> "Too much money" is a condition almost always caused by the creation of too much "fiat currency" (ie a currency that is backed by nothing but the good faith and credit of the issuing government)
> As we all should know, in the US, on 6/5/1933 FDR took the US off gold-backed currency and started the fiat currency situation we still find ourselves in.
Except for the multiple decades post-WW2 with Bretton Woods.
Further, being on the gold standard didn't seem to help with inflation in the US during the 1920s:
I have no idea how anybody looks at Japan without realizing that the MMT people got it right.
Thought experiment: If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected?
If that community was then connected to the rest of the world, would the economic benefit be positive?
You can clearly see that the limitation on printing money is unutilized resources in the economy.
Then the unemployed people on uninhabited farmland move back to their home cities with all this extra money and buy a house for a couple million, sending prices skyrocketing.
This is literally what's been happening to the economy for the last decade. All the money that went into the economy from 2008 onwards ended up in the financial & tech sectors in NYC, Seattle & the Bay Area. As long as it stayed there, it only increased prices in NYC, Seattle & the Bay Area. Then remote work happened and these techie millionaires realized they could live anywhere. Or they just hit a threshold where they can retire. Suddenly those millions are ending up in places like Boise, Phoenix, Austin, Denver, Asheville, etc. and now we get inflation.
Quite the contrary. Japan's money supply has grown considerably more slowly than other countries - reinforcing the relationship between money supply, economic growth, and inflation.
> Thought experiment: If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected?
Sure, because those people can't actually spend the money they were given. But who would agree to be sent to said island? The incentive of getting paid is worthless if you can't spend your money on anything. If the government printed money to pay people to build wind farms with the restriction that they can't spend this money on anything, how many workers would accept this offer?
The government can and should print money to turn unutilized resources in the economy into utilized resources. What's best for the economy is for every capable person in it to be generating stuff. Everything else is an abstraction around that end.
In my thought experiment, there's simply more stuff in the economy because the government printed the money, and the whole is more prosperous for it.
Your thought experiment involves people working for free: being paid with money they can't actually use because they're isolated from the rest of the economy and can't spend that money. Nobody would agree to this. In practice, the people receiving the printed money would not be isolated from the rest of the economy and would be purchasing goods and services with their subsidies and driving up the prices of those products.
You're right that if spending printed money created gains in production to match the increase in money supply it wouldn't result in inflation. That's correct, but I seriously doubt that this is how MMT would work out in practice. Most MMT evangelists aren't trying to get a favorable return on investment. They're looking to fund massive social spending programs like UBI, government healthcare, or decarbonization of energy production.
To be clear, some of these are important projects but we shouldn't kid ourselves into thinking that printing trillions of dollars to pay for them isn't going to affect inflation. They're worth paying for because of the benefits they bring and disasters they avert, not because they're going to produce a return on investment.
> If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected?
First, this never happens, and certainly is not what's been happening for decades now in the US with the Fed printing money, so it's not a very relevant thought experiment.
Second, taking your scenario as given for the sake of argument, what was stopping the unemployed people from cultivating the uninhabited farmland before? Was it the absence of money, or the fact that they didn't own the farmland?
In other words, the real operative point in your thought experiment is not the government printing money, but the government giving tangible resources (uninhabited farmland) to a group of unemployed people, so that they will produce something of value from it. The money is really incidental: once they start producing more food than they can consume themselves, they will be able to acquire their own money by selling the excess. The initial printed money is really more like a one-time grant of working capital, so they can buy enough initial supplies to get the operation going. And money doesn't even have to be printed for that: the government could just allocate some tax revenue to it.
Third, in our actual system as it actually works, who does get newly printed money? Is it unemployed people who could be doing productive work but aren't? That was perhaps true for COVID relief checks--although those didn't really enable anyone to go back to work, they enabled people to stay out of work, not producing anything, for longer--but in any case those don't actually add up to a lot in terms of the total US money supply. The vast majority of the money the Fed prints goes to financial institutions, and the only thing whose "production" is increased by that printed money is loans. Those loans, since they are mostly mortgages, will certainly redirect productive capacity in the economy (so we build more McMansions and commercial office buildings that sit empty for years after being built, while our roads, bridges, drainage systems, electrical power grid, and other infrastructure deteriorate), but they don't increase productive capacity overall. In other words, they're just redistribution--and almost always (with the COVID relief checks being the only possible exception I can see) from the poor to the rich, since that's who the newly printed money goes to (financial institutions).
> You can clearly see that the limitation on printing money is unutilized resources in the economy.
No, we can clearly see that the limitation on printing money is how much redistribution from the poor to the rich the rich think they can get away with. Remember that the Fed was initially advocated to the US government by rich bankers who were tired of the government coming to them for bailouts whenever there was a financial panic due to stupid government interventions (the Panic of 1907 was the specific one that prompted the legislation that became the Federal Reserve Act), so they decided to put a system in place that would make it so the costs of the bailouts ended up being paid by ordinary citizens (who wouldn't get any of the money the Fed would print) instead of them.
The "uninhabited farmland" is just an analogy for some area of the economic landscape that when you spend money on it, can absorb labor and return a tangible benefit that is equal or more than what you spend. Maybe for example repairing worn out infrastructure or creating new infrastructure.
>The vast majority of the money the Fed prints goes to financial institutions
You maybe thinking of Quantitative Easing. In which case financial institutions are just incentivized to cash in their Government Bonds, whereby they need to look for some place else to put the money, hence perhaps asset inflation. The Government doesn't just print a whole lot of money and give it away to someone.
> The "uninhabited farmland" is just an analogy for some area of the economic landscape that when you spend money on it, can absorb labor and return a tangible benefit that is equal or more than what you spend.
Such areas aren't doled out by the government. They're invented by entrepreneurs. Your "uninhabited land" analogy obscures that vital point since uninhabited land is not invented, it's already there.
> Maybe for example repairing worn out infrastructure or creating new infrastructure.
As I already pointed out, if there are things like this that are worth doing, and there are unemployed people who can do them, the government can just use tax revenue to pay them to do it. There's no need to print new money.
> You maybe thinking of Quantitative Easing.
That's one way of doing it, which has been common in recent years, yes. But it's not the only way.
> The Government doesn't just print a whole lot of money and give it away to someone.
The government goes to great lengths to try to convince people that it's not doing that. But economically speaking, that is what it's doing.
When someone "cashes in" a government bond under "quantitative easing", the money they get is not taken from currently existing dollars. The dollars are newly printed money; they are newly created purchasing power that is given to whoever is "cashing in" the bond. That purchasing power doesn't come from nowhere: the purchasing power of a dollar is not fixed, it's determined by the total number of dollars in circulation. So printing new dollars and giving them to someone, even if it's in exchange for a "government bond", is still increasing the total number of dollars in circulation, and that means the purchasing power represented by the new dollars is taken from everyone else who holds dollars.
For a simple example, if there are a thousand dollars currently in circulation, and I "cash in" my government bond for 100 dollars of "quantitative easing", there are now 1100 total dollars in circulation, and I now have 100 dollars of purchasing power that was obtained by reducing the purchasing power of all other dollars by 10 percent. It's economically equivalent to taking 10 cents in tax for each dollar of the 1000 dollars that existed before, and giving it to me. Calling it by some other name doesn't make it something else. It just obfuscates what is actually going on.
(The Fed can in principle also destroy money, by selling securities and retiring the dollars that it gets for them, but historically it has almost never done this.)
> Except for the multiple decades post-WW2 with Bretton Woods.
Um, what? The Bretton Woods agreement was part of "the fiat currency situation we now find ourselves in" (just an earlier stage of it where the government was still trying to pretend to some sort of "linkage" with gold, instead of just dropping the pretense altogether as was done in the early 1970s when Bretton Woods fell apart). No US money was backed by gold at all (not even United States Notes, which were still in circulation) after the FDR administration confiscated all private gold holdings and suspended redemption indefinitely in 1933.
> being on the gold standard didn't seem to help with inflation in the US during the 1920s
To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913. A significant amount of that money was in circulation in the 1920s. Plus, even United States Notes, which were notionally backed by US gold reserves, were not expected to be redeemed for gold in any great quantities, since paper money was so much more convenient than gold for transactions; so the fact that those notes were notionally backed by gold did not have much practical effect on their exchange value. What did have a practical effect was the fact that United States Notes and Federal Reserve Notes exchanged at par (one dollar of each was required to have the same exchange value), so as more Federal Reserve Notes were printed, the exchange value of United States Notes dropped.
> Um, what? The Bretton Woods agreement was part of "the fiat currency situation we now find ourselves in" (just an earlier stage of it where the government was still trying to pretend to some sort of "linkage" with gold,
If USD was not linked to gold, why was a multi-country agreement needed to change the value of the US dollar to gold?
> To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913.
The Federal Reserve was limited to how much money it could "print" by the 1920s, which is why the article explicitly used that time period to make its point:
> It's not clear cut when exactly the U.S. was on or off the gold standard. We suspended it in July 1914 when the onset of World War I precipitated a domestic financial crisis. We then re-established the full gold standard in December 1914 after an aggressive policy response stabilized the financial system. This continued until we entered the war, and subsequently partially embargoed gold exports starting in September 1917. The gold standard was still in effect domestically -- meaning people could trade dollars for specie -- but not internationally. These restrictions on gold exports continued until June 1919, at which point we returned to the full gold standard. I have started from this last date, because there is no question that we were operating under the gold standard at this point. For more, read this superb Federal Reserve paper on the history of the gold standard from World War I through the Great Depression.
This limitation was one of the contributing factors of turning a market crash and economic downturn into deflation and the Great Depression. See James and Bernanke (1991):
> However, Temin (1989) argues that, once these destabilizing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the absence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.
The economies of most countries started to recover once they left the gold standard as they could pump money into their systems to generate economic activity.
If there's not enough money in one's economy you can't do business. There are historical periods where economies literally ran out of money:
Note in particular this at the end of the section on fractional reserve money:
> Before leaving the subject of fractional reserve systems, I should mention one particularly bizarre variant -- a
fractional reserve system based on fiat money. I call it bizarre because the essential function of a fractional reserve
system is to reduce the resource cost of producing money, by allowing an ounce of reserves to replace, say, five
ounces of currency. The resource cost of producing fiat money is zero; more precisely, it costs no more to print a five-
dollar bill than a one-dollar bill, so the cost of having a larger number of dollars in circulation is zero. The cost of
having more bills in circulation is not zero but small. A fractional reserve system based on fiat money thus economizes
on the cost of producing something that costs nothing to produce; it adds the disadvantages of a fractional reserve
system to the disadvantages of a fiat system without adding any corresponding advantages. It makes sense only as a
discreet way of transferring some of the income that the government receives from producing money to the banking
system, and is worth mentioning at all only because it is the system presently in use in this country.
(By "this country" he means the US, although the US is not the only country with such a system.)
> Note in particular this at the end of the section on fractional reserve money:
> (By "this country" he means the US, although the US is not the only country with such a system.)
Actually the US is a country without such a system, i.e, the US (and most countries really) are not fractional reserve systems, and have not been in decades. James Tobin called this "The Old View" in 1963:
Fractional reserve banking is a nice 'Econ 101' way of thinking of the monetary system, but in no way does it match reality. It should really be stopped being taught because people hold onto the paradigm and it causes faulty analysis:
By the simple definition of "fractional reserve"--that a financial institution only needs to keep a fraction of its total liabilities as actual currency in its reserve pool, and must convert other assets into currency if withdrawals exceed that reserve amount--it most certainly is. That is how all financial institutions in the US work, just as in other countries.
It would be interesting to see a debate between Friedman and the other economists you reference, who obviously hold very different views. I don't think we're going to resolve any such differences here; I would simply note that there are such differences, and that the views of the economists you mention are not universal, nor are they necessarily correct.
> why was a multi-country agreement needed to change the value of the US dollar to gold?
By that time, as the article you linked to notes, redemption of US dollars to gold at $35 per ounce had already been suspended by Nixon. I was in error before when I said there had not been any such redemption possible since the FDR administration suspended it in 1933; Bretton Woods did re-establish that in 1944 (though IIRC it was at a different conversion rate than before 1933, so it was effectively a devaluation of the dollar).
The Smithsonian Agreement itself was about exchange rates of other currencies relative to the dollar; it was made because those other countries realized that the US had already gone off the gold standard (when Nixon suspended redemption), and they were trying to make the best out of the situation that they could.
> This limitation was one of the contributing factors of turning a market crash and economic downturn into deflation and the Great Depression. See James and Bernanke (1991)
While this might be true given that the Fed had already been given the power to manipulate the money supply, that does not mean it would not have been better still to not manipulate the money supply at all, and for the government to have simply done nothing after the stock market crash of 1929--as it did after market crashes in 1920 and 1987, neither of which led to prolonged recession or depression.
As for the more general point that printing money and "pumping" it into an economy can generate economic activity, that is of course true, but that does not mean doing that is the best way to generate economic activity. Moreover, being forced to do it in response to a crisis that was caused by government interference in the economy to begin with, which has been the case in every instance I'm aware of where fiat money or paper currency was involved, is not a good argument for it being a good idea.
Inflation is money supply relative to the amount of goods and services. E.g. I have 500 cars in the economy and $1000 in circulation. Over time I grow the economy, and now I have 1000 cars, and I still only have $1000 in circulation. In this scenario we'd have deflation. To maintain an equilibrium I'd need to increase the money supply commensurately, to $2000. If I increased supply to $4000 I'd have inflation.
Japan's money supply growth is actually pretty constrained. From 2007 to 2017 it want from 713 trillion to 960 trillion as per the chart you linked. For the USA [1], money supply in circulation went from 7 trillion to 13.3 trillion and inflation is correspondingly higher [2]. Granted, this source doesn't include recent data around the pandemic, so it's of limited use for analysis existing inflation trends.
Japan money supply:
* https://fred.stlouisfed.org/series/MYAGM2JPM189S
Japan inflation:
* https://fred.stlouisfed.org/series/FPCPITOTLZGJPN
Money supply ≠ inflation.
> As we all should know, in the US, on 6/5/1933 FDR took the US off gold-backed currency and started the fiat currency situation we still find ourselves in.
Except for the multiple decades post-WW2 with Bretton Woods.
Further, being on the gold standard didn't seem to help with inflation in the US during the 1920s:
* https://www.theatlantic.com/business/archive/2012/08/why-the...
* https://archive.ph/FWKcL