Money

My main motivation for inventing Minsky was to enable proper modelling of money. Since then, Modern Monetary Theory ( MMT ) has risen to prominence, and Minsky is ideally suited to analyzing the claims and counter-claims made about MMT . The core claim is that government spending precedes taxation: that rather than having to tax to be able to spend, governments create money first by spending, and tax it back later.[51]

One of the best ways to illustrate this is to take a situation where there was no monetary system, and have money introduced. As Graeber (Graeber 2011) emphasized, this was not what normally happened in history—the assumption first enunciated by Smith that barter was the rule before money was introduced is a myth. But there are instances where one political system has collapsed, and the monetary system with it, followed later by the development of a new monetary system in the context of forging a new political system. The legal scholar Christine Desan identified instances of this in England after the collapse of the Roman Empire:

The new narrative explains how each of the capacities associated with money— its function as a unit of account, mode of payment, and medium of exchange—is, at base, a mode of governing. The unit of account, first, arises when a stakeholder takes something that is not fungible—the in-kind service owed by individuals or families—and marks it with a token. Accounts that rely on the “convergence story” of money’s creation often simply assume the existence of a unit of account because it is so difficult to understand how people who are engaged only in bipolar exchanges can create a term for value that is shared among them all. But establishing a unit of account is a critical accomplishment that demands an explanation. The capacity of an object to furnish homogeneous comparative terms—a unit of account—to evaluate other objects supplies the terms for “counting” value, i.e., price. That unit is used both as the basis of accounting systems and as the metric into which circulating coin or currency can be converted. Once we admit the agency of a stakeholder common to those engaged in bipolar exchanges, the accomplishment becomes intelligible.

In early medieval England, rulers chose to make the basic unit of account—the penny—out of silver. That choice gave silver a price. For example, a weighed pound of silver of specified fineness might be exchanged for 230 pennies at the mint—the “mint price” received when an individual took that amount of bullion in to be coined. The mint made perhaps 242 pennies out of the bullion, kept 12 for the moneyer and the king, and returned the remainder. The “price” of silver was tied, by definition, to the value of the tribute or tax obligation: pennies made by the mint were the tokens used by the king to pay for resources advanced to him. At the time the tax was due, each penny carried value towards extinguishing the tax obligation.

Note that without violence to that reality, observers could assume that coin expressed the value of the silver it contained: at tax time, the arrangement itself identified the value that a penny held for extinguishing the fiscal obligation with the value of silver. In fact, we might say that the silver coin had become a material proxy for the tax obligation. (Money therefore also furnished a “store of value,” another function often attributed to money.) It was not, however, the content of coin that gave it a priced value, but the system that made coin into money. (Desan 2015, p. 58)

Desan singled out the example of the 8th century King of Mercia, Offa, whose coinage was particularly well designed—see Figure 146.

Figure 149: A silver penny from Offa's reign

The main aspect to the design wasn’t the art on the coin itself, but the role of the coin in defining the Kingdom itself: what once were payments-in-kind to the King became payments in coin, while the coin came to be used in person-to-person trade in the Kingdom as well:

in-kind payment of rents began to be converted in part into cash payments during the 8th century, a trend that would continue in later centuries, and the late 8th century Mercian king Offa extended tribute obligations to virtually “everyone” in his territory… tokens clearly acted as a “mode of payment” to the government when they were returned in lieu of tribute or other obligation. As we saw above, the tokens invited use as a mode of payment in private deals as well. (Desan 2015, pp. 57-59)

The first fully-fledged Minsky model in Manifesto simulates this “ab initio” creation of a monetary system.

• 8.1 Modelling the Origins of Fiat Money in Minsky : pp. 33-39 of Manifesto

File: _http://www.profstevekeen.com/wp- - _content/uploads/2021/05/Figure03DesanOffaCoins 1.mky

To create a monetary system based on coins, firstly you have to create the coins. Assuming that the King starts with enough silver to make the initial coins, the most sensible entity to start with is the authority he directs to make the coins, The Mint.[52]

The steps in this process are:

• The Mint creates the coins;
• The Mint gives the coins to the Treasury;
• The Treasury spends the coins to procure goods from lords and peasants, where the purchase replaced the pre-monetary practice of compulsory acquisition at the point of a sword (the in-kind payment of rents noted by Desan above);
• The coins are then used by lords to pay peasants to produce output, which is sold to both lords and peasants, and the government (this is a bit of a fiction: back in the 700s, peasants were indentured to their feudal lords, but it’s for the purposes of illustration); and
• Finally, coins are taxed from the lords and peasants by the Treasury.

Figure 147 shows these steps in The Mint’s Godley Table.

Figure 150: The Mint’s view of King Offa's establishment of a monetary economy

As I note in Manifesto , Godley Tables don’t show actual coins, but are an accountant’s record of where the coins are at some point in time (the stocks called CoinsMint, CoinsTreasury, etc. in Figure 147), and the rate at which they’re moving from one account to another per year (the flows called MintCoins, SpendPeasants, etc., in Figure 147):

Think of the entries as records in a spreadsheet file, rather than the things themselves, whether these be grams of gold in a vault, penny coins in your pocket, or electronic dollars stored in a bank database. (Keen 2021, p. 27)

This “spreadsheet” shows the distribution of coins from the Mint’s point of view. Once you have defined it, it also tells you how many more tables you need to complete the model: three, one each for the Liabilities of the Mint. Figure 148 shows the model after those three tables have been created, but before they are populated with stocks and flows by using the tool in each table to identify Liabilities that haven’t yet been defined as Assets.

Figure 151: Introducing Godley Tables for the other 3 entities in the model

The Treasury has both the Asset of CoinsTreasury, and the Liability of CoinsMint (the Mint’s Asset has to be a Liability for another entity in the model). If you open the Treasury Godley Table, and use the

tool on both the Asset and Liability side of its ledger, you will generate the table you see in Figure 149:

Figure 152: The Treasury's Godley Table after allocating the Mint's assets and liabilities

The next step is matching the flows with changes to the Equity of the Treasury—which I define as TreasuryE—see Figure 150

Figure 153: Treasury Godley Table finalised. Peasants and Lords to go

All that is left to complete the structure of coin accounts in this model is to repeat this process for the Peasants and Lords—see Figure 151.

Figure 154: The complete set of Godley Tables for the King Offa model

I find this structure alone, in any model, to be very informative. We’ll see a better example with the next model, of modern-day fiat money. But for now, it is obvious that act of minting the coins sends the Treasury into negative equity, while the issuance of those coins to it by the Mint puts it back into zero equity—if the coins just remained in the Treasury. But of course, the Mint and the Treasury are two wings of the government, so the sum of their two operations is zero. In effect, the fact that the government can do this—create liabilities and assets within itself, and then have those liabilities accepted by other entities in the society (“Would you prefer a coin in your hand, or a sword at your throat, in exchange for those chickens?”)—is the essence of what gives the government’s balance sheet a unique status in a monetary economy.

To complete the model, we need to define the flows, and the initial flow here is the minting of coins. I’m using 1000 coins to match Milton Friedman’s mythical “Optimum Quantity of Money” model, in which

(12) All money consists of strict fiat money, i.e., pieces of paper, each labelled "This is one dollar." (Friedman 1969, p. 3)

The first stage of modelling the flows is to take the stocks and flows from the Godley Tables themselves and place them on the canvas. This is done using the right-mouse menu—see Figure 152.

Figure 155: Copy stock and flow variables from Godley Tables to the canvas

In Figure 153, I’ve copied the stocks and flows from the Mint’s Godley Table, placed them on the canvas, put the Mint’s table back in icon rather than Edit view, and turned off display of variables on each Godley Table to save space. This is feasible now that Minsky has a “Godleys” tab that lets you see all the Godley Tables at once. The stocks and flows overlap onscreen somewhat because when I resized the Mint’s icon, it rescaled the layout of the variables as well. This is technically a bug—it would be better if the symbols didn’t overlap. But it’s not fatal, so we’ll leave this bug in place until we’re rolling in development funding.

Figure 156: Stocks and flows extracted from the Mint's Godley Table

The first activity to define is the minting of coins, and here I use a simple but very useful feature of Minsky, the switch. This takes a logical operator in at the top, and has two options on the left hand side: what happens if the logical operator is false, and what happens if it is true.[53] The operation shown in Figure 154 compares the system simulation time to 1, and so long as , it outputs 1000 per year . Once then the output drops to zero. Therefore, over the first year of the A A< 1 simulation, 1000 coins are created. You could add a time lag between minting and issuing if you A≥1 wish, but for simplicity I’ve simply linked minting to issuing.

Figure 157: Using the switch to produce 1000 coins while t< 1 year

So long as the coins remain in the hands of the government, nothing of interest happens: the Equity of the Treasury, Mint and the government as a whole remain at zero: the minting of coins (which increases the Mint’s equity and reduces the Treasury’s) is offset by the issuing of those coins to Treasury (which increases the Treasury’s equity and reduces the Mint’s)—see Figure 155.

Figure 158

The action commences—as MMT argues—when the Treasury spends its newly created currency into circulation. As Desan emphasises, this practice replaced forced appropriation in these post-Roman and pre-Norman Kingdoms. In this simple model, I assume that the rate of spending is a function of how many coins are in the Treasury, using a time lag. One by-product of the spending is that the Treasury’s equity turns negative: it still “owes” the Mint 1000 coins, but it has spent them all into the economy, where they are now in the hands of the Lords and Peasants—see Figure 156.

Figure 159: Treasury spends coins into circulation

For the Treasury, this means that it goes into negative equity: it “owes” 1000 coins to the Mint, but it has spent them into the economy, so that, with no subsequent usage of the coins, and no taxation, it has no coins to meet its “debt” to the Mint, and no coins to continue purchasing goods from the Lords and Peasants—see Figure 157.

Figure 160

To continue purchasing goods from the private sector, it either has to produce more coins (which would undermine the value of those in existence), or tax back some of those in circulation. The latter makes far more sense, and also sets up the antagonistic relationship between the private sector, where everyone wants to hang on to the tokens they already have, given their value in exchange, and the state, which wants the tokens back, not because it needs them—it could, after all, just print more—but because taxation maintains the value of those in circulation.

As Desan emphasises, the most important impact of going from paying taxes in kind, to paying in coin, was that the first way of levying taxes simply takes resources out of the “private sector”, leaving nothing behind. Paying in coin achieves the same physical outcome—resources produced in the private sector are transferred to the public—but leaves the private sector with an exchangeable token, the coins. This enables trade to expand in the private sector, if these coins are made valuable by being a means to pay taxes in future. Therefore, the expansion in trade that Neoclassicals attribute to using a “money commodity” in place of barter, actually occurred when an otherwise valueless token—King Offa’s coin—was made valuable as a way to pay taxes in future. Taxes, which mainstream and Austrian economists rail against, are essential to maintaining the value of that commerce-enabling fiat currency.

This creates a symbiotic relationship between the public sector and the private sector, rather than the parasitic one emphasised by Austrian economists.[54] Yes, the government is taking resources from the private sector; but its manner of doing it by coins rather than payment in kind creates a token which can be—and was, as Desan explains—used to dramatically expand private sector trade.

These aspects are introduced by the flows shown in Figure 158—which does a bit of historical violence by imagining that peasants are paid a wage rather than being indentured:

Figure 161: Coins are now used for private sector commerce

Finally, taxation is imposed to both get the coins back to the Treasury to finance future spending, and to give the coins a value to the public: it’s worth collecting them in the course of business to be able to pay taxes when they are levied. For reasons of historical accuracy, I show the Peasants paying a higher rate of tax than the Lords. That taxation revenue, when subtracted from government spending, determines the deficit—see Figure 159.

Figure 162: Taxation and the deficit

Finally, we have the full model shown in Manifesto—see Figure 160.

Figure 163: The model that produced Figures 2-3 and 2-4 in Manifesto

The Godleys Tab, with display of values turned on via the Options/Preferences menu, provides a nice overview of the flows in the model—see Figure 161. Notice that the Mint has zero equity, while the Treasury has negative equity of 952 coins—and this is precisely equal to the positive equity of the private sector, which is 11 for the Peasants and 941 for the Lords.

Figure 164: The Godley Tables in the Offa example, with display of values turned on

8.1.1 Check the equations

One thing Minsky does which is almost unique in the system dynamics space is generate the equations of the model in mathematical format—I’m pretty certain Mathematica’s System Modeler does the same, but Vensim, Stella, etc., do not. It’s an option under “Export Canvas”—see Figure 162, where LaTeX is the relevant option).

Figure 165: The options under "Export Canvas")

One of the advantages of this capacity is that things you might have missed in the flowchart model can be more obvious in the equations (if reading equations is “your thing”, as it is mine). The clear flaw, in stock-flow consistency terms, in this model is that I have the Lords consuming their “Profits”, but also paying taxes on their profits. I missed that in laying out the flowchart, but it was obvious when I checked the equations—see Equation (53), where I’ve highlighted the inconsistent equations in red.

Differential Equations

d Coins dt MInt  MintCoins d CoinsTreasury  IssueCoins  TaxPeasants  TaxLords SpendPeasants  SpendLords  dt d CoinsLords  ConsumePeasants  SpendLords Wages  TaxLords  dt d CoinsPeasants  Wages  SpendPeasants ConsumePeasants  TaxPeasants  dt d LordsEquity  ConsumePeasants  SpendLords Wages  TaxLords  dt d PeasantsEquity  Wages  SpendPeasants ConsumePeasants  TaxPeasants  dt d Mint dt Equity  MintCoins IssueCoins d TreasuryEquity  IssueCoins  TaxLords  TaxPeasants MintCoins  SpendLords  SpendPeasants  dt Equations MintCoins   1  1 t 0 1  1  1 t 1000 IssueCoins  MintCoins Spend  Coins  SpendTreasury ;SpendLords  Spend LP Ratio ;SpendPeasants  SpendSpendLords GDP  CoinsLords ;Wages  GDPWageShare;Profits  GDPWages (53)  GDP ConsumePeasants  CoinsPeasants ;ConsumeLords  Profits;Consumption  ConsumePeasants  ConsumeLords  Consume TaxLords  ProfitsTaxrateLords ;TaxPeasants  WagesTaxratePeasants ;Tax  TaxPeasants  TaxLords Deficit  Spend Tax PublicEquity  MintEquity  TreasuryEquity PrivateEquity  LordsEquity PeasantsEquity Parameters  Spend  0.1;  GDP  0.5;  Consume  0.01;WageShare  0.7;TaxratePeasants  0.3;TaxrateLords  0.25;L P Ratio  0.65

This error was easily edited—see Figure 163—and it didn’t have any impact on the model anyway, but it shows what can go wrong when you use the flowchart logic for monetary flows rather than the Godley Tables, since the flowchart paradigm doesn’t automatically enforce stock-flow consistency, whereas the Godley Tables do.

Figure 166: Lords consumption now shown net of taxes

A Godley Table would have captured this error, but since I was assuming that, to consume, the Lords were buying from other Lords (there was plenty of inter-estate trade in the feudal epoch: some fiefs were almost entirely devoted to one industry, such as ship-making), this intra-class trade couldn’t be entered into a Godley Table (yet).[55] One critical insight into the role of government spending in any economy—or rather, any economy where the government issues its own currency—can be garnered by adding together the equity of the Mint and the Treasury to define the equity of the government sector in this model, and the equity of the Lords and Peasants to define the change in equity of the private sector. The insight, as shown in Equation (54), is that an increase in equity for one sector is necessarily a decrease in equity of the other .[56] I’ve colour-coded transactions that net out within different sectors: minting of coins increases the Mint’s equity and reduces the Treasury’s; issuing of coins does the opposite, leaving taxation and spending the only actions that alter aggregate government equity. Conversely, Wages and consumption by peasants net out in the private sector, leaving taxation and spending the only actions that alter aggregate private equity. A deficit for the government sector (spending exceeding taxation) causes a surplus for the private sector:

This is the basic insight of MMT: the government deficit is the private sector surplus.

We can also integrate these rates of change to derive the result that the equity of one sector is the negative of the equity of the other:

There’s no debt of any sort in this model, so I can’t yet derive the other fundamental insight of MMT, that the outstanding government debt is simply the record of government money creation. But that’s an obvious deduction from the next model.

of your monetary model is the fiction that intra-class or intra-sectoral trade is barter. So in a 4-sector model I built for a research project for UNEP (the United Nations Environment Program), I split each of my 4 sectors (manufacturing, services, agriculture, energy) into 2 halves, and had one half buy its sector-specific inputs off the other. At some point, we’ll add the same facility to the Godley Tables—so that they effectively become 3- dimensional. Then an intra-sectoral transaction would occur in the 3rd dimension, and the sum of the “slice” of the cube would be zero, rather than the sum of a row in the table.

8.2 Modelling Modern Fiat Money in Minsky : pp. 39-50 of Manifesto

Notice that all the accounting in the King Offa model is shown on the Mint’s Godley Table (see Figure 147 on page 133), because what is circulating in the economy is its combination asset-andliability, the coin, which was created by Offa’s Mint. The Mint doesn’t actually facilitate the exchange of coin between Peasant and Lord, or Lord and Treasury; but because the Peasants and Lords tables record these transactions—where they are exchanging assets—the exchange turns up on the Mint’s Godley Table as well, as a record of the movement of its liabilities (this is a feature of Minsky ).

When we move on to a modern monetary economy, the private banks and their liabilities of deposit accounts enter the picture as well, because private banks do facilitate the transfer (when the transaction is a transfer from one deposit account to another), and what is being transferred are liabilities of the private banking system, not of the Central Bank itself. They are also the conduit for government spending and tax payments

This necessitates a much more convoluted path for government spending: to actually get money to the public, it has to turn up in people’s deposit accounts, which are liabilities of the private banks. So the assets of the private banks have to be increased as well, which means that net government spending creates both deposits and reserves .

Therefore, net government spending creates both assets and liabilities at the level of the private banking system: the assets and liabilities of the banking sector rise because of a government deficit, leaving its net position unchanged: its aggregate equity position remains at zero (in this model, at this stage of its development).

For the private sector non-bank public however (where did we develop this contradictory usage of the words “private” and “public”?), the deficit increases their assets—the Deposit accounts— without changing their liabilities. This is the key MMT point that government deficits create “net financial assets” for the public.

At the next level of the financial system, the Central Bank, there is no creation of net financial assets: instead, there is a transfer of Central Bank liabilities from one account to another. The reserves, as well as being an asset of the private banks, are a liability of the central bank. Reserves are increased by government spending and reduced by taxation. Simultaneously, government spending reduces the Treasury’s deposit account and taxation increases it. At this level therefore, the deficit is a liability swap: a transfer from one Central Bank liability account— the Treasury—to another—Reserves.[57] Neither deficits nor surpluses alter the assets of the Central Bank.

At this stage of the development of the model, the Treasury only has the asset of its deposit account at the central bank, and no liabilities, so spending decreases the Treasury’s assets while taxation increases them. Overall, the Treasury’s capacity and willingness to go into negative equity is what drives the creation of money at the level of the private banking sector and the public.

Therefore at the minimum, four Godley Tables are needed to show the overall monetary mechanics: the Treasury, the Central Bank, the Private Banks, and the (confusingly named) Public, or non-bank private sector—see Figure 164.

Figure 167: Government spending and taxation in a modern monetary economy

This basic situation for a modern monetary economy confirms the point made by the model of King Offa’s coins, which is the fundamental insight of MMT: the government sector deficit is the private sector surplus, and vice versa. Focusing just on the Treasury, Bank Deposits and Bank Reserves, a government deficit creates both Deposits, which are an asset of the non-Bank private sector, and Reserves, which are an asset of the Banking sector—see Equation (56).

This immediately shows that government surpluses are a bad idea, unless you actually want to reduce the amount of money in the economy; and that whatever they might do to future generations—which we’ll tackle shortly—government deficits enrich the current generation, by creating net equity for it (see Equation (57)).

Figure 165 adds the account TBondsB to the model. This records the value of Treasury Bonds that have been sold, so it is an asset for the private banking system and a liability for the Treasury.

You can see that if government spending exceeds taxation, the net equity of the private sector rises, and is identical in magnitude to the negative equity of the government, which at this stage is entirely reflected in a negative value for its account at the Central Bank—effectively, the government’s Treasury runs an overdraft account with the government’s Central Bank.

Also, Reserves and the Treasury’s account at the Central Bank move in opposite directions: if the government runs a deficit, Reserves are created; if it runs a surplus, Reserves are destroyed. The Reserves are identical in value to the negative of the equity of the government sector.

Figure 168: Bond sales enabled but not yet simulated

I haven’t defined flows for bond sales as yet however, so the simulation shown in Figure 165 is effectively of the model in Figure 164. Now let’s introduce government debt by having the Treasury issue bonds, which are sold to the private banks—see Figure 166. This could be made much more complicated—bond sales could be modeled as based on forward forecasts of the deficit, extrapolating existing trends—but the simplest case will do here.

Figure 169: Bonds are sold to cover the Deficit

Figure 167 introduces bond sales by Treasury to the private banks. Bond sales are made equal to the deficit. The impact of this change to the model is that bank Reserves remain at zero, the Treasury’s account at the Central Bank also remains at zero—whereas it went negative in the simulation without bond sales in Figure 165—and that the money in the economy is identical to the level of government debt.

It also introduces money as the sum of the amounts in deposit accounts plus (short-term) bank equity. Now we can see that—in this model—the money in existence is identical to the Treasury Bonds in existence. So the sale of bonds has had no role in the creation of money—that was done by the deficit itself—but it has enabled the banking sector to exchange a non-tradeable, non-incomeearning asset (Reserves) for a tradeable, income-earning asset (Treasury Bonds).

This confirms the crucial points made by MMT, that the “debt” itself doesn’t create the money, nor does the government need to sell the bonds in order to finance its deficit. If the Treasury didn’t sell the bonds, then it would be in the same situation as the Treasury in the King Offa model: it would be in debt to the Central Bank (as King Offa’s Treasury was to his Mint), with an overdraft taking the place of a deficiency of coins in its possession. The bond sales let the Treasury maintain its account at the Central Bank at zero (in this model—in the real world, a positive level could be maintained as well), because the bond sales bring in revenue equivalent to the deficit.

To illustrate an important feature of this model, I’ve enabled display of numbers on the Godley Tables, via the Options/Preferences dialog box.

Figure 170: Bond sales, but no interest on bonds

The government does, of course, pay interest on Treasury Bonds. I assume that it then borrows the funds needed to pay the interest from the Central Bank—see Figure 168.

Figure 171: Interest on Bonds

Introducing this fact has a dramatic effect on the model: compare Figure 169 to Figure 167, and you will see that private bank equity, which remained at zero with no interest on bonds, turns positive when interest is paid, because the interest on bonds adds to bank reserves, without also adding to liabilities. So it increases bank equity, which has been zero through all the previous models. Notice also that the amount of money in existence exceeds the amount of bonds—otherwise known as government debt to the private sector. The difference is made up by the Treasury’s debt to the Central Bank, which is equivalent to the total interest paid on Treasury bonds.

Figure 172: Interest on bonds creates positive equity for the banking sector

What this shows is that a government deficit can actually “kick-start” a private banking system, by creating positive net equity for the banking sector, which is necessary for real-world lending: a bank with negative equity is bankrupt, while to start operation as a bank, a private corporation needs to raise share capital so that it can start with its activities as a bank with positive equity.

Before writing Manifesto , I had primarily used Minsky to model the dynamics of private credit— largely because that’s the topic that mainstreamers like Krugman get so badly wrong. One puzzle, when working with models of a pure credit economy, was how did banks accumulate the positive equity needed to operate: in a pure credit system, positive equity for the banking sector means identical negative equity for the non-banking sectors.

This model shows that, arguably, interest on government bonds enables the banking sector to have positive equity, without driving the non-banking sector into negative equity, because the bonds create positive equity for the non-banking sector (notice that the equity of the public in Figure 169 is 294, which is identical to the value of bonds on issue), while the interest on those bonds creates positive equity for the banking sector (the positive equity of the banking sector, of 486, is identical to the debt of the Treasury to the Central Bank, which is identical to the sum of interest paid on bonds).

One personal opportunity cost of all the time I waste reading Neoclassical literature is that I am not up to date on the literature of MMT. That said, I am not aware of any MMT authors making this same case—that interest paid on Treasury bonds creates positive equity for the banking sector. If any reader knows of papers making that case, please let me know and I’ll read them and cite them here. That said, this may be a novel discovery—and a good reason for the rate of interest on Treasury Bonds to be positive.

This model can obviously be extended to include private bank lending, and financial transactions between subsectors of the non-bank public.

8.3 An integrated view of deficits and credit: pp. 59-65 of Manifesto

This section of the Manifesto covers a vital episode in America and the world’s economic history: the boom of the 1920s and the bust of the 1930s. These events should be the focus on economic analysis, but instead, Neoclassical economists prefer to ignore them as “outlier events”. The Great Depression, according to them, shouldn’t have happened; and nor should the Stock Market reach such ridiculous heights and then crashed. But of course they did happen.

Before I use Minsky to explain why this boom and bust happened, I’m going to take the opportunity here to go more deeply into the data than I had space for in Manifesto . The first thing to note is that this was a time of extreme volatility, compared to the relative stability of the post-WWII economy— a point that was fundamental to Hyman Minsky’s analysis of capitalism:

The most significant economic event of the era since World War II is something that has not happened: there has not been a deep and long-lasting depression.

As measured by the record of history, to go more than thirty-five years without a severe and protracted depression is a striking success. Before World War II, serious depressions occurred regularly. The Great Depression of the 1930s was just a “bigger and better” example of the hard times that occurred so frequently. This postwar success indicates that something is right about the institutional structure and the policy interventions that were largely created by the reforms of the 1930s.

Can “It”—a Great Depression—happen again? And if “It” can happen, why didn’t “It” occur in the years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years. To answer these questions it is necessary to have an economic theory which makes great depressions one of the possible states in which our type of capitalist economy can find itself. We need a theory which will enable us to identify which of the many differences between the economy of 1980 and that of 1930 are responsible for the success of the postwar era. (Minsky 1982, p. xix)

The volatility of the pre-WWII period is striking, which we, embedded in out post-WWII “Baby Boomer”/Gen X/ Gen Y reality, can fail to fully appreciate. Table 2 and Figure 175 show that not only was real growth higher in the pre-WWII period (averaging 3.7% per year versus 2.5% since 1945), it was also much more volatile: the ratio of the standard deviation of growth to the rate of growth was 2.2 for 1850-1945 versus 1.17 for 1945-2021.

Table 2:Growth and Volatility 1850-2030

Nominal Growth Real Growth

Figure 173: Pre-WWII Volatility & Post-WWII Stability of growth

Change in Nominal and Real GDP 1850-2030

The same applies to the unemployment and inflation rates: both were lower on average before the end of WWII than in the post-War period, but the volatility was far higher in the pre-War period than after

Table 3: Unemployment and Inflation Volatility 1850-2030

Figure 174: Unemployment and Inflation Volatility 1850-2030

Minsky was obviously right that there was a significant change in the nature of American capitalism after WWII, which he identified as the evolution of “Big Government”:

Whereas in the small government economy of the 1920s profits were well nigh exclusively dependent on the pace of investment, the increase in direct and indirect state employment along with the explosion of transfer payments since World War II means that the dependence of profits on investment has been greatly reduced.

With the rise of big government , the reaction of tax receipts and transfer payments to income changes implies that any decline in income will lead to an explosion of the government deficit. Since it can be shown that profits are equal to investment plus the government’s deficit, profit flows are sustained whenever a fall in investment leads to a rise in the government’s deficit.

A cumulative debt deflation process that depends on a fall of profits for its realization is quickly halted when government is so big that the deficit explodes when income falls . The combination of refinancing by lender-of-last-resort interventions and the stabilizing effect of deficits upon profits explain why we have not had a deep depression since World War II. The downside vulnerability

of the economy is significantly reduced by the combination of these types of “interventions.” (Minsky 1982, p. xxviii. Emphasis added)

As Figure 172 shows, the transition from small to Big Government is emphatically a product of the Great Depression and World War II. World War I caused a sharp spike in government spending as a percentage of GDP, but the post-War period saw a rapid return to small government—the pre-WWI period had, from today’s perspective, an unthinkably low level of government spending of just 2% of GDP. World War I saw that rise to almost 25%, but it fell rapidly back to below 5% of GDP in the early 1920s. It then continued to fall during that decade, as Coolidge used the prosperity of the era to reduce government debt by running a surplus that, across much of the decade, was equivalent to 1% of GDP.

Figure 175: From small to Big Government between the Great Depression and the end of WWII

https://www.whitehouse.gov/wp-content/uploads/2021/05/hist01z1_fy22.xlsx

This is what Calvin Coolidge thought was responsible for the apparent prosperity of The Roaring Twenties. To repeat, at much greater length than in Manifesto , the quote from Coolidge’s State of the Union address, he attributed the prosperity of the 1920s to his policy of running a sustained government surplus, and using it to pay down government debt:

No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment, harmonious relations between management and wage earner, freedom from

industrial strife, and the highest record of years of prosperity… The country can regard the present with satisfaction and anticipate the future with optimism.

The main source of these unexampled blessings lies in the integrity and character of the American people… Yet these remarkable powers would have been exerted almost in vain without the constant cooperation and careful administration of the Federal Government…

Wastefulness in public business and private enterprise has been displaced by constructive economy… We have substituted for the vicious circle of increasing expenditures, increasing tax rates, and diminishing profits the charmed circle of diminishing expenditures, diminishing tax rates, and increasing profits…

One-third of the national debt has been paid … the national income has increased nearly 50 per cent, until it is estimated to stand well over $90,000,000,000. It has been a method which has performed the seeming miracle of leaving a much greater percentage of earnings in the hands of the taxpayers with scarcely any diminution of the Government revenue. That is constructive economy in the highest degree. It is the corner stone of prosperity. It should not fail to be continued…

Last June the estimates showed a threatened deficit for the current fiscal year of $94,000,000. Under my direction the departments began saving all they could out of their present appropriations… The combination of economy and good times now indicates a surplus of about $37,000,000. This is a margin of less than 1 percent on our expenditures and makes it obvious that the Treasury is in no condition to undertake increases in expenditures to be made before June 30. It is necessary therefore during the present session to refrain from new appropriations for immediate outlay, or if such are absolutely required to provide for them by new revenue; otherwise, we shall reach the end of the year with the unthinkable result of an unbalanced budget . (Coolidge 1928, December 4 1928. Emphasis added)

The June to which Coolidge referred was June, 1929. The “unthinkable result” at the end of that year was not “an unbalanced budget”, but America’s second Great Depression (the first, as I note in Manifesto , was “The Panic of 1837”).

Coolidge was acutely aware of the declining government debt of his time. However, he, like his successors one century later, had no idea of what was happening with private debt. As he applauded halving government debt, from $30 to roughly $15 billion, private debt rose from $45 to $80 billion—see Figure 173. He was, as Clinton and Bush did in the 1990s and early 2000s, conducting an unwitting experiment into how long credit-based money creation could counter the destruction of fiat-based money, without causing a crisis.

Figure 176: GDP, Private and Government Debt 1910-1940

In Coolidge’s time, the answer turned out to be “about 8 years”. Between 1921 and 1929, the government surplus of roughly $1 billion a year was more than counterbalanced by credit of between $1 billion and $8 billion per year—see Figure 174.

Figure 177: Private Credit and the Government Deficit 1910-1940

Credit and Government Deficit 1910-1940

While that situation endured, GDP rose from a low of $71 billion in 1921 to a maximum of $104 billion at the start of 1929—see the dotted plot in Figure 173. It was a volatile performance, as Figure 175 indicates—inflation-adjusted growth ranged from as low as minus 21% in 1921 to a high of 23% in 1922—but the average was still a very high 5.8% real growth per year. Coolidge’s rhetoric extrapolated this rate of growth forward thanks to his good budget management, but that’s not what transpired: the average real growth rate from the high of 1929 till the 1930s low in 1933 was minus 9% per year. Nominal GDP in 1933 was $16 billion lower than in 1921.

Figure 178: Volatile GDP

The core feature of the Great Depression that, even today, is seared into people’s minds, is the huge increase and then sustained level of unemployment. Unemployment data wasn’t as systematic back then—much of it was recorded by trade unions—but nor was it as corrupted as is has become in the last fifty years: back then you were recorded as unemployed if you had registered as unemployed, either with your union or an employment office. The boom of the 1920s was so extreme at its end that the percentage rate of unemployment in October 1929 was zero. Three years later, it was an unprecedented 25%, and it remained at elevated levels throughout the 1930s.

Figure 179: Unemployment and Inflation 1910-1940

There is much more to the story of the 1920s and 1930s than just government money destruction and private money creation. But since that part of the story has never been properly told—because the mainstream, as well as misunderstanding the role of fiat money creation in a well-functioning capitalist economy, also continues to deny the role of credit in aggregate demand—I’m going to attempt to use Minsky to reproduce the effects of government surpluses and private credit across the boom period of the 1920s. I’ll define this as starting at the nadir for nominal GDP in the 1920s— mid 1921, when the USA’s nominal GDP was US$72.25 billion—and ending at its apogee in 1929, when it peaked at $104.6 billion. Across almost all of that time, the government surplus was 1% of GDP, while credit began at 1% of GDP and peaked at 8% in mid-1927—see Figure 177. I’m showing the deficit rather than the surplus, since a deficit has the same impact on the economy as positive credit. So, for most of the 1920s, the government deficit was minus 1% of GDP. Though it fluctuated much more than the government surplus, the average value of credit between 1921 and 1929 was 5% of GDP.

Figure 180: Government deficits and private credit 1910-1940

Credit and Government Deficit 1910-1940

The data that I wish to emulate in a Minsky model are the following:

Table 4: Historical data to emulate in the Minsky model

I have created a very simplified model here, because I want as few complications as possible to get in the way of the three basic questions that I want to pose: what would have happened to the economy had the private sector not gone on a borrowing binge; and what would have happened had Coolidge run either a deficit, or a balanced budget during that private sector borrowing binge; and what would have happened had Coolidge run a deficit while the private sector’s debt remained constant?

Table 5: Godley Table for the banking sector in the model

The model came pretty close to fitting the data (see Table 6), even though the time path of credit was much simpler—a constant 5% of GDP throughout, rather than the range from 1 to 7.5%—than the actual data.

Table 6: Simulation results

The full model is shown in Figure 178. It is, as noted, extremely simple: there are no government bonds for example, all the government debt is owed by the Treasury to the Central Bank. But as the previous model showed, bonds don’t finance government spending: instead, they are a way of creating reserves for the private banks. They could be added here, and quite possibly could improve the accuracy of the simulation; but this is a sufficient structure to disentangle the causal factors behind the boom of the 1920s.

Figure 181: Simulating Coolidge's Golden Years

With the model constructed, we can now use it to answer those “what if?” questions:

• What if the private sector had not increased its debt?;
• What if Coolidge had run a balanced budget or deficit, while the private sector borrowed?;
• What if Coolidge had run a deficit while the private sector’s debt remained constant?;
• What if Coolidge had run a deficit while the private sector borrowed; and
• How large a deficit would have been needed to reproduce the prosperity of the 1920s without increasing private debt?

All the subsequent plots of this model export the Canvas from the Plots tab.

• 8.3.1 The actual event: Coolidge Surplus and private sector credit binge

8.3.2 Coolidge Surplus with no private sector borrowing

This first simulation indicates that, without the rise in private debt, there would have been no boom—no growth even—during the 1920s.

Figure 182: No credit: the Roaring Twenties loses its Roar

8.3.3 Coolidge Balanced Budget with the credit binge

This simulation indicates that the impact of Coolidge’s surplus was to reduce the level of economic growth, compared to what it would have been with the credit binge alone.

Figure 183

8.3.4 Coolidge runs a Deficit with the credit binge

This generates higher growth and a lower private sector debt ratio.

Figure 184

8.3.5 Coolidge runs a Deficit with no credit

This is with the 1% of GDP surplus converted into a deficit: the economy grows rather than shrinks.

Figure 185

8.3.6 Coolidge runs a Deficit to reproduce the 1920s boom without credit

A deficit of 4% of GDP is sufficient to reproduce the boom of the 1920s, without any growth in private debt.

8.3.7 Disentangling cause and effect

This simple model shows the advantages of the monetary, system dynamics approach to modelling. But it would be nothing without including the key causal factors, which Neoclassical economics omit by assumption: private debt and credit. In the next chapter I’ll explain my “Keen” model of Minsky’s Financial Instability Hypothesis, which shows that capitalism can be overwhelmed by excessive private debt, and plunged into a deep and lasting downturn as credit turns substantially negative.

This has now happened three times in the history of American capitalism: during “The Panic of 1837”, the Great Depression, and the Great Recession. The unifying factor in each of these crises has been a prolonged period of negative credit, as noted in Table 2.5 in Manifesto (reproduced here as Table 7).

Table 7: Magnitude of Credit and duration of negative credit in the USA's major economic crises

The next four figures illustrate this, along with the rising level of private debt associated with each boom and bust, and the correlation of credit to the rate of economic growth (nominal in these plots, since I’m focusing here on the impact of credit on the monetary level of output: changes in the price level—but do not eliminate—the impact).

Figure 186: USA Debt and Credit since 1834

Census Data Rescaled to fit Federal Reserve Data post-1952

The major crises in America’s economic history were all negative credit events, and Richard Vague’s magisterial survey of global credit crises, A Brief History of Doom (Vague 2019), shows that this rule applies to all of global capitalism’s roughly 150 crises in the last 150 years. The next three charts focus on America and its three major crises: the “Panic of 1837, the Great Depression, and the Great Recession. Though the levels of private debt were substantially different, the scale of the negative credit events were quite similar: as shown by Table 7, each crisis was preceded by a credit boom, with credit-based demand reaching between 9% and 15% of GDP, while the plunge from this peak was roughly 20% of GDP in each case.

Figure 187: The Panic of 1837

Figure 188: The Great Depression

Figure 189: The Great Recession

8.4 A Modern Debt Jubilee: pp. 65-68 of Manifesto

The end result of almost two centuries of widespread misunderstandings about how money is created, developed and maintained by the false beliefs of mainstream economists, is a global economy terminally indebted to the private creators of money. The previous charts show this phenomenon in the home of modern capitalism, America. The next chart--Figure 187—shows that this is a global phenomenon.

Here I have to thank the Bank of International Settlements for assembling an excellent database on debt across over 40 countries.[59] When I started warning that a global financial crisis was imminent back in December 2005, the only data I could get easily was on America from the Federal Reserve ’ Flow of Funds,[60] and Australia from the Reserve Bank of Australia s statistical tables.[61] Today, thanks to Bill White[62] — who, as Research Director for the Bank of International Settlements, was the only person in an official position to warn that a financial crisis was likely (Borio and White 2004)—the Bank of International Settlements publishes a database with standardized measures of private and public debt from over 40 countries. That data shows unequivocally that the level of private debt, relative to GDP, is the highest it has been in the post-WWII period, which, by reference to long term data series for the USA and UK, is also the highest it has been in the history of capitalism—see Figure 187.

This has numerous deleterious effects on the economy, which I discuss with respect to my model of Minsky’s Financial Instability Hypothesis in the next chapter. Here, I want to model something that I first proposed in 2012 (on January 1st , as it happens):[63] a “Modern Debt Jubilee”, as a means of escaping from this debt trap, by effectively replacing credit-based money with fiat-based money in a way that does not discriminate between those who had joined the 2000s speculative bubble and those who did not.

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62 https://williamwhite.ca/

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Figure 190: Record private debt levels afflict almost all economies

Though I thought of the idea a decade ago, I didn’t subsequently develop it, because I believed that it had a snowflake’s chance in Hell of actually being implemented. And then along came Hell, in the form of Covid. In 2020, private debt in the USA rose faster than it had even done.

Figure 191: Covid and its impact upon private debt and credit

All previous instances of rapidly rising private debt have occurred during a speculative binge. This one is occurring because the corporate sector in particular can’t meet its financial obligations during Covid, and so has rolled over existing debt that would otherwise have been retired, and taken on new debt in order to meet financial commitments that were ordinarily covered from cash flow. So there will not be the typical economic boom from private sector borrowing—but there could well be the typical bust after Covid, if there is ever an after, especially if the welcome if insufficient government supports are removed too quickly.

This meant that it was time to actually model how a Modern Debt Jubilee could be undertaken, and the results surprised even me. The model in Manifesto was extremely simple—I just covered the accounting involved and showed that it was consistent: see Figure 189. I’ll include the simulation model for this at the end of this chapter, just for the sake of completeness, but what I want to do now is develop a much more comprehensive model of a Modern Debt Jubilee, to show how it might be used to reduce America’s private and government debt levels.

Figure 192: The basic mechanics of a Modern Debt Jubilee

This is the first moderately large Minsky model that I’ve developed here, so it will take quite a while to explain its structure and dynamics. The basic structure of the Jubilee, and outcomes of the model, are as follows:

• (1) The Jubilee is used to convert Jubilee % of existing private sector debt into government debt, thus converting credit-backed money into fiat-backed. Fiat-money increases, credit-money decreases.
• (2) The Jubilee is distributed on a per capita basis, so every adult (person over 18) receives the same amount. If the per capita amount exceeds a person's debt, the excess is used to buy newly-issued corporate debt, which must be used to pay down corporate debt.
• (3) The Jubilee creates money, but the allocation of it to debt repayment cancels precisely as much, so there is no net creation of money by the Jubilee itself.
• (4) Treasury issues Jubilee Bonds, which are sold to the Banking sector. The Banking sector gets the funds to buy these bonds from the Jubilee itself, which creates excess Reserves equal in magnitude to the fiat money created by the Jubilee.
• (5) Interest payments by Treasury on the Jubilee bonds then compensate the Banking sector for the fall in its income from interest on private debt
• (6) Side-effects of the Jubilee include a fall in inequality and an increase in GDP from dramatic rise in the velocity of money. These occur because the Jubilee increases the money held by workers, whose higher propensity to spend also boosts the economy.
• (7) If interest is paid on Jubilee Bonds, this creates money over time, thus expanding GDP.

Though the model is the most complicated to date, the monetary model is essentially a combination of the endogenous money model of Figure 126 with the Jubilee components of Figure 189. I have divided the non-bank private sector into three sectors—Firms, where output is produced, Capitalists, who own the Firms, and Workers, who work in the Firms. The first eight rows of Figure 190 are the basic financial operations of the private sector: interest and dividend payments, wages, and consumption. I have omitted bank lending and debt repayment here, just to simplify the model— they could easily be added.

The remaining rows implement the mechanics of the Jubilee:

• Jubilee payments to workers and capitalists;
• Debt repayment by workers and capitalists;
• Share purchases by those workers and capitalists whose debts were less than the value of the per-capita Jubilee payment (set at 60% of aggregate private debt in this simulation, which is roughly equal to 100% of GDP in this simulation, and equal to the debt level of the US private sector);
• Firms using these share sales to pay down corporate debt;
• Bond sales by the Treasury, of a value equal to the Jubilee itself—which has created the excess Reserves that banks will use to buy the bonds; and
• Interest payments on those bonds by Treasury to the Banks.

Figure 193: Banking sector Godley Table for a Modern Debt Jubilee

The Jubilee component of the model is shown in Figure 191. The top left-hand corner determines the Jubilee itself. The switch means that the Jubilee doesn’t commence until Start year, after which it lasts for one year.[64] The other logic switches determine that, if debt is paid down to zero, the payments are used to purchase “Jubilee shares” instead—shares newly issued by companies (so that they receive the revenue, rather than a trader), the revenue from which must be used to pay down corporate debt.

Figure 194: Mechanics of the Jubilee

The scale of the Jubilee is based on current US private debt data, which totalled US$29.5 trillion in 2021. This is broken into corporate debt of $17.5 trillion and household debt of $12 trillion. I made an arbitrary division of initial household debt into ¼ as debt of capitalists 0 and ¾ as debt of 65 workers 0 , since the Flow of Funds doesn’t provide that information. The Jubilee equals 60% of K D this outstanding debt, or $17.7 trillion. W D

The division of the population into workers and capitalists is somewhat arbitrary as well: I assume that 5% of the population earns its income primarily from ownership, and 95% primarily from wages. Since the Jubilee is on a per capita basis (which works out to US$100,000 per adult American in this simulation), 95% of the Jubilee goes to workers and 5% to capitalists. This is hardly unfair to capitalists as individuals—everyone gets the same amount, regardless of social class—and it goes some way to redressing the impact of Quantitative Easing, which had the express objective of increasing share prices, and therefore overwhelmingly favoured capitalists over workers.[66]

There are some complicated issues as a result of the change in share ownership, which are handled by the component shown in Figure 192: the new shares dilute existing shareholdings, so there has to be a change in where the dividends go.

65 The variables 0 and 0 and the constants that determine them replicate details of the Godley Table in Figure 190, because at the moment Godley Tables only take numbers as the initial conditions (the first row in K W the table). At some point we’ll add the capability to take parameters as the inputs, which would remove the D D need for this separate definition of 0 and 0 . 66 The Atlantic Council asserts that cumulatively QE in America has totalled $7.6 trillion as of 2021: see K W https://www.atlanticcouncil.org/blogs/econographics/global D D -qe-tracker/.

Figure 195: Share ownership and dividend effects of the Jubilee

This doesn’t make existing shareholders worse off however, because the fall in interest payments by firms is partly passed on to all shareholders via a rise in dividend payments—see Figure 193, and Equation (58), which I think is easier to read than the flowchart.[67]

Figure 196: Firms pass on the fall in interest payments in the form of dividends

Equation (58) cover the variable part of dividend payments by firms because of the Jubilee. When the simulation starts and before the Jubilee, Equation (58) equals zero, and the dividend payout is 11% of profits, as specified by PayoutRatio . When the debt level of firms LoansF falls because of the Jubilee, this becomes positive, and is added to the dividend payout ratio. In this way, the reduction in firm interest payments is passed back to the owners of shares—who also change in social composition, because, with 95% of the Jubilee going to workers, their debt of $12 trillion is extinguished, and they buy $7 trillion of Jubilee Shares.

In the first simulation shown below in Figure 194, the interest rate on Jubilee Bonds is set to zero, to illustrate what the Jubilee does if the amount of money in the economy remains constant—with interest payments, the amount of money increases. The effects include a large increase in GDP— which surprised even me when I first ran the model.

The reason for this is the impact of the Jubilee on the distribution of money, with initially more of it turning up in workers’ bank accounts, but then—because workers have a much higher rate of spending than capitalists or bankers—most of that money ends up in the firm sector, rather than in the bank accounts of capitalists and bankers. The firm sector’s turnover of money determines private sector GDP (I have omitted normal government spending and taxation from this model), and its rate of turnover is lower than that of workers, but much higher than bankers and capitalists. So the impact of the redistribution of money via the Jubilee is a much higher level of GDP via an increased rate at which money turns over in the economy.

This modelling phenomenon is the obverse of a real-world phenomenon that I have long observed and attributed to the impact of higher private debt levels on people’s willingness to spend: the fall in the velocity of money since the peak inflationary period of the early 1980s—see Figure 195. This explanation still has legs as an inadvertent macro effect of a micro phenomenon: the higher average debt to income ratio today makes people “hoard” money to be able to pay their interest and principal commitments, but at the aggregate level hoarding merely reduces the rate of turnover of money. This leads to lower incomes, defeating the micro objective people have of saving more.

Figure 197: Simulation with no interest on Jubilee Bonds

However, this model has constant turnover rates for each social class (workers, capitalists and bankers) and the firm sector, so the rise in velocity it generates comes from the redistribution of existing money (and the fall in indebtedness, which reduces interest payments on existing debt, thus enabling that money to be used for commodity purchases instead).

Figure 198: Velocity of money of zero maturity (https://fred.stlouisfed.org/series/MZMV)

The next simulation has interest paid on Jubilee bonds at the same rate as private debt, of 6% per year. The outcome is that bank income does not fall because of the Jubilee, while the payment of interest also creates new money. The banks don’t lose income out of the Jubilee—the interest they used to receive from private debtors is now provided by the government. As with MMT’s insight in general, the negative equity of the Treasury enables the positive equity of the private sector—see Figure 196.

Figure 199: The Treasury's Godley Table for the Modern Debt Jubilee

Rather than this leading to an increase in the government’s debt to GDP ratio however, over time, it leads to a fall—see the second plot in Figure 197, which shows the debt to GDP ratios for the private sector, public sector, and the sum of the two. The government debt to GDP ratio rises as a direct consequence of the Jubilee initially, as government debt replaces private debt; but the growth in the economy triggered by the Jubilee means that the government debt ratio falls over time. After a decade, the government debt ratio is lower than it was before the Jubilee. The aggregate debt ratio also falls: the economy transitions from a private sector based on debt to one based on share equity.

This is because the stimulatory effect of the Jubilee on private sector activity more than outweighs the increased debt the government takes on in Jubilee Bonds. Direct attempts to reduce the government debt to GDP ratio by austerity have the opposite effect on the real economy— depressing GDP and counteracting the attempt to reduce the debt ratio by reducing government debt.

Figure 200: A Modern Debt Jubilee with interest on Jubilee Bonds

Figure 201: Modern Debt Jubilee Godley Tables

Figure 202: The full Modern Debt Jubilee model

This completes the models showcased in Manifesto . As time goes on, I’ll add new models here, developed by myself and others, to show what Minsky can do.

Footnotes

51 We’ve already seen this in an earlier chapter on modelling money without mathematics. Here I’ll replicate the models in Manifesto and introduce mathematical modelling of fiat money dynamics as well.

52 You could start your model earlier if you wish—Desan explains how rulers acquired silver once they started making coins—just start from the assumption that The Mint has all the silver it needs, and then later add buying silver from the public in the manner that Desan explains. “In early medieval England, rulers chose to make the basic unit of account—the penny—out of silver. That choice gave silver a price. For example, a weighed pound of silver of specified fineness might be exchanged for 230 pennies at the mint—the “mint price” received when an individual took that amount of bullion in to be coined. The mint made perhaps 242 pennies out of the bullion, kept 12 for the moneyer and the king, and returned the remainder. The “price” of silver was tied, by definition, to the value of the tribute or tax obligation: pennies made by the mint were the tokens used by the king to pay for resources advanced to him. At the time the tax was due, each penny carried value towards extinguishing the tax obligation” (Desan 2015, p. 58)

53 We will add to the switch feature over time to enable it to handle multiple cases, but we haven’t got there yet.

54 It also inverts where the “parasitic” behaviour occurs: by spending the coin it has created, the government gets private-sector-created resources “for free” (the sword-wielding tax collector can now be assigned to other activities, such as invading the neighbouring kingdom); taxing is merely the government taking back that otherwise worthless token it created.

55 One practice I follow when building serious models is to force all transactions to be monetary—including those between the same social classes (Lords) or in the same sector (Manufacturing)—otherwise, at the heart

56 I emphasise that this is focusing on the claims one sector has on another, and not the value of physical assets which are not a liability to someone else. The sum of all claims is necessarily zero in these models.

57 Of course, in the real world, there are multiple reserve accounts—one (at least) per private bank. This model focuses on the aggregate of reserves. A model covering possible liquidity default risks would use multiple reserves accounts for multiple banks.

58 This is measured from the first negative month to the last, but includes some periods of positive credit (most of 1839, and late 1935 till late 1936).

59 https://www.bis.org/statistics/totcredit.htm

60 https://www.federalreserve.gov/apps/fof/FOFTables.aspx

61 https://www.rba.gov.au/statistics/

63 http://www.debtdeflation.com/blogs/manifesto/

64 At the moment, it’s not possible to select a set of icons from Minsky and export those as an SVG file, so I had to copy these elements to a blank canvas, which reset the parameters and variable values. Hopefully by the time this book is published, we’ll add support for exporting a selection of icons on the canvas. This is the sort of thing that continued funding of Minsky enables, so please consider signing up to its Patreon page https://www.patreon.com/HPCODER

67 This is another planned enhancement of Minsky : make it possible to show a flowchart as an equation, where an equation is easier to read.