State Money and Markets

A national government with the authority to tax gets to nominate a money of account along with the ‘money things’ that will be accepted in fulfillment of the tax obligations it imposes. In doing so, the government creates a demand for a particular money – a ‘state money’. This motivates the formation of markets for goods and services whose prices are denominated specifically in the money of account. This is true whether the national government with the authority to tax is a monetary sovereign (a currency issuer) or a monetary non-sovereign (a currency user), though a monetary sovereign will have greater autonomy in shaping the economy according to democratically expressed preferences as well as the wherewithal to underwrite the economy.

Markets in a sovereign currency system

In the case of a sovereign currency system, government establishes a currency by:

  1. defining and declaring a monetary unit of account (e.g. the dollar);
  2. imposing obligations denominated in that unit of account and nominating the money things (e.g. reserves or currency) that are to be required in final settlement of those obligations; and
  3. spending its money into existence.

Once government has spent its money into existence, the money can be used by non-government to extinguish the financial obligations that government has imposed.

The imposition of financial obligations (primarily taxes in modern times, but also fees and fines and, historically, tribute and tithe) makes it necessary for non-government to obtain the money things (typically currency or reserves) or claims on the money things denominated in the money of account (such as commercial bank deposits, which are claims on currency and reserves) as required to fulfill the financial obligations that government has imposed.

Some members of non-government can obtain the money needed to meet their obligations by supplying goods and services directly to the currency-issuing government.

Others can do so by offering goods or services for sale to members of non-government who have previously acquired – or have gained access to – government-issued money or claims on that money.

In this way, markets for goods and services priced specifically in the nation’s monetary unit of account are formed.

Monetary sovereignty and a government’s capacity to shape policy

While any government with the authority to tax can motivate the establishment of markets denominated in a particular money of account, the capacities of a currency-issuing government exceed those of a currency-using government.

Notable present-day examples of currency-using governments are the national governments of eurozone countries. By imposing taxes in euros, these governments ensure a demand for euros. This results in a willing supply of goods and services in exchange for euros. It results, in other words, in markets for output priced in euros.

However, a monetarily non-sovereign government, by nominating as a national money a currency that it has no authority to issue, relegates itself to the status of mere currency user. It becomes a market participant on a similar footing to a household or firm, financially constrained in its capacity to assist the private sector in crises. Just as insolvency is a possibility for households and firms, insolvency is a possibility for the monetarily non-sovereign government. In a crisis, such a government is reliant on the currency issuer – in this case, the European Central Bank – and so is subject, in the event that it is assisted by the currency issuer, to whatever conditions the currency issuer imposes upon it. Such assistance might only come with a requirement to impose austerity, or privatize public assets, or cut pensions and public sector pay, or weaken unions, or with requirements to do all that and more, irrespective of the wishes of the affected society. So long as the nation retains the euro, it forgoes a more democratic determination of its socioeconomic path and instead places itself at the mercy of a currency issuer that is not, even in principle, subject to democratic account. This, at least, will remain the situation until and unless democracy is established at the European-wide level.

For monetarily sovereign governments – those who retain the prerogative to issue their own currencies – the situation is different. A government, by nominating its own money of account and asserting the sole right to issue the ‘money things’ required for the fulfillment of the tax obligations it imposes, retains for itself the financial capacity to safeguard the economy. Involuntary insolvency is never a possibility for a currency-issuing government, just as involuntary insolvency is never a possibility for the democratically unaccountable issuer of the euro. Since a currency-issuing government, in contrast to the European Central Bank, is at least in principle subject to democratic pressures, the manner in which the currency-issuing government responds to crises and, more generally, the manner in which it conducts its policy, is subject to the influence of the citizenry. It is never financially necessary for a currency-issuing government to impose austerity in a crisis, privatize, cut pensions and public sector pay, or weaken unions. To the extent that such policies are adopted, it is in response to political – not financial – pressures. The recourse, for those who oppose such policies or the prevailing economic system, is to mount sufficient political and industrial support for change in the desired direction.

Monetary sovereignty and a government’s capacity to shape and delimit markets

The forms markets take and the regulatory framework in which they operate are always subject to the influence of the currency issuer. In a sovereign currency system, the influence of the currency issuer is direct and synonymous with the government’s influence, since the government is the currency issuer. In a non-sovereign currency system, the influence of the currency issuer is indirect and can be at odds with the currency-using government’s preferred course of action.

A currency-issuing government specifies the terms on which the currency will be issued and the legitimate ways in which it can be obtained, whether via market exchange or other means. These decisions will shape and delimit private-sector behavior. Government-imposed restrictions on economic activity define the bounds of legitimate competition. If child labor were permitted, competition would exert pressure on for-profit firms to exploit children, as the history of industrializing England attests. Outlawing the practice does not compromise competition but rather helps define the rules of the game. Minimum wage legislation is of a similar nature. Government can also influence standards not only through regulations and consumer protections but by competing directly with the private sector. The setting of a particular public sector pay scale incentivizes private-sector firms to offer pay and conditions that are competitive with those offered in the public sector. A currency-issuing government that funds, for example, a semi-autonomous public broadcaster at a level sufficient to meet a particular standard of service will exert pressure on commercial broadcasters to more or less meet that standard. And so on.

A currency-issuing government is also ideally positioned to enable non-market and not-for-profit activity. Any mix of public and private sector activity, or not-for-profit and profit-seeking activity, is technically feasible. In general, the more critical a good or service to a citizen’s well-being, the stronger the case for non-market and not-for-profit provision. The less important a good or service, the less it matters if its provision is left to markets. Most societies, at least in wealthy countries, deem universal access to quality health care and education to be imperative, making for-profit or market-based provision inappropriate. Likewise, most societies deem it important that all citizens enjoy the protection made possible by police and defense forces. Things a society deems to be of relatively little importance will be more amenable to market provision. The issue of where to draw the line on market-based activity finds a political resolution.

In the case of monetarily non-sovereign nations, the influence of the currency issuer on societal institutions is indirect. The European Central Bank typically requires the implementation of pro-banking and pro-corporate policies in return for its assistance to financially constrained, currency-using governments. A currency-using government can still attempt to specify the legitimate ways in which the currency can be obtained within its borders, but if its desired legislative and regulatory framework comes into conflict with the agenda of the currency issuer, the government’s capacity to shape the economy in accord with the will of citizens can be compromised due to its financial constraints.