An Alternative Meme for Money, Part 6: Alternative Framing on Inflation

By L. Randall Wray

As we have discussed, sovereign government cannot run out of the keystrokes it uses to mark-up balance sheets as it spends. Does our argument rely on modern technology, that sends electrons or photons (I’m not sure which) pulsing through copper or fiber-optic lines? No, of course not.

Government always spent by notching hazelwood, imprinting clay, stamping coins, chalk on slate, or “running the printing press”. There has never been another alternative. These marks or electronic entries represent government IOUs.

No matter what time period we are talking about, I would have received government payments as “Government Owes Me’s”.

Obviously, government cannot run out of these. Government can “afford” to buy what’s for sale in its own currency.

The question is not about affordability but rather concerns effects on the value of the currency and impacts on the pursuit of private interest.

As Stephanie Kelton says, cash registers do not discriminate: they do not care whether that dollar comes from government spending or private spending. If something is in scarce supply, more purchases of it by either government or private buyers might push up the price. A government purchase of something that is scarce can “crowd out” a private purchase. Government purchases need to be, and can be, planned to avoid undesired crowding out and price pressures.

Where the public purpose trumps the private purpose (say, use of rubber in WWII), government has at its disposal a number of options to reduce price pressure, including patriotic propaganda and rationing. It also has the big gun: taxes. An excise tax raises the cost to private buyers; an income tax reduces disposable income to free up production for the public purpose.

In those cases, the tax hike keeps the currency strong. It is not needed to “pay for” the government spending, but to avoid the crippling effects of high inflation.

Progressive taxes can be justified on the basis that higher income people pose a much greater inflation threat than do low income people. Cash registers don’t discriminate. Rich folk take more dollars to market, and their spending cannot be planned, budgeted, coordinated in the way that government spending is done.

And their spending is largely discretionary, not essential to daily life. Indeed, as one group of rich folk ramps up conspicuous consumption, other rich folk take up the challenge. Keeping up with the Jones’s it is called.

When resources are scarce, taxes on the rich need to be raised to protect the currency.

We don’t tax the rich to “pay for” government spending. Government is not in the position of Robin Hood. We never need rich folks’ money in order to provide for the poor. We can keystroke the bank accounts of the poor so that they won’t be poor.

We increase taxes on the rich only when their spending threatens our currency with inflation. If there’s no inflation danger, there is no point in taxing the rich before keystroking the poor. Linking the two operations only reduces public support for helping the poor. And it’s confusing. And it’s operationally wrong. Except in the unlikely event that all resources are already fully utilized.

Progressives must stop linking the two—that only plays into the hands of the conservatives.

The rich also are much more likely to endanger the currency’s value by pulling out of the domestic currency and running to safe havens at the first sign of inflation (as they are doing in Argentina now, creating pressures on the currency that raise inflation fears and fuel a cascading run out of pesos and into dollars). We need progressive taxes and inheritance taxes to protect our currency from antisocial behavior by the rich. (And we might need capital controls, too, to prevent their runs to tax havens.)

There is also a strong argument to be made for using taxes on the rich—especially capital gains taxes—to discourage sins of various kinds. The sin of speculative excess. The sin of usury. The sin of conspicuous consumption of prestige goods and services. And the sin of excess inequality.

Most important: the goal of taxing the rich has nothing to do with raising government revenue. Taxes are used to keep the currency strong and to punish sin. An ideal sin tax raises no revenue because it eliminates sin. While we cannot achieve that ideal, we can make sin less enjoyable.

It is fitting that those who already enjoy all the benefits of life at the top ought to suffer more when they are sinful. Don’t tax the sin of the worker who enjoys the occasional six-pack of brew. Go after the real sinners—those with the wherewithal to engage in truly anti-social sinning—speculative and consumption excess.

To conclude:

1. When inflation threatens, in some circumstances it makes sense to raise taxes. Since the rich pose a greater inflation threat, put the taxes on them. Cash registers don’t discriminate, so tax those with greater purchasing power.

2. There are additional measures that can be taken when inflation pressures arise; depending on circumstances, they are probably more effective: rationing, targeted wage and price controls, patriotic saving.

3. At full employment it makes sense to tax the rich while providing income to the poor. At less than full employment, this is not necessary (government is not Robin Hood who must steal from the rich to give to the poor). However, to reduce inequality it may make sense to tax the rich to reduce their richness.

4. Government spending and taxing need not be closely linked; however, as the economy nears full employment taxes need to be raised if there are strong public purpose interests in continuing to increase government spending. The goal is not to increase government revenue, but to reduce competition for relatively scarce resources in order to direct them to the public interest.

5. Not only does the high income and thus potential spending by the rich threaten domestic value of the currency, there is a danger that the rich will speculate against the currency. This provides an additional justification for removing excessive income from them through taxes, and perhaps also for taxing their speculation. Again, the goal here is not to raise government revenue, but rather to punish the sin of anti-social excess.

6. Explaining that government cannot run out of its own keystrokes (or other records of its IOUs) does not mean that one is promoting run-away government spending. Rather, it means that one must confront the inflation danger directly, ensuring that government spending and tax policy take account of inflation pressures.


We use taxes to keep our currency strong. We raise taxes when speculative excess threatens the value of our currency. Unless there is a strong reason to move resources to the public sector, once full employment is approached, either taxes need to be raised or government spending needs to be reduced to avoid inflationary pressures.

Up next: Part 7.

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