Activity title | Founding a new state |
Overview | Together, the group founds a new state and acts out the phenomena: currency monopoly, democratically decided money creation, public expenditure and taxation. Then it plays another two or three annual budgets and observes the parallel development of public debt and private savings. Afterwards: discussion on public debt |
Objectives | What should the participants take with them? 1. government deficit spending is money creation in the democratic process, at best for the common good. 2. public debt is not like private debt. It is money creation within the currency monopoly that is registered as debt. 3. public debt and private net savings move in parallel, one increases, the other increases, when public debt decreases so do private savings. 4. understanding the following terms: currency monopoly, government money creation, government expenditure, deficit spending, government budget, budget deficit, balanced budget, surplus budget, government debt, private sector, net savings |
Materials | Paper and pencil for money creation, a board on which the public debt can be written down in a clearly visible way. |
Time | 15 minutes: introduction 30 minutes: for playing the foundation of the state 30 minutes: for playing the first budget year 15 minutes: for playing 2-3 further budget years 30 minutes: discussion on the nature of public debt |
Group size | 3 to 20 |
Instructions for trainers | Introduction: Some questions for a little discussion about money and where it might get its value from. Introduction to the topic of taxes. Play part I: Founding a State, choosing a Government and a Currency Play part II: First Government budget, deficit spending, taxes and balancing Play Part III: 2-3 further budget years, to show the parallel trend in public debt and private savings Discussion: What did you think about public debt before? What do you think know? What is usually associated with public debt. Is it logical to you that the governments money creation is registered as debt? Does it seem a real debt? Is there a difference to the debt of a private person?
|
Evaluation | At the end of the discussion round: everybody could answer briefly two questions: Was there a moment in the play that let you notice something interesting or new, which moment was that? Is there now something about money and debt you would like to know more about? |
Tips for trainers | The initial state formation phase could take longer, especially if there are many players. Giving this space shifts the focus to the aspect of the state monopoly on money and the democratic process of money creation through deficit spending. If the trainer focuses on the technical side, namely, the ratio of public and private deficits/surpluses, it is a good idea to keep the state foundation short, to assume some things and leave more time for the game parts II, and III. If the game is limited to two budget rounds, the second round should be a surplus budget, so that it becomes clear how private savings are diminishing again at the same time as public debt. When the tax law is passed, a percentage is set, which may sound strange in the first round. The trainer should not explain too much here, push the vote forward and be sure that the group will have understood the meaning very well in the second round. The group plays the parliament in some phases of the game and the population/real economy in others. The trainer should specify these changes clearly. |
For inspiration | As an inspiration for those who understand German: a talk, in which Dirk Ehnts tells a state-founding-money-and-taxes-story https://www.youtube.com/watch?v=kOGVKoLQwl4 |
More detailed information for trainers:
Introduction:
The trainer starts a question and answer session on money: what does the group think money is and, above all, where does it get its value from? After an initial discussion, she brings the topic of taxes into play and what they might have to do with the value of money. She invites the group to test this thought and, in general, the relationship between the state and money in the state-founding game.
Examples for question and answers:
- Where does the money come from?
- Do you know the concept of the currency monopoly? And what does it mean?
- How does one get a currency monopoly, where does it say? (Constitution, laws, European treaties)
- Who makes the laws? (State, Parliament, Constituent Assembly, European Council) But do all people accept state money just because of a law?
- (not necessarily, it also depends on what you can buy).
- What would happen if someone else made competing money?
- (probably only few would accept it, the state could also prohibit)
- How can the state give its money practical binding force? (taxes)
- How and under what conditions can taxes have this effect?
- (If enough people must pay taxes – here can be named proof examples like poll taxes or taxes on houses that are independent of income and expenses)
- How does the state make its taxes binding?
- Would taxes also grant that people start to use this currency between themselves and why?
Play part I:
Founding a State, choosing a Government and a Currency
- The group elects a Head of Government
The group as parliament elects a Head of Government and a Finance Minister (FM), FM appoints the Head of the Central Bank. The three represent the state.
- The parliament determines the name of the Currency.
The head of government collects name proposals on the blackboard and have them voted on. (Further it is assumed here that the new currency is called the Money)
- Political decisions and a first budget law
The Head of government asks the parliament about its political goals. For the sake of simplicity, you might want to have everyone name a political end, which will be noted on the blackboard. FM writes e.g. 1000 Money behind each and then adds up the budget. The parliament approves the budget by majority vote and thus passes the first budget law of the new state.
- A tax law is also passed
The parliament decides what percentage of the annual expenditure should be recouped through taxes. Question wording: “How much of government expenditure should be returned to the state through taxes this year?” Don’t explain too much here, but perhaps start with suggesting percentages. Collect three suggestions, vote.
Play part II:
Money creation, first public expenditure and balancing
5.Head of the central bank makes banknotes
She creates exactly the amount needed for this year’s government expenditure.
6.FM spends money and records it in the budget balance
The group now represents the real economy. FM gives people the money to fulfil the political ends set in the budget law.
Afterwards, FM notes the state expenditure on the blackboard:
Government budget, year 1:
-1,000 Money deficit spending
- FM collects taxes and completes the Government budget
F.M. reclaims taxes as predetermined in the tax law. (Maybe he appoints a tax authority who does the collecting) In our example the FM now completes the balance sheet as follows:
Government budget, year 1:
-10,000 Money deficit spending
+ 8,000 Money tax revenue
= -2,000 Money…household deficit, year 1
On the balance sheet: Why is the state’s money creation listed as debt?
Accounting conventions: In our monetary system, money creation is always registered as a loan and thus with an equal amount of debt With a state monopoly on currency, the state must create money because nobody else can. Together with the accounting rules, this means that the state cannot “have no debts”. Otherwise there would be no money…
8 Head of government examines private sector savings
Head of government makes survey in the private sector and adds up the savings of all households and companies and then announces the net saving of the private sector/population.
It should turn out that the private net saving is equal to government debt. (in year one the annual deficit is still equal to the total amount of government debt)
Play Part III:
two to three more fiscal years show parallel trends in public debt and private savings
In subsequent budget years, both taxes and expenditure may change.
(In order to keep an overview, it is recommended to change only one of both in comparison to the previous year). Some or all of the following effects should be apparent.
Several budget deficits add up to an increasing national debt (record national debt separately from the annual budget). A surplus budget reduces the national debt, but also private savings Increasing taxes has the same effect as reducing revenues, both times leaving less to the private sector, the opposite effect is achieved by reducing taxes and increasing expenditure. If the government had the ambition to reduce the national debt to zero, all savings would be gone and there would be no more money in the real economy.
