I often hear from Ron Paul followers that our money has no value. This is obviously untrue, but if they really believe that they are welcome to give me theirs. So how does paper money get its value? One theory is that of tax-driven money. Fellow crackpot and Uconn grad Warren Mosler often uses the example of colonial Africa, which I’ve paraphrased here:
Imagine some African villages where the locals grew food. British colonists showed up in Africa and declared a tax, payable in British pounds. But when they first arrived, none of the African natives had any pounds, so how were they to pay the tax??? You could suddenly consider the natives unemployed, in the sense that they needed to get those pounds somehow, or the Brits would burn down their huts.
The British government is the one and only source of pounds. They would have to employ the natives, by buying some of the native’s food in exchange for pounds. Once this happened, the natives had the money to pay the tax, and British pounds were quickly adopted as their preferred currency.
Notice that it is taxes which create the state of unemployment. Taxes reduce the ability of the natives to buy all of the food they produced from each other, because the government must buy some of it in order to provide at least the funds the natives need to pay their taxes.
Thats the simple model of tax-driven money. The funds to pay taxes come from government spending, and taxes are what ultimately create the demand for paper money, such that it can be evaluated like any other commodity: production is when the government spends, and consumption is when a tax is payed. The value of the money is as good as the government’s willingness to spend and ability to credibly enforce tax collection.
Notice also that if the government spends more than they tax, the Natives can hold on to some of the Pounds in their savings. This is called deficit spending. By the laws of double-entry accounting, the government’s budget deficit in a given period is equal to the amount of money the private sector can save.
7 users commented in " Tax-Driven Money "
Follow-up comment rss or Leave a TrackbackAs a Ron Paul crackpot, I’ve never heard anyone say the US dollar is worthless. Soon to be worthless, unconstitutional, immoral, yes, but not worthless.
Solution: get government out of the monetary policy making business.
Ron Paul is a hack.
There I said it.
BRING IT, PAUL TARDS.
great stuff! When it’s analyzed on such a simple level, it makes much more sense to me.
It just bothers me because this is so chicken-and-the-egg in a way, but it’s not. We need the government in order to spend in a controlled and easily measurable manner, without bias. On the flipside, the government needs us because without us, obviously there would be nothing for them to tax or collect on. The system would implode.
This is a very chicken-and-egg way of looking at it. The conventional view is that the government must first levy a tax to raise money, and then spend that money later.
This view demonstrates that a government that issues its own currency spends first, providing the funds for people to pay their taxes. It also means that spending would provide the funds people use to buy Treasury bonds
So Mike, would you agree that our current monetary system aught to be changed, on the basis that the government’s undue influence creates market instability?
lol, will respond when i get some down time at work
[...] ready to issue notes promising to pay its vendors at a future date. According to the theory of tax-driven money, if they made California just made state taxes payable in these IOU’s they would be on the [...]
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