" tax works by pooling a percent of sellers revenue."
What the public servant actually does is impose a tribute on the workers in a denomination the public servant determines. If you don't provide the denomination then the public servant confiscates your assets by force.
The population then offers their goods and services in return for the denomination the public servant issues. The public servant then determines the level of the tribute required by how much of its own denomination it gives in exchange for the tribute.
That's the source of money, and the source of the price level.
There is no 'universal exchange commodity'. Money is really just promises between people.
Fred would say to Jim: "here's a pig, owe me one". Fred now has Jim's IOU as an asset which he could give to Bob in exchange for something Bob made so Bob can claim a pig from Jim.
>That's the source of money, and the source of the price level.
The vast majority of money in the modern economy is created by banks, not by the tax agencies or even the mint. When the bank lends you $1000 they just create it out of thin air and credit your account by $1000.
They still have to borrow the money from the central bank. Fractional reserves mean that the credited account's bank must deposit a portion of the money bank at central bank.
So there is a limit to how much money can the bank create.
Mostly banks borrow from depositors and from the capital markets.
Reserve requirements of that type still do exist in some places (though in some places they've been abolished) but don't really play much of a role in determining how quickly money supply grows any more.
Control over money supply growth is mostly down to interest rates these days.
Similarly, the role reserve requirements used to play in protecting depositors has been replaced by the various "Basel" rules which determine what sources of funding banks can use to fund their loans which depend on the loan book's credit quality, tenor etc.
How did you get the wad of cash in the first place and what is it?
A wad of cash isn’t money. It is nothing more than a receipt for a deposit held at an institution somewhere - that was created as an advance in the past in response to an equivalent loan.
When you deposit a wad of cash in a bank, the bank takes ownership of the deposit in the institution and creates a new deposit in the bank for you. It’s just another loan creating a deposit.
They must only borrow the money (or get it from somebody else who got it from somebody who borrowed it from the central bank) that they need to pay you out in paper or digital cash and the money they have to keep in reserve. They do not have to borrow the whole credit value. The credit itself is created out of thin air but with some strings attached, so banks can't just create infinite amounts of credit and they cannot just pay out arbitrary sums of created credit. (Source: Some books I read a long time ago.)
QE is a separate process from the usual act of money creation by banks making loans, it's best to consider it as an out-of-the-ordinary manual intervention by the central bank where they create new central bank money ad hoc and use that to purchase assets on the market. The normal process of money creation is banks creating new commercial bank money when making loans to individuals and companies.
>They still have to borrow the money from the central bank. Fractional reserves mean that the credited account's bank must deposit a portion of the money bank at central bank.
Absolutely false. For starters, in many jurisdictions including the US, the reserve fraction is now 0% and has been for quite some time.
The bank acts as an intermediary, but not the way economists tell you. They say that the bank is an intermediary of loanable funds between debtor and creditor. That is, money exists outside the system and the bank is just efficiently distributing it, kind of like eBay.
Except the bank is an intermediary of a completely different kind between creditor and lender. What the bank does is aggregate illiquid credits and debts to create liquid credit and debt.
You have a coupon that says you are owed X products by person A. Person B has a coupon that says he is owed Y by person C. The bank takes these coupons and transforms these illiquid promises into a liquid promise that lets you buy both X and Y products from person A and C. Think of it as a many to many relationship. The bank essentially acts as a blender that takes many things of non uniform quality and it produces a product of uniform quality.
When you go to the bank and bring a stack of coupon that says "I will work for one hour for you" and the bank puts a stamp on the coupons that says "Bank B vouches for this coupon". Except this is inconvenient. What the bank does instead is print its own coupons that everyone recognizes and it deposits your coupons in its bank vaults. The bank writes down that you owe it all the coupons representing your labor time that you deposited as debt. Except this again is inconvenient, we can do away with the individual coupons entirely. Since paying your own coupon debt requires you to withdraw the coupons using bank coupons, we can just decide that you owe the debt in bank coupons instead.
This isn't contradicting the GP's point: money is created by private banks, but they still create “United States dollar” that get a significant part of their value from the US government's ability to enforce taxes.
"The state sets the terms of exchange for its currency with the prices it pays when it spends, and not per se by the quantity of currency that it spends. For example, if the state has an open-ended offer to hire soldiers at $50,000 per year, the price level as thereby defined will remain constant regardless of how many soldiers are hired and regardless of the state’s total spending. The state has set the value of its numeraire exogenously, providing that information of absolute value that market forces then utilize to allocate by price with exchange values of other goods and services determined in the marketplace. Without the state supplied information, however, there would be no expression of relative value in terms of that currency.
Should the state decide, for example, to increase the price it pays for its soldiers to $55,000 per year, it would be redefining the value of its currency downward and increasing the general price level by 10%, as market forces reflect that increase in the normal course of allocating by price and determining relative value. And for as long as the state continues to pay soldiers $55,000 per year, assuming constant relative values, the price level will remain unchanged. And, for example, the state would have to continually increase the rate of pay by 10% annually to support a continuous annual increase of the price level of 10%."
What the public servant actually does is impose a tribute on the workers in a denomination the public servant determines. If you don't provide the denomination then the public servant confiscates your assets by force.
The population then offers their goods and services in return for the denomination the public servant issues. The public servant then determines the level of the tribute required by how much of its own denomination it gives in exchange for the tribute.
That's the source of money, and the source of the price level.
There is no 'universal exchange commodity'. Money is really just promises between people.
Fred would say to Jim: "here's a pig, owe me one". Fred now has Jim's IOU as an asset which he could give to Bob in exchange for something Bob made so Bob can claim a pig from Jim.