1. By virtue of naming the thing that settles a tax payment (i.e., reserve balances in the US, which provide the final settlement of tax payments; while the IRS and govt accept checks drawn on private bank accounts, these are not what is actually transferred to the Treasury’s account at the Fed), there is a demand created for this particular “thing.” Note that this is ‘sufficient’ to create such a demand, though not necessarily ‘necessary AND sufficient’ for doing so. Also, ‘naming the thing that settles a tax payment’ presumes tax payments can be enforced—i.e., in a democracy, the people in the aggregate have submitted to this. It’s a state theory of money, not a theory of the state (that would be the realm of politics and political theory, by the way).
2. If the “thing” that settles tax payments is also something that the govt itself can create costlessly (i.e, via keystrokes), then there is no limit to the govt’s operational ability to spend, and neither tax revenues nor bond sales actually finance the government’s spending. Further, the govt’s “money” is its own liability in this case (as opposed to if it were to name gold as the “thing”) and also an asset of the non-govt.
3. The state can set the bid and the ask for its liabilities and thereby control the interest rate on its own liabilities (i.e., the federal funds rate in the US). Other rates will generally arbitrage to varying degrees against this rate, but the state can only set these other rates in a more precise manner by actively entering those markets. So, there is a monopoly over the “own” interest on the state’s liabilities, but not necessarily on other rates.
continued below due to character limit
4. The state can set the price that it will pay to purchase goods and services, and this will have some effect on the aggregate price level. How much depends on how significant the state’s purchases are relative to purchases others make. (In the case of the Job Guarantee, for instance, this effect wouldn’t be overly strong—the stabilization effect on aggregate prices in that case comes mostly from the functional finance nature of the spending on the program. Setting the JG wage has the effect of not pushing up private sector wages, but it does not itself mean private sector wages won’t rise—that effect will mostly be tempered by the countercyclical spending on the program, and even then there are other things in the economy that can affect costs and prices. The claim is that the JG will not be inflationary and will be somewhat stabilizing, not that it will set the aggregate price level—and again, even in that case the effect is through functional finance, not setting the wage.) So, “monopoly” here is simply monopoly over the prices of the things it buys or sells, which in the real world states often don’t exercise at any rate.
5. The state cannot directly control the quantity of non-state liabilities (such as bank liabilities) that circulate as media of exchange. And it shouldn’t try (those that think it should try are called Monetarists, or at least traditional Monetarists). This is quite clear in Randy Wray’s first book, Money and Credit in Capitalist Economies, as well as in the horizontalist/circuitiste literature that we largely agree with. So, there is no “monopoly” of non-government monies. They have always existed—Randy’s very clear that private credit money pre-dated state money—and are created endogenously.
6. The state cannot directly control the quantity of state liabilities circulating. As we’ve noted many times, the government’s deficit is endogenous—attempting to balance the budget or run a surplus in a recession, for instance, could lead to even larger deficits.
7. So, overall, beyond the fact that it is not operationally constrained given 2 above, the state's "monopoly" is generally a monopoly over the price of its own money--the interest rate on its money--and the price of things it purchases or sells. Nothing more than that. Nothing less, either.
Hope this helps some.
March 27, 2012 1:03 PM
Scott comments further and responds to some comments, too. Click on this link March 27, 2012 1:03 PM to get to the comment section there.