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So under the Bretton Woods system, with the Central Bank having to carefully manage how much currency was in the system so that there wasn't an excess supply of currency which would put downward pressure on the exchange rate, fiscal policy was highly constrained.

Remember, the fiscal policy is government spending and taxing and under the Bretton Woods system of fixed exchange rates, governments had to be very careful when they spend because that would spend currency into existence and they had to be very careful to make sure that they weren't violating or working counter-productively against the Central Banks' ambition to manage their how much currency was in the system.

So as a consequence, governments would, if they wanted to spend, they would tax. And the tax would drying out currency from the system that the government would inject via its spending. And if they wanted to spend more than the tax revenue that they were receiving (because the amount of tax revenue would be a political variable, of course, they couldn't tax to the end of the earth), they had to issue debt. And that debt, of course, drained liquidity or currency out of the system.

And so fiscal policy had to behave in a way that made it look as though the government had financial constraints. Because practically, they had to tax and issue debt when they spent.

Now, after August 1971, when we entered the era of Fiat currencies, those constraints on fiscal policy no longer applied. Now, what does that mean? What world did we then enter into?

Well, the first point is that governments no longer had to tax when they spent. They no longer had to issue debt if they spent more than their taxation revenue. And so we entered a world where the government was no longer financially constrained in any way, if it issued its own currency.

And so then you have to ask questions - well, what purpose do taxes play anymore? Because obviously our government still taxes. I pay taxes every year. And so we had to understand that taxes were not levied then to fund government spending. There's some other reason and in subsequent discussion, we'll work out what those reasons are.

And the second point is, that all these arguments that you hear about how are we going to pay for it whenever some good idea comes, like - let's fight climate change, let's make sure our public education and our public hospitals are working properly.

How are we going to pay for it?

There's always these doomsayers talking about we'll run out of money.

Well, in a Fiat currency system, the government can never run out of money if it issues its own currency. And the way government spends in Fiat currency systems is to instruct their Central Banks to type numbers into bank accounts. Type numbers into bank accounts and it wouldn't matter how many zeros follow the ones - that would be government spending.

Now, it would matter in functional terms as we'll learn but financially, they can spend as much as they like. And so then we have to ask the question, well, if our governments aren't financially constrained in any way in their spending, are they constrained in any other way?

And the answer that you'll learn in MMT is that the government spending is highly constrained by the available real resources that it can buy in its currency. So once we understand that the government isn't financially constrained, we also understand it can buy whatever is for sale in its own currency and that includes all unemployed labour - which gives you another little insight already that when there's mass unemployment, causing so much hardship in our society, that's a political choice by government, not a financial imperative.

It can always offer jobs to the unemployed if it wants to and we'll learn more about that later. But what we're doing now is transitioning our thought processes from worrying about whether the government can afford to do it in financial terms to understanding real resource constraints. And of course, if there's all the current productive resources - labour and land and machinery and all the other things that go in to producing output - if all of those are fully used and the government tries to compete for those resources and bring them into the public sector, or then you'll meet the resource constraint very quickly, which is the inflation constraint, because the government competing for those resources amongst the existing users will cause inflation.

But if there are idle resources in the economy, if there's mass unemployment, as we've got around the world now due to the pandemic, well then the government isn't constrained in any way at all financially or resource terms. It can offer jobs to any of those workers or stimulate the private sector with spending so that the private sector offers the jobs until we get to the point where all the resources are being used again.

So what we learnt today is we've transitioned from worrying about financial constraints to concentrating on real resource constraints. And once we do that, our concept of what's appropriate fiscal policy position for a government becomes very different construction. And this is extremely important in participating in public policy debates - to understand these points.

We move on next.

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