The title of this article may sound like a jab at MMT’s confidence in monetarily sovereign governments’ lack of fiscal constraint—and it is—but the real focus is on a cherished historical claim of MMT: that governments burned paper money collected through taxation.
MMT, History, and Burning Money
The MMTers are correct that, historically, several governments did burn paper money collected in taxes. In fact, there are several cases where governments have burned either paper money or tally sticks, and much modern currency is routinely shredded, pulped, or incinerated. Colonial American paper currencies were deliberately burned in several colonies prior to the Revolution, and similar destruction of depreciated paper money continued at the state and national levels after the Revolution, particularly during the withdrawal of Continental currency; medieval tally sticks were destroyed as obsolete financial instruments by the British government, causing a fire (1834, see image below); the Greenbacks were both eventually redeemed in gold and some were destroyed post-Civil War. …
MMT Gets Partially Right
Governments certainly did rearrange real resources by issuing paper money; government revenue did not always need to be collected first through taxes before it was spent; tax acceptability, legal tender laws, and compulsory par laws did support and sustain some demand for a depreciating paper currency (i.e., Gresham’s law); legal structures and redemption schedules did help paper circulate, even when people might not have otherwise accepted it voluntarily; governments did accept back its paper money in settlement of tax obligations and did sometimes burn the money.
All these things can be affirmed without embarrassment, however, they do not confirm MMT. Where MMT goes wrong in this argumentation is in misplaced chartalist assumptions, historical inversion, disanalogies between theory and history, equivocation of definitions (e.g., chartalism, redemption), and reinterpreting destruction as ontology. Space only permits touching on a few of these elements here. …
What MMT Gets Wrong: Inverted Historical Sequence …
In all cases in American monetary history, market-chosen monies preceded the state and the public’s fragile, conditional acceptance of inflated paper money from the government depended on the (often misplaced) trust in the (usually false) promises of convertibility and/or future redemption, not in taxes, but in money proper (i.e., real money, specie, etc.). Statist intervention came after the fact and depended on such a process to enable artificial money expansion. The chartalist sequence is not just incorrect, it is nearly the inverse of history.
Ironically, the government depended on the preexistence of (imperfectly) sound money in order to have a chance to inflate instead of taxing. Without this feature, it would be doubtful that anyone would accept and continue to use what they knew to be pure government fiat paper money, except by legal force. This can only happen in a context where there are already media of exchange circulating. Governments—short on revenue and wanting to avoid unpopular taxation—print paper money and lead people to believe that the money will be redeemable in real money later. Money has not been created for the first time by this spend-and-tax process.
Why Burning?
Why did governments burn the notes they received back in taxes instead of using them for revenue?
There are several answers to this question, but the first and primary one seems to be that the real taxative purpose of the paper money had already served the government—expropriating purchasing power costlessly and without the appearance of direct taxation. Governments often choose the easy-money path of the hidden tax of inflation. This brings the printer-spenders and early users many benefits at the expense of others, however, there is a trade-off: by choosing this method of taxation people must be convinced that the money will be redeemable and will not be printed endlessly, the currency’s value will be gradually reduced, price inflation will occur, economic calculation is distorted, and there are even the risks hyperinflation and monetary collapse. While some may say that the political elites would not care about these consequences, even they recognize that such unchecked inflation undermines their ability to maintain power and continue taxing.
The governments who burned money had so destroyed the conditional usefulness of the paper money by inflation, as well as the public’s trust, to the point that it was no longer useful, even to them. In fact, it was a liability. The massively depreciated and discredited paper money was near-worthless. Further, burning the tax revenue saved the governments from having to redeem in real money (with specie they did not have), tax the people again in order to redeem the paper notes (risking popular unrest), and/or a monetary collapse.
Of course they burnt the money!! The real reason was that the paper money was worthless in the eyes of the money-using public! it couldn’t be reasonably spent by them to buy goods and services. What, at that time, was money was cold, hard cash, in other words, silver, gold and copper. The seller always preferred the cold hard cash to the paper, flutter in the wind kind of money. So, as a consequence of that money being useless, they burnt it, rather than try circulating it again. So the MMTers have it wrong again because you could say that paper money was only stolen valor from cold hard cash.