Economist Richard Murphy explains what money and taxes actually are and how they work

Richard Murphy is an economist who blogs at TaxResearch.org.uk. He's also a visiting professor and consultant on economics and management at several universities; as well as an advisor to the Fair Tax Mark; company secretary of the Green New Deal Group Limited; and director of Corporate Accountability Network Limited.

And in a recent Twitter thread—which he compiled and reposted as a singular blog—he has wonderfully and succinctly explained the function and role of money and taxes in a modern society. Or, as some might call it, Modern Monetary Theory.

That likely sounds unexciting. But what's actually refreshing is how clearly Murphy breaks down the how and why of currency—both in philosophical, and practical terms. Essentially, his argument boils down to this: all money is just a promissory note between people. Currency is just a way that governments regulate these interactions; and taxes are the governments' tool for regulation. The currency itself is inherently meaningless without the mutually accepted value, established by the government—which is to say, there is no gold standard, nor will we ever go back to a gold standard.

A person goes into a bank and asks for a £1,000 loan. The bank checks them out, and agrees. And that is all that it takes to create new money. Money is just a promise to pay. That simple exchange of promises is all it takes to create it.

Most people think there must be something that backs up the value of money. Gold, most likely. But there isn't. Money is just a promise to pay, and has been for almost 50 years now. Mutual promises to pay creates all the money we have.

[…]

The reality is that money is almost free. Allowing for inflation, which is higher than this interest rate, money is free to the government. In fact, in reality people are paying the government to hold their money.

But the government borrows more cheaply than anyone else. It creates the currency – the pound – and declares it legal tender. And it has its own bank – the Bank of England. This means the government can lend to itself. So it can never run out of money. It is risk free.

The rest of us don't have a bank, and can't declare the money we make to be legal tender. So all other lending is riskier. Including the money that you lend to your bank, which is exactly what you are doing if you have a bank account that's in credit.

If you think you have 'money in the bank', think again. You have not. You just have a promise from the bank to pay you money if you demand it. And if they can pay it, of course. You're now the banker. They're the borrower. And you have the risk they won't repay.

[…]

Tax is what gives the pound its value. If the government could just create money without limit it would soon be worthless. But it does not do that. Tax ensures that the government can control the amount of money in the economy.

It goes on.

Murphy's argument here reminds me of the last time I got into an argument with a Libertarian about "taxation is theft," etc etc. If we accept Murphy's premise—that currency only exists because of governments anyway—then any currency that exists within the borders of a nation is dependent upon that nation's government, who historically lays claim to the land that you ostensibly "own." If you truly desire a "free market" that skirts around tax law, then by all means, come up with your own mutually agreed upon value exchange and trade a bale of hay directly with someone else to receive other goods in return. But as soon as you assign a monetary value to those goods based in local currency, you're only doing so because the government established that currency (and thus, you're arguably using their intellectual property anyway, which has a cost, at least under modern capitalism).

There are exceptions to this, of course. Particularly those governments whose existence is dependent upon the currency of another nation. That's where things get messy.

As Cory Doctorow explains in his Pluralist newsletter:

Tax is not collected *before* the government spends. The government
spends money into existence. It doesn't need to tax us before it can
spend money. But taxing limits how much money circulates.

If the government creates money without destroying it, eventually there
will be too much money in circulation and prices will go up – inflation.
Governments aren't households and they don't need balanced books.

A balanced budget (in which the government taxes as much as it spends)
leaves no money to circulate. If there's too much money in circulation –
if there's an inflation problem – we might want that, but if governments
net-remove money every year, the economy collapses.

Again, there's lots to unpack from Murphy's screed. So start by reading it.

Macroeconomics, money and post-Brexit recovery, all in one Twitter thread [Richard Murphy / Tax Research UK]

Image: epSos.de/Flickr (CC-BY-SA 2.0)