20.5 VoTa versus Modern Monetary Theory

What MMT claims

Modern Monetary Theory (MMT) argues that a national government which issues its own floating currency cannot become insolvent in that currency. It does not need to obtain its currency from taxation or borrowing before it can spend, and debt issued in its own currency need not be repaid for financial reasons. Its true limit is the availability of real resources. If government spending creates more nominal demand than the economy can satisfy, the result is inflation or pressure on the exchange rate (see Fiscal Reform to Benefit State and Local Governments).

On this account, taxes do not finance the currency issuer in the ordinary sense. They create demand for its currency, withdraw private purchasing power, and release labour and other resources for public use. Government bonds are likewise not required to obtain money for spending; they provide an interest-bearing alternative to currency and reserves, and can support the government's chosen interest-rate arrangements. MMT therefore permits government to spend more than it taxes whenever unused productive capacity makes the additional demand non-inflationary.

VoTa does not depend on denying that a sovereign currency issuer can make payments denominated in its own currency. The disagreement concerns whether such an issuer should exist, what money creation accomplishes in real terms, and who should have the power to command resources through it.

How the Buckaroo system works

L. Randall Wray illustrates MMT with the Buckaroo, a currency introduced by the economics department at the University of Missouri–Kansas City. The system has the following rules (see L. Randall Wray, How to Implement True, Full Employment).

Every student must submit 25 Buckaroos at the end of the semester in order to receive their grades.
The department is the sole issuer of Buckaroos.
The department pays one Buckaroo for each hour of approved community service.
Any student willing and able to perform approved work may do so, with no limit on the number of hours. The system therefore includes a job guarantee at a fixed wage of one Buckaroo per hour.
Buckaroos are freely transferable, so a student may obtain them by working for the department or by trading with another holder.
Students may hold as many Buckaroos as they like for as long as they like.
The department pays no interest on Buckaroo balances.

How the Buckaroo system behaves

The requirement to submit 25 Buckaroos creates demand for an otherwise valueless token. The department can then obtain community work because it is the only source of the tokens students need. It must issue Buckaroos before students can return them, so spending logically precedes taxation. Transactions between students redistribute existing Buckaroos but cannot change their total quantity outside the department.

The fixed wage determines what a student must do to obtain a Buckaroo directly from its issuer and therefore provides a price anchor. If the department changed the wage to two Buckaroos per hour, each Buckaroo would buy half as much labour at the point of issue. The open-ended offer of work also means that no willing and able student need remain unable to earn the required currency. The issuer creates unemployment in the relevant sense by imposing a Buckaroo liability, then eliminates it by offering a job guarantee.

If students want only enough Buckaroos to meet their obligations, the department can issue approximately as many as it collects. If they also want to save Buckaroos, it must issue more than it collects. Its cumulative deficit is equal to the number of Buckaroos accumulated outside the department. An attempt to run a surplus by issuing fewer Buckaroos than it requires students to return would necessarily leave some obligations unsatisfied. The amount retained outside the department is therefore determined by the students' desire to save, accommodated by the issuer's willingness to supply Buckaroos through its standing offer of work.

Interest is not needed to make the system operate. It would merely give additional Buckaroos to existing holders, with the largest payments going to those with the largest balances. Nor does the department face a financial limit on how many Buckaroos it can issue. Its limits are practical: the amount and usefulness of the work students can perform and the effect of its terms of issue on the value of the Buckaroo. If it removed the grade requirement, demand for Buckaroos would disappear; if it paid more Buckaroos for the same work, their value would fall.

MMT's conclusions

MMT treats a national government which issues its own floating, non-convertible currency as occupying the same logical position as the department, while households, businesses, and currency-using governments occupy the position of the students.

The issuer cannot become insolvent in its own currency.
The issuer does not need to obtain its currency through taxation or borrowing before spending.
Taxes create demand for the currency.
The system rests on the government's authority to impose and enforce taxes. The State's monopoly on force enables it to create demand for its currency by requiring taxes to be paid in that currency.
Government deficits supply the net financial assets which the private sector wishes to retain as savings.
The government does not need to pay interest on those savings. The interest rate on its currency can be zero.
The government can provide a job guarantee by making a standing offer to employ anyone willing and able to work at a fixed wage.
Creating currency creates additional nominal claims over existing resources. When the government spends it, the government or its chosen recipients can bid labour, land, energy, materials, food, housing, machinery, and expertise away from alternative uses. MMT recognises this transfer and treats taxation as a means of withdrawing private purchasing power and releasing resources for public purposes (see L. Randall Wray, Taxes and the Public Purpose).
The issuer anchors the value of its currency through the prices it pays. By maintaining its tax authority and not paying more for the same resources, the government can avoid long-term inflation (see Fiscal Reform to Benefit State and Local Governments).
MMT explains the government's capacity to mobilise resources using its currency; whether it chooses worthwhile purposes or uses those resources wisely is a separate question.

Similarities and differences

What VoTa and MMT have in common

Currency consists of tokens with no inherent value.
The tokens must be issued before they can be used.
Taxation creates demand for the currency.
State spending contracts help determine the price level. In VoTa, these are public service contracts funded through tax choice, which determine the cost of the service to the taxpayer.
State taxation and spending release resources for collective purposes.
The State creates jobs.
The State does not need to offer interest on the currency.
There is no need for government bonds.

How VoTa differs from MMT

VoTa does not object to MMT's analysis of money when MMT's assumptions are followed. Instead, it deliberately breaks with the institutional assumptions on which that analysis is based.

VoTa currency is not debt.
MMT treats the government as having a monopoly on the supply of its currency. Under VoTa, no one can influence the money supply. Rather than handing this power to the government, VoTa takes away one of its main economic levers.
VoTa assumes that currency is issued once to bootstrap the system and is conserved thereafter. MMT treats government spending as creating money and taxation as destroying it.
Under MMT, an unwise government can debase the currency through its spending, reducing people's propensity to save currency and increasing their propensity to invest. This creates demand for safe investments which preserve the value of the currency and is one reason interest-paying government bonds are in high demand. MMT leaves such debasement within the government's power; VoTa makes it impossible because the currency supply cannot change. VoTa therefore increases the propensity to save and eliminates demand for safe investments whose purpose is merely to preserve the value of currency: the currency itself is completely safe in a Central Bank account and tends to increase in value over time as economic growth creates deflationary pressure.
MMT promotes commercial banks influencing the money supply by creating money when they extend credit, a mechanism independent of government spending and taxation. Under VoTa, the State provides a currency for people to use directly and makes bank-created money less desirable by neither regulating it nor insuring it against bank runs.
VoTa does not constitutionally mandate a job guarantee, but it permits a public service to operate as one. Such a service may make a standing offer of work to everyone who satisfies published, task-relevant conditions and use a provision scale which expands as more people accept the offer. It must attract sufficient taxpayer support and produce outcomes which its supporters value. Competing employment services and other approaches may coexist instead of one programme becoming compulsory national policy.
VoTa constrains spending by fixing the money supply.
VoTa uses the water-filling algorithm to funnel spending into the most popular projects, avoiding underfunded projects.
MMT is silent on how to ensure that government makes wise spending decisions. VoTa provides a democratic, market-driven, profit-and-loss-driven approach to collective spending on projects funded by taxation.
MMT explicitly relies on a State with a monopoly on force to give it the authority to impose and enforce taxes. The VoTa State must adhere to the NAP and cannot impose taxation through force; it instead uses voluntary citizenship to adhere to the NAP.

The stick versus the carrot

MMT's explanation of demand for State currency begins with a threat. The State imposes a tax liability denominated in tokens which only it can issue. A person must then obtain those tokens or face enforcement. Fines, seizure of property, arrest, imprisonment, and physical force stand behind that enforcement. Most taxpayers comply before the threat is carried out, but compliance under a credible threat of violence is not voluntary exchange. The violence does not disappear merely because it is authorised by statute, administered through courts, or described politely as tax enforcement.

The Buckaroo example makes the structure unusually clear. The students do not first value Buckaroos and then choose to exchange their labour for them. The institution first threatens to withhold their grades unless they surrender twenty-five Buckaroos. Having manufactured the liability, it offers students a way to obtain the tokens by performing work on its terms. The job offer is presented as the benefit, but the prior threat is what gives the offer its power. This is the stick, not the carrot: create a penalty, monopolise the means of avoiding it, and then call the resulting labour voluntary.

At the level of a State, the same logic is more serious because tax demands are ultimately backed by armed force. MMT does not merely observe that people happen to use a convenient currency. Its account of why a State currency is accepted relies on the State compelling people to acquire it. The system is therefore founded on an initiation of force: obey the tax demand or the State will take property, liberty, or both. That is an inherent violation of the libertarian Non-Aggression Principle, regardless of whether the revenue is spent wisely or whether the resulting employment programme benefits some of the people subjected to it.

VoTa takes the opposite approach. Citizenship is voluntary, and the State must attract and retain citizens by offering constitutional protections and public services which they judge worth their tax obligations. A person is not forced to become or remain a citizen merely to avoid punishment. Tax obligations arise from chosen citizenship, and citizens control the allocation of their tax through tax choice. The State must therefore rely on the carrot: make participation valuable enough that people choose it. It may not manufacture demand for its currency or its services by threatening peaceful people with violence.

A zero State rate is not a zero natural interest rate

The Buckaroo issuer pays no interest on Buckaroo balances. MMT generalises this point: a government which issues its own currency does not need to pay interest on that currency or issue interest-bearing debt. This is reasonable as a statement about the issuer's financing arrangements. It does not establish that the natural market rate of interest is zero.

These are different rates answering different questions. The rate paid on State currency is a policy choice made by its issuer. A market interest rate is the price at which one person is willing to surrender present control of resources in exchange for a claim to resources in the future. The cost of creating monetary tokens says nothing about the compensation required to persuade their present owner to lend them.

Suppose Alice owns 100 units of currency and Bob wants to use them for one year. Even if Bob's repayment is certain, Alice gives up purchasing power, liquidity, optionality, and the ability to consume or invest during that year. If she values 100 units today more highly than 100 units next year, Bob must promise her more than 100 future units to make the exchange worthwhile. The difference is interest arising from subjective time preference, not from the risk that Bob might default.

Removing default risk can remove a risk premium, but it does not remove time preference. Actual loan rates may also reflect illiquidity, administration, uncertainty, and expected changes in purchasing power. Inflation or deflation can affect the quoted nominal rate, but neither eliminates the underlying choice between present and future command over resources.

A natural or market rate therefore cannot be inferred from the rate the State chooses to pay on its own liabilities. It emerges from the competing subjective valuations of savers and borrowers. Greater willingness to postpone consumption tends to increase the supply of savings and lower the rate; a stronger preference for present consumption tends to raise the compensation required by lenders. Declaring the policy rate to be zero does not abolish those preferences.

VoTa makes the distinction explicit. The Central Bank pays no interest because it does not borrow or lend, and its currency is property rather than interest-bearing State debt. Private owners nevertheless remain free to lend their existing currency at mutually acceptable rates. The Central Bank rate is zero by institutional design; private market rates remain free to express time preference and market conditions. A risk-free private loan may therefore still bear positive interest (see Robert P. Murphy, Is the Natural Rate of Interest Really Zero? (Answering MMT)).

VoTa currency is not debt

In Wray's account of MMT, money is always debt rather than a commodity. This includes even a State-issued gold coin: he regards it as the issuer's IOU, redeemed when the State accepts it in payment of taxes. A commercial bank deposit is likewise a liability of the bank, while notes and Central Bank reserves are liabilities of the currency issuer. Wray argues that creation necessarily precedes redemption: the issuer must first spend or lend its IOUs into circulation before it can accept them back in payment of obligations to itself. On this account, government deficits leave financial assets in private hands because the government's corresponding liabilities remain outstanding (see L. Randall Wray, Modern Money Theory: How I Came to MMT and What I Include in MMT).

Central Bank currency under VoTa is not a debt, IOU, promise to pay, or claim for redemption. A unit of currency is property recorded in its owner's Central Bank account. It has no maturity and no debtor who must perform an obligation for it to retain its status as currency. Consequently, there is neither creation of currency as an issuer's IOU nor redemption of that IOU. The fixed quantity of currency is brought into existence by the Constitution and initially distributed as property, without creating a corresponding debt. Private loans and other contractual claims still create assets and liabilities between their parties; Central Bank currency itself does not.

This changes the meaning of ordinary monetary operations. A payment transfers existing currency between owners. Tax transfers currency into the relevant tax pools, from which it funds public services or UBI; it does not extinguish currency. Public expenditure transfers currency out of those pools; it does not issue a new State liability. Repaying a private loan likewise transfers currency to the lender but does not destroy it.

Private saving therefore does not require a government deficit to leave State liabilities in circulation. The State can spend only currency received through the constitutional tax system, and neither it nor the Central Bank can overcome that constraint by issuing additional liabilities. The quantity of Central Bank currency is independent of the amount of public or private debt.

Money does not create real resources

Creating money does not create workers, land, machinery, energy, materials, food, housing, or expertise. It creates additional nominal claims over whatever real resources already exist. When government creates and spends money, it enables itself or its chosen recipients to bid resources away from alternative uses.

MMT recognises this real-resource transfer. L. Randall Wray explains that taxation removes resources from private use so that government can employ them for public purposes (see Taxes and the Public Purpose). VoTa's objection is constitutional rather than merely financial: no political authority should decide which resources to take under its control through discretionary creation of purchasing power.

Tendency for government spending to raise prices

The concern is not limited to obvious overspending. It arises even when a government follows an ordinary tender process and accepts a bid at the market rate. A public tender is an additional claim on labour, land, capital, materials, and expertise. When the tender proceeds, the government has offered enough to secure those resources instead of leaving them available for competing private uses. In that sense, a successful public tender has outbid the private sector.

Each tender therefore tends to place upward pressure on the prices of the resources it requires. The government does not face the same financial limit as a private purchaser: under MMT, it can issue the currency needed to make a higher nominal bid. The limit appears instead through rising prices and the displacement of private activity. As government continues to tender for resources, the prices it must pay tend to rise so that its bids continue to prevail over competing private demand.

Democratic government also has persistent reasons to expand its claims on resources. Politicians make promises to interest groups, seek to help people on lower incomes, propose new projects intended to benefit society, and have an interest in maintaining or expanding public institutions and employment. Each proposal may appear reasonable on its own, but together they create a tendency towards larger government, greater competition with the private sector for resources, and higher prices.

MMT recognises inflation as a real constraint, but that recognition does not remove the political tendency to keep spending. Because money itself is no obstacle, the government can continue to outbid private purchasers. The resulting constraint is experienced as inflation, displacement of private activity, or both.

MMT requires a political government

MMT presupposes a fiscal authority that decides how much currency to issue, what to purchase, whether productive capacity is underused, when inflation has become excessive, how much purchasing power taxation should remove, and which people or activities should bear that taxation. Even if each decision is presented as technical or democratic, the institution exercising these powers is a political government.

VoTa has a state but no political government with discretionary control over money or budgets. The Central Bank is a mechanistic payment system. It cannot create or destroy money, own assets, borrow, or lend. Tax is collected automatically, taxpayers control its allocation, and public services operate through contracts under profit and loss. No governing body can decide to issue additional purchasing power or choose the resources on which to spend it.

Deficit spending is impossible

VoTa makes the conventional debate over whether governments should engage in deficit spending moot. The Central Bank cannot create or lend currency, the State cannot borrow, and public-service providers can spend only the tax currency allocated to them. No institution can borrow on behalf of the public or spend more currency than it has received. Deficit spending is therefore impossible by design, regardless of the economic circumstances that might otherwise be offered to justify it.

MMT proponents correctly observe that a currency issuer can spend without first collecting an equal amount of tax. But the absence of a financial constraint is not the absence of a resource cost. If newly issued currency purchases concrete, steel, energy, land, food, or labour, less of those resources remains available for other purposes at the prices that would otherwise have prevailed.

In this discussion, expropriation means transferring effective command over real resources from existing holders to the currency issuer or its chosen recipients without first collecting an explicit corresponding tax. The transfer may occur through higher prices, changes in relative prices, reduced private access to scarce inputs, or taxation imposed later to contain inflation. Describing the expenditure as affordable does not remove that transfer; it only describes the issuer's ability to make the nominal payment.

Persistent net deficits cause inflation

An MMT job guarantee is countercyclical: its spending rises when private employment falls and declines when private employment recovers. This does not reverse the monetary expansion from the downturn. If the government merely runs a smaller deficit during the recovery, rather than a surplus, the previously issued currency remains in circulation and more is added. Each complete cycle then leaves the quantity of currency greater than before.

The decisive issue is therefore not whether individual deficits are countercyclical, but whether government deficits outweigh government surpluses over the long term. If they do, the State continually increases nominal claims over real goods. Growing production or a growing desire to hold currency may absorb some of that increase for a time, but neither can accommodate unlimited monetary expansion. Persistent net issuance must eventually reduce the purchasing power of each unit and raise prices. MMT cannot advocate permanent cumulative deficits while also promising permanent price stability; avoiding the inflation ultimately requires the State to withdraw the excess currency through taxation.

Taxes and bonds control inflation

MMT treats taxation as an important means of controlling inflation because taxes remove purchasing power from the private economy. It also treats government liabilities of different kinds as instruments for managing liquidity and interest rates rather than as necessary financing. This makes the political problem more visible, not less: officials must decide when aggregate demand is excessive, how large the correction should be, and whose purchasing power should be removed.

Such decisions cannot be neutral. Tax increases take effect through particular tax bases, while bond interest is paid to particular asset holders. Both alter the distribution of income, wealth, risk, and access to resources. They also make private planning depend on changing political judgements about inflation, acceptable deficits, interest rates, and public priorities.

Money creation cannot be neutral

New money must enter accounts in some pattern. There are three general possibilities:

Unequal distribution. Money is issued to particular governments, contractors, banks, borrowers, industries, or asset holders. These recipients gain purchasing power before the effects have propagated through prices.
Equal distribution per person. This is redistribution financed by dilution of existing money. The payment is large relative to the money holdings of a poor person and small relative to those of a rich person. It resembles a UBI funded by an implicit tax on monetary balances rather than by an explicit consumption tax.
Distribution in proportion to existing money holdings. If every monetary balance, price, wage, debt, and nominal contract changes by exactly the same proportion at the same time, nothing real changes. This is merely a change in the scale used to measure money. If nominal values do not all adjust together, the process redistributes purchasing power between holders of money and other assets, debtors and creditors, and people with differing abilities to adjust prices.

Money creation with no real effect serves no economic purpose. Money creation with a real effect necessarily changes who can command resources.

Cantillon effects

In practice, new money is not distributed to everyone simultaneously. It enters through particular accounts and markets. Early recipients can purchase at prices that do not yet reflect the additional money, while later participants encounter prices and asset values that have already adjusted. These distributional consequences are known as Cantillon effects.

The effects need not first appear in a broad consumer-price index. New credit may raise the prices of land, shares, housing, or other assets; government expenditure may raise the prices of the particular labour and materials it purchases; and people without access to the initial flow may lose purchasing power without receiving an equivalent benefit. Measuring only the eventual average inflation rate conceals these changes in relative prices and ownership.

Why VoTa fixes the money supply

VoTa removes the institutional reasons commonly offered for discretionary money creation. Money is held directly in Central Bank accounts and is not a commercial bank's debt. Bank failure, loan default, and loan repayment cannot destroy transaction balances. Bank runs cannot threaten the payment system. Lending transfers existing savings rather than manufacturing deposits, and public expenditure is funded transparently through consumption tax rather than debt or monetary issuance.

With a constant money supply, increasing production is likely to produce gradual long-term deflation. VoTa does not regard productivity-driven deflation as a failure requiring officials to reduce the value of money. Falling prices allow the benefits of increased production to appear as greater purchasing power and permit people to save without being forced into risky investments merely to preserve their wealth.

VoTa's UBI also requires no monetary expansion. Consumption tax is collected and redistributed from the UBI pool, so it circulates existing money without adding to its total quantity. If every person were instead given newly created money, the payment would be redistribution through monetary dilution. VoTa makes that redistribution explicit through tax.

The fundamental disagreement

MMT asks how far government can mobilise real resources before its spending causes unacceptable inflation. VoTa asks what constitutional authority permits a political government to mobilise those resources in the first place. MMT makes inflation the principal limit on currency-financed expenditure. VoTa places the limit in the institutional design: there is no political government authorised to create currency, allocate tax revenue, or direct production.

Public expenditure under VoTa must therefore be funded through an explicit tax and allocated through transparent constitutional mechanisms controlled by citizens. The prohibition on money creation does not arise from a belief that the state could literally run out of symbols in a database. It prevents any authority from acquiring command over real resources by manufacturing those symbols.

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