Modern Money Theory (MMT) and New Currency Theory (NCT)

/3/ The financial crisis since 2007/08 has shed doubt on common wisdom regarding money and banking. Orthodox economists did not see any of the problems coming and refused to acknowledge the expertise of those who did. Central banks' monetary policy did not prevent ever larger waves of government debt and financial bubbles on the basis of overshooting creation of bank credit. Had they wished differently, within the present system of fractional reserve banking, they could hardly have done very much about it. Markets and politics still treat the crisis as a big, but one-off, operational accident. It may require some additional regulation, but otherwise, one expects to eventually resume business as usual. Neither markets nor politics want to hear about the market failure and government failure they actually produced—and which they are bound to reproduce in the future unless the monetary, banking and financial systems undergo some structural change.

Against this background, orthodox economics is now challenged by a number of advanced approaches to the analysis of money and banking. Sometimes these are grouped under the heading of heterodox economics, or real-world economics, or non-fiction economics.[1] Some scholars reconsider academic traditions such as for example historical and institutional economics, chartalism and constitutionalism, post-Keynesianism, disequili­brism, the circuitist school, economic systems dynamics or similar.

This broadly overlaps with analyses and policy approaches of the new monetary reform movements across the industrial world, aimed at regaining control of the money supply and reestablishing a sovereign state's monetary prerogative.[2] Most advocates of monetary reform explicitly understand this as an endeavour to modernising the money system―which implies modernising money theory.[3]

/4/ Since around 1995–2000 there has been another new approach, which explicitly calls itself Modern Money Theory, abbreviated as MMT. MMT scholars include Warren Mosler, Scott Fullwiler, Stephanie Kelton and Randall Wray. As their 'forefathers' they cite Godley (sector balances), Lerner (functional finance) and Mitchell-Innes (state theory and credit history of money). MMT sees itself as an offspring of post-Keynesianism. So the aforementioned currents may have expected MMT to represent some sort of close relative or even political ally. Some of MMT's views actually correspond with those of the aforementioned. A closer look, though, finds discrepancies. Becoming better acquainted with MMT has caused increasing irritation and controversy.[4]

This text deals with those accordances and discrepancies. I approach the subject from a standpoint as it is underlying present-day analyses and policies in favour of monetary reform as quoted above. To delineate from MMT, I will call that approach New Currency Theory, abbreviated as NCT. NCT is not completely different from MMT. But important differences there are, and NCT can claim to have a more encom­passing understanding of what modern money and monetary modernisation actually is all about. This will be explained step by step in the following, when the discussion is put into a specific frame of reference (currency vs banking), and when thereafter what NCT and MMT have in common, and what sets them apart, is discussed in more detail.

MMT is intended as an academic label. Reform activists aiming at getting new monetary policies onto the political agenda will ask why bother about engaging in a discussion of mainly academic concern. The answer is: academic expertise matters. Weak expert support is currently a main bottleneck for advancing monetary reform. Parties and politics will not seriously move as long as there are not 5–15 per cent among the economic experts at universities, in think-tanks, editorial offices, ministries, financial authorities, central banks and MFIs who understand the relevance of modernising money and banking theory, and who acknowledge monetary reform to be a relevant issue, without necessarily endorsing everything at once.

/5/ For that very reason, monetary reformers have to come to grips with MMT. At first sight it looks as if MMT and NCT are relatives not so far apart in that they share a number of views vis-à-vis more orthodox theories; for example the basic conviction that the money system is an essential foundation of the economy, not just a veil on economic transactions; or that modern money is and ought to be fiat money which can freely be created at discretion. They also share a common analysis of banks' credit and deposit creation, a critique of the standard model of the credit and deposit multiplier, and a more appropriate view of the role of deposits and savings for funding investment. A number of different positionings, however, will be hard to bridge.

For example, MMT claims to be a chartal theory or state theory of money. Most people will understand 'state money' or 'sovereign currency' as money issued by a state authority such as a national central bank. MMT, however―and in line with banking doctrines and national-liberal ideas of old in the vein of Knapp and Mitchell-Innes―understands by 'sovereign currency' that the state just defines the national currency unit and for the rest accepts the money denominated in that currency issued by private banks rather than a public agency. This creates misunderstanding from the beginning.

MMT does not recognise a need for monetary reform. Central bank and government together, it is assumed, exert effective control over banks' creation of credit and deposits. Fractional reserve banking on the whole is seen as efficient and benign. To NCT this is just another example of fictional economics, for the actual situation today comes close to one of capture of the state's monetary sovereignty by the private banking sector. Realities today, far from representing a sovereign currency system, represent a state-backed banking rule. In spite of a long list of dysfunctions of fractional reserve banking―from lack of money safety via the distortion of economic and financial cycles, to monetary and financial instability and proneness to crisis―that system is maintained on grounds of an almost inextricable mutual dependency of government and banks; with governments running high levels of deficits and debt, and banks creating overshooting money supply and BIP-dispropor­tio­nate levels of financial investment (asset inflation).       

/6/ MMT has it that money is credit and debt by its very nature and history. MMT adherents ridicule the notion of debt-free money as 'dry water'.[5] This again is banking doctrine rather than chartal currency teaching. Money certainly is a medium for paying debt, i.e. to get rid of debt, and thus has of course developed historically in a context of debt of various kinds. Debt and credit existed before monetary units of account were developed, just as such units of account existed long before coin currencies came into existence; yes, and this is another teaching NCT and MMT have in common vis-à-vis classical commodity theories of money. MMT, yet, misrepresents 2,500 years of coin currencies when money typically was not lent into circulation against interest, but spent into circulation by the rulers of the realm free of interest and redemption. Debt money, i.e. the false identity of credit/debt and money, isn't a natural necessity at all. Modern money can freely be created, and of course it can be spent into circulation debt-free — pure water, so to say, not contingent upon credit and debt at source.

Pure resources must not be abused. Just because modern money can freely be created, there must be some arrangement for making sure that there is neither too much nor too little money and that additions to the money supply keep within certain limits set by economic productivity and potential growth. Money and capital markets, contrary to what they are supposed according to efficient market hypotheses, perpetually fail to achieve the task, because there are no effective limits to banks' deliberate creation of money on account, or intermittently, their deliberate extinction of credit and bank money.

Without openly denying this, MMT is nonetheless contemptuous of monetary quantity theory and the notion of sound finances. MMT cultivates laxness about deficits and debt. MMT does not question why the concept of 'functional finance' turned out to be quite dysfunctional in practice. Mosler's original MMT manifesto was titled Soft Currency Economics. Presumably this wasn't by mistake. However, any economic paradigm with enough common sense to it will surely place much value on sound finances, private and public alike. NCT does so; and this is one of the reasons for aiming at overcoming the present system of fractional reserve banking, because this system clearly has proved to be a historical basket case of unsound finances and soft currency economy indeed.


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[1] Werner 2005 324.

[2] Among the monetary reform approaches referred to here are those of the American Monetary Institute (, Positive Money in the UK ( and NZL (www.posi­ti­ve­­, Sensible Money in Ireland (www.sensible­, Monetative in Germany (www. mone­ and Switzerland (vollgeld. ch), and others. Cf. http://www.      

[3] Cf.  Huber/Robertson 2000, Zarlenga 2002 651–685, Ryan-Collins/Greenham/Werner/ Jackson 2011, Jackson/Dyson 2013, Robertson 2012 97–155, Huber 1999, 2013, Gocht 1975, Allais 1987, 1988.

[4] Cf. Walsh/Zarlenga 2012.

[5] Dirk Bezemer in an interview with Silfur Egils on Icelandic TV, 14 April 2013.