Money Creation and Budget Deficits

Recently, I had the good fortune to run across this book, "Understanding Modern Money" by L. Randall Wray.

Money is created by government deficit spending. Again, money is created by government deficit spending.

Think about the time before the U.S. existed, before U.S. federal reserve notes existed. How did the first net dollar come into existence? Answer: The government bought something with a U.S. dollar. Did it borrow this dollar? No, because there were no dollars to borrow yet. What would have happened if the U.S. government ran a balanced budget at the end of the year, where 100% of spending would be paid for with taxes? There would be no dollars in circulation.

It is this accounting identity that drives our modern economy. Because economists, federal reserve board members, and politicians do not understand what how money is created, we have huge economic problems. I cannot believe that I am saying this, but our budget surpluses of the late 90's were the worst thing to happen to this country in my lifetime.

This is probably the biggest book for me since I read "Critical Path" by Bucky Fuller back in the day, because it makes sense of how money is created. The traditional method does not make sense. I've thought this since I first heard it 15 years ago. I could not understand the traditional view and have always struggled with it because it does not make sense.

This theory of money creation is known as Chartalism.