Rather, the view I forumlated seems to be held more by internet supporters of MMT, and was the way Per Bylund interpretated comments of Stephanie Kelton in their Twitter debate on MMT (Bylund 2023: 148–152).
However, it seems that L. Randall Wray has a different view, and Per Bylund was not correct in his interpretation of MMT.
I quote from L. Randall Wray’s Modern Money Theory: A Primer (2024):
“Ultimately, it is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations. The government cannot so easily force others to use its currency in private payments, or to hoard it in piggybanks, but government can force use of currency to meet the tax obligations that it imposes.Tymoigne and Wray (2013) also state their opinion as follows:
For this reason, neither reserves of precious metals (or foreign currencies) nor legal tender laws are necessary to ensure acceptance of the government’s currency. All that is required is imposition and enforcement of a tax liability to be paid in the government’s currency. It is the tax liability (or other obligatory payments) that stands behind the curtain” (Wray 2024: 47).
“We can conclude that taxes drive money. The government first creates a money of account (the Dollar in Australia, the Tenge in Kazakhstan, and the Peso in the Philippines), and then imposes tax obligations in that national money of account. In all modern nations this is sufficient to ensure that many (indeed, most) debts, assets, and prices will also be denominated in the national money of account” (Wray 2024: 48; see also Mitchell et al. 2019: 137).
“To be more precise, MMT does argue that imposition by authorities of obligations (including taxes, fines, fees, tithes and tribute) is logically sufficient to ‘drive’ acceptance of the government’s currency. Some who adopt MMT (including us) believe that the historical record, such as it exists, does point to these obligations as the origin of money: government currency was first made acceptable through the imposition of an obligation, and the creation of a monetary unit of account was also initiated by a government to denominate those obligations. ....This is also explained by Wray in this video:
But to be clear, MMT does not argue that taxes are necessary to drive a currency or money—critics conflate the logical argument that taxes are sufficient by jumping to the conclusion that MMT believes there can be no other possibility. In truth, MMT is agnostic as it waits for a logical argument or historical evidence in support of the belief of critics that there is an alternative to taxes (and other obligations). We have not seen any plausible alternative” (Tymoigne and Wray 2013: 9–10).
So Wray’s claim here is that taxes alone are sufficient (but not necessary) to ensure the acceptance of the government’s currency, but that the state may not actually be able to force the use of its money in other private purchases (although in many modern nations today this is indeed the case).
This logically requires that there could be other sufficient causes for creating the acceptance of something as money: for example, a state or private entities minting gold or silver coins of a consistent weight and purity and offering this as money without demanding the coins back as taxes. And, indeed, the creation of Bitcoin (which admittedly functions more as a type of digital financial asset) and its limited acceptance as money in purchases does show that money can be created by entities other than the state (Palley 2015: 60).
So Wray’s much weaker claim is different from the view that “only taxes levied by the state and the need to pay those taxes in the state-issued fiat money drive the demand for, and value of, that fiat money,” which on reflection is a straw man that does not accurately describe Wray’s theory.
However, is it true that taxes alone are sufficient (but not necessary) to ensure the acceptance of the government’s currency?
Unfortunately, even this weaker claim is not true.
There are clear historical instances that falsify this claim. A hyperinflating currency cannot be made acceptable just having the government demand it back in tax revenues.
In certain Latin American nations, some governments struggle to get their national fiat currency accepted in domestic payments or contracts, which can be denominated and payable in US dollars: that is to say, the state demanding that its fiat currency be paid in taxes does not lead to its universal or widespread acceptability (Garzón Espinosa 2024: 49).
Most states before the 1930s needed to mint coins of gold or silver as their state-issued money, as even Abba Lerner admitted (Lerner 1947: 314), and they could only occasionally maintain the acceptance of, or value of, inconvertible paper currency just by taxation. Experiments with inconvertible paper money were mixed at best.
One need only think of the French assignats, a paper money (fiat currency) issued by the successive governments of France from 1789 to 1796 during the French Revolution. The French assignat was a terrible failure and had lost most of its value by 1795, despite the fact that successive French governments accepted them for payment of taxes.
In light of all this, it would be far better if advocates of MMT revised their claims about “taxes driving money” to the following:
“Taxes drive money” in the sense that, in the modern world after the abolition of the Gold Standard, many powerful modern states (that do not face serious economic problems) can create demand for their fiat money by levying taxes payable in that fiat money. This is a major cause of fiat money’s acceptability, but the state must maintain public confidence both in itself and in its currency. Of course, in crisis situations such as hyperinflation, the acceptability of fiat money can break down.
BIBLIOGRAPHY
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.
https://qjae.mises.org/article/77380-is-it-money-because-it-is-redeemed-in-tax-payments-a-response-to-kelton-and-wray
Colander, D. 2019. “Are Modern Monetary Theory’s lies ‘plausible lies’?,” Real-World Economics Review 89: 62–71.
Garzón Espinosa, Eduardo. 2024. Modern Monetary Theory A Comprehensive and Constructive Criticism. Routledge, Abingdon, Oxon, UK.
Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.
Mitchell, William, L. Randall Wray, and Martin Watts. 2019. Macroeconomics. Macmillan International, London.
Palley, T. I. 2014. “Money, Fiscal Policy, and Interest Rates: A Critique of Modern Monetary Theory,” Review of Political Economy 27.1: 1–23.
Palley, T. I. 2015. “The Critics of Modern Money Theory (MMT) are Right,” Review of Political Economy 27.1: 45–61.
Tymoigne, E. and L. Randall Wray. 2013. “Modern Money Theory 101: A Reply to Critics,” Working Paper Series No. 778, Levy Economics Institute.
Wray, L. Randall. 2024. Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Palgrave Macmillan, Cham, Switzerland.
How do you view Rodger Malcolm Mitchell’s perspective on taxes? Although he aligns closely with Modern Monetary Theory (MMT), he deviates on issues such as taxation and the Job Guarantee. Here’s a quote that I think effectively captures his stance on taxes and illustrates how it differs from traditional MMT views:
ReplyDelete"MMT claims that taxes are necessary to create demand, and thus give value to money. A leader of MMT, Professor Randall Wray has written: “Taxes or other obligations (fees, fines, tribute, tithes) drive the currency.” MS agrees that while taxes do create demand and do give value, they are not necessary. It is quite possible for money to have value without the need for taxes. There are, in fact, thousands of money examples that have demand unsupported by any form of tax. Some are listed here. Additionally, product and service coupons represent money for which there is no tax. And, there are currencies in which taxes are collected, but have scant value. A title to money, not supported by taxes but only by the full faith and credit of the manufacturer. Many currencies have been used for tax payments, but yet are subject to hyperinflation. Taxes did not rescue those currencies from value loss. What then “drives” the demand for a currency? As with every other thing, Reward and Risk drive demand. (Demand=Reward/Risk) For money, Reward is the acceptance by others, plus the interest paid to the holder of a currency. That is why the Federal Reserve increases interest rates when it wishes to fight inflation (i.e, to increase the value of a dollar). Risk is the threat of inflation and the full faith and credit of the issuer. Initially, the demand for a currency relies on the perceived value of the full faith and credit supporting the currency. When you borrow, your note is a form of money, the demand for which is determined by your full faith and credit. Your lender considers your note to be money; your full faith and credit, not federal taxes, are key determinants of your note’s acceptance as money."
What are your thoughts on Rodger Malcolm Mitchell’s perspective? I’ll include the link to the full article for additional context.
https://mythfighter.com/2018/10/07/the-stunning-differences-between-mmt-and-ms/
"A hyperinflating currency cannot be made acceptable just having the government demand it back in tax revenues."
ReplyDeleteIt necessarily can. It hikes taxes, demand more physical output when spending and start confiscating assets and jailing tax evaders. Hyperinflation is, in essence, an uncontrolled inflationary boom and savings are really voluntary taxation. Therefore the fix is to convert them to compulsory taxation by generating a massive surplus, or use other ways of stopping the money flowing without permission.
Offering goods and services demanded by the currency issuer is the *cheaper* alternative to losing assets and liberty due to tax evasion.
Once the surplus flow is deleted and the cost in physical terms of getting jailed and foreclosed for tax evasion becomes higher than just getting the currency in exchange then the value is restored.
The currency is a public monopoly. Nobody gets to use it without the issuer's permission. The empirical evidence for that is the suspension of the Russian ability to use most of the currencies of the world. Whether you can use the currency is in the gift of the issuer no matter where you are in the world.
As ever do not take those who crash planes as evidence that heavier-than-air planes cannot fly. The solution is better pilots, not treat the planes as though they are a bus just because some planes were crashed by their pilots.
The control surfaces are there.