Per Bylund’s “Is it Money because it is redeemed in Tax Payments?”: A Post Keynesian Response

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The Austrian economist Per Bylund has recently written this challenge to advocates of MMT/Neochartalism:

Bylund, Per. 2023. “Is it Money because it is redeemed in Tax Payments?: A Response to Kelton and Wray,” Quarterly Journal of Austrian Economics 25.4: 147–165.

In this article, in reply to an argument by the MMT economist Stephanie Kelton, Bylund argues that fiat money cannot have value only because it is used to pay government taxes:

“If the [sc. fiat] currency is valued because (and only because) it is needed to pay the taxes owed to the government, then this does not also explain why actors would value it much beyond their tax liabilities. If the government requires me to pay taxes of $100,000 in its currency in year X, I have no reason to demand that currency beyond the $100,000 I owe. The exception to this would be if the currency is already the common medium of exchange and therefore valued for its (expected) purchasing power with respect to other goods. But that is not the chartalist argument, which, at least as Kelton states it, is that the currency would be worthless were it not for taxes.” (Bylund 2023: 150).

Some modern advocates of MMT have indeed argued that only taxes levied by the state and the need to pay those taxes in the state-issued, monopoly fiat money drive the demand for, and value of, that fiat money and its use as a general medium of exchange in modern nations.

Bylund has here put his finger on some of the more extreme, dogmatic and unconvincing claims of the most recent advocates of Modern Monetary Theory, who appear to argue that there is no role for modern fiat money’s current acceptability as a general medium of exchange, and its historical role as a general medium of exchange in the short-term and long-term past, in explaining its persistence as money.

Bylund is correct in rejecting this particular MMT view here, and has some reasonable criticisms of L. Randall Wray. Bylund is also correct that legal tender laws, government coercion, and state monopoly issue are all factors in the modern widespread use of fiat currencies as money (Bylund 2023: 161–162), although not in defending Carl Menger’s theory of the origin of money as the monocausal or fundamental explanation of money’s origin, which is actually contradicted by the historical evidence that is more in line with the MMT view (see also here).

The value of, and demand for, and general use of modern fiat money is not simply caused by the need to pay taxes in the state-issued currency.

But long before Austian-school economists like Per Bylund made this critique of MMT, Post Keynesian economists made the same criticism, as well as much more cutting critiques of MMT.

In what follows, I first review what Post Keynesians have said in criticism of the taxes-drive-money theory of MMT, and, secondly, the much better view of Abba Lerner on how we should understand modern fiat money as being “a creature of the state.” It can be seen that the Post Keynesian view and the views of Abba Lerner are not refuted by Per Bylund’s critique.

1. Post Keynesian Critiques of the Taxes-drive Money Theory
The view that only taxes drive the value of, or demand for, pre-1930s money or modern state-issued fiat money has been rejected by Post Keynesians such as S. Rossi (1999), P. Mehrling (2000: 402), C. Gnos and L.-P. Rochon (2002), L.-P. Rochon and M. Vernengo (2003), and E. Febrero (2009: 539–530), and the Monetary Circuit Theorists A. Parguez and M. Seccareccia (2000: 120).

Rossi (1999) already rejected the view of L. Randall Wray that modern governments can control the general purchasing power of fiat money (Rossi 1999: 484).

Moreover, Febrero (2009) argued that fiat money being fundamentally required for clearing between private banks is actually a major source of its acceptability as general money, especially in nations that do not operate as MMT envisages such as the Eurozone. Febrero also held that, historically, “private money precedes state money” (Febrero 2009: 538), so that even this view has supporters within modern Post Keynesian economics.

Parguez and Seccareccia (2000: 120) – who advocate Monetary Circuit Theory (which has strong similarities to Post Keynesianism) – argued the following in opposition to MMT:

“As we have defended in our historical discussion, viable monetary systems existed during periods of economic history when taxes were quite insignificant. What matters, therefore, was not whether tax liabilities were of any significance but rather whether, largely through the legal system, the state endorsed existing banks by allowing them to issue debts on themselves. For very long historical periods, state money had been quite negligible in relation to the circulation of bank liabilities. By linking the existence of money exclusively to that of taxes, neochartalists are led to find money in societies where there are heavy taxes levied in natura. Taxes can more easily be levied if there is a state-imposed unit of account which would serve as money (Wray 1998). Ironically, such a definition of money as a pure unit of account is very close to the Walrasian conception of numéraire money in which it is the (state) auctioneer that chooses a numéraire before efficient trading takes place!

The state can endorse central and/or private bank liabilities, but it cannot impose the value of money” (Parguez and Seccareccia 2000: 120).

In a discussion to some extent similar to that above, the Post Keynesians Rochon and Vernengo (2003) concluded in a 2003 paper that, while modern money is certainly fiat money and “chartal” in the sense of being issued by the state, MMT was wrong to regard government taxes as the only, or main, cause of the existence of modern fiat money.

Rochon and Vernengo argued that modern European states actually faced a long and difficult struggle to impose state-issued money on the respective private sectors of their nation-states. They point out that, before the 19th century, domestic taxes were actually quite limited to excise duties on certain goods and tariffs on imports, and that income taxes were either non-existent or quite low (Rochon and Vernengo 2003: 63). Within nation states in the later Middle Ages and Early Modern period, there was in fact a plethora of foreign coins, private bank notes, bills of exchange and even foreign state currencies that competed within the domestic markets with the national state-issued currency (Rochon and Vernengo 2003: 63; see also Desmedt and Piégay 2007: 124). Worse still, in the Middle Ages and well into the Early Modern Period, the state did not have a monopoly on coercive payments like taxes, because there were tax-like payments demanded by the local churches, the landed gentry and the Catholic Church (Desmedt and Piégay 2007: 124). In the Middle Ages many people paid “taxes” in the form of payments in kind and forced labour (corvée), not money (Desmedt and Piégay 2007: 124).

Rochon and Vernengo (2003: 64) argue that in Early Modern Europe it was not domestic taxes of the state driving the acceptance of the local state-issued money, because, firstly, the tax burden was too light, and, secondly, it was actually the Venetian ducat, Dutch guilder, and eventually the British pound sterling (which were all originally gold or silver coins) that won a great degree of acceptance within many other nations as against the domestic state-issued money, precisely from their roles in international trade and as proto-foreign exchange reserves (which was of course backed up by the state power and military power of the Venetian, Dutch and British empires).

It was not the state, but merchants, bankers, and money changers who preferred the currencies used in international trade that drove the widespread use of the Venetian ducat, Dutch guilder, and British gold guineas and later gold sovereigns.

Rochon and Vernengo (2003: 65) conclude that it was only in the 19th century that modern states succeeded in dominating the money used within their nation-states and displacing foreign currencies and private bank notes. It was only then that a monopoly, or near monopoly, by the state on national money was achieved, in the sense that nearly all prices, contracts and debts were denominated and paid in the national unit of account.

As we can see from this review, the Post Keynesian view on money does not put the emphasis on state taxes as the only cause of the value of modern money.

2. Abba Lerner’s Theory
Abba P. Lerner wrote a foundational article inspiring Modern Monetary Theory called “Functional Finance and the Federal Debt” (1943).

Moreover, Lerner wrote a now classic article called “Money as a Creature of the State” (1947), and he makes an argument there that is quite different from some modern advocates of MMT:

“Money, as I have said in an article of that name in the Encyclopaedia Brittanica, is what we use to pay for things. The basic condition for its effectiveness is that it should be generally acceptable. Its transformability into gold and the guarantee of this possibility of gold backing (or any other kind of backing) are nothing but historical accounts of how acceptability came to be established in certain cases. These were possibly the only ways in which general acceptability could be established prior to the development of the well-organized sovereign national states of modern times. General acceptability had to be transferred in some such way from something which had already acquired it in the course of history. But if general acceptability could be established in any other way these historical methods would no longer be necessary or relevant.

This is just what has happened. The modern state can make anything it chooses generally acceptable as money and thus establish its value quite apart from any connection, even of the most formal kind, with gold or with backing of any kind. It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done. Everyone who has obligations to the state will be willing to accept the pieces of paper with which he can settle the obligations, and all other people will be willing to accept these pieces of paper because they know that the taxpayers, etc., will accept them in turn. On the other hand if the state should decline to accept some kind of money in payment of obligations to itself, it is difficult to believe that it would retain much of its general acceptability. Cigarette money and foreign money can come into wide use only when the normal money and the economy in general is in a state of chaos. What this means is that whatever may have been the history of gold, at the present time, in a normally well-working economy, money is a creature of the state. Its general acceptability, which is its all-important attribute, stands or falls by its acceptability by the state” (Lerner 1947: 313).

“Before the tax collectors were strong enough to earn for the state the title of creator of the money, the best the state could do was to tie its currency to gold or silver which had a stability of their own that antedated the appearance of the state. By that policy extreme inflations were made impossible, and in a small country even small inflations (relatively to other countries) would be checked by the disappearance of the money in an outward flow of gold. By the same policy a limit was set to depressions” (Lerner 1947: 314).

As we can see here, Lerner never denied that, historically, money was tied to units of gold and silver.

Abba Lerner in essence argued that it was only when, in the 1930s, the link between state money and gold was finally abolished that modern states had the power to declare whatever paper currency they wished to be money within their own states.

Money became a total “creature of the state” only then, and, although Lerner did invoke taxes as a major explanation for fiat money’s acceptability today, his view does not necessarily exclude other causes of modern fiat money’s value as a medium of exchange. Lerner quite plainly admitted that the “[g]eneral acceptability [of money] had to be transferred in some such way from something which had already acquired it in the course of history.”

Lerner seems to have accepted that modern fiat money has value both because of the state’s demand that its fiat money be used in tax payments, fines etc., and that historically its money had been used as a general medium of exchange with purchasing power throughout the economy in the short-term past and long-term past before the link with gold was severed. At the very least, the latter view is compatible with his arguments in “Money as a Creature of the State,” and certainly would not be rejected by modern Post Keynesians.

I would note that Per Bylund makes a reasonable point in his article when he points out the following:

“Wray also overlooks the important fact that the government currency has a legacy of being real money. Paper notes, whether issued by private banks or the central bank, used to be accepted because they were redeemable in precious metal. The name of those notes—dollars—was kept after the gold standard was abandoned incrementally through political decrees. Also, this process of replacing gold with mere paper not only consisted of increasingly undermining the dollar’s redeemability, but was accompanied by legal changes that supported the transition” (Bylund 2023: 162).

But, as we have seen above, Abba Lerner – who could be regarded as a founding father of MMT – would not have disagreed with this at all.

3. Conclusion
In short, while Per Bylund can score some points against MMT, his article has no force against the better Post Keynesian theories of the history and nature of money, and particularly the much more reasonable and defensible views of Abba Lerner, whose article “Money as a Creature of the State” (1947) is in line with the historical evidence.

The MMT view that only state taxes and the need to pay taxes in state-issued fiat money drive the demand for, and value of, that fiat money and its use as a general medium of exchange is wrong. There are other factors such as legal tender laws, government coercion, state monopoly issue, and the historical role that our money had as a general medium of exchange before the link with gold was severed.

Another problem with MMT is that it neglects the role of endogenous money in a historical sense: modern Western capitalism has been exceptionally good at expanding the money supply by private-sector “credit money” such as bills of exchange, promissory notes, negotiable cheques, private banknotes and “bank money” (or “deposit money” created by banks on their books).

Even in the modern world of fiat money, most money is “broad money” that mostly consists of “demand deposits” and other bank accounts at private-sector banks denominated in the national fiat currency, but, normally, such money creation is credit-driven: most money, being “broad money,” is created by private banks and its quantity is determined by the private demand for it. This is the essence of endogenous money.

As Nicholas Kaldor argued,

“This is the real significance of the invention of paper money and of credit creation through the banking system. It provided the pre-condition of self-sustained growth. With a purely metallic currency, where the supply of money is given irrespective of the demand for credit, the ability of the system to expand in response to profit opportunities is far more narrowly confined.” (Kaldor 1972: 1250).

So Post Keynesian economics really should put the emphasis not only on the power of state to determine what is money (which, since the 1930s, is very important and the dominant factor), but also in a historical sense on the dynamic power of capitalism to create new forms of “credit money” and endogenously expand the money supply.

BIBLIOGRAPHY
Bylund, Per. 2023. “Is it Money because it is redeemed in Tax Payments?: A Response to Kelton and Wray,” Quarterly Journal of Austrian Economics 25.4: 147–165.
https://qjae.mises.org/article/77380-is-it-money-because-it-is-redeemed-in-tax-payments-a-response-to-kelton-and-wray

Dequech, David. 2013–2014. “Is Money a Convention and/or a Creature of the State? The Convention of Acceptability, the State, Contracts, and Taxes,” Journal of Post Keynesian Economics 36.2: 251–273.

Desmedt, Ludovic and Pierre Piégay. 2007. “Monnaie, état et production: apports et limites de l’approche néo-chartaliste,” Cahiers d’économie politique / Papers in Political Economy 52: 115–133.

Febrero, Eladio. 2009. “Three Difficulties with Neo-Chartalism,” Journal of Post Keynesian Economics 31.3: 523–541.

Gnos, Claude and Louis-Philippe Rochon. 2002. “Money Creation and the State: A Critical Assessment of Chartalism,” International Journal of Political Economy 32.3: 41–57.

Kaldor, N. 1972. “The Irrelevance of Equilibrium Economics,” Economic Journal 82: 1237–1252.

Keynes, J. M. 1958 [1930]. A Treatise on Money. Volume 1. The Pure Theory of Money. Macmillan & Co. Ltd, London.

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.

Mehrling, Perry. 2000. “Modern Money: Fiat or Credit?, Journal of Post Keynesian Economics 22.3: 397–406.

Murphy, R. P. 2020. “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy,” Quarterly Journal of Austrian Economics 23.2: 232–251.

Nesiba, Reynold F. 2013. “Do Institutionalists and Post-Keynesians share a common Approach to Modern Monetary Theory (MMT),” European Journal of Economics and Economic Policies 10.1: 44–60.

Parguez, Alain and Mario Seccareccia. 2000. “The Credit Theory of Money: The Monetary Circuit Approach,” in John Smithin (ed.), What is Money?. Routledge, London. 101–123.

Rallo, Juan Ramón. 2020. “Georg Friedrich Knapp was not a ‘Chartalist,’” History of Political Economy 52.4: 773–793.

Rochon, Louis-Philippe and Matias Vernengo. 2003. “State Money and the Real World: Or Chartalism and its Discontents,” Journal of Post Keynesian Economics 26.1: 57–67.

Rossi, Sergio. 1999. Review of Wray’s Understanding Key to Full Employment and Price Stability, Kyklos 52.3: 483–485.

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability. Edward Elgar, Cheltenham.

2024-07-23