THERE'S NOTHING MODERN ABOUT MMT.

• Author: Salter, Alexander William
• Position: HISTORY - Modern monetary theory

MODERN MONETARY THEORY (MMT) tells us that governments should finance public spending by creating money. To prevent inflation, MMT advocates say, the government should use taxes to siphon off excess purchasing power, which supposedly would enable the public sector to greatly expand its activities, eliminating the scourge of underemployment.

At a time of skyrocketing national debt and mild inflation, what was once a fringe school of thought with few adherents has captured the public imagination. Rebutting MMT's claims requires a little history, which shows there is nothing "modern" about its prescriptions.

MMT promoters, who are mostly journalists and public intellectuals rather than professional economists, start with a couple of obvious truths: Governments can't default if their debts are denominated in their own currency, and they can create a demand for their currency by imposing tax obligations. From those premises, the theory's supporters leap to some extraordinary conclusions: They argue that there are too many idle resources even in healthy economies and that fiat-money finance is the key to mobilizing those resources. It sounds like clickbait: "Learn this one weird trick to jumpstart the economy!"

Similar measures have been tried before, right here in America, and they have worked. But that isn't good news for MMT fans, because understanding why currency finance worked then means seeing why it won't work now.

A popular myth about early American fiat money claims that various colonial and state governments created hyper-inflationary disasters after they experimented with currency finance. But while New England and the Carolinas occasionally made a mess of things before the Revolutionary War, most colonies had a lot of success in issuing their own currency.

E. James Ferguson, a historian of American public finance, explains how it worked: "Governments met expenses by issuing a paper medium....They redeemed this paper, not by giving specie [i.e., hard money, such as gold and silver coins] to those who held it, but by accepting it for taxes or other payments."

This system had two great benefits. First, because hard money was scarce in the colonies, fiat money provided Americans with a much-needed medium of exchange. Second, controlled depreciation--a gradual fall in money's purchasing power, which redistributed wealth from the users of paper money to the issuers--functioned as a uniform and relatively unburdensome form of indirect...