In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them.
Edward Harrison, in MMT for Dummies:
Basically, according to MMT, your pound notes, your dollar bills, your euro coins have no intrinsic value. They're tokens. They only acquire value because the government says so. The government says, "you owe me taxes and you must pay these taxes using the money we create." And that proclamation alone makes state money valuable.
Doug Henwood, in Modern Monetary Theory Isn’t Helping:
As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes.The MMT explanation that money has value "because you have to pay your taxes with it" has long been a sore point with me. But I never pinned down why it bothers me until I remembered being awakened in the middle of the night by this thought: The thing that makes money valuable to the people who have most of it is that it earns them interest. And the people who have most of the money set the standard for the rest of us.
The thing that makes money valuable to the people who have most of it is that it earns interest: This thought leads directly to others, such as "The idea that deficits don't matter for countries that can borrow in their own currency I think is just wrong". The Chairman of the Federal Reserve said that.
We need money to pay our taxes? Our taxes? Sure. Also, our food and clothing and shelter and our earthly delights: stuff from Amazon or maybe from somebody local, god forbid. To me, money has value because I need it to buy what I want.
Conveniently, money is also what people are paid for their work. Gosh, what a fortuitous coincidence!
We can say money has value by convention. That's probably why they made the "fiat" dollars look much like "backed" dollars when they made that change:
| Text and Images from Larry Parks at fame.org |
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| This is not a dollar. It is a promise to pay a dollar. |
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| This is a broken promise to pay a dollar. |
We didn't abandon the dollar en masse when Nixon pulled the rug out. Convention kept people thinking of the dollar as real money. Me, for example: I don't have a problem with our money being fiat.
The transition from "backed" to "fiat" might have been less smooth if they took Washington's face off the fiat dollar and put Alfred E Neuman on it, or Aaron Burr. But they didn't fiddle with that, and the dollar, though worse for wear and worry, still has value.
The Ed Harrison quote above refers to "state" money. That's what the MMT discussion is about: why we in the US use the dollar specifically, as opposed to ounces of gold or pieces of eight or whatever else we might possibly use for money that's not measured in dollars.
Nobody brings this up, but when you're in the early days of a state, a nation-state say, the people want to belong to it. They want to be part of it. They want to use the money their state issues. It's part of the "national pride" thing. When you're in the late days of a state, people have lost that feeling and national pride is somehow seen as a problem. And they'll switch from dollars to bitcoin at the drop of a hat.
My memory's not great, but I recall the government setting a new policy, that they would allow credit cards to be used to pay taxes. I don't know when that was: late '80s, early '90s, maybe? But I know people were using credit cards before the government said you could pay your taxes with em.
Credit cards are not state money. They are a vehicle for state money, and can be used to pay US taxes. But credit cards arose and came into common usage before the government said we could use them to pay our taxes.
I'm thinkin US state money similarly came into common usage before the government said we "have to" use it to pay our taxes. That would make "because you have to pay your taxes with it" a bullshit argument.
Is there a law making it a requirement that US taxes be paid in US dollars? If there is, when did that law come into existence? I can't answer these questions. But if you want to say the US dollar only has value because they tell us we have to use it to pay our taxes, then you have to answer those questions. And the answers have to be "Yes", and "Before we started using the dollar as our accepted medium of exchange." Otherwise, "because you have to pay your taxes with it" is bullshit.
Come to think of it, the US dollar is used by the people of many nations. The dollar must be more stable than their own state currency, or must have some other advantage that makes those people prefer to use US state money. What do those people use to pay their taxes? And is there some law about that?
I don't need to use US money to pay my taxes. Whatever I use for money, I can exchange it for US money when it's time to pay my taxes. The notion that our money has value "because you have to pay your taxes with it" is bullshit.
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From Benjamin Franklin and the Birth of a Paper Money Economy:
"But what gives paper money its value? Here Franklin is clear throughout his career: It is not legal tender laws or fixed exchange rates between paper money and gold and silver coins but the quantity of paper money relative to the volume of internal trade within the colony that governs the value of paper money. An excess of paper money relative to the volume of internal trade causes it to lose value...
From the same PDF on Benjamin Franklin:
"The Pennsylvania legislature issued its first paper money in 1723 — a modest amount of £15,000 (the equivalent of just over 48,000 Spanish silver dollars), with another £30,000 issued in 1724. This paper money was not linked to or backed by gold and silver money. It was backed by the land assets of subjects who borrowed paper money from the government and by the future taxes owed to the government that could be paid in this paper money."
The PDF does NOT say the paper money had value because people "had to" pay their taxes with it. It only says they "could" pay their taxes with it.
It also says the money was "backed" by (or had value because of) the "future taxes owed to the government". Even if no one else would accept the paper money the government would, and the paper money had value because it could be used for that purpose. (But this uses a different meaning of the word value!)
If you say what some people say nowadays, that after the government receives your payment of taxes it "shreds" the money, well, then you cannot also argue that the money "has value" for payment of taxes (or for anything), and you are left to say only that it has value because you "must" pay your taxes with it.
So the money has "value" because it keeps you out of trouble? The logic is certainly murky.
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