Mosler seminar: Tax-driven currency

[Per Gunnar Berglund <pgb@xxxxxxxxxxxxxxxxxx>]

First, let me express my appreciation of Warren Mosler's extraordinarily interesting seminar paper. We are fortunate to have him with us on this list.

Warren's fresh perspective, as worked out in co-operation with Mat Forstater, is that of currency as a particular kind of commodity. The "production" of that commodity is simply the State's printing and spending it; the "consumption" is the reflux to the State in the form of tax payments. Warren uses the term "tax-driven" to describe this circular flow. The public's demand for the currency is caused by the State's power to tax, and that power is basically what secures the value of that currency.

I should say that I do have some problems with this view. It makes perfect sense in a primitive economy, where Bank money and State currency are different. But it does not seem to make sense in an advanced economy with integrated State and Bank financial systems, and the State currency as a common unit of account.

In a country like Sweden, where the government debt is some 30 percent of the GDP and taxation amounts to 60 percent of the GDP, it seems reasonable to suppose that the public would willingly accumulate that half year's worth of taxes. But in a country like Italy, where government debt is perhaps 120 percent, and taxation is 40 percent, of the GDP, it doesn't seem reasonable to explain the public's willingness to hold government securities (to "store currency" in Warren's terminology) with the needs for future tax payments. Why should they accumulate three full year's worth of "tax tickets"? That story just doesn't hold.

Wouldn't it be more reasonable to explain the government debt in terms of the private credit net, rather than to do it the other way around? It seems to me that a government debt of the considerable size of e.g. Italy would be impossible to maintain if it weren't for the large _gross_ stocks private debt. Suppose the gross credit is 200 percent, and the net (=gov't debt) is 120 percent, of the GDP. Then the net is 60 percent of the gross. But if the gross volume would be relatively minor, say 60 percent of the GDP, then the net would be huge (200 percent) compared to the gross. The point is that a government debt of "modern" size presupposes (1) the integration of Bank and State money, and (2) a considerable size of private gross indebtedness.

There is nothing wrong with the principle of a tax-driven currency, as set out by Warren and Mat. However, I doubt that this principle takes us all the way to the working of modern financial systems. My view is rather that it is the "synergy" effects of the co-ordination of State and Bank money that makes for Functional Finance.

A "primitive" tax-driven currency must presuppose a balanced, or nearly balanced budget, simply because there is no willingness, on behalf of the public, to accumulate substantial amounts of currency for the sole purpose of future tax payments. That motive is not sufficient for taking on a large public debt. It is only when the private credit system has evolved considerable degree of sophistication and volume that the option of large and permanent deficits is opened. But in that phase it no longer seems adequate to call the currency "tax-driven". One should rather call it "credit-driven". The tax-payment motive to accumulate currency is still there, but it is not necessarily the _chief_ motive any longer. That main motive must be found elsewhere, and I would suggest that we search in the direction set out by the so-called "real-bills doctrine".

I will end this post here, hoping for some stimulating on-list exchange.

Best,
Per

Per Gunnar Berglund
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