Randall Wray and Monetary theory

One of the most interesting post-Keynesian theorists who specializes in monetary theory is L. Randall Wray who teaches in the Economics Department at the University of Missouri in Kansas City. Wray whom I have met and talked shop with is a former Ph.D. student of Hyman Minsky and much of his work shows the influence of Minsky. One of Wray's books Understanding Modern Money(Edward Elgar, 1998) I consider a classic because it largely successfully revives Abba Lerner's conception of the monetary system. It also introduces the very heuristic concept of fiat currency as "That which is necessary to pay taxes" or twintopt. As Wray puts it " If a state decided it would accept only beaver pelts in payment of taxes , the population would have to organize itself to ensure that it obtained the requisite number of beaver pelts; ...of course all modern states impose a monetary tax liability and generally accept only money in payment of taxes. Not coincidentally all modern states require that monetary tax payments be made in the form of the state's own currency. That currency, in turn, is nothing more than the government's liability. " (Wray,Understanding Modern Money, p.4) As Wray explains because citizens need the fiat currency with which to pay their taxes governments (and in reality employers and the private banking system to the extent that governments permit them)have the power through their central bank to dictate the terms upon which citizens acquire the currency. High powered money with which citizens can pay taxes is supplied through the banking system governed by the policies and overnight lending rate imposed by the central bank.If the central bank imposes too high an interest rate and also effectively restricts the availability of high powered money through tight money policies citizens will have a difficult time finding enough currency and bank deposits to pay their taxes with. Instead they will resort to credit . Wray's book is definitely worth reading as his recent article done for the Jerome Levy institute for economics at Bard college available on the internet.(simply google Randall Wray) I don't agree with some of the thrust of his most recent paper on the irrelevance of monetary policy but his work is both informative and provocative, particularly on the way in which overnight interest rate setting works and its impact upon liquidity in the banking system.