Money is a currency of exchange.
You have a product or service that I desire and in exchange I give you an agreed upon
amount of whatever the local currency is.
Today this would likely be the currency, either a number in a bank account or cash
issued by the state.
The common understanding is that ancient markets were structured around bartering.
Before money, people would trade products or services directly for other products or
services.
I have some fish I caught and I would like to exchange them for the potatoes that you
have grown.
If we make this trade then we can both enjoy fish and chips.
This became complicated to define how much fish was worth how many potatoes and so over
time an medium of exchange was developed, such as a precious metal.
This is an historical myth.
There’s no anthropological evidence that any ancient society based an economy on bartering.
In fact, quite the opposite.
The earliest found writing often records financial transactions and details of debts.
Not only have these economies built around currency and debt existed for as long as recorded
history, they were fundamental to the development of writing.
Writing was invented and popularised to record debt.
Historical evidence shows us that it is far more likely that the earliest exchanges evolved
out of debt.
I will promise to give you some fish now in exchange for your potatoes later.
Eventually these records were recorded by clay tokens, or tally sticks.
Essentially these tokens were a receipt where each party to the transaction could verify
with the other on what was owed.
Over time the original debt can give way to direct exchange of the tokens.
I will give you this tally stick and if you exchange it with the baker, he will redeem
this debt for you.
All of these systems, for as far back as we can find evidence, were overseen, controlled
and managed by government or local authority, everywhere they were used.
We already found that money is simply tradable debt, and in issuing the currency the government
was creating a promise that they would honour repayment of that debt in exchange for the
currency.
The government created an incentive for the population to use their currency by collecting
taxes.
The taxes would only be accepted in the government currency, so in order to pay your taxes you
needed a sufficient supply of that currency.
The government eventually began to issue the currency in place of token systems, and so
the modern image of the economy was developed.
The government mints a currency to be used by the people.
The government distributes this to the people by paying for goods and services rendered
to the government and eventually some portion of this currency is then removed from the
general economy by taxation.
The government creates the supply of currency and also creates the demand for that currency.
The final myth and the one that has the most impact on our daily lives is that the money
the government taxes from the people is then spent on services the government provides
to the people.
From the time where the currency no longer became attached to any resource, taxes were
often destroyed upon receipt by the government.
Today the money is a number on a screen so it’s a less destructive process.
As we learned earlier, this is because the money is inherently an exchange of debt.
The government does not owe a debt of its own currency to itself.
So, given this history of currency, we can look at how money operates in today’s economies.
The government still issues its own sovereign currency (in most cases), and still taxes
in that currency, so we can see they still create the supply and demand for that currency.
The government today purchases goods and services from companies and people, who then pay their
workers, who then pay for other goods and services, and eventually the government will
demand all of these entities to return some of that currency in tax.
The common misconception of a modern economy is that the revenue redeemed by the government
from taxes is then recycled back into the economy to pay for the goods and services
required by the government, and that the government is limited in its purchasing power by how
much it can raise in taxes.
This is a circular argument.
There is no creation point of money in this model.
The government pays the people, the people pay the government, who pays it back to the
people.
There is no inception point of money.
Based on what we have already learned about money, we can change this model.
The economy is not two buckets full of cash pouring into one another ad infinitum.
The economy is created by the government.
The government creates the currency, the currency is then supplied to the economy and then the
government creates demand for that currency by taking it back in taxes.
Government spending is the origin point of money.
Taxes are the destruction of money.
So the government is the creator of money and can create as much as it wants, limited
only by the full employment of available resources, beyond which we would see inflation.
Taxes do not pay for government services, they are a control on inflation.
Government services are not limited by the amount of tax revenue collected by the government.
The government will never run out of its own money, only the will to spend more of it.