Modern Money Theory –  Part 3. Spending by the Issuer of Domestic Currency, the Government. Taxes Drive Money –  L Randall Wray.

A key distinguishing characteristic of MMT is its view on how government really spends.

The government of the nation issues a currency (usually consisting of metal coins and paper notes of various denominations) denominated in its money of account.

The sovereign government alone has the power to determine which money of account it will recognize for official accounts (it might choose to accept a foreign currency for some payments, but that is the sovereign’s prerogative).

Further, modern sovereign governments alone are invested with the power to issue the currency denominated in its money of account.

The sovereign government imposes tax liabilities (as well as fines and fees) in its money of account, and decides how these liabilities can be paid, that is, it decides what it will accept in payment so that taxpayers can fulfill their obligations.

Finally, the sovereign government also decides how it will make its own payments. 

Most modern sovereign governments make payments in their own currency and require tax payments in the same currency.

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.

Neither reserves of precious metals (or foreign currencies) nor legal tender laws are necessary to ensure acceptance of the government’s currency.

It is the tax liability (or other obligatory payments) that stands behind the curtain.

Tax obligations to government are met by presenting the government’s own IOUs to the tax collector.

Taxes Drive Money

L Randall Wray

From his book: Modern Money Theory, a primer on Macroeconomics for Sovereign Montary Systems. 

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s