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The tax-foundation theory of fiat money

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Abstract

A 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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Suggested Citation

  • Dror Goldberg, 2012. "The tax-foundation theory of fiat money," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 489-497, June.
  • Handle: RePEc:spr:joecth:v:50:y:2012:i:2:p:489-497 DOI: 10.1007/s00199-010-0564-8
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    Cited by:

    1. 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.
    2. 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.
    3. Gabriele Camera, 2016. "A Perspective on Electronic Alternatives to Traditional Currencies," Working Papers 16-32, Chapman University, Economic Science Institute.

    More about this item

    Keywords

    Fiat money; Taxes; Legal tender; Inflation; E42;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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