Where does money come from?

[Wossname]

Steve3007 » Today, 12:12 pm

These are my comments, from the point of view of not having any specialist knowledge on the subject but just relying on my everyday experience of money and economics.

97% or thereabouts of the money we use is electronic (the sort of thing used by your credit card).

If a government wants to pay for something it simply credits the relevant bank account. Money is created right there by keystrokes. (More correctly it credits the reserves of the bank involved which in turn credits the account of the customer. But discussion of the reserve banking system is a distraction for now).

The key point is that the money was not first raised by levying a tax. No-one can pay tax until the government creates the money with which to pay it. It is spend and tax not tax and spend. Money is created by keystrokes on a computer, (computers), which is under B. of E. control (which owned by the government).

Tax helps control inflation by removing money from the system. The government also requires we pay tax in its money (e.g. sterling) which creates a need for its money and ensures we are obliged to earn some to pay taxes with. In this way the government’s money is given value and we are obliged to work and thereby increase the wealth of the nation.

Where bonds are concerned, these can only be bought with money the government has already created. No-one else is allowed to create money (apart from banks making loans which must be repaid with interest). This money is money the government has spent (created) but not been returned in tax. This is called the deficit. Note that this deficit amounts to all the (non-loan) money in the economy which we have to use and to spend. No deficit, no money. Bonds are a secure investment which institutions and individuals can use but it is all money the government has already created. I think a chief merit of bonds is that they support the private pensions of many people. The rest is mostly welfare for bankers.

Essentially money represents a credit-debit relationship. An IOU if you like. The government promises to accept its money in payment of tax and you cash the IOU in when you pay tax. It is not needed to pay for stuff. The government can always make more money by keystrokes and it does so every day. We don’t so much pay people using the labour of workers, as ensure people are obliged to work if they are to earn the money that the government demands in tax.

I think these (from page 4 of the thread) are useful places to start exploring the topic.

https://modernmoneybasics.com/

https://www.youtube.com/watch?v=bHQCjFebIf8

Good on you for putting your money (ha) where your mouth is and trying to learn this stuff!

[Steve3007]

I presume most people are aware that money is created by governments via the mechanism of the central bank. The fact that it's created electronically is not really relevant to the discussion. I think anyone who has thought about the question in any depth realizes that when we talk about "making money" by doing a job, we're not literally talking about creating new money; we're talking about being given some pre-existing money in exchange for some labour.

Tax helps control inflation by removing money from the system.

You don't seem to have dealt with the points I've raised, so I'll take one thing at a time.

I'll repeat this part from my previous post:

But too much is inflationary and so taxes remove money to reduce inflation (among other things).

I see why creating money is inflationary. But I don't see how taxes remove money from the system if those taxes are then spent in the system.

[Wossname]

Steve3007 » 19 minutes ago


Wossname wrote:
Tax helps control inflation by removing money from the system.
You don't seem to have dealt with the points I've raised, so I'll take one thing at a time.

I'll repeat this part from my previous post:
Wossname wrote:
But too much is inflationary and so taxes remove money to reduce inflation (among other things).
Steve3007 wrote:
I see why creating money is inflationary. But I don't see how taxes remove money from the system if those taxes are then spent in the system.

Inflation arises when more money is chasing a limited supply of goods.
Taking money out of the system means less money for people to spend.
Government does not store and use this tax money. It creates money by keystrokes at need.

[Sculptor1]

Steve3007 » 19 minutes ago


Wossname wrote:
Tax helps control inflation by removing money from the system.
You don't seem to have dealt with the points I've raised, so I'll take one thing at a time.

I'll repeat this part from my previous post:
Wossname wrote:
But too much is inflationary and so taxes remove money to reduce inflation (among other things).
Steve3007 wrote:
I see why creating money is inflationary. But I don't see how taxes remove money from the system if those taxes are then spent in the system.

Inflation arises when more money is chasing a limited supply of goods.
Taking money out of the system means less money for people to spend.
Government does not store and use this tax money. It creates money by keystrokes at need.

Inflation can arise in those conditions, but not always.
Inflation can be a good thing.
The war against inflation exactly correlated with the massive rise in inequality. And there are good reasons for that.

[Wossname]

Sculptor1 » 12 minutes ago


Inflation can arise in those conditions, but not always.
Inflation can be a good thing.
The war against inflation exactly correlated with the massive rise in inequality. And there are good reasons for that.

Agreed.
Inflation has a number of potential causes, and a small amount of inflation, (around 2% but economists argue) is considered usually healthy and a sign of a growing economy.
But there are many potential causes of inflation (or deflation), cost-push, demand-pull, and things like the oil price, pandemics, wars etc. are all possible issues here.
Who and what the government taxes, and how much, is a matter for careful consideration.
Progressive taxation can promote equality. Unfortunately government policies here have not always been progressive (quite the reverse).

[Sculptor1]

Sculptor1 » 12 minutes ago


Inflation can arise in those conditions, but not always.
Inflation can be a good thing.
The war against inflation exactly correlated with the massive rise in inequality. And there are good reasons for that.

Agreed.
Inflation has a number of potential causes, and a small amount of inflation, (around 2% but economists argue) is considered usually healthy and a sign of a growing economy.
But there are many potential causes of inflation (or deflation), cost-push, demand-pull, and things like the oil price, pandemics, wars etc. are all possible issues here.
Who and what the government taxes, and how much, is a matter for careful consideration.
Progressive taxation can promote equality. Unfortunately government policies here have not always been progressive (quite the reverse).

Where is "here"?
Inflation encourages spending and discourages hoarding of money. Hoarding is the essence of inequality; spending keeps the economy going.

[Wossname]

Sculptor1 » 21 minutes ago


Where is "here"?
Inflation encourages spending and discourages hoarding of money. Hoarding is the essence of inequality; spending keeps the economy going.

Apologies Sculptor1. Here is the UK (where I believe you are)?
Arguably spending encourages inflation.
Certainly we need some spending and a bit of inflation. There can be too much inflation though, you agree?
And yes, it is the wealthy who can hoard money. The poor are mostly struggling to survive.

[Steve3007]

But too much is inflationary and so taxes remove money to reduce inflation (among other things).

Taking money out of the system means less money for people to spend.

Sorry to be persistent about this one single point. It was just one of the points in my original reply but I don't seem to be getting it across.

I see why creating money is inflationary. But I don't see how taxes remove money from the system if those taxes are then spent in the system.

In what sense does taxation, which is then spent within the system, "take money out of the system"?

[Steve3007]

Government does not store and use this tax money. It creates money by keystrokes at need.

I can't see the link between the above two sentences. They're written as if the second sentence is supposed to be a consequence of the first.

Yes, governments, via the mechanism of central banks, create money. But I don't see how you conclude from this that when taxes are levied, that tax money is not spent/used. When we fill in our tax return and pay our income tax to the treasury at the end of each January, or every month in the form of PAYE, where are you supposing that money goes? How is the issue of where that money goes related to the fact that governments also create new money?

[Wossname]

Government does not store and use this tax money. It creates money by keystrokes at need.

I can't see the link between the above two sentences. They're written as if the second sentence is supposed to be a consequence of the first.

Yes, governments, via the mechanism of central banks, create money. But I don't see how you conclude from this that when taxes are levied, that tax money is not spent/used. When we fill in our tax return and pay our income tax to the treasury at the end of each January, or every month in the form of PAYE, where are you supposing that money goes? How is the issue of where that money goes related to the fact that governments also create new money?

When you pay your tax your bank account (or wages) are debited. That’s it. There is no money going anywhere.

When the government spends, it credits an account. The money did not come from anywhere.

It is just debits and credits.

You persist with the idea that tax money is being used to pay for things.
Money is an IOU cashed when you pay tax.
What use is a cashed in IOU?

This from R. Wray
https://neweconomicperspectives.org/201 ... roach.html

Tax payments debit the accounts of taxpayers. If you’ve ever gone to a ballgame you know that when the scorekeeper awards a run to Boston, he does not take it away from New York. Rather, he keystrokes runs to Boston. If after review of the video, the umpire has made an error, he “debits the account” of Boston. Where does the run taken away go?
That’s a question for the physicist, not the economist. Where do the taxes payments go? Nowhere—a bank account is debited. I think it has something to do with electrical charges changing from negative to positive, although some commentators told me it is all photons now. All I know is that taxes do not and cannot “pay for” spending.


This from W. Mosler
What happens if you were to go to your local IRS office to pay [your taxes] with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.
Why? There’s no further use for it. Just like a ticket to the Super Bowl.



— The 7 Deadly Frauds of Economic Policy, page 14, Warren Mosler

[Steve3007]

When you pay your tax your bank account (or wages) are debited. That’s it. There is no money going anywhere.

When the government spends, it credits an account. The money did not come from anywhere.

What you've described there is the process of money moving around. In what other sense would you use the term "money moving around"? Would it only be when some kind of physical object, perhaps made of paper or metal, physically moves from place to place? If so, then I think you're making the mistake I referred to earlier of reification of the concept of money. Money is not bits of paper and metal. It's an abstract concept that is used to represent the exchange value of human labour.

You persist with the idea that tax money is being used to pay for things.

Ok, so let's back up. Do you believe that anything, in any circumstances, ever gets paid for? If "no", then I don't think there's much more to say. If "yes" do you believe that only happens when some physical object, perhaps made of paper or metal, moves around?

[Steve3007]

This from W. Mosler
What happens if you were to go to your local IRS office to pay [your taxes] with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.
Why? There’s no further use for it. Just like a ticket to the Super Bowl.

Why would anybody feel the need, as above, to point out that the paper and metal that we call "cash" has no intrinsic value, in itself, but is just one of the ways of physically representing the abstract concept that we call money? I would think that's obvious to anybody who has lived in the world for long enough to experience the use of money.

[Wossname]

Steve3007 » Today, 8:08 pm

Wossname wrote:
When you pay your tax your bank account (or wages) are debited. That’s it. There is no money going anywhere.

When the government spends, it credits an account. The money did not come from anywhere.
What you've described there is the process of money moving around. In what other sense would you use the term "money moving around"? Would it only be when some kind of physical object, perhaps made of paper or metal, physically moves from place to place? If so, then I think you're making the mistake I referred to earlier of reification of the concept of money. Money is not bits of paper and metal. It's an abstract concept that is used to represent the exchange value of human labour.

It is not just moving it around. It is creating and destroying money. Nor should money be viewed as representing the exchange value of human labour.

As i have stated before, money represents a credit-debit relationship.

If you hand your coat in to a cloakroom attendant and get a ticket it can be seen as a form of money.
If you couldn’t cash it in for a coat it is just a piece of paper.
When the ticket is returned you get your coat back.
The ticket has no value now. What use is it?

Money in the economy is something the government is obliged to accept as payment of tax. Otherwise it would never likely be perceived or adopted as having value. It is a government IOU. When you cash it in by paying tax, what use is it?

IOUs can be on metal or bits of paper. We have agreed, nowadays money is mostly electronic, numbers in an account somewhere. So it is all just keystrokes on a computer.

Money is debt (to the issuer, like a cloakroom ticket). When you pay your tax or repay a bank loan money is effectively destroyed (the debt is cancelled).

When the government spends, money is created (a debt is created).

Steve3007 » Today, 8:08 pm

Wossname wrote:
When you pay your tax your bank account (or wages) are debited. That’s it. There is no money going anywhere.

Ok, so let's back up. Do you believe that anything, in any circumstances, ever gets paid for? If "no", then I don't think there's much more to say. If "yes" do you believe that only happens when some physical object, perhaps made of paper or metal, moves around?

So of course things get paid. They usually get paid in the money the government creates. And we have agreed (I have stated more than once) that this is electronic and does not need to involve moving bits of paper or metal around.

Steve3007 » Today, 8:15 pm

This from W. Mosler
What happens if you were to go to your local IRS office to pay [your taxes] with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.
Why? There’s no further use for it. Just like a ticket to the Super Bowl.
Why would anybody feel the need, as above, to point out that the paper and metal that we call "cash" has no intrinsic value, in itself, but is just one of the ways of physically representing the abstract concept that we call money? I would think that's obvious to anybody who has lived in the world for long enough to experience the use of money.

I think the idea of sticking money in a shredder would surprise a few. It illustrates what money is, and what it really is is not, I think, obvious to you. But you are not alone in that, and it is not meant as harsh criticism.

Have a look back over the thread and/or visit the links I suggested. I think it will help.

I must away to bed now.
Maybe we will catch up tomorrow.

[Steve3007]

It is not just moving it around. It is creating and destroying money.

Yes, as we've agreed many times, governments, via the mechanism of central banks, create the money supply. Money is created by the government, it moves around the economy and it is ultimately destroyed by the government. When money moves around, that is a process called "payment". This process obviously does not necessarily require a physical object (perhaps a rectangle of paper or a metal disc) to change hands. For sure, money can sometimes be represented by those physical objects (although it's quite a long time since I personally last used those objects as money, and they're now starting to seem quite a clumsy and antiquated way to represent money). But it can be represented in other ways too, such as a number in a computer database. Before the advent of computers, it would have been represented as a number written in ink in a financial ledger. Same principle.

Suppose you go to the supermarket, pick up some groceries, touch your credit/debit card (or perhaps your phone) against the machine and then walk out of the shop with those groceries. Your bank or credit card account is debited with X amount of money. Another bank somewhere is credited with X amount of money. No physical object has moved anywhere. Some computer databases have been updated. You have now paid for those groceries. We quite rightly think of X amount of money as having moved from one place to another.

We agree with all of the above, yes? It's all fairly obvious stuff so far? You wouldn't dispute that those groceries have been paid for?

Assuming the answer is "yes", I'd like to go back to the question I asked near the start of this recent conversation about this kind of thing:

...taxes remove money..

When you pay your tax your bank account (or wages) are debited. That’s it. There is no money going anywhere.

If you agree that those groceries in that supermarket were paid for - i.e. that some money went somewhere - then that is inconsistent with what you said above. Clearly, when I pay my taxes, money goes somewhere in exactly the same way that it does when I use my card (or, these days, app on my phone) to pay for something at a supermarket.

You seem to think, for some reason, that taxes are not collected from one place and then spent in another place. I still don't see why you think that. For sure, once the tax has been debited from me and credited to the Treasury's coffers, the government could, if it chose to, remove that money from the system, at the push of a button. Or they could spend it on public services. Generally speaking, money raised by taxation is spent on public services.

I still don't know why you appear to disagree with this simple truth. It seems to be because of a fixation with a particular physical representation of money, using paper and metal, which is usually called "cash". You seem to think that if some physical object is not moving around, then money is not moving around. And you seem to think that the fact that governments can create and destroy money means that money does not also move around from one part of the system to another. Is that what you think?

[Wossname]

Steve3007 » Today, 7:50 am

Wossname wrote:
It is not just moving it around. It is creating and destroying money.
Yes, as we've agreed many times, governments, via the mechanism of central banks, create the money supply. Money is created by the government, it moves around the economy and it is ultimately destroyed by the government. When money moves around, that is a process called "payment". This process obviously does not necessarily require a physical object (perhaps a rectangle of paper or a metal disc) to change hands. For sure, money can sometimes be represented by those physical objects (although it's quite a long time since I personally last used those objects as money, and they're now starting to seem quite a clumsy and antiquated way to represent money). But it can be represented in other ways too, such as a number in a computer database. Before the advent of computers, it would have been represented as a number written in ink in a financial ledger. Same principle.

Suppose you go to the supermarket, pick up some groceries, touch your credit/debit card (or perhaps your phone) against the machine and then walk out of the shop with those groceries. Your bank or credit card account is debited with X amount of money. Another bank somewhere is credited with X amount of money. No physical object has moved anywhere. Some computer databases have been updated. You have now paid for those groceries. We quite rightly think of X amount of money as having moved from one place to another.

We agree with all of the above, yes? It's all fairly obvious stuff so far? You wouldn't dispute that those groceries have been paid for?

Assuming the answer is "yes", I'd like to go back to the question I asked near the start of this recent conversation about this kind of thing:
Wossname wrote:
...taxes remove money..
Wossname wrote:
When you pay your tax your bank account (or wages) are debited. That’s it. There is no money going anywhere.
If you agree that those groceries in that supermarket were paid for - i.e. that some money went somewhere - then that is inconsistent with what you said above. Clearly, when I pay my taxes, money goes somewhere in exactly the same way that it does when I use my card (or, these days, app on my phone) to pay for something at a supermarket.

You seem to think, for some reason, that taxes are not collected from one place and then spent in another place. I still don't see why you think that. For sure, once the tax has been debited from me and credited to the Treasury's coffers, the government could, if it chose to, remove that money from the system, at the push of a button. Or they could spend it on public services. Generally speaking, money raised by taxation is spent on public services.

I still don't know why you appear to disagree with this simple truth. It seems to be because of a fixation with a particular physical representation of money, using paper and metal, which is usually called "cash". You seem to think that if some physical object is not moving around, then money is not moving around. And you seem to think that the fact that governments can create and destroy money means that money does not also move around from one part of the system to another. Is that what you think?

What I think is that when we use money we move it around all the time. I am not an idiot (not that much anyway).

But we are discussing what money is and where it comes from. That is a different matter. We have a perspective as users of money. It is quite a different perspective if you are a creator of money.

But this is a bit like pulling teeth.

I invite you to learn about the theory because you are interested and post some links which explain it. They are easy to understand, it won’t take long and should be a doddle for a man of your abilities. You decline to read the links or learn the theory, promote what you see as obvious flaws in my argument, and we do not seem to move forward.

There is a pattern emerging here.
Does it strike you as at all familiar?
Just saying.