Re: Putting Chartalism In Its Place?

[William F Hummel <wfhummel@xxxxxxxxxxx>]

Barkley,

I haven't seen anyone assert that paying taxes DEFINES what money is.
In my view, money is simply whatever is widely accepted as a medium of
exchange.  That necessarily implies it must also be a store of value,
at least in the short run.

In my view, the state theory of money applies mainly, if not
exclusively, to any modern fiat money system serving the entire state.
Fiat money itself is simply credit issued by the government.  The
viability of its credit depends on the power to tax.  In effect, fiat
money represents tax credits.  The power to tax ensures that the
private sector will seek the government's fiat money.  Equally
important, taxes also provide the mechanism for controlling its
abundance, which is essential to maintaining its value in the long
run.

Fiat money comprises the monetary base on which all private sector
credit money is leveraged.  Credit money depends for its viability on
the promise that it can be converted at par to base money on demand.
Except for cash used mainly in retail transactions, the private sector
operates entirely on credit money.  Money paid to or received from the
state is entirely fiat money.  In a hypothetical cashless system, the
size of the monetary base would be quite small, just enough to provide
liquidity in the payment system.  However the system could not
function in the absence of the government's tax-based fiat money.

William

>     All that I have been objecting to here
>is the scattered use by some folks on the
>list of the idea that it is paying taxes that
>DEFINES what money is.  I am perfectly
>amenable to the idea that in modern fiat
>economies, this is a very important part
>of what money is.
>     When I pick up an intro textbook or a
>text on monetary theory, I never find the
>chartalist theory put forward as the definition
>of what money is.  One can easily lapse
>into sneering that well these are all just
>neoclassical mainstream garbage books.
>But I would note that such a view is not
>universal even among Post Keynesians,
>not to mention many other heterodox
>economists, much less among the
>mainstream.
>     Thus (and I see that he carefully
>stays out of these discussions), I just
>scanned over my copy of Paul Davidson's
>Post Keynesian Macroeconomic Theory
>(don't own Money and the Real World but
>have read it and remember it as saying
>similar things), and there is no mention
>of the role of paying taxes to the state at
>all in there regarding the definition of money.
>Money is to settle contracts and to store
>value for future contracts in an uncertain
>world.  The state is cited as aiding in
>determining what money is by legalizing
>it for settling contracts, but not for paying
>taxes (that is not mentioned, not denied).
>      The standard textbooks usually list
>three "functions of money," (medium of
>exchange, unit of account, and store of
>value) and then basically say that whatever
>fulfills all of those functions is money.  This
>seems very reasonable to me.  What is
>involved in establishing that something
>will fulfill those functions is another matter,
>and having people pay taxes to the state
>is certainly a very important part of
>establishing that something will fulfill
>those functions.
>Barkley Rosser