Just Because You Know How to Make Money, That Doesn’t Mean You Know How to Make Money

Elon Musk has been making a lot of comments on government debt recently, and though I have a lot of respect for what he's done in electric vehicles and space travel, I couldn't restrain myself from ridiculing his views on government debt:

That led to another tweeter having a go at me, because obviously someone who knows how to make money knows a lot about money:

But in fact, knowing "how to make money"—in the sense of accumulating vast wealth from being a successful entrepreneur—doesn't convey any special knowledge about "how to make money"—in the sense of creating money itself. My Exhibit A here is the attitude to government debt of two equally famous entrepreneurs—Henry Ford and Thomas Edison—which was diametrically opposed to Musk's.

Back in the early 1920s, these two entrepreneurs joined forces to argue that a huge infrastructure project—the Muscle Shoals hydroelectric plant—should be financed using government debt. Their scheme was literally front page news in the Twitter of the day, the New York Times ("Ford hopes to use Muscle Shoals as Step to End Wars"; "Ford Sees Wealth in Muscle Shoals"). An essential feature of Ford's logic was that the government doesn't need to borrow money, since it is a money creator:

"Army engineers say it will take $40,000,000 to complete the big dam. But Congress is economical just now and not in a mood to raise money by taxation. The customary alternative is thirty-year bonds at 4 per cent. The United States, the greatest Government in the world, wishing $40,000,000 to complete a great public benefit is forced to go to the money sellers to buy its own money. At the end of thirty years the Government not only has to pay back the $40,000,000, but it also has to pay 120 per cent interest, literally has to pay $88,000,000 for thirty years.

And all the time it is the Government's own money. The money sellers never created it. They got it from the Government originally. The Government first gave credit, now it must pay for the use of what it gave. Think of it. Could anything be more childish, more unbusinesslike!" (Henry Ford, December 4th 1921)

Ford's proposal was that the government should finance the dam's construction by simply creating the money needed. His argument here—that currency and government bonds are effectively just different forms of government created money—is very similar to the argument that Stephanie Kelton makes today, that bonds and currency are just different forms of government-created money:

This is Kelton from The Deficit Myth in 2020:

"Then why does the government need to borrow? The answer is, it doesn't. It chooses to offer people a different kind of government money, one that pays a bit of interest. In other words, US Treasuries are just interest-bearing dollars.

To buy some of those interest-bearing dollars from the government, you first need the government's currency. We might call the former "yellow dollars" and the latter "green dollars."

When the government spends more than it taxes away from us, we say that the government has run a fiscal deficit. That deficit increases the supply of green dollars. For more than a hundred years, the government has chosen to sell US Treasuries in an amount equal to its deficit spending.

So, if the government spends $ 5 trillion but only taxes $ 4 trillion away, it will sell $ 1 trillion worth of US Treasuries. What we call government borrowing is nothing more than Uncle Sam allowing people to transform green dollars into interest-bearing yellow dollars."

And this is Ford from the New York Times article in 1921:

"Now, I see a way by which our Government can get this great work completed without paying a nickel to the money sellers. It is as sound as granite. and there is but one thing hard about it. It is so simple and easy that, maybe, home folks can't see it.

The Government needs $40,000,000. That is 2,000,000 twenty-dollar bills. Let the Government issue those bills and with them pay every expense connected with the completion of the dam... the entire $40,000,000 issued can be retired out of the earnings of the plant."

"But suppose the contractor would be unwilling to accept that kind of currency in payment?", he was asked.

"There is not that kind of suppose in the situation at all," said Mr Ford smiling. "He would take the Government bonds in payment, wouldn't he? Certainly! Here," said the manufacturer, pulling a twenty-dollar bill from his pocket, "he wouldn't hesitate about taking that kind of money, would he? Of course not. Well, what is there behind a bond or this bill that makes it acceptable. Simply this, the good faith and credit of the American people, and twenty-dollar bills issued by the Government to complete this great public improvement would have just as much of the good faith and credit of the American people behind them as any bond or other American currency ever issued."

So who does Ford sound like here—his fellow entrepreneur Musk, or the MMT advocate Kelton? And which entrepreneur do you trust on this issue?

You don't: you work it out from first principles instead. This is something that Musk says he does in his engineering, but it's clearly not what he's doing when it comes to his attitude to government debt. As it happens, it's Ford and Edison who did the first principles thinking and got it right, not Elon Musk. I'll explain that in my next post.

Figure 1: The headlines from the two New York Times articles on December 4th and 6th of 1921