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Reading Beardsley Ruml carefully

Many social media commentators that have become interested in Modern Monetary Theory (MMT) regularly cite sections of the article written by businessman and former Chairman of the Federal Reserve Bank of New York Beardsley Ruml – Taxes for Revenue Are Obsolete – which appeared in the January 1946 edition of the American Affairs journal. The article was actually a speech that he made “before the American Bar Association during the last year of the war”. Some claim that the content provides an early underpinning for Chartalism, upon with MMT is, in part, derived. I disagree. If you read his work carefully, rather than selectively quoting convenient sentences, and, that work includes his more substantial book that was published in 1945 and from which the article cited above was derived, you

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Many social media commentators that have become interested in Modern Monetary Theory (MMT) regularly cite sections of the article written by businessman and former Chairman of the Federal Reserve Bank of New York Beardsley Ruml – Taxes for Revenue Are Obsolete – which appeared in the January 1946 edition of the American Affairs journal. The article was actually a speech that he made “before the American Bar Association during the last year of the war”. Some claim that the content provides an early underpinning for Chartalism, upon with MMT is, in part, derived. I disagree. If you read his work carefully, rather than selectively quoting convenient sentences, and, that work includes his more substantial book that was published in 1945 and from which the article cited above was derived, you would get no MMT succour. He was basically lobbying for zero corporate taxation and he expressed rather orthodox views about fiscal policy at the time, which are very non-MMT in substance.

The historical context

Beardsley Ruml argued that his insights on tax were of relevance because of “two changes of the greatest consequence” that had “occurred in the last twenty-five years” that “substantially altered the position of the national state with respect to the financing of its current requirements.”

These changes were:

… the gaining of vast new experience in the management of central banks … [and] …

the elimination, for domestic purposes, of the convertibility of the currency into gold.

In 1933, the US President Roosevelt abandoned the gold convertibility of the US dollar with the introduction of the – Gold Reserve Act – that became operational on January 30, 1934.

It forced the US Federal Reserve Bank to hand over all its gold and gold certificates to the US Treasury and prevented any financial institutions, including the Treasury from converting US dollar bills into gold.

Public holdings of gold stocks were also largely made illegal and a fixed exchange price of $US20.67 per ounce of gold was paid as part of the surrender deal.

The motivation for the legislation was the Great Depression, which followed the 1929 share market crash.

The chaos (bank failures, business collapses, etc) cascaded into a deep depression as households and firms preferred to hoard gold rather than spend.

Under the gold standard that was in operation at the time as part of a global agreement, nations could not inject more liquidity into their economies unless they acquired more gold, given the strict relationship between the two.

In 1931, Great Britain was the first nation to retreat from the standard and introduced its own fiat currency.

The system then collapsed a few years later when the US also withdrew, although many other nations had followed the example set by the British.

The motivation for the US to abandon the gold standard was to allow the central bank to increase US dollar liquidity in the system

There was a lot more happening at the time, particularly as the Gold Act was quickly followed bu the – Banking Act of 1935 – which reformed the way the Federal Reserve interacted with the US Treasury.

But analysing all those things would take us too far away from the topic for today.

The point is the Beardsley Ruml was presenting his speech in a post Gold Standard, pre-Bretton Woods environment, which is not dissimilar to the fiat currency era that we know of today.

The point about taxes

The excitement that MMT proponents found in Beardsley Ruml’s speech related to his questioning of “Why does the government need to tax us at all?”

He noted that the “obvious answer is, of course, that taxes provide the revenue which the government needs in order to pay its bills.”

He also noted that:

The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government.

And the reason he drew that conclusion related to those two “changes”, noted at the beginning (above).


The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes.

In keeping with the narrative style of his time, Beardsley Ruml was in tune here with the writings of Abba Lerner on ‘functional finance’.

Taxes were not necessary to “provide the revenue which the government needs in order to pay its bills” so the only reason for imposing them lies in the functions they serve in advancing, in Ruml’s words “public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”

Please read my blog post – Functional finance and modern monetary theory (November 1, 2009) – for more discussion on this point.

Those functions included:

1. “to help stabilize the purchasing power of the dollar”.

2. “To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes”.

3. “subsidizing or in penalizing various industries and economic groups” – that is, a resource allocation impact.

4. “To isolate and assess directly the costs of certain national benefits, such as highways and social security” – he used the hypothecated social security system as an example to “limit the benefits to amounts which the people who benefit are willing to pay.”

Given all this, selectively read, it was no surprise that MMT proponents saw something kindred in what Beardsley Ruml wrote.

A basic MMT proposition is that – Taxpayers do not fund anything (April 19, 2010).

The agenda

It should be noted before I proceed that Beardsley Ruml’s basic intention in this address was to make a case to reduce the “federal tax on corporate profits”, which he labelled “The Bad Tax”.

He didn’t like any taxes on corporations during a “peacetime”.

He thought all the impacts of corporation income taxes were bad.

1. They are passed on to consumers (higher prices), the corporation’s own workers (lower wages), shareholders (lower returns).

2. They distort management decision-making.

3. They result in “double taxation” – reducing distributable profits and then reducing the benefits from the dividends.

He called for this “evil tax” to be abolished and the functions of taxation noted above be achieved through taxes on individuals.

So while his agenda is not one that I would endorse, it doesn’t negate the resonance with MMT in this narrow sense.

But think again

Imagine, that instead of focusing on the taxation discussion above, I had tweeted (across two Tweets given character limits) the following and added the handles of known MMT types:

If we look at the financial history of recent years it is apparent that nations have been able to pay their bills even though their tax revenues fell short of expenses. These countries whose expenses were greater than their receipts from taxes paid their bills by borrowing the necessary money. The borrowing of money, therefore, is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.

Would there be a constant focus on Beardsley Ruml, as if he is some kind of MMT genius?

Clearly not.

His speech was clearly a political lobbying effort on behalf of the corporate sector to reduce company taxes.

The question that the last quotation poses is whether he really understood the implications of the US going of the Gold Standard in the 1930s?

He used that as a justification for his views on taxation, but, if he really had an understanding of what the shift to fiat currency after 1933 and before the Bretton Woods meant, then he would not have written that governments could “obtain the necessary means for the payment of their bills”.

That is the antithesis of MMT.

The fact that MMT proponents selectively use Ruml to justify the main MMT propositions is the worry.

We need to be careful in who we align ourselves with.

Beardsley Ruml’s 1945 book

I have just finished reading Beardsley Ruml’s book – Tomorrow’s Business – which was published by Farrer and Rinehart in 1945.

His speech on taxes was revisited in the book.

I wonder how many of those who continually cite Beardsley Ruml have read that book.

He considered “business” to be more than a supplier of “goods and services” but “also as a source of order and of freedom”.

He saw the primary purpose of “business” was “make a profit” and not “to give people useful work to do.”

Business is a “private government because the rules it makes within the law are final and are not reviewable by any public body.”

He also considered that business was “one among many” private governments: trade unions, the church and the family, are similarly ‘private governments’.

And all have to be regulated by the state in some way to ensure that freedom is advanced.

His views on trade unions were symptomatic of his pro-business approach.

But, while he did not express an anti-union view in the book, he did claim that “trade union organization today is chaotic” which has “not been able to resolve its inner ideological and power conflicts”, which suppress individual worker freedom.

He was against the creation of “union shops” (where workers had to join the union) because:

… the rule-makers of the labor union do not rule by consent of the employees … [and that the] … labor leadership is not competent to use this great power wisely.

He thought that the trade unions would abuse their role as private governments and impinge on profits, to which he said that:

… the higher the profits the better.

And it was in that context that he advocated the abolition of company taxes.

But for the purposes of this blog post, the relevant parts of his book are Chapter 3 – “Fiscal Policy and Private Business”.

Beardsley Ruml’s very non-MMT on fiscal policy

He recognised that the realisation of company profits required an “adequate flow of purchasing demand”:

… it is only through the flow of purchasing power that the nourishment of business by business profits can be accomplished.

Principally, this would be achieved by the lending activities of private banks, which create “a mighty river of purchasing demand which rises and falls as a a result of a hundred million private, free decisions.”

But, occasionally, government intervention is required to meet “ups and downs of business activity”:

It is now generally recognized that the national budget must be called on to support purchasing power on the down side of a business cycle.

The national ‘budget’ should support profit creation because it:

… has a decisive effect upon the level of demand, both by influencing the quantity of purchasing power available and by causing changes in its rate of flow — upon the rate at which purchasing power becomes purchasing demand.

But, according to Beardsley Ruml, how the ‘budget’ was financed impacted on this.

Imagine, I tweeted this:

If the deficit is financed by loans from commercial banks or from the Federal Reserve banks, purchasing power will be increased. But if the borrowing comes in the form of the sale of governmtnt bonds to private investors, the federal deficit will take away from purchasing power in the hands of the public an amount equal to the quantity that the deficit has created. A surplus in the budget will take away from purchasing power if the surplus is used to retire government debt held by commercial banks or by the Federal Reserve banks; but, if it is used to retire government debt held by the public, the retirement of this kind of debt adds as much purchasing power to the amount in the hands of the public as the creation of a surplus in the budget had taken away.

How many MMT proponents would get excited about that and started retweeting it furiously or including it in books and papers?

Not many I imagine.

He also considered government expenditure could “affect unfavorably the outlook for private risk-taking … because of impaired confidence” and reduce spending.

This is a sort of crowding out idea – that government spending could “weaken … the stream indirectly by more than they can add to it directly”.

He also raised alarm about the “interest on public debt”, which would have to be “covered by taxation” and further undermine the overall spending in the economy.

In that vein:

One of the great problems of postwar fiscal policy will be so to manage the national debt that interest payments and amortization do

It here that massive contradictions emerge.

He talks about “the need for taxes seems greater than ever” when government debt has to be paid back and serviced during its period of maturity.

He talks about rolling over debt when it matures and this:

… refunding operation again provides the money which the government needs – and, again, the need for present taxes is avoided …

How do you reconcile that with his claim that taxes are not necessary?

You cannot.

What Ruml was advocating was not that taxes do not fund anything but that he only wanted taxes on individuals not corporations.

Those who use Ruml as a source of MMT wisdom have missed this point entirely.

I am not reading much MMT into any of his work.

How about you?

But all of this led Ruml to advocated balanced fiscal positions over the economic cycle such that when the economy was strong, the government should run large surpluses and pay off the outstanding national debt.

That is not an MMT position.

The MMT position is that the goal of fiscal policy is not to achieve any particular fiscal position at any point in time, but, rather to allow the position to adjust to non-government spending and saving decisions in order to maintain full employment and price stability.

That requirement, in certain contexts, may require a continuous and quite large fiscal deficit.

It might, also, in different circumstances, require continuous fiscal surpluses.

Beardsley Ruml was also against major public works programs, which he considered to be impractical ways of stabilising the non-government spending cycle because they “require long and detailed planning, legal investigations, and, in many cases, enabling legislation by state and local governments”.

He considered the public works efforts during the Great Depression to be wasteful and the public employment programs worthy of the “public ridicule and abuse” they received.

He concluded that:

The idea of using standard public works as a way of supporting purchasing power in time of depression had failed.

The only justification for public works is “to stabilize the construction industry” rather than any generalised counter-cyclical stabilisation function.


I found it interesting reading Beardsley Ruml’s book, which provides his overall thesis on fiscal policy rather than relying on a few sentences from his speech, which was railing against taxes.

I am currently in day 4 of a 14-day quarantine in Melbourne after I escaped Newcastle last week. I had planned to fly from here to do public speaking events in other states that had closed their borders to NSW given the virus outbreak there.

At the time of my escape south, I would have been able to fly from Melbourne over the next few weeks to honour these commitments

But the virus spread from NSW to Victoria and the borders were then closed to that state.

So I am stuck.

Best laid plans.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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