MMT: Taxes Are Sufficient But Not Necessary To Drive A Currency

MMT: Taxes Are Sufficient But Not Necessary To Drive A Currency


The imposition of a liability
is sufficient to drive a currency. It will drive the currency. It will ensure there will be a demand for the currency — up to the amount you must pay
to absolve yourself of your debt. If it’s a tax debt — enough to pay your taxes. You will have at least that much demand for the currency. Will you demand more than that? Probably. Why? Because you’re going to owe taxes next year, so it is very useful to have more than you need… to pay this year, okay. We do not claim that state money and taxes, or other kinds of obligations are necessary to drive a money. But, historically there are very few examples, so…. just as one apparent example… Ask the question: how did the banks all get together and choose the same unit of account? Well almost always — virtually without exception they use a state money. Virtually without exception, okay. And probably having a legal system that backs it up and that enforces liabilities denominated in that money of account plays a big role in getting them to do that. I do know of one possible exception to this rule, and that was in Northern Europe in the Middle Ages — the banks got together and setup a banque de giro, in which they had their own clearing unit. And they were operating across state lines, they needed a unit of account that was not associated with any state for clearing. And so they seem to have created one. That is an exception. (Question) Well, it’s not hard — it’s a means of clearing between banks, okay. So within each nation you had a currency, and there’s transactions going on. You have bills of exchange written in currencies that cross state lines. And so you would have, let’s say, Italian bills of exchange in France, which require payment in Lira. But the banks got together and seem to have created this unit of account that they can use to clear with each other, so you could submit it to a bank and you wouldn’t have to get Lira, you can get the giro unit of account. This seems to be true — I’m not an expert on this, I read a bit about it 35 years ago. It seems to be a counter example to the normal situation in which banks use the unit of account of the country in which they are operating. So far as individuals choosing to refuse their own state money of account, in their own private transactions, that occurs. Especially — like in Latin America — it’s very common even to write contracts in US dollars. Even though you have your own currency, some contracts like real estate contracts, will be written in dollar terms. You might actually make the payments in the domestic currency, but the contracts are in dollars. Why did they do that? Inflation. It was to get a more stable money of account in which to write these very large contracts, to protect themselves from inflation of the currency. But again, that doesn’t in any way dispute Modern Money Theory. The dollar still is a state money of account, and it can be used outside the United States. It’s a state money of account and it can be used for individual transactions, but even banks can offer you accounts denominated in the dollar money of account. Even in Italy — right– you can have a dollar deposit account at your bank. But it’s still a state money — it’s still consistent with our argument.

1 thought on “MMT: Taxes Are Sufficient But Not Necessary To Drive A Currency”

  1. It is also right-wing/libertarian language framing the way even a progressive like Mosler puts it: "Taxes are coercive." That's been historically true, but in a sophisticated society this can be turned around, and taxes can be purely voluntary. How is that possible? Answer: if most altruistic people know the functional purpose of taxation they would likely volunteer tax revenue back to government for the good of all. The way to make this easy is to have regular debt jubilees — Hudson style, not ProfKeen style — i.e., a Clean Slate (debts are cancelled and so are savings). I know this sounds radical but it would make it crystal clear to everyone what money is. Then voluntary tax would be fairly easy to motivate. It would also mean that innately greedy people would be spending all their income, not saving it, to accumulate real assets, not money. Since sales drive private enterprise this would be a net social benefit. "What about the inflationary impact of the spending?" you maybe ask. To which I'd answer, "Yes!" Inflation reduces spending power of savings, and reduces debt burdens, so it acts like a continuous partial jubilee. The real problem is hyperinflation, caused by collapse in supply, and we know the fixes for that: rationing, vouchers instead of cash, and other non-fiscal "pay fors". "What about investment?" you may cry! Answer: investment is not driven by savings, it's the other way around. So a debt jubilee clean slate will not impact investment. Bank loans and government grants facilitate investment, not private savings. "What about rampant fraud?" you may ask. Answer: strict (severe) regulations on bank loaning prudential requirements, a la Warren Mosler "Tell banks only what they CAN DO." Including making shadow banks illegal, and making securitization and derivative trading illegal, and then beefing up Serious Fraud Office policing — make the anti-money fraud police champions of society.
    Once you appreciate all this, especially the power of voluntary taxation, you might find that a Clean Slate jubilee is not even necessary, and would be a very small minor adjustment every 10 or 20 years, because (a) no one would see the point of hoarding cash, and (b) with the MMT understanding of public purpose financing very few people would be going into chronic debt.
    I wonder what MMT experts think about futures trading? A necessary discipline on market pricing, or completely unnecessary financialized overhead? (My own opinion is futures trading is unnecessary, it is inherently speculative and is a negative-sum game, so is not producing and real goods, and market prices would clear fine without futures. I suspect futures trading introduces more not less price volatility.)

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