Per Bylund versus Carl Menger on Taxes driving the Value of Money

The Austrian economist Per Bylund has recently written this challenge to advocates of MMT/Neochartalism:

Bylund, Per. 2023. “Is it Money because it is redeemed in Tax Payments?: A Response to Kelton and Wray,” Quarterly Journal of Austrian Economics 25.4: 147–165.

Bylund rejects the view that fiat money only has value and is used as a general medium of exchange because governments demand it as the legal means of payment for state taxes, and demands that advocates of Modern Monetary Theory (MMT) respond to his critique.

Now certainly the recent view within MMT that only taxes cause state fiat money to have value and be the general medium of exchange (and nothing else) is too extreme an idea, and has been rejected even by some Post Keynesian economists (e.g., Rochon and Vernengo 2003), there are, quite remarkably, passages in the work of Carl Menger – the founder of the Austrian School – that actually give some credence to that view, but in the context of the paper money issued by the Austro-Hungarian empire in the late 19th century.

The fundamental passages come in Carl Menger’s Lectures to Crown Prince Rudolf of Austria (1876):

“Payments abroad in Austrian currency and Austrian bills of exchange will not be accepted at all or only with a considerable surcharge; and with the diminishing reputation of the currency – which doubtless is of great, if not the greatest, influence – the reputation of the state as a whole diminishes; therefore, it can reasonably be argued that an uncertain, disorderly currency is a vital deficiency of a state, because it makes itself deeply felt in all of economic life and its progress.

Therefore we must strive especially for a sound currency, and to do this successfully, we must first of all find out the reasons why our paper money is unsound.

Let us first consider the unfortunate condition of our state notes and its causes.

The state note is the paper money which is issued by government and has acquired the status of money only because citizens are entitled to pay their taxes with it (Menger 1994 [1876]: 142). ….

In any country with a well-ordered monetary system, the quantity of state notes in circulation must be fixed, and the government should then resolve not to exceed this quantity under any circumstances by issuing more notes. State notes derive their value only from the fact that they may be used for paying taxes; a fairly small quantity of them is sufficient for this purpose; an issue of notes in excess of this requirement will certainly have harmful consequences, since the notes are thereby devalued and must then have their terms of exchange fixed by decree” (Menger 1994 [1876]: 143).

In the 1870s, the period during which Lectures to Crown Prince Rudolf of Austria was written, Austria (as part of the Austro-Hungarian Empire) was on a silver standard in which the state currency was the Austro-Hungarian florin/gulden (with a weight standard of 11.111 grams of fine silver under the 1857 Vienna Monetary Treaty), which was also divided into 100 kreuzers after 1857. The official central bank of the Austro-Hungarian Empire also printed banknotes that in theory should have been convertible into silver coins.

But on 25 April 1859, during Second Italian War of Independence (1859), the convertibility of Austrian central banknotes into silver coins had been suspended and was never re-instated, so that these banknotes were effectively a form of inconvertible paper currency (a state of affairs noted by Menger 1994 [1876]: 137).

It seems also that the imperial government of the Austro-Hungarian empire issued its own currency notes via the Treasury separate from those of the central bank, so that there were two inconvertible paper currencies in use in the empire. It is these “state notes” that Menger was referring to in the quotation above.

Astonishingly, Menger states that the “state note is the paper money which is issued by government and has acquired the status of money only because citizens are entitled to pay their taxes with it [my emphasis]” and that these state notes “derive their value only from the fact that they may be used for paying taxes” [my emphasis], in direct contradiction to the view defended by Per Bylund. Ouch!

It’s as if Carl Menger has taken the hapless Per Bylund to the woodshed and schooled him in economic theory!

Despite all this, I admit that there are indeed problems with the dogmatic view in modern MMT that only taxes drive the value of money, but I will leave a discussion of this for a subsequent post.

BIBLIOGRAPHY
Menger, Carl. 1994 [1876]. Carl Menger’s Lectures to Crown Prince Rudolf of Austria (ed. by Erich W. Streissler and Monika Streissler; trans. Monika Streissler and David F. Good), E. Elgar, Aldershot.

Rochon, Louis-Philippe and Matias Vernengo. 2003. “State Money and the Real World: Or Chartalism and its Discontents,” Journal of Post Keynesian Economics 26.1: 57–67.