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The Greek Crisis: Time to Rethink the Concept of “Money

Auerback, M. (2015) “The Greek Crisis: Time to Rethink the Concept of “Money“, Institute for New Economic Thinking, 07 Μαρτίου.

 

As the economies of Europe stagger, and Greece in particular staggers under the weight of a depression exceeding in scale the devastation of the 1930s,  it appears difficult to see a way out of this agonizing cycle of repeated financial meltdowns. In fact, there are  creative ways to solve not only our recurring fiscal crises but our ongoing social debacles as well. Solutions are already in place where terrible problems once existed.  But these solutions challenge many existing economic paradigms, no less than the concept of “money” itself.

Commenting on the recent negotiations between Greece and its EU “partners”, economist and market analyst  Rob Parenteau suggests that tax anticipation notes, or “TANs”,  would way be a for Greece to give itself more fiscal spending wriggle room without violating Eurozone rules.  Bear in mind that modern money (what we call “fiat currency” because it is created by government fiat) has no intrinsic value in the absence of state sanction.   Since the demise of Bretton Woods, any tenuous link to the gold standard has been extinguished.

So what does impart value to a fiat currency? In the words of economist Abba Lerner:

“The modern state can make anything it chooses generally acceptable as money…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.”

The modern state, then, imposes and enforces a tax liability on its citizens and chooses that which is necessary to pay taxes. The unit of account has no real value if not ultimately sanctioned by use from the State.  By extension, the state is never revenue constrained because it alone determines what is money.  The tax is what gives the currency its value insofar as it functions to create the  notional demand for federal expenditures of fiat money, not to raise revenue per se. Value has been given to the money by requiring it to be used to fulfill a tax obligation, but the money is already in existence, not “created” by the revenue.

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