Thanks again for well-focused questions and comments. Here we are concerned with why government “fiat”currency is accepted. The short answer was that “taxes drive money”: since you have a tax liability that must be cleared by delivering the government’s own currency back to government, you want to obtain government currency. So in that sense, it is the tax liability that drives the desire to obtain government currency.
I did leave a couple of teasers, which some touched on in their comments. First, does it have to be a tax? Clearly the answer is “no”: if government imposes a fine on you in the form of five Dollars, you need five Dollars in the form government is willing to accept to pay your fine—sovereign currency. Until the 20th century, taxes were relatively less important; what mattered more were fines and tithes and fees.
To go further, let us say government monopolizes the water supply (or energy supply, or access to the gods, etc); it can then name what you need to deliver to obtain water (energy, religious dispensation, etc). In that case, if it says you must obtain a government IOU, then you want government IOUs—currency—to obtain water in order to avoid death by dehydration. In early 19th century England, almost all activities necessary to keep your family alive were illegal by dictate of the crown. You had to pay a fine after you killed game to feed your family. You needed the crown’s currency to pay the fine—hence “fees drove money”. You get the picture.
All you need to drive a currency is a more or less involuntary obligation to deliver the currency—and that can be a tax, fee, fine, or even religious tithe. Or a payment to obtain water or any other necessity. We can go into this later, but at UMKC students need buckaroos to pay a “tax” to pass their courses—that drives the buckaroo currency—it creates a demand for buckaroos (the sovereign currency at UMKC).
That answers the question: yes it is not enough to impose the obligation (fee, fine, tax); the obligation must also be enforced. A tax liability that is never enforced will not drive a currency. A tax that is only loosely enforced can create some demand for the currency, but it will be somewhat less than the tax liability for the simple reason that many will expect they can evade the tax.
We can next move on to the second teaser: why would those who do not have tax liabilities also be willing to accept currency?
That leads us to the Tobin, “snowball” point: if some segment of society owes the tax (or fee or fine) denominated in the currency, others will accept it. Note this is not an infinite regress argument. It is the tax standing behind the currency. But it is not necessary for every individual to owe the tax.
Let us say that Bill Gates owes $1.5 trillion in taxes. I’d be happy to accept Dollars since I know Gates will accept them when I purchase Microsoft software. And that explains why foreigners want dollars—not because they owe taxes, but because a sufficient number of Bill Gates do.
From inception we know that if the total tax liability in dollars is, say, $100 billion, the taxpayers will want a minimum of $100 billion. (How much more? $120 billion? $180 billion? We will investigate that later.) Government can spend into the economy at least that amount.
How much will the Dollar be worth? Well, that depends on what must be done to obtain it. We will have much more to say about that in coming weeks.
A commentator did hit on this point: what if the tax liability is too low? Let us say the tax liability is $100 billion but government tries to spend $1000 billion. This is ten times what the taxpayers need to cover their liabilities. It is possible—even probable—that government will not be able to find takers for the $1000 billion. It can bid the price it is willing to pay (for labor, finished output, or resource inputs) up, but still find no takers. We could register “inflation” and still find government cannot spend as much as it wants.
A better solution—obviously—is to raise the tax liability toward $1000 billion, rather than to increase the price government is willing to pay. Again, that is something we will come back to, but it also sheds some light on what determines the value of the currency. As I said last week, we need to separate the willingness to accept currency from the value of the currency. Raising the tax liability will increase the desire to obtain currency although that does not tell us exactly how much the value of currency (in terms of labor or other resources) will rise.
Valuing something like a bridge is very difficult—especially if we are talking about a bridge already in place. Fortunately, it is also a question that is not very important, so long as the bridge is public—not owned by some profit seeking entity. There really is very little reason to value public infrastructure once it is in place, except perhaps in terms of all the pleasure it provides to the population. That is probably something that cannot be and should not be measured in money terms.
But, yes, raising the tax liability while holding government issue of the currency constant is likely to lead to what we might call unemployment: those willing to work to get the currency in order to pay taxes, but who cannot find work or demand for output to obtain the currency.
We will later go through the accounting to answer the question raised by a commentator: what about the reserve effects of tax payments? But, briefly, yes, paying taxes will all else equal reduce outstanding bank reserves. In practice, if the central bank targets overnight interest rates, it will replace lost reserves if they were desired or required—by lending at the discount window or through open market purchases of treasuries.
There were several questions/comments that were not comprehensible to me: what about interest, which requires one to repay more than what is owed. I do not see the relevance to this week’s topic. What about issuing money with no offsetting debt? Well, all money “things” are IOUs hence are debts, hence there is no possibility of issuing money that is not a debt. What about socio/political ramifications of who pays the tax? Yes very important, but I do not see the relevance to the topic at hand.

OK I hope I have covered the main comments and questions. More next week.


  1. "What about issuing money with no offsetting debt?"I suspect the question was meant to ask… why do we issue Treasuries dollar-for-dollar against deficit spending?

  2. @ RW "What about issung money with no offsetting debt " .. "there is no possibility of issuing money that is not debt.So during the civil War the US treasury issued Greenbacks i.e, printed currency straight from the Treasury to pay for government expenditures.. The Greenbacks were debt just like US Treasury bond bearing interest? Either way the debt would be paid by the Treasury issuing Greenbacks or US Treasury Bonds. Maybe you or someone reading this post could explain if my reasoning is flawed…Also What interests would have likely lobbied against issuing Bonds verses Greenbacks?

  3. I am late to the whole MMT discussion but working hard on getting caught up. Unfortunately I haven't figured out whether to start in the past or just jump into the present. So I will jump in to the present.Several Points:1. From what I have read of MMT, the Treasury spends money into existence. Thus in my view, the reason people want money is to participate in the opportunity to sell goods or services to the Government. No one has to participate.2. Thus the tax obligation is a result of participating.3. At extreme, if I have a self contained farm in a municipality that has no property taxes on farms, I can be self supporting without ever generating a tax liability. Similarly, if I have an inheritance of $100 million, and simply hoard the cash, I will never have a tax liability unless they impose a wealth tax.4. Finally for today…I still reject the conclusion that the Treasury must "collaberate" with the Fed to create money. Historically they were more than capable of doing this prior to 1913 and the Fed's creation. Absent any current legal requirements, could the Treasury simply "print" ned $100 bills and deposit them in any bank account upon which it drew checks. Or, could not the Treasury simply use those $100 bills (or their electronic equivalent)to buy back all outstanding Chinese held US Treasuries? Or buy back the $2.6 trillion in Treasuries that are owned by the Social Security Trust Fund?Open to learning.WMARKW

  4. "Well, all money “things” are IOUs hence are debts, hence there is no possibility of issuing money that is not a debt."Am I correct in assuming that coin seigniorage is understood to be debt in MMT? To whom is the seigniorage value of coin money to be borrowed from and then repaid to? I am trying to understand where MMT applies and how seigniorage fits into its framework. Is MMT a system for analyzing how various monetary systems work, or is it a prescription for how a new system could work?I can see how coin seigniorage could be spent into circulation accompanied by a debt such as a tax owed or Treasury bill for a ledger net zero. But what is to prevent it from being issued without an accompanying debt?

  5. Anonymous 8:52 MMT is a descriptive system, not a prescription. The "Modern Money" should be understood in the sense of Keynes when he said "Modern Money is 4,000 years old" (Actually a few thousand years older)Yes, a coin is a debt. Rather, when held by the public it is a physical indicator of a debt due to the holder, from the government. The one who holds the coin is the creditor. The borrower, the debtor is the government. The real value of nearly all forms of money nowadays is all seigniorage, so it is not too useful a word, except when you are trying to work around archaic or wacky laws and a self-contradictory Congress. What does the government owe the coin-holder? Remission of tax and fine liabilities, some gold or whatever commodity the government might make its currency convertible into, oil leases, surplus tanks or knicknacks from the Smithsonian gift shop, etc. all at the prices the government sets. These things are valuable enough that people will sell their stuff to the government in return for the coin.The point to realize is that the coin itself signifies a debt. That is its value – its seignorage. Taxes owed or treasury bonds outstanding are other debts. They do not accompany or back the coin. The bond is just another kind of coin. The thing to realize is that you, and everybody else, already know that coins and all kinds of money are debt! If the taxes are owed or the treasury bond held by the same person, they can add or subtract to the credit/ debt the coin represents, that person's net worth. You can pay your taxes with the coin + a bond, but that is all.

  6. Calgacus…So then, am I to understand that when the government borrows, either it may do so by issuing interest bearing instruments such as Treasury bills or non-interest bearing instruments such as dollars? And also, that when the private sector has a trade deficit it is actually creating a foreign owned government debt? And that this must be true whether the foreign owner of this debt holds it in dollars or converts it to what is conventionally known as debt, such as interest bearing Treasury bills? And when the government legislates tax incentives that encourage corporations to export manufacturing or to purchase goods produced by low wage foreign labor, the government is actually creating a negative, self-imposed tariff that increases foreign owned government debt, whether held in dollars or Treasury bills? Does it follow that the foreign debt created by the private sector contributes mightily to the government debt now owned by China? And the current government efforts to impose austerity on the domestic public are now ‘necessitated’ (as popular rhetoric would have it) in fact, by the successful efforts of the private sector to impose austerity on the domestic providers of goods and services through competition with low wage workers living under authoritarian regimes?

  7. Calgacus: thanks, you are doing my work for me! Nice explication, resolving most of the issues raised. A coin is an IOU that is stamped on metal, rather than paper. Unlike a treasury bond, it promises no interest.WmarkW: You need the tax. If you were self-sufficient, you'd never want the govt's currency without the tax. True, once we "monetize" the economy so that most people cannot be self-sufficient, then they've got to get money to eat. But from inception, you'd never accept govt's currency if you were self-sufficient. Gov't needs to create a demand; it can do this through fees, fines, taxes, tithes. Or by monopolizing the water supply. Or by imposing a Buckaroo tax to pass your economics course (as we do at umkc).

  8. Anon jul 28: There is a very close correlation between US current acct deficit and foreign accumulation of US Treasuries. Reason: exporters to US receive dollars in the form of bank reserves, receiving zero interest. So they use those to buy Treasuries to get positive interest. So, yes, you are on the right track but we need to get the causation right. Takes two to tango. Actually in this case it takes at least 4: domestic consumer; foreign exporter; US government; foreign government (since the Treasuries are usually held by the foreign central bank). LRWray

  9. once again, great work Prof. Wray. And yes, Calgacus, excellent response to the issues raised.I posted this before, about commenting with a name rather then anonymous. But, will post it again as I still see a lot of anons (to many to keep track of).When posting a comment select the Name/URL option under Comment as:. This allows you to type the name of your choice and also gives you the option of linking your blog, website, profile, etc.

  10. Once again, great work Prof. Wray. And yes, Calgacus, excellent response to the issues raised. I posted before about commenting with a name rather than as anonymous. But, will post it again as I still see a lot of anons (to many to keep track of).When posting a comment, select the Name/URL option under Comment as:. This option allows you to post with the name of your choice and gives you the option to link your blog, website, profile page, etc.. If you are not linking a website you can leave the URL field blank.

  11. lrwray…"So, yes, you are on the right track but we need to get the causation right."I am intrigued by your mention of consumer causation and responsibility in the present state of government debt.I am a consumer who buys imported televisions. There are no domestic producers of televisions in the US. Most consumer products are produced with foreign made components; brand names are not a relevant guide to determining which products may, through a long chain of causes and effects, increase the national debt. To what extent do I as a consumer lead the dancing of this ‘tango’? My personal experience is of merely being dragged along as an unwilling participant who is compelled to dance to the music against my will.My jobs have also been exported to Mexico, China and other distant locations within the US. I was not consulted by my former employers on the issue of where I would prefer these manufacturing facilities to be located. I am very interested in causation. Can you point to a first cause and, if so, would that be relevant? My experience suggests that causes beget causes and a first cause will often be fruitlessly named without suggesting a resolution to a problem; such as this happens in war. Is there a cause to be targeted so as to break the vicious cycle of causes in order to transition to a virtuous cycle? Does MMT suggest political actions, without which, in my opinion, economic appeals are but futile abstractions?

  12. Its the central banks & sovereign wealth funds which hold most of the foreign debt. Exporters generally dont want to hold dollars. Oil/commodities are mostly traded in dollars. Partly why the U.S has a strong military presence in the Middle East. Can't extricate politics from economics. Oil importing nations need dollars to trade for natural resources/oil. Oil export nations recycle dollars via central banks/S wealth funds/occasional direct investment in certain areas.

  13. "there is no possibility of issuing money that is not debt."probably, but I'm not sure, the meaning of this statement is that to issue money is to issue a liability. Every deficit spending or in generale every money issue is a liability for the issuer, so in this sense it's a debt.

  14. "in generale" is the italian for "generally". sorry

  15. Luigi: coins = debt of treasurypaper notes = debt of central bankdemand deposit = debt of bankYour IOU = debt of UMy contention is that this has always been true, for "the past 4000 years at least" as Keynes said. That is contentious but I do not have to make that case. Today it certainly is true that all money things are debts.

  16. Anon: on causation. It is as complex as Shrek's onion. At individual level, income plus access to credit determines (mostly) your spending. At aggregate level we reverse: spending determines income.But I am sympathetic to your argument. You want a TV and have income or plastic to buy it. USA produces none, so you add to imports. Still, it takes two to tango–if no one outside USA wants dollars then you might not be able to import that TV and would be forced to stare at a blank wall. We could discuss the benefits!

  17. @ RW"At individual level, income plus access to credit determines spending""At aggregate level we reverse" :spending becomes income" "Common sense" has most of the public confused (including me but i'm working on it) The household budget analogy does not apply to Sovereign Governments that issue currency..One of the most difficult concepts to grasp. Its simple yet a mind bender. This is crazy, not like im trying to learn nuclear physics here.

  18. When counting a government's debt, are all dollars issued included in the debt total? Does the national debt include all money in circulation, both domestic and foreign? Does the amount of debt change when dollars are exchanged for Treasury bills? If dollars in circulation are not counted isn't the 14 trillion dollar amount a gross understatement?

  19. Dr. Wray,Nick Rowe has a post at his blog exploring these issues ( ). He disagrees because he thinks taxes need to exceed govt spending to make the fiat money valuable and scarce.Regarding the water monopoly, he similarly states:"But Dr Wray is assuming that the monopolist reduces the supply of water to 9 litres per year when the demand is 10 litres per year. OK, that will make water scarce, and valuable.But that would mean that the government spends 9 bits of paper per year and taxes 10 bits of paper per year. So it has taxes higher than spending. This creates two issues:1. If the government can have taxes higher than spending, why does it resort to paper money? It could do the same with gold, or whatever.2. This means that the stock of paper money is falling over time. That is certainly not what has happened, historically. It has been growing over time. Governments spend 11 bits of paper, and tax 10."He would be interested in your response! Hope you have time!

  20. Re Rowe:the stock of currency doesn't have to fall simply because taxes exceed spendingthe central bank can always continue to provide currency by acquiring assets of any type and paying for them with currency

  21. 'What about socio/political ramifications of who pays the tax? Yes very important, but I do not see the relevance to the topic at hand."You present a "descriptive" account of monetary reality which supposes that power is the fundamental explanation for why your theory is the one we should follow; it is easy enough to point out that we now have moved to a "normative" matter; that's why the topic is relevant.

  22. I am not sure if I am still in time to ask a question on this topic, but anyway I'll try.What happens when we have a recession, something like the early 1930 when a lot of people were laid off and had no income? Will this be a problem in the acceptance of the currency? Why would some one want to hold a german "Raichsmark" when it loses value by the minute, not even hours or days? How can you get to this point? I am affraid the Euro is going to be a big problem since it is not even a sovereing currency.Thank you and Kind RegardsDietmar