Blog-Reference
Peter Cooper argues: “We saw that to establish a currency, government needs to do three things: 1. Define a unit of account (e.g. dollar). 2. Impose taxes that can only be paid in that unit of account. 3. Spend or lend the currency into existence. The most basic purpose of taxation is to create a demand for the currency. Economists sometimes summarize this as ‘taxes drive money’. … A currency-issuing government’s IOU is the currency. Like any issuer of an IOU, government promises to accept its IOU back again in fulfillment of obligations to it.”
Every single plank of this argument has been refuted.
(i) An IOU economy can ― as a matter of principle ― be established by the business sector. This includes the definition of the unit of account.#1 Every issuer of an IOU can define the unit of account.
(ii) A money economy is different from an IOU economy in that the general acceptance of the means of transaction is established and enforced by law.#1 This is the crucial point where ‘the state’ participates in the creation of the monetary order.
(iii) Only a central bank is needed for the ongoing creation and destruction of money which takes the elementary form of deposits/overdrafts on the central bank’s balance sheet. Money comes into the economy by the autonomous transactions between the business and the household sector. It is ‘the economy’ that determines the quantity of money.
(iv) As a matter of principle ‘the economy’ never runs out of money because the central bank can create it out of nothing. The crucial point is whether new money comes into the economy as (a) additional wage income, or (b), as additional nominal demand. Option (a) is the neutral way because the real side and the monetary side are synchronous.#2 Option (b) affects the overall profit of the business sector and by consequence the income distribution.#3
(v) ‘Taxes drive money’ is just a silly slogan because it does NOT matter whether taxes T come first and government expenditures G come later or vice versa. As long as G = T in a given period, there are only short-run fluctuations of the quantity of money during that period. It is only deficits, i.e. G greater T, or surpluses, i.e. G less than T, that drive money.
(vi) There is NO difference at all between the household sector and the government sector: it is deficits/surpluses = dissaving/saving = change of debt that drives money.
(vii) By defining the institution central bank ‘the state’ can determine that the financing of the government deficit is unlimited and interest-free. This has NOTHING to do with the origin or the nature of money. The MMT narrative has NO scientific content whatsoever.#4
Egmont Kakarot-Handtke
#1 The ultimate ― analytical ― origin of money
#2 Money and time
#3 Keynesianism as ultimate profit machine
#4 For the comprehensive overview and the full-spectrum refutation of MMT see cross-references MMT.*
Related 'The final implosion of MMT' and 'Basics of monetary theory: the two monies' and 'Down with idiocy!'.
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