Understanding Modern Money Theory: Four Decades in Development

This was my response to a book review panel organized by Reynold Nesiba, Professor of Economics at Augustana College, dedicated to my recently published Understanding Modern Money Theory: Money and Credit in Capitalist Economies (Edward Elgar 2025), reflecting the continued influence of MMT scholarship within institutionalist circles.

In 1986, I went to Bologna (on a Fulbright, sponsored by Johns Hopkins University’s School of Advanced Studies) to write my dissertation which was going to put money into a Classical/NeoRicardian framework—with Hyman Minsky as my official advisor but working closely with Jan Kregel who warned me on my arrival that he didn’t do that stuff anymore.

I didn’t let that deter me. Along the way, I was digging deeply into the history and evolution of money. Because I had studied Institutional economics with Marc Tool, and Lewis Henry Morgan with Joe Furey, and J. M. Keynes with John Henry I knew the barter story was wrong. Kregel gave me many histories of banking to read as well as Keynes’s Treatise on Money where I learned about the State theory of money.

I came across Anne Mayhew’s work on economic history and wrote to her for references on the history of money. The surprising thing about historians is their interpretation is inevitably Monetarist and Metalist. So, I took the facts and interpreted them differently.

I finished the draft dissertation and mailed it off to Minsky, who came over to Italy in April and we met up in Sienna. He handed it back to me with red ink on every page. He told me he was too old to fight for it so it would never make it through the department.

However, there was a central core that was the endogenous approach to money—he told me to extend that part. So, I went deeply into credit money and all the new innovations in the 1980s—including securitization, off balance sheet operations, and the rise of nonbank banks—that we now call shadow banking. This was long before most economists had ever heard of such things. Indeed, when I tried to publish a paper on securitization, the journal rejected it because the referee argued that “securitization” is not a word.

Edward Elgar published the dissertation in 1990 as Money and Credit in Capitalist Economies: The Endogenous Money Approach. All the reviews of the book were positive.

For my next project I planned to edit a volume on the origins and history of money and recruited a bunch of contributors, including Mayhew.

At the annual AFIT meetings that year, I gave the presidential address on the origins of money, poking fun at the barter and metalist story of money. I remember Jim Sturgeon coming up afterward and telling me he would never teach that story again.

But the Journal of Economic Issues refused to publish it and I got in a bit of an argument with some of the prospective contributors to my planned volume over what money is—I rejected the view that you can find money in just about every society you look at, and the argument that primitive valuables like cowry shells or huge stone wheels are money. I abandoned the book project.

Meanwhile, this hedge fund guy named Warren Mosler joined the PKT (Post Keynesian Thought) online discussion group with ideas that were very close to those of Keynes’s Treatise, Knapp’s “chartalist tokens,” and the origins of money and endogenous money approach I was trying to sell.

Mosler got me to write my second Elgar book, Understanding Modern Money: The Key to Full Employment and Price Stability—which formulated what became MMT. Unlike the first book, this one received bad reviews and provoked outright anger. Paul Davidson called the job guarantee slavery. Otto Steiger called the state money theory fascism. The Post Keynesians threw us out of their association—that didn’t even exist.

But Modern Money Theory (MMT) was born, mostly in the blogosphere, and it got the attention of the media and politicians—while much of that was negative, at least it was recognized. As Geoff Hodgson later wrote, MMT is the only heterodox approach that influences recent policy discussions—forcing a mainstream response.

However, in retrospect, I think some of the criticism was valid. To sell MMT, we relied excessively on simplistic heuristics—taxes drive money, bond sales are just a reserve drain, as supplier of the currency government can set the price level.

In the real world, it is far more complicated than that. So, when Elgar approached me a couple of years ago to write an updated edition of Understanding Modern Money, I told them I wanted instead to synthesize the two books—both credit and state money and to dive deeply into the real-world history of the making of the modern money system. That’s what this book does.

And as it turns out, it is complicated—it took Britain 400 years to create modern money. Driving money using taxes was difficult—taxes are hard to impose and harder to collect. Kings that issued the currency would either cry down its value or refuse to accept it. They defaulted on debt and put creditors in dungeons.

Sovereign finance was messy. People trusted private banks more than the king or queen. The UK Parliament had to take the power of the purse away from the crown and then charter a private bank—the Bank of England—to issue the currency. And for four centuries it had to tie the value of the currency to metal to build trust in the pound.

That finally connected the private and government payment systems and ultimately led to the integrated, pyramidal system we have today—with the central bank on the top and private banks issuing most of the money we use. That’s the key contribution I was trying to make in this book—integrating the state’s money system with the private credit system, unified under the national money of account.

All of MMT’s main conclusions follow: the sovereign cannot run out of its own currency; logically, the sovereign spends first, then collects taxes; with the central bank at the top of the pyramid, it sets the base interest rate; and policy should pursue functional finance rather than sound finance, acting as both the lender and the employer of last resort.

But getting from there to here was a long journey.