Ongoing Debate Over Currency Value

In this post, I outline how I see the questions of demand for state money and domestic value of state money. My perspective is informed by neo-chartalism (modern monetary theory). Hopefully the post can serve as a basis for discussion and we can identify some of the sources of disagreement. I am mainly referring to disagreements between Modern Monetary Realists (MMRers) and Modern Monetary Theorists (MMTers), but others have expressed opinions such as John Carney at CNBC and John Kay at the Financial Times.

A few issues need clear treatment from the outset, because disagreements may be stemming from one or other of the issues without it being clear to both sides in a given instance.

Domestic Value. What I am considering is domestic value of the currency. I take no account of exchange rates between different state monies or potential private monies that are not denominated in the government’s unit of account.

Positive Demand. If at least somebody needs to get hold of the government’s money, there is some demand for the currency, but not necessarily widespread use of the government’s money.

Extent of Use/Demand. In principle, the government’s money could be used for all monetary transactions in a nation or only for some transactions, with alternative monies used at other times.

 
Role of Taxes

There seems to be disagreement over the significance of taxes. The MMRers appear to acknowledge that taxes play an important role (perhaps necessary?) but argue that they are insufficient to ensure the viability of the government’s money. My interpretation of MMT has been that enforceability of taxes (or fees or some other obligation to the state) is sufficient but not necessary (i.e. that other factors could conceivably be sufficient), even though historically this does not appear to have been the case.

In thinking about the possible necessity and/or sufficiency of tax enforceability in relation to government money, the question that springs to mind is, “necessary and/or sufficient for what?”

I suspect MMRers are thinking in terms of widespread use of the currency whereas MMTers have in mind the minimum requirement for the viability of the government’s money. For this reason, the MMRers stress that there are other factors relevant to the widespread acceptance of the government’s money, whereas MMTers point out that, at minimum, all that is necessary is the introduction and successful enforcement of a lump-sum tax.

The way I see the MMT position is this. Whether or not people think there are great things to be had by trading in the government’s money, that is immaterial to the question of whether the government can create sufficient demand for its currency to transfer resources as desired from the private to public domain. If there is a lump-sum tax, and it is successfully enforced, that will be sufficient. End of story.

That does not mean that the government’s money will be widely used beyond what is necessary to extinguish the tax obligation. Nor does it mean that if the government’s money is widely used, this will be solely due to the enforced tax obligation. MMTers agree that many other factors come into play including convention, convenience, other legal measures (e.g. contract law), and so on.

In the MMT view, it would not ultimately matter if people, having met their tax obligations, transacted in other monies the rest of the time. A reason governments try to restrict people as much as they can to use of the government’s money is that they have introduced consumption and income taxes, which can be avoided by transacting in other monies. However, if governmental attempts to restrict use failed and people largely adopted other monies for private transactions, the matter could be resolved by the government imposing only lump-sum taxes to the extent necessary to transfer the desired resources to the public domain. This, in itself, would be sufficient for viability of the government’s money.

 
Domestic Value of the Currency

In terms of the (domestic) value of the currency, the MMT position is that it is determined by the scarcity of the government’s money relative to the enforced tax obligation. The government, through its fiscal policy, should keep its money just plentiful enough to facilitate tax payments and any non-government net saving desire in the government’s money.

In a sense, enforced lump-sum taxes determine the minimum scope of the currency. That is, they define the minimum use the non-government could make of the government’s money while still abiding by the tax laws. Provided tax enforcement is successful, the government’s money will be used at least to that extent.

If the government’s money were not used beyond that, and most goods and services were for sale in some other money (or monies), the point of interest for other transactions would be the value of whatever money was in use. This would not impact on the (domestic) value of the government’s money. There would be fluctuations in exchange rates between these different monies, but that would have no bearing on the (domestic) value of the government’s money, which is what matters for dealings in that money.

In other words, lack of access to quality output or resources for sale in the government’s money beyond what was necessary to extinguish the tax obligation would result in the government’s money only circulating in a narrow sphere, but this would not impact on its value within that sphere. Provided that sphere was wide enough to enable the desired transfer of resources – which it would be, provided the lump-sum tax obligation was enforced – viability of the government’s money would be maintained.

 
Note on Productivity

Having said all that, as long as the government is maintaining the (domestic) value of its currency, there is little reason for the non-government not to opt for it rather than other monies.

This is irrespective of a nation’s level of productivity. The problem declining productivity causes for exchange rates will apply irrespective of the money in use within a nation. Using a money other than the government’s money will not resolve this problem. The difficulty in obtaining a foreign state money for the purposes of purchasing goods not for sale in domestic monies (whether the state money or private monies) will remain. The problem would be low productivity, not domestic value of the currency.

So it seems to me that successful tax enforcement and keeping the currency sufficiently scarce relative to the tax obligation and non-government net saving desire is both sufficient to ensure the viability of the government’s money and in all likelihood conducive to its widespread use, albeit in combination with a wide array of other factors.

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64 thoughts on “Ongoing Debate Over Currency Value

  1. The main reason I can see for failing to accept the ‘taxes can drive money’ argument is that it requires a state.

    Generally the thrashing around is brought about by those people who can’t stand the idea of a state and all that it represents.

    Essentially the rejection is a position based on anarchic principles.

    It is a simple matter of construction that if you have the power to enforce a liability on some third party in some token that you control then they will have to obtain that token or suffer the consequences of the enforcement.

    And that is a perfect description of the current system.

    “A reason governments try to restrict people as much as they can to use of the government’s money is that they have introduced consumption and income taxes, which can be avoided by transacting in other monies.”

    I don’t think that’s the case. Taxes are imposed in the native currency on entities that are tax domiciled in that nation *regardless* of what currency the transactions are executed in.

    The transactions are converted, with the agreed exchange rate, into the native currency and taxed *as though* they were transacted natively.

    The reason people tend to use the native currency then is so that they don’t suffer exchange risk as well as taxation.

    I see the limit of a native currency as directly proportional to the ability to enforce liabilities in it and the extent that you can enforce liabilities in it. It’s all down to how good your enforcement is and how acceptable that is seen to be.

    And that doesn’t sit easily with some people who see enforcement of social rules as abhorrent.

  2. “A reason governments try to restrict people as much as they can to use of the government’s money is that they have introduced consumption and income taxes, which can be avoided by transacting in other monies.”

    I don’t think that’s the case. Taxes are imposed in the native currency on entities that are tax domiciled in that nation *regardless* of what currency the transactions are executed in.

    Good point, Neil.

    Regarding the broader debate, I am trying to see if we can identify the points of difference more precisely. The MMRers have reacted quite strongly against the suggestion that it is a libertarian streak that is behind their disagreements, so I was hoping a discussion could pinpoint the sources of disagreement.

    Personally I agree, of course, with your depiction of state money.

  3. > In the MMT view, it would not ultimately matter if people, having met their tax obligations, transacted in other monies the rest of the time.

    Very good..! An “aha-moment” for me.

  4. Here’s a viewpoint.

    Cullen recently suggested that its the production process which is the more important reason money exists.

    Even Keynes talked of a “monetary theory of production”.

    Randy has mentioned that money came before the State (my way of putting it but I can find the reference).

    The important thing about taxes is not what the Neochartalists emphasize. The reason IMO is that taxes makes the State’s liabilities the best debt out there. Because that’s unlike Apple whose iPhone can run out of fashion, and hence the possibility of zero revenues in the future.

    Money does not exist for public purpose whatever rhetoric the Chartalists come up with. However, the power of the State to get permanent revenues gives it the power to manage demand and attempt to achieve full employment. That is different from saying money exists for public purpose.

  5. Thanks for your thoughts, Ramanan. You seem to be addressing a different point, concerning whether money need always be state money. I think clearly the answer is no to that question. It is possible to have other monies. But, as I understand it, the MMRers are arguing that tax enforceability is not sufficient to ensure the viability of state money.

  6. I should point out the flip side of the ‘enforcement’ argument.

    The act of enforcement, ie jailing tax evaders, increases the amount of state demand for resources which increases the level of taxation and therefore the level of enforcement.

    So the very construction removes from society those who are prepared to defy the enforcement, and by doing so those that decide to tow the line get richer.

    So it is self-reinforcing.

  7. Peter,

    I’m still finding it hard to get my head round the Chartalist position on money demand. I have a couple of questions.

    1, When you say that all that is necessary for viability is for people to want to hold enough state money to pay their taxes, are you imagining a situation in which the starting stock of govt money is zero, and then the govt spends into existence every period the exact amount needed to pay taxes, which the population has to compete for?

    2, When I think of money demand, I have a very simple model in mind that relates demand, supply and the price level. Something like (M/P)=f(Y,i). Do Chartalists use something similar? Do taxes appear in the demand function or do they operate on demand at a different “level”?

  8. Peter,

    I understand you are addressing something else here. However, my comment was not necessarily out of context. This is because you wrote about the “role of taxes” which made me jump to my comment. But I will discuss this no further here. Perhaps another post where this will be discussed.

  9. Fair enough, Ramanan. That was a poor choice of section heading on my part. We can start up a separate discussion on the points you wish to discuss in the not-too-distant future, as you suggest. Thanks for not sidetracking this thread.

  10. That is different from saying money exists for public purpose.

    Ramanan, I think you must view such generalised statements within the normative perspective that the raison d’être of democratic governments themselves, and thus logically also of the means by which they achieve this, lies in furthering the ‘public purpose’. As PeterC points out, this does not mean that public money necessarily furthers public purpose, nor that money is necessarily public. History tells us quite the contrary, I dare say. But then, neither history nor the present are marked by enlightened democracies working peacfully towards a brighter common future. ‘t’would be nice, though…

  11. “I’m still finding it hard to get my head round the Chartalist position on money demand.”

    It’s fairly simple. The currency issuer can impose an a-priori liability on you in a token it controls – and it has the power to enforce that.

    It doesn’t matter what the starting position is. Creating that liability generates a ‘high pressure area’ and a ‘low pressure area’ in the nominal circuit which is sufficient to cause a flow to happen as people look to extinguish that liability to avoid the enforcement action.

    But for the model to work you have to operate with a separate circuit for the tokens from the economy for real goods. Think two separate circulations influencing each other much like electrical induction or an electrical transformer – and with a similar power loss.

    That power loss is what (S-I) represents – the excess savings/investment in the nominal circuit over the real circuit.

    You can see that the tokens are separate from the real system if you run the thought experiment where the currency issuer imposes the liabilities but then simply gives the individuals the correct amount of tokens to ensure those liabilities are extinguished. You get lots of flow in the nominal circuit and nothing happening in the real circuit.

    You might even need to issue more tokens than you demand, because some people are sticking tokens in a jar due to feelings of uncertainty.

  12. vimothy, regarding your point 1, all I am saying is that there will be at least some acceptance of the government’s money if some people need to get hold of it to extinguish tax obligations or they desire it as a form of saving. If the non-government already has more than enough for these purposes, the government’s money is not sufficiently scarce to maintain the value of the currency.

    Regarding your point 2, demand for broader money (i.e. currency plus demand deposits) can be satisfied by private credit expansion (what MMT regards as horizontal transactions). If the private credit expansion results in expenditure that can be met at current prices, it will not pose a problem. But it can be problematic if credit expansion causes demand to outpace productive capacity. This would indicate a smaller non-government net saving desire than is consistent with the government’s fiscal stance. Since the non-government cannot rid itself of the government money in excess of this desire on its own (i.e. through horizontal transactions), maintaining the value of the currency will require the government to tighten its fiscal stance to match the reduced net saving desire of the non-government.

    As with Ramanan’s comment, this also seems a little off topic in terms of sorting out where the differences lie between MMR and MMT.

  13. Neil,

    What I’m asking is: exactly what premises need to be satisfied to get that kind of result?

    Say e.g. that the govt levies a lump-sum tax against me, but I already hold a large stock of “govt money”. In that case, nothing implies that I need to forgo access to real resources in order to pay the tax.

    BTW, if MMTers are, as Peter’s post seems to suggest (though perhaps I am misreading him), positing a relationship between taxes and inflation, analogous to the relationship between money supply growth and inflation, then this should be fairly easy to verify this empirically.

  14. vimothy, in MMT value of the currency is the amount of labor time required to obtain it. This is argued to depend not just on taxes, but government net expenditure relative to the net saving desire.

    There are two issues that I suspect are getting confused in the debate between MMRers and MMTers. One is about acceptance of the currency, which MMT argues depends on tax enforceability. Then there is the question of what determines the value of the currency. There may also be disagreement over the definition of the value of the currency. That is, perhaps MMRers disagree with defining it in terms of labor time required to obtain it. I am not sure.

  15. Peter,

    Lol, I thought that my questions were exactly on topic! (Meaning, what is it that MMTers believe about money that MMRers might or might not disagree with). But of course it is your blog and I am happy defer to you on this 😉

  16. Peter,

    On reflection, I don’t want to be taking up the thread of what is supposed to be a discussion between MMTers and MMRers. Perhaps at some point in the future we can revisit this.

    I do have one further question and a suggestion which might help further the debate between the two groups, though:

    How would MMTers relate their measure of currency value to changes in the price level / inflation?

    If they can be simply related then it should be small beans for someone to do some regressions in Stata to find out what the relationship between d(NFA), say, and d(MMT currency value) is empirically.

  17. Neil,

    What I’m asking is: exactly what premises need to be satisfied to get that kind of result?

    Say e.g. that the govt levies a lump-sum tax against me, but I already hold a large stock of “govt money”. In that case, nothing implies that I need to forgo access to real resources in order to pay the tax.

    No, but your ability to consume out of savings or smooth consumption out of income has been diminished and thus will, all other things remaining equal (i.e. no income from other sources), have some impact on spending / saving decisions and thus on real flows at some point, albeit possibly with a lag. Lump-sum taxation directly affects nominal stocks. Nominal stocks affect nominal flows. Nominal flows affect real flows.

    BTW, if MMTers are, as Peter’s post seems to suggest (though perhaps I am misreading him), positing a relationship between taxes and inflation, analogous to the relationship between money supply growth and inflation, then this should be fairly easy to verify this empirically.

    Easy to verify? If that were so, economics would be peanuts :-). Economists can’t even agree on a definition of the term ‘money’.

  18. What about the following description to subsume the MMT/MMR approaches on the subject?

    In a specialized labor production system exchanges and distribution are of necessity. The tool to make them function is a monetary system (if one does not know better). Therefore, money becomes of necessity, as a title and valuation device for people to access goods and services produced.

    Such necessity is objective and in abstract it appears independent of the existence of the State. As goods and services produced can only be accessed through purchases people need to hold (earn) money to access such goods and services. This need appears independent of the need to pay taxes to a State.

    But, is it? I think there is no record in history of a specialized labor production system without a State. Moreover, it becomes of historical necessity that the emergence of a specialized labor production system needs (the previous existence of) a State (and therefore the payment of taxes and the moving to the public sphere of private product).

    For a gedanken experiment, one may consider a society with a very simple production system made up of farmers, herdsmen and artisans. Can such a society thrive without an army to defend land, livestock, etc from external predatory armed attacks? It cannot (unless it stays in a condition of complete isolation).

    Therefore, one concludes that the first specialization of labor must be between warriors and other producers. But warriors organize themselves in what we call now a State, enforcing the producers to pay taxes to provision themselves.

    It is reasonable to assume that money as payment of taxes came to birth first than money as a medium of exchange.

    As societies develop labor specialization the need for money to purchase also develops. But unless the production system would function without a State the need for money to pay taxes will not disappear: both needs are inextricably linked.

  19. Neil: The main reason I can see for failing to accept the ‘taxes can drive money’ argument is that it requires a state.
    Generally the thrashing around is brought about by those people who can’t stand the idea of a state and all that it represents.
    Essentially the rejection is a position based on anarchic principles.

    Taxes are not needed to drive money. Taxes are required to give state money value so that the state can transfer private resources to itself without just confiscating them.

    Anarchists realize this, and want to prevent the state from being in a privileged position wrt money. The idea is that if the state needs private resources for public use then it should obtain the funding from the private sector by borrowing from private entities.

    The is not only the position of anarchists. It is also the position of bankers. 😮

  20. @ Ramanan

    The argument is not about money, it is about state money. As far as I know, no MMT economist has argued that taxes are required for money to have value. Their claim is that taxation is required to give state money value so that the state can transfer private resources to itself using currency it issues.

    Perhaps this argument is based on a misunderstanding?

  21. I’ll repeat a comment I made previous under a previous post.

    peterc, the way I understand the state theory argument as MMT economists put it, taxation is necessary and sufficient to give state money value. It is the sine qua non and the causal factor. Other factors come into play in determining how the state money is used and what its purchasing power is.

    I also believe that the state money involved is the unit of account rather than the medium of exchange. For example, in the US use of barter or alternative currencies has to be converted into the unit of account for tax reporting. One cannot avoid taxation in terms of state money by avoiding its use as a medium of exchange, because it is the unit of account that is the criterion the government uses.

    Perhaps one of the MMT economists will clarify this.

  22. Agreed, Tom. It’s a theory of state money (not a theory of the state, by the way, since some seemed confused between the two). One must also be clear of the distinction between “giving the state’s money value,” which is done by requiring the state’s liabilities to be used in paying taxes, and “the value (i.e,. purchasing power) of the state’s money” that is largely set by the NFA relative to non-govt saving desires and then both of those relative to productive capacity (and other things, like pricing power, labor union power, etc.)

  23. Tom,

    “@ Ramanan

    The argument is not about money, it is about state money.”

    Money is the creature of the state – how do I interpret this?

  24. “and “the value (i.e,. purchasing power) of the state’s money” that is largely set by the NFA relative to non-govt saving desires and then both of those relative to productive capacity (and other things, like pricing power, labor union power, etc.)”

    In terms of the mental model of two circuits – the nominal and the real – which influence each other in some non-linear fashion.

    I’d say the ‘NFA relative to the non-govt savings desires’ is the nominal circuit and the tendency to put the tokens in savings pots (and of course the inability of the banks to be 100% efficient at offsetting those savings pots).

    Then what is left circulating induces activity in the real circuit which is where productivity matters. Real stuff is produced and tokens change hands.

    I can’t see productivity being that important to the production of tokens in the nominal circuit.

  25. “Say e.g. that the govt levies a lump-sum tax against me, but I already hold a large stock of “govt money”. In that case, nothing implies that I need to forgo access to real resources in order to pay the tax.”

    Haven’t you already given up access to real resources to gain the large stock of govt tokens? Access you are not guaranteed to recover when you try and use those tokens in the future.

    For tax to have effect at inflation control it has to stem the flow, not the stock. It has to eliminate real transactions.

    Don’t confuse the lump-sum tax with the inflation control tax/reduced spending. They are two different taxes performing two different functions.

  26. So let’s take that as a starting point and bring some more into it, if I can. I find the MMR perspective interesting here and would like to see it scrutinized a bit. I’m not sure it’s incompatible with MMT but maybe is trying to take it a step further. We’ll see.

    Tom said: “taxation is necessary and sufficient to give state money value.” and

    Scott added “One must also be clear of the distinction between ‘giving the state’s money value,’ which is done by requiring the state’s liabilities to be used in paying taxes, and ‘the value (i.e,. purchasing power) of the state’s money’ that is largely set by the NFA relative to non-govt saving desires and then both of those relative to productive capacity (and other things, like pricing power, labor union power, etc.).”

    This seems to me very different than saying the value of the currency is solely determined by the amount of labor it will buy, which seems limiting, in my view. It’s like saying “goods and services” and taking “goods” out of the equation.

    Now, the MMR position (obviously I could be wrong) seems to be that taxes may be sufficient as a starting point, but that ultimately maintenance of production is ALSO necessary. Furthermore, enforcement may be necessary and sufficient as a starting point, but that ultimately you also need ACCEPTANCE. The question at issue seems to be: what drives productivity? Is it the enforcement of taxation alone, as MMT may suggest (In the MMR view?) or is it acceptance? It seems to me that in the MMR view, ACCEPTANCE is more important than ENFORCEMENT in maintaining production. The question remains whether this is a valid position or not, and if it is at odds with MMT.

  27. Dave,

    Good points. Regarding this–“The question remains whether this is a valid position or not, and if it is at odds with MMT”–I would say that from our view the points they raise are obvious (i.e., obviously you can’t enforce if the state is not legitimate enough for there to be acceptance). Given that, and the fact that, again, we are talking about a state theory of money and not a theory of the state, in our view these points did not require overly lengthy discussion in our research.

    Also, MMT doesn’t suggest that enforcement drives productivity. There’s this weird discussion ongoing about “does productivity come before taxes?” But it seems to me there’s no possible way for MMT to suggest taxes come first since the point of levying a tax is to bring goods/services to the public sector. Without productivity, what is there for the govt to buy? Further, chartalist literature on the history of money is clear that the earliest forms of money that have been found have been credit monies–related to private trading and thus private production of goods and services.

  28. Ramanan: Money is the creature of the state – how do I interpret this?

    The use of credit money preexists the state. See economic anthropologist David Graeber, Debt: The First 5,000 Years (2011). The book contains copious references.

  29. dave, being the sole issuer of currency gives the state a currency monopoly. Taxes give state money value as tax credits, which are absolutely necessary for retaining one’s freedom and property in any state which has the power to enforce its laws. A state unable to enforce its laws would lose the advantages as currency monopolist to counterfeiters, tax avoiders, black markets, etc.

    The purchasing power of the state’s money is affected by the state’s monopoly over currency issuance. This gives the state price setting power by virtue of its monopoly to the degree that the state chooses to exercise it, or even recognizes that it has it.

    Being the currency monopolist gives the state enormous power. This is the reason that Libertarians oppose state money and prefer free banking with the state having to obtain funding from the private sector.

  30. Certainly, money is not a creature of the state, it is actually his brother. Both are sons of humanity.

    The loss of time and energy of people so capable with so little fruitful discussions is disappointing.

    Loans make deposits!. Unanimous. To make this possible, law (sister of government and money) and its acceptance by the community are required. I find this cristal clear.

    Which is the discussion?

    The descriptive “soul” of MMT is the final demonstration that money is an exclusively human artifice rather than an esoteric one (as many many people perceive) and that its change is possible through the law which is the same than saying through the state or the citizens.

    In the times of General Franco, many citizens who were asked what they thought about this or that public issue, they always responded that they were “apolitical”. As if that was not a political position!…

    There is a need of absurd diferentiation by the MMR that really infravalaues his work. Policy is inseparable from the human animal.

    Like the good songs , some quotes can be read and read without getting tired of it. This one comes from one of the greatest.

    “…It is therefore indispensable that all things which can be exchanged
    should be capable of comparison, and for this purpose money has come
    in, and comes to be a kind of medium, for it measures all things and so
    likewise the excess and defect…And money has come to be, by general a greement, a representative ofDemand: and the account of its Greek name -nomisma- is this, that it is what it is not naturally but by custom or law
    and it rests with us to change its value, or make it wholly useless”.

    Salud

  31. Ok, fine. Productivity precedes taxes. But I´d argue that people precede productivity, which implies we should move the debate to Creationism vs. Theory of Evolution as the primary driver of…what were we talking about again…

  32. Likewise, we would argue that there’s nothing unique in the insight that a govt needs taxes, laws, system infrastructure, etc. to exist. That’s pretty obvious. There’s nothing unique there. As Peter noted, many economists acknowledged the fact that taxes are important to money. That didnd’t make them all Chartalists.

    Also, anthropologists have found the earliest forms of socialized money in primitive apes. They create a social construct whereby they become indebted to one another. I scratch your back, you have sex with me later. Default on your debt and you don’t get thrown in jail. You get beaten or worse. When we evolved we simply changed a verbal agreement into a written agreement and we stopped killing eachother and started threatening one another with more humane punishments (like fines or jail). The creation of state money did not change the driver of money (real resources). It just changed the structure which money operates within. The state theory does not add anything unique to any of this. It just adds an obvious insight – a govt needs taxes, laws, etc to operate smoothly.

  33. Just bouncing my gradual understanding of MMT around a little here in the context of demand for State money and its value:

    (Materially) – human beings value things.

    Sometimes they exchange things according to their values. Credit is an ongoing store of value. Obviously, things need to exist before they can be exchanged (or at least promised to be brought into existence). The real factor at work in all credit transactions is trust. Although looking at the world today you could say subterfuge, miasma, fiasco and ipso facto hedging risk …. (sigh) …

    Problem is, credit (constrained only by human nature and finite resources) is monetised (constrained by number); and money can change in value as well as the value of things. If you sit on the seesaw you must go up and down …

    Money ministers to human need, flowing in to just about every single household and individual’s pocket on the planet. A lot of it is used for rubbish … or to counter free human expression and development.

    (That’s the money bit).

    Human beings also have a need for governance, just as they have a need for fulfillment: love, art, good health, learning, organisation, creativity, socialising ect. Each of these are an energy extant in a living Nature that meet in man ….

    Credit can never be monopolised by anybody but money can be controlled because of number.

    Indirectly by the People who create credits in monetary terms (blindly hoping they will be monetised by the State).

    Directly by the State who maintain the value of money by monetising the credits; setting the price and adding and subtracting money.

    So, would it be true to say that the State holds a monopoly because of the human need for governance (social control over the personality aspect in man). And integral to governance (steering) is resource control. And integral to resource control is money? So the People grudgingly favour State money and taxes?

    Today, who would credit the State (voluntarily) if it wasn’t enforced?

    This is because the quality of the governance is poor and the need for governance (security, law, international relations, purpose, planning) has to be consciously recognised and appreciated and deemed of greater value, than the need for greed – if people are to sacrifice to and credit govt. voluntarily. Biggest problem is governance has been hijacked because we do not insist on quality governance? And this because of a misinformed public.

    Would it be fair to say that greed has had the most significant impact on State money value and demand? And the only cure is governance?

    Always a human thing ….?

  34. Agree with most of what you say, Cullen, except there is quite a bit of difference among economists regarding the history of money–the story told in the textbooks is the typical barter-to-coin-to-credit story; Chartalism is the primary counter to the Metallist story, so it’s rather significant in that sense. But, yes, the history of money as you recount it is largely the same that we’ve found, too. And if you understand that already, I can understand where one might look at our view of tax-driven money and say, “yes, and . . . ?” Wish everybody knew it as well as you and was at that point.

  35. There is an aspect to state money that hasn’t been mentioned. The introduction of state money was actually quite brilliant. Prior to the inception of state money rulers simply appropriated the resources they required through confiscation. This created very bad vibes, since such society was fear-based. It was robbery, but the ruler was above the law as law-giver. The resources went to maintaining the palace and temple, and was also used for war.

    Although state money is used to transfer private resources to the state, compelled by taxation and penalty for non-compliance, this arrangement not as rude as confiscation. Randy Wray relates the story of imposition of colonial money by British colonialists in Africa precisely to avoid the naked use of force by cloaking it in a threat instead.

    In this case the purpose was to transform a tribal society that was self-sufficient, where people were able to enjoy ample leisure along with work, into a modern economy of workers who would use their income from employment the way the colonialists wanted in the markets that would replace the tribal way of self-sustenance. The idea was that once the natives learned what their income would buy they would want to work for it, instead of enjoying leisure.

    Here, the institution of state money was specifically to initiate productivity where there was none to speak of. There were no existing markets, no jobs, and no surplus product. All this was created from scratch by the introduction of state money, as a consciously chosen alternative to turning the indigenous people into slaves and making them work by force. Moreover, “voluntary” workers are more productive than forced labor. Quite a brilliant scheme, and it worked.

    Once state money is integrated into an economy, there may be grumbling and some may attempt to avoid it by avoidance, counterfeiting, etc., most people grow accustomed to the convention and accept it as natural. After a while, people even get patriotic about their national currency. Notice how most American prefer a strong dollar, even thought his makes imports more expensive for them.

    So state money began as a sort of ruse to disguise confiscation of private property for state use, but it later became a convention. Moreover, as state became more democratically governed, citizens came to realize that taxation with representation made for the government’s ability to carry out public purpose that benefited all.

    Where problems arise now — for the most part anyway, in that there will always be those that see taxation as confiscation — is when it seems to a great many people that the system is rigged for the privileged at the expense of the them. It’s not a matter of the amount of tax one is required to pay, since the wealthy always pay most of the taxation, haivng the most. Rather, it is a question of “fairness.” This is social, political and economic problem with rising wealth and income inequality. Ultimately it becomes corrosive unless adequately addressed.

    Money is a social construct that preceded the inception of the state. It began as credit, and as anthropologists like David Graeber observe, obligation, reciprocity, and a sense of fairness is pre-human. The social construct of money was an evolutionary development that later became a conscious idea. State money constituted a huge development of that conscious idea, and it has gone through many iterations since its inception as the state grew into the dominant social, political and economic entity, now operating on a global scale.

  36. Well said, Tom

    And, of course, regarding the economists that understood state money–largely writing before Knapp “invented” the term “Chartalist”–the point there (since some of the literature Peter cites there is actually ours) is to note how the idea of state money was well understood at one time and then largely “forgotten” and replaced by the ahistorical metallist story of barter-coin-credit.

  37. Here is my simple thought experiment:

    Peter, you are now the President of the Republic of Texas (yes, they finally seceded!). And the government needs to issue its own currency. How would you ensure the viability of the new currency from an MMT and MMR perspective, in an attempt to frame the differences from the two?

  38. Trixie, I know the MMT answer. Not sure if the MMR answer would be different or the same when it comes to starting up a new currency.

  39. Tom Hickey:

    Notice how most Americans prefer a strong dollar, even though this makes imports more expensive for them.

    A strong dollar makes imports cheaper, no?

    Generally:

    I can understand Ramanan’s and Cullen’s question. Knapp’s book was called ‘The State Theory of Money’, not ‘The Theory of State Money’. I haven’t read the book but, along with the Lerner quote, it is easy to conclude that Chartalists assert that there can be no money without a state.

    Could one say that for Chartalists, the definition of ‘money’ and ‘state money’ coincide, so that all forms of exchange that precede state money and lead up to it are refered to as ‘credit’?

    And speaking about Graeber, I’m about half way through Graeber’s book – so I don’t know where he’s going – but until now he has distinguished between what he calls ‘social currencies’, that can be seen as precursors of ‘state money’ (they fit with the ape story), and trade currencies (forget the exact term he uses, but mostly coins or just metal), that don’t fit with the Chartalis story my opinion. I would say Graeber isn’t a Chartalist in the strictest sense.

  40. It’s also important to remember that the origin of money in its various messy forms doesn’t alter the mechanism by which it can be used now in its evolved form.

    If the imposition of liabilities back by enforcement gives you extra policy space economically, and our existing currency systems do fit that model, then they can be used to deliver that extra policy space for the benefit of the population.

    How we got to here is interesting anthropologically, but economically the argument is a moot point.

  41. @Oliver,

    “Could one say that for Chartalists, the definition of ‘money’ and ’state money’ coincide, so that all forms of exchange that precede state money and lead up to it are refered to as ‘credit’?”

    This is interesting, it’s like they are trying to explain two different things that they categorize under one term “money”, and then define this term “money”. It’s like we have “apples” and “oranges”, which we combine into a broader category called “fruit”, and then we are trying to define “fruit” so that it perfectly defines both “apples” AND “oranges” at the same time…. I don’t know if we can do that.

    In a review of the Greek Scriptures, I have observed that the Scriptures use separate specific Greek terms for separate items what we might today perhaps be seeking to conflate into a common entity and term “money” in English, and now are attempting try to seek a common definition of… I’m not sure if this will get us somewhere. resp,

  42. To all those who think its tax and tax alone that gives money its value:

    What would happen in an economy where government took a minute proportion of GDP, i.e. where taxes were of negligible significance? That could be because there was no external threat, so no military was needed. Virtually everyone was honest, so few police were required. And childrens’ education was all funded by parents.

    Such an economy could have gold as the monetary base. So gold would give money its value. But I suggest a fiat base would do equally well. And money would not lose its value because of INERTIA. That is, absent excess demand, there’d be no point in a car dealer trying to sell cars at too high a price because people would just go to a competitive car dealer.

    Moreover, even where taxes take a sizeable chunk of GDP, that does not stop inflation. We had serious inflation in the 1970s/80s. So while taxes certainly do explain the existence of money in several countries throughout history, the tax driven money theory is not the full explanation for the existence of money or why it maintains or fails to maintain its value.

  43. But I suggest a fiat base would do equally well. And money would not lose its value because of INERTIA.

    For a time, Ralph. But financial systems are constantly innovating. And for whatever kinds of money and financial instruments exist at any time, people are always making lots of promises for delivery of those assets in the future, and building new cleaver kinds of assets and cash flows on top of the existing ones. Their initial confidence sows the seeds of the Minsky cycle into speculative and Ponzi finance, and generates increasing systemic fragility. Eventually there is a crisis.

    What would have happened in our recent financial disaster in the US if the state-run currency system were not anchored in place by its enforced legal network of dollar payment obligations, which create a permanent crisis-proof foundation of dollar demand for the dollars needed to meet those obligations, and its monopoly control of the currency system that allows the government to run a central bank with unlimited powers of domestic liquidity provision? I think it would have looked like one of the frequent 19th century depressions. A dollar whose general acceptability was based only on inertia and convention would have been blown away by the collapse of the fragile house of dollar-denominated cards.

  44. And just to be clear, I do think the inertia of a social convention is probably sufficient to keep a currency running for some period of time. But it is not an effective long-run solution to the persistent and recurring problem of financial instability.

  45. Ramanan,

    “Money does not exist for public purpose whatever rhetoric the Chartalists come up with. However, the power of the State to get permanent revenues gives it the power to manage demand and attempt to achieve full employment. That is different from saying money exists for public purpose.”

    Everything the Government does, including creating money, ought to be done for the public purpose. Insofar as acts of Government aren’t intended to fulfill the public purpose they are illegitimate acts of Government. Insofar as acts of Government do not result in consequences that contribute to public purpose they are either illegitimate if they were not intended for that purpose or are errors if they were so intended, but have unintended consequences that detract from, rather than adding to it.

  46. “What would happen in an economy where government took a minute proportion of GDP, i.e. where taxes were of negligible significance? That could be because there was no external threat, so no military was needed. Virtually everyone was honest, so few police were required. And childrens’ education was all funded by parents.”

    You old hippy you. 😉

  47. Joe,

    Completely agree.

    Since the government’s fiscal stance itself affects demand, it should not restrict fiscal policy, else unemployment will result. The fundamental task of the government is full employment. Everything the government does should be with this aim in mind.

    My point was only about how money came into existence historically.

  48. Ralph: To all those who think its tax and tax alone that gives money its value

    Who is arguing this?

    The value of money as a tax credit in meeting liabilities to the state guarantees its acceptance in moving resources from private to public use. The contention as I understand it is that this happens to the degree it is necessary to obtain the tax credits needed to preserve one’s freedom and property intact.

    No one I know pays taxes “voluntarily,” and I don’t know anyone who pays more in taxes than required because they are patriot or generous. Virtually no one likes sacrificing purchasing power to transfer resources to pubic use. They do everything they can to preserve purchasing power, by staying on the edge of the law. Some skirt the law, figuring that they either won’t be caught or will pay the fine if they are. Some are willing to take a bigger chance with losing some of their freedom, too, if caught, and we all probably know someone or of someone that did. This is not uncommon. So there has to be an incentive with negative reinforcement to motivate behavior where there is strong resistance. Especially when the positive reinforcement of visible and tangible benefits may be low.

    Without taxation and enforcement, transferring purchasing power away from the private sector would be ineffective because everyone would realize that a lot of others were in avoidance and the incentive would be to avoid instead of being one of the chumps.

    This means that the currency always has the value as a tax credit that government gives it. If taxation is very low, then that value is low in comparison with other factors, and if high the value of the tax credit increases in demand to meet obligations. So the tax obligation has to be sufficient to give the tax credit the value required so that government can move private resources to public use, but not so large as to overly restrict productivity in non-government.

    Most people don’t really appreciate this because currency is relatively abundant. But talk to people that live in a situation where money is not abundant. My wife’s family were farmers during the Great Depression. Money was extremely scarce because farmers only get paid at harvest time. Making the tax payment may involve going into debt. Add that to other necessary expenses and many farmers went bankrupt at that time since they were forced to borrow in greater quantity to maintain themselves than they could eventually service.

    I also know people who spent time as IRS agents. These are very smart people with CPAs. They know every trick in the book and take pride in catching out people that think that they are smarter than the Feds.

    The value of the money wrt purchasing power and changes in relative purchasing power domestically and internationally is determined by a variety of factors, one of which is the government’s price setting power as currency monopolists, e.g., setting the base-line price of money through the overnight rate.

    However, the value of money in terms of purchasing power is determined by what a unit of currency will purchase in the market. Economists are particularly interested in changes in cost of a unit of labor, the cost of a unit of energy, etc. in determining changes in purchasing power.

  49. Tom, et al,

    Can it be said that the interest payment on credit money (that created by the banks) acts in the same, or similar, way

    So because of the ‘peg’ between credit money and fiat money the combination of taxation and debt repayments – all of which can be settled with the state scrip – help drive the money system.

    So you have to pay taxes. You get into to debt to pay the taxes and then you have to pay off the debt while running up more taxes.

  50. Another matter to consider in the MMT paradigm is that taxes don’t fund government, since the state is the monopoly issuer of the currency. Rather, currency injections into non-government are required for non-government to obtain the needed tax credits in the first place. Of course, most people don’t understand this and think that their taxes are funding government expenditure, which is not the case.

    The state creates currency in two ways, 1) through its own direct expenditure and also 2) through the institutional arrangement of public-private partnerships called banks, which are really money-creation franchises sponsored by the state with its currency. Banks create credit money denominated in the currency as unit of account by extending loans — loans create deposits. However, final settlement of all transactions in the economy that don’t take place intrabank simply by adjusting accounts occur through exchange of currency, either as reserves in the interbank system on on the spot through the use of cash. Thus, the state injects currency into non-government indirectly through its “franchises.”

    There must be enough of the medium of exchange available in an economy to facilitate the transactions necessary to consume all production less capital investment including planned inventory. If too little, then unplanned inventory grows and there is economic contraction as firms cut back production. If too much for the economy to expand to meet the increased effective demand, then inflation occurs.

    So the government must balance money provision with economic production by adjusting the amount of vertical money injected by government and horizontal money created by banks with productive capacity. It’s never a matter of getting money from taxes to purchase private goods for public use. Rather it is a matter of ensuring a well-functioning economy from which government can extract the resources it requires for public use from the private sector.

    Government does this through changing its fiscal position by altering injection through expenditure and withdrawal through taxation, as well as regulating its franchises in the financial system through monetary policy and regulation. How government can accomplish this through knowledge of monetary operations, sectoral balances, functional finance and financial sector management is the subject of MMT.

    Thus we see that the business of transferring private resources to public uses is a complicated one, involving the entire economy. And the idea that government taxes to get money to transfer private resources to public use is wrongheaded.

    IN the MMT perspective the notion of taxes wrt state money is simply that taxes create a need to obtain currency to meet obligations that the currency issuer imposes. This establishes the currency as the unit of account in terms of which tax liability is figured, whether the transaction occurs in the currency as medium of exchange or not. For example barter transaction must be converted to the unit of account for tax reporting. This means that the entire economy is denominated and valued in terms of the unit of account.

    Thus, taxation does two things simultaneously. It creates purchasing power for the government’s unit of account that allows government to use its currency to transfer private resources denominated in the unit of account to public use, and it also is a chief factor in allowing government to manage the currency relative to the economy.

  51. Dan, A central bank which acts as lender of last resort is a good way of ameliorating financial crashes and recessions. Agreed. But you could have that in place even where tax formed a minute proportion of GDP.

    Also in a crash, the problem is not that the currency will lose value. If anything, it’s the opposite. That is that too much deflation takes place – in both senses of the word: i.e. too much unemployment and prices falling.

    Neil, Far as I can see you are asking whether money can be underpinned by the interest paid to private banks in the same way as tax underpins the state’s money. Having consulted the few remaining brain cells in my skuIl that haven’t died of old age, my answer is thus. Strikes me that any complex economy requires a form of money, and it will accept any old form of money that looks like it is being competently administered. Absent any form of money, I’d guess a large supermarket chain which issued tokens to be used to purchase its goods would find a big demand for the tokens from people who wanted to buy and sell stuff that nothing to do with the supermarket.

    Argentina and Hong Kong effectively used the US dollar as their currencies for long periods. The “tokens” acceptable for payment of tax do not have to be tokens issued by the government collecting the tax.

  52. Ralph,

    As long as there’s correlation between the domestic needs of the tax collector and the monetary policy of the token issuer it works fine. The problem is it’s only correlation, not coordination. When that correlation breaks down the domestic economy of of the tax collector gets stepped on, as happened to Argentina.

  53. You know, given the current state of affairs, I look back longingly at those days when all a Modern Monetary Theorist or Realist had to look forward to was a nice dust-up with the Austrians!

  54. And on that note, as more of a personal comment about myself, I was on my way to becoming an Austrian until I discovered MMT.

  55. Oliver @8:03am

    I’m not sure who is a “strict” Chartalist. Perhaps Knapp? I’m not sure that splitting hairs b/n “state theory of money” or “theory of state money” is anything more than semantics, but could be wrong.

    At any rate, as far as the “modern” Chartalists go–MMT’ers, that is–our research on the history of money is virtually the same as Graeber’s. Note that Randy edited a book on the history of money a few years back titled “Credit and State Theories of Money.” There’s thus no contradiction in suggesting credit money precedes state money for us–Randy’s written that himself several times.

  56. Scott, Joe,

    Splitting hairs – my favourite past time. Probably because I have none left of my own… And since the difference between the MMT & MMR folks apparently lies within the breadth of half a hair, I agree we should call the whole thing off.

  57. “And since the difference between the MMT & MMR folks apparently lies within the breadth of half a hair, I agree we should call the whole thing off.”

    Let it run its course. Different views are always useful and operating from a different angle may yield something of use.

    Much as I enjoy hearing the MMT economists point of view, they are rather settled on a particular angle, which means some questions have become self-evident truths and axiomatic – rather than being supported by solid argument and evidence. Hardly surprising if you’ve spent a decade or more ploughing a lonely furrow. MMT economists are human too.

    Let the debate continue!

  58. Oliver, I meant my comment here to refer only to the issue of origin. Not to the rest of the issues between MMR and MMT. I think those are really of great significance. Here’s the summary of my series: http://www.correntewire.com/the_job_guarantee_and_the_mmt_core_series

    and here’s a postscript: http://www.correntewire.com/thats_not_all

    The issues are highlighted are very important. The fight over the origin of money is about jockeying for position to gain an advantage in the ideological conflict.

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