State Monies are Fundamental to Modern Monetary Economies

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.

 
Related Post

Some points considered here are discussed in more depth in:

Taxation, Money, Freedom and Economy
 

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15 thoughts on “State Monies are Fundamental to Modern Monetary Economies

  1. “It starts from the imposition by government of a tax obligation.”

    Right. The power to tax is the heart of government power.

    Governments can and do function without issuing their own currency, but they cannot function long unless they can collect taxes.

  2. ”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”.

    Looking around the planet I would say the defining feature of capitalism ’manifest’, is GREED (no matter what the text books say). Greed consolidates itself in control (I wouldn’t use the word power because power in the human species comes from collaboration, not control). Greed revolves around the energy center that is the ‘I’: – the ‘I’ wants more and more, is never satisfied, and does not know why; or have any control over itself. Then it dies and some other ‘I’ steps in to take its place. This is not human intelligence at work.

    The only cure for that is generosity. Generosity is because of the presence of something in a human being that makes us human; more than the animal: – greed is simply its absence. Greed is like the dark depths of the ocean where the light does not reach, and everything has big teeth and big mouths. Commit one little generous act, and it will change your whole day. Someone may even smile at you!

    ‘The antidote to greed is appreciation’.

  3. Here is my comment to a question in another place yesterday that has relevance to jrbarch’s comment above on greed.

    One definition of philosophy is reflection on experience. This tradition traces back to Socrates reportedly saying, “The unexamined life is not worth living.” This is also translated, “A life not reflected upon is not worth living.”

    The starting point is necessarily experience, since our world is the objective aspect of our experience, which is given directly by sense experience and then conceptualized in terms of understanding. Knowledge is the confluence of experience and understanding. Experience and reflection are natural in the process of gaining maturity. 

    There are two aspects of experience, subjective and objective. The objective is based on sense data. The subjective aspect is based on perception, thought including memory, imagination reasoning, etc., and feeling, both gross and refined. This constitutes the field of experience that constitutes one’s world and colors it subjectively. According to perennial wisdom is the outcome of the accumulated impressions latent in the deep memory.

    But there is an additional aspect of subjectivity, the consciousness in which experience occurs, both the objective pole of perception and the subjective pole of thought and feeling. In addition to the field of experience, both objective and subjective, there is the knower of the field as consciousness. The knower is the conscious witness of experience as a field. The knower of the field is also self-conscious and capable of reflexivity, curving back on itself by directing attention toward the knower, which does not change, instead of toward the field, comprising changing sense data and mental phenomena.

    However, the knower of the field of experience tends to identify with the field of experience through the body that experiences in accordance with its mode of experiencing, so that the knower gets lost to itself at least much of the time. This is determined by the bodily form unique to the individual. Conscious experience is said to begin at the fish stage of evolutionary development. The full capability of self-consciousness requires the development of a subtle and mental body, which occurs when the human stage is attained.

    Perennial wisdom also teaches that the type of experiencer falls into the categories through the medium of a gross (physical) body, a subtle (energy) body or mental (causal) body. As long as one’s experience is though an embodied vehicle that limits experience, the experience is apprehended as my experience, or “mine.” One tends to identity with the body as vehicle of experience rather than the knower as witness of experience. The witness is ever-present but ordinarily is overshadowed. The only escape from this limitation of the ego that persists even at the finest levels of the relative is realization of Infinite Consciousness as the sole reality that is eternally unchanging (absolute).

    So it would dishonest not to admit that one’s experience is “my” experience as long as one is not realized. One cannot help but identify with the false “I” until the Real I of “I am Infinite Consciousness” is realized as “I alone am.”

    However, there is always the danger in this of self-importance, self-inflation, self-interest, and the like arising and dominating by taking ownership of experience as “mine” and asserting it. This is the shadow of individuality that is always present until realization and while one cannot elude one’s shadow, one can be aware of it for what it is.

    Perennial wisdom is helpful in this since it makes us aware that the limited ego is false (shadow). Thus we can be aware that the false “I” is not the Real I and do our best not to fall under it’s spell. The various methods taught by the masters and saints are means for preventing ourselves from falling into the trap of self-importance, self-inflation, self-interest and self-aggrandizement that arises by of taking ownership. 

    The tendency to identify with the limited ego and its projected world of experience remains until realization, and along with it the tendency to take ownership. One is in the illusion until realization, but one need not be in delusion while in the illusion. Taking ownership of experience and its objects as “mine” is delusional. 

    “Resigning the self to the will of the Almighty” (Ramakrishna) is one of these means of escaping delusion while one is still in the illusion. Another way of phrasing this is accepting all that happens as God’s will.

    Another is recognizing that what we experience ourselves to be at the deepest level is the knower of the field. The knower of the field is the one constant unchanging aspect of our lives, and it is closest to the absolute in our experience. By plumbing its depth, it is even possible to discover its source in pure consciousness. “Mine” belongs to the field and not to the knower of the field, which is found to be independent as pure consciousness. 

    To the degree that one identifies with the knower of the field rather than the field, it become possible to “have no consciousness that anything is ‘mine.'” (Ramakrishna)

    Through spiritual living one comes to greater and greater appreciation of this teaching of perennial wisdom. Identification of the knower of the field with the field of experience becomes weaker and weaker, and the solitary witness of all that is becomes stronger.

    The witness of the field is not involved in the changing aspects of the field but rather is independent of the field and its changing aspects. The witness is different from the subjective aspect of the field. The subjective aspect of the field is associated with claiming ownership. Taking ownership of experience, including action and its results, produces desirable feelings. This is where the problems begin according to perennial wisdom. It is here that self-importance, self-inflation, self-interest and self-aggrandizement arise. 

    Be the knower of the field, rather than the owner of it. Krishna says to Arjuna in the Bhagavad Gita, II, 45, “Be beyond the three qualities.”

    There is no problem from the side of the knower as long as the knower is acknowledged to be the witness of the field. This acknowledgement is made possible by the teaching of the masters and testimony of the mystics even before one gets a taste of it.

  4. I try to say this simply, like: – ‘imagine that you as a consciousness were suddenly transported to live in the personality of everyone else on the planet, one by one. You would very quickly realise the difference between yourself and the ‘I’ of those personalities’. And you would also realise that consciousness is awareness; and awareness happens at different elevations, hence perspective. Keep going up and up, and the Divine comes into view; the personality still extant on the earth, doing its funny little dance, but connected. You, like a little skylark, hanging betwixt Being and earth (also a part of that reality although you wouldn’t think so at the UN).

  5. Dan at http://heteconomist.com/state-monies-are-fundamental-to-modern-monetary-economies/#comment-612902 you have it back to front,

    A government that can’t spend can’t last a second. A government that issues currency can only spend if its currency is accepted as payment. One sure way for a currency to be accepted as payment is for it to be the only way taxes can be paid. A currency issuer doesn’t need taxes for revenue. It needs taxes to have its currency accepted as payment. It may also need taxes to prevent inflation and to make space for goverrnment activity, but as a currency issuer it can never run out of currency.

  6. #PeaceDay … (the story that didn’t make the headlines)

    The United Nations declared Sept. 21 as the International Day of Peace, marking a special time that brings people together around the world to strengthen the ideals of peace. In support of this effort, The Prem Rawat Foundation produced this video, “Medicine for Peace,” to help grow awareness that peace is possible for individuals across the planet.

    Medicine for Peace 2m:19s

  7. “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.”

    It is often suggested that full employment is adverse to capitalism.

    This made me dig around for some insights into what exactly we are referring to when we say ‘full employment’

    The first discovery I made (and this is based on Australia), is that on average each individual has a ratio of 25% of unproductive debt to income. What this equates to as a serviceability ratio I am not sure, but I worked out that if each person who is employed full time reduced some of their unproductive debt and was then able to give up 3 hours of employment, this would create just in excess of 21 million hours of labour per week, and if then divided by the unemployment rate, would give each unemployed 30 hours a week of employment. In other words, there would be zero unemployment without creating one new job.

    But this begged the question – are some people’s occupations reliant on people going into debt? and the answer would appear yes, and this then made me realize that unemployment is a market in itself as there are literally hundreds of thousands employed because of the fact that there is unemployment (centerlink, job network providers etc, short term lenders etc) not to mention all those who devote their time voluntarily in support of these people. What would happen to all these occupations (both paid and unpaid) if there was full employment?

    This made me also ask, is it really full employment that capitalists do not want, or is it rather that with full employment (especially full time employment) more people would have surplus money and this would enable them to accumulate more in financial assets, thereby creating more competition in the financial wealth space? I know it is often claimed that big business don’t like full employment because a) it means government is meddling and they don’t like this, and b) with full employment labourers get more of a say, and are less frightened to stand up for themselves. These are plausible and make sense, but wouldn’t competition in the financial wealth space also bring profits and yields down or otherwise contribute to busts and capitalists would not like this?

    This led me to the question of idleness. It seems that idleness is seen as an evil and yet technology is worshiped. Doesn’t technology itself create idleness in the sense that it enables more production with less labour? And as a result, does this not then mean that in order to get people out of being idle (because of technological advances) we have to basically make more stuff that people really don’t need just for the sake of making sure people are employed?

    In Australia, the average welfare recipient gets around $15K a year, and yet Australia on average produces $70K in GDP per capita and a lot of this stuff seems pointless. Do we really need to be producing so much stuff just so we can ensure there are less ‘idle’ people?

    But this made me also think of something. Why not give a lot of the unemployed research tasks as a means to get them from not being idle? This would be working for the government and I think there is a definite need for it. Just one example would be researching into food preservation. In a time where food production is becoming an issue due to population growth, I don’t see too many people talking about food preservation as a means to off-set this problem. Instead we are getting people telling us we should consider eating insects. Quite a strange thing to suggest when the whole purpose of politics and economics is supposed to be aimed at raising our living of standard.

    But anyway, I just thought I’d throw this out there.

  8. Pete

    I’m not sure I understand this:

    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.

    Specifically, it’s not clear to me why “This step [i.e. ‘the imposition by government of a tax obligation’] is prior (both logically and temporally) to a currency-issuing government’s enforcement of private property”.

    Would it be logically impossible for an anarcho-capitalist society — without government — to have private property and a monetary economy?

  9. Hi Magpie. In the paragraph you quote, the operative words in the phrase “currency-issuing government’s enforcement of private property” are “currency-issuing”.

    That is, the paragraph concerns a currency-issuing government’s method of enforcing private property.

    This is not to deny that government could enforce private property in a non-monetary economy or that non-currency issuing governments in monetary economies can enforce private property (for example, currency-using government’s in the Eurozone enforce property rights).

    In a non-monetary economy, taxation would be in kind. In either a monetary or non-monetary economy, taxation is a mechanism that usually obviates the need to resort to actual physical force or violence, though this will be resorted to in the final instance.

    The point I was trying to get to (in the closing paragraphs) was that, although coercive, a currency-issuing government’s means to compelling a degree of cooperation is perhaps less coercive than the alternatives. It would be better if no coercion was required at all. But that will require everyone to cooperate voluntarily.

  10. Thanks Pete

    I think I understand the final point you were trying to make, namely:

    The point I was trying to get to (in the closing paragraphs) was that, although coercive, a currency-issuing government’s means to compelling a degree of cooperation is perhaps less coercive than the alternatives. It would be better if no coercion was required at all. But that will require everyone to cooperate voluntarily.

    That’s okay.

    But that’s not exactly what I asked. I imagine I wasn’t clear. Note that in that paragraph it is the government that issues currency.

    In the paragraph below you also talk about government in a non-monetary economy or non-currency issuing government:

    This is not to deny that government could enforce private property in a non-monetary economy or that non-currency issuing governments in monetary economies can enforce private property (for example, currency-using government’s in the Eurozone enforce property rights).

    So, let me reformulate my original question: can a monetary economy exist without a government enforcing it? Say, in an anarcho-capitalist utopia there would be no government (but there would certainly be private property). Can a private party issue tokens with all the properties of a fiat currency in the absence of a government?

  11. Oh, okay. Sorry for misinterpreting. I’m not sure what the answer is. If money is an IOU with the only difficulty being getting it accepted (Minsky’s view), then hunters and gatherers in sparsely populated regions could presumably do what you suggest. (Is it an informal kind of government? Maybe?) I tend to think the larger the society, a private issuer of a widely accepted currency would likely have to be pretty much a privatized government unless the level of spontaneous cooperation had reached a high level. A utopia, to me, seems to imply something like that kind of highly developed voluntary cooperation.

  12. “A utopia, to me, seems to imply something like that kind of highly developed voluntary cooperation.”

    Right. A utopia is only possible if the level of collective consciousness is capable of supporting.

    This is a reason that utopian thinking is “utopian” in the pejorative sense of being unrealistic.

    The path to utopia lies through progressively achieving more ideal society by reducing the negative factors and increasing the positive ones.

    Intellectually, this inquiry begins with the question, What does it mean to live a good life in a good society? That is followed by the question, What does it take to live a good life in a good society.

    Behaviorally, in means doing what it takes, e.g., in setting priorities and making choices and following through on this, adjusting iaw feedback (learning).

    Spiritually or humanistically, which ever term one prefers, this means becoming more humane, which is a prerequisite for being truly human.

    This requires a shift in the level of collective consciousness since achieving a more ideal society progressively is a collective endeavor societally. It requires cooperation and coordination, along with adaptability.

    This idea was prominent among the Ancient Greek philosophers, and it was taken up by the philosophers of the Enlightenment, which results in modern liberalism.

    Modern liberalism bogged down trying to integrate social, political and economic liberalism. So far the collective consciousness is not elevated enough to live up to the ideal. Best at least we are on the right page.

  13. in an *** ANARCHO-CAPITALIST utopia *** there would be no government (but there would certainly be private property)

    Everybody is free in an *** ANARCHO-CAPITALIST utopia ***. Free in these terms: (1) Capitalists are free to do with their capital whatever they feel like. (2) Workers, too, are free. First and foremost, they are free from the encumbrance of capital. And they are free to choose between working for capitalist 1 for a wage, or for capitalist 2 for a wage, or starving.

    That enforces cooperation. Cooperation doesn’t mean absence of coercion.

    ———–

    Our species has existed for at least 150 thousand years. Before that, our ancestors existed for maybe 4 million years. All that time, with the exception of the last 10 thousand years at the most our ancestors banded together voluntarily. It took a lot of coercion to force them to “cooperate”. Now, suddenly, it takes little baby steps extending to infinity to reverse that.

    It’s the law of nature that dictates capitalism!

    Give me a break.

  14. Oh, okay. Sorry for misinterpreting. I’m not sure what the answer is.

    No worries, Pete. 🙂

    I don’t know that a utopia needs voluntary cooperation. It depends on how one defines utopia, I suppose.

  15. You could be right about the voluntary cooperation, Magpie.

    It depends on how one defines utopia, I suppose.

    I, however, am ill-equipped to define an anarcho-capitalist utopia as it sounds dystopian to me. 🙂

    (Note to self: Stop alienating readers. First it was the Sunshine Cult; now anarcho-capitalists. At this rate, there’ll be no heteconomist readers left soon!)

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