Globalisation and currency arrangements

In today’s blog, I continue the discussion that I started last Thursday, and, specifically, focus on the critique that commentators have made about the loss of state control of their economies as a result of globalisation. The thesis advanced by many analysts is that globalisation has reduced the capacity of the nation-state and forced governments to adopt free market policies at the microeconomic level and austerity at the macroeconomic level, for fear that capital flight will destroy their economies. It is a neatly packaged thesis that the political Left has imbibed, and, in doing so, has undermined the progressive basis of these institutions and left voters with little choice between right-wing parties and the social democratic parties who formally represented the interests of workers and acted as mediators in the class conflict between labour and capital. The major distinguishing feature these days between these two types of parties, who were previously poles apart in approach and mandate sought, is that the so-called progressive side of politics now claims it will implement austerity in a fairer way. These austerity-lite parties, buying into the myth that globalisation has undermined the capacity of the state to pursue full employment policies with equitable income distribution, do not challenge the basis of austerity, but just quibble over who should pay for it. The aim of this research which will appear in my next book (with co-author Thomas Fazi) is to outline a manifesto by which progressive activists and political movements can claim back the space the current generation of sham progressives have ceded to the neo-liberals.

The gold standard and beyond – constraints on sovereignty

The significant aspect of this research that is often lost these type of discussions is that the monetary system in most countries changed dramatically from August 1971 when the US president Richard Nixon abandoned US dollar-gold convertibility.

Prior to that, as part of the Post Second World War settlement, the majority of leading nations agreed in 1946 to create a fixed exchange rate system for all participating currencies.

The so-called Bretton Woods system was a modified gold standard, where convertibility to gold was abandoned and replaced by convertibility into the US dollar, reflecting the dominance of the US in world trade (and the fact that they won the war!).

This new system was built on the agreement that the US government would convert a USD into gold at $USD35 per ounce of gold. It was thought that this would provide the nominal anchor for the exchange rate system given the stability of the gold price.

Under the pure gold standard nations with sustained balance of payments deficits risked losing their entire gold stores to the surplus nations and were forced to engage in harsh domestic deflation to curb imports and attract capital flows (via higher interest rates).

The surplus nations who enjoyed gold inflows were meant to use the increased stock of gold to expand their money supply and thus stimulate their domestic economies and increase imports as a counterpart to monetary contractions in the deficit countries. The proponents of the system argued that these mutually reinforcing central bank actions would stabilise the system.

The reality was that the deficit nations were always forced to adjust as their gold reserves depleted but the surplus nations were under no pressure to meet their side of the bargain and so they just built up gold reserves unless their was a need to stimulate the domestic economy.

There were other institutional constraints on central banks (for example, required gold reserves, which limited the ‘free’ reserves available for currency stabilisation, and, restrictions on open market operations, which limited the scope of the banks to stimulate the domestic economies), which undermined these so-called ‘automatic’ balancing mechanisms.

The deflationary bias meant that deficit nations had to endure elevated levels of mass unemployment, which were politically difficult for nations to maintain and became a source of social instability.

Bernanke and James (1991: 33) argue that “Recent research on the causes of the Great Depression has laid much of the blame for that catastrophe on the doorstep of the international gold standard.”

Things came to a head in 1928 when the US central bank raised interest rates to quell the speculation in the share market and maintain its gold reserves. Romer (1993) argues that this act was the catalyst for the Great Depression.

France was also accumulating gold reserves as a result of balance of payments surpluses driven by a perception that it was secure nation to park surplus capital. The problem was that its government prevented it from expanding the money supply (via bond sales) and so it did not reduce the deflationary pressure on deficit nations (Eichengreen, 1986, Bernanke and James, 1991).

Temin (1989) described the way in which the policy positions of the US and France imparted a deflationary shock throughout the World economy because of the commitments by the central banks in other countries to maintain the gold standard (see also, Bernanke and James, 1991; Bernanke, 2004).

The classic constraint on governments existed, whereby any attempt by a single nation to reduce unemployment via easier monetary policy would be accompanied by further loss of gold reserves as capital flowed to higher interest rate nations.

It is also the case that “As with any system of fixed exchange rates, the gold standard was subject to speculative attack if investors doubted the ability of a country to maintain the value of its currency at the legally specified parity” (Bernanke, 2004).

As a result, the accelerating speculative currency attacks in the late 1920s demonstrated to many nations the unsustainability of the gold standard, which had created a deflationary bias in the world monetary system.

Britain abandoned the gold standard in 1931 after the “speculators attacked the British pound, presenting pounds to the Bank of England and demanding gold in return” (Bernanke, 2004). Thirteen other nations followed suit and left the gold standard.

The speculators then attacked the US dollar because they feared the failing US economy would force the central bank to devalue the currency. They wanted to avoid losses by converting into the more stable store of value – gold.

The US central bank ignored the pressure the speculative attacks were having on the banks (reductions in deposits) and raised interest rates in 1931 to shore up the dollar and stop the outflow of gold. The problem was that the domestic economy was in drastic need of stimulus and the monetary contraction exacerbated the situation.

Significantly, the nations that abandoned in 1931 resumed growth relatively quickly because their governments were not bound by the necessity to maintain deflationary domestic policy positions. In contradistinction, the Depression was deeper in nations that persisted with the gold standard, such as the US (Bernanke and James, 1991).

The US only began to recover when it abandoned the gold standard in 1933 and the new President stabilised the banking system and introduced fiscal expansion and job creation programs.

The mass unemployment and related social costs that accompanied the Great Depression not only convinced politicians that a return to the gold standard was unwise but made them receptive to a new framework for maintaining international monetary stability.

A key player in developing this new framework was John Maynard Keynes, who in several articles had questioned the sustainability of the pure gold standard.

Once World War 2 ended, focus turned to establishing this new system.

On May 23, 1944, the British House of Lords debated a “suitable foundation for further international consultation with a view to improved monetary co-operation after the war” (Hansard, vol 131 cc834).

Keynes then delivered a statement to the House where outlined the basis of the international monetary system that was proposed to replace the failed gold standard (Hansard, vol 131 cc 838-849). Central to the plan was the creation of an international Fund (which he called the International Clearing Union, which would have “substantial rights and duties to preserve orderly arrangements in matters such as exchange rates”.

He considered this a radical break from the rigid gold standard system, “relief from which we have rightly learnt to prize so highly”.

He said that the new system was “the exact opposite of” the gold standard. Under the proposed system Britain would “in consultation with the Fund” determine the parity that sterling would trade against gold.

In other words, there would be discretionary capacity for revaluation and devaluation in the system which would overcome the deflationary bias in the rigid gold standard system, whereby “the external value of a national currency is rigidly tied to a fixed quantity of gold which can only honourably be broken under force majeure; and it involves a financial policy which compels the internal value of the domestic currency to conform to this external value as fixed in terms of gold”.

These ideas were extremely influential in framing the British approach at the Bretton Woods Conference, which was held between July 1-22, 1944. The International Clearing Union was rejected by the Americans because it placed the adjustment burden on surplus nations, who would be charged interest if their trade surpluses and capital inflow exceeded some level.

The US, instead, proposed the creation of the International Monetary Fund (IMF) and required that the burden of adjustment for external imbalances remain firmly on the deficit and capital outflow nations – one of the major problems of the previous gold standard.

Please read my blog – Gold standard and fixed exchange rates – myths that still prevail – for more discussion on this point.

After World War II, the 44 allied nations agreed to return to a type of gold standard because they believed this would bring economic stability.

The so-called Bretton Woods system was established in July 1944 (and introduced in 1946) and required the central banks of participating nations to maintain their currencies at agreed fixed rates against the US dollar.

The newly created International Monetary Fund (IMF) was empowered (with contributions from the member states) to offer short-term funding to any nations that could not earn sufficient foreign currency reserves via trade to maintain the agreed exchange rate parities. The US government, in turn, agreed to convert US dollars into gold at a fixed price.

The system was under pressure from the start because countries with trade deficits always faced downward pressure on their currencies.

As in the previous system, in order to maintain their exchange rates they had to: buy their own currencies in the foreign exchange markets using their foreign currency reserves; push up domestic interest rates to attract capital inflow; and constrict government spending to restrain imports.

The nations with weaker currencies were thus often faced with recessed growth rates, higher unemployment, and depleted foreign reserves, and this created political instability. The effective operation of the system required the nations to have more or less similar trade strength, which was of course an impossibility and ultimately proved to be its undoing.

The use of the US dollar as a reserve currency also exposed the instability of the Bretton Woods system. The Belgian economist Robert Triffin warned in the early 1960s that the system required the US to run balance of payments deficits so that other nations, who used the US dollar as the dominant currency in international transactions, were able to acquire them.

In the 1950s, there had been an international shortage of US dollars available as nations recovered from the war and trade expanded.

But in the 1960s, the situation changed. Nations started to worry about the value of their growing US dollar reserve holdings and whether the US would continue to maintain gold convertibility.

These fears led nations to increasingly exercise their right to convert their US dollar holdings into gold, which significantly reduced the stock of US held gold reserves.

The so-called Triffin paradox was that the Bretton Woods system required the expansion of US dollars into world markets, which also undermined confidence in the dollar’s value and led to increased demands for convertibility back into gold. The loss of gold reserves further reinforced the view that the US dollar was overvalued and, eventually, the system would come unstuck (Triffin, 1960).

The way out of the dilemma was for the US to raise its interest rates and attract the dollars back into investments in US denominated financial assets.

But this would push the US economy into recession, which was politically unpalatable.

It was also increasingly inconsistent with other domestic developments (the War on Poverty) and the US foreign policy obsession with fighting communism, which was exemplified by the build up of NATO installations in Western Europe and the prosecution of the Vietnam War.

The US spending associated with the Vietnam War had overheated the domestic US economy and expanded US dollar liquidity in the world markets further.

The resulting inflation was then transmitted through the fixed exchange system to Europe and beyond because the increased trade deficits in the US became stimulatory trade surpluses in other nations. These other nations could not run an independent monetary policy because their central banks had to maintain the exchange parities under the Bretton Woods agreement.

Clearly, the fixed exchange rate system also restricted the scope for fiscal policy because monetary policy had to target the exchange parity. If the exchange rate was under attack (perhaps because of a balance of payments deficit) which would manifest as an excess supply of the currency in the foreign exchange markets, then the central bank had to intervene and buy up the local currency with its reserves of foreign currency (principally $USDs).

This meant that the domestic economy would contract (as the money supply fell) and unemployment would rise. Further, the stock of $USD reserves held by any particular bank was finite and so countries with weak trading positions were always subject to a recessionary bias in order to defend the agreed exchange parities.

Just like in the previous, rigid gold standard, the system was politically difficult to maintain because of the social instability arising from unemployment.

So if fiscal policy was used too aggressively to reduce unemployment, it would invoke a monetary contraction to defend the exchange rate as imports rose in response to the rising national income levels engendered by the fiscal expansion.

Ultimately, the primacy of monetary policy ruled because countries were bound by the Bretton Woods agreement to maintain the exchange rate parities.

Sure enough, the nation states could revalue or devalue (once off realignments) but this was frowned upon and not common.

Whichever system we want to talk off – pure gold standard or USD-convertible system backed by gold – the constraints on sovereign government were obvious.

Further, it is incorrect to think that the era of speculative capital flows began with the advent of transnational capitalism and global supply chains (globalisation).

These speculative attacks on currencies took a different form in the earlier period but were nonetheless destructive and, along with the persistent differences in trading position between nations, were the undoing of the fixed exchange rate system.

The growth of US multinationals

It is in this context, that we can better appreciate the early literature on globalisation and economic sovereignty loss.

In a Foreign Affairs article (October 1968) – Economic Sovereignty at Bay – was one of the earlier proponents of the view that the nation-state had lost its fiscal authority.

He later refined these ideas in his 1971 book, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises.

Raymond Vernon argued that:

… as far as the advanced countries are concerned, the generalization holds: the pattern of coördination, consultation and commitment has evolved to such a point that freedom of economic action on the part of those nations is materially qualified.

He was referring to the creation of multi-lateral agreements regarding trade and exchange rate arrangements and agencies (such as the IMF) in this regard.

Note, he was writing before the Bretton Woods system of fixed exchange rates broke down in 1971. As we have seen above, the tenet that currency-issuing states were policy constrained under the Bretton Woods arrangements was perfectly true.

The central banks were responsible for setting domestic interest rates such that they could stabiise the exchange rate at the agreed parities. For nations with persistent trade deficits, this meant elevated interest rates and unemployment rates. That bias towards domestic recession was one of the principle reasons the system broke down in August 1971.

Expansionary fiscal policy was cautiously used because it risked pushing out imports and opening up trade deficits, which would then promote speculative movements in the currency as the anticipation of devaluation rose.

However, notwithstanding this, Vernon, also acknowledges that:

Nations still take it for granted that ‘the vital interests’ of any sovereign, as the sovereign perceives them, will take precedence over any international obligation.

And so it remains. But we need to establish that proposition.

There is no doubt that in the 1960s international trade grew rapidly as technological improvements in transport and communication were made. This was accompanied by a substantial increase in the volume of capital flows between nations, and, particularly, the growing presence of US industry in Europe.

Vernon writes that this growing US involvement through multinational enterprises created some fear that:

… as long as the multinational enterprise has the power, difficult or improbable though its use may sometimes be, to dry up technology or export technicians or drain off capital or reduce production or shift profits or alter prices or allocate export markets, there is a latent or active tension associated with its presence.

As we will see, these tensions persist today and are used as the basis for the claim that nation-states must compromise domestic policy to ensure they do not trigger a negative response from international capital and labour that is ‘parked’ within their borders.

Vernon also argued that the growing interdependency of economies through these trade and capital flow links meant that “whatever happens in any economy becomes the pressing business of all the others”.

However, this interdependence was significantly more constraining under the fixed exchange rate system, in which Vernon was writing.

After 1971, as nations began the new era of floating exchange rates, the constraints on domestic policy setting were clearly reduced because no longer was monetary policy tied to defending the agreed parity. The exchange rate would now adjust to imbalances in trade and financial flows, leaving fiscal and monetary policy, within limits, to pursue domestic objectives previously unattainable on a sustainable basis.

Vernon also suggested that the nature of international transactions became more complex with the advent of multinational enterprises, in the sense that, many financial flows were now conducted within the same enterprise but across national borders.

He concluded that “any state which senses an inadequacy in its capacity to impose effective restrictions at the border has ample reason for harboring that feeling”.

He argued that while governments could block flows for a short time, companies would develop new ways of shifting capital, which would leave “the regulating sovereign … increasingly at a disadvantage”.

Many commentators have used this line of reasoning to suggest that taxation bases are now unstable and can easily shift across national borders to exploit the most favourable tax regimes.

Governments in turn, worried about losing these enterprises, offer competing tax environments.

Mostly, the ‘tax shifting’ argument is used to demonstrate that the capacity of the government to spend is undermined as the tax base shifts. In order to overcome the limits imposed by a declining tax base, governments then have to run fiscal deficits, which, in the mainstream argument, push up interest rates, like the government with debt, and ultimately, lead to a refusal by bond markets to fund the government deficits.

These arguments are not really specific to concerns about globalisation because they are used to critique deficits under any circumstances.

As we will argue, much of this concern about tax shifting is misplaced when considering the options facing a currency-issuing government.

There is no question that a government that aims to achieve full utilisation of all of available productive resources in the nation and provide public goods and services to enhance the well-being of the population needs to be able to restrict the non-government use of the available resources.

Clearly this can be done through regulation or dictate, but, mostly it is done through taxation.

Taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.

The orthodox conception is that taxation provides revenue to the government which it requires in order to spend. In fact, the reverse is the truth.

Government spending provides revenue to the non-government sector which then allows them to extinguish their taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.

It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector which allows the government to pursue its economic and social policy program.

This insight allows us to see another dimension of taxation which is lost in orthodox analysis.

Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector.

The unemployed or idle non-government resources can then be utilised through demand injections via government spending which amounts to a transfer of real goods and services from the non-government to the government sector.

In turn, this transfer facilitates the government’s socio-economics program.

While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.

Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.

Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.

The point is that multinational corporations may be engaged daily in shifting revenue and costs across national borders in order to minimise their corporate tax liabilities under one regime relative to another.

That governments, as long as they can enforce the rule of law, have many options available to ensure they have sufficient taxing capacity to create the necessary real resource space to accommodate a public spending program.

We will deal with the generalised arguments against deficits later.


Bernanke, B.S. (2004) ‘Money, Gold, and the Great Depression’, Remarks by Governor Ben S. Bernanke
At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia, March 2, 2004 – Link

Bernanke. B. and James, H. (1991) ‘ The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison’, in Hubbard, R.G. (ed.) Financial Markets and Financial Crises, Chicago: University of Chicago Press, 33-68

Eichengreen, B. (1986) ‘The Bank of France and the sterilization of gold, 1926-1932’, Explorations in Economic History 23, 56-84.

Romer, C. (1993) ‘The Nation in Depression’, Journal of Economic Perspectives, 7, 19-40.

Triffin, R. (1960) Gold and the Dollar Crisis: The Future of Convertibility, London, Oxford University Press.

Vernon, R. (1971) Sovereignty at Bay: The Multinational Spread of U.S. Enterprises, New York, Basic Books.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

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    18 Responses to Globalisation and currency arrangements

    1. Podargus says:

      If taxation is the answer then it was a bloody stupid question.
      If the 1% are behaving in ways which are contrary to the interests of the nations where they operate then those national governments have the power to stop the nonsense. Try capital controls for a start.

      But of course the 1% control the governments so where does that leave us?

    2. Simonsky says:


      When you say: ‘a transfer of real goods and services from the non-government to the government sector.’ If the non-government sector is not using certain resources (eg. building schools) then is it still a ‘transfer’ as that word seems to imply the prior existence of that intention in the non-G sector. Isn’t it rather, as you say as well, that the Government ‘promotes’ the use of resources -I don’t get the use of the word ‘transfer’-maybe I’m just getting muddled in the domain of verbal/abstract thinking here!

      Any help with clarifying my woolly thinking appreciated!

    3. Anthony Krensel says:


      I always have trouble when you make reference to this argument:
      “…the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities”.

      My trouble is, most taxes don’t in fact work this way: taxes on land do, but most taxes are conditional upon the supply of resources occurring: i.e. income tax on provision of labour, consumption tax on supply of goods or services. So while I can see the theoretical basis for this proposition, I find it very difficult to look at the real world and see this proposition in it. I suppose it is at a macro-scale that one needs to look, but even then I struggle. We all know that individuals do not think about taxes as a reason to earn money.

      Do you have any way of expanding or approaching this that I might understand better?


    4. John Doyle says:

      If I might add an observation here, You have deeply embedded taxation into the argument about spending etc.
      I had thought tax important A] to legitimise the currency, and B] as a coercive measure to skew spending to or away from certain habits, like smoking. Etc.

      Tax is a cost to the economy which is being avoided by multinationals. Could we use tax to reduce this drain in the economy, not because the government needs the revenue, it doesn’t. But to offer corporations a more competitive environment in which to do business here. The company tax take is about $70 billion.

      Would you know if reducing the tax take to match say Singapore or other havens, 10% lets say, that the benefit to the economy would make the operation worthwhile?
      You would think the corporate world would jump at this chance,[ but probably the neo-liberals would find a way to not change it]. However this carrot would have a stick that all employment had to be at not less than a living wage.

    5. James Schipper says:

      Dear Bill

      The British government also suspended the gold standard during WWI and, if I’m not mistaken, during the Napoleonic Wars as well. Governments always knew that the gold standard wasn’t indispensable. Of course, these wars were followed by inflation, which was then used as an argument for reintroducing the gold standard after the war. Things become problematic when the gold standard is reintroduced at the same exchange rate as it had before the war, as was done in Britain in the 1920’s. That made British industry very uncompetitive. It was done in order to compensate the bondholders, who had lost wealth due to the war-generated inflation. It goes to show again that the chief beneficiaries of price stability or deflation are the owners of financial wealth.

      The reduction of policy space caused by fixed exchange rates can be mitigated considerably if there are controls on cross-capital flows and if a government has no dogmatic commitment to free trade. Let’s say that a country exports mainly primary products and that the prices of those products have plummeted. It could then protect its exchange rates by imposing tariffs on the import of luxuries. Of course, if the import of luxuries is permanently burdened by tariffs, then domestic industry will be biased toward luxuries, so we may have to increase sales taxes on luxuries as well.

      Tax-shifting could be reduced considerably if businesses didn’t have to pay taxes, but only business owners. In my view, the amount of taxes should be independent of the legal business form. Suppose that Peter and Paul each have their farm as a sole proprietorship and that each has a profit of 50,000. Now they form a fifty-fifty partnership, which has a profit of 100,000. Subsequently, the partnership is incorporated and still has a profit of 100,000. In all 3 cases, Peter and Paul should pay income tax on 50,000. A business should never be incorporated in order to reduce tax liabilities, as is done so often in Canada.

      Suppose that Corporation XYZ has a branch in the US and a branch in Ireland. Suppose further that in the US the corporate tax rate is 35% and in Ireland 10%. The total profits of XYZ are 100 million. Obviously, it has an interest to allocate as much of those 100 million to its Irish branch. Such incentive would not exist if the total 100 million were simply divided by the 2 million shares and if a person had to pay tax on 50 for each share of XYZ that he owned.

      Regards. James

    6. roger erickson says:

      This long standing fascination with a commodity value-std for setting the value of a sovereign currency has been flawed from the beginning. The argument boils down to a simple observation. If people don’t trust their teammates, or co-citizens, or the institution they call their “nation” – then they may wish to hedge their bets by converting their sovereign currency into commodities which they can personally hoard.

      That’s been an outdated, misguided pipedream since BEFORE the advent of nation-states. The anchor of cultural value in all social species has always been affinity and teamwork, whether family, clan, tribe or the supra-tribal alliances we call nation states. Just ask the War College of any nation state. Organization always trumps supplies or tools. Today we call it the return-on-coordination, but mostly still fail to admit that it is the source of the vast majority of increasing value, wealth or benefits we generate.

      There is no greater hedge against risks than the teammates in a social structure. They are the ones who have your back. In complex economies, the distributed services which teammates provide to one another are guaranteed – by the social structure – to be DENOMINATED in a sovereign set of social credits, which are usually, but not always, themselves DENOMINATED in a sovereign currency. In short, at least part of the Public Initiative of an organized nation state is denominated in sovereign currency, which is by default a fiat currency since it’s defining metrics can always be changed by public fiat. Confused people only argue about the constraints arbitrarily imposed on dynamic fiat.

      Further, it is Public Fiat that ultimately adds the bulk of value to currency units, not just the act of taxation. Taxation sets the “pay to play” cost, but not the added value of participating. What one can purchase with any currency left post taxation depends upon the distributed, net output of the electorate disbursing that currency. Again, it is the return-on-coordination that matters most in any system, especially in human cultures.

      The outcome of all this review of real context? Since the Public Initiative (Public Fiat) of various electorates necessarily floats, by nature, any attempt whatsoever to circumvent that reality and arbitrarily peg any currency anywhere to any commodity supply whatsoever – vs a floating-FX – quickly causes more systemic trouble than it is worth to any local recipient of benefits. All that matters to a sovereign culture is how long it takes to notice the distributed vs divided benefits.

      If our challenges in this changing world mount unpredictably, it makes little sense to add to those trials by repeatedly attempting to constrain the options of citizens within distinct nations … with increasingly arcane monetary and tax policies.

      The solution is obvious. Until such time as social instrumentation allows global governance to be as agile as distributed local governance, then cultures and nation states must evolve and adjust as sovereign entities, instead of trying to adjust increasingly arcane monetary hoops to jump through.

      In this way, the history of financial policy very much resembles the history of astronomy, where hilarious hoops (“heavenly spheres”) were invented, after much useless and self-defeating toil, before the mounting evidence for a heliocentric perspective was eventually admitted.

      Go back to the simple adjustments discussed at the original Breton Woods conf. All currencies must be fully floating-FX, and all international credits/debits can ONLY be denominated in the local, sovereign currency. That simple step alone would work wonders if again enforced as policy. Then urge all electorates to continue enacting increasingly refined Automatic Stabilizers, to keep “social gangrene” from appearing in any “toes or fingers” of any nation state anywhere.

      Perspective first. Data is meaningless without context.

    7. J Christensen says:

      “There is no question that a government that aims to achieve full utilization of all of available productive resources in the nation and provide public goods and services to enhance the well-being of the population needs to be able to restrict the non-government use of the available resources.

      Clearly this can be done through regulation or dictate, but, mostly it is done through taxation.”

      It does not appear certain that currently signed but yet to be ratified international trade agreements would permit dictate, regulation or fiscal policy (taxation), which interferes with corporate profitability, to occur without significant punitive measures being taken against the state under the “Investor-State Dispute Mechanisms”. Would that be state spending or is it allowing the TNC’ s to tax states?
      Anyway you look at it, it seems to create a lot of headaches for government in the management of national economies in the interest of providing for the public good and equitable income distributions.

      A very timely article! There is a lot to digest here.

    8. Nigel Hargreaves says:

      Anthony Krensel

      I agree. It is the difference between theory and practice. Taxes being the incentive to acquire the currency might be realistic on day one, but after decades or centuries it isn’t in practice the case. There is a display in the Bank of England museum that asks the question as to why money is accepted, and the answer they give is that it is based on trust. Nothing about taxes. Personally I don’t use the legitimising the currency argment. I prefer to leave it that taxes are for regulating the economy. People can relate to that – it’s all about reframing the language of macroenomics so that it can be understood by anyone. Nevertheless we followers of MMT should understand the theory.

    9. J Christensen says:

      Roger Erickson, That was an excellent comment!

      A spirit of global cooperation running parallel with responsive and agile local governance is a more achievable and worthwhile goal than global governance; which we’re still too primitive for. We need to let go of all empire building and imperialism to advance the common good at this point in human history. The current path is leading to disaster on a number of levels.

    10. Steve says:

      Even if one doesn’t want to confront the fact of modern economies being cost inflationary due to their creating more costs/prices than individual incomes as a flow, the host of other factors diminishing individual incomes like globalization, financialization, innovation and artificial intelligence are ever more rapidly doing exactly the same. Before we have a spate of chaos and war severely rhyming with the 20th century in the 21st century where modern weaponry puts everyone’s personal safety and every businesses productive capacity in doubt…..someone has to put their finger on the chest of the financial authorities and say:

      “It’s over.” We’re going to repair and re-build our national infrastructures, establish systemically equilibrating and individually freeing monetary policies that end our obviously disequilibrated economies and break up your monopolistic dominance in order to make you join the community of other business models in a cooperative and safe future…..and these multiple millions of people in the street agree with me.”

    11. Bob says:

      “My trouble is, most taxes don’t in fact work this way: taxes on land do, but most taxes are conditional upon the supply of resources occurring: i.e. income tax on provision of labour, consumption tax on supply of goods or services. So while I can see the theoretical basis for this proposition, I find it very difficult to look at the real world and see this proposition in it. I suppose it is at a macro-scale that one needs to look, but even then I struggle. We all know that individuals do not think about taxes as a reason to earn money.”

      TLDR version: the small taxes mean you can’t avoid the bigger ones.

    12. Daniel says:

      Anthony Krensel

      I know James has already given an answer to this, but I thought I’d add my take on how the tax/spend cycle is squared. I hope if I make mistakes, they will be corrected as kindly as possible, I’m not an economist, just an avid blog reader!

      Look at it this way. You require food, shelter and energy. This can be sold to you buy the providers of such, and they will incur a tax liability when they sell it to you. Because of this, they will seek to sell to you in the local currency (dollars, pounds etc) in order to have the required currency to extinguish this liability. Now, how do you go about obtaining the currency in order to purchase the food, shelter and energy? You sell what you can, which might be your labour! Of course, in doing this, you will incur taxes yourself (income taxes), so you must obtain more currency than required for just your food, shelter and energy in order to extinguish YOUR tax liability! Thus, the demand for the currency exists, and perpetuates, to meet these non-tax requirements.

      Of course, you could refuse to sell your labour (or other commodities you may possess) to avoid these liabilities, but then how would you obtain the other necessities? (food, shelter, energy).

    13. Bob says:

      “how the tax/spend cycle is squared. I hope if I make mistakes, they will be corrected as kindly as possible, I’m not an economist, just an avid blog reader!”
      Good explanation here:

    14. Paul Krueger says:

      Anthony Kernel & Nigel Hargreaves,
      My take on the MMT argument regarding the value of a currency deriving from the imposition of taxes is part of the truth, but perhaps not the whole story. You can certainly find many historical instances where the imposition of a tax is completely sufficient for creating currency value. The prototypical example is the imposition of a hut tax by a colonial power which results in the willingness of natives to supply goods and labor to the colonizing force. My personal view is that this is a special case of the creation of money (or monetary value) as an artifact of debt. You can view all commercial transactions as a seller providing credit to the purchaser thereby establishing a debt that the purchaser can extinguish by providing money to the seller. Money is then anything that is acceptable to the seller to extinguish that debt. All U.S. currency is stamped “This note is legal tender for all debts, public and private”, thereby establishing its value not just for the payment of taxes (i.e. public debt), but also for payment of private debts as well. You can still argue that it is the government that establishes the value of this money because they made the law that makes the currency legal tender for private debts; the point being that tax policy alone isn’t the whole mechanism. To me it seems obvious that it is not just the extinction of public debt (i.e. paying taxes), but also the extinction of private debt (i.e. paying for purchases) that establishes the value of a currency. Certainly tax policy can affect the degree of unemployment, as MMT tells us, but it doesn’t totally control it. In my opinion it is the totality of aggregate demand which determines the level of employment. And demand is a more complex function of taxes, the current state of the economy, and, significantly, the current public propensity to consume vs save (which affects consumption and the level of private sector debt).

    15. Kevin Harding says:

      Which came first the money or the tax?They evolved together.
      They are both means to ends for private and public.
      The economic power of the state to direct real resources remains but
      globalization has concentrated enormous spending power in few hands
      which gives them access to land ,labour and the fruits of both which
      they will guard in anyway they can from democratic oversight ,are
      governments too captured to resist trade agreements which seek to
      protect future access to whatever that and their children want.

    16. Jerry Brown says:

      Daniel @4:52, I think that’s a really good explanation. And if you didn’t need things like food, shelter, and energy, then you probably wouldn’t need currency either (or even an economy). And currency would have little value, at least to that individual. Government trying to up the value of unneeded currency might have to collect poll taxes and such, and it might be far more difficult and unpopular and less fair.

    17. Daniel says:


      Thanks for that link, being a scientist (chemistry/physics) the analogy worked well for me, and I’ve started reading Neil’s blog (fun, since I consider myself left-leaning, but still find myself agreeing with what he writes!) though I hadn’t seen that post yet! It’s worth holding onto that one. After all, the one lesson I learned most when teaching was have as many ways of describing the same thing as possible, since if someone doesn’t get the first way, they might get the second, third… :)

    18. acorn says:

      So Bill,is it possible to fit these MMT “Lego” bricks together? Would it switch off “monetary” policy, that is. economy wide sledgehammer blanket interest rate setting by a central bank?

      (a) Put the central bank under the Treasury debt management office, a la Neil Wilson.
      (b) “The natural rate of interest is zero” a la Mosler and Forstater. Can it be done, assuming a redesign of taxation including rapid tax change response for inflation bubbles appearing.
      (c) The central bank, within the Treasury, is the national clearer in a/the International Clearing Union.
      (d) Shut down the IMF; the tool of US foreign policy and the root of the neo-liberal austerity religion.

      Discuss; additional marks will be given for original thinking.

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