tax driven currency

[Mathew Forstater <forstate@xxxxxxxx>]

Let's be clear about one thing. Any who want to argue against the idea of
"tax driven currency" should at least acknowledge that they are arguing
against an idea that has a long history in economics from at least
1776 to 1998, including strong support from Post Keynesians (but not only
Post Keynesians), and including Keynes.  This doesn't mean one can't argue
against it.  But it shouldn't be summarily dismissed.

Of course, the basic starting point can be traced back at least as far
as Adam Smith, who wrote in 1776:

"A prince, who should enact that a certain portion of his taxes should be
paid in a paper money of a certain kind, may thereby give a certain value
to this paper money; even though the term of its final discharge and
redemption should depend altogether on the will of the prince."


E. Cannan's 1904 marginal summary to his edition of the Wealth of Nations
puts it:

"A requirement that certain taxes should be paid in particular paper money
might give that paper a certain value even if it was irredeemable."


Knapp's STATE THEORY OF MONEY (1924) certainly takes this Chartalist or
"Cartalist' view.


Keynes accepted Knapp's view explicitly in the TREATISE (1930):

"Knapp accepts as 'money'--rightly I think--anything which the State
undertakes to accept at its pay-offices."

"The age of chartalist or State money was reached when the State claimed
the right to declare what thing should answer as money to the current
money of account--when it claimed the right not only to enforce the
dictionary but also to write the dictionary.  To-day all civilised money
is, beyond the possibility of dispute, chartalist."


Abba Lerner (1947) firmly took this position:

"The modern state can make anything it chooses generally acceptable as
money and thus establish its value quite apart from any connection, even
of the most formal kind, with gold or backing of any kind.  It is true
that a simple declaration that such and such is money will not do, even if
backed by the most convincing constitutional evidence of the state's
absolute sovereignty.  But if the state is willing to accept the proposed
money in the payment of taxes and other obligations to itself the trick is
done.  Everyone who has obligations to the state will be willing to accept
the pieces of paper with which he can settle the obligations, and all
other people will be willing to accept those pieces of paper because they
know that taxpayers, etc., will accept them in turn.  On the other hand if
the state should decline to accept some kind of money in payment of
obligations to itself, it is difficult to believe that it would retain
much of its general acceptability...What this means is that whatever may
have been the history of gold, at the present time, in a normally
well-working economy, money is a creature of the state.  Its general
acceptability, which is its all-important attribute, stands or falls by
its acceptability by the state."


As did Minsky, 1986:

"In an economy where government debt is a major asset on the books of the
deposit-issuing banks,the fact that taxes need to be paid gives value to
the money of the economy....[T]he need to pay taxes means that people work
and produce in order to get that in which taxes can be paid."


How about James Tobin, 1998:

"In advanced societies, the central government is in a strong position to
make certain assets generally acceptable media. By its willingness to
accept a designated asset in settlement of taxes and other obligations,
the government makes that asset acceptable to any who have such
obligations, and in turn to others who have obligations to them, and so
on."


Take a look at:

L. Randall Wray, "Money and Taxes: The Chartalist Approach", Levy Working
Paper No. 222, 1998.

Stephanie Bell, "The Hierarchy of Money," Levy working Paper No. 231,
1998.

Charles Goodhart, "The Two Concepts of Money," Financial Research Group
Working Paper, London School of Economics.

additional cites on request. including those who opposed this idea (e.g.
Von Mises and his modern followers like George Selgin) who at least take
it seriously.


Mat Forstater