Taxes drive money. (There’s a guy at the door with a gun.)

What gives money its value? The power of the authority that issues it. The only “faith” necessary for the state’s money to have value, is if you don’t pay your taxes with the money the government gave you, you have faith that there will be severe consequences.

At the bottom of this post you will find some stories and analogies from MMT founder, Warren Mosler.

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This post was last updated January 18, 2022.

Disclaimer: I have studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for MMT. The information in this post is my best understanding (especially based on my reading of Wray’s paper and my conversation with Wray about it) but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.

Federal taxes “drive money”‬

A fundamental concept of chartalism, or the state theory of money, is that taxes drive money: the idea that national taxation is a sufficient but not necessary condition for driving a currency. Federal taxation is what gives money its value. (Sufficient means it definitely works, necessary means that although there may be other conditions that will work, it is up to others to discover what that is. Here’s more on sufficient versus necessary from L. Randall Wray.)

At the federal level, taxes don’t – and can’t – pay for stuff, but they’re still very important. One of these important reasons is the idea that “taxes drive money.”

The federal government doesn’t need your money (they’re the ones that gave it to you!). They need you to need their money, so you do what society needs doing. To put it concisely and perhaps a bit cheekily:

The purpose of federal taxes is not to generate revenue.
The purpose of federal taxes is to generate workers.

Here is an excerpt from Warren Mosler and Mat Forstater’s 2005 paper “The Natural Rate of Interest Is Zero” (8 pages) that elaborates on the concept:

…taxation (and the declaration of what suffices to settle the tax obligation) serves to create a notional demand for the government’s (otherwise worthless) currency. The process can be viewed in three stages:

  1. The government imposes a tax liability payable in its currency of issue.
  2. Faced with this need for units of the government’s currency, taxpayers offer goods and services for sale, asking in exchange units of the currency.
  3. The government “issues” its currency—spends—in exchange for the goods and services it desires.

The non-government sector will be willing to sell sufficient goods and services to the government to obtain the funds needed to pay tax liabilities and satisfy any desire to net save (financial assets) in that unit of account.

Related, here’s a nine-minute, 2017 video by Modern Money Network founder Rohan Grey called “MMT: Taxes Drive Money,” hosted by Deficit Owls:

A concise take on barter versus chartalism by Rohan Grey in his 2020 paper, Equality, not equal pay: distributional justice beyond money

Money as a system of production

According to standard economics textbooks (see, e.g., Mankiw 2011, p. 324), money emerged as a technically superior way to facilitate private exchange than in-kind barter. By agreeing upon a certain commodity, like gold, to function as a general circulating medium, store of value, and unit of account, private actors overcame the problem of the “double coincidence of wants,” and developed more sophisticated systems of coordinated production and consumption. The state, by contrast, entered only later, as the collective entity responsible for enforcing property rights and contracts in exchange for the power to levy taxes to fund its activities.

This stylized account has no empirical basis. To the contrary, the earliest documented forms of money emerge contemporaneously with the written word, as a tool of public governance in societies too large to be administered via kinship and in-person relationships (Graeber 2011; Ingham 2004; Schmandt-Besserat 1986). In particular, public authorities impose taxes and other non-reciprocal obligations that can only be satisfied by tendering tokens (or credits) issued or endorsed by the public authority itself. The nominal value of the tokens establishes a common unit of account, which private actors later use to denominate their own private credits (Desan 2016).

For monetarily sovereign public authorities, the function of taxes has thus never been to generate revenue, but rather to establish demand for currency only they can create (Wray 2016; Tcherneva 2007a; Forstater 2005). Once such demand is established, public authorities then inject currency into the economy in exchange for real goods and services, most importantly labor, thereby creating a real production circuit that otherwise would not exist.

Source: Christine Desan’s 2016 paper, Money as a legal institution

Warren Mosler’s business cards (or, “Turning litter into money,” or “There’s guy at the door with a gun”)

Finally, as MMT founder Warren Mosler states, “the money story begins with a government that needs to provision itself,” meaning move resources from the private sector to the government sector. He describes this with an analogy about business cards. Related is this excerpt from Stephanie Kelton’s 2020 book, The Deficit Myth (chapter one):

My head spun. Then he told me a story.

Mosler had a beautiful beachfront property with a swimming pool and all the luxuries of life anyone could hope to enjoy. He also had a family that included two young kids. To illustrate his point, he told me a story about the time he sat his kids down and told them he wanted them to do their part to help keep the place clean and habitable. He wanted the yard mowed, beds made, dishes done, cars washed, and so on. To compensate them for their time, he offered to pay them for their labor. Three of his business cards if they made their beds. Five for doing the dishes. Ten for washing a car and twenty-five for tending to the yard work. Days turned into weeks, and the house became increasingly uninhabitable. The grass grew knee high. Dishes piled up in the sink, and the cars were covered in sand and salt from the ocean breeze. “Why aren’t you doing any work?” Mosler asked the kids. “I told you I would pay you some of my business cards to pitch in around here.” “D-a-a-a-a-ad,” the kids intoned. “Why would we work for your business cards? They’re not worth anything!”

That’s when Mosler had his epiphany. The kids hadn’t done any chores because they didn’t need his cards. So, he told the kids he wasn’t requiring them to do any work at all. All he wanted was a payment of thirty of his business cards, each month. Failure to pay would result in a loss of privileges. No more TV, use of the swimming pool, or trips to the mall. It was a stroke of genius. Mosler had imposed a “tax” that could only be paid using his own monogrammed paper. Now the cards were worth something. Within hours, the kids were scurrying around, tidying up their bedrooms, the kitchen, and the yard. What was once considered a worthless rectangular calling card was suddenly perceived as a valuable token. But why? How did Mosler get the kids to do all that work without forcing them to do any chores? Simple. He put them in a situation where they needed to earn his “currency” to stay out of trouble. Each time the kids did some work, they got a receipt (some business cards) for the task they had performed. At the end of the month, the kids returned the cards to their father. As Mosler explained, he didn’t actually need to collect his own cards back from the kids. “What would I want with my own tokens?” he asked. He had already gotten what he really wanted out of the deal—a tidy house! So why did he bother taxing the cards away from the kids? Why didn’t he let them hold on to them as souvenirs? The reason was simple: Mosler collected the cards so the kids would need to earn them again next month. He had invented a virtuous provisioning system! Virtuous in this case means that it keeps repeating.

Top image: From Cdd20 on Pixabay (license)