Kling Monetary Theory

In one sentence, KMT says,

There is no scarcity in the means of payment.

Textbooks used to say that money is a unit of account, a store of value, and a means of payment.

The textbook justification for money is that barter is inefficient. Suppose that the butcher walks into the baker and says, “I want to buy bread, and I have meat to sell.” The baker says, “I have bread to sell, but I want candlesticks.” So now the butcher has to try to sell meat to the candlestick maker in order to turn around and get bread from the baker. With way more than three goods, this gets completely crazy. But if everyone agrees to accept money, there is less running around.

I claim that nowadays there are many means of payment. Last March 11, my wife and I locked ourselves down. In the year that has transpired, neither one of us has gone to an ATM for cash. We have no use for it.

The dollar still matters as a unit of account. The baker quotes prices in dollars, not candlesticks. The Fed does not control money as a unit of account. The dollar as a unit of account is firmly established as a social convention.

Currency, checking accounts, and saving accounts are stores of value. But there are other stores of value, including bonds, stocks, and real estate. Some of these stores of value are less liquid than others. People are reluctant to sell stocks in their retirement accounts in order to spend. It takes a while to get a mortgage in order to convert real estate into spendable funds. But you can spend more than what you have in deposit at the bank, and you can have deposits in the bank without spending them.

Total spending in the economy is related to the total amount of wealth that people have in all of their stores of value. The Fed does not control the supply of the stores of value. The Fed mostly controls the supply of Fedcoin, meaning reserves held by banks. Total wealth bears little relationship to Fed actions.

All stores of value differ from one another. They have different risk characteristics. Some require conversion into a different store of value before they can be used as a means of payment, and some do not. But at the margin, variations in the relative supplies of different stores of value are not a big deal.