Modern Monetary Theory is an economic paradigm that treats money as a utility that governments issue and tax in order to mobilize resources needed to provide the services that the public wants; it explains why some kinds of government spending leads to inflation while other kinds do not, and how sovereign states use different levers to control inflation, even when they're spending extraordinary sums, as in WWII.
MMT is key to understanding how bold and vital social programs — from Medicare for All to a federal jobs guarantee to the Green New Deal — can be enacted, and why austerity and its absurd comparisons between sovereign nations' spending and household or small business budgets are cruelty dressed up as prudence.
In The People's Money, MMT theorist JD Alt takes a swing at a comprehensive explanation of what we mean when we say "money" — and what the difference is between "money" in the national bank, "money" in your local commercial bank, and "money" you have in your pocket right now.
It's a crisp and comprehensive explanation, blissfully easy to follow and light on finance or accounting jargon. This is only part one, and Alt has promised a sequel dealing with the relationship between the public and private sectors.
Reserves, then—even though they are the "real" U.S. fiat dollars—are not the "money" American citizens and business borrow and spend every day. That money comes in two other forms: Federal Reserve Notes (the cash dollars we have tucked in our wallets) and bank-dollars which is the money we have on balance in our demand bank-accounts (checking and money-market accounts). What is the relationship between these other forms of money, that we actually use every day, and Reserves?
The relationship is very simple: Federal Reserve Notes (cash dollars) and bank-dollars are claims on the Reserve dollars posted on the electronic balance sheet at the FED. So, while you can't get your hands on Reserves, you can make a claim on them when you actually need them. This is not something you need to worry about accomplishing—it happens, automatically, as needed, when you spend your cash or write a check.
This happens because of the way the central bank is structured. Every private bank in the Federal Reserve System has its own Reserve account at the FED. In its Reserve account, each bank keeps track of the "real" sovereign U.S. fiat dollars it is in control of. (Remember, these are just digital entries on the electronic balance sheet—very much like the scoreboard at a basketball game.) The FED can debit Reserves from one bank's Reserve account and credit them to another's, "keeping score," if you will. The FED can also simply "issue" new Reserves and add them to one account or another—again, with keystrokes—in exchange for another asset (collateral). Importantly, the U.S. Treasury also has a Reserve account at the FED—which is the spending account for the U.S. federal government: Not only does the federal government expect to be paid with Reserves, it only makes payments, itself, with Reserves.
The People's Money (Part 1) [JD Alt/New Economic Perspectives]
(via Naked Capitalism)