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In this post, I summarise (cherry pick to my best ability) the essence of a series (of 20 posts so far) by The Heteconomist called Short & Simple, in which he tries to introduce MMT.
Human communities are in need of collective action and social rather than private provisions alone. In this context, governments have functions to fulfill, which in a democratic society are based on a public mandate and monitored by the people or their representatives.
(1) Effective contributions by government to the common weal require that adequate resources are diverted to the state's agencies.
(2) Effective social contributions by government imply also that there must be a reasonable balance between resources going to the non-government sector and government.
By establishing a national currency, the state attains both goals (1) and (2).
ad (1) By requiring people to pay taxes in the national currency determined and issued y the state, the latter is able to effect acceptance of its currency and spend it to attract resources needed to carry out its mandate.
ad (2) by withdrawing purchasing power from the non-government sector via taxation, government is in a position to influence how much of total resources available to a society go to government and how much are left for the non-government sector.
One way of fulfilling government's mandate is to organise the financial system and create a division of labour between its own functions within that system and those of participants in the non-government sector, like banks.
Government needs to ensure that enough money is available for the smooth running of the economy, part of which task is, of course, preventing banks from becoming dysfunctional.
A crucial feature of the division of labour between government and non-government financial agency is reflected in the distinction between currency (or state or government money) and bank money.
Banks are allowed to create money by extending loans. the corresponding deposits represent national currency and bank money but not currency in the sense of state money.
A commercial bank deposit is not currency. It is a bank’s promise to supply the government’s currency to the deposit holder. Since the government is the sole issuer of currency, banks ultimately depend on government to obtain it.
Even so, banks do not need to have the currency at the time they make the promise. They just need to know that, as necessary, they will be able to get it.
The bank promises to provide the currency at par, meaning that each dollar of deposit is completely convertible into a dollar of currency.
With a current account or checking account, the bank is obliged to supply currency on the spot, whenever the deposit holder requests it. With a term deposit, the bank promises to supply currency at a future date.
To guarantee that deposit holders can always convert deposits into currency (up to some limit set by government), the central bank acts as lender of last resort.
This means that if a bank is short of currency and cannot obtain it from another bank, it can borrow from the central bank.
This makes deposits “as good as currency” for most purposes, up to the limit at which deposits are guaranteed by government.
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