A few weeks ago a blogger at CNBC discussed the relative merits of Austrian monetary theory in comparison to modern monetary theory (MMT). The issue at stake is the origins of money: Austrians highlight the fact money comes into existence as the medium of exchange, while MMT points to governments requiring people to pay taxes with money.
The author admits both have merit, and calls for some sort of reconciliation between the two. Specifically:
“The Austrian theory has never adequately explained how the government got control of money. Mises and others talk about the government monopolizing coinage but this still doesn’t explain why government money retains its role as the medium of exchange.”
Obviously, the author has not read Rothbard’s What Has the Government Done to Our Money? As he demonstrates, the government not only monopolizes the mint, they pass legal tender laws. So not only do governments demand taxes be paid in money, they require that all transactions can be paid in the monopoly money. So a bank might print its own money, but people can always pay in the government’s money.
“The MMT explains how the government can foist whatever currency it wants on a people, including fiat money. But it doesn’t go far enough in explaining why people accumulate currency far beyond their possible needs to extinguish tax obligations. The tax obligation story doesn’t at all explain why money has a particular exchange value.”
I agree with the author here. A government cannot simply foist a money on people. Imagine gold is becoming money in a community, but the government decides to demand sofas as taxes. People would buy sofas to pay off the tax, but still use the naturally developing money in other situations.
The government might further pass a legal tender law, forcing people to except sofas as payment. In this scenario, the legal tender law would likely simply be ignored by people, or else the government would have to take drastic measures to enforce the law.
Simply put, money evolves naturally on the market as Mises describes, and this natural process imposes limitations on the government’s monopolization. As further evidence, look at the well documented case of cigarettes being used as money (medium of exchange) in prisons.
So the two theories are not incompatible. Austrian monetary theory does not ignore the effects government monopolization. In fact, Rothbard has meticulously chronicled the progression from private community money to fiat government paper money.