Posts Tagged ‘currency’

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The second part of That Film about Money is even better than the first.

That’s because it explores the connection between money and the crisis of 2007-08, including giving the working-class more debt instead of increasing wages (which is why, as you can see below, household debt service payments as a percent of disposable personal income rose so precipitously from the early-1990s onward, until the crash) and why the banks have recovered since the crash (by taking cheap money from the government and lending it back, to finance the deficit, at higher rates of interest).

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This is the first part of a two-part series on money, directed by James Schamus (best known as the producer of such films as Hulk and Brokeback Mountain). The films about money are part of We the Economy, 20 Short Films You Can’t Afford to Miss (from writer and director Morgan Spurlock and Microsoft cofounder Paul G. Allen).

That Film about Money does a good job challenging certain common myths about money and banks, especially the idea that currency and money are the same thing, and it introduces important ideas, such as debt as the basis of the expanding money supply.

I only wish, during the discussion of trust, Schamus and the people he interviews had introduced the notion (developed within Modern Monetary Theory) that the basis of our trust in fiat money is the fact that only specific monies—in the United States, the U.S. dollar, the national money of account—can be used to pay taxes. That places the state (and its sovereign authority to levy and collect taxes) at the center of the process of accepting and issuing a particular kind of fiat money.

We can conclude that taxes drive money. The government first creates a money of account (the Dollar, the Tenge), and then imposes tax obligations in that national money of account. In all modern nations, this is sufficient to ensure that many (indeed, most) debts, assets, and prices, will also be denominated in the national money of account.

(Note the asymmetry that is open to a sovereign: it imposes a liability on you so that you will accept its IOU. It is a nice trick—and you can do it too, if you are king of your own little castle.)

The government is then able to issue a currency that is also denominated in the same money of account, so long as it accepts that currency in tax payment. It is not necessary to “back” the currency with precious metal, nor is it necessary to enforce legal tender laws that require acceptance of the national currency. For example, rather than engraving the statement “This note is legal tender for all debts, public and private”, all the sovereign government needs to do is to promise “This note will be accepted in tax payment” in order to ensure general acceptability domestically and even abroad.