Thread by @DeficitOwls

On a stroll through Austrian Twitter today, somebody asked a good question I'd like to clarify here: wouldn't it be better if the government taxed and spent in gold instead of fiat money?

Presenting:

Why Fiat Money is the Best System of Government We've Yet Devised - A Thread.

This person's point was that on a gold standard, it's much harder for the government to "borrow money it doesn't have."

MMT highlights this as a fundamentally flawed point of view. Let's start in the usual way, with the problem we're trying to solve here. /2

We have a group of people, that possess some productive capacity between them (labor, machines, etc.). When they come together to form a government, they are empowering that government to have final authority over what those resources get used for. /3

This is not about "central planning" or something like that. All governments do this in many forms. For instance, we empower the courts to determine the outcome of disputes. All govs also have to decide how much of these resources to use for public vs private purposes. /4

Suppose the gov decides, "of our productive capacity, we're going to use 80% for private affairs, do whatever you want with it (within reason), and the remaining 20% for public purposes." Great, that's an important governance decision that must get made, and now we have. /5

The next thing that needs to happen is that the gov needs a system for actually *getting* that 20%, in order to do the job of government (whatever the people decide that job is). How does it do that?

This is the question that MMT asks, which other economists don't. /6

What we need here is a system to mobilize resources. What are some desirable properties of such a system? It should 1) actually work (the state gets the 20% it needs), 2) be as unobtrusive as possible (don't interfere with the other 80%), and 3) preserve freedom and fairness /7

One approach would be to ask for volunteers and donations. There are some benefits to that method, but some obvious problems as well, particularly that it violates goal #1, it probably won't actually work to get gov the 20% it needs. /8

Another possibility would be to confiscate the goods and conscript the workers. There are some benefits to this approach too, but some even more obvious drawbacks, namely that it violates goal #3: unless social trust is very high, this approach will make everybody mad. /9

Is there something in between? Less coercive than confiscation, but more effective than begging for donations?

There is! A voucher system. It works like this: /10

1) the gov unilaterally declares that all citizens owe a debt to the state (that's the coercive part)
2) the only thing that can extinguish these debts are state vouchers
3) these vouchers will only be given out when work is done for the gov /11

4) the people therefore can decide amongst themselves exactly who is going to work for the state and do which job. Some people work for the gov more, earn more vouchers than they need, then sell them to others who work for the state less (so, more voluntary than conscription) /12

This is obviously a better system, and this is exactly what we do in real life. We call it a "tax-driven money."

But there's an easy way to screw it up: tie it to gold! Why? Because making vouchers redeemable into gold limits how many vouchers the gov can keep outstanding. /13

That's because if people suddenly decide to redeem the vouchers into gold and the gov doesn't have it, then the system blows up.

That means that after the gov gives out enough vouchers to get its 20%, then it has to tax *more* of them back than it would otherwise. /14

Off of gold there's no obvious reason for the gov to care how many vouchers are outstanding. If the gov can still get its 20% of resources but with lower taxes, that just means that some people wanted to save some vouchers: they worked to earn a voucher that they didn't need /15

to pay their debts (taxes) to the state. That's fine, the more people save, the lower taxes can be.

But if the gov needs to tax those extra vouchers back because of the gold standard, then for the same size of gov, we need higher taxes than we otherwise would. That's bad. /16

Specifically it's bad because it violates our goal #2 for how this system should work: don't mess with the other 80%. Without enough vouchers, there are some people who want to do labor to earn a voucher but can't because nobody's selling. That's involuntary unemployment. /17

It means that of our available capacity, 20% would be going to gov, only (say) 70% would go to the private sector, and the remaining 10% would be simply going to waste! That would not be good at all, nobody wants that. /18

Or, suppose the gov ignored gold-related prudence, and just left vouchers outstanding. That fixes our goal #2 problem because it eliminates involuntary unemployment, but now we have a goal #1 problem: if the gov ignores gold management, the system will eventually blow up, /19

because people will try to redeem their vouchers for gold the gov doesn't have. And a fiscal crisis like this violates goal #1: the gov wouldn't be getting the 20% it needs to do its job. /20

What's going on here is that a) a crisis-free fiscal situation, b) full employment, and c) a gold standard - are jointly incompatible goals. You can't sustainably do all 3. /21

The conclusion: a gold standard IS a tax-driven money system - just worse. It either forces the state to impose involuntary unemployment, opens it up to unnecessary crises, or both. And it distorts the gold market.

Why would we want that? /Fine

Oh PS., let me just reiterate: on a gold standard, for the same size government, we need higher taxes, simply to protect the system.

Why would anybody want that?