Lovers of exemption from tax

‘Tax Payers’, GB 1937, 1952

Notwithstanding their fundamental simplicity, it is sometimes a little difficult getting across the basic concepts embodied in Modern Monetary Theory. That it is occasionally a bit tricky indicates how misconceptions about the monetary system are deeply ingrained in the public consciousness.

Examining the ideas in an unusual context can help and that’s what I am going to try here.

It starts with a little riddle:

I am made of paper and have interesting designs printed on my surface. I am usually associated with a nation and if that nation is a monarchy it is commonplace for me to have a representation of the monarch included in my design.

I am created and issued on demand by the state (although the state may contract my creation to the private sector). It is illegal to create counterfeits of me.

I have monetary value and I am denominated in varying amounts of the national unit of account. In comparison to my denominated value, it costs the state virtually nothing to create me.

I can be used to pay for goods and services supplied by the private sector or by the state.

I can also be used to pay taxes to the state. When I am used to pay tax, or to pay for services from the state, I am cancelled.

Until I am cancelled I represent debt owed by the state.

Quite a few people desire to hoard large quantities of me and forego using me for payment. In certain circumstances the state will pay interest to the people who have collected me.

Some foreign entities like to hoard me and are happy to accept me in return for real resources.

The fact that some people like to hoard me means that the state issues more of me than gets cancelled.

Finally, my greatest fear is hyperinflation.

What am I?

Most people will answer without hesitation. Surely the answer to the puzzle is ‘currency in the form cash’, isn’t it? That is certainly a valid answer, but there is another option which meets all the criteria: postage stamps.

Eh? Can you pay for goods and services with stamps? Can you really fulfil your tax obligation with little sticky labels? Does the government pay interest on stamp collections? Do people gleefully swap real resources for tiny bits of paper which the state created at virtually no cost?

The answer to all these questions is ‘Yes’ and that’s because stamps are a form of currency.1 Let’s look at the description in detail to see why.

I am made of paper, issued by the state and cost virtually nothing to create

Printing money, Kenya 1966

Clearly, stamps fit the physical description, being made of paper and bearing printed designs which frequently feature a ruling monarch. At one time they were issued exclusively by the state (no longer so in the UK now that Royal Mail is a private company) and there are custodial sentences available for anyone making illicit copies of them. Stamps are generally denominated in the local currency — ranging in the UK from a few pence to a few pounds — and the cost to the state to print them is negligible.

The same applies to cash issued by the state and the bit about costing nothing to create is at the core of MMT. The no-cost concept applies to all new money created by the state, most of which can be brought into existence with nothing more onerous than typing a few numbers at a keyboard. And all state spending is new money, just like all stamps issued by the state are new stamps.

I have monetary value

Officials, India 1883, New Zealand 1941

Unused stamps have worth and can always be exchanged for cash at or close to their face value. Just like cash, precautions must be taken when unused stamps exist in large quantities and to prevent theft they need to be kept in a secure place and be subject to regular auditing. The problem of theft is particularly troublesome in countries with large bureaucracies and extreme income inequality — countries of the British Empire, for example.

In India under colonial rule, a lowly railway clerk may have been tempted to pocket a few postage stamps which had been issued for government use and sell them on in the private sector. To get around the problem the colonial administration issued special ‘Officials’,  stamps overprinted with ‘On Her Majesty’s Service’ or something similar. They were supplied exclusively to civil service departments and would have no value in the private sector. Officials were issued by administrations across the Empire and Dominions.

Looked at from an MMT perspective, the processes which follow on from the issue of Official stamps are interesting. The stamps cost almost nothing to produce and could, in theory, be issued in any quantity desired by a particular civil service department. When the stamps are used on letters and parcels they cause work to be done in another part of government — the postal service. Officials effect a transfer of resources from one government department to another.

In the same way, when the government spends money (which costs nothing to create) it causes resources to be transferred from the private sector into the public sector. Provided we have elected a suitably enlightened government, those resources will be used to further the public purpose.

I can be used to pay for goods and services

Postal Order, Ireland 19222

That stamps are used to pay for a service is not contentious. It’s something you do every time you put a stamp on a letter and drop it into a post box. If the state owns the postal service then you are paying the state for the service; if the postal service is in private hands then you are paying the private sector.

There used to be a very easy mechanism for paying for both goods and services using stamps: postal orders. These were pre-printed in a narrow range of fixed values and stamps were used to make a postal order up to an intermediate value.3

Stamps are not legal tender in the UK and you cannot demand that someone accepts them as such. However, there is nothing to prevent anyone accepting them as payment for goods. In fact, this was common practice in the past when small items sold by mail order could often be paid for in stamps. ‘Send 1/- in stamps for bumper collection of jokes’ is typical of the sort of small advertisements found in 1960s children’s comics.

I can be used to pay taxes

Penny Lilac used to pay Stamp Duty, 19024

The use of small paper labels to indicate that tax has been paid pre-dates the introduction of postage stamps. The labels were used to show that document tax had been paid and were known as ‘revenue stamps’. Document tax was a small, fixed levy on certain types of documents, particularly those used for record purposes, including receipts, cheques, licences and wills. The tax was considered a payment to the government for its part in ensuring — through the courts and by force, if necessary — that the agreements recorded in the documents were upheld. The tax became known as ‘stamp duty’.

Most people in the UK associate stamp duty with the tax payable when property is bought and sold. This is actually a tax on the transfer of title and is proportional to the purchase price. It is not a document tax and I doubt very much that it can be paid in stamps.

A document tax can have unintended consequences. The Stamp Act of 1765 introduced to the British colonies in America a tax on printed documents. It wasn’t very popular, gave birth to the slogan ‘no taxation without representation’, started a revolution and, ultimately, led to a chap called Trump taking up residence in the White House.5

When Roland Hill launched the world’s first postage stamp in 1840 — the Penny Black — it was really just an extension of the document tax. The stamp showed that a tax had been pre-paid to the state for delivery of a paper document. Prior to Hill’s introduction of the Universal Penny Post, postage fees were paid by the recipient and could be very high, being based on distance and the number sheets of paper. Receiving a single sheet could cost a shilling or more — a day’s wages for the working poor. Under Hill’s system, sending several sheets in an envelope was pre-paid by a tax on the sender of one penny, no matter how far the destination.

This explains the word ‘philately’, which is derived from the Greek philéō meaning ‘I love’ and atéleia meaning ‘exemption from tax’ — referring to the fact that the recipient of a letter doesn’t have to pay anything.6 So, technically, we can call anyone who avoids or evades tax a ‘philatelist’, a lover of exemption from tax. Perhaps the Left should use this in their campaign to get the rich to ‘pay’ for government spending:

Down with the philatelists! Stop them stashing our money in tax havens!

Postage stamps were issued alongside revenue stamps until the Customs and Inland Revenue Act of 1881 when the two types were combined and a new stamp was issued — the Penny Lilac — bearing the words ‘Postage and Inland Revenue’. From that point forward you could indeed pay tax with postage stamps.

The words ‘postage’ and ‘revenue’ were included on all British definitive stamps, like the two at the top of this article, right up until 1967 when both words were dropped. By the way, you may need to adjust your initial interpretation of the ‘Tax Payers’ caption I added to those two stamps.

I am cancelled when I am used to pay tax or for state services

Cancelled half-penny stamp, Lancaster 1903

When a stamp goes through the postal system or is used for revenue purposes it has to be cancelled to prevent it from being reused. In the case of postal use it is partially obliterated with a postmark and for revenue use it is often done with pen and ink — a signature, for example.

It’s the same with government spending. Quite a few critics of MMT misunderstand the theory and think that it advocates abolishing taxes. If there were no tax then, just like uncancelled stamps, money issued into the economy by the state would be available for infinite reuse. Inflation would soon result if the state continued to spend. Tax ‘cancels’ the money issued by state. Tax prevents inflation.

The only difference between taxation and cancelling a stamp with a postmark is that the latter only allows for single use, whereas the former allows multiple uses, albeit with reduced purchasing power after each use. Tax only cancels a portion of the money spent in a taxable transaction, but over time and after multiple transactions the money is completely destroyed.

Tax destroys money which was previously created out of nothing by the state. The state doesn’t need the tax money in order to continue spending. Tax money is not re-spent. Anyone who thinks that it is should ask themselves why the government is not obliged to soak stamps off envelopes in order to keep the postal service running.

I am debt owed by the state

State debt, GB 19387

An unused postage stamp clearly represents a liability of the stamp-issuing state because it is obliged to swap the stamp for postal services. Every liability must be matched by a corresponding asset and this is no less true for stamps. From the holder’s perspective a stamp is an asset, it is a ‘postal credit’.

It’s much the same with money. Money represents a liability of the currency-issuing state because the state is obliged to accept its own money in payment for taxes. In the same way that a stamp is postal credit, money is simply a tax credit.

The state should only ever accept its own money in payment for tax because this is what gives value to today’s apparently worthless ‘paper money’ (money not backed by gold). We are willing to accept ‘paper money’ in payment for goods and services because we will need it to pay tax.

State issued currency — state debt — can exist in multiple forms. For example:

  • paper cash as shown here;
  • entries in a computer system owned by the Bank of England;
  • entries in a computer system owned by the Treasury; or
  • entries in a computer system owned by National Savings and Investments (NS&I).

All four of them are a ‘bond’, a form of debt, issued by the state. The only real difference between them is their lifespan, how much interest they pay and the form of that interest.

State debt in the form of cash is effectively a zero-interest, perpetual bearer bond. It’s a bond which pays no interest, which never expires and which belongs to the ‘bearer’ — whoever is currently holding it in their wallet.

Currency registered on the Bank of England system is perpetual and pays a small bit of interest. It is usually registered there by a commercial bank on behalf of its customers (individuals cannot have accounts at the Bank of England). This means that a positive balance on your bank account isn’t really ‘money’ in the sense of it being state debt. It is a debt owed to you by your bank which is matched by an equal debt owed to your bank by the Bank of England. By the way, if anyone starts talking about the Bank of England being ‘independent’ you should stop listening to them. The Bank of England is a wholly owned subsidiary of the Treasury.

Currency registered on the Treasury system is slightly different. These are Treasury bonds or ‘gilts’. They pay a bit more interest and expire after a period ranging from a few months to a few decades. When a Treasury bond expires it is converted into an equivalent amount of debt held at the Bank of England or is simply rolled over into another Treasury bond. The process of ‘repaying the debt’ represented by Treasury bonds requires nothing more than swapping a few entries between computer systems — tax money is not required and it is never a ‘burden’ on future generations.

An example of currency registered on the NS&I system are Premium Bonds. These are perpetual, registered directly in an individual’s name and pay a strange form of interest called ‘winnings’.

All modern money is, and can only ever be, debt. Anyone who campaigns for ‘debt-free’ money really doesn’t know what they are talking about and needs to have a chat with an accountant about how double-entry bookkeeping works.

The state will pay interest to the people who have collected me

Post Office Savings, GB circa 19258

To the best of my knowledge, the state has never made periodic payments to anyone as a reward for the contents of their stamp albums. But the state did once reward a different form of stamp collecting: deposits in Post Office Savings Banks. As you can see here, this was a particularly good method of encouraging children to save. Get them saving when they are young and with any luck the habit will stick.

Unfortunately, the concept of saving causes no end of confusion. It’s clearly seen as a good thing for the individual, but as Keynes pointed out in 1931, it’s not necessarily good for society:

Whenever you save five shillings, you put a man out of work for a day.9

If savings lead to unemployment, why does the state allow us to put our money into savings? Remember, ultimately, all saving is with the state, whether it’s cash in your wallet or the Treasury bonds which pension companies are obliged by regulation to buy. Surely the state should stop people from saving, shouldn’t it?

Well, the MMT view is that the state probably shouldn’t pay interest on savings, whether it’s Bank of England reserves or Treasury bonds. After all, it is really just welfare for the rich — because it is they who are most able to save — and it would be better for their money to be used productively.

However, there is one reason why the state might want us to save and that’s because savings are really a form of taxation. I know that sounds crazy, but bear with me; it does make sense.

When people think of tax they usually think of it in terms of coercion. Tax is something the government forces us to pay and prison awaits those that don’t pay. Tax certainly is coercive, but it is a necessary mechanism for removing money from the system so that the government can continue spending without causing inflation. Savings have exactly the same effect, but without the coercion. Savings also remove money from the system and allow the government to continue spending without causing inflation.

The only difference between tax and savings is that tax is compulsory and permanent (no choice, you never get the money back), whereas savings are discretionary and temporary (your choice, you always get the money back).

So, there will be occasions when the state encourages us to save because it increases the amount it can spend into the economy without risking inflation and without having to raise tax rates. The more the state can spend, the more it can direct the use of real resources. The more it can move real resources around, the more it can further the public purpose. And in doing so, the state can always employ the ‘man’ that you put out of work.

There is one a good example of the state actively encouraging savings as a form of taxation: War Bonds. During the world wars the state needed to withdraw money from the economy because it was spending on a massive scale, directing all the country’s resources for a single purpose. It could have done it by increasing taxes, but that would have meant taking money away and we are psychologically indisposed to that. It would have engendered feelings of defeat. Instead, the state played on feelings of patriotism and encouraged people to help with the war effort by ‘lending’ to the state. As compensation for voluntarily and temporarily removing money from the system the state paid a little bit of interest.

And guess what? In both world wars the UK government issued special War Bonds stamps for people to save.10

Foreigners accept me in return for real resources

Unprinting money, Russia 1966

Many governments have taken advantage of the popularity of philately as a hobby and have issued new stamp designs solely for the purpose of sale to collectors. This is particularly true for countries that have a desire (and indeed a need) to acquire foreign currencies and was very much the case for the countries of eastern Europe prior to the ‘collapse of communism’ and before we all abandoned the gold standard.

In the 1960s, for example, large quantities of stamps were printed for export to dealers based in those countries which had ‘hard’ currencies. The stamps were heavily discounted below their face value (remember: stamps cost virtually nothing to create) and this provided the dealers with an opportunity for large profits. The collectors were duped into thinking that the high face values meant that they were getting a bargain.11

There was one little problem: stamps are currency. The stamp issuing countries were printing money and selling it abroad at a discount. On the face of it, that wasn’t a problem because the stamps couldn’t be ‘spent’ abroad. However, if those stamps made their way back into the issuing country they could be spent and had the potential to lower the perceived value of officially issued stamps. Why buy stamps from the post office when you can get them at half price on the grey market?12 The purchasing power of the domestic currency (in the form of stamps) would be diminished. In other words, there would be inflation.

The solution was to cancel the stamps before they were exported. Whole sheets would be hand postmarked in a process known as Cancelled to Order (CTO). In most cases the CTO postmarks would be positioned on each stamp in a manner most pleasing to collectors — a quadrant across a corner is best. You can usually tell a CTO stamp by its improbably perfect postmark. That and the fact that the gum is still on the back because it has never been through the postal system.

In summary, people in one country were depriving themselves of real resources (because they had less money to spend) in return for worthless bits of paper. People in the other country were swapping bits of worthless paper for real resources (which they could buy from other countries with the ‘hard’ currency they were earning).

Which is not unlike how international trade has worked ever since we came off the gold standard. The UK is a net importer from China and the Chinese are happy to collect our currency (which costs us nothing to create) in return for the real resources they send by the ship load. However, there is one major difference when compared to CTO stamps: we don’t cancel the currency before giving it to the Chinese. This means the Chinese can spend the money here at some point in the future and critics of MMT identify this as a big problem. It isn’t. As long as the UK has the ability to impose capital controls then we can always ensure that the money is spent in a way that is advantageous to both the UK and China.

The state issues more of me than gets cancelled

‘The Deficit and The Debt’, circa 189013

There would be a shortage of stamps if, in any given period, the state only issued as many stamps as had been cancelled by being passed through the postal system. That’s because some unused stamps end up in stamp albums and never get cancelled.

Let’s look at what would happen if the state stuck to some bonkers rule which said that it must only issue as many stamps as it cancels.

Suppose the philatelists want to collect uncancelled stamps amounting to 5% of the stamps issued in any given period. Then in the next period the state is only able to issue 95% of the stamps required to keep the system going. And in the next period the artificial limit is reduced by another 5% and so on. People soon find that they are unable to send letters because the state is not allowed to print enough stamps. Even although the state has the capacity, it is prevented from providing essential services because of a silly rule.

People end up queuing for miles outside post offices, hoping to get their hands on a few precious stamps. State employed postal workers are laid off. Mail order companies go bust. The country goes into recession as the effects of the redundancies ripple through the economy. There are stamp riots.

The private sector, sensing an opportunity to make a quick quid, steps in to provide a bastardised version of the postal service. Some of the former postal workers are taken on by the new providers as ‘self-employed’ contractors — but at considerably lower wages. The public are offered a confusing array of packages, plans and deals — up to 40 letters, 2 small parcels and 1 recorded delivery for only £75 per month on a 36-month contract. The government believes it is powerless to do anything about the crisis and merely urges people to switch providers. Competition between the new companies drives up prices.

The right-wing press are relentless in their support for the new model. The liberal press eventually falls into line too. Over time, the public forgets what it was like when the state provided essential services or, more accurately, when the state was allowed to issue as many stamps as were needed. There is a paradigm shift and the public begin to see the mess as the natural order of things.

The public’s acquiescence is partly down to a new focus on the individual. When the time is right, the big postal corporations use this individualism to blast away the bedrock which has supported postal services for 180 years — they abandon the idea of the Universal Post. Not only are postage rates now calculated by distance, but also by remoteness. Heaven help those who live in Cornwall or Caithness.

Eventually, the idea of pre-paying for delivery with a stamp is abandoned too and we go back to recipients having to pay to get their letters. The public now believes that it is only common sense for someone who ‘chooses’ to live at Dunnet Head to pay dearly to have their mail delivered. Solidarity finally departs these isles.

You probably see where this is going, so I’ll stop there.

Matching stamp issue to stamp cancellations is madness and nobody could possibly support the idea. But then many people can’t see that this is exactly how they want the country to be run. These are the people who invent a scary name for the difference between the amount of money the state issues in a year and the amount that is cancelled by tax: they call it ‘the deficit’. And they claim it has to be eliminated at all costs. Even the Labour Party is committed to getting rid of ‘the deficit’ within five years of taking office.14

These people are unable to grasp that ‘the deficit’ is no more scary than adding a few more stamps to our stamp albums each year. And the thing they call ‘the debt’ is just the sum total of all the stamps in all our stamp albums. It’s just our savings and it’s nothing to worry about.

My greatest fear is hyperinflation

Hyperinflation, Germany 1923, Hungary 1946

Stamps don’t cope at all well with hyperinflation. They either have to suffer being overprinted or have a very short lifespan. The examples here show what happened in Weimar Germany in 1923 (overprinted due to 1,000,000% inflation) and in Hungary in 1946 (issued 15 July, withdrawn 31 July).

The Hungarian stamp has a face value of 40,000 adópengő. The adópengő was introduced at the beginning of 1946 purely as an accounting unit and was used alongside the pengő, which was the real currency. Adó in Hungarian means ‘tax’, so the adópengő was ‘tax money’. It was introduced so that the government didn’t have to bother with an excessive amount of zeroes in its accounting procedures, particularly in relation to tax. They set the amount of tax due in terms of the adópengő and you paid in pengős at whatever the going rate was that day.

Eventually it all became too cumbersome and the adópengő was adopted as the currency. This must be the only time that the true nature of money — that it is a tax credit — has been reflected in the currency’s name.


Well, that was a bit weird. Five thousand words explaining the descriptive components of Modern Monetary Theory through the medium of postage stamps. And I haven’t even begun to talk about the prescriptive elements (although I did make one oblique reference to the Job Guarantee).

It’s difficult writing something which covers so much because there’s a limit to how much text people are willing to read and I had to choose what to include and what to omit. Making those choices means that I am never going to please everyone.

For example, in the section on savings I had to choose one topic for discussion. I went with the ‘savings are voluntary taxation’ angle. Some proponents of MMT will say that I should have gone for the ‘bonds maintain interest rates’ line of reasoning. Some will say that I should have explained how the current arrangements mean that a fair chunk of our savings end up being used by pensions fund managers to buy their yachts. Instead I opted for a simple example — one that most people will understand, one that will sow a seed.

If nothing else, this piece demonstrates how MMT leads us to examine apparently unrelated bits of the world in ways previously unthought. As Scott Ferguson says:

After Modern Monetary Theory, nothing looks the same: not political economy; not everyday caretaking; not paintings, pop songs, or porn sites.15

Hopefully, the opposite is true — that by analysing the seemingly unconnected we will lead more people to an understanding of the theory.

It should also help with the problem of framing. When we talk about the theory in context we just end up reinforcing existing frames — internalised concepts, ideas and beliefs. Mention ‘tax’ and pre-existing neural pathways fire up in the listener’s brain, pathways that lead to a stored frame that says ‘tax pays for spending’. The frame is there because people have heard the assertion over and over their whole lives. And once that frame has been brought to the fore it is very difficult for the listener to consider an alternative.

Hence stamps. Create a parallel frame using a different terminology and there is a greater chance of disrupting the stored frame.

So, next time you are faced with someone who doesn’t understand deficits ask them to explain why the state prints more stamps than it cancels.

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1. Some proponents of MMT will be bristling at the suggestion that postage stamps are currency. If you are one of them, I urge you to read on before passing judgement.
2. Image source: Postal Order Provisional Govt Ireland overprint 1922 [Public Domain], Wikimedia Commons
3. Postal orders still exist, but are now produced on demand in any value requested. They no longer need stamps to top them up.
4. Image source: Carnegie receipt from Wolverhampton Council [Public Domain], Wikimedia Commons
5. No, I am not saying that the American colonies should have stayed under British rule.
6. See ‘philately‘, Wiktionary,philately‘, Oxford English Dictionaries and, weirdly, Cumberland Times/News, 12 June 1987.
7. Image source: 100 Pound White Note 1938 Peppiatt obverse [Public Domain], Wikimedia Commons
8. Image source: George V Post Office Savings Bank deposit slip [Public Domain], Wikimedia Commons
9. John Maynard Keynes, Essays in Persuasion, [1931] 1963, Norton & Co, p152
10. The imagery used on war savings stamps issued in the UK has very different connotations today. In the First World War it was a swastika; in the Second World War it was a burning cross.
11. What’s worse was that many of the collectors, the end consumers, were children and were targeted through advertisements in children’s comics. The issuing countries colluded in this exploitation by churning out brightly coloured designs based around themes which appealed to children — butterflies, space travel, horses, cars, cats, scouts, locomotives and so on. Relevance to the issuing country was unimportant.
12. See Grey market, Wikipedia
13. Image source: Another old album [CC BY-NC-SA 2.0], Flickr.
14. ’Our manifesto is fully costed, with all current spending paid for out of taxation or redirected revenue streams. Our public services must rest on the foundation of sound finances. Labour will, therefore, set the target of eliminating the government’s deficit on day-to-day spending within five years.’ Balancing the Books, Labour Party Manifesto, 2017, The Labour Party.
15. See The Unheard-of Center: Critique after Modern Monetary Theory, Scott Ferguson, Arcade, Stanford University.