7 ms·

That’s not true, because it would have to mean that money is created by the private sector (or just magically springs into existence somewhere) and that taxing

That’s not true, because it would have to mean that money is created by the private sector (or just magically springs into existence somewhere) and that taxing it is the only way for the Government to get it. Money is a created thing, a creature of the state. We maintain certain fictions about it (like “tax to spend”, allowing the market to set bond yields most of the time and keeping track of the outstanding bonds as “government debt”) because people are scared that Governments wouldn’t be controlled enough to manage money creation if they overtly used the powers they have to issue currency… But effectively they still kind of do it… And while it’s not perfect it’s actually far more stable than attempts at fixed exchange rates and pegging currency to commodities like gold (which always fails eventually, because it doesn’t stand to reason that the amount of gold or any other commodity in a country would correspond to how much money the economy needs. You can set the exchange rate but it always drifts, so those periods tended to swing between big deflation and then inflation, with panics, recessions, and financial crises every few years)

digitaltrees 23d ago
Most money is created by the private sector. Thats was fractional reserve banking is, creating money.
- stephen_g 23d ago
  That's half correct (and yes I did leave that bit out as a simplification to the argument), banks do create money, but not in the mechanism called "fractional reserve banking" which is only found in textbooks because it would actually violate accounting rules (it's true that banks only hold a fraction of their assets as central bank reserves but the mechanism referred to as "fractional reserve banking" and related "money multiplier theory" can't work because the bank can't make a loan out of a deposit because it would require two entries on the same side of the balance sheet). But it is true that when a bank creates a loan (which to them is an asset, but to the borrower is a liability - debt) it creates a matching deposit (a liability to them) which does increase the money supply. The amount of central bank reserves is not hugely relevant to the process, that's more of a liquidity management thing. The main limitation is actually capital adequacy regulations. But all of that aside, a Government doesn't need banks to create money so they can tax it, it permits banks to do it by granting them a banking license.

digitaltrees 23d ago

Most money is created by the private sector. Thats was fractional reserve banking is, creating money.

stephen_g 23d ago
That's half correct (and yes I did leave that bit out as a simplification to the argument), banks do create money, but not in the mechanism called "fractional reserve banking" which is only found in textbooks because it would actually violate accounting rules (it's true that banks only hold a fraction of their assets as central bank reserves but the mechanism referred to as "fractional reserve banking" and related "money multiplier theory" can't work because the bank can't make a loan out of a deposit because it would require two entries on the same side of the balance sheet). But it is true that when a bank creates a loan (which to them is an asset, but to the borrower is a liability - debt) it creates a matching deposit (a liability to them) which does increase the money supply. The amount of central bank reserves is not hugely relevant to the process, that's more of a liquidity management thing. The main limitation is actually capital adequacy regulations. But all of that aside, a Government doesn't need banks to create money so they can tax it, it permits banks to do it by granting them a banking license.