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Now, if you're wondering - where the modern bit in MMT comes from, we need to do a little history lesson.

At the end of the Second World War in July 1944, all of the nations, the victors got together and they plotted a scheme to achieve what they thought would be currency stability in the global sense.

Because prior to the Second World War and remember, that was followed immediately after the Great Depression, there was massive currency instability, a lot of speculative activity and exchange rates, which are the links between currencies - how much you get for one for the other - they were all over the place.

And so one of the ambitions in the peace time was to have this system of global stability. And so all of the nations met, not all but most nations met at a town in the United States in New Hampshire called Bretton Woods. And the Bretton Woods Conference proceeded to develop what was called a fixed exchange rate system. It was a system based upon US dollar gold convertibility. Now, what did that mean?

What it meant was that all the individual currencies that signed up to the deal would be priced against one US dollar so they would have some exchange rate against the US dollar. And then the stability component of the scheme was that the US dollar would be priced, one US dollar would be priced against an ounce of gold. And the price that was set was 35 dollars US an ounce.

Now the stability idea was that they thought - because there hadn't been any recent discoveries of gold, the gold was in relatively finite supply and so therefore its price would be relatively stable. There'd been no big supply shift improving the stock of gold. And so this system was set in place by the Bretton Woods Agreement and most nations signed up to it.

Now the problem is, that it then required Central Banks in each of the economies to regularly manage their exchange rates. And so if you have a country that had a what we call an external deficit, what does that mean?

That means that, for example, it imports more goods from the rest of the world than it exports, then when it's importing goods, it's got to be supplying its currency to international markets to buy the foreign goods and when people buy that nation's exports, they're supplying foreign currency in exchange for the local currency. And so if you've got an excess of imports over exports, there's more of your currency going into the international community than people are wanting your currency. So supply exceeds demand. And so there was downward pressure on that nation's exchange rate. Now, that wasn't allowed. The exchange rate couldn't fall under this agreement.

And so what Central Banks were committed to doing would be to buy up their currency in the international markets, using their stocks of foreign currencies that the Central Banks would all build up and that why they were regulating their currency price against the US dollar. The problem with that - for a country running an external deficit, the contraction in the money supply would lead to domestic recession.

And furthermore, fiscal policy - that's government spending and taxation - would have to work sympathetically with what the Central Bank was doing. What does that mean? That means that if there was downward pressure on a nation's exchange rate, then the treasury function, the fiscal function would have to try to stop imports by cutting spending because import-spending is directly functional to total income and so if the government cuts spending, it will also cut imports and therefore reduce the external deficit.

And so the problem that faced all of those countries under this system was that they were always prone to domestic austerity and that became politically unsustainable. Now, cutting a long story short, by the 1960s, this system had become unviable. And countries were feeling the pressure of constant austerity to maintain their exchange rates.

Their domestic policy was so tied to maintaining the exchange rate that they couldn't achieve the purposes of domestic policy to advance well-being of its citizens.

And in 1971, in August, that system broke down when President Nixon made the historic announcement that the US dollar was no longer going to be convertible into gold and that currencies would, from then on, float. What does that mean?

That they were no longer tied in any particular formula to the US dollar and the US government was no longer responsible for accepting US dollars from whoever and converting them into gold.

This is the era of Fiat currencies and this is the starting point for Modern Monetary Theory and the mainstream textbooks that you mostly will learn out of if you study economics at universities around the world, haven't really caught up with the fact that the monetary system changed categorically in 1971.

And so what we'll do next is - what were the consequences for governments as a consequence of moving from convertible currencies into fiat currencies? Because as we'll see, fiat currencies have no intrinsic value. They're not backed by gold. They're not backed by anything else other than themselves.

And so what we're now about to embark on, is understanding the consequences of that. And that's the way you start your Modern Monetary Theory journey. And that's what differentiates MMT from mainstream economic thinking.

So let's get going.

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