Modern Money Basics Glossary

Bank credit is used here to describe all other forms of non-government money. Banks and credit card companies create bank deposits (bank IOUs or credit money) when they issue loans, mortgages, or process credit card payments. They remove deposits (delete credit money) each time a loan or credit card is repaid. Bank credit is usually denominated in the national currency unit (e.g. dollars or yen) and exchangeable at par to the government's currency.

Currency is used here to refer broadly to all the money that the federal government creates, which is mostly in the form of central bank account balances, but also includes paper bills and metal coins.

Government is used throughout the site typically to refer to a federal or national government that issues the nation’s currency. For simplicity, we combine the operations of the Treasury and the Central Bank when describing the process of government currency issuance. We try to be specific when drawing a distinction between the federal currency-issuing government and the currency-using state and local governments, but they are otherwise not included in the term “government” as used throughout the site.

Government bonds are basically tradable savings accounts for the government’s currency. For simplicity, we use the term bonds to refer to all forms of government securities, including Treasury bills (short-dated securities offered at a discount) and Treasury bonds (long-dated interest-earning government bonds).

Government deficit is a way of saying that the government added more of its currency into the economy via payments than it removed via taxation, typically measured during a calendar year. For example, if the government made $1,000,000 in payments and taxed $900,000 during the year, the deficit would equal $100,000. However, this also means the non-government sector of the economy has retained the $100,000 and therefore has a surplus. A deficit in one sector of the economy must equal a surplus somewhere in the other sectors.

National debt is a term that describes the combined total over time of all the net currency that the government has added into the economy since inception. It is normal for most nations to see their money supply increase over time with the growth of population, economy, and trade. The term "debt" dates back to when nations were on fixed exchange rate or gold convertibility arrangements. However, we should now view this as a nation’s base money supply, with government bonds being simply an interest-earning option for the cumulative savings of currency.

Government surplus is a way of saying that the government removed more of its currency from the economy via taxation than it added via payments, during a given time period. For example, if the government made $1,000,000 in payments and taxed $1,200,000 during the year, the government surplus would equal $200,000. However, this also means the government removed $200,000 from the rest of the economy, which therefore has a deficit.

The term monetary sovereignty is sometimes used in MMT literature to describe governments that issue their own non-convertible, floating currency. Recognizing that no nation is truly independent or sovereign in an absolute sense in our interconnected world, we prefer to use terms like monetary agency or fiscal capacity. In any case, the key point is that any nation that issues its own currency (e.g. the U.S., Japan, Canada) will generally have more fiscal capacity if it can maintain the following:

• Makes no promises to convert its currency to other currencies or gold at a fixed rate;
• Allows the currency to float in foreign exchange;
• Has no (or minimal) debt in other nations’ currencies (or gold);
• Operates a central bank function to manage interest rates and payments.

Countries that do not meet one or more of these criteria are often subject to greater domestic fiscal policy policy limitations.