Modern Money Systems: Understanding the Monetary Mechanics of Value
Reproduced from: https://www.johnlaurits.com/2018/mmt-modern-money-system-explained/
Modern money is a strange thing. To most of us, money appears as something continuously given to landlords and businesses to secure a place to live, food to eat, and all the little parts to make that thing called “a living.” Since a living is made of money-giving, it must be regularly collected — or, to put it another way, money is gathered by people who need to “un-gather” it. For the working majority whose only access to money is to labor under an employer for wages, money is a full-time job and whole lives are revised, re-written, or canceled just to make ends meet, leaving us too little time to ask how a monetary system works — or even what money is.
The Evolution of Money & Currency: A Brief History of Value, Exchange, Gold, Paper
Somewhere in the mist of prehistory, humans lived with no permanent settlements, agriculture, or industry and each person held a more-or-less identical job-title of hunter-gatherer. Since everyone produced the same thing, there was little need for any notion of exchange. As farming methods developed to a more-advanced stage, food surpluses allowed people to settle and improve the soil’s productivity. This led to more complex forms of social, economic, and religious organization and gradual division of labor took place as specialized labor, skills, and knowledge morphed into profession, craft, and status in emergent hierarchies and relations of distribution.
Value, Exchange, & Currency
Organized religious traditions coalesced into governing authorities that depended on tributes to support administrators and soldiers, which in turn required accounting to compare quantities, record past transactions, and devise new measures of value. Questions like ‘how much salt is 1 shekel of barley worth?‘ or ‘is 1 jar of oil equal to 1 or 2 sack of wool?‘ established ratios of equal value between differing goods and some commodities came to serve as a medium of exchange or currency. (from Latin currens, meaning ‘flow’ or ‘circulation’)
Metal Coinage & the Definition of Money
Cast or engraved to identify weight and purity, metal weights, bars, and rings came to be more widely used as currencies during the Bronze Age. Though grain and livestock were useful, metal stored value in relatively small sizes and had an effectively infinite shelf-life, making it particularly handy in long-distance trade. True coins appeared somewhere around 650 B.C., often bearing the images of animals, mythic heroes, rulers, and religious symbols.
Grain, cattle, cigarettes, bitcoin — anything might act as currency but money must also serve as unit of account and store of value. Since coins represent equal values, they can act as a unit of account — a 10¢ coin is equal to two 5¢ coins because ‘cents’ are considered to be identical units. Both scarce and hard to fake, the intrinsic value of coins proved to be fairly stable and thus a store of value. Issued by the mints of states and empires, coinage — from electrum, bronze, or copper to silver and gold — was one of the dominant forms of currency for a few thousand years.
Reserves, Paper, & Fiat
Paper money arose from promissory notes issued by banks upon deposit of real money, enabling merchants to conduct business without lugging chests of gold everywhere. Originally, banknotes functioned in the same way coinage did except that, rather than mint coins, notes were issued as representatives of real value held in reserves. By the modern era, monetary institutions in most industrialized nations had adopted some type of reserve system with a state-authorized central bank that issued the national currency.
Though reserve systems and banknotes had practical advantages over coinage, both of them — paper representing metals and metal money itself — are designed to function on the same basic principle. Modern money, however, is different. Most currencies ditched the gold standard after the US jumped ship in 1971 but these worthless bits of paper, aka ‘fiat money,’ are still pretty good at being money.
But how can this value-less money work?
The State Theory of Money
After observing banknotes’ relation to reserves, Georg Friedrich Knapp proposed that money’s value did not result from any intrinsic value in metals but from the state’s ability to impose taxes. While the idea that money’s value comes from intrinsic value in its material seems to be common sense, it simply never added up to the observable reality and the state theory of money is able to explain why. Metal has intrinsic value on its own, of course — but this value isn’t worth a lot if your taxes must be paid in a different currency and that means the state has the last word about value inside its borders. If the state only accepts taxes in Roman coinage, having tons of gold or Swiss Francs is irrelevant because the options are (A) buy the state’s money, (B) move away, or (C) spark a protracted people’s war to topple the regime so you can change its legal tender.
The power to issue money has pretty much always been an exclusive privilege of the state and coins were frequently produced to fund the armies needed to expand a state’s borders — ‘money is power,’ as they say. Imperialist states routinely banned coins minted in conquered territories and imposed taxes that could only be paid in imperial coin. To Rome, for example, imposing taxes in its territories meant more coin to pay more armies to conquer more people to loot treasuries to mint more coins and gain more territories to tax and so on ad infinitum.
Modern Monetary Systems & MMT
Under today’s capitalist systems, money plays a larger role in human societies than ever but this greater intimacy with money’s form is contradicted by broad uncertainty about its substance and how it works overall. On a daily basis, nearly everyone handles fiat money and, despite knowing it literally has no intrinsic value, it is accepted as if it were gold itself, which it clearly is not. The root of the confusion, however, is not that fiat is treated like gold but that it is expected to behave like gold — but modern money isn’t gold.
And modern monetary systems do not function the same way that metal trinkets and reserve-backed currencies do.
How Modern Money Works
The first thing to understand is monetary sovereignty — a nation is monetarily sovereign if it has exclusive and unlimited authority to issue its currency. Since fiat money issued by a monetarily sovereign state isn’t fixed to the value of anything else, its government cannot run out of money because it creates money from nothing by spending it into circulation. Full stop. This does not mean the government should spend infinite amounts of its money — but it technically can.
Just as modern money is created from nothing by spending it into circulation, money is destroyed through taxation. The ‘taxpayer dollar’ funds nothing — it is deleted from the money supply, nothing more. Taxes do not fund spending because it is impossible for a monetarily sovereign government to need its citizens’ fiat paper to alter numbers in a spreadsheet. Taxation’s most important function is to generate a base-level of demand for the currency by ensuring those who benefit from participating in the nation’s economic production or commerce must also use some of its currency. Since taxation removes currency from circulation, taxation is also a lever to fine-tune inflation.
Why Balancing the Budget Is a Silly Idea
Spending creates money and taxation destroys it, then spending creates it again. Modern money is like a circuit — money is spent into circulation and taxed back out. A balanced budget means that the amounts entering and exiting are equal. Deficit spending — more money being spent than being taxed — means the non-government, aka the people at large, must gain wealth. A surplus — more money being taxed than spent — means the people at large must lose wealth. If the goal is to create jobs, increase the production of economic value, or develop resources, then a budget surplus is clearly the worst strategy possible and even a balanced budget is unhelpful at best.
Spending deficits are equal to the people’s surplus.
Modern Money vs. Debasement & Devaluation
If a government issues commodity-money, such as gold coins or notes backed by gold, then an increase in quantity by mint or by print will result in debasement or devaluation unless more gold is added. In that case, the government has to either produce or borrow gold or impose new taxes to siphon some money back to its treasury before it can spend without devaluing or debasing it. But modern money — currency issued at a flexible exchange-rate by a monetarily sovereign government — is not the same thing as commodity money. Devaluation happens if a currency’s fixed exchange-rate (its relation to gold or whatever) is lowered by issuing too much of it — but modern money isn’t fixed to gold or anything else.
Spending Modern Money & Inflation
Inflation happens to prices, not money, and it is caused by markets, not by money. Whether the money is gold or paper, if the total that people are spending is more than the total goods and services available to buy, the result is inflation and it happens because demand is greater than what is available. Whatever the currency, spending more money than production can handle will inflate market-prices.
SPENDING IS ULTIMATELY RESTRAINED ONLY BY THE IDLE LABOR & RESOURCES AVAILABLE
If a government continuously spent money into the system without doing anything else, it would result in inflation because the total economic value in the system is unchanged but with a higher total buying power. One of the cool things about money, however, is that it can convince people to do and make things and it is also able to buy materials and tools that people do and make things with. That means, if idle labor and resources are available, money can be spent without inflation so long as spending activates that idle labor and resources to add economic value to the society.
In other words, there is no reason to fear deficit spending if that spending employs people who were jobless or provides capital to workers to develop its value because, when money and value are added simultaneously, it does not provoke inflation. Public infrastructure projects, universal healthcare, a workers’ self-managed jobs guarantee, and tuition free public universities — programs like these could be tomorrow’s reality.
Knowledge, Not Money, Is Power
Ancient thinkers developed a cosmological model called the Ptolemaic Model — it envisioned earth as the center of a series of nested, interlocking spheres that rotated the sun, stars, and planets across the sky and [spoiler alert] it turned out to be incorrect. Despite being wrong, the model is still a solid way to calculate seasons, motion, speed, and position of planets, and when constellations appear — but new models emerged that did all that and more. Those models took humanity to the moon, not because it was impossible before, but because the old model could not account for its possibility.
The way we are taught to understand money is rooted in an outdated model that developed when virtually all money was metal and this model cannot account for the reality of money today. Money is not gold. The truth is — and always was — that money is a way to distribute access to the actual value of real goods and services and the material forces and resources used to produce them. The fact that the state accepts taxes in fiat paper and enforces its status as legal tender is enough to establish it as the society’s medium of exchange, despite its intrinsic valuelessness. In fact, this lack of value is what makes modern money more useful than gold ever was — money can be as abundant as it needs to be but gold cannot reflect that.
Most of the time, it has been true that ‘money is power’ but no inanimate object has power until people give it power and forget they did. And knowing that takes its power away and returns it to its original treasury, where the real power always remains.
P.S. I’ve published a follow-up to the article above that explores how these ideas might be applied in a Marxian framework of class-struggle — if you’re into that sort of thing, give it a read at the link below…
Reproduced from: https://www.johnlaurits.com/2018/mmt-marxism-modern-money-part-2/
Marx + MMT: Socialism Through a Self-Managed Federal Job Guarantee (Modern Money Systems, Part 2)
The following post is part two of an open-ended series exploring how modern money works and why it may change how social activists and revolutionaries organize the struggle for a better society. Part one, “Modern Money Systems: Understanding the Monetary Mechanics of Value,” looked at the historical evolution of money and introduced the basics of modern monetary theory (MMT), as well as some radical implications of the economic reality it describes. Part two aims to further explore these ideas, first by looking at how MMT might fit into the socialist framework of class-struggle described by Karl Marx and then by exploring the revolutionary potential of a federal job guarantee.
Practical Steps to Socialism: What Is to Be Done?
Socialism is the notion that society can be run by the ordinary people who produce the goods, services, and knowledge that make up society and that this working class is fully able to decide how to best use its resources and the wealth they create with them. But this idea is rooted in a deeper movement of history. Just as people can only exist in the movement that develops from infancy to youth, maturity, and old-age, societies only exist in movements of social development through history. But this development isn’t automatic — just as a person must be nurtured to adulthood, a society’s historical development is driven by the force of social struggle between opposing classes. Capitalism cannot become socialism by wishful thinking — socialism must be built from existing conditions through class-struggle against the power of capital.
But what is the “power of capital”?
Basis of Power in Capitalist Society
Capitalism arises from relations of private-ownership that allow a wealthy minority to control all the resources, tools, and other things used by a working majority to create wealth. Creating the wealth of nations is a big ordeal and — since it takes the better part of nearly everyone’s days to do that — the relations people form to organize this endless group-project become a basis for social power. This structural power crystallizes into formal power through institutions, such as the political and legal systems, that turn back to reinforce and stabilize the pattern of social organization that created them in the first place.
These self-reproducing patterns of social relations determine the form a society takes (feudal, capitalist, socialist, etc.). Capitalist relations are relations of private-ownership that enable a dominant social class control over the means of production, i.e. the land, machines, networks, space, and resources used to produce all the wealth.
The Dictatorship of Capital
By default, private property denies access to everyone but the owner and others whom they permit. To make — i.e. to produce — a living, the non-owners of capital must enter contracts with the owners, often to sell their labor-time for wages or a salary. This is how power becomes concrete under capitalism. Owners control people’s wages and benefits, promotions, careers, how workplaces are organized, when and how long working-hours are, what good or service will be produced, and the product itself plus all the profit from sale. Less directly, the owners often decide stuff like what workers wear, who they spent time with, whether they can fly home for a parent’s funeral, what food or medicines they ingest, how much their kids see them, or whether a worker can honor her tribal heritage by wearing a traditional tattoo, etc.
This is the power capital has over people’s day-to-day lives and this actual power over the working majority is what has to be smashed through class-struggle, then reconstructed by social revolution. The wealthy few have power to rule the many directly because the working majority lacks the power to create wealth of its own without access to means. To fix this, the working class must seize the means of production and transform private control of production into public, social control. This would mean an equal right for all people to earn a living by accessing a means to produce the wealth of necessary and useful goods, services, and knowledge for themselves, their communities, and the greater society.
Or, more simply — everyone who wants a job, gets a job.
The Revolutionary Importance of Jobs: Marxism & Armies of Labor
Among Marx’s thoughts on how the masses might kick-start a social revolution, is the idea to establish armies of labor to undertake large-scale development of farmland and other resources. Apart from ending unwanted joblessness, fully employing the workforce would add economic wealth to society through programs to restore public infrastructure, increase industrial and agricultural outputs, make technical improvements, and develop idle resources. The primary goal, however, was to create a framework for the transition from private to social control of wealth-production (aka socialism) by putting the ordinary people of the working masses directly behind the wheel of the economy.
Who Pays for the Revolution?
To fund the total employment of the workforce (as well as the large-scale programs for social transformation), Marx rightly judged that a future revolutionary state would need to get control of the money necessary to do it. To pay for it, Marx suggested replacing private rent-collection by landlords with a system that applied all rents to public purposes, levying a progressive income tax, and concentrating all credit in a publicly-run central bank.
In that era, people used commodity-money — government-issued notes backed by a gold standard — and this context shaped the ideas in the Communist Manifesto about how programs of social transformation might be funded. All of today’s most widely-used currencies, however, are not commodity-money backed by gold or silver but paper fiat-money and, as one might think, this changes things quite a bit (to say the least).
Toward a Marxist Modern Monetary Theory & a Worker Self-Managed Job Guarantee
In an area where commodity-money still prevails, the usual Marxist ideas on funding a program for mass-employment might still be relevant but it would be absurd to apply the same logic in a monetarily sovereign, currency-issuing nation, such as the United States. Most leftists, however, have yet to understand the implications of the model developed by modern monetary theorists to describe how modern money — fiat-currency issued at a flexible exchange-rate — actually works.
By integrating the model of macroeconomic reality offered by modern monetary theory with a correct theory of social revolution, the strategies available for struggle against capital would expand considerably. Marx’s proposal to raise armies of labor, for example, could potentially be realized in the framework of a federal job guarantee program with worker self-management.
How a Federal Job Guarantee Works
A federal job guarantee is one of those rare ideas that is exactly what it sounds like. Differing proposals have been made, each with its own take on implementing the details, but the core concept is that the government guarantees a job to anyone who wants one. As professor of economics Matthew Forstater explains:
“[a job guarantee] offers a public service job to anyone ready and willing to work, no means tests or time limits. The federal government pays the basic JG wage-benefits package, but community groups, NGOs, nonprofit enterprises, and local governments administer and manage the program.”
The unconditional and open-ended nature of a job guarantee sets it apart from the garden-variety reforms peddled by pidgeonhearted liberals. By guaranteeing a public-sector job to all who want to work, the federal wage-benefit package would become the de facto standard for compensation. Since it would be offered to workers in the private sector also, a job guarantee gives working people considerable leverage against private capital and acts as a basis for wresting further concessions from their grip.
Radical Potential of A Worker Self-Managed Job Guarantee
If a provision for worker self-management were included, a job guarantee program could also act as a forum for workers to freely associate, a means to democratize workplaces, and organize an array of counter-institutions. Allowing local governments, community-service organizations, and even neighborhood committees to manage the program would minimize bureaucracy and empower communities to identify and address their unmet needs. The possibilities for how such a program might be applied are only limited by material resource and labor constraints and the social imagination — as Forstater describes:
“Musicians and artists might be free to follow their calling. Oral histories can be documented and preserved through interviews with the elderly. Community gardens can thrive, with JG chefs preparing meals. Addressing the historical legacy of patriarchy and gender exploitation, care for one’s own children and one’s own home can be considered valid JG work. Even education and training may be considered public services.”
Macroeconomic Reality Check
Since nobody worth listening to is against good well-paying jobs, most objections to a job guarantee are some variation of the idea that the government is unable to afford such a costly program. Luckily, this notion is totally divorced from the operational reality of modern money. Politicians on both sides of the aisle in congress decry any big increase in government spending because . Naturally, this logic quietly vanishes each time they raise their own pay, increase military spending, or cut taxes for their wealthy pals. The fact, however, is that it never applied in the first place.
If congress passed a spending bill for a job guarantee program today, then tomorrow the government could pay to create as many jobs as it likes the same way it pays for as many tanks, hellfire missiles, soldiers, and drones as it likes — by altering numbers in a spreadsheet.
The State Theory of Money, From a Marxist Perspective
One of the key points where MMT diverges from the liberal notions of the Keynesian economists, is its basis in the state theory of money (also known as chartalism). Rejecting metalism and quantity theory (as Marx did), MMT argues that money’s value arises from the state’s power to impose taxes in its currency, which makes it a use-value (regardless of what the money is made of) since no other commodity can be used to settle a tax-debt. This explains fiat paper’s acceptance in exchange and, since it takes definite amounts of labor equal to a minimum- or subsistence-wage to “produce” units of fiat, modern money has value for the same reason gold has value (in Marx’s sense of the word).
Marxists understand the state as the constellation of institutions used by the ruling-class to organize and direct power. It is a concrete expression of class-struggle and, whether it calls itself a republic or monarchy, the state is always, at the end, the dictatorship of one class over another. Its characteristics reflect the class-characteristics of the ruling-class and it serves as an organizing committee to protect their interests. The state is both an expression of the outcome of class-war and a weapon used by the ruling class to wage it — thus, the state, almost by definition, is one of the primary arenas for the conflict of social classes.
Re-Thinking What It Looks Like To Seize the Means of Production
The traditional prescriptions for socialism all hinge on the idea that the masses should seize the means of production and use the state’s power to abolish the ownership-relations of capitalism. This simple outline is well-grounded in revolutionary theory but too many on the Left have a tendency to take this formula as an invitation to replay the romanticized tactics of a preferred mid-1900s historical revolution. The Bolsheviks did their thing in 1917, followed by revolutionary experiments in Cuba, China, and elsewhere that are still unfolding — but all that has little to do with the real conditions and issues faced by revolutionaries all over the world in 2018.
Knowing how class-struggle drives social change is great but, to paraphrase Marx, simply understanding the world misses the point, which is to change it. Capitalism’s inability to address issues like climate-change and increasing inequality is growing more obvious to more people everyday and, while socialism as an idea appeals to many, the left needs to come up with viable ways to get there. And quick. In sovereign currency-issuing nations — like the US — the radical spending-framework offered by MMT’ers might offer a practical road to an updated version of the revolutionary policy of full-employment envisioned by Marx nearly 200 years ago. The individual and social benefits of a worker self-managed federal job guarantee are immense and wide-reaching, making it an ideal rallying point not only for workers but for the precariat, the unemployed, and the houseless, too.
Modern money is a mechanism of state-power and MMT provides us with the user-manual. Whether the Left cares to use it or not, the spending-power of sovereign currency-issuers as described by MMT is already being used to advance the causes of capital and imperialism. But if the people wrested control of this power away from the bastards, it might just as easily be used to build a better world…
On the State Theory of Money, Social Power, & Taxes: Modern Money Systems 3
The following is part-3 in an open series meant to introduce the basics of modern monetary theory (MMT) and to explore the potential for MMT’s radical model of macroeconomic reality to intersect with revolutionary theory and struggle. In Part-1, the basic principles and monetary mechanics of MMT were presented alongside an irresponsibly brief review of money’s evolution from its prehistoric origins to the ongoing failure of orthodox economics to explain how money functions today. Part 2 looked at how MMT re-writes the rules of public spending and how it could be used by the working classes to build radical organizations and fight the power of capital with a self-managed federal job guarantee. And now Part 3 presses on to new territory where, for the first (and probably last) time, engine mechanics and the state theory of money will become relevant to a discussion of one of history’s most exhilarating topics — taxes. (Please, don’t leave)
MODERN MONEY SYSTEMS, PART III: The State Theory of Money, Social Power, & Taxes
In the fogs of economic illiteracy that envelop today’s political debate, there exists the eternal stalemate over how much ought to be taxed from whom to pay for what for whom else under which conditions and why. Those preferring a small welfare-state that taxes and spends less stand bitterly opposed to those who prefer a less-small welfare-state taxing and spending more. All of it, of course, is silly and unnecessary because, for sovereign currency-issuers like the United States, taxes do not fund spending and the only real constraint on spending is the availability of idle labor and resources. Public healthcare in the US, for example, is not a financial question of funds but a material question of whether definite amounts of labor and resources are available to build clinics, train doctors, and produce medical supplies.
But if monetarily-sovereign governments like those of Japan, Australia, and the US can fund such ambitious programs as a federal job-guarantee and universal public-healthcare without taxes, the obvious question is — then, why tax at all? Strange as it may seem, it turns out that the value of money depends on taxes….
How Money Gets Its Value & Why Gold Is Just a Yellow Rock
For anyone still using gold doubloons as money, it may seem reasonable to assume that money’s value results from its materials since metals have value apart from any seal of authority. But considering that all major currencies are issued by fiat today, it seems absurd for anyone else to assume so and particularly for the billions who regularly use this money made from nothing valuable and backed by even less. Metallism — the notion that money’s value results from its price as a commodity — simply fails to describe any form of money that has actually existed (including the metal ones). The fetish-worshipers of gold and other metals can cry all they like but the fact is that bits of paper work as well as (and in many ways better than) electrum, silver, and gold ever did.
A Quick Word About Value: Use-Value & Exchange-Value
One way to pose the question of money’s value is to ask why anyone would exchange things of obvious value — food, tools, labor, etc — for zinc wafers or paper with spooky symbols, numbers, and images of dead rich people on them? Money satisfies neither hunger nor thirst nor any other need in itself. In fact, money’s only use seems to be in exchanging it for other things but that just leads back to the question of why it has value at all. To get a clear idea of how exactly fiat money differs from things of easily-recognized value, it helps to know how use- and exchange-values work.
If something satisfies a need or desire (real or imagined) it is a use-value. Most things people make are use-values. A use-value that is produced for exchange becomes reflected as an exchange-value by the market and both values together form a commodity that turns value into price, expressed in amounts of money. As an example, a pair of shoes is a use-value that satisfies a person’s need to protect her feet and also an exchange-value equal to, say, 2 months of Netflix, 24 AA-batteries, 3 packs of cigarettes, etc. In commodity-exchange, one side takes the shoes as use-value and the other as exchange-value — it is impossible to possess both use- and exchange value at the same time (i.e. nobody can eat cake and still have it, too).
What makes fiat so weird is that, while the commodities that people are familiar with exist as both a use- and exchange-value, fiat appears only as an exchange-value. And this is too much like a one-sided coin — it just cannot be.
The State Theory of Money
The answer to the riddle, as it turns out, is not so much on either side of any coin but printed right across the front of the fiat. Inscribed on all notes denominated in US dollars are the words “this note is legal tender for all debts, public and private,” along with the authorizing seals of the US Department of the Treasury and US Federal Reserve. This tells us a few things –
- That the US government has the sole authority to issue US dollars
- That the US government accepts payment in US dollars to settle public debt (taxes, fines, etc)
- And that private debts under US jurisdiction are legally settled by payment of US dollars
To take part in the production, distribution, and consumption of goods and services that forms the basis for society, virtually everyone ends up with debts owed to the government as taxes on income, payroll, and property or other fines, customs, and fees. By fiat — meaning in Latin an official decree or literally ‘let it be done’ — the state imposes these debts periodically on adult citizens, a vast majority of whom pay up with a shrug to avoid the eventual imprisonment. And of course, such debt is only payable with… wait for it — US dollars.
Taxes Drive the Currency
Effectively, these tax-debts create a base-level of demand for dollars so long as the US has sovereign power to issue and tax its currency. Taxation (or another form of distributed debt, such as tithe or tribute) is what drives demand for a currency. This is corroborated by the historical record, which consistently shows that various forms of money rise and fall with the state-powers that tax them. In a nutshell, the state theory of money (also known as the chartal theory or chartalism) is that it was never about the gold — money was always a creature of the state. Sure, a Roman denarius is still a use-value to museums and it could even still be melted down to sell at current market-prices of silver 2,000 years later — but as a state, Rome is no longer in a position to insist on anyone making payments in denarii and so no one does.
In the end, the only real way to guarantee that any currency will be widely accepted in exchange is to enforce its acceptance with the organized power of the state.
Thought Experiment: Money & the State
Say someone hands you a note with “1 dollar” written on it. How valuable would this “dollar” be? Then, say that person returns with a baseball-bat demanding either “1 dollar” or your teeth — the dollar became pretty valuable, didn’t it? But more importantly, the dollar became a use-value — and even more importantly, it became the first and only unit of paper fiat-money in a very tiny hypothetical monetary system. Just replace the person and the bat with the state and the severe penalties it imposes for refusing to settle tax-debts, then multiply the whole scenario by 200 million or so, and presto — money.
Money, Among Other Units of Measure
In context, the fact of money’s origin in the state is hardly surprising. Few take any issue with the state’s role in setting most of the other official national standards. Is it not the state that typically decrees whether a nation officially uses Metric or Imperial units of weight and measure? And does the state not also declare whether temperature is recorded using the Fahrenheit or centigrade scales, as well as the calendar system used to date said records? Considering how normal it is for states to set everything from units of measure to national birds, official languages, and the whole kaleidoscope of regulatory standards, it almost seems obvious that states would also set the unit of account, aka money.
The Real Function of Taxes
One of the implications of this state theory is that taxation (in one form or another) is a vital, non-negotiable feature of money systems. To get rid of taxes altogether would also get rid of demand for — and thus, the value of — the currency. To be clear, this point — that a state’s ability to impose tax-debts is a core component of money systems — does not mean that a state “should” tax its citizens for moral reasons or because it is fair or just, or even reasonable to do so. It means that failing to enforce payment of tax-debts in a currency will result in evaporation of demand for that particular monetary-instrument and the system will literally be toast.
Punching holes in the bottom of a boat will cause it to sink despite what anyone may think or feel about it because it is buoyancy that keeps vessels afloat, not feelings or opinions — likewise, the fact that taxes drive currency is just part of the operational reality of running a monetary system. If or when it might be ethical to punch holes in boats is probably a great topic for academic debate but, since this post is about how money works and not how to destroy it and because such a debate is clearly not in the interests of those of us on board, let’s leave it to the philosophers.
All that being said — while tax-collection is necessary to maintain a currency’s value, taxes are never needed to fund spending. ‘Taxpayer dollars’ fund nothing and no one’s hard-earned income is shoveled back into the treasury by the IRS — taxes are deleted. Taxes destroy the money that spending creates from nothing — however, the real economy happens in between.
Micro- & Macro-Economic Perspectives
To understand how a money system works, a macro-economic perspective must be adopted. Just as the mechanics of physical matter are different at very large scales — like that of planets and stars, where motion is determined mainly by gravitational forces — and very small scales — like that of subatomic particles, where nuclear forces dominate — the mechanics that rule economies look different at micro- and macro-economic scales.
Spending & Taxation as Inputs & Outputs
Think of all the circulating currency as a system with an input and output — currency is spent into the system and taxed out by the sovereign issuer. The reality is a slightly more complex (for example, the state can also pull money out with treasury bonds, in a way that is similar to taxes) but the principle is simple — the net-total of currency is increased and decreased by the state alone.
- If equal amounts of money are spent and taxed, the net-total currency doesn’t change
- If more is spent than taxed, the net-total currency increases
- If more is taxed than spent, the net-total currency decreases
Now — to get a basic idea of how this circulatory system of inputs and outputs works, it helps to understand its limits. In the simplest terms, the system’s capacity is determined by the amounts of actual labor and resources that are available — or, to put it another way, no amount of money can ever cause a factory to be built if there are no building-materials or workers willing to do so. If the system has reached full-capacity already (if labor and resources are fully-employed), then injecting more cash is not only pointless but may lead to unsustainable levels of demand and rising prices — this is where taxes come in handy as an exhaust for pulling out the excess. On the other side, if capacity is not yet reached, then choking the spending-input is a great way to increase unemployment and throw the system into artificial recession.
Resource & Labor Flows
Inside the system, circulating currency is moving labor and resources between the different parts of the society, distributing access to the means of producing wealth and to wealth itself. Broadly speaking, resources flow into activity arising from spending and out from taxed activity — this means spending and taxation (aka fiscal policy) function as levers that direct labor- and resource-flows within the system. To shift resources from fossil fuels to renewables, for example, heavy taxes might be levied on oil as new programs are funded to provide living-wages to millions of workers building a new framework for sustainable energy-production.
This can also be used to do awful things, of course — if the goal is to maintain a robust military-industrial complex full of parasitic finance-capitalists, income could be taxed more heavily than capital gains while subsidizing costs for weapons manufacturers. (As in today’s USA). The money system is a tool — it can be used to fix things just as easily as it can be used to beat the daylights out of poor people and sabotage the dawn of a better world.
It all comes down to whom is driving.
Taxation & Questions of Social Power
Accepting that taxes maintain a currency’s value but considering that taxes are never collected to fund spending, the question arises of what and whom to tax and why. From the perspective of a neutral ‘monetary mechanic,’ more than one answer is possible — unlike the matters of function discussed thus far (like that tax-debts create demand for currency, that sovereign currency-issuers cannot go broke, etc), any question of why to tax what or whom is inherently a human question — one that cannot be answered from a neutral point of view.
From the viewpoint of a currency-issuer looking ‘down’ at the macro-economy, taxation appears as an outlet for removing excess money from circulation that (in addition to driving the currency) can also be used to influence the flow of resources and manage inflation. However, from the viewpoints of individual currency-users, a tax appears as a limitation on the individual’s power to access wealth and control resources (aka capital) — or, to put it another way, taxes restrict how much buying-power an person has. And “buying-power” (at least in the context of capitalism) is hardly more than a euphemism for power itself.
So the correct question is: whom or what should have less power? And the answer depends on the perspective and the interests of the one answering.
The Social Approach: Taxing Bads, Not Goods
One approach to the question — and remember, no approach is neutral — is to employ the logic Mr. Spock used in The Wrath of Khan when he concluded that “the needs of the many outweigh the needs of the few.” Applying Spock’s logic to tax policy, the question can be refined to something like — whose (or what) money has the most negative impact on the society overall? This is the reasoning behind so-called “sin taxes,” such as added taxes on cigarettes, that are intended to deter economic activity considered harmful to society.
The same type of reasoning could also justify taxing activity that contributes to pollution (like oil extraction) or wastes resources (such as the production of junk-foods) and even taxes to deter stuff like the construction of buildings that block the view of natural surroundings or spoiling open spaces with advertisements. This approach to tax policy takes the social perspective of the collective and favors the interests of “the many” over and against individual interests. To implement such tax policies, however, the many would first need to gain control of their state….
Social Class & the State: Taxation as Power
The state, strictly speaking, is not the government. Government is an entire constellation of public institutions tasked with the chores of society, from fire departments and schools to waste and recycling, licensing drivers, civil courts, road work, and so on. Government is less of a monolith than a category of activities that organize society. The state is a political entity recognized as the highest authority in a geographic area. Since wielding supreme authority over even a small population is difficult, states invariably try to maintain at least some popular support, along with the capability to use violent force.
In historical-materialist (aka Marxian) schools of thought, the state arises from class-conflict as an institutional structure that formalizes the power of the dominant class to rule society. The state, in other words, is always and everywhere the organization of class-power. And only an organized class — like say, a hypothetical coalition of social activists and labor unions formed by an increasingly militant working-class majority — is capable of influencing the state’s use of power.
The Role of Taxation in Social Revolution
From a social-revolutionary perspective (broadly speaking, any perspective that aims to put the working-class majority in charge of society) the framework of modern monetary theory seems to offer new possibilities for a viable economic strategy to transition from a society ruled by private capital to one where all power rests with the people. Unlike the bourgeois neo-classical and New Keynesian economics, the MMT model acknowledges the social creation of money as an abstract form of value that serves as universal medium for circulating the real values that labor creates.
But to realize a truly modern monetary system — one that issues currency democratically by the public authority to benefit society as a whole and that frees people from the brutal austerity and artificial scarcity that the profits of private capital demand — for such a currency to exist, ordinary working people must become at least as well organized as those who presently hold the reigns of the state. And until the toiling classes do, these rich white men are perfectly content to keep using society’s monetary power to spend into their own pockets and tax away any shred of wealth the ones who actually work for a living manage to get because, wherever money grows, there is the chance it might turn into power.
And they can’t have that, now can they?
The State vs. Government: Opposing Concepts of Authority
Much of the US political debate seems to ultimately break down into a meta-debate between what people call “big” vs. “small” government — but how can such a big pile of ideas fit in a word as small as government? The answer is — it can’t. In fact, it is completely nuts to expect one word to hold everything from fire departments, the DMV, and the Iraq War to healthcare, fiscal policy, and the other Iraq War. All of that stuff is just too complex to boil down to pro- and anti-government politics — and luckily, there are words that can organize this mess. The cause for a lot of confusion is the fact that people tend to mix up the concepts of “government” and “state” and a lot of the time both of them get smooshed into one word. So — what is the difference between government and the state?
What is Government?
“Government” is a noun that more-or-less describes a bunch of smaller acts of “governing” all lumped together — and governing is basically unavoidable. Whenever people call a meeting to address shared issues or concerns, they are governing — for example, a neighborhood might get together to fill in a few potholes or mobile home park may pool resources to build a playground or start a community garden . Stuff like fire departments, public libraries, and fleets of snow plows are simply how people deal with the collective chores that need to be done to avoid getting buried in snow or stupid or on fire. Even if the government somehow vanished today, it would take a massive effort to stop a new one from springing into existence tomorrow because the only real difference between a society and a dumpster fire is the level of organization.
What is the State?
The concept of a “state” is a different can of worms. While government and state tend to overlap a lot in practice, the state is an organization with sovereign authority over and against a specific population in a well-defined container of borders. The state is a stable, specific, political entity — government is more of a fuzzy blob of chores that tend to change over time. In ancient Greece, “city-states” were described by Plato as politically-unified communities who shared a distinct language, religion, and culture. Later, the city-state model became further developed in the Roman res publica (aka republic or commonwealth), which extended the city-state’s legal-system to territories under its control. Finally, the modern nation-state emerged after new transportation and communication technologies allowed people to cooperate over nation-sized distances.
The Opposing Word-Origins of ‘Government’ & ‘State’
“The individual has a soul but the state is a soulless machine that can never be weaned from the violence to which it owes its existence”
The origin of the word “government” is gubernare, a word that Latin-speaking folks ripped off from the Greek kyber, a verb meaning “to guide or to steer,” which was associated with navigating the seas. It’s easy to see how this navigational idea relates to governing — the system of government is what a society uses to steer itself in the direction it wants to go and maneuver the nation to avoid any geopolitical icebergs.
“State” grew from the Latin word status, meaning “position, condition, order, or arrangement,” which is from the verb stare, “to stand or be firm.” It was used to talk about someone’s rank or position in a hierarchy in the same way that English-speakers now talk about a person’s “standing.” Next to government’s origin in steering and navigating, the origin of “state” contrasts so sharply it is nearly a contradiction — to stand firmly in one place.
Authoritarianism in Government vs. the State
“The state is a professional apparatus that sets itself apart from the people and apart from the institutions the people themselves create. It’s a monopoly on violence that manages and institutionalizes social activity. The people are perfectly capable of managing themselves and creating their own institutions”
It is possible for government to get by without formal authority — it mainly depends on people agreeing to accomplish a set of tasks and goals together. Government can be authoritarian, of course — and, under the state’s control, it often is — but it does not have to be. For example, it is hard to imagine anyone demanding to know who authorized another person to fix a street lamp or redirect traffic from the site of a car accident.
The state, on the other hand, can only exist by possessing the power to contain its borders and wield authority over its population, which means states are fundamentally authoritarian. States must have the capacity to defend their political structures from any external threat and, maybe just as often, from their own citizens. This is why states tend to fund and develop policing, military, and surveillance organs whether citizens want them or not. Just to exist, the state must separate itself from its citizens and develop its structures of power independently.
Government Is Just a Pattern of Activity, States Institutionalize Power & Authority
Government is more-or-less a repeating pattern of activity that can be shaped and re-shaped to serve whatever purposes a people want — the main issue is whether the governed can control the governing. Just as part of an individual’s time and resources is absorbed in practical activities (like cleaning, grocery-shopping, bringing the kid to school, etc.), part of society’s labor and resources is absorbed in its pattern of governing activities. It is a system to direct resources and energy to accomplish necessary or useful goals — nothing more. Systems can be redesigned or replaced — but disabling or hacking off bits of “the government” is unlikely to improve society in the same way that setting the tools and cleaning supplies on fire is not likely to improve the condition of a person’s house.
The state has a nasty habit of hijacking government to preserve the level of control it depends on to exist. To sustain the police, military, and intelligence organs necessary to coerce its population, a state needs access to resources and — since government is designed to direct public resources — governing can be re-purposed to be an interface for a state’s power. If this happens — and it often does — the state has taken control of the activity that governs the society. In other words, the state is now the one behind the wheel who “steers” the nation and, since the state treats itself as separate from its citizens, it tends to choose its own destinations.
The ‘Big’ or ‘Small’ Government Debate Is Useless, The Real Debate Is About How the State Uses Power
“As long as the state exists, there is no freedom. When freedom exists, there will be no state”
Problems like the failed war on drugs, authoritarian policing, military interventionism, micro-managing people’s behavior, and mass incarceration are mostly about how the state uses power and authority. Issues of government are more about things like roads, utilities, mediating conflict, public services, environment and resource management, establishing standards, elections, and political organization. If the distinction between state and government were more widely drawn, many who hold differing political views might find it easier to agree with each other about the fundamental nature of the problems facing both of them.
If civil-libertarians, for example, understood that left-communists, libertarian-socialists, and many others on the left also opposed institutional coercion by the state, a broader anti-authoritarian front could form in spite of differing views on government organization. The portrayal of the left as champions of “big government” solutions is not only reductionist and wrong but it acts as an obstacle to any strategic alliance between leftists and genuine anti-authoritarians with differing, non-deal-breaking views* on other issues. No problem can be resolved without understanding it first and, in any case, a bit more precision in the public debate is never a bad thing.
*Note: I’d like to clarify that, by “genuinely anti-authoritarian groups who hold differing and non-deal-breaking views on other issues,” I do not mean to suggest that anyone should ever align w/ flat-out reactionary groups or w/ racists of any kind for any other reason whatsoever. That is what I mean by “deal-breaking.” Racists can never be comrades. Full stop.