Pavlina Tcherneva (1996)

A Critical Review of SOFT CURRENCY ECONOMICS

(http://moslereconomics.com/wp-content/uploads/2019/02/35433741-Critical-Review-of-Soft-Currency-Economics.pdf)

Pavlina R. Tcherneva

INTRODUCTION

Warren Mosler has worked as a fixed income trader for over twenty years and is the cofounder of III Finance, an international investment company that specializes in local currency sovereign debt. In his essay Soft Currency Economics, he draws from his experience as a practitioner in financial markets in analyzing the underlying forces at work in a modern monetary system. Interestingly, this analysis incorporates several postulates that can be considered logical extensions of Post Keynesian monetary thought. Considering the fact that he had no exposure to the Post Keynesian school of thought before writing his paper, it is fascinating to see the striking similarities between important aspects of his analysis and Post Keynesian monetary theory. Furthermore, Mosler’s work deserves serious consideration for the valuable insights into the monetary system that are not currently focused on by the academic world, policymakers, or the general public.

The remainder of this paper will be organized as follows: The first section will review the points of contact between Mosler’s Soft Currency Economics and Post Keynesian monetary theory. The next section will focus on those aspects of Mosler’s analysis that may be considered as possible extensions of Post Keynesian monetary thought.

MOSLER AND THE POST KEYNESIANS

The purpose of this section is to demonstrate parallels between Mosler’s analysis and Post Keynesian monetary thought. It will examine overlaps in the discussion of monetary theory as well as the common conclusions that have been derived.

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Conclusion

The outlined similarities between Mosler’s analysis and Post Keynesianism establish a common logical foundation that lead to Mosler’s extended analysis.

His position can be summarized as follows: The monetary system is a creation of the government with three exogenous variables:

1. Taxes
2. Prices
3. Interest rates

Furthermore, in no case is the government funding itself. It has no imperative to obtain its own currency per se through taxation or borrowing. Taxes function to create sellers of real goods and services and borrowing functions to pay interest on excess reserves. This entire perspective can be viewed as a logical extension and contribution to Post Keynesian monetary thought

Gehigarria:

Monopoly Money: The State as a Price Setter

(https://modernmoneynetwork.org/sites/default/files/biblio/Pavlina_2007.pdf)

Pavlina R. Tcherneva

CONTENTS

1. Introduction
2. Colonial Africa: An Introductory Model of a Tax Driven Currency
3. Further Historical Examination of State Currency
4. Present-Day System: The Integration of the Banking System and the State
5. Mathematical Model: Analyzing the Implications of the State as a Single Supplier of that Which it Demands for Payment of Taxes
6. Conclusion: The Employer of Last Resort Option

Today’s currencies exist within the context of State powers. These powers endow the State with the ability to move desired resources from the private to public sector using economic policies targeting full employment and price stability. This paper explores the basis for understanding modern monetary systems as rooted in the monopoly powers of the State. In the first section, the case of colonial Africa will be used to demonstrate how State powers are used to give value to the currency. The second section further explores historical issues in the development of these powers and their institutional basis. The present-day monetary system and the role played by the government are then examined. In particular, the way in which certain powers of the State turn bank money into State money is explored in this section. This third part is intended to alleviate any doubts with regard to the government’s monopoly powers in the presence of bank credit creation. In the fourth part, a mathematical framework is employed to demonstrate the exogenous pricing power of the State. Finally, a conclusion is offered in which the employer of last resort approach is identified as an appropriate policy framework for full employment and price stability.

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Conclusion:

The Employer of Last Resort Option In sum, price is an exogenous function in the case of a single supplier monopolist. The State has several available options when choosing a method of price determination. The current method of paying market prices for all purchases has been shown to have exactly the outcomes observed in the world today. Likewise, historical examples of other options are also consistent with this model. The case for employer of last resort (ELR) made by Wray [1998], Mitchell [1998], and Mosler [1995] uses the option outlined in Case 3a above. The currency is set exogenously for one purchase, ELR labor, and other prices are allowed to be determined by existing market conditions.

We have considered the driving force behind currency as well as the role of the government as a single supplier of currency both in the past and in the present. Finally, the mathematical framework presented in this paper outlines the inverse relationship between the price the government pays for goods and services and the minimum quantity of real goods and services it receives for a given level of taxation, considering that:

1. The government is the monopoly supplier of its fiat currency.
2. The government exogenously sets taxes and creates sellers of real goods and services.
3. The government has the ultimate power to exogenously set the prices it pays for real goods and services.

The inverse relationship is maintained regardless of the fact that the private sector may or may not have a desire to net save. Net saving equals the government deficit by definition, which can be incorporated into a fiscal policy that lets market conditions cause the deficit to float with the net desire of the private sector to save the currency, as outlined by Wray, Mitchell, and Case 3a in this paper.

To recapitulate, this mathematical framework outlines some basic relationships that can be considered in the selection of fiscal policy options. Taxation is the driving force behind the currency, the government is the single monopoly supplier of currency, and as such it has the power to set taxes and prices exogenously. Furthermore, there is an option open to the State that can eliminate the problems of unemployment and provide meaningful price stability as well.