MMT 06 Money

Chapter 6: Intro to Sovereign Currency

Shortlink: bit.do/az4money - MEANT to be CENTRAL PAGE for MONEY

THe in-class video lecture is MAC18 MMT06 on Sovereign Money. Prior to the system of fiat currencies currently in existence, there was the gold standard. These two systems are dramatically different. Two lectures on International Financial Architecture explain the rise and fall of the Gold Standard. The concept of sovereign money is at the heart of MMT. A few simple articles on this are also linked below

Final Exam Questions:

1. Explain the tension between needs of domestic monetary policy versus the needs of stable exchange rates for foreign trade, especially on the gold standard. Explain how this tension led to the collapse of the gold standard.

2. Explain how a Sovereign Currency, or a fiat currency, has value when there is nothing behind it -- it is completely valueless as a commodity. Explain the MMT point of view and provide some arguments in favor and also against the MMT explanation for why money has value.

3. Explain how floating exchange rates with fiat currency solve the problem of money supply needed by domestic economy and monetary policy needed for foreign trade.

Student Answers:

A1. It is now easy to understand that use of gold as money cannot be a good idea. This is because gold supplies increases due to discoveries and mining of gold, at a rate which has no match to the needs of the economy. The economy will perpetually be in recession when gold stock is too low and inflation when gold stock is too high. However in WW1 massive war expenses depleted gold reserves and led to a breakdown of the gold standard. After that there was effort to recreate gold standard but there was need to rebuild the domestic economies destroyed by war. However expansion in Fiat money was not compatible with maintaining a stable exchange rate in the international market, leading to failure in the attempts to stabilize currencies against gold This answer is CUT-AND-PASTE with no understanding. Would get ZERO even though it covers some aspects of the answer.

ANSWER2: It is not necessary to back the currency with precious metal, nor it is necessary to enforce legal tender laws that require acceptance of national currency. The main reason behind that is because government's currency is accepted by government in payment of taxes. Taxes derive the demand for sovereign currency. It is true that the government currency can be used for other purposes as well but these other uses of currency are subsidiary , government can't enforce others to use its currency in private payments but can force use of currency to meet tax obligations that it imposes. This answer is CUT-AND-PASTE with no understanding. Would get ZERO even though it covers some aspects of the answer.

ANSWER 3: In a floating exchange rate all of the imbalances in the foreign exchange market are resolved by the price of the currency fluctuating. What that means is that domestic policy instruments- the central bank and the fiscal policy- are free to target domestic policy goals knowing that exchange rate will resolve the currency imbalances arising from trade deficits , trade surpluses etc

With a floating exchange rate a government doesn't need to fear that it will run out of foreign currency reserves or gold standards. So government has greater freedom to pursue other policy goals such as maintenance of full employment, price stability and economic growth.This answer is CUT-AND-PASTE with no understanding. Would get ZERO even though it covers some aspects of the answer.