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The Core Significance of Taxation and Currency Sovereignty in a Nutshell

Summary:
A government with the authority to tax can ensure acceptance of a particular currency. By nominating a currency in which income and wealth are to be assessed, and imposing taxes that can only be paid in the nominated currency, the government establishes a demand for the currency. This is true whether the government issues its own currency or instead adopts a currency issued by some other entity. But a government that adopts somebody else’s currency is reduced to the status of mere currency user and, as a consequence, faces financial constraints similar to those that bind private households and firms. In times of economic crisis, a currency-using government is dependent for assistance on the currency issuer and so subjects itself to whatever terms and conditions the currency issuer

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A government with the authority to tax can ensure acceptance of a particular currency. By nominating a currency in which income and wealth are to be assessed, and imposing taxes that can only be paid in the nominated currency, the government establishes a demand for the currency.

This is true whether the government issues its own currency or instead adopts a currency issued by some other entity.

But a government that adopts somebody else’s currency is reduced to the status of mere currency user and, as a consequence, faces financial constraints similar to those that bind private households and firms.

In times of economic crisis, a currency-using government is dependent for assistance on the currency issuer and so subjects itself to whatever terms and conditions the currency issuer might attach to the assistance it grants. These terms and conditions may well conflict with the democratically expressed policy preferences of the affected community.

In contrast, a government that issues its own currency is unencumbered by revenue constraints. Like any economic entity, it always remains subject to real resource constraints, and like any government it will face political constraints, but finance is never a genuine barrier to the implementation of appropriate policy.

A currency-issuing government, in other words, always has the financial capacity to purchase whatever is available for sale in its own currency.

For societies, therefore, that retain for themselves currency sovereignty, anything that is technically feasible, is affordable.

In short, for such societies, if something can be done, it is affordable.

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