiscal policy, particularly for smaller countries in the world market. Money is a social relation, as MMT frequently states, but capitalist money is specifically a relation of class, both domestically and internationally. The monetary sovereignty of a state and the exercise of economic policy are constrained by this fundamental aspect of money.

2 The test of theoretical debates is, of course, practice. The last section of the article places the Marxist critique of MMT in context by examining perhaps the most prominent recent case of contested monetary sovereignty, namely Greece in the Eurozone in the 2010s. The analysis brings to the fore little-known aspects of the crisis, especially the formulation of a plan for exit from the Eurozone by domestic political forces opposed to the bailouts imposed by the lenders to Greece. It is shown that regaining monetary sovereignty was certainly a demanding technical problem but also, and more fundamentally, a class issue embedded in relations of international subordination.

2. Neo-Chartalist theory of money

According to Wray (2014), MMT has retrieved the Chartalist theory of money developed by Knapp and Innes and updated it with further contributions from Lerner, Goodhart, and Ingham. MMT has been called neo-Chartalism, “tax-driven money”, or “money as a creature of the state” (Lerner, 1947; Tcherneva, 2006).

For neo-Chartalists, money is a unit of account legally determined by public authorities to measure mutual debt obligations within a community (Tcherneva, 2016). Modern nation-states impose a liability in the form of a tax obligation, and name the “thing” they will accept in payment (Tcherneva, 2006). Since agents must possess the “thing” to pay taxes, it becomes the general means of exchange and payment, and thus it becomes money.

From this standpoint, money is an institutionalised social relationship based on state authority. Since the state has the monopoly of issue, it can choose anything as money, irrespective of material (Wray, 2010); it can also define money’s value by unilaterally determining the terms on which it is offered (Tcherneva, 2006). If, for instance, the state introduced money through a Job Guarantee scheme paying the wages of public sector

3 workers, it could establish the money-value of an hour of work (Mosler, 1997-8; Tcherneva, 2016). 1

Pursuing the analysis further, money is essentially a credit relationship representing a promise to pay, with the dual character of asset for the lender and liability for the borrower. Anyone can create money, but the real issue is the degree of social acceptability of private money. There is a hierarchical structure of monetary forms within a community, with the state at the apex, followed by banks, firms, and individuals (Bell, 2001). State-issued monetary forms are at the top because the state is the only agent that does not have to settle its obligations by delivering someone else’s promises to pay (IOU) (Tcherneva, 2016).

The barter economies constituting the foundational myth of neoclassical economics have no historical basis (Graeber, 2011). Moreover, according to Innes (2004), exchange transactions would simply be registered (in a tally, for example) and the debt obligation would be subsequently settled by using other commodities. Registries of past societies show that mutual credit networks predate coin minting, and credit predates cash. Wray (2010) stresses that coin minting does not have spontaneous origins in exchange but in the actions of the public authorities.

An original instance of this process was wergild or wergeld (Tcherneva, 2016; Wray, 2010). This was a system used by the assemblies of Germanic tribes to determine penalties for offences among community members to prevent potential escalation into intra-communal conflict. 2 In time the assemblies established a common unit of account,

1 Furthermore, the imposition of money tribute could lead to profound social and economic change on the dominated (Goodhart, 1998). In Africa the imposition of taxes by European colonisers forced change toward wage work and export-oriented production (Forstater, 2005). 2 The classic account of the origin of money in wergeld was given by the authoritative numismatist Grierson (1977) but with deeper roots in the tradition of the German Historical School.

4 gradually transforming penalties into tributary payments and finally taxes. Once a unit of account had been established, credits and debts began to be denominated in money (Wray, 2010). The same notion could easily be extended to other forms of recompense, such as dowry, bride-price, and blood money.

Stripped of its historical associations, this is a truly extraordinary theoretical claim. Apparently, tribal assemblies in the forests of Germania or priestly cabals in the temples of Egypt and Babylonia were able to identify a common denominator (essence) among things, actions, rights, wrongs, beliefs, and sentiments. They then defined an abstract unit of account (commensuration) for all these species manifestly belonging to different genera. The “thing” that corresponded to the abstract unit of account was able to equate apples and oranges in social practice because the assembly or the priests had somehow equated these in the mind (abstractly). This is the assumption underpinning the claim that money is inherently a purely abstract unit of account defined by a public authority. If indeed it were true, it would represent a magnificent philosophical breakthrough, long before Aristotle proposed his ten categories.

Critics of MMT often seem ill at ease with these issues, perhaps perceiving them as abstruse debates on the historical and analytical origin of money, a sideshow to the “real” issue of fiscal and monetary policy. 3 The opposite is true. The policy suggestions of MMT depend fully on the underlying assumption of what is money. It is impossible coherently to criticise the former without also criticising the latter.

For Wray (2016), if a taxpayer is to be able to pay, the state as monopoly issuer of money must have already provided the means of payment. Indeed, the government must engage in expenditure prior to collecting taxes, making it possible for individuals to obtain the

3 Palley is characteristic of this approach in a series of critical assessments of MMT; see for instance, Palley (2015 and 2020) focusing on the “meat and potatoes” of fiscal and monetary policy.

5 means to pay taxes and purchase goods (Tcherneva, 2016). Government spending is not financially constrained either by tax collection or by public debt (Bell, 2000). Taxation is merely a way of destroying money and redeeming state debt, as happened even in physical terms in the American colonies (Wray, 2019).

MMT rests on the assumption that state authority is the foundation of money. Monetary sovereignty is to exercise the ability to define the unit of account and make it the means of settling state transactions and obligations. If that assumption proved unsound, the entire approach of MMT would be problematic. What would remain would be a series of particular points on economic policy, some of which are well known and some strongly debatable. The following section discusses the theoretical content of monetary sovereignty and its implications for economic policy in comparison to Marxist monetary theory. The final section demonstrates the content of monetary sovereignty in connection with the Greek crisis in the Eurozone.

3. A Marxist critique of neo-Chartalism

Marxist monetary theory differs significantly from neo-Chartalism on four crucial issues: i) the ontology of money, ii) the state and money, iii) state economic policy, and iv) world money and monetary sovereignty.

i. The ontology of money

For Marxist theory, money is a creature of commodities and not of the state. This view does not rely on puerile notions of “primitive” barter societies. Rather, money emerges historically at the point of mercantile contact between pre-capitalist societies and fully

6 develops under capitalist conditions. It is a social relationship that unfolds completely when capitalism dominates economic and social life.

Marx (1986) argued that the allocation of total social labour in pre-capitalist societies was often determined by a central authority. Under these conditions, the social character of production was presupposed, and the products of labour did not typically take the form of commodities. Such societies deployed units of account, but these were largely tallies and not money as it exists in capitalist society. With remarkable prescience – confirmed by recent anthropology – Marx claimed that mercantile exchange emerged at the point of contact among separate societies (Lapavitsas, 2005a). That is the original locus of the emergence of money, not state authority.

Along similar lines, Shaikh (2016) argues that the neo-Chartalist treatment of dowry or blood price as debts imposes on these relations a mercantile character that they do not intrinsically possess. More broadly, the historical validity of neo-Chartalist claims is highly debatable. The history of Egypt and Babylonia shows that the unit of account was different from the means of exchange, but that is a common feature of several monetary systems. Furthermore, Caligaris & Starosta (2016) argue that when practices such as wergild are considered more closely, the units of account emerge as products of labour and their choice was not necessarily an arbitrary decision by public authorities.

As for coinage, its origins lie in ancient Lydia in the 7th century BC, from where it spread to the Greek city states, its true propagators in the ancient world. Minting appears to have emerged privately, although it was quickly monopolised by the state, a pattern repeated in China and India (Graeber, 2011). The acceptability of coined money across borders depended on its metallic content. This was clear for the Roman solidus, or more accurately, the Eastern Roman (Byzantine) nomisma (later hyperpyron), named bezant by Western Europeans, the “dollar of the Middle Ages” (Lopez, 1951). Similar

7 considerations hold for the Islamic “dinar”, which had roots in Roman coinage (Dwyer & Lothian, 2002). These states were far from able to determine the value of coin at will.

Historical issues aside, Marx offered a theoretical exposition of money in the Grundrisse which relied on the allocation of total social labor and the specific features of capitalism (Lapavitsas, 2013). Individual capitalist producers are autonomous and independent from each other, deciding privately and without coordination what, how, and how much to produce. To engage in production and to satisfy their personal needs, they must turn their own output into a commodity. Commodity exchange is not a contingency but the moment of unity between social production and consumption, when individual claims to total social labour are validated.

For Marx, as is well known, this implies that commodities share a common social substance, i.e., value, or socially necessary labour time. Other than substance, however, commodity value also has form, i.e., exchange value. In any exchange transaction, the value of one commodity necessarily appears as a quantity of another, the former being the “relative”, the latter the “equivalent” form of value. Marx developed the theoretical exposition of money in Capital via an extraordinary philosophical excursus on the dialectical relationship of the relative to the equivalent form of value. The end result was the emergence of the “universal equivalent”, the commodity par excellence that monopolises the ability to buy, i.e., money (Lapavitsas, 2005a).

The point of going over this well-trodden ground is to establish a fundamental difference with MMT. Money is a commodity that emerges spontaneously and proceeds to act as the organiser of the total social labour, when production is dominated by private, autonomous, and independent units. It is an endogenous creation of markets that does not require any external authority to bring it into existence. The money commodity gravitates toward precious metals because of their properties of divisibility and reconstitution, durability and portability. Yet, there is no “metallism” in Marxist theory:

8 money necessarily develops beyond the commodity form and even becomes incorporeal. In all its forms, it remains the universal equivalent spontaneously created by commodity exchange. The state has nothing to do with money’s emergence, a point that is fundamental to analysing monetary sovereignty.

This theoretical derivation of money also implies a qualitative difference between money and credit, in sharp contrast to MMT. In its fundamental form, money is the final means of payment between two transacting parties, leaving no obligations behind, an aspect of commodity exchange that is integral to the formal freedom of buyer and seller. In contrast, credit always leaves obligations behind, creating formal and informal links between borrower and lender. Obligations are finally settled through the intervention of money, unless they are mutually cleared, or fresh credits are extended. Credit is a complex relationship of promise and payment arising on the basis of the prior existence of money. Marxist economics has a monetary theory of credit, not a credit theory of money (de Brunhoff, 2015).

ii. The state and money

For Marxist political economy, similarly to MMT, the state is certainly able to determine money as the unit of account but the implications drawn regarding sovereignty are vastly different. The reason is that the unit of account is a subsidiary facet of money’s function as measure of value, and the latter is a spontaneous outcome of production and exchange beyond the discretionary power of the state. The burden of this point for economic policy is made clear in the last section in relation to Greece and the Eurozone.

Briefly put, the value of a commodity produced capitalistically is measured by the physical units of the money commodity, historically in ounces of silver or gold. The measuring process is spontaneous and blind, involving the production of commodities (determining

9 value content) and their exchange in practice (expressing value content in units of the money commodity). Money prices, on the other hand, derive from the arbitrary subdivision of the physical units of the measure of value into units of account: a certain number of silver ounces make the pound sterling. The accounting process is direct and conscious, and rests on pure social convention: it is the “name giving” to an arbitrary quantity of the money commodity. The state is the social agent best able to support the convention, thus establishing its own monetary sovereignty, although it has no direct power over the spontaneously operating measure of value (Lapavitsas, 2005b).

It follows, moreover, that the unit of account is not ideal, despite being decided by an extra-market authority. There are no tribal assemblies, priests of Babylon, and state bureaucrats engaging in extraordinary mental feats to commensurate commodities (and a myriad other human relations). Commensuration emerges spontaneously through regular production and exchange as diverse labours are made equivalent with each other in practice. The abstraction is real, though it took the establishment of capitalism and the genius of classical political economy for it to be recognised. It provides the material bedrock of the money commodity on which the state is able to fix the unit of account.

The limits of the state’s power are, nonetheless, shown by its inability to determine the measure of value directly in terms of the physical units of labour, that is, in hours of work. Marx sharply critisised the Ricardian socialists of his time, who proposed measuring commodity value directly by replacing money with labour chits (i.e., “time money”) (Saad- Filho, 1993). For that to be possible, there would have to be an authority capable of establishing the socially useful character and the time content of the products of labour. Such an authority would inevitably become a central planner, the economic system would no longer be capitalism, and commodities would become altogether superfluous (Iñigo Carrera, 2007). As long as capitalist conditions prevail, there has to be a spontaneous and blind process of measuring value, which sets limits to the power of the state.

10 Marx differed in this respect from Sir James Steuart, who was the true father of the theory of the ideal unit of account but was not a Chartalist (Lapavitsas 2005b). Steuart was also effectively the father of the Anti-Quantity Theory of Money, including the view that banks actively make loans that are subsequently backed by liquidity, and the theory of the return of banknotes to their issuer, that is, the Law of the Reflux, which characterises credit money. They are all fundamental elements of the alternative monetary tradition to which Marxism, post-Keynesianism, and MMT belong. Marx, though grounding much of his theory on Steuart, disagreed with him on the unit of account ultimately because of its implications for value and exchange. MMT is strangely quiet about Steuart but nonetheless reproduces his erroneous views on the unit of account.

The limits of state monetary power can also be seen in connection with fiat money. A sovereign state is certainly able to introduce arbitrary symbols of the money commodity in the domestic economy, creating simple fiat money. 4 State power appears total in this connection but that is misleading: its limits emerge as the risk of inflation intrinsic to simple fiat money. If the state chose to issue arbitrarily large quantities, there would be discord between the unit of account and the measure of value. The value of commodities would be unchanged and measured as before, but it would be rendered into price through increasing volumes of fiat money. The result would be escalating inflation and disruption of circulation. State monetary power is passively circumscribed by the realities of production and exchange.

Similar but far more complex considerations apply to credit money. Credit relations emerge spontaneously in capitalist production and circulation, giving rise to an integral financial system. They also give rise to credit money, the dominant form of money in capitalism, the creation and circulation of which are very different from commodity and

4 There is an analytical lacuna in Marx(1976: 221-22, 224) in this connection, since he does not derive this power from the relations of exchange and production, i.e., endogenously. Instead, he merely assumes that the state can buttress the necessary social acceptability of fiat money because of its broader social role.

11 simple fiat money. The capitalist economy does not need the state to supply it with money – it can create credit money privately and endogenously. 5

Credit money does not contain value, and yet it is not fiat but a private promise to pay, subject to its own internal regulatory mechanisms. These depend on the advance and repayment of credit among banks and non-financial enterprises, and thus have a bearing on the rate of interest, in contrast to commodity and fiat money, which are unrelated to interest. By the same token, they depend on the institutional make-up of the financial system, which inevitably varies among countries. Crucially, they also depend on whether credit money is convertible into commodity money.

The state has the power to intervene in the conduct of credit money first and foremost because it can enforce, suspend, or altogether lift convertibility into commodity money. Equally important is the state’s power to alter the institutional structures, mechanisms, and operations of the financial system. Above all, states command central banks backed by public credit, which seek to coordinate the functioning of finance and credit money. The monetary history of capitalism since the beginning of the twentieth century reflects the application of state power to credit money primarily through central banks. The real task is to ascertain the limits of this power.

iii. State economic policy

Economic theory is aware of the peculiar features of credit money but there are sharp differences regarding their importance. Disagreements have roots in the classic British debates on the Law of the Reflux and the Banking and Currency Principles in the nineteenth century, which have subsequently reemerged on several occasions in different

5 In this regard, theories of the monetary circuit proposed by MMT that present the state as a necessary supplier of money to the private sector are wide of the mark (for instance, Tymoigne and Wray, 2015 )

12 historical contexts. At the core – though often unspoken – lies the connection between credit money, central banking, financial bubbles, and economic crises with national and international consequences. In historical terms, MMT has triggered an early twentieth- first century variant of these debates, with heavy focus on the post-Bretton-Woods institutional structures of the US financial system and the mechanics of fiscal and monetary policy.

MMT insists that a sovereign government faces no financial constraints, but is only constrained by the availability of real resources (Wray, 2012, c. 7, and 2019). The reason is that, unlike a family or an enterprise, a sovereign state can create limitless amounts of the unit of account to finance its actions. The inspiration for this argument comes from the “functional finance” perspective of Lerner (1943), for whom a depression would only occur if spending was insufficient, thus concluding that unemployment could be tackled through money-backed public expenditure. According to MMT, the state could finance expansionary fiscal policy pushing the economy toward full employment, for example, through a Job Guarantee scheme or a Green New Deal (Forstater, 2006; Tcherneva, 2007; Wray et al., 2018). At full employment, the risk of inflation could arise as additional real resources would not be available, but the state could destroy money through taxation, thus reducing aggregate demand and forestalling inflation. 6

This argument has immeasurably boosted the popularity of MMT, and yet it is misleading, not least because it is heavily dependent on the institutional features of the USA and perhaps a handful of other advanced capitalist countries. The functioning of credit money changed drastically in 1914, at the outbreak of the First World War, when Britain lifted domestic and international convertibility into gold for the first time since the Restriction of 1797-1821. Bank of England notes became the legal money of the UK (as did “Treasury notes”, i.e., simple fiat money of smaller denominations issued directly by the state) thus

6 MMT also considers the possibility of inflation arising for reasons other than excess demand, for instance, Fullwiler, Gray and Tankus (2019), but these are not important to the issue to hand.

13 ushering in the era of inconvertible domestic “managed money”. The historical transition took decades and was completed only after the collapse of Bretton Woods in 1971-3, when the US government lifted dollar convertibility into gold for international purposes.

These institutional changes have afforded several degrees of freedom to mature capitalist states in both fiscal and monetary policy. Central bank liabilities have become a form of fiat money typically created through the acquisition of state, but also private, securities. Since the central bank is not obliged (either domestically or internationally) to convert its liabilities into commodity money, its functioning is released from the constraints imposed by the requirement of holding an adequate reserve of gold. The central bank could potentially stretch its balance sheet to an enormous extent by buying securities and issuing its own inconvertible liabilities.

Note that, strictly speaking, the capacity of the central bank to stretch its balance sheet has nothing to do with state spending and borrowing, and nor does it arise from the institutional mechanics of holding the account of the state. Rather, it arises from the structural position of the central bank as the dominant bank of the money market managing the reserves of other banks. Even when its liabilities are compulsorily convertible into gold and are not the legal money of the state, the central bank has great room to buy private securities, or simply lend to other banks, thus providing liquid reserves. The Bank fo England repeatedly demonstrated this capacity in the course of several crises of the nineteenth century. It is a power endogenously created by the credit system and rests on the social acceptability of central bank liabilities.

Still, lifting convertibility into gold hugely augments the power of the central bank to stretch its balance sheet. Moreover, it offers to the state the possibility of financing expenditures by issuing securities bought by the central bank. The state would appear to be borrowing but, in practice, it would be monetising its debt through the central bank. By the same token, the central bank could turn the rate of interest into a policy instrument.

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Nonetheless, the historic lifting of convertibility of central bank money into gold had little to do with the needs of the domestic economy and the degrees of freedom of the state in financing its expenditures. Rather, it arose from the international functioning of money, which MMT largely ignores. It is not an accident that the great acts of inconvertibility occurred during the Wars of the French Revolution, the First World War, and the Vietnam War. The most powerful states of the world turned central bank credit money into fiat primarily to protect their international hoard of gold and defend their ability to make international payments at a time of exceptional economic and political turbulence.

MMT is strongly impressed by the formal release of the state from financial constraints on its domestic spending. 7 Yet, the possibility of financing the state via inconvertible money has been broadly understood since the eighteenth century. The real issue is not the availability of finance for state expenditure. It is, rather, the availability of resources claimed by state expenditure. MMT rightly stresses this point but does not fully pursue its implications, two of which are of crucial importance.

First, the state is not financially constrained, as an enterprise or a family are, but it also does not produce value and output (nationalised industries aside): it merely claims those of others. It is true, as Keynesianism has long argued, that through its expenditures the state can boost aggregate demand and thus support, and even expand, the production of output and value. Yet, the creation of resources also has its own internal logic summed up by the profits of private producers, which depend on far more than aggregate demand. In standard Marxist terminology, capitalism is about accumulation through the extraction of surplus-value in production. The state can protect and support accumulation by

7 And by the power of the central bank over the rate of interest. According to Fullwiler (2016), a monetary sovereign has absolute control of the interest rate applied to its debt.

15 boosting aggregate demand but cannot direct accumulation without radical supply reforms that also involve international action.

Second, the state could potentially finance its expenditures by creating fiat money, imposing taxes, or borrowing. All these methods amount to claiming resources produced by others but have different implications for output, employment, income, and wealth. It is entirely arbitrary to privilege one – fiat money – at the expense of the other two, as MMT does. The choice and the mix of financing methods is contingent on the balance of social forces in specific circumstances, as is shown concretely for Greece in section 4.

Financing purely through central bank fiat money appears to lie entirely within the discretionary power of the state without preconditions. However, it always retains the ability to disrupt the operation of the unit of account relative to the spontaneous measurement of commodity values. Inconvertible central bank money could potentially be accompanied by inflation, as happened in the 1970s and 1980s in much of the developed world. Moreover, easy availability of central bank money could also disrupt the paying and hoarding functions of credit money by destabilising the financial system, generating bubbles, and leading to crises with profound distributional implications. It is notable that MMT has little to say on these aspects of domestic money, a glaring lacuna in financialised capitalism riven with financial crises. 8

Financing through taxes, on the other hand, is a valid tool of state policy and not merely a method of regulating excessive aggregate demand. MMT makes much of the fact that fiat money can be committed to expenditure without first appropriating a part of the income or wealth of others, as happens with tax. Yet, in the end, both amount to the state claiming value and output produced by others. Their impact on aggregate demand will certainly be different but so will their distributional consequences. The method of finance deployed by

8 Epstein (2019, ch. 6) has aptly named this feature of MMT “The mystery of the missing Minsky”.

16 the state will depend on the issue to hand and the balance of social forces. As for taxes destroying central bank money, strictly speaking, such money could drain away from circulation completely independently of taxes, since it is still created through banking processes and the Law of the Reflux applies, even if institutionally adapted. 9 The central bank is able to contract its balance sheet as assets come to maturity, without any fresh taxes imposed by the government.

Similar points apply to borrowing. The national debt is not merely a technical matter of rearranging claims on the consolidated balance sheet of the central bank and the Treasury, as MMT often implies (for instance, Wray, 2012, ch. 4). Rather, it reflects the accumulation of claims on future output and value by different classes and social strata. The domestic composition of national debt holders is of great social importance since it could profoundly affect the distribution of income and wealth through capital gains and losses. The international composition of national debt holders and the currency of issue, on the other hand, are matters of the first importance for the international functioning of money. This holds even for the USA which can borrow abroad in its own currency, as Taylor (2019) has stressed in relation to MMT.

iv. World money and monetary sovereignty

Perhaps the most important constraint on state economic policy, however, is the international functioning of money, which is driven by commodity and capital flows and marked by exchange rate instability. The constraint operates differentially across the world market, reflecting a hierarchy among capitalist currencies and states.

9 Even the physical destruction of money is not something that occurred only in the distant past, or in the American colonies. Until recently, the Bank of England run the central heating of its printing works with unusable returning banknotes. The notes are now simply shredded.

17 Neo-Chartalist authors rightly claim that mainstream economic theory ignores the anchoring of money in nation-states (Goodhart, 1998). Yet, an analogous charge could be levelled against them regarding world money. According to MMT, the hierarchy of money starts with instruments of credit created by households, followed by debts of firms, debts of banks, and finally debts of the state at the top (Bell, 2001). This sequence bears a resemblance to Marxist analyses of the forms of money, starting with enterprise promises to pay, surpassed by bank credit, money market credit, and finally central bank credit. 10 However, in Marxist theory, there is a still higher level, that of world money.

Money in the world market loses its local functions and returns to its original commodity form as the direct social embodiment of abstract labour (Ivanova, 2013). This is broadly consistent with Marx’s analysis of money’s ontology, positing money as inherently an international economic entity that only subsequently becomes domestic. It is also consistent with the Marxist understanding of capitalism as global in content and national only in form (Starosta, 2016). Commodity value is universal and therefore the measure of value has to be global. In contrast, units of account and symbols of value can be national and regulated by national states. This is the basis on which national currencies relate to each other through exchange rates.

In mature capitalism commodity money is replaced in domestic circulation by credit money, but the international arena is far more complex and reflects power relations among nation states. Gold has been the classic form of world money, retaining its key role in international payments and global reserve of value, even if national currencies, such as the British pound sterling and the US dollar, have also functioned internationally. Since the collapse of Bretton Woods, the US dollar has acted as inconvertible quasi- world-money subject to competition by other currencies, including the euro (Lapavitsas, 2013; Labrinidis, 2014). Countries other than the USA are forced to acquire dollars as the

10 The literature is extensive, see, for instance, Marx (1999); Evans (1997); Germer (1997); Itoh and Lapavitsas (1999); Lapavitsas (2017a).

18 internationally accepted means of payment and value reserve – they have to deliver someone else’s IOUs to settle their international obligations (Itoh & Lapavitsas, 1999). The economic and political power that accrues to the state that issues quasi-world-money is enormous.

It seems that MMT supporters consider this state of affairs to be a self-imposed ordinance by nation states limiting their monetary sovereignty (Tcherneva, 2016). According to Wray (2019), monetary sovereignty comprises: 1) the national government choosing a unit of account; 2) the national government imposing obligations denominated in that unit of account; 3) the national government issuing currency in that unit of account and accepting it in payment; 4) the national government issuing other obligations (say, debt) denominated and payable in national currency; and 5) a flexible exchange rate. 11 Thus, MMT writers often adopt a critical approach toward countries that lose sovereignty by abandoning their national currency (as in the case of the euro) or by establishing a currency board (as in Argentina).

For Marxist political economy, monetary sovereignty in the world market has a very different content. The fundamental insight comes again from Steuart, who considered international monetary payments to have an obligatory rather than a voluntary character, that is, nations are obliged to deliver the commonly acknowledged form of world money. This is ultimately the reason why the global monetary system is hierarchically structured, a point that is fully appreciated by development economists ( Kaltenbrunner & Painceira, 2018, Prates, 2020). Lack of monetary sovereignty is the result of international structural constraints, rather than policy choices (Bonizzi et al., 2019).

The constraints include exposure to flows of money capital that are not under the control of smaller countries and depend to a large extent on the global availability of credit. Critical

11 On flexible exchange rates, see also Wray (2012, ch. 6)

19 development economists have frequently analysed the destabilising impact of capital flows on domestic monerary policy (Akyuz, 2014). Developing countries occupy a subordinate position in the international financial system (Bonizzi et al., 2020). In this connection, even mainstream literature has proposed the notion of a global liquidity cycle, or global financial cycle, marked by common fluctuations of asset prices, capital flows, and leverage, all of which ultimately reflect changes in U.S. monetary policy (Rey, 2013). In short, the monetary sovereignty of the USA is the reason for the lack of monetary sovereignty of developing countries.

Neo-Chartalist theory is distinctly troubled by the passage from the national to the international realm, where there is no supranational state choosing units of account or having the power to tax. There is a distinct paucity of analysis of money at the world level compared to the sustained output on domestic monetary arrangements, especially for the USA (Epstein, 2019, ch. 4, 5). There is little doubt that MMT finds it hard to analyse monetary policy in developing countries (Bonizzi et al., 2019; Vernengo, & Caldentey, 2019; Prates, 2020).

The rest of this article discusses concretely these weaknesses of MMT by considering the attempt to regain monetary sovereignty in Greece in the 2010s.

4.Monetary sovereignty in practice: Greece in the 2010s

MMT writers frequently refer to Greece as an example of loss of monetary sovereignty due to adoption of the euro in 2001, with disastrous effects on both economy and society when the Eurozone crisis broke out in the 2010s. 12 Close examination of the Greek events, however, casts an unflattering light on MMT analysis.

12 See, for instance, Kelton (2020, pp:84-86).

20

Several MMT supporters initially thought that it might not be necessary for Greece to recover its monetary sovereignty, provided that the European Economic and Monetary Union (EMU) abandoned austerity and allowed the European Central Bank (ECB) to finance a highly expansionary fiscal policy. Mosler (2010) proposed very early in the crisis that the ECB should engage in large liquidity provision to push national governments toward expansionary fiscal policy. Wray (2010) was also in favour of reform encouraging the ECB freely to purchase government debt and giving more fiscal authority to the European Parliament. A similar view was stated in more technical terms by Papademetriou, Wray, and Narsisyan (2010).

By 2011, however, it was clear that the ECB was unlikely to follow this path and Greece had to consider regaining its monetary sovereignty by exiting the EMU. Mosler proposed the bare bones of an exit strategy, reproduced approvingly by Wray (2011), which included: announcing that taxes would be payable in the new currency; making all government payments in the new currency; freely floating the currency; a moratorium on the national debt; redenomination of government contracts in the new currency; no redenomination of bank deposits and loans; a full employment guarantee, zero interest rates, and bank regulation.

The strongest MMT supporter of unilateral Greek exit was, however, Mitchell (2015, and for instance, 2019) in a book that decried the Eurozone as well as in a series of polemical blog posts. Mitchell’s sketch of an exit was brief but showed far greater awareness than Mosler of potential problems. Although in favour of floating the new currency in the international markets, he advocated capital controls and redenomination of bank deposits and loans. Mitchell appeared to believe, however, that Greece could somehow settle its national debt in the national currency. Finally, he proposed expansionary fiscal policy with a Job Guarantee following exit.

21 Political economists aware of the institutional and political reality of the EMU were clear already in 2010 that reform was extremely unlikely, and Greece would have to consider exit. 13 In January 2015 the radical government of SYRIZA took power, challenging the policies of the European Union (EU) and making exit a realistic prospect. The final outcome was, of course, failure, with Greece submitting to EU austerity policies and failing to recover monetary sovereignty. The events of that time have not been fully analysed and a proper historical account remains to be written. 14

The left of SYRIZA, which eventually opted to leave both government and party rather than submit to the lenders, had actually developed a detailed programme to recapture monetary sovereignty, which played a role in political events and a fair copy was eventually published, but broader awareness of it remains minimal. 15 The programme rested on well-established arguments of Marxist, Keynesian, and Sraffian economics, offering a clear guide to monetary sovereignty for a relatively small country in contested circumstances. MMT had little to contribute.

i.The social and political rupture of exit

The first issue to be confronted was the legal basis of exit, including lex monetae and lex contractus. The EMU is essentially a Treaty-based set of institutions created by sovereign states, and its statutes have the character of law. They make no legal provision for exit, in contrast to the EU from which legal exit is possible, as the UK has demonstrated with Brexit. The evident aim is to force member states to abide by the euro, not least by raising

13 See, for instance, Flassbeck and Lapavitsas (2013). 14 By far the most popular rendition is the memoir of Varoufakis (2017). Note that, in his ministerial and public capacities, Varoufakis enormously exaggerated the difficulties of exit, with the explicit aim of keeping Greece in the EMU. Note also that Galbraith, a leading supporter of MMT, was closely involved with Varoufakis and produced his own account admitting, after the event, that exit would have been the best outcome (Galbraith 2016). 15 See Lapavitsas and Mariolis, with Gavrielidis (2017).

22 the threat of also being forced out of the EU. 16 Fortunately for Greece, lex monetae afforded the right unilaterally to declare its own currency, without being automatically forced out of the EU. The implications of lex contractus were, however, of a different order of complexity, reflecting directly the hierarchical nature of the world market and its monetary arrangements, particularly with regard to redenomination.

Unilateral exit would inevitably commence with the formal announcement of the New Drachma as the money of all payments to, and by, the government, including taxes and the wages of civil servants and public employees, as is also stressed by MMT. However, it was immediately apparent that the announcement would have to be accompanied by suspension of all redemptions of the national debt. The government would also have to close down immediately all bank operations and financial markets as well as appointing a Commissioner for Banking with plenipotentiary powers, including over the Bank of Greece. Announcing the return of monetary sovereignty in contested circumstances would inevitably result in a profound economic and social rupture. At the very least the Greek financial system would have to be placed under national ownership and management, and draconian capital controls would have to be imposed. 17 Only then could the government realistically pledge to fulfil all its obligations to economic agents under Greek law.

The nature of the social and political rupture first became clear with regard to the accounting rate of the New Drachma with the euro. 18 The government certainly had it in its power to announce the accounting rate that would create a basis for the new nomenclature of prices, for instance, by allowing civil servants to know the numerical

16 Athanassiou (2009) made this point forcefully in a publication of the ECB. 17 See Lapavitsas and Mariolis, with Gavrielidis (2017, p. 49-53). 18 As it did also with the name of the new currency, an issue that is too complex to discuss at length here. The acceptability of money is a social process relying on symbols, perceptions, and norms. A choice had to be made between a name close to “Euro” to convey links with broader European developments or close to “Drachma” to draw on the history and traditions of the Greek people. The latter prevailed.

23 value of their salaries and wages. But the actual domestic rate of exchange of the New Drachma with euro, which would undoubtedly continue to circulate, could only be marginally influenced through administrative measures. The same broadly held for the international rate of exchange with the euro (and other currencies), which could not be stabilised given the absence of reserves. In short, the government could set the unit of account but had very little power over the measure of value.

Even the accounting rate, however, was a profoundly social issue. For one thing, it could give rise to money illusion, since EMU entry of Greece in the EMU had occurred at 340:1, Old Drachmas to the euro. The simplest new rate would have been 1:1 but that could appear as a tremendous drop of wages and pensions compared to pre-euro days, thus weakening social support. Moreover, it was possible to adopt different accounting rates for the rich compared to the poor, allowing for much-needed redistribution and perhaps making the new currency more broadly acceptable. However, the administrative complexities and the inherent risks would have been formidable. The programme opted for an accounting rate of 1:1 for simplicity and effectiveness. Protection of workers and the poor would require other measures.

Equally important was the actual physical form of money. The dominant form of the New Drachma would certainly be credit money issued by private banks. Detaching the clearing mechanisms of banks from the euro was complex and required a bank holiday. Even more pressingly, however, the social acceptability of the new currency would depend on the availability of good quality banknotes. It takes time to produce banknotes and requires technical capacity that is available to only a few private enterprises and sovereign states across the world, and European institutions under the effective command of the ECB.

There were two choices available, both of which lay bare the domestic and international risks of regaining monetary sovereignty. The first was to secure a supply of banknotes from a willing (non-EU) government. This would evidently impinge directly upon Greek

24 international relations, with potentially grave domestic political consequences. The second was to use substitutes, including cheaply made scrip and stamped euro banknotes. This was evidently more problematic for circulation and social acceptability but engendered fewer international and legal complications. The programme chose the second option.

ii. Redenomination and a sovereign central bank

Nothing brought out more sharply the economic, social and political risks of exit than redenomination. It showed that regaining monetary sovereignty was partly a technical, partly a class, and partly a national issue.

There was not much that could be done about redenominating public debt. The real problem was not the currency of public bonds, as MMT writers appear to believe, but the governing law. When the Eurozone crisis broke out in 2010, the bulk of Greek public debt was denominated in euros and yet the governing law was Greek, with jurisdiction in Athens. A Greek government could pass a Parliament Act redenominating the debt, but the ruling elite did not take that step. Instead, during a bout of rescheduling under the auspices of the lenders in 2011-12, the governing law was changed to UK and jurisdiction was taken away from Athens. Redenomination became effectively impossible. The path toward monetary sovereignty would inevitably commence with national default.

Redenomination was, nevertheless, possible for the private sector (non-banking and banking). It was necessary to estimate the attendant risk, since remaining foreign currency exposure after exit could trigger a balance sheet recession. Empirical work for the programme showed that the redenomination risk of the private sector was fairly small.

25 19 The true difficulty lay with the central bank, whose balance sheet would also have to be redenominated to establish monetary sovereignty. In legal and institutional terms, the Bank of Greece is a member of the Eurosystem and effectively operates as a branch of the ECB. Redenomination of its balance sheet brought out the subordinate position of Greece in the EMU.

Two balance sheet entities were crucial to confronting the Greek crisis: first, Emergency Liquidity Assistance (ELA) to private banks, the ultimate responsibility for which presumably lay with the Greek central bank; second, liabilities in TARGET2, the complex clearing mechanism of the Eurosystem. The Bank of Greece also carried a great volume of euro-denominated banknotes, for which the Eurosystem was legally responsible as the sole issuer of currency in the EMU. It could be assumed that euro-denominated banknotes would remain in the hands of the public, circulating in parallel to the New Drachma. It could also be assumed that ELA assets would be redenominated. TARGET2 liabilities, however, were an entirely different matter. 20

Assets and liabilities in TARGET2 are typically clearing entries among central banks. Obligations are not legally a form of the national debt and are not contracted as national debts. As long as the system continues to function, they are simply overdrafts among central banks, arising due to intra-EMU current account imbalances and capital flows. But in case of default, there would be losses for the Eurosystem, which would have to be made good by replenishing the capital committed by member central banks. What would happen with regard to redenomination?

19 A pioneering technique was proposed by Nordvig and Firoozye (2012; see also Nordvig (2014)). An equally helpful balance sheet analysis from a Marxist perspective was proposed by Durand and Villemot (2016). For the estimates of the Greek programme, see Lapavitsas (2018a, 2018b). 20 In his “friendly criticism” of MMT, Lavoie (2013) rightly stresses the institutional importance of TARGET2, but his analysis does not extend to the point that matters here.

26 Without entering into a detailed discussion, bilateral obligations in TARGET2 are not governed by European law. They are under the law of the Federal Republic of Germany and jurisdiction lies in Frankfurt am Mein. 21 This is far from accidental and casts light on the deeper reality of international monetary arrangements among capitalist states. Greece would have some room for legal argument since the EMU does not make explicit provision for a country exiting the system. But there could be no doubt as to who would have the upper hand.

The Bank of Greece would most probably have to default on its TARGET2 liabilities, thus immediately entering an international legal quagmire. In effect, the Bank would have to be re-founded. Refoundation would have required, first and foremost, recapitalisation since the central bank is still a bank, and its creditworthiness rests on adequate capital. That would have meant state guarantees and fresh public debt in a country that would have just defaulted. Refoundation would also have required building reserves of international means of payment, that is, someone else’s IOUs, mostly euros and dollars. Part of the reserves would have comprised the Bank’s gold assets, which were no longer under its direct control. The demise of Bretton Woods has not stopped gold from acting as a reserve of last resort internationally, even for the ECB. In sum, easy assumptions about the link between the central bank and the state, including consolidation of balance sheets, offered little help. Regaining monetary sovereignty in practice represented an economic, social, and political rupture of the first order.

iii. Foreign exchange; monetary and fiscal policy

21 For fuller discussion, see Lapavitsas (2018a). See also the decision of the European Central Bank, 24 July 2007, creating TARGET2 (ECB/2007/7), https://www.ecb.europa.eu/ecb/legal/pdf/l_23720070908en00710107.pdf

27 The final issue to discuss were the programme’s policy proposals following exit, backed by theoretical and empirical work. 22 MMT prescriptions, including a Job Guarantee, were again of not much relevance.

The first problem was the likely impact of exit on the price level, which had three crucial aspects: first, domestic inflation due to monetary policy; second, price disturbances due to parallel circulation of more than one currency; third, domestic inflation due to the depreciation of the New Drachma. The first could be set aside, along lines similar to MMT: in the heavily depressed Greek economy, it would be absurd to fear monetary inflation. The second was more problematic and intractable, but the only possible response was for the government to persevere with using the New Drachma, as MMT also suggests. The real difficulty lay with the third.

There could be little doubt that the exchange rate of the New Drachma would follow a J- curve path, with significant overshooting downwards in the initial period. Apart from “pass through” inflation, this would also create major problems of supply of food, energy, and medicines. The answer would inevitably involve administrative measures, including rigid foreign exchange and banking controls, to limit the extent of depreciation. It would also involve state intervention in product markets to ensure normalisation of supply. It was not a matter of rationing but of prioritising access for vulnerable groups and key enterprises.

Fortunately, the empirical work underpinning the programme showed that inflation was unlikely to be a major problem. Not only this, but depreciation would remove the iron collar of the euro, restoring competitiveness, rapidly improving the external balance, and facilitating the recapturing of the domestic market. MMT generally downplays the Balance of Payments constraint since it overlooks the international functioning of money. The constraint was crucial for Greece, as it also is for most developing countries. Programme

22 See Mariolis (2008, 2013), Mariolis and Soklis (2018), and Katsinos and Mariolis (2012).

28 estimates, based on Thirlwall’s model of balance of payments constrained growth, showed that depreciation would have a strong positive effect of GDP and employment. Monetary sovereignty was vital because it would automatically launch Greece on a growth path through the exchange rate.

It was also apparent that expansionary fiscal policy would be needed and it would not be financed through taxation on borrowing, given the depression of the economy and the parlous state of public finances. There would have to be monetary financing of fiscal policy, and that was a further fundamental reason for regaining monetary sovereignty. The problem was to calibrate the fiscal and monetary intervention, for which it was necessary to have estimates of output, import, and employment multipliers. On this basis, the programme made a series of targeted proposals to boost government consumption and investment, focusing on service sectors in the first instance. The longer-term task of rebalancing the economy in favour of the secondary and primary sectors would have to await a separate plan of industrial strategy.

There is no escaping, finally, that the challenge to the lenders came to nothing, and Greece failed to regain monetary sovereignty. This was certainly not due to lack of a sophisticated programme of EMU exit. The reasons were associated with money’s non- economic role and cast further light on monetary sovereignty. Money is a means of socialisation and an element of personal and national identity in mature capitalist societies. Changing the currency from the euro to the New Drachma represented a direct challenge to the perception that Greeks have of themselves and created intense fear of the unknown. To countermand these pressures and regain its monetary sovereignty in contested circumstances, the country needed to have clarity on political economy and strong political leadership. It lacked both.

10.Conclusion

29

Marxist and neo-Chartalist monetary theories have deep differences, despite sharing common ground. Four key differences were discussed in this article: the ontology of money, the state and money, state economic policy, and world money. These are far from academic and have crucial implications for monetary sovereignty.

Money is a creature of commodities and not of the state, both theoretically and historically. In its original form, money emerges spontaneously as the universal equivalent, and not as a mere unit of account. It is fundamentally a social relation among commodity owners enabling the organisation of total social labor when production is dominated by private, autonomous, and independent units. For Marxist theory, in contrast to MMT, money is prior to credit, and indeed acts as the bedrock of credit relations. Treating money as a form of credit associated with state power is a source of theoretical and policy confusion.

The state can certainly command money’s function as unit of account but not as measure of value. It can also intervene in money’s functions as means of circulation, means of payment, and means of hoarding (value reserve) but without fully commanding them. Nevertheless, the state plays a pivotal role in managing credit money because of its power to determine the convertibility of credit money into commodity money and also because it possesses the pivotal institution of the central bank. Thus, the state’s monetary power is historically and institutionally specific.

Since the end of Bretton Woods, mature capitalist countries have been able to finance their interventions by creating central bank fiat money, but remain constrained domestically and internationally. The analysis of monetary forms proposed by MMT ignores world money, in sharp contrast to Marxist monetary theory. The global monetary system is hierarchically structured and broad swathes of countries are subordinate. They

30 face constraints on their monetary sovereignty because of the exercise of monetary sovereignty by a few developed countries, above all, the USA.

The differences between Marxist monetary theory and MMT were considered in the case of Greece in the Eurozone showing that monetary sovereignty is a complex social and political issue that extends far beyond the formal declaration of the unit of account. Sovereignty rests on the actual material form of money and its social acceptability; it faces severe domestic and international legal constraints reflecting global hierarchies; it has to resolve thorny problems of policy associated with the exchange rate. In short, monetary sovereignty is an outcome of domestic class forces embedded in international power structures. It could not be otherwise for money, the most essential product of commodity exchange.

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