The state is the most important of all our institutional innovations. It is the ultimate guarantor of security. But its power also makes it frightening. For this reason, people sometimes pretend it is weaker than it is. In one area of economics, this is particularly true: money. Money is a creature of the state. Modern monetary theory, a controversial account of this truth, is analytically correct, so far as it goes. But where it does not go is crucial: money is a powerful tool, but it can be abused.

L Randall Wray of the University of Missouri-Kansas City set out these ideas in Modern Monetary Theory. They have the following fundamental elements.

First, taxes drive money. This doctrine is called “chartalism”. Governments can force their citizens to use the money it issues, because that is how people pay their taxes. The state’s money will thus become the money used for domestic transactions. Banks depend upon the government’s bank — the central bank — as lender of last resort. The IOUs of banks — the predominant form of money in today’s economies — are imperfect substitutes for such sovereign money. They are imperfect, because banks may become illiquid or insolvent and so may default. That is why banking crises are common.