Reader Ellen in a comment writes: "I'm interested in MMT's definition of "money" primarily because I want to be able to identify, among other things, 1) the "money" supply at some time (t0) and 2) the change in the "money" supply from/to another time (t-1, t+1)."
I'm not an intellectual leader of MMT, though I would claim to be influenced by it. Hopefully, Scott Fulwiller would chime into the discussion at some point, and enlighten us with the real deal. Quick definitions here and here. As for my own interpretation, I view Money as a token that can equate to the value of a good or service you provide, that you can then use to purchase something else of equal value. I buy into the idea that its value as a token is greatly assisted by government fiat. If it's privately-issued, it can easily lose its acceptability as a token of value. So why does government issue money?
1. To pay for private services bought by the government - fiscal policy
2. To support private transactions that need the money/currency/reserves to facilitate trade - via Fed discount rate, and/or via explicitly backing the banking system's electronic creation of fiat money.
When the government injects money into the private economy via spending, or by printing money to support banking activities, it enables the private sector to function, to grow, and to create new income via productive ventures. So a better way to state one of my sentences in my previous post was probably: G creates the Y that enables both domestic and foreign investors of Treasuries, for whatever reason they are issued and sold. If you have no deficit spending, there's no new currency to go around, nothing to save, no money to use to spend, no money to buy Treasuries with.
This is a complete mirror image of the mainstream view of how money is created, which is that the private sector creates it via its private market activities, while government only taxes it later on to fund its own spending. While this view is easier to digest, and more intuitive, this view does bring up some thorny questions that could only be answered by looking at money creation backwards. After all, why is the belief that money should be existing first before government can borrow it more believable than the view that government has to issue money first by spending before people have the money to lend to government?
Some questions I could think of that pokes holes in the mainstream view are: Did a certain group of people at some point in history suddenly decide amongst themselves to create money first, and only years (decades?) later did government decide that all this one creation could be a lucrative way to fund its own consumption? So how did those first group of pioneering people decide to start using money instead of barter? How did this custom reach a network effect, such that everyone else opted into the monetary system and fully abandoned bartering?
And how did all these disparate market actors all agree (at a network effect level) to stop creating money via private spending? How did they all know (as a people) that they had created a sufficiently large pool for everyone that from then on, money could only be created by 'fractional reserve lending'? How did this massive private market coordination come about? By what mechanism, or event, was everyone made to stop creating new money altogether? And why would everyone agree to stop, when private money creation by citizen merchants (if it ever happened at any time at all) facilitated more spending (by these same creators) without having to earn it first? How was everyone suddenly forced to only spend more via the more painful method of borrowing?
These holes in logic makes it easier to just believe that a tribal chieftain, monarch, council of senate leaders, or early government body was the one who first created money by fiat, and everybody else had to follow. This process started with government using fit to pay for money that at the very start, no one had to begin with. After all, government paying you the income you never would have otherwise is like me renting you my lawnmower so that you can mow my lawn and every other house on the street for money. You never had money to pay this rent in the first place, so by yourself, you'll never ever find a way to make any money. But if someone lends you the mower in exchange for service, you get the money to pay for it as well as earn income for yourself. Same principle happens with government spending. The act of the government using private capacity, and paying for it with fiat money, can create the income that the private sector can use to buy government's borrowing that fund the spending.
So we can then conclude that money used to finance all those government borrowings came from income created by government spending. This private income creation, leading to aggregate money creation, is what enabled government rachet up its debt level to that amount and still people could not have enough of it. How else would you explain government borrowing rising to the current level it has, $15 Trillion and counting? Where did all that money come from, if not from itself? Can all of it really be private bank created? if so, then private people are in the hook to pay it all back to some private banks? How did private bankers ever have the balls to lend private people, who cannot after all manufacture money but have to earn it to pay the loan back, then only to see those trillions of money just end up being used to finance government borrowing?
In a world where government cannot create fiat money, all money has to be borrowed into existence. And we know that a loan is riskier, and eventually gets unprinted when it's paid back. Also, since it has to be paid back, it needs a creditworthy borrower that will have the income to pay it back. Government spending, meanwhile, never has to be paid back if it was paid for services rendered. If all government spending is just facilitated by borrowing from the private sector, then deficit spending does not solve the problem of balance sheet recession, as you would be merely exchanging one indebtedness with another. Such is not what I am espousing here, otherwise I would be joining the chorus of people shouting that deficit spending is not sustainable.
And while I agree that deficit spending doesn't change aggregate level of reserves when it is funded by an equal amount of government borrowing, I stress that if it is done by crediting new reserves to recipients in excess of borrowing, then it does increase reserves. (And if a greater amount is taxed than the excess credited, then it decreases reserves).
If our world were a world where every currency/money has to be borrowed into existence, then it would be a ticking time bomb one day bound to collapse, when the last person who borrows money decides not to pay the second last person to borrow, and so on. Everything in our world will come crashing down when that day comes, and all it takes is a few unscrupulous people to untangle that ponzi scheme.
How will it ever get back to work, if such were the case? if no one single person can start the money creation process again without having to borrow first, then it's game over. Because the law forbids any private person or entity from spending money he doesn't already have, he cannot spend first before borrowing it later when he has the money to pay it back. And even if some people do have all the money now, and are hoarding it for fear of not getting it back (because everybody else wants to hoard money), and if people are too afraid to borrow again, then money in our world will cease to exist (in the sense that it will stop being used to facilitate trading in the economy). It's not so much that I believe in a valueless dollar, but if nobody is spending, and nobody is earning, all the money in the world will not do anything for anyone.