In my last article, I discussed a beloved historical claim that MMT finds significant for their theory—that governments sometimes burned paper money they received back from the people in settlement of taxes. Historically, it is true that governments did sometimes burn paper money received back in taxes, but these examples are misread as confirming MMT.
The last article dealt with misplaced chartalism assumptions, that is, the governments burning paper money received in taxes is only significant if one already accepts chartalist presuppositions. If someone already accepts that money is a fiat-token created by the state and gets its value from the government’s inflate-spend-tax process, then burning money is significant because it seems to confirm that money only has the value the government gives it. The article also demonstrated—as history repeatedly shows—that chartalist presuppositions are false, that the historical examples provided are disanalogies that do not even meet the requirements of chartalism, and the theory is the near-inverse of history.
This article will expand on how this MMT claim reinterprets destruction as ontology, why governments burned money, and what this meant. For the purposes of this article, the historical examples will be limited to Colonial and Revolutionary America.
Destruction as Ontology
If governments received the very money they received in taxes, what does that imply? Doesn’t this confirm that money is simply a fiat-token—a creature of the state—rather than something rooted in market value or commodity exchange? If the government doesn’t need the paper money as revenue, then why does it tax at all? Doesn’t this seem to confirm that money is simply a policy tool, inflated to mobilize underused real resources? Doesn’t this demonstrate that taxes are not to fund spending but to create demand for the currency and withdraw excess money to control price inflation?
MMT and chartalism miss the importance of historical sequence and assume that, because inflation and government spending can precede taxation now, that this must have always been the case. Before money, historically, taxation necessarily had to precede government spending, and that sequence continued after monies were created on the market. Governments could not spend what they did not first tax or borrow. Government inflation and spending could only come after and depend on the fact that the economy had developed into a money economy; only then could governments print and spend their money into the economy with acceptance. A government depends on the public’s belief that their paper money is, and will continue to be, equivalent with the real money people already use. This belief of the public may be unfounded and fragile, but it is foundational for the original acceptance of government paper money. Only then can governments begin to inflate and spend to gain easier revenue than taxes, impose legal interventions to compel equivalent acceptance of their money, gradually remove the promise of convertibility and/or future redemption in real money, and then accept the money back in taxes and burn it.
Chartalism involves an anachronism that retrojects what is possible with government monies now—inflate and spend first, tax later—onto governments and money systems of history. This is done without realizing that, 1) this was not always possible; and, 2) that there were preconditions that made inflating and spending before taxation possible. MMT misreads the present system and historic cases involving burning of some tax money and concludes that money must have always originated from the state, that spending has always preceded taxation, that the money has always been just a government fiat-token and unit of account, that taxation simply removes excess currency to limit price inflation, and, therefore, when the governments burned the money, the true nature of money was revealed.
Historically, governments have resorted to inflation when they were short on tax revenue—their only source of income. The governments taxed first for revenue, then spent it; they had no other choice. It was when the taxed or borrowed money was insufficient, from the point of view of governments, that they attempted inflation (i.e., devaluation, printing, etc.). Contra MMT, governments did not begin by issuing fiat money, then taxing it. Inflation and spending prior to, or instead of, taxation could only take place later, after a money economy already developed and governments’ tax-spend cycle was already in place. Further, governments could not just jump to pure fiat money immediately; they had to introduce their inflationary monies gradually. This history undermines the chartalist inflate-spend-tax narrative, in fact, the historical process has been tax-spend-inflate. Governments did not just inflate and spend, require an exchange of real resources for fiat-tokens, and then require taxes in that token to ensure its value and control inflation, per chartalism. The power to spend before taxing is not a timeless truth of sovereign money, but a governmental abuse that developed only after monetary systems were already in place.
Why Burning?—The Trade-Off between Inflation versus Direct Taxation
Governments have a choice to make. If they fall to the temptation of easy money and embark on a policy of inflation, there are trade-offs and costs, even for them. Once a money economy is in place, as in Colonial America and during the Revolution, governments are afforded an opportunity—taxation by inflation. Here, an opportunistic government must proceed delicately and gradually. Rothbard describes the gradual process,
Only when its paper money has been accepted for a long while is the government ready to take the final inflationary step: making it irredeemable, cutting the link with the gold. After calling its dollar bills equivalent to 1/20 gold ounce for many years, and having built up the customary usage of the paper dollar as money, the government can then boldly and brazenly sever the link with gold, and then simply start referring to the dollar bill as money itself. Gold then becomes a mere commodity, and the only money is paper tickets issued by the government. The gold standard has become an arbitrary fiat standard.
MMT misses the historical fact that this inflationary process was founded on already-existing, semi-sound money which governments covertly utilized to costlessly expropriate purchasing power to themselves. It does not explain the origin and foundations of money, unless we mean fiat money. This is not where money comes from or how it gets its value.
Mises carefully distinguished between money proper, money-substitutes, and fiat money. Money proper is real money, that is, a good that is a generally-accepted medium of exchange in itself and does not have to be exchanged with something else to possess the money (e.g., specie, tobacco, etc.). A money-substitute is an “absolutely secure and immediately payable [claim] to money,” the acceptability of which might also be “further increased by their standing in law and commerce.” Fiat money, on the other hand, in unbacked and irredeemable currency. Therefore, governments did not burn money proper (in fact, they did not burn specie), but they burned excess claims to money.
This leads to an important question, especially for Austrians: how did the unbacked fiat currency we use as money today become money? Rothbard’s statement above partially answers this—redeemable paper money-substitutes circulated, governments introduced their paper money as legitimate money-substitutes, continued inflating, and eventually removed the critical link between the paper and specie (or another commodity). At that point, the paper already circulated as a medium of exchange and so continued. However, the original perceived link between paper and specie was essential in government paper money gaining acceptance. Hans-Hermann Hoppe wrote in “How is Fiat Money Possible?”,
Yet without a doubt the coexistence of money and money substitutes and the possibility of holding money in either form and in variable combinations of such forms constitutes an added convenience to individual market participants. This is how intrinsically worthless pieces of paper can acquire purchasing power. If and insofar as they represent an unconditional claim to money and if and insofar as no doubt exists that they are valid and may indeed be redeemed at any time, paper tickets are bought and sold as if they were genuine money—they are traded against money at par. Once they have thus acquired purchasing power and are then deprived of their character as claims to money (by somehow suspending redeemability), they may continue functioning as money. As Mises writes: “Before an economic good begins to function as money it must already possess exchange-value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange-value has ceased to exist [Mises, Theory of Money and Credit, p. 111]. (emphasis added)
In essence, the government was able to deceive people into thinking that their paper money was, and would continue to be, money-substitutes—redeemable claims to money proper—only to gradually move toward true fiat money. MMT posits the opposite—government fiat money became the generally-accepted medium of exchange through decree and the government spend-tax process.
By the time the inflated and devalued paper money returned back to the government in settlement of tax obligations (one of its only useful functions at that point), the real taxative purpose of the paper money had already served the government. The governments who burned money had so destroyed the conditional usefulness of the paper money by inflation, as well as the public’s fragile trust, that it was no longer useful, even to them.
Prior promises of redemption in specie somewhat limited government inflation. As long as that promise of true redemption, not just redemption through tax settlement, existed, the inflating governments put themselves in a precarious position by printing more money than they were able to redeem in money proper. People might call on the government for redemption and/or lose total faith in the paper money; therefore, governments often must contract (burn) the paper money supply received in taxes. Writes Rothbard,
So long as paper money was redeemable in gold, the government had to be careful how many dollars it printed. If, for example, the government has a stock of $30 billion in gold, and keeps issuing more paper dollars redeemable in that gold, at a certain point, the public might start getting worried and call upon the government for redemption. If it wants to stay on the gold standard, the embarrassed government might have to contract [burn] the number of dollars in circulation: by spending less than it receives, and buying back and burning the paper notes. No government wants to do anything like that.
Rothbard recognized that the burning or retirement of paper money after the American Revolution was the better alternative than to tax the people in order to fulfill redemption promises in specie. He wrote,
The one redeeming feature of this monetary calamity [i.e., the American Revolution] was that the federal and state governments at least allowed these paper issues to sink into worthlessness without insisting that taxpayers shoulder another grave burden by being forced to redeem these issues specie at par, or even to redeem them at all. Continentals were not redeemed at all, and state paper was only redeemed at depreciating rates, some at the greatly depreciated market value. By the end of the war, all the wartime state paper had been withdrawn from circulation. (emphasis added)
Using inflation for taxation, governments often put themselves in a trilemma: 1) attempt to honor a promise to redeem in specie (or another commodity; i.e., money proper), and go bankrupt, lose further public trust, and risk civil unrest; 2) attempt to another tax to enable redemption in specie, risk civil unrest against unpopular taxation paid in an already-depreciated money or specie; 3) attempt to spend the depreciated paper again, lose further purchasing power, further destroy the public’s trust, risk civil unrest, and possibly lose the ability to maintain power and use inflation again in the future. To this, a fourth option is available—burn the tax money!
