ABSTRACT

Simons’s insistence that taxation alone should fund fiscal expenditure is a derivative of Ricardian equivalence. With loans merely deferring payment, borrowing rests upon the perceived capacity to repay the loan. As the sovereign-debt-to-GDP-ratio rises, sovereign borrowing becomes more difficult. At the limit, an excess supply of (and a reluctance to hold) sovereign debt creates an excess demand for other items. Then, as nominal prices generally rise, the real value of sovereign debt falls. As indicated by an IMF presentation (of the credit counterparts of broad money), a central bank and its sovereign treasury are essentially a single entity. This sheds light upon the forlorn Eurozone project, to integrate a single monetary authority with diverse fiscal authorities. Simons articulates a prescient verdict on that schema: ‘The plain fact is that the ultimate monetary powers and the ultimate legislative powers are those of taxing and spending. This suggests a fatal weakness of schemes for supra-national currencies or world-currencies’. Friedman echoes that verdict: ‘a system under which the political and currency boundaries do not match is bound to prove unstable’.