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Why Governments Burned Money

The article challenges the Modern Monetary Theory (MMT) assumption that burning tax-received paper money reinforces the idea of state-created money losing value. It argues that such historical claims do not support MMT's chartalist views and that government practices regarding taxation and money have been misinterpreted.

1. Misinterpretation of Evidence: Historical instances of governments burning money received as taxes are frequently misread as evidence supporting chartalism, which posits that money's value derives solely from government decree.

2. Historical Precedence: The article emphasizes that historically, taxation was essential for government revenue before spending. This contradicts the MMT notion that spending can happen before taxation, a concept which is a modern phenomenon that didn't apply in earlier economies.

3. Inflation and Taxation: Governments would typically inflate their currency only when tax revenue was insufficient. They could not issue fiat money or engage in inflationary practices without first having a functioning monetary economy. Thus, the sequence of tax, then spend, then inflate is historically accurate.

4. Burning Money: The act of burning money was a reflection of a government’s choice between the inflationary impacts and direct taxation. As the value of paper money declined, governments may have chosen to burn excess notes rather than redeem them in gold or impose additional taxes.

5. Understanding Money Forms: The article distinguishes between money proper (a commodity with intrinsic value), money substitutes (claims to money), and fiat money (unbacked currency). It argues the belief in money's value lies in perceived redeemability and acceptance in trade.

6. MMT's Failure: MMT’s narrative misreads historical practices and overlooks the gradual transition to recognition of fiat money. The government's ability to inflate money supply was dependent on the earlier establishment of a stable monetary system and the public’s trust.

Ultimately, the article argues that MMT's interpretation of historical events regarding money destruction fails to acknowledge the complexities of monetary origins. It stresses the historical necessity of taxing before spending and criticizes the assumption that current monetary practices were always possible. The process of transitioning from commodity-backed to fiat money was gradual and contingent on earlier systems of value and trust. 

https://mises.org/mises-wire/why-governments-burned-money

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