Re: two currencies and Korean war

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

David Gleicher wrote:

> If the State were to finance all its expenditures by borrowing from the
> public and not collect taxes at all, would there be no money?
>

I joined this discussion not as an economist but as a policy wonk. The issue
whether the State Theory of Money is conceptually valid is minor interest to
me. On this discussion threat, examples have been raised with money that did
not seem to be backed by taxes and yet seemed to command some form of general
acceptance.  The world is full of strange things.  And the fact these strange
things exist does not mean that the norm is invalid.  There is several cases of
parents murdering their children in the news recently.  It does not negate the
validity of motherhood.

The interesting thing about the State Theory of Money in a universe of fiat
currencies is that it frees policy from the straitjacket of orthodoxy: namely
the causal effect of money supply and inflation, and its policy implication
that inflation is the wrost possible option.  To me, the worst nightmare
invented by orthodox economics is the so-called natural rate of unemployment.

The State does not need taxes to financed its expenditures. Nor does it need to
borrow.  The State authority to tax make its currency useful.  Currency is
needed for complex economic activities.  The prime function of tax system is to
keep individuals (and corporations as individuals legally) working.  Government
borrowings serves as a venue for expanding and contracting credit.  A point
will be reached when a high tax rate would dilute the incentive for working for
money.  This is why a wise and optimum tax policy is important for economic
expansion and growth (which are different things, but that is another issue).

Under the State Theory of Money, a government deficit is necessary for economic
expansion.  This can be accomplished with a proper balance of tax cuts and
government spending, any imbalance of which would put the economy in jeopardy.
A government that runs a protracted surplus will face an economy in a downward
spiral.

The STM may be full of holes conceptually, but it can be useful in developing
policy options that would go a long way in tackling the "natural"unemployment
problem (or worse the IMF unemployment prescription), the debt problem and the
foreign exchange rate problem for many economies under todays existing
conditions.  Of course, as each economy is beset with a different mix of
problems, the propper balance between tax rate and government deficits are
different for each economy.  But the coneptual underpinning is similar.

Henry C.K. Liu