Actually, mostly Taxes.
Now here’s a subtle point of Modern Monetary Theory that thwarted me for a while but I think I’ve got a grip on it finally. They spend a lot of time emphasizing the importance of Taxes.
Wha?! MMT is that feel good stuff about how it doesn’t matter how much money you print until you see evidence of hyper-inflation (some inflation is good because it incentivizes investing in presumably productive enterprises instead of swimming in and sleeping on a pile of cash). Why then are Taxes important? The Government doesn’t need the revenue, they have monopoly control of the printing press (enforced by a honking great Army).
Well, because Taxes are what gives currency its value.
If money is simply a medium of exchange then anything will do, Tulip bulbs, Bananas, Oil, Ur Cow Tokens. All that matters is that both parties in the market use that “medium” to “exchange” items that are not directly comparable, like chickens and cloth. You can establish that relationship directly (barter) but money is more convenient because, if widely accepted, you don’t have to renegotiate relative value for every transaction (how much cloth are those eggs worth in terms of the chickens I exchanged to get the cloth in the first place?).
I’ll stop to repeat that “money” is not a store of value. Once the market moves on what you have is a collectable.
Here’s how Taxes work to establish value-
The World According to Modern Monetary Theory
By Rebecca Rojer, The New Inquiry
April 11, 2014
First, we must understand the source of modern money’s value and contend with the violence of its origins. Imagine you have just invaded an island. The populace leads a leisurely life of hunting and subsistence farming, and natural abundance ensures nobody needs to work too hard. But beneath the fertile soil are precious minerals that will make you very rich— provided you can get the people of the island to do the backbreaking work of mining for you.
Guns will work for this purpose, but slavery has fallen out of social acceptability. What if, instead of each day forcing workers into your mines at gunpoint, you created your own money system? You could print your face on a bunch of plastic tokens and pay miners with them, while imposing a mandatory token tax at the end of each month. To avoid imprisonment or death, they will have to make sure they work enough to have tokens at the end of the month. Now you need to take out your gun only once a month, when you go door to door demanding your token. The natives remain ostensibly “free.” But the mining still gets done.
A sovereign (you, in this scenario) becomes a money creator not by figuring out how to carve their faces into a coin, but by having the strength to enforce taxes denominated in their own coins. As the economist Hyman Minksy famously said, “Anyone can create money—the problem is getting it accepted.”
Your tokens would be totally worthless without your threat of violence, but with it, they become an overriding factor in your subjects’ lives. Subjects must refocus their society around earning and holding tokens. Some people will work in your mines; others will perhaps sell goods and services to those with jobs. You, in the meantime, will have transformed an entire economy for your profit, with only the periodic use of force.
Forcing people to pay their taxes in a money that is otherwise worthless creates demand for money and gives it its value. This idea, called chartalism, is one of the core building blocks of Modern Monetary Theory. “Modern money” is fiat money, state-issued currency not backed by precious metals or any other commodity. It’s as arbitrary as your island’s plastic tokens. You cannot trade in fiat money with the state for a fixed quantity of gold or barley, but you still need it to pay taxes. The United States has functioned on a fiat system since 1971, when Nixon ended Bretton Woods, the international system of financial relations established after World War II that had permitted U.S. dollars to be converted into gold. The euro, the British pound, and the Japanese yen have since become fiat currencies. But even in commodity-backed systems, state-issued money — if acceptable as payment for taxes — tends to trade at above its strict commodity value. According to Keynes, money systems have been “modern” for the “past 4,000 years at least.”
Variations of the modern-money narrative are found repeatedly throughout history. The levying of monetary taxes to create waged labor was “a nearly universal experience throughout Africa” in the colonial era, explains economist Randall Wray. Hut taxes, coupled with extreme violence and racial segregation, forced unwilling migrant laborers into the gold and diamond mines of South Africa. Bernard Magubane, an anthropologist, described the purpose of these taxes as being to “increase the economic pressure on the African peasants” to force them into waged work.
Even earlier, in the 8th century, Anglo-Saxon kings had “struck their names and titles into coin” that they used as payment for things they wanted and accepted in lieu of “in-kind payment of rents” and obligatory tributes, writes Christine Desan, whose research overturns the mythical “barter” story of introductory economics textbooks that claims money was invented only after trading became complex. According to Desan, “money is created when a stakeholder uses his or her singular location at the hub of a community to mark the disparate contributions of individuals in a common way”
Desan’s explanation of money’s origins reminds me of the points system used in the student co-ops I lived in during college. We enjoyed a home-cooked meal each night, and the houses only rarely succumbed to squalor despite their inhabitants’ tendency for heavy loads of courses and drugs — because the points system imposed work on us. Points could be earned by doing household chores (the more time-consuming the task, the more points you earned), and every member of our co-op owed the house 30 points per week. Point balances were kept on a paper chart or online spreadsheet (no one’s face was minted on any point tokens), and if your point deficit exceeded a certain threshold, you risked getting kicked out.
It’s not a huge leap to imagine a co-op choosing to run a deficit by issuing more points than it collects and permitting them to be traded. This would allow individuals to save points to exchange on private markets for tutoring, homegrown, or whatever else co-opers have the means and inclination to produce. A local farm might even be willing to sell food for points, provided they could use the points to employ co-opers during the harvest. Like colonially imposed money, points would have value as long as co-opers needed them to fulfill their obligation to the house, and the house had punitive means at its disposal to enforce it.
The point, like the token, is an arbitrary unit that has value because of an imposed debt burden. But the resemblance suggests that the logic of modern money can also be put in the service of collective, as opposed to exploitative, political aims.
Note that words like “Debt” and “Deficit” don’t have any significance at all except in terms of the monopoly of violence (or shunning) that allows a “sovereign” to compel the servitude of the populace.