Why Understanding Money Matters in Greece…(Issuing Tax anticipation notes)

Robert W. Parenteau and Marshall Auerback look at the real purpose of money and go into history for the same.

They says real purpose of fiat money is to allow govts to pay for its expenses:

As Greece staggers under the weight of a depression exceeding that of the 1930s in the US, it appears difficult to see a way forward from what is becoming increasingly a Ponzi financed, extend and pretend, “bailout” scheme. In fact, there are much more creative and effective ways to solve some of the macrofinancial dilemmas that Greece is facing, and without Greece having to exit the euro. But these solutions challenge many existing economic paradigms, including the concept of “money” itself.

At the Levy Economics Institute conference held in Athens in November 2013, I proposed tax anticipation notes, or “TANs”, as a way for Greece to exit austerity without having to exit the euro (see “Get a TAN, Yanis!” published here last month, for an updated version of that policy proposal). This proposal is based on a deeper understanding of what money actually is, and the many roles that it plays in the economies we inhabit. In this regard, Abba Lerner captured the essence of modern fiat currencies, which are created out of thin air by modern states with sovereign currency arrangements. Lerner’s essential insight is contained in the following passage from over half a century ago (and, you will note, Lerner’s view informs much of the neo-chartalist view espoused by advocates of what is called Modern Monetary Theory):

“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. That means a state with a sovereign currency is never revenue constrained. In fact, the government has to first create the money before the private sector can find a way to get the money it requires to pay taxes and by government bonds. Taxes and bonds are therefore not really the source of government funding or finance. Wait, what?

The government itself ultimately is the source of money required to pay for government expenditures. Taxes simply give value to money, as households and nonbank firms cannot create money – that is counterfeiting.  Instead, they have to sell an asset or a product or a service to the government to get money, or they need to be beneficiaries of government corporate subsidy or household transfer programs to get money.

Superb. And then to avoid criticism, they give these counterfeiting powers to central banks who try and behave as if they are independent of the govt.

Based on this logic, the Greece govt can create TANs which is something govts have been doing for ages:

It is in this context that one has to look at the TAN proposal.  It is important to note that the tax anticipation note is by design a debt issued by the government, just like any other bond. It is a debt instrument that could be returned by the TAN bondholder to the Treasury to settle tax payments due on a 1 TAN = 1 euro basis. By imparting a value to these TANs (i.e. letting them be used to extinguish national tax) this will ensure a natural source of demand for TANs. In addition, it is very likely that consenting adults in the Greek economy would be willing to use TANs in settling private transactions as well, and this is an important element if the TAN approach is going to provide a way out of fiscal austerity without requiring an exit from the euro.

Skeptical? Well, there are other historic examples of local currencies operating in parallel with national ones. As economist L. Randall Wray has noted, in Argentina as the financial crisis deepened after 2000, local governments began to issue “Patacones” (bonds with interest) as local currencies, paying workers and suppliers, and accepting them in tax payment. Utility companies began to accept them—knowing they could pay part of their taxes with them–and acceptance spread even to international corporations such as McDonald’s.

There are other historic examples closer to home, some of which might underline the irony of adopting this kind of approach in a “what is good for the goose, may be good for the gander” fashion.  None other than the self proclaimed “Old Wizard” Hjalmar Horace Greely Schacht – who was the Currency Commissioner of the Weimar Republic after the 1922-3 hyperinflation bust,  a President of the Reichsbank from 1924-30, and then again from 1933-39,  a highly placed executive at both  Dresdner and Danatbank , and Minister of Economics under Hitler in the 1930s, all of which is not bad for a guy named after an American newspaper editor – himself introduced the MEFO bills, which TANs bear some resemblance to, though TANs are constructed much more along neo-chartalist lines, with their value deriving from their use as a tax credit, which was definitely not the case with Schacht’s MEFO bills.

They point to how US had 5 multiple notes during the crisis:

For less extreme examples in the decade before Schacht, it is worth noting that the US had at least 5 forms of paper currency going at the same time in the 1920s – despite the concerns about hyperinflation generated by the horrifying Weimar experience in 1922-3.  These were used interchangeably and included:

  1. Gold Certificates (redeemable in gold coin until FDR’s prohibition on private citizens holding gold)
  2. Silver Certificates (redeemable for coin or bullion)
  3. National Bank Notes (issued by US government chartered banks with equivalent face value of bonds deposited by bank at Treasury)
  4. United States Notes (issued directly by Treasury and also called Legal Tender Notes, but with no “backing”)
  5. Federal Reserve Notes (redeemable in gold on demand at Treasury or in gold or “lawful money” at any Federal Reserve Bank, until FDR’s prohibition, when it was just declared legal tender redeemable in lawful money at the Fed or Treasury).

Indeed, experiments with alternative financing instruments that can help bring economies back on line during monetary and financial crises are frequently cited by Austrian School economists, especially the Hayekian splinter group/wing that favors privatizing money. For example, clearinghouse certificates were created and spread during the Panic of 1907 and the Great Depression (seehttp://mises.org/library/economics-depression-scrip). So this adaptability of financing and monetary systems is much wider than we are led to believe, and it is not always government driven, which presents something for neo-chartalists to ponder.

Interesting and worth thinking about..


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