The Tax-Foundation Theory of Fiat Money
AbstractA government can promote the use of an object as the general medium of exchange by accepting it in tax payments. I prove this old claim in a dynamic model and compare the mechanism to convertibility. The government can often keep its favourite money in circulation even while increasing its quantity and thus causing it to decrease in value. This opens the door for an inflationary policy. Most successful fiat moneys have been acceptable for tax payments, typically due to legal tender laws. Numerous historical failures of fiat moneys are consistent with the theory.
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Bibliographic InfoPaper provided by Department of Economics, Bar-Ilan University in its series Working Papers with number 2009-5.
Date of creation: Apr 2009
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- Starr, Ross M., 2007. "Equilibrium and Media of Exchange in a Convex Trading Post Economy With Transaction Costs," University of California at San Diego, Economics Working Paper Series qt3wx6s4z8, Department of Economics, UC San Diego.
- Starr, Ross M., 2008. "Commodity Money in a Convex Trading Post Sequence Economy," University of California at San Diego, Economics Working Paper Series qt2s87k9cj, Department of Economics, UC San Diego.
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