Thread by @DeficitOwls

New Working Paper out with the Global Institute for Sustainable Prosperity!

Who once called taxation an "essential anti-inflationary weapon"? Was it one of those Modern Monetary Theory economists? Or was it...the US Government in 1942?

(A thread)

global-isp.org/working-paper-…

@GISP_Tweets In this paper, I piece together the worldview held by top US Treasury officials during World War Two, and compare it to that espoused by MMT, to find many striking similarities. The paper looks at taxes, bond sales, interest rates, and national debt. (2) global-isp.org/working-paper-…

@GISP_Tweets In the conventional narrative, the job of the Treasury is to "find money" for the gov. In war, we might expect that Treasury's job would be to "find a lot of money." But Treasury officials often spoke about "finding money" as though it were quite easy. (3)

@GISP_Tweets Instead, Treasury believed that the primary danger was inflation. Now, it might be tempting to think of this as a "printing money" story, but Treasury thought about the issue more in terms of claims over limited real resources. (4)

@GISP_Tweets The WW2 Treasury viewed taxation as the basic anti-inflationary tool in wartime, though it is not by itself sufficient. (5)

@GISP_Tweets Treasury's view of government borrowing is especially interesting. The first principle was to try not to sell bonds to banks, and instead to target bonds to individuals and non-financial corporations. Instead. Why? (6)

@GISP_Tweets Treasury did understand that selling bonds to commercial banks creates money (the bank crediting the Treasury's private account). But they also understood that this could happen just as well if individuals sold their bonds to banks, or borrowed from banks to buy bonds. (7)

@GISP_Tweets In fact, they make clear that the real issue was not the quantity of money or even who buys the bonds. The issue was about getting people to save, as in, to refrain from purchasing goods and services.. (8)

@GISP_Tweets Note however that unlike a 'loanable funds' model, Treasury didn't need the saving to "finance" the deficit, but rather to free up real resources for the gov to buy. The consequence of insufficient saving would be inflation, not rising interest rates. (9)

@GISP_Tweets So, why not sell bonds to banks? The answer is that Treasury was trying to convince individuals to save *who would not otherwise have been doing so*. They used the size of bank bond purchases as an indicator of how well they were achieving this goal. (10)

@GISP_Tweets **Although it hasn't made it into the paper yet, this quote below from a Treasury official named Henry Murphy after the war makes this point more explicit.** (10.5)

@GISP_Tweets The Treasury tried, though fairly unsuccessfully, to explain that the goal of its bond sales was to encourage saving, rather than to "get money." Here's an example of a war bond ad that exhorted citizens to refrain from spending, even if they didn't buy bonds. (11)

@GISP_Tweets On interest rates, Treasury favored low and stable interest rates both during the war, because high rates would not help fight inflation, and after, because high rates would hurt growth and volatile rates would hurt trust in government. (12)

@GISP_Tweets The next sections of the paper compare the view thus far with MMT, and try to interpret Treasury's view on public debt. I'll leave that for the paper, but note here that Treasury's view and MMT clearly have much in common, but for the differing circumstances of war vs peace. (13)

@GISP_Tweets The latter section of the paper highlights some other voices, particularly in the popular media, that were kindred with the Treasury view. To be clear: by no means was the Treasury's view widely shared. There was in fact quite a lot of confusion in this era. (14)

@GISP_Tweets In fact, the US government ran surveys hoping to discern how people thought about the economy. These found that Americans mistakenly believed that the government needed their money rather than their abstention from consumption. (15)

@GISP_Tweets But some people did get it, at least some aspects. Here's a smattering of quotes from the popular press in line with the Treasury view. (How many of these would be unthinkable today?) More are in the paper. (16)

@GISP_Tweets Finally, the paper ends with a call for optimism. We mustn't ignore the dangers of despotism, nor should we downplay the horrors of war - but mobilizing our "unrealized reserves" for the public purpose could be a powerful force for positive change. (17)

@GISP_Tweets If citizens/leaders now better understood the role of our monetary system in WWII, then we could mobilize again, not for battle, but to address the existential challenges of today. Not to wage war but, as Morgenthau might put it, “to wage an active and continuous peace.” (Fine)

@GISP_Tweets cc @wbmosler @ptcherneva @StevenHailAus @RaulACarrillo @NathanTankus @billy_blog