Re: [gang8] Re: two currencies and Korean war

[William F Hummel <wfhummel@xxxxxxxxxxxx>]

>Gunnar Tómasson wrote:
>
>> In other words, the 'taxation' aspect enables the State to take fiscal
>> action by monetary means - it has nothing to do with monetary theory
>> as such.
>
>Henry Liu wrote:
>
>The State Theory of Money assserts that the fundamental function of
>taxation is to create on the part of the public a financial obligation
>to the state through the levying of taxes which is payiable with the
>currency issued by the state.  Taxes are what give currency value.  The
>fact that the state spends tax revenue is merely to recycle the money
>supply.  Thus taxation is very much part of monetary theory.  A
>government that has no tax revenue (or insufficient) would have to
>support its currency through other means, such as a gold standard.  This
>is where Reagan missed the point when he compared government with a
>corporation. Corporation have no authority to impose taxes, although
>many try through monopolies.

I fully agree with Henry's comments.

In a modern industrial nation in which the monetary system is
based on inconvertible fiat money, and where payment is mainly
made through transfer of bank deposits rather than cash, the
government can only control the own rate of money, not the
quantity.  Even if the government imposed a 100% reserve
requirement on banks, thereby becoming the only source of new
liquidity, it would still have to respond to the demand for loans
in order to avoid an excessive own rate and a credit crunch.

Taxes payable to the government in its own fiat money are an
essential aspect of monetary control.  In effect the Treasury
recaptures all of its spending via taxes and bond sales, while
the central bank supplies whatever base money is needed to
maintain the own rate of money in response to the demand for bank
reserves and cash withdrawals.  Only at the risk of creating
unacceptable inflationary pressures on the one hand or a
liquidity crisis on the other can the central bank arbitrarily
control the supply of base money issued.

William F Hummel