The State Theory of Money (Chartalism) assserts that the fundamental function of taxation is to create on the part of the public a financial obligation to the state through the levying of taxes which is payable with the currency issued by the state. Taxes are what give currency value. The fact that the state spends tax revenue is merely to recycle the money supply. Thus taxation is very much part of monetary theory. A government that has no tax revenue (or insufficient) would have to support its currency through other means, such as a gold standard. This is where Reagan missed the point when he compared government with a corporation. Corporation have no authority to impose taxes, although many try through monopolies. The Chartalist approach is of significance at this particular time in history becuase of the total dependance of global trade on fiat currencies. Globalization has elevated the importance of trade above its previous status. Trade issues now dominates domestic monetary and fiscal policies of all nations. The global foreign exchange market now drives central bank interest rate policies and currency valuations. Argentina, along with recurring financial crisis in Mexcio, Asia, Brazil, Russia and Turkey in the last decade highlights this point. The currency board, though still arguable whether it was directly responsible for Argentina's financial and economic problems, undeniably reduced the flexibility of the government to call on all options to deal with the situation of recession, unemployment and deficits. I wrote in PKT on December 24, 2001: Argetntina should file for bankruptcy under Argentina law and have all dollar debts discharged by Argentina courts. Foreign banks will not lend to Argentina for a while, which is precisely what Argentina needs: to avoid any new foreign debts. Instead of a currency board, Argentina should proceed with a monetary regime based strictly on the State Theory of Money. All Argentina exports must be paid in new Argentina currency, thus creating a global demand of its new currency. A job guarantee program can be financed with local currency backed by future tax revenue. All dollar denominated commodities that Argentina must import, such as oil, should be put on barter with Argentinan exports. Full employment should be the starting point to revive the economy. Argentina does not need more foreign credit, parrticularly if it aims at repaying foreign debts already incurred. Before Argentina declares bankruptcy and dischareges the $150 billion foreign debt, servicing which was consuming 50% of government revenue before the political crisis, no financial rescue was possible. Money takes on top importance in finance capitalism different from its role of units of eschange in industrial capitalism. And whether the Chartalist approach to money is theoretically more valid than other approaches is now only of academic concern, because all governments now practise it and the entire foreign exchange market operate on it. Money is the creature of the State over which the State has a monopoly on issuance. Taxes drive money in that the public needs mony to pay taxes. The government does not need the publics money to spend. The conservative tiresome whinning on taxes being the people's money is based on a fundamental misunderstanding. The government can buy anything money can buy merely by providing the money. The function of a government deficit is to make up for the penchant of the public to hold extra money. The purpose of government bonds is not to finance the deficit, but to provide interest bearing money to the use of the economy. Thus the Chartalist appraoch leads to monetary and fiscal policy alternatives, such as full employment, the elimination of overcapacity through demand management, not opened to other, particularly monetarists views of money. Such policy alternatives are of particular importance in this era of globlaized finance capitalism to moderate its structural contradictions. Foreign exchange is necessary only when trade is conducted, and globalized trade at that. Bilateral trade has relatively simple foreign ecxchange issues. But bilateral trade now is merely a sub-unit of global trade, in the sense that no product is anymore made in one or two single country. A "Japanese" car has 60% of its parts and 90% of its raw material made ouside of Japan or outside of Japanese car assembly plants worldwide. Similarly with American and German cars. Detroit is the main importer of foreign steel, much to the unhappiness of US steel makers. Thus when a car is sold in New Jersey for dollars, the foreign exchange implication of that one simple transaction is highly complex, as funds flow through multi-currency conduits of varying interest rates and values. Trade is no longer the merely exchange of goods and services. It has become the exchange of obligations and claims. Wages take on exaggerated importance in the trade regime and have become the most significant determinant in plant location, mostly because among all factors of production, the most immobile factor remains the supply of workers, for political reasons, through immigration laws (often racist). Energy, trransportation, technology, finance are all mobile. Container ports can be built faster than than changes in immigration laws. Thus unemployment, the most direct cause of social unrest, can be tackled only two ways: 1) reduce wages or 2) upgrade labor skill demand in the economy. Item one can only be accomplished with a floating exchange rate, because of wage inelasticity in labor contracts. With a currency board, that option is closed. The US has relied on item two, by shifting its employment demand toward hightech. And dollar hedgemony permits a strong dollar to keep wages constant in dollar terms within the US, but high in trade terms, exporting all low pay jobs overseas. But most other emerging economies do not enjoy a option of shifting labor demand to a hightech economy, thus they are trapped with high unemployment, especially middle level economies such as Argentina, which cannot complete with low wage economies nor with hightech economies. The bottom line is: globalized labor movement must accompany globalized trade and finance, or a new anti-imperialism struggle will re-emerge to bring the system crashing down. There is much to idea of every economy sharing equally its share of high and low pay jobs to promote world growth. Henry C.K. Liu
