Defining Money, IX: More on the State

Our correspondent seemed to like the responses we gave.  In fact, he sent us a thank you note!: “Thank you for your elaborate explanation.  I had not been aware before of the necessary connection between the real bills doctrine and Say's Law.”

He did, however, have one final concern:

“I am unclear about one point.  I can see how bills of exchange would provide an adequate supply of money in the absence of government.  But if government exists and produces services of value that are under-supplied in private markets (defense being the primary example), will the amount of money be adequate to sustain the resulting level of exchange?  You describe government exclusively in terms of tax collections, but not in terms of services rendered.  Implicitly, it then seems that the real bills doctrine is also a doctrine of either zero government or some close approximation to that.  Is that true?”

Our response was that, no, we do not advocate eliminating government.  It is an essential institution.  Our position is that government of whatever size must meet all expenditures out of current tax revenues.  If expenditures increase, taxes should increase to keep the budget balanced.

A case can be made that in an emergency a government must be allowed to print money, but it is a weak case, economically speaking, and is usually politically motivated. Citizens who refuse to be taxed to support an unpopular war are really saying that they prefer not to be at war and are willing to accept whatever consequences that entails.  It does not justify the hidden tax of inflation.

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