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OK now, when we learnt about the Bretton Woods system, we understood that the currencies had intrinsic value. Why? Because they were convertible into gold under the parameters of the system.

But then in 1971, when most of the world shifted into the Fiat currency era, the currencies became worthless tokens.

Check this out.

A dollar bill, of course.

Now, the question is that why would anybody want this worthless token that the government is now telling us is our currency?

It's a Fiat currency. It's dictated by legislative Fiat. Now, this is an important question because the government, of course, has what we call a provisioning challenge.

What does that mean?

That means that it's been elected by us to pursue a socio-economic program providing hospital care, education, roads, public infrastructure, ports, airports, all sorts of things that we expect our government to do, which is better at doing than us individually. But it doesn't have any productive resources.

Who has the productive resources? Us - the non-government sector. We have the labour resources and the machinery. We own that and the capital and the trucks and the land and all the rest of it. And so the provisioning challenge is how does the government shift the resources that we own, motivate us to shift them into the public sector to fulfil its political mandate?

That's the provisioning challenge and that becomes the role of the currency.

So how does that work? Well, think about this. This currency is, as it stands, worthless piece of paper. So why would anybody want it if the government says, OK, we'll pay you this currency if you shift your productive resources and do work for us either by working directly in the public sector or by meeting procurement contracts and working under those type of arrangements.

How does the government use this currency to motivate that resource shift? Well, the answer is, it imposes a tax liability. It says to the non-government sector in one way or another that they have to pay taxes to the government or else.

Now, what unit is required to pay those taxes? You guessed it. And so immediately, by imposing a tax liability, there can only be extinguished in the currency that the government determines is the unit that will be required. The government creates a demand for its worthless currency from within the non-government sector. Now, once it does that, the non-government sector, which is all of us, has a problem, doesn't it? Because where are we going to get the currency from?

Because the monopoly issuer is the government. We don't have that currency. Where do we get it from? This is the essential part of what we call the money story. The only way that the non-government sector as a whole can get the government's currency in order to then pay its tax obligations in that currency is if the government spends it into existence first. The government has to spend the currency into existence for us to earn it, accumulate it, and then meet our tax liabilities as well as whatever else we do with the government's currency.

And so it's very important to understand the causality.

The government has the legal authority to impose tax liabilities in this unit - its currency, which it issues as a monopoly issuer.

It's the only one that can issue this currency. And then the next part of the sequence is that it has to spend that currency into existence and thereby solve its provisioning challenge - moving resources into the public sector so that it can fulfil its political mandate and then by spending its currency into existence, it creates income in the private sector. It creates incomes for the resource owners, the workers, the owners of machinery and equipment, which then allows them, amongst other things, to pay their tax obligations.

And so the causality is very clear - tax liability, spending, ability to pay taxes. And so if you've done Logic 101 in Philosophy, you know that causality requires something to come before another thing. And so the mainstream story that the government requires tax revenue in order to spend is actually reversed now.

In MMT, spending has to come before tax payments and so the taxes can't possibly fund the government spending.

It's exactly the opposite.

And we'll explore some examples to illustrate that point more clearly.

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