Free Banking vs. Free Money

You know you’re in trouble when your economic theories are so far to the left that Paul Krugman calls you out for neglecting the dangers of too much government spending.

Such is the dilemma of the Modern Monetary Theorists — best known for providing Bernie Sanders with the intellectual ammo for his big-spending agenda.

Modern Monetary Theory holds that we don’t need to worry about deficits, since government can always pay for its programs by making more money. When asked about the nightmares of Zimbabwe, the Weimar Republic and former Yugoslavia, the MMTers must admit that we need taxes to drain currency from the economy just before hyperinflation kicks in.

George Selgin on Free Banking vs. Free Money


Trusting Congress to raise taxes at some future date in advance of a sudden and unpredictable bout of inflation is wishful thinking, and this is just one way MMTers use hand-waving to disguise a brute fact: to spend is to tax.

The basic ideas behind MMT are very old and are no longer taken seriously by most economists, but MMT theorists like Stephanie Kelton are still getting credit for the novelty of their ideas from places like NPR’s Planet Money.

Planet Money hosts Alex Goldmark and Sally Helm take a question from a 13-year-old listener in Bristol, England, as the starting point for their exploration of “free money.” The girl wonders, endearingly, if government could simply spend newly-created money on underfunded schools and hospitals, rather than creating money through the banking system (as the Fed currently does).

Helm and Goldmark use the segment to celebrate MMT’s moment in the spotlight—which includes Kelton’s warm reception by the House of Lords and her advisory role for Bernie “Remember Castro’s Good Side” Sanders. They give her a platform to do much of the usual hand-waving one finds deeper in the MMT blogosphere. Of course there is a natural synergy between politicians who always wish to spend without consequences, and an economic theory that allows them to do so guilt-free.

Against these Jedi mind tricks claiming a source of free money comes George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute, to explain why free money is too good to be true.

Selgin joins the show this Sunday to look more closely at the MMT perpetual motion machine and reveal the sleight of hand employed by its adherents, who always seem to retreat into obscure jargon when pressed beyond accounting identities. He boiled down a Huffington Post op-ed by Stephanie Kelton to a sort of naïve Keynesianism, where the usual assumption is that government can boost “aggregate demand” when there are idle resources—as there were during the Great Depression, when 20% of the workforce suddenly lost their jobs.

We are now living in very different times, and the idea of limitless spending is dangerous if it catches on with the broader public. All thinking people must understand at least the contours of this debate. Charlie Deist, producer of the show and editor of a short primer on macroeconomics and monetary policy, will ask George to cut through the mind-bending tactics of the Modern Monetary Theorists.

You can follow George’s writings at, or on Twitter. For a deeper understanding of central banking monetary policy, you can read his latest book, Floored! How a Misguided Fed Experiment Deepend and Prolonged the Great Recession.

Don’t miss the show of ideas, not attitude, for a plain-language primer on MMT, along with an overview of the principles behind free banking, and market-based alternatives to the free money mindset.