MODERN MONETARY THEORY UNIT I: MONEY AND PHYSICAL RESOURCES

Let us take a moment to look at what was actually said in this 2005 discussion between Chairman of the US Federal Reserve Bank, Allen Greenspan, and Congressman Paul Ryan. The subject, of course, is Social Security:

Congressman Ryan: “Do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?”

Chairman Greenspan: “I wouldn’t say the pay-as-you-go benefits are insecure in the sense that there is nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody. The question is. . . How do you set up a system which assures that the real assets are created which those benefits are employed to purchase? So – it is not a question of security – it is a question of the structure of a financial system which assures that the real resources are created for retirement as distinct from the cash. The cash itself is nice to have – but it has got to be in the context of the real resources being created at the time those benefits are paid and so that you can purchase real resources with the benefits, which of course are cash.”

The seemingly simple question asked by Congressman Ryan was loaded. It was an attempt to lure Chairman Greenspan into agreeing that the publicly operated Social Security System, providing retirement income for millions of elderly or disabled Americans, was becoming insolvent and that the way to save the system was to begin privatizing it through “personal retirement accounts” (i.e. turning the money over to Wall Street). In asking this question Congressman Ryan was trying to manipulate, but in doing so he unwittingly displayed two things. . . his ideologically driven belief that all things public are bad, and his complete ignorance of how the US monetary system actually works. The fact that when Ryan retired from congress a decade later in 2016, he was still attempting to privatize social security, is indicative of how intellectually, psychologically and emotionally incapable he was of learning what Chairman Greenspan was trying to teach him.

Now, turning to Chairman Greenspan’s reply, it would be hard to overstate the importance of what he was saying. “I wouldn’t say the pay-as-you-go benefits [social security] are insecure in the sense that there is nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody.” Translated – – – Social Security is in no danger of becoming insolvent because the US Treasury and the Federal Reserve Bank are the creator of the nation’s money and they can always create whatever money is needed to pay social security benefits. The system cannot become insolvent.

But the second part of Greenspan’s reply is equally important. “The question is. . . How do you set up a system which assures that the real assets are created which those benefits are employed to purchase? So – it is not a question of security [insolvency] – it is a question of the structure of a financial system which assures that the real resources are created for retirement as distinct from the cash. In other words – – – the US Treasury can always pay social security benefits. There is never a risk of insolvency. The real concern is whether or not we will be able to provide the goods and services social security beneficiaries will need to buy. Greenspan was making the critical link between real physical resources and money. In effect Greenspan was saying we must structure the society so it produces what is needed or money loses its value and there is a risk of inflation.

We as citizens need to clearly understand what Greenspan was saying. We need to internalize it. Because it raises major questions about our economic “system” and our personal and collective economic wellbeing. We need to understand “money.” Here is an extraordinary conversation which took place in 1941 between Franklin Delano Roosevelt (FDR) and Luther Gulick (one of FDR’s advisors) concerning the creation of the payroll tax to “pay” for the recently instituted social security program. It comes directly from the historical archives of the Social Security Administration:

MEMORANDUM ON CONFERNCE WITH FDR CONCERNING
SOCIAL SECURITY TAXATION, SUMMER, 1941

“Beginning in June, 1941, I [Gulick] was working in the Treasury organizing the study of federal, state, and local government fiscal relations. My colleagues for this project were Harold Groves of Wisconsin, Mabel Newcomer of Vasser, and Clarence Heer of North Carolina—though Heer later withdrew from the staff and served only as a special advisor. The result of our work was published under the title, “Federal, State and Local Government Fiscal Relations,” as Senate Document 69 of the 78th Congress, First Session.

As part of the study, Harold Groves and I came to the conclusion that federal enactment of a retail sales tax might prove to be a highly useful revenue producer, and at the same time something of a brake on the then mounting inflation. We also thought that a federal enactment would prevent the further spread of state legislation and that this would mean the possibility of repealing the retail sales tax at a later point in the economic cycle when counter deflationary measures might be required. Henry Morganthau showed no interest in the proposals and repeated all of the regular arguments on the sales tax ignoring the fiscal policy considerations arising at a time of high incomes and commodity shortage. I, therefore, discussed the problem with FDR when he asked me how I was coming with the Treasury study. He said to go ahead and explore the idea with Harold Smith, Marriner Eccles [Chairman of the Federal Reserve], and others.

In the course of this discussion I raised the question of the ultimate abandonment of the pay roll taxes in connection with old age security and unemployment relief in the event of another period of depression. I suggested that it had been a mistake to levy these taxes in the 1930’s when the social security program was originally adopted. FDR said, “I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”

FDR also mentioned the psychological effect of contributions in destroying the “relief attitude.” (bold added)

We need to think about this conversation between Gulick and FDR. We need to think about it hard. Because it brings into question everything we were ever taught to believe about how our “economic” and “monetary” systems actually work. FDR knew full well that no payroll taxes were needed to “pay” for social security just as Alan Greenspan knew it. Those regressive taxes were instituted strictly for political and psychological reasons. They had nothing to do with sound economics.

This article, Unit I, uses social security to begin a description of the concept of money and real physical resources and how they relate to one another. But it isn’t really about social security per se. It is about understanding how a sovereign fiat monetary system actually works. It is about the economic discipline of Modern Monetary Theory, which isn’t “theory” at all. It is simply an accurate description of the monetary system that has already been operating in the United States and other sovereign nations with sovereign fiat currencies for decades.