What is the most appropriate entry point to the study of a monetary economy in which government is currency issuer? Is it “the market”? Is it the definition: total spending equals total income? Is it real exchange? Real production? Is it total output? Total employment? Total value? Distribution of income? The origin of profit? Price formation? Competition?
I would answer “no” to all these suggestions. They are all important aspects of the subject, but they are all embedded in something else. They are all embedded in a social context that is put in place through collective action. In modern monetary economies, this collective action is conducted through currency-issuing government and its instrument, state money.
The operation of markets requires various collective arrangements already to be in place, which can be summarized as the laws and regulations governing property rights and their transference, along with supportive social institutions.
Spending, in a modern economy, is monetary, and is received by somebody else as monetary income. But where does this “money” come from?
Real exchange is conducted through monetary means.
Production only takes place once certain monetary expenditures have occurred.
Employment and value creation only begin once the production process is put in motion.
There is no income to distribute prior to production, nor any profit.
In a modern economy, prices are specified in monetary terms, again raising the question, what “money”? And where does this “money” come from?
Competition occurs within the institutional and regulative framework that has collectively been put in place (the “rules of the game”), and the means for putting this framework in place is state money.
Government, to function, requires staff and other resources. By imposing taxes payable only in its own currency, government creates a demand for that currency. This enables government to attract staff by offering remuneration in the currency and purchasing items available for sale in the currency.
This is one means – in a state money system, the most fundamental means – by which autonomous spending occurs. A demand for privately produced output sold on markets is created in the process.
Government employees and firms receive the government’s autonomous spending as household income and business income, respectively. They use this income to spend, save and pay tax.
Others, in turn, receive this spending as income, which enables more spending.
Private credit issued by banks is another means of initiating autonomous spending in the government’s unit of account.
In a state money system, banks are dependent on government. Their IOUs (deposits created through lending) are promises to deliver the government’s currency (cash or reserves) on demand to the account holder.
Government is the sole issuer of currency. It does not “borrow” cash and reserves from the private sector. To the contrary, government is the original source of cash and reserves.
Bank loans create deposits. Borrowers draw upon these deposits to spend. In doing so, their spending creates income just as government spending does, and adds to the market demand for goods and services as well as enabling saving and tax payments.
To be clear, the suggestion is not that state money is the defining feature of a particular economic system. It can be argued, for instance, along with Marx, that wage labor is the defining feature of capitalism.
The suggestion, rather, is that understanding the currency system is at a more fundamental level than the understanding of the other aspects of a monetary economy listed in the opening paragraph. In the case of capitalism, for instance, it enables us to see how a class of wage earners is produced and reproduced.
In any society subject to internal conflict, private property is predicated on power and, in the final instance, brute force.
In a society operating a state money system, this power is exerted in a particular way. It starts from the imposition by government of a tax obligation that, in effect, compels acceptance of a currency. This step is prior (both logically and temporally) to a currency-issuing government’s enforcement of private property, which in turn is prior (both logically and temporally) to an enabling (in the case of a capitalist government) of the exploitation of wage labor.
Although the exploitation of wage labor and, prior to that, the enforcement of private ownership of the means of production, is enabled by a particular application of state money, this is not the only possible application of state money. A state money system could instead be geared toward a less exploitative, more democratic, more cooperative economy. Such a progression might involve an overturning of capitalism without an end to state money.
Just as state money predates capitalism, it might also outlive it.
Until we can reach a stage where cooperation is entirely voluntary, there is likely to be a role for state money as the least coercive of the coercive means for carrying out collective functions.
Some points considered here are discussed in more depth in: