The line of criticism appears to go as this: taxpayer Alice pays off a tax bill drawn on Bob's Bank. Since Alice's bank deposit is destroyed* by writing the cheque, and the deposit is "bank money," and Bob's Bank creates "bank money" independently of central government fiscal policy, this is seen as refuting the MMT view.
Not so fast. The tax obligation will only be considered discharged if the cheque clears.
There are two cases of interest:
- The fiscal arm of the central government banks solely at the central bank.
- The fiscal arm of the government holds deposits at private banks.
If the fiscal arm of the government (Treasury/Ministry of Finance) banks solely at the central bank, Bob's Bank has to make a settlement balance transfer. The implication is that there is a destruction of private sector settlement balances (since we are setting aside the fiscal arm).
If the fiscal arm of the central government leaves deposits at private banks, the logic is slightly more convoluted. Firstly, in the modern era, the decision to leave deposits at private banks is voluntary -- but this did not apply in earlier eras where central banks did not exist. The settlement of the tax obligation will just result in a transfer within the private sector banking system. However, the demand deposit held by the fiscal can be transferred at will to the central bank. Such a transfer will destroy settlement balances. In this case, the tax did not directly destroy the settlement balances, rather it created an obligation within the private banking sector that can only be discharged by the destruction of settlement balances.
(Why leave deposits in private banks? In the case of the United States, it makes it easier to run its byzantine payments system. By not destroying reserves, there are less complications for hitting the required settlement balances. Also, the Treasury can aim to increase interest received on these balances. As was pointed out to me on Twitter by George Selgin, the behaviour of the U.S. Treasury has changed over time. Since 2008, the Fed has paid interest on reserves, and so the Treasury has been keeping its deposits with the central bank -- link. In Canada, the Ministry of Finance achieves the same thing by making loans to private banks from its settlement balance.)
If we walk away from completely pointless word-twisting, we see that the underlying principle remains: the existence of a tax forces some entity in the private sector to get their hands on settlement balances -- government money -- to settle those taxes (or increase demand deposits that can only be discharged by transferring a settlement balance). The real threat of the government's coercive power (since non-payment of taxes is illegal) creates a real value for what are ultimately spreadsheet entries. The ability of the private sector to create its own monetary instruments that are layered on top of the monetary base does not change this reality.
* One may note the deliberate use of figurative language.
(c) Brian Romanchuk 2020