Modern Money Part I
In the beginning there were taxes.
There are several conflicting stories about the origin of money. Many of them may even be true, but most don’t deal with “modern” money. Accounting has been a necessity since we first formed societies and things, even simple lines carved in sticks, have been used to represent other things, but accounting isn't money in the context we currently use. Money must be universal as a representation of value in many things, so it cannot be a consumable or perishable with intrinsic value itself. The value of money may be “pinned” to a commodity, but the commodity cannot be the money if it has its own value. Modern economics begins where barter leaves off. It doesn't include barter, and a currency that represents, or can be exchanged for, a commodity is simply a higher form of barter.
Modern money requires an issuing authority that has the confidence of the majority of the people using the money, and in most instances this will mean a government. Almost all governments issue their own denomination of currency into their economies, even if they call them by names shared by other currencies, such as our dollar. While the governments supply us with the currency we need to transact commerce and trade, and to give a denomination to contracts, that is not the primary reason they issue currencies. Our economies are secondary to their need to provision themselves without restriction from revenue sources, such as taxation or bond issues. It is impossible to create money by taxing or borrowing, as both assume someone has the currency to pay a tax or to lend and governments have no product to sell or exchange, so they must create the currency of exchange as they spend. Neither taxation or borrowing fund spending for the issuer of the currency. In fact, the opposite is true.
By levying taxation that can only be paid in the currency governments issue they assure that they can always provision themselves, maintain armies, and purchase goods and services as required. However, it is important to remember that the currency must first be spent/distributed before taxes can be collected and that the issuing government has no “need” for the currency it collects. Its needs are for the goods and services that the people exchange for the currency that is created as it is spent into the non-government sector. Unless a currency is “pinned” to a commodity or exchange rate with another currency the only purposes served by taxation or borrowing, beyond driving the demand for the currency, are maintaining a balance of currency in the economy to meet the demand for goods and services produced, reducing the currency held by a specific segment of the population, or controlling an economy that becomes overheated and inflationary by drawing away demand.
These points will be touched on again, but what to take from this are, taxes drive demand for a currency but never “fund” anything; spending must precede tax collections or borrowing; and the issuer of the currency never needs to “get” currency from anyone to enable it to spend.
