Most national governments today are currency issuers. Their spending is not financed out of revenue but self-financing. The act of spending is what issues the currency, and the aggregate net liabilities of the rest of us are only payable once the currency has been issued in this way.
Pretending otherwise is damaging
Pretending that the spending of a currency-issuing government is limited by tax revenue or borrowing inverts reality. It is government spending that makes tax payments and the purchase of government bonds possible, not the other way round.
When the fiction of a revenue-constrained currency issuer is maintained, it falsely relegates government to the same status as a capitalist firm. A capitalist firm, as a mere currency user, is revenue constrained. Its production is only viable if profitable.
To pretend a currency issuer is revenue constrained is to pretend that government is also subject to the profit criterion. It falsely suggests that government can only initiate production if there are profits to tax or if the production itself is profitable.
In reality, a currency-issuing government can override the profit criterion at will.
If production decisions are based on the profit criterion, actual output falls short of capacity output whenever closing the shortfall is unprofitable. But if the currency-issuing government uses its fiscal capacity appropriately, no shortfall need occur.
Profit is a bad social criterion
A capitalist firm requires production to be profitable. Society as a whole does not.
Profitability might have utility as a social criterion if there were equality, information were perfect, markets were competitive, and individual preferences over potential investment paths were guided by long-term considerations.
Under these conditions, markets would weight individual preferences equally and these preferences would be well informed.
But when these conditions fail to hold – which is always – profit is a bad social criterion for deciding what to do with our resources.
Universal provision of health care, education, infrastructure, even necessities like food, are unprofitable not because of something inherent to these activities but because inequality leaves many unable to afford them.
Why do politicians pretend the government is revenue constrained?
Under capitalism, politicians (and most economists for that matter) serve the interests of capitalists.
Capitalists benefit from unemployment, which presses down real wages. They benefit from corporate welfare and government crying poor when it comes to serving ordinary people.
These same politicians and economists conveniently forget their feigned concerns about affordability when it comes to aiding capitalists, who as mere currency users constantly need propping up.
If we fall for this subterfuge, mistaking the currency issuer for a currency user, we allow the government to maintain the fiction that its failure to deliver is out of a powerlessness to do so.
The importance of understanding how currency works
Failing to recognize the capacities of the currency issuer can deceive otherwise informed critics of capitalism into thinking that money is a relatively superficial object of analysis.
In truth, much coercion in our societies is linked to the way currency is handled.
It’s true that the relationship between currency issuer and user is not what makes capitalism the system that it is. But this does not mean the relationship is superficial. It reflects, rather, that the relationship applies more generally than just to capitalism.
The relationship applies to any system that permits commodity production.
Commodity production, by definition, implies the existence of markets: commodity production is simply production for the market.
Markets, at least in their modern form, are creatures of the State. They arise from the State’s authority to impose and enforce taxes in a currency of its choosing.
Once a State nominates a particular currency as acceptable in payment to it, markets will tend to form for output priced in that currency.
For weak States, markets might not form solely or even mainly in the nominated currency, but they will form sufficiently for citizens to pay their taxes.
The currency relation is coercive
From the moment the State assesses income and wealth in its currency and requires payment of taxes in that currency, there is coercion not only to accept the currency but to obtain it.
Some people can obtain the currency by working directly for the State. Some, instead, can work for corporations contracted to produce something for the State.
Others will spot opportunities to start businesses that supply output in exchange for the currency. Still others can work for those businesses. And so on.
In this way, markets that are denominated in the State’s nominated currency tend to form as people jostle to get hold of the currency.
This coercion is every bit as binding as the compulsion of workers, under capitalism, to sell their labor power as a commodity to capitalists.
The coercion is, in fact, a prerequisite for capitalist exploitation, because the way the State commands the resources that are needed to enforce private property rights is by compelling a supply of labor-power to the State through the imposition of taxes.
This is the sense in which “taxes drive money”.
The coercion of currency may be necessary for now
Unlike capitalist exploitation, however, currency issuance can be arranged in a way that improves the lives of all people rather than just a small minority.
A comparison of the two forms of coercion is stark.
Capitalists, as has been noted, require unemployment to press down wages and wring out profit. They require not only that workers are compelled to offer their labor-power for sale but also that some workers will be unable to do so!
This is a sick and cruel system.
A currency-issuing government, in contrast, has no need of profit. Indeed, profit in its own currency is meaningless to it. A currency-issuing government can never have more nor less capacity to issue its currency.
Accordingly, full employment is viable.
So long as markets play a role in the economy, there will be a need to ensure price stability. Under full employment this can be achieved through either price controls or a federally funded job guarantee that acts as a buffer stock of living-wage jobs.
The reason for either of these approaches is not profitability but price stability.
In the absence of price controls, full employment would need to take a loose form in which workers countercyclically exercised their job-guarantee option.
This allows inflation-easing economic slack alongside full employment.
Markets, capitalism, and socialism
Considering the way in which “taxes drive money”, it is ironic that the most ardent supporters of markets tend to be the archest enemies of taxation. Without the effective enforcement of taxes, it would be difficult to maintain functioning markets.
Markets existed long before capitalism, which is no surprise considering States were imposing taxes – and so driving the formation of markets – long before capitalism.
Markets continue to exist under socialism too.
Confusion over whether China is capitalist or socialist often arises from falsely conflating markets with capitalism. A better indicator of China’s socialism is the extent to which the State takes command of the economy’s heights.
In China, industry is seventy percent nationalized, assets are eighty percent publicly owned, the State plans, and private corporations that do exist are directed to operate for the benefit of society as a whole.
It’s true that if we reach full communism, there’ll be no need for markets. At that point we’ll contribute what we can and receive according to need. But China doesn’t claim to have reached communism. The Soviet Union didn’t make this claim either.
The relationship between issuer and user would remain fundamental even under Marx’s lower form of communism in which labor certificates replaced currency. The issuer of labor certificates would condition how users can obtain the certificates.
Authority is with the currency issuer
Once the currency issuer/user relation is understood, the error in depicting government as reliant for its revenue on capitalist firms becomes clear. It is not the government that relies on capitalist firms but the other way round.
If not, private for-profit banks and car manufacturers would have bailed out the government after the global financial crisis of 2007 rather than the other way round!
We would see currency-issuing governments filing for bankruptcy rather than capitalist corporations!
During Covid it would have been capitalist firms tiding the government over rather than the government tiding over capitalist firms!
And so on.
Capitalist firms, as currency users, survive by obtaining currency. If the government bails them out, which it can do without limit, a firm can survive any financial crisis. But it won’t be the firm’s own might that saves it but the government.
The question to ask is why we need capitalist firms to begin with. It would be much better to do away with them altogether. They bring nothing to the table.
If something can be done, and is worth doing, we can do it by harnessing the capacity of the currency issuer. There is absolutely no need for profit – no justification for a tiny elite to appropriate value created at no cost to themselves – and therefore no need for profit makers.
