The Government Cannot Run Out of Money. But the People Can Run Out of Trust.

I. A Remarkable New Theory

In the documentary Finding the Money, Professor Stephanie Kelton, an economist at Stony Brook University, former senior economic adviser to Bernie Sanders and chief economist for the Democratic staff of the U.S. Senate Budget Committee, presents an idea she believes could fundamentally change how governments approach public spending.

The United States government, she explains, cannot run out of dollars because it issues the dollar. Unlike a household or private business, it does not first need to earn money before it can spend. It can create the money it needs.

The documentary presents this observation almost as a revelation. For decades, we have supposedly been asking the wrong questions about public finance. Instead of asking how government will pay for new hospitals, infrastructure, education, or environmental programs, we should ask whether the economy possesses the labor, materials, technology, and productive capacity required to provide them.

This approach is known as Modern Monetary Theory, or MMT.

Its ideas were developed by a group of economists and financial practitioners, particularly Warren Mosler, L. Randall Wray, and others associated with post-Keynesian economics. Stephanie Kelton became one of its most prominent public advocates through her academic work, her bestselling book The Deficit Myth, and the documentary Finding the Money.

Her ideas have received considerable attention in the media and in debates over public spending, healthcare, employment, and climate policy.

MMT begins with a technically meaningful distinction. A government that issues its own freely floating currency and borrows in that currency does not face the same financial constraints as a household. It can, through its monetary institutions, create additional nominal money. Consequently, MMT advocates argue that the true limit on government expenditure is not the availability of dollars but the availability of real resources.

Taxes, in this framework, are not primarily a means of obtaining money for the government to spend. They create demand for the currency, influence economic behavior, redistribute income, and withdraw purchasing power when inflation threatens. Government bonds, similarly, are interpreted less as an indispensable financing mechanism than as a way to provide interest-bearing financial assets and manage monetary conditions.

There is an element of truth in this description. A modern sovereign monetary system is not constrained by a fixed quantity of gold or silver. Money can be created electronically, and governments exercising monetary sovereignty possess capabilities that ordinary citizens do not.

But this observation immediately raises a more important question.

Does the ability to create money establish the right to create it?

MMT concentrates on what governments are technically capable of doing. The more fundamental question is what they should be permitted to do, and why the monetary system exists in the first place.

That is where the problem begins.

II. What Is Money For?

Before discussing how much money a government can create, we should ask a much simpler question: what is money?

Money is one of the most important institutions human beings have developed. It allows people who do not know one another to exchange their work, knowledge, goods, and services through a common measure of value.

A farmer exchanges crops for money because he trusts that he can subsequently exchange that money for clothing, machinery, or the work of another person. A worker accepts wages because she believes that the purchasing power earned through her labor will remain available when she needs it. A family accumulates savings because it wants to preserve part of today’s work for tomorrow’s necessities.

Money therefore performs three fundamental functions: it serves as a medium of exchange, a unit of account, and a store of value.

These functions depend upon confidence. Money need not have an immutable value, and its purchasing power will never be perfectly constant. Productivity, scarcity, technology, and changing preferences continually alter individual prices. But people must reasonably trust that the institution administering money will not deliberately undermine its general value for purposes unrelated to the functioning of the monetary system itself.

Modern states have assumed responsibility for establishing and administering national currencies. That authority is not evidence that the state owns the value represented by all the money circulating within its territory.

The value is created by society: by labor, production, resources, knowledge, organization, and voluntary exchange.

The state administers the common mechanism through which that value is measured and transferred.

This distinction is essential. A government does not become the owner of everyone’s purchasing power merely because it has been entrusted with issuing the monetary units through which that purchasing power is expressed.

Yet when the government creates new money to finance its own expenditure, it introduces additional purchasing power into the economy according to political decisions. Depending on economic circumstances, this can affect prices, interest rates, asset valuations, exchange rates, and the distribution of wealth.

Those effects are not necessarily identical for everyone. People who receive newly created purchasing power, or who own assets that benefit from monetary expansion, may gain. Other citizens may face higher prices or reduced real returns on their savings. Monetary expansion can also prevent unemployment and economic collapse, benefiting people who might otherwise suffer severely. Its distributional consequences must therefore be examined, not assumed.

The governing principle, however, remains unchanged.

Money creation is an exercise of economic power. It must be justified by the purpose of the monetary system, not merely by the financial needs of those administering it.

A society may authorize monetary expansion when productive capacity genuinely increases, or temporary emergency issuance when the alternative is a destructive collapse. But creating money simply because government wishes to spend more reverses the relationship between the public and its institutions.

The purpose of money is to serve exchange among citizens. The purpose of citizens is not to furnish government with an endlessly adjustable source of purchasing power.

III. Six Centuries of Warnings

One of the most troubling aspects of the enthusiasm surrounding MMT is how little attention its popular presentation gives to the political lessons of financial history.

For centuries, European rulers struggled with the same recurring problem: their ambitions exceeded the resources they could obtain from taxation.

And among the greatest causes of those ambitions were wars.

The Spanish Habsburgs provide an early example. Philip II governed an enormous empire and commanded formidable financial resources, including revenues flowing from the Americas. Yet his military commitments required extensive borrowing from European financiers.

The Spanish Crown suspended and restructured payments in 1557, 1575, and 1596. These episodes were not always outright repudiations of debt, but they involved severe negotiations with creditors and sometimes disrupted the financial system supporting the monarchy’s military operations.

In 1575, the suspension of payments to Genoese bankers contributed to a credit crisis in Castile. Financial arrangements that had enabled the Crown to sustain distant campaigns became a source of instability when the sovereign could no longer meet his commitments.

Yet the Spanish Habsburgs provide another lesson, perhaps even more relevant to the nature of money itself.

Spain did not possess a modern printing press capable of manufacturing unlimited quantities of its currency. Its monetary system relied upon gold and silver coins. But the conquest of the Americas brought an extraordinary flow of precious metals into Europe, particularly silver extracted from the great mines of Potosí and Zacatecas.

These riches were obtained through a colonial system involving conquest, coercion, taxation, and the exploitation of Indigenous labor. The Spanish Crown received part of the proceeds, while merchants and financiers handled much of the remainder. Enormous quantities of bullion subsequently flowed across Europe as Spain purchased goods, paid creditors, and financed its wars.

The consequences became known as the Price Revolution. During the sixteenth and early seventeenth centuries, European prices rose severalfold. The enormous influx of American silver was an important cause, alongside population growth and other economic changes. Even precious-metal money began to lose purchasing power. The coins still contained the same weight of gold or silver, but they bought progressively fewer goods.

Here was a monarchy receiving unprecedented quantities of the very metals used as money, yet the abundance did not produce equivalent growth in real productive wealth. Much of the treasure passed through Spain into the hands of foreign merchants, bankers, and military suppliers. The country became increasingly dependent upon external production, while the Crown continued accumulating debts and periodically suspending payment.

This is the remarkable irony. Spain possessed vast quantities of the substance that constituted money, yet that very abundance contributed to diminishing its purchasing power. And despite the treasure flowing from the Americas, the monarchy repeatedly found itself unable to meet its financial obligations.

If even gold and silver can lose purchasing power when their supply expands disproportionately to the production of goods and services, why should we imagine that unlimited creation of paper or electronic money would be harmless?

The Spanish experience demonstrates that the fundamental problem is not whether money consists of precious metal or entries in a computer. It is whether the quantity of money remains consistent with the real economic value it is supposed to represent.

France encountered a comparable fiscal problem in the eighteenth century.

The Seven Years’ War and French intervention in the American War of Independence placed immense burdens upon royal finances. By the late 1780s, the monarchy struggled to service its obligations and reform a tax system in which privileged estates resisted contributing adequately.

The fiscal crisis contributed directly to the calling of the Estates-General in 1789, setting in motion events that culminated in the French Revolution.

The Revolution had many causes: social inequality, political exclusion, privilege, food shortages, and the intellectual transformations of the Enlightenment. But the immediate collapse of royal financial authority was an essential part of the story.

One of the most revealing episodes occurred in England.

The Bank of England was established in 1694 primarily to help finance war against France. Investors supplied £1.2 million to the government and received an interest-bearing claim in return.

Here was an important development in modern public finance: a sovereign could obtain resources by pledging future revenues, while financial institutions organized and administered the claims.

Modern banking did not originate solely from warfare. Banking, commercial credit, and financial instruments had existed for centuries. Yet the financing of sovereign military ambition became one of the major forces behind the development of modern public debt and central banking.

The same historical process had two consequences. It increased financial sophistication and accountability in some respects, while simultaneously allowing governments to undertake expenditures — and wars — on a scale that previous fiscal systems could not sustain.

The Austrian Habsburg experience provides an even more direct warning about money creation.

During the Napoleonic Wars, the Austrian monarchy increasingly relied on paper-money issuance. According to the Austrian National Bank’s historical account, the circulation of Bancozettel increased from approximately 44 million gulden in 1796 to 942 million by 1810.

The currency depreciated dramatically. In 1811 the monarchy imposed a currency conversion at a ratio of five to one, effectively inflicting severe losses upon holders of the old paper money.

The state had found a way to issue more monetary units. It had not found a way to create the productive wealth required to sustain their value.

This is the distinction that the history of sovereign finance repeatedly demonstrates.

Governments can postpone financial consequences. They can restructure obligations, issue debt, debase coins, create paper currency, or expand central-bank liabilities. But they cannot manufacture real economic resources by changing the units in which those resources are measured.

War makes this problem particularly dangerous. Military expenditure can mobilize production and accelerate particular technologies, and defensive wars can be necessary to protect a nation. But warfare also destroys productive assets, consumes resources, kills workers, interrupts commerce, and leaves enormous obligations that may outlast the conflict by generations.

A factory producing ammunition may contribute to GDP just as a factory producing agricultural machinery does. Yet if the ammunition is expended destroying another country’s infrastructure, the measured expenditure tells us little about the resulting gain — or loss — to human welfare.

The financial system may record economic activity while the real economy experiences destruction.

This raises a question that MMT’s account of sovereign currency issuance cannot answer by itself: if rulers have repeatedly exhausted taxation, borrowing, and monetary credibility to finance their ambitions, what justifies removing another restraint upon their expenditure?

History does not show that governments lack reasons to spend irresponsibly.

It shows how desperately they have sought the means to do so.

IV. Why Central-Bank Independence Matters

The United States offers a more recent example.

The Federal Reserve was established in 1913 primarily to improve monetary and banking stability after recurring financial crises. Its modern independence from Treasury debt-financing demands, however, developed through later institutional conflicts.

During World War II, the Federal Reserve agreed to maintain exceptionally low interest rates on government securities to facilitate war financing.

In 1942, the Fed formally committed itself to supporting low short-term Treasury-bill rates, while long-term government-bond yields were effectively capped around 2.5 percent.

Maintaining those rates required the Federal Reserve to purchase government securities when necessary, expanding its balance sheet and limiting its independence in monetary policy.

The immediate priority was financing the war. The monetary consequences became clearer afterward.

Once wartime price controls were removed, American inflation surged. Consumer prices rose 17.6 percent between June 1946 and June 1947, and another 9.5 percent over the following twelve months.

Several forces contributed: shortages, accumulated wartime purchasing power, recovering private demand, and the removal of price controls. But the Federal Reserve’s obligation to support government borrowing also constrained its ability to combat inflation.

The conflict between Treasury financing and monetary stability eventually led to the Treasury–Federal Reserve Accord of March 1951, which established the foundation of modern Federal Reserve independence.

What was the lesson?

That even governments operating within sophisticated financial systems will exert pressure upon monetary authorities when their financing needs conflict with monetary stability.

Today, the American Treasury normally finances its expenditure through taxation and the issuance of government debt. Congress authorizes spending, the Treasury manages public accounts and borrowing, and the Federal Reserve conducts monetary policy under a separate statutory mandate.

The separation is imperfect. The Federal Reserve can purchase Treasury securities in secondary markets, and those purchases influence financial conditions and government borrowing costs. Moreover, the Fed remains a public institution established by Congress, not an entity existing outside democratic government.

Nevertheless, the distinction between fiscal authority and monetary authority serves an important constitutional purpose.

It prevents government expenditure from becoming automatically equivalent to an instruction to create money.

MMT often examines the Treasury and Federal Reserve as components of a consolidated sovereign monetary system. That accounting perspective can be useful. But the legal separation between them is not a meaningless technical inconvenience.

It is an institutional restraint established because monetary power must not simply follow the wishes of political authority.

The fact that institutions are created by law does not make their limits arbitrary or dispensable. A constitution is also a collection of legally established constraints. The separation of powers exists precisely because those entrusted with authority must not be permitted to exercise every power they might technically possess.

Monetary authority deserves the same treatment.

V. Inflation Is Not an Adequate Constitutional Restraint

MMT proponents do not deny the danger of inflation. Kelton has repeatedly emphasized that inflation, rather than the availability of dollars, is the principal economic constraint on government spending.

She also advocates assessing inflation risks before approving expenditure, developing stronger automatic stabilizers, and using taxation and other policies to manage demand.

These proposals deserve to be acknowledged. MMT is not literally a doctrine of spending without any economic limits.

But the difficulty lies in implementing those limits.

First, we do not know an economy’s productive capacity with sufficient precision.

GDP measures current economic production. Economists also estimate potential GDP, unemployment gaps, capital utilization, and other indicators of unused capacity. But potential output cannot be observed directly, and its estimates are subject to considerable revisions.

Even the conventional measures are imperfect. They reveal too little about the condition of a country’s infrastructure, the durability of its productive base, its dependence on imports, the distribution of essential services, or whether growth has been financed through increasingly unsustainable debt.

A country may report rising GDP while losing productive independence.

A financial boom may register as prosperity even while it creates little additional manufacturing capacity, housing affordability, economic resilience, or security.

This is why a more complete assessment of national economic capacity is necessary. It should examine productive infrastructure, the balance of international trade and payments, living standards, access to essential services, environmental durability, demographic conditions, economic resilience, and scientific and cultural development.

Even such a comprehensive system cannot eliminate measurement uncertainty. It can, however, reveal forms of deterioration concealed by a single aggregate such as GDP.

Second, inflation is often a delayed consequence.

The decisions that create excessive demand or financial imbalances may precede their full observable effects by months or years. In other circumstances, inflation can emerge almost immediately because of an energy shock, harvest failure, currency depreciation, or supply disruption.

There is no dependable interval.

By the time sustained inflation becomes unmistakable, contracts have been signed, capital has been committed, employees have been hired, and political constituencies have formed around the expenditure responsible for some of the pressure.

Correcting the imbalance can then require painful decisions.

Which politician will willingly cancel projects already promised to voters? Which government will announce substantial tax increases immediately after celebrating an ambitious program of public investment? Which administration will terminate contracts supporting thousands of employees because economic forecasts made two years earlier turned out to be wrong?

Kelton acknowledges this political difficulty and proposes preventive assessments and automatic stabilizers.

But forecasts are not enforceable restraints. Even technically competent institutions can misjudge economic capacity. And an inflation assessment does not automatically prevent elected officials from rejecting its conclusions.

This is the fundamental difference between an economic warning and a constitutional constraint.

An inflation forecast tells government what might happen if it spends.

A fiscal rule determines what government is authorized to spend before the consequences arise.

One cannot simply substitute the former for the latter.

VI. The Psychology of Political Power

The central problem with MMT is therefore not merely monetary.

It is political.

Democratic governments do not consist of perfectly informed individuals pursuing a single objective called the public good. They consist of elected officials, parties, ministries, bureaucracies, organized interests, corporations, contractors, and voters, all operating under imperfect information and conflicting incentives.

Politicians want to remain in power. They want to fulfill promises, reward constituencies, demonstrate achievements, and avoid imposing visible sacrifices.

These motivations do not automatically make politicians corrupt. They are ordinary features of political life.

But they explain why institutional limits are necessary.

Consider a government that wants to embark upon an expensive war.

If taxes must rise to finance it, citizens confront part of the cost immediately. If the government borrows, its debt obligations are recorded and may affect future borrowing costs. Neither mechanism reliably prevents war, as history abundantly demonstrates.

Yet both create financial consequences that are relatively visible.

Now suppose the government can finance expenditure through the direct creation of monetary purchasing power, arguing that the economy still possesses unused productive capacity.

The war begins. Contractors receive orders. Factories expand. Workers are hired. Political commitments deepen.

Several years later, inflation begins to rise.

By then, withdrawing the spending may be politically or militarily unacceptable. The government may claim that national security demands continued expenditure, that victory is close, or that ending the program would sacrifice everything already invested.

At this point, inflation is no longer an effective political brake. It is simply another cost imposed on society.

This problem extends far beyond warfare.

A government may finance unnecessary construction, inefficient subsidies, permanent administrative expansion, politically favored industries, or projects that offer immediate popularity without durable economic value.

MMT does not advocate such expenditure. But the question is whether its proposed framework gives sufficient institutional protection against it.

It is not enough to say that governments should spend responsibly.

The entire purpose of checks and balances is to reduce the consequences when those holding power do not behave responsibly.

A political system must be designed for human beings as they are, not for the exceptionally knowledgeable and virtuous officials we hope might someday govern us.

That principle applies to monetary power as much as to executive, legislative, or judicial authority.

VII. The Illusion That Debt Is Merely Somebody Else’s Savings

Another prominent argument in MMT concerns public debt.

A government bond is an asset to the person or institution holding it. Consequently, government debt corresponds to financial claims held elsewhere in the economy.

This is an accounting truth, although some of those claims are held by foreign investors rather than domestic households.

But the existence of a financial asset does not establish the existence of equivalent additional productive wealth.

Suppose the government borrows one trillion dollars and uses it to build essential infrastructure that raises productivity, lowers transport costs, and improves the country’s ability to produce useful goods.

That debt has financed something capable of creating lasting economic benefits.

Now suppose the government borrows another trillion dollars for activities that leave no comparable productive or social benefit.

The creditors still possess government securities. Their financial claims are real. But the nation has not necessarily acquired the additional capacity required to service those obligations without costs elsewhere.

The same accounting instrument can therefore finance either the expansion or the destruction of national productive capacity.

This is what makes the size of a deficit an incomplete measure of economic performance. A deficit is not automatically disastrous, but neither is it automatically harmless because the corresponding debt is an asset to somebody.

By 2026, American gross federal debt had exceeded $40 trillion. Annual net interest expenditure was approaching one trillion dollars. Not all of this debt arose from wars: tax policy, recessions, financial crises, social programs, emergency spending, and accumulated interest also contributed. But military expenditure has repeatedly imposed large and enduring costs upon public finance.

MMT offers a provocative response: why issue interest-bearing government bonds at all when the sovereign monetary system can create dollars?

Let us take this idea to its logical extreme.

Imagine that tomorrow the United States government announces that all outstanding government bonds must be surrendered for cash. It creates $40 trillion in new money and declares that the entire national debt has been paid.

This is a thought experiment, not a specific proposal made by Kelton. In practice, some gross federal debt is owed between government accounts, and such a conversion would require fundamental changes to existing monetary and fiscal arrangements. But imagine that the government has decided to replace essentially its entire stock of debt with newly issued money.

On paper, the problem would seem to disappear.

The Treasury could announce that its bonds had been repaid and that the corresponding interest obligations had been extinguished.

But what would actually happen to the economy?

The owners of those bonds — pension funds, banks, insurance companies, investment funds, wealthy individuals, foreign governments, and other institutions — would suddenly possess enormous quantities of liquid money instead of securities paying a contractual return.

What would they do with it?

Some would hold the money. But others would immediately begin searching for alternative investments.

They would buy shares, real estate, commodities, foreign currencies, and other assets expected to preserve their wealth. An enormous additional demand for such assets could develop within days.

Share prices could rise dramatically, not because the underlying companies had suddenly become more productive or profitable, but because investors were attempting to exchange newly created money for existing financial assets.

Real estate could become even more expensive. Land, houses, and apartment buildings cannot be multiplied overnight. Yet enormous quantities of money would suddenly be available to compete for the same properties.

The prices of scarce assets could rise far more quickly than the incomes of ordinary people.

And what would happen to the prices of everyday goods?

If the conversion undermined confidence in the dollar, people might increasingly seek to exchange money for goods before prices rose further. Producers and merchants, expecting higher costs tomorrow, would begin raising prices today. Workers would demand higher wages to compensate for the loss of purchasing power, while businesses would incorporate those wage increases into their prices.

Meanwhile, the supply of goods could not simply expand to match the increase in spending and the collapse in confidence.

A farmer cannot instantly double his harvest. A factory cannot immediately produce five times as many washing machines. An electricity producer cannot create additional generating capacity simply because customers suddenly possess more dollars.

Prices would begin adjusting to the imbalance between money, spending, and the real goods available for purchase.

Could the price of ordinary necessities double? Could it rise four or five times if confidence in the currency deteriorated sufficiently?

History demonstrates that price increases far beyond these levels are possible when monetary systems lose credibility. But no responsible economist can calculate such a result merely from the number of dollars issued in this hypothetical operation. The consequences would depend upon how rapidly the money was spent, how people reacted, how monetary authorities responded, and whether confidence in the currency survived.

There is also an important accounting distinction. Exchanging a bond for money does not immediately increase the bondholder’s nominal net wealth. The holder has exchanged one financial asset for another. The danger lies in the enormous change in liquidity, asset demand, interest-rate conditions, and confidence — and in the possibility that the new monetary liabilities would circulate far more aggressively than the bonds they replaced.

The immediate result could nevertheless be severe financial disruption, followed by a broader inflationary crisis if the monetary system could not contain the resulting pressures.

And while asset owners were competing for property, shares, and commodities, ordinary citizens could find themselves increasingly unable to afford housing, food, and other necessities.

People who had accumulated savings through years of work could discover that those savings purchased far less than before.

The government, meanwhile, could proudly announce that it had eliminated its debt.

What an extraordinary achievement: the state would have relieved itself of its financial obligations by placing the stability of the entire monetary system at risk.

The country would not have gained a single additional factory, hospital, farm, power station, or skilled worker. Its productive capacity would remain exactly what it was before the announcement.

Only the financial claims circulating through the economy would have changed.

And even the supposed elimination of interest expense could prove misleading. Under present monetary arrangements, central banks pay interest on certain monetary liabilities. Replacing government bonds with newly created money does not necessarily eliminate the corresponding public costs.

We have already seen in Section III what happened when Spain received unprecedented quantities of gold and silver from the Americas. An enormous increase in monetary metals contributed to rising prices across Europe and a decline in the purchasing power of money itself. Even precious-metal currency offered no protection against an excessive expansion of its supply.

And despite possessing immense quantities of bullion, the Spanish monarchy repeatedly failed to meet its financial obligations.

We have also seen how the Austrian Habsburgs financed their wars through paper-money creation and eventually imposed enormous losses upon the holders of their currency.

But history offers an even more devastating example.

In Germany, the First World War was financed extensively through borrowing and monetary expansion. The Reichsbank increasingly supplied credit to the government, allowing it to obtain purchasing power without equivalent taxation.

After the war, the financial pressures continued. Germany faced domestic debts, political instability, reconstruction costs, and reparations imposed by the victorious powers.

The government continued relying upon credit from the Reichsbank, which expanded the money supply far beyond the growth of available goods.

In 1923, inflation became hyperinflation.

The German mark lost value so rapidly that workers were sometimes paid daily and rushed to exchange their wages for food before prices increased again. Shops repeatedly changed their prices. People carried banknotes in bags and suitcases, while many merchants preferred payment in goods or more stable forms of money.

The currency was no longer performing its essential function as a reliable measure of value and means of exchange.

When the Rentenmark was introduced in November 1923, the old mark had been almost entirely destroyed as a store of value. According to the Deutsche Bundesbank, Germany’s wartime debts of 154 billion marks had been reduced by inflation to a real value equivalent to just 15.4 pfennigs.

The government had effectively escaped much of its domestic debt burden.

But the people had paid for that escape through the destruction of monetary wealth and confidence.

Germany’s hyperinflation was not caused by a one-time conversion of all government bonds into cash, nor does it demonstrate that a similar event would necessarily occur in the United States. It does, however, demonstrate what can happen when public borrowing, monetary creation, and collapsing confidence reinforce one another.

Brazil experienced another monetary catastrophe during the late twentieth century. By June 1994, annual inflation had reached approximately 4,922 percent. The country had repeatedly changed its monetary arrangements before the Plano Real, introduced in July 1994, finally established a successful stabilization framework through fiscal, monetary, and institutional reforms.

These episodes differed in their causes and political circumstances. But they illustrate a common danger: once confidence in money deteriorates, restoring its function can require extraordinary economic and social sacrifices.

The lesson could hardly be clearer.

Money does not become more valuable because we create more of it. Nor does the state become wealthier merely because it can manufacture the monetary units in which its obligations are expressed.

The government may be able to discharge a nominal debt through monetary creation. But it cannot abolish the economic cost of that debt. It can only change how that cost appears and who ultimately bears it.

What is presented as a solution to irresponsible public borrowing may therefore become a mechanism for transferring its consequences to the entire population through declining purchasing power.

This is what makes the proposition that governments can simply create whatever money they need so profoundly misguided.

The history of money is filled with governments attempting to escape financial constraints through monetary manipulation. We have seen the consequences under precious-metal currencies, under paper-money systems, and under modern fiat currencies.

To propose the removal of additional financial restraints as a remedy for excessive government expenditure is to disregard the very historical experience that explains why those restraints became necessary.

VIII. The Economy Government Spending Leaves Behind

There is another difficulty with treating government expenditure primarily as a question of available resources.

Expenditure changes the economy.

Suppose a government decides to invest heavily in infrastructure. It commissions roads, bridges, hospitals, railways, and power systems.

Construction companies expand. They purchase machinery, hire engineers, train workers, rent facilities, and establish relationships with suppliers.

Local communities begin to depend upon those companies. Their employees acquire homes, borrow money, and organize their lives around the expectation of continued employment.

Some of these investments may create extraordinary public value.

But what happens when the roads are finished?

What happens when the hospitals have been built, the railway is complete, and the government no longer needs the same volume of construction services?

If private demand can absorb the workers and equipment, the transition may be productive. If it cannot, businesses face losses, unemployment rises, and communities suffer.

Political pressure then emerges to continue government expenditure, not necessarily because additional projects are worthwhile, but because an entire network of economic interests has become dependent upon them.

Government spending has created not only infrastructure but also obligations, expectations, and political constituencies.

This does not mean public investment should be avoided. It means that responsible public investment must consider the economic structure it leaves behind.

A project should not be evaluated solely by the number of people employed while it is under construction, or whether the original expenditure creates immediate inflation.

It should also be judged by whether it enlarges the country’s enduring productive capacity and whether the firms, skills, and institutions developed around it can remain economically useful once the expenditure ends.

This is another reason why artificially sustained public spending can become dangerous.

The government may eventually be financing economic activity because stopping it would expose the weakness of the economic structure it has created.

The distinction between production and dependence becomes blurred.

And once again, what began as an economic decision becomes a political problem.

IX. The Direction Should Be Exactly the Opposite

What should we conclude from this history of sovereign debt, monetary manipulation, inflation, and government expenditure?

Certainly not that governments should be given greater freedom to obtain money whenever they wish to spend it.

The reasonable conclusion is precisely the opposite.

We should be searching for ways to make government expenditure more responsible, government borrowing more difficult, and monetary authority more independent of political ambition.

The present financial system already allows governments to accumulate enormous obligations without confronting their full consequences immediately. Public debt can increase year after year, administrations can change, and the responsibility for repayment can be transferred to future taxpayers.

That is already a serious weakness of democratic government.

The solution cannot be to weaken the remaining financial constraints by allowing expenditure to be financed more directly through monetary creation.

It should be to strengthen those constraints.

Ordinary public expenditure should be financed through taxation, with progressive taxation distributing the burden according to economic capacity. If a government proposes additional spending, it should explain what the program will cost, how it will be financed, and what existing priorities must be reduced if taxation is not increased.

Persistent deficits should not be accepted as an ordinary method of government administration. Borrowing should be restricted to clearly defined purposes, subject to transparent authorization, enforceable limits, and credible repayment obligations. Exceptional circumstances may require exceptional measures, but the existence of an emergency must not become a permanent excuse for avoiding fiscal responsibility.

Nor should the central bank become an institution for satisfying the financing needs of elected officials. Its primary responsibility should be the integrity of money, not the convenience of government expenditure.

This does not mean that society should stop building roads, schools, hospitals, or essential infrastructure. It means that such projects should be undertaken according to their value, available resources, and responsible financing.

A road may serve society for a hundred years. That does not mean we must build a hundred years’ worth of roads today, nor does it justify unlimited borrowing on the assumption that future generations will somehow pay for everything.

We cannot eat a month’s food in a single day. Neither can an economy consume a century’s productive capacity at once.

Infrastructure should be developed continuously, according to the country’s needs and its real ability to finance and construct it. The fact that something is beneficial does not establish that every useful project should be undertaken immediately.

The same principle applies to government itself.

A responsible state must choose between competing priorities. It must distinguish necessities from ambitions, productive investment from waste, and the public interest from the interests of those temporarily exercising power.

MMT seeks to replace conventional financial restrictions with economic assessments of inflation and productive capacity. But those assessments cannot substitute for the political discipline of having to justify, finance, and account for public expenditure.

The problem of modern government is not that politicians have too little freedom to spend. It is that they already possess too much freedom to create obligations that other people must eventually pay.

The direction of reform should therefore be toward stronger fiscal responsibility, stricter borrowing rules, greater transparency, and more effective separation between political power and monetary authority.

Not toward liberating government from the remaining constraints upon its expenditure.

X. The Constitutional Question MMT Does Not Resolve

Ultimately, the disagreement with Modern Monetary Theory is not about whether governments can create dollars.

They can.

Nor is it about whether unemployment, poverty, inadequate infrastructure, or insufficient public services deserve serious political attention.

They do.

It is about the relationship between political authority and the common monetary system.

MMT asks us to reconsider traditional financial constraints because the monetary sovereign possesses powers that households and businesses do not.

But constitutional government is founded upon an almost opposite principle.

The fact that government possesses a power does not establish that government should be free to exercise it.

The purpose of constitutional limits is precisely to prevent those holding political office from exercising every power technically available to them.

And here we encounter an even more fundamental problem with modern government.

The state is not identical to the people. Unfortunately, despite centuries of democratic development, it is still far from being identical to them.

Democratic constitutions proclaim that sovereignty belongs to the people. Governments claim to exercise authority in their name. But in practice, sovereignty is exercised through institutions controlled by elected representatives, executive officials, bureaucracies, and other holders of public power.

The people are formally sovereign, yet many of the most consequential decisions affecting their lives are made by institutions over which they exercise only limited and intermittent control.

Citizens elect representatives, but they do not ordinarily vote directly upon the laws that bind them, the debts accumulated in their names, the wars undertaken by their governments, or the monetary decisions that affect their savings.

The state claims to represent the people, but representation is not identity.

The interests of the government are not automatically the interests of society. The interests of those temporarily occupying public office are not necessarily the interests of the citizens whose authority they claim to exercise.

Indeed, the history of government repeatedly demonstrates how easily these interests can diverge.

Political officials may seek reelection, institutional expansion, international influence, or military power. They may favor particular industries, reward political supporters, or postpone difficult decisions until their successors take office.

This is precisely why constitutional restraints are necessary.

We do not abolish judicial independence because executive officials could govern more efficiently without it. We do not eliminate legislative oversight because ministers could make decisions more quickly if nobody questioned them.

Why, then, should we weaken the financial and monetary restrictions governing the same officials?

Why should those holding political authority be granted greater freedom to create purchasing power merely because economists can demonstrate that the sovereign monetary system is technically capable of doing so?

If anything, the distance between the people and the institutions exercising sovereignty in their name is an argument for imposing additional restraints.

As long as the state is not genuinely identical to the people, the authority to govern must never be confused with ownership of the resources, wealth, or money of the people.

This is particularly important because monetary expansion can impose costs without the same direct visibility as taxation.

When the government raises taxes, citizens can identify the law authorizing the increase, the amount collected, and the political officials responsible.

When monetary expansion changes purchasing power, its consequences may appear indirectly through inflation, asset prices, currency depreciation, or altered financial conditions. Those consequences are often difficult to trace to particular political decisions.

This creates the possibility of transferring economic costs to citizens without a correspondingly transparent act of taxation.

It is therefore not enough to say that governments should use their monetary powers responsibly.

The powers themselves must be limited.

There must be enforceable restrictions on ordinary borrowing, clear rules for exceptional expenditure, independent monetary institutions, public accounting, and genuine democratic oversight.

The purpose of these restraints is not to prevent governments from serving society. It is to ensure that governments remain servants of society rather than acquiring the means to place their ambitions above it.

The more power an institution possesses, the stronger the restraints required to prevent that power from being abused.

MMT moves in the opposite direction. By treating the financial restrictions on sovereign expenditure as obstacles that can be overcome through a different understanding of money, it risks weakening restraints whose political importance extends far beyond their accounting function.

This is why the question is fundamentally political and constitutional, not merely monetary.

We should be trying to make government more accountable, not less. We should be limiting the discretion of officeholders, not expanding it.

We should be developing institutions that make unnecessary borrowing, excessive expenditure, monetary manipulation, and politically motivated financial decisions more difficult.

The solution to irresponsible government is not to provide it with an easier means of financing its irresponsibility. We should be trying to make government more accountable, not less. We should be limiting the discretion of officeholders, not expanding it. We should be developing institutions that make unnecessary borrowing, excessive expenditure, monetary manipulation, and politically motivated financial decisions more difficult.

The solution to irresponsible government is not to provide it with an easier means of financing its irresponsibility.

There is an uncomfortable historical comparison. When physicists developed the atomic bomb, they placed an unprecedented power in the hands of political authorities. Some of those scientists warned against its use on Japanese cities. Nevertheless, President Truman authorized the bombings of Hiroshima and Nagasaki. The scientists understood the power they had helped create, but they did not control how the government would use it.

In a different sense, Stephanie Kelton is offering politicians a monetary atomic bomb: the argument that sovereign governments need not be constrained by the availability of money because they can create it themselves. She proposes safeguards against inflation, but what guarantees that politicians will respect those safeguards once they have embraced the freedom her theory appears to offer?

What politician would not welcome an economic theory telling him that the government can always find the money to finance his ambitions?

I do not know Kelton’s motives. Perhaps she genuinely believes that politicians can be trusted to exercise such power responsibly, or that the safeguards she proposes would be sufficient. I cannot judge her intentions, and they are not essential to the argument.

But economists, like physicists, have a responsibility to consider not only what their theories make possible, but also what happens when those possibilities are placed in the hands of political power.

The danger is not merely what an economic theory permits. It is what politicians will do once they believe they have been given permission.

Conclusion: The Wrong Question

Modern Monetary Theory contains legitimate insights about sovereign currencies, government accounting, the role of taxation, and the importance of real productive resources.

But its popular message places too much emphasis on removing financial obstacles and too little on the reasons those obstacles exist.

Six centuries of sovereign financial history provide ample reasons for caution. Rulers have repeatedly borrowed beyond their means, financed destructive wars, undermined their currencies, and transferred the consequences to people who never authorized the original ambitions.

The answer cannot simply be to give future governments an easier way to obtain purchasing power.

It is not enough to say that politicians should stop spending when inflation threatens. By then, the political commitments, commercial dependencies, and economic damage may already exist. And inflation itself can be difficult to measure, predict, and control.

The purpose of economic institutions is not to assume that those holding political office will always make wise decisions. It is to establish conditions under which society can function even when they do not.

Money is a public institution. It belongs neither to the government nor to the central bank. Its value arises from the productive activity and trust of the people who use it.

The state’s obligation is to protect that trust.

Government should finance ordinary expenditure through transparent taxation, justify every exceptional obligation, and operate under monetary rules that protect citizens against arbitrary changes in purchasing power.

Above all, its ability to borrow and spend should be subject to stricter constraints than those that have allowed modern governments to accumulate obligations approaching levels previously associated with major wars and extraordinary national emergencies.

We already know what happens when rulers obtain access to financial resources without sufficient accountability. We have centuries of experience with the consequences.

Why should we assume that modern politicians, presented with still greater financial freedom, would suddenly behave more responsibly?

The question is not whether the government can run out of dollars.

The question is whether it has the right to diminish the value of the dollars its citizens have already earned.

The government is not the people. It exercises authority in their name, but that authority must remain limited by the purpose for which it was granted.

The answer to the irresponsibility of public finance cannot be to liberate government from its financial constraints.

It must be to impose stronger ones.

And behind that conclusion stands a fundamental principle of constitutional government:

The purpose of economic and political institutions is not to make it easier for those holding power to do what they want. It is to ensure that the power entrusted to them is exercised responsibly, transparently, and within limits established for the protection of the people.

References and Further Reading

Modern Monetary Theory and its critics

1. Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (2020).
2. Stephanie Kelton, “How Do You Solve a Problem Like Inflation?”, January 18, 2022.
3. Stephanie Kelton, “Should We Be Raising Taxes to Fight Inflation?”, September 27, 2022.
4. Finding the Money (2023), documentary directed by Maren Poitras.
5. William Van Lear, “Modern Monetary Theory and Fiscal–Monetary Policy Frameworks,” Eastern Economic Journal (2025).

Money, monetary institutions, and public debt

1. Bank of England, Money Creation in the Modern Economy (2014).
2. Federal Reserve Board, “How Does the Federal Reserve’s Buying and Selling of Securities Relate to the Borrowing Decisions of the Federal Government?”.
3. Federal Reserve Board, “Interest on Reserve Balances: Frequently Asked Questions.”.
4. Congressional Budget Office, The Budget and Economic Outlook: 2026 to 2036.

The Spanish Habsburgs and the Price Revolution

1. Mauricio Drelichman and Hans-Joachim Voth, “The Sustainable Debts of Philip II: A Reconstruction of Castile’s Fiscal Position, 1566–1596”, The Journal of Economic History (2010).
2. Yao Chen, Nuno Palma and Felix Ward, “Reconstruction of the Spanish Money Supply, 1492–1810”, Explorations in Economic History (2021).
3. Kendall Brown, “Mercury and Silver Mining in the Colonial Atlantic”, Oxford Research Encyclopedia of Latin American History (2017).

Sovereign finance, war, and monetary crises

1. Bank of England, “Why Was the Bank of England Founded?” (2021).
2. Oesterreichische Nationalbank, OeNB History, including the Napoleonic Wars and the 1811 currency crisis.
3. Federal Reserve History, “The Treasury–Fed Accord.”
4. Deutsche Bundesbank, “Inflation — Lessons Learnt from History.” An account of German monetary instability, including the hyperinflation of 1923 and its consequences.
5. Banco Central do Brasil, “The Real Plan.” An explanation of Brazil’s experience with chronic inflation and its monetary stabilization.
6. Athanasios Orphanides and Simon van Norden, The Reliability of Output Gap Estimates in Real Time (1999), Federal Reserve Board.