SMT vs. MMT

     Sound Monetary Theory vs. Modern Monetary Theory

In this piece I will contrast Sound Monetary Theory (SMT) with Modern Monetary Theory (MMT).
The term SMT may be as new to you as MMT, but I will reveal that you already know everything about SMT, unlike its upstart rival, MMT.

By asking a few simple questions, it will become clear which theory is superior in describing the real world.


1.  Where does money come from, who makes it?

SMT – Obviously, money is only made when people in the private sector make a profit. Entrepreneurs and big corporations such as Apple, Sony, Tesla make millions if not billions every year. Banks make money by charging interest. Even governments can make money by selling land and so on.
Organisations that lend money clearly need the savings of richer people to give to creditors.

MMT – Only banks can make money, essentially out of thin air, though some argue that a balancing asset is needed such as a promise to pay it back. Private banks create money every time that they lend, they don’t need other peoples' savings. In most countries the state (central) bank can create money as well, unless they use another countries currency such as the Euro.


2. OK, if money was being created all the time for many years, we should all be rich by now. Who destroys the money to keep the supply just enough to satisfy the economy?

SMT – Is this a trick question? Obviously, only an idiot destroys money. All the surplus money is held by very rich people and organisations. Do you think billionaires and giant corporations are destroying money? If they gave all their money away we would need wheelbarrows to buy a loaf of bread.

MMT – Private banks cancel all the money they lent out as the loan is paid back. Central banks cancel some of the money they paid into the economy when they tax it back.


3. What about governments? Where do they get money from to spend?

SMT – Obviously, a government can’t make money. They need to get it from the private sector who makes it. They do this by simply taking it from the private sector as taxes. If they don’t have enough, they need to borrow money from the rich people and corporations who have been prudently saving the money. They do this by selling ‘bonds’ that rich people can buy at a price that suits them. These ‘bonds’ are created by the government treasury as needed, however they have to pay interest on the ‘bonds’ to make them worth buying.

MMT – The government of a monetarily sovereign country can create all the money it needs as required by its ruling body when it spends. There is no numerical limit to its spending, but there are real-world limits such as available resources and effects on inflation that will limit spending.
Government bonds are simply a form of savings account at the central bank. They’re not needed by sovereign governments (Note 1) in order to get money to spend, neither are taxes.


4. Why do governments need to get into debt?

SMT – Why indeed. They’re simply living beyond their means. Obviously, if you were in debt all the time, you would never be able to pay it back. All debt needs to be paid back eventually. Do you know what size the National Debt is now?. It’s really big, and getting bigger every day.
If governments can’t afford to pay for a National Health system for example, then unfortunately it simply can’t afford it. If people worked harder to make things that other countries want to buy then maybe they would be able to afford it. Eventually.


MMT – The so-called National Debt is simply all the money that has been paid into the economy by the sovereign government that hasn’t been taxed back. As a monetarily sovereign government creates its own money by spending it, it doesn’t need to ‘borrow’ money from anyone.


There we are then. Two theories of how money works. I know which one I think truly represents reality – it’s obvious.



(1) Monetarily sovereign government. A government that creates and uses its own currency, doesn’t guarantee conversion into another currency or a precious metal and doesn’t have debt in another currency.