Modern Money Theory claims to be the first empirically supported account of how the modern “fiat” money system works. According to MMT, non-cash commercial bank loans are promises to pay which, by their very nature, are not subject to money supply constraints.

MMT’s view of how the credit mechanism works has since been confirmed by publications of the Bank of England and the Deutsche Bundesbank. This proves the conventional money supply theory to be scientifically outdated, because it claims that commercial banks are dependent on savings or central bank balances for lending, i.e. they “lend” savings or central bank deposits when they extend credit.

Commercial banks have to achieve a profit in order to fulfill their liabilities and promises to pay (insolvency risk) on the one hand, and to keep the privilege to obtain the central bank money (on account or cash. In contrast, a central bank is in principle always in a position to fulfill its payment promises, because it can compensate for any losses accrued from it business activities by acting as the monopolist of formal money creation and create its own funds or cash on demand (no insolvency risk). A central bank’s deposits – also called reserves or settlement balances – are therefore practically identical with cash except for access to it being limited to banks alone.

As the owner of the central bank, the state is to ensure, through its spending, a constant supply of aggregate income compatible with full employment and the permanency of its purchasing power in terms of consumer goods (price stability). Government spending is executed by the central bank only, which marks up the account of the receiving bank. The bank then marks up the account of the recipient of the government’s spending. According to MMT, tax payments are therefore logically nothing other than the recovery of the state’s own money from the private sector. Therefore, money is nothing but a tax credit. Other functions of money follow from this.

Since, contrary to prevailing economic theory, the use of money is the central feature of modern economic systems, government deficits are indispensable for successful economic development. Without them, all money would eventually flow back to the state through tax payments. Thus, if foreign trade is balanced and no new debt in the private sector was incurred, a constant government surplus would inevitably lead to stagnation/recession of the national economy.

In addition to taxes, the issuance of government bonds to the private sector is another way of organising a return flow of government expenditure from the private sector (in this case temporarily). Bonds are issued to stabilize the interest rate in the banking system, not to finance the government. Money that flows back to the government is void, since a tax credit in the hands of the government is worthless – it does not make (tax) payments to itself.

While maintaining a close relationship between the state and its central bank, government bonds issued in domestic currency are usually risk-free.

The “MMT axiom” is therefore: A state cannot run out of its own currency.

A good introduction to MMT in English is provided by Prof. Stefanie Kelton’s lecture “The Public Purse – A Government Budget is not a Family Budget”, (a video of) which can be found on the website of the British Library. There are many books and dozens of academic articles by authors such as Warren Mosler, Randall Wray, Stephanie Kelton, Pavlina Tcherneva, Bill Mitchell, Eric Tymoigne, Fadhel Kaboub, Yeva Nersisyan, Sam Levey, Steven Hail, Rohan Grey, Martin Watts, Mathew Forstater and Dirk Ehnts, many of which are available through the (German) website of the Samuel-Pufendorf-Society.