Let’s start at the very beginning. 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.
No, that’s credit. OK, so, we can call that money if we like. But it’s broad money. M3 or M4 money. This is important. It’s not the same as central bank money, which is narrow, base or M0 money. The big difference is that wide money is the MV and narrow the M in the money equation – MV=PQ. This is important.
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.
Nope, we’ve just agreed that a bank can create that wide or M3 money. Therefore the government does not control it. Influence, sure, but not control. Further, it is not tax power that gives money its value. We have monies that are not taxed – bitcoin say. It’s not a very good money and all that but it has value. Further, we have monies that have no value despite taxing power existing. Z$ for example. So, again, we find ourselves in a world where taxation can influence the value of a money but cannot be the full and total determinant of said value.
We’re not in SnippaWorld, where influences are total reality.
And there is. We could have a government promise full employment. It could create the jobs we need. It could force up the minimum wage by guaranteeing local work for anyone who wanted it. And we could improve benefits too. All using government made money. Not tax.
But would there be inflation then? Not if we then taxed enough and cut spending a bit. But people at work in good jobs do pay more tax. And they claim fewer benefits. So that condition is easy to meet. And if we still needed more tax? Well, we could do that, if needed.
The difference between this and the old tax a lot first then spend the money is what? We still end up in a high tax, high government spending, world, don’t we?
Eleventh, inflation is not now controlled by interest rates – because we don’t want them to rise. It’s going to be controlled by tax. I admit, right now no one has an ideal tax to achieve this goal. I am working on it. It is possible. And it’s progressive, and so fair.
The underlying problem here is that Snippa is just sure that he’s found the Philosopher’s Stone of economics. Government can control interest rates, the quantity of money, the inflation rate and the FX rate all at the same time. With the one instrument.
Naaah, ain’t gonna happen.