Money means taxes

Money is created by taxation

1800 words

To understand money it is best to begin elsewhere: With permanent protective agencies. These, by their nature, exercise a monopoly over a terrain. “Permanent” does not mean for ever, but that expiry is not foreseen.

Protective agencies are otherwise known as states or governments, but this description provides a better perspective. Protective agencies might be compared to insurance companies, except that the latter are not monopolies.

Protective agencies assert a monopoly on the use of force. A little discussed topic is the limits to that monopoly. This author argues that one limit is violated where there is state censorship. But that is a theme for a separate discussion.

Through its monopoly on the use of force a protective agency ensures, in principle, protection of life & limb and of property, among other things. This assurance is effected internally through a police force and the apparatus of courts of law; externally by the military.

In time, a protection agency may come to expand its remit or what it sees as its remit. Similarly, it may begin to overcharge. Worst of all is when it provokes, encourages or organises threats to the protection it claims to afford. At this point it becomes dysfunctional, i.e. it becomes a protection racket and loses the moral legitimacy of its monopoly on the use of force.

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A legitimate protective agency provides a service. This service, which requires employees of various categories, must be paid for, or rather, the employees must be rewarded for their work. (An alternative would be for most citizens to give up some of their time in order to assist in rendering the service. For obvious reasons this alternative would, today, have little viability.)

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The analysis given here is not a historical account. It is about the logic of the creation of money and its connection with taxation. That logic is commonly subverted so that the picture is blurred and the financial economy corrupted. It is complicated not least by the necessary expansion of the money supply. This expansion can be done correctly or incorrectly.

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We have established that the protective agency (hereinafter, the state) must reward its employees so that, at a minimum, they too can obtain the goods & services they need in order to live a normal life.

The way the protective agency does this is to issue credit notes to its employees. This means that it takes on debt. Eventually, the debt must be repaid by the credit notes being returned to the issuer.

Four things happen here. (i) It is in the nature of debt that this is tied to time, or rather, its discharge is. There is a time delay.

(ii) The state employees give the credit notes the state has issued them to other citizens in exchange for the goods & services they want.

(iii) Why should the other citizens accept these credit notes?

(Note that, now, what has here been called “credit notes” are, in effect, money.)

(iv) They accept the credit notes because the all-powerful state demands they be returned at appointed times. Note that they cannot be returned early.

The return at the appointed times is called taxation. Taxation is the final step in the recycling of credit notes.

That is, the purpose of money is to pay taxes and thereby extinguish the debt which the state has incurred.

Note that taxes must be paid in the currency the state stipulates, i.e. by returning the credit notes it issued earlier. Taxes cannot be paid directly with jewellery or bits of gold and silver.

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This account runs contrary to much popular discussion about the nature of money and debt. It is objected that the state (or the central bank) issues banknotes (i.e. money) without anything to back it with, for example, gold. But this is false. The state backs the money it issues with its monopoly of force and the provision of the protective services which that monopoly enables.

Digression: The cultural fixation on gold and similar rare commodities is almost universal, but has little logic to it. People imagine that the economy cannot be flooded with gold and consequent inflation because, like bitcoin, it is limited, being difficult to find and mine. But the stocks of gold of many nations and even individuals are vast. At any time, that gold could be let loose in the market, with catastrophic impact on those who have invested in the metal. There is also the salutary tale of private holdings of gold being prohibited with draconian penalties for disobedience, for example, by Franklin Roosevelt during the Great Depression.

There is a crucial difference between gold et al and money: money must circulate, whereas gold is intrinsically inert. Money is forced to circulate by inflation and taxation. It is these that keep money alive.

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People think of debt as being something negative, to be avoided if possible. But governments must go into debt, otherwise they cannot perform their task. Governments are a collective, not individual persons who may resist indebtedness. Here the word “debt” is an accounting term, not a moral category.

Note, however, that, misleadingly, the word “debt” may be used in completely different constellations. One such constellation arises when interest is charged on fiat money. See https://klasseverantwortung.com/english/Fiat.html

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Having money has many advantages over other forms of holding and exchanging wealth. It is quite different to gold, silver, precious stones and other valuables which might be used in barter. These are best described as barter intermediaries. In other times and places, corn or salt served similarly. These at least have intrinsic use, whereas the value of precious metals and stones is entirely cultural. Banknotes, on the other hand, are easier to handle and have specific values. Within a given jurisdiction they are accepted universally. Contrast this with a lump of gold.

People object to paper money on the grounds that it has been created “out of thin air,” whereas to produce silver coins, silver is needed, which cannot be conjured up on an electronic ledger.

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In certain times in not too distant history, banknotes have been issued not on the basis of any holding of gold etc., but as mirroring the wealth existing or being generated in an economy. This was the case with the “Bradbury” pound, "fiduciary" rather than gold-backed in 1914. It is not unique historically and is the de facto situation with most major currencies today. However, differences in detail are significant.

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There is a fundamental and unavoidable tension because money as a means of exchange becomes also a measure of anything which might be exchanged, including anything which may only be offered as collateral for borrowings.

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Having set the scene, we can now turn to the core issue, which is control of the amount of money and the nature of the debt in an economy.

As set out at https://klasseverantwortung.com/english/money.html the key factor is circulation. The average speed of circulation is unknown. The core merit of money is its anonymity. Malicious planners might yet succeed in ending this anonymity via central bank digital currency (CBDC) and so monitor the speed of circulation, but we are not there yet.

To repeat: it is taxation and slight inflation which keep money circulating, whereas barter intermediaries (assets) such as gold need never circulate.

On the account given above, the quantity of money in the economy should equal the amount of (government) debt. But this picture is obscured by the volumes of both changing constantly.

Ideally, the volume of money combined with its velocity of circulation would correspond to the amount of trade in the economy. But with circulation being unknown, only rough estimates are feasible. This said, it is apparent when the correspondence no longer holds even approximately. This is visible in the form of bubbles, with disproportional increases in prices in specific areas.

It might be assumed that such occurrences stem from mismanagement of the relationship between taxation and the issue of new government money (=debt). But something else is happening here. It is not the government alone which creates money. Much is done by banks in the form of fiat money. Popularly, in the alternative media, fiat money has been targeted as the chief culprit. Money is created electronically on a ledger, without the intercession of banknotes, on the basis of collateral provided by the borrower. When the money has been repaid the ledger entry is erased and the artificially created money therewith destroyed.

But that is not the end of the story. Interest is charged on the money lent, and this must be paid from the stock of money available in the economy. The bank has created debt in the form of interest it is owed, and this debt is not erased on repayment of the principal. For details, see https://klasseverantwortung.com/english/Fiat.html.)

Remember that money is equivalent to credit. If you have money, you have claim at a time of your choosing to something indeterminate in the economy, which is vast. Where there is credit, there is also debt.

The charging by banks of interest – and likely of compound interest – means that they create money for their own benefit, usurping the prerogative of the government (i.e. its monopoly).

Instead of their operation (the issue of fiat money) being neutral in respect of the quantity of money in the economy, the banks add to that quantity surreptitiously. This means that they create permanent debt, or rather, they create a dynamic whereby ongoing taxation cannot correspond to the volume of money/debt in the economy. They force the hand of the government, which is itself compelled to issue treasury bonds to compensate for the shortfall.

The solution would be to forbid any interest being charged when fiat money is issued. (Cash would be unaffected.)

The issue of such money could remain profitable by charging a fixed commission on the money lent, such that a borrower would receive, say, only ninety pounds for each hundred lent. This is what already mostly happens when shares are bought in a company.

The talk above has been of ordinary banks, large and small, issuing fiat money. But much the same considerations must hold true for central banks such as the US Federal Exchange (the Fed) or the Bank of England. Or indeed the Bank for International Settlements (IBS).

All our countries are saddled with gigantic quantities of “debt;” — that is, the level of debt is so high that it can never be repaid even over generations. A breakdown is needed of the net sums owed externally and internally. A cancellation — or confiscation — must proceed forthwith.