Now that we know that it’s a government who issues fiat, that can use its force to compel cooperative effort from a large group; how does that government get those notes into the hands of the people who need it to pay their taxes? Well, the government could just give hand-outs (and we can see with social benefits programs). However, a more useful approach is for the government to SPEND the fiat currency it issues by purchasing goods and services from the people who will use the currency to pay taxes. “Government spending” then, accomplishes the goal of transferring the fiat money into the hands of the people—but it also has the benefit of creating goods and services the government might find useful. A commonly held fallacy: Government spending isn’t always valued by the community. Perception is that it serves as a transfer of wealth, not to actually add economic value. Once the people are paid in the fiat currency, they logically begin to use it to trade amongst themselves, being willing to take it as payment for goods or services because they know that every other “citizen-who-needs-to-pay-taxes” will be willing to take it as payment as well.
Now the question becomes, what is the government’s motivation to spend its fiat money? (Typically governments like to spend money on war. Again, that’s another topic altogether.) The government could only spend as much as it receives in taxes. Whatever the government spends its fiat on - more tanks, guns and soldiers; or roads, schools and hospitals, it is a consequence of this spending that the citizens come to hold the fiat currency as payment for their labor. Naturally the citizens will spend their fiat into the economy to buy the things they consume everyday but at the end of the year, all the fiat earned, is paid back to the government in taxation. The citizens are once again money-less but the government repeats the process again, spending that fiat back out into the economy through stimulus programs and the like. The government gets what it wants which is the labor and commercial energy of the citizens and the citizens get to use a fiat money system to pay their taxes. Who do you think gets the better end of that deal?
Now let me suggest that the function of fiat does change a little bit depending on the type of sovereign power we are talking about. In a monarchy the monarchy ultimately decides. In a democracy (it’s presumed anyway) the citizens get to vote on government spending. Another consideration is whether or not that fiat money can be redeemed on demand for something of intrinsic value like gold or silver. These two considerations play the biggest role in how a fiat money system looks in a society. If the government be a democracy then the government might choose one of form of spending (guns, tanks etc) and the citizens can vote to have a new school built or hospitals instead.
But what happens when the citizens realize they can vote for the government to spend its tax revenue for public services? Soon the citizens ask why can the government only spend the same amount it gets in taxes every year? Why should citizens vote to make themselves money-less every year come tax time? Why shouldn’t they vote instead to have the government issue MORE fiat currency than it is planning to collect in taxes? If that happened, the citizens would save more fiat currency each year and expand economic trade amongst themselves. It’s logical to see how a government can operate with a substantial “deficit”—the amount of fiat currency it spends over what it collects being exactly equal to the private wealth remaining in the hands of the “citizens.”