Here Marshall Auerback on his INET Blog discussing Greek options but providing excellent perspective on money and taxes:
"So what does impart value to a fiat currency? In the words of economist Abba Lerner:
“The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.”
The modern state, then, imposes and enforces a tax liability on its citizens and chooses that which is necessary to pay taxes. The unit of account has no real value if not ultimately sanctioned by use from the State. By extension, the state is never revenue constrained because it alone determines what is money. The tax is what gives the currency its value insofar as it functions to create the notional demand for federal expenditures of fiat money, not to raise revenue per se. Value has been given to the money by requiring it to be used to fulfill a tax obligation, but the money is already in existence, not “created” by the revenue......Skeptical? Well, there are other historic examples of local currencies operating in parallel with national ones. As economist L. Randall Wray has noted, in Argentina as the financial crisis deepened after 2000, local governments began to issue “Patacones” (bonds with interest) as local currencies, paying workers and suppliers, and accepting them in tax payment. Utility companies began to accept them—knowing they could pay part of their taxes with them--and acceptance spread even to international corporations such as McDonald’s.
There are other historic examples closer to home (“home” in this case being the heart of Europe). Germany has had a history of creating notgeld, or emergency money, in the wake of the problems introduced by WWI reparations. None other than that Old Wizard Hjalmar Horace Greely Schacht, head of Germany’s Reichbank in the 1930s, himself introduced the Mefo bill, which were company issued IOUs, well beyond the corporation’s capital base. They were discounted by Schacht’s Reichbank. Indeed, it was the collapse of globalization that allowed Schacht a degree of freedom for unilateral action from the Reichsbank office that would have been unthinkable before 1929. This freedom would first be applied to Germany’s international liabilities and then its internal economic structure. The Nuremburg trial transcripts described the plan in the following manner:
Transactions in “mefo” bills worked as follows: “mefo” bills were drawn by armament contractors and accepted by a limited liability company called the Metallurgische Forschungsgesellschaft, m.b.H. (MEFO). This company was merely a dummy organization; it had a nominal capital of only one million Reichsmarks. “Mefo” bills ran for six months, but provision was made for extensions running consecutively for three months each. The drawer could present his “mefo” bills to any German bank for discount at any time, and these banks, in turn, could rediscount the bills at the Reichsbank at any time within the last three months of their earliest maturity.
The bills were used as fiscal boost for the intertwined priorities of rearmament and work-creation. Through Mefo bills, monetary expansion could be concealed to appease traditionalists at home and go unnoticed abroad. The formal justification from the central bank perspective was that the government would eventually compensate the Reichsbank for the Mefo advances, effectively paying for the spending at a later part of the business cycle. The upshot is that the resulting spending engendered the German economic boom that took place under Hitler
For less extreme examples than Nazi Germany, it is worth noting that the US had at least 5 forms of paper currency going at the same time in the 1920s. These were used interchangeably and included:
- Gold Certificates (redeemable in gold coin until FDR’s prohibition on private citizens holding gold)
- Silver Certificates (redeemable for coin or bullion)
- National Bank Notes (issued by US government chartered banks with equivalent face value of bonds deposited by bank at Treasury)
- United States Notes (issued directly by Treasury and also called Legal Tender Notes, but with no “backing”)
- Federal Reserve Notes (redeemable in gold on demand at Treasury or in gold or “lawful money” at any Federal Reserve Bank, until FDR’s prohibition, when it was just declared legal tender redeemable in lawful money at Fed or Treas).