Re: tax driven currency

[Paul Davidson <pdavidson@xxxxxxx>]

>	Mathew Forstater writes:
>
>"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."
>

To be absolutely accurate Keynes writes that "At the cost of not conforming
entirely with current usuage ] I propose to include as State-Money not only
money which is itself compulsory legal tender but also money which the
State or the Central Bank undetrtakes to accept as payment to itself or TO
EXCHANGE FOR COMPULSORY LEGAL-TENDER MONEY". {Keynes, Treatise on Money,
VOL 1, P. 6, emphasis added]..

This willingness to exchange certain private sector agents (call them
banks) IOU's for the legal tender that will discharge legal contractual
agreements under the CIVIL LAW OF CONTRACTS but not to exchange other
private sector agents (call them all nonbank entities) IOUs for legal
tender, makes the bank IOU's money and the non-bank agents' IOUs merely a
promissory note.

Thus it is not difficult to explain that although taxes are a small
percentage of income (the usual basis for most government sponsored taxes
-- rather than a head tax), in a society where legal contracts are used to
organize almost ALL production and exchange activities, private agents --
even those who do not pay taxes to the government -- e.g., Saudi sheiks,
are willing to accept US llegal tender money AND US bank money for the sale
of oil to anyone --  and since the US government does not own any
refineries as far as I know -- Saudi sheiks never sells crude oil to the US
government to earn dollars to pay US taxes!!


so I would try to bring Per and Mosler's argument closer together by
arguing, that perhaps tax-driven money can help "explain" how existing
non-monetary economies -- e.g., natives in colonial Africa and Asia in the
recent centuries were brought (coerced ?) into the monetary economy of
Europeans colonial powers via head taxes, but that the CIVIL law of
contracts has maintained and spread the use of Chartalist money to all
civilized parts of the globe. (There may still be  "uncivilized" Amazon
river tribes, eskimos, south sea islanders, etc that have not been touched
by "Western" CIVILZATION and may still not use chartalist money for
organizing production and exhange activities in their closed communities.
Such societies are probably Say's law system -- where there is never
involuntary nemployment -- but neither is there the ability to obtain so
much economic goos from any given resource base as the entrepreneurial
chartalist system under which we live-).

  Nevertheless, the idea of chartalist money starts in ancient Greece --
not with Adam Smith.  As I point out in my paper on "Chartalism vs.
Monetarism" (paper given at the Chicago ASSA metings in 1998)

"According to Schumpeter [ 1954, p. 56], Plato can be considered the "first
known sponsor" of the second ?fundamental ? theory of money -- an
anti-monetarist theory that we now call Chartalism. For Plato money comes
into being only once a society has organized itself along continuous market
lines and it is social custom supported by social behavior and/or
legislation that gives money its unique importance in a system where as
Clower [1965] noted "goods trade for money and money trades for goods, but
goods do not trade for directly for goods".

" 	The Monetarist vs. Chartalist distinct conceptual streams can be traced
through the centuries-old  development of economic thought. For example, in
the nineteenth century this difference of views involved the debate between
the currency school and the banking school. Nevertheless, the vast majority
of economists over the years have either explicitly or implicitly accepted
the  monetarism vision of money at the back of their minds. Certainly the
most famous economists of the 18th and  19th century -- Adam Smith and Karl
Marx -- both accepted the Monetarist view as did Petty, Locke and Mill.
Followers of the chartalist view since Plato-- with one except-- are far
less well known. To today's generation of economists, perhaps the only
recognizable chartalists are John Law, Georg Fredrick Knapp and John
Maynard Keynes."

	"Most economists today recognize that the Monetarist vision of money
involves the conceptual idea of a barter exchange of a producible good for
an ultimately commodity backed money. The meaning of Chartalism, however,
is far less clear. In fact, Schumpeter defines the chartalist view as
merely the negative of the Monetarist conception (where Schumpeter equates
Metallism with Monetarism). This negative connotation is designed to
immediately put the impartial observer off the idea that Chartalism is a
"good" or "proper" view. One purpose of this paper is to provide a better
perspective."

(ED of quote from Chicago paper)

Perhaps the most interesting thing  I find about the Mosler argument is the
asosciation of Adam Smith with Chartalism  and tax-driven money to attempt
to justify the notion as well established in the history of economic
thought -- while Shumpeter, perhaps the greatest historian of economic
thought in the 20th century, classified Smith as a :Monetarist".  After all
Adam smith's inquiry into the "wealth of nations" agued that money was
neutral, i.e., that the merchantilist view that running exports surpluses
to increase the gold money in the system did not increase the real wealth
of the community.

(The trouble with trying to pin Smith down to any unique principle is that
he was all over the lot philospohically -- not only talking about the
importance of an unfettered invisible hand but also about "moral sentiments".)



 Also  I find a bit unusual that the attemtpt to link chartalist money to
the circuit requires an illustration of a commodity money (corn
--admittedly with strange properties for a commodity, e.g., no production
costs, no storage costs,) .

Paul
Paul Davidson
Holly Chair of Excellence in Political Economy
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennesseee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (423)974-4221;    fax: (423) 974-1686