Why Understanding Money Matters in Greece

By Robert W. Parenteau
March 06, 2015

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.

It is in this context that one has to look at the TAN proposal.  It is important to note that the tax advisory 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, some 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 that Hjalmar Horace Greely Schacht, involved with Germany’s Reichbank, Dresdner Bank, and then as Minister of Economics in the 1930s, 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.

The Nuremburg trial transcripts described Schacht’s scheme as follows:

“Transactions in mefo bills worked as follows: mefo bills were drawn by armament contractors and accepted by a limited liability company called the Metallurgische Forschungsgesellschaft, m.b.H. (MEFO). This company was merely a dummy organization; it had a nominal capital of only one million Reichsmarks. Mefo bills ran for six months, but provision was made for extensions running consecutively for three months each. The drawer could present his mefo bills to any German bank for discount at any time, and these banks, in turn, could rediscount the bills at the Reichsbank at any time within the last three months of their earliest maturity.”

German policymakers themselves, operating under financial constraints in the 1930’s, devised alternative government financing instruments, although Schacht’s mefo scheme was clearly a shell game relying on the complicity of the central bank, and that is not how TANs work at all.

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:

  • Gold Certificates (redeemable in gold coin until FDR’s prohibition on private citizens holding gold)
  • Silver Certificates (redeemable for coin or bullion)
  • National Bank Notes (issued by US government chartered banks with equivalent face value of bonds deposited by bank at Treasury)
  • United States Notes (issued directly by Treasury and also called Legal Tender Notes, but with no “backing”)
  • 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 (see here). 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.

Those who are not of a neo-chartalist persuasion might be skeptical of the claims that a 1 TAN for 1 euro exchange rate could be sustained.  Their argument centers on the fact that even if one imparted value to the tax anticipation notes by allowing them to be used to extinguish tax liabilities, TANs would still plummet in value relative to the euro and so wouldn’t do much in terms of boosting aggregate demand via their use in financing fiscal expenditures.

Let’s consider that argument for a moment:  Say TANs plummet and start “trading” in private exchanges in Greece at 4 TANs to 1 euro or some such horrible disaster. Say you are a Greek citizen. You have tax arrears (as many do) and you hear Syriza has made tax compliance a high priority, and is required to do so by the Troika/Institutions if it is going to get any further loans from external official sources. Your tax arrears are equal to say one years’ worth of your salary. You will then use euros to buy discounted TANs and deliver them to the Treasury, who are obliged by law to accept tax payments in TANs at the prescribed 1 TAN= 1 euro. This gets you a huge effective tax deduction in the process – but one you had to earn by selling euros and buying TANs – thereby bidding up the price of TANs relative to euros.  If this is done over and over again by many citizens with tax arrears and tax payments forthcoming, whatever “depreciation” of TANs to euros has occurred will be essentially arbitraged out of the market.

As any Wall Street arbitrager would realize, the only reason why one would do not do that trade, all day, and every day, for oneself and all one’s relatives, would be if one believed that the “market maker”, the Treasury, would ever run out of its capacity or willingness to accept TANs as a means of settling tax payments, at 1 TAN= 1 euro. And recall that the market maker, in this case the Greek Treasury, has virtually unlimited authority to impose new taxes and raise existing tax rates, which directly influences the demand for TANs. Of course, there is a political constraint (recall tennis superstar Bjorn Borg threatening to emigrate from high tax Sweden in the 70s), and Greece has got to get its tax compliance dealt with properly before TANs can be implemented. But if that adjustment mechanism doesn’t do the trick, the Treasury can vary the proportion of government spending financed through TAN issuance, directly influencing the flow supply of TANs.

In other words, by design, there is a self-correcting mechanism through arbitrage that should keep the 1 TAN to 1 euro “exchange rate” in a pretty tight band, as long as it is clear that tax liabilities can and will be settled with the Treasury at a 1 TAN =  1 euro exchange rate. Anybody who works on Wall Street or the City would understand this self-correcting process.  After all, “arbs” on Wall Street scalp minuscule basis point discrepancies in various financing instruments at the speed of light these days in automated arbitrage programs and in high frequency trading. TANs have a built in self-correcting mechanism that work precisely in that same fashion.

As for the unusual hybrid structure of the TANs (as zero coupon, perpetual, bearer bonds) it is worth noting the following irony:  isn’t it peculiar how we marvel at, and handsomely reward, financial engineers on Wall Street when they create all kinds of debt instruments that get counted as equity (as an example, consider that perpetual bonds are ruled Tier 1 capital for banks under the Basel Accord rules), and all kinds of equity that look like debt? Or even better still, how we applaud the ingenuity of financial engineers when they stitch together such Frankenstein monsters as total return swaps, exchanging one set of returns on one asset for another set of returns, while never nominally changing the ownership of an asset (and remember, according to research by Jan Kregel, these types of instruments played a critical role in the 1997-8 Asian Crisis, as well as the more recent 2008 Financial Crisis).

Yet for some odd, unspeakable reason, we simultaneously refuse to entertain even the possibility of a similar level of creativity and hybridization to the realm of government finance.  Or we hand wave it away, declaring it dead on arrival, simply impossible, fraught with all sorts of inconceivably difficult complications, and bound to eventually lead to fiscal irresponsibility, outright misallocation of resources, and ultimately, the dreaded source of much hyperventilation at the Bundesbank in particular, the eruption of hyperinflation…even despite the fact more and more eurozone nations are sinking into outright price deflation (and others, like Greece, have suffered outright income deflation)

This appears to be the case even with things we should know nations have done successfully before (like no less than currency types running side by side in the US in the ‘20s), but no one seems to remember, or at least no one bothers to mention this “verboten” subject.  Money matters in Greece. Understanding the nature of money, and designing financing instruments informed by that understanding, matters if we are going to find a practical and effective solution to Greece’s conundrum of trying to exit austerity without having to exit the euro.

Ignorance, both of these essential financial principles, and of economic history, is no excuse for sadistically demanding the deepening of a humanitarian crisis, and thereby potentially creating a failed nation state, all in the name of pursuing what is called sound finance or fiscal responsibility, but upon saner reflection, is far from either of these things. It is high time to drop the charade, and it is well past high time to solve the problem.

18 responses to “Why Understanding Money Matters in Greece

  1. Bayard Waterbury

    It is obvious that Greece must find a solution because it’s hard to see that it will survive as a nation otherwise. The “Tan” Solution given in this article makes a great deal of sense but as Devon indicated his article there are a few in the traditional economic theoretical communityWho are likely to accept what the solution offers. How sad for Greece and the rest of the European economic community.

  2. I hope this article is sent to Yanis Varoufakis (or, perhaps, he already knows this information). I wish the TAN could be implemented as soon as possible and I would love to see the looks on the faces of the Troika when they realize they have been out maneuvered! I can just imagine the instant relief on the faces of the Greeks as they collect their TANS, pay their taxes (as per the memorandum) and have some left over for food and shelter. Then just think what Ireland, Portugal and Spain could do with their own TANS.

  3. In principle this could work, but what about the dreaded SGP rules, originally written in the Maastricht treaty, which are now imposed on Greece by the Troika? Or “institutions” if you prefer.

    This is really not much different to the BoG or the Greek Government issuing their own liabilities called Euros. Just as any commercial bank issues liabilities denominated in dollars, euros pounds etc. Except to be called Euros they’d have to be also guaranteed by the ECB , but the TANs presumably wouldn’t be.

    They’d still be a liability of the Greek government, though, and should be included in their accounts. They’d inevitably cause the Greek government to miss any arbitrary surplus target imposed on them by the Troika. So for this reason alone, I cannot see that the Germans would approve the scheme. At present, they can veto anything they don’t like. They aren’t going to like this even if, on some technical pretence, the Greek government can keep their TAN liabilities out of their Euro accounts.

  4. When you realise that tax arrears in Greece, including social security, stand at about €95bn or 50% of GDP, the demand for Tax Anticipation Notes seems assured.

    And the scenario where the individual citizen has tax arrears of 100% of their own annual income is anything but far fetched.

  5. Sounds like an interesting idea. But my first reaction was, it sounds like a Ponzi scheme. So the treasury sells these notes at par I presume. Likely they would be at a discount. And those euros can be used to spend into the economy – a new fiscal policy. Or they can be used to pay off some euro debt. Now when taxes come due the treasury fills up with TANs presumably. But the government can’t pay off its euro debt with it. So now they go to round two of notes and so forth?

    This also means the notes will be the new drachma and have some exchange rate as well. Is that allowed in the euro rules? Will this form of fiscal policy result in a higher debt to gdp ratio and is that allowed under the rules? What is the chance this will result in selling of Greek bonds as investors lose confidence? And if these are issued at par then reselling them will mean at a discount. Who would want a currency that loses its value versus the euro?

    Anyway how does the troika feel about this scheme? My bet is they are not keen on the idea.

    Then again anyone can issue a note and call it money. So maybe they can just do it. The trick I hear is to get them accepted. Taxes will help, no doubt. But they are a debt.

  6. “But the government can’t pay off its euro debt with it.”

    Nobody pays off government debt. It grows with the desire to save – which is what causes all the fun and games in the first place.

    Always remember whatever the government issues to cause real activity to happen is taxed away to nothing for any positive tax rate *unless* somebody decides to save.

  7. There is no law without enforcement. So in any system you have to look for the enforcer. That role is currently being played by the ECB which is probably throwing its weight around Ultra Vires.

    That will continue until some nation treats the Eurozone as a nice to have and drives forward a programme with the National Central Bank instructed to discount whatever is offered by the commercial banks regardless of any action the ECB takes.

    If Greece or any other nation issued parallel currencies the ECB would simply threaten to take their ball home again. Until a nation turns around and threatens to injunct the ECB for failing to ensure the ‘smooth operation of the payment system’ – one of its basic tasks – then the ECB will continue to play the playground bully and none of these secondary currency systems can succeed.

  8. “tax anticipation notes” as a concept works well for me. The TANs would be a substitute for what is presently being done now in Greece and many other nations – paying part of Government’s share of GDP with debt.

    Most governments today use taxes to pay for only part of their share of GDP. The remainder of GDP that can be attributed to government is paid with debt. That fact is not obvious to government payees because government runs a debt conversion system that borrows money from willing lenders. Only the lenders see the government debt; government payees receive money. None-the-less, the economy as a whole is receiving BOTH money and debt as annual payment for GDP services rendered to government.

    Your TAN program would forego the debt conversion service by government. Under the TAN program, government payees could receive both tax sourced money and debt equivalent to the amount of annual new debt incurred. Government payees could then do their own debt-to-money conversion.

    I liked the way you explored what the value of the TAN certificates might be. Government acceptance of TANs for tax payment would certainly be a first step. It might also be wise to increase the percentage of TANs to government payees over time if the program became a popular way to pay taxes. We could see a demonstration of Gresham’s law (where good currency is forced out by bad currency) if the use of TANs was not controlled.

    As you say, the Greece economic puzzle is a challenge for the base concepts of money. I think we will all learn from their experiment.

  9. Interesting.
    On occasion I’ve thought about whether or not it would be a good idea for States in the U.S. to have the ability to issue its own currency. Because State budgets are analogous to my budget, while the federal budget is not (via fiat currency powers), I think a strong case can be made of a steady subversion of state powers to the federal government in a way that makes degrades democracy. States must compete for businesses by lowering taxes and providing the most services. The only way to have low taxes and high services is to rely on grants by the Federal government; but that money comes with strings, strictures, goals that may come into conflict with those goals or will of the state.
    My conclusion was that States should have their own fiat currency.

  10. Rob Parenteau

    Peter: First, as I understand it, debt issued as a perpetual note is NOT included in public debt calculations, as it is considered more like equity (and actually perpetual notes are counted as Tier I Capital in banks these days) so it would not add to the “public debt burden”. Second, the TAN approach, by design, is to be implemented unilaterally, and requires no approval by the Troika. I dealt with potential legal challenges last week on Naked Capitalism blog, in the intro and in the comment sections, but perhaps on NEP as well. Third, since fiscal austerity has led to nothing except rising public debt to GDP ratios, perhaps openly violating SGP constraints, as both France and Germany did around 2003 or 2004, will lead to falling public debt to GDP ratios – which after all, was the raison d’être for SGP, right?

  11. Neil, “nobody pays off government debt” but government debt is probably contractually serviced with a(n actual) Euro payment stream. Greek debt service is still a small fraction of total government spending, though. If the Greek government can pay its domestic expenditure with TANs it can use its Euro revenue for debt service, I think.

  12. Greece should not only issue TANs, but immediately begin to accept only TANs for payments to the government. Anyone who doesn’t have enough TANs at tax time could buy them from the government for Euros on the spot. In fact, initially, Greece should only issue them to payers at payment time. This would prevent TANs from circulating right away, but clearly signal to all that Greece has a path laid to a new currency if it needs it, and give time for setting up payments systems (something like Paypal , or M-PESA), so that the Grexit gun is loaded and the safety is off. Introduction of TANs in this way will prepare the public for the inevitable Grexit.

    Grexit is the only alternative, realistically speaking.

  13. “government debt is probably contractually serviced with a(n actual) Euro payment stream.”

    Always remember that TANs are there to increase the *velocity* of transactions. It’s very important to avoid a static analysis of the situation or you’ll get the wrong end of the stick. TANs also cause Euros to move, which then pass tax points. If done right you’ll end up with more taxation than TANs issued via the induced transactions.

  14. I’m really not sure why people think you have to line up anything different to switch currencies. Greece already issues clearly marked notes and coins and runs its banks via its own central bank.

    Greece *automatically* gets a new currency the day the ECB refuses to clear a TARGET2 balance – at which point liabilities pegged to the Greek Central Bank start floating against German Euros.

    Anything then payable and due in Greece via the Greek banking system becomes payable in Greek Euros – which can be simply renamed Drachma if it becomes confusing.

    Currency areas are defined by the pegs between institutions. Break the pegs and you create new currencies.

  15. I got mugged in Recoleta, Buenos Aires in December 2001. The poor guy was unhappy that I didn’t have many pesos on me but he ended up taking the patacones and seemed quite happy with the ‘transaction’. On learning that I was British, he even wished me ‘goodnight’. It’s amusing to think that his ethics have more to admire in them HSBC, RBS, JPM etc.

  16. Rob Parenteau

    Paul: I am sympathetic to your idea of the Treasury issuing TANs near tax time to investors wishing to by them with euros, which would add another inherent arbitrage mechanism that would tend to help maintain the 1 TAN = 1 euro “exchange rate”, should any discount (or “depreciation”) of TANs arise in private exchanges. Though absent that discount, not sure why you would want to sell euros to by TANs to pay taxes, but I can be dense sometimes and may be missing something. Regarding your second proposal of issuing TANs to finance government expenditures only near tax time, remember, the main point of this alternative government financing instrument is to open a way for eurozone nations to escape fiscal austerity, which has done nothing (in every single case, by the way) over the past half decade or so of running this live experiment but lead to ever rising government debt to GDP ratios (and so on its own criteria is an utter and obvious failure, the elephant in the room that no one dares mention) without requiring that nation to exit the euro. Given the degree of social instability and economic damage done, there is not a moment to lose in implementing TANs, in my admittedly biased opinion (though I suspect people on the ground in these countries might concur) or we shall soon be looking at a half dozen or so failed nation states in the eurozone, each either a fertile breeding ground for fascism or anarchy, take your pick…which I would hope, was never the intention of the founders of the eurozone, but certainly appears to be what was set in motion by some glaring design flaws, right from the start. Best, Rob

  17. Rob Parenteau

    Neil: TANs are there to increase the income flows, employment, socially useful production of the implementing nation by freeing up the financial constraints on fiscal policy, and allowing a pro-LIFE (low inflation full employment) fiscal policy to be pursued. If I am correct that TANs also are likely to become quickly and broadly accepted as a means of settlement by consenting adults in voluntary exchanges of goods and services in the private marketplace, as has been the case in numerous other historical situation, including Germany and the US, then TANs will both increase the effective money stock, and the velocity of the circulation of the official or euro based money stock, as economies emerge from deep recessions, profit expectations improve, and entrepreneurs perceive better risk/reward prospects for expanding production. So TANs are not meant merely as an enhancer of the “income velocity of the money stock”, which as you know, is pretty much a remainder from the old quantity theory equation of exchange, MV=PQ, and so is neither causal, nor crucial, to the task at hand of freeing up financial constraints on fiscal policy so a pro-LIFE approach can be implemented and businesses can begin to revive and expand again in the cumulative fashion we expect of capitalist economies where profits are the signal to firms to reinvest in product tangible capital, thereby expanding employment and household incomes, in what is most of the time an upward spiral, but in more recent times, has been a collapsing vortex…and not just because of failed government policies or flawed eurozone architecture. Greece’s R&D expenditures, for example, have been pitiful for years if not decades. Very difficult to produce competitive firms in tradable goods sector that way.

  18. Rob Parenteau

    PhilJoMar: Will you sign an affidavit to that effect? Because I am howling with laughter on the floor right about now…because almost every single critic of the TANs approach eventually whittles their argument down to, yeah, well, but, but, but, the 1 TAN = 1 euro “exchange” rate will never hold, the private sector will never accept this funny money as a means of settlement, and neither will the recipients of government spending either (cuz no one pays taxes anyway). And I do my song and dance on this, and they say, yeah, right, in theory. So you are telling me when you got robbed, the thief wanted the parallel currency called patacones that was circulating widely in Argentina at the time, and apparently being used in enough private transactions in Argentina that he was not so happy that you had only pesos, and no patacones, in your pocket? That is hilarious. May I share this little anecdote…with or without the affidavit attached (will you accept attribution, instead?)…because like my once President Reagan once told me, after the first election I ever got to vote in, “facts are stupid things”, so I need more anecdotal evidence to support my case for TANs, since nothing else seems to sink in, at least not in the extended echo chamber of this land known as Faux News.