Thoughts On Economics
Daniel Defoe On Debt As Money
Robert Vienneau
BTW, there is confusion among some that the credit theory of money is incompatible with the chartalist theory, and that Randy Wray has made this mistake. IIRC Perry Mehrling asserted in a review of one of Randy's Understanding Modern Money (1998).
Daniel Defoe On Debt As Money
Robert Vienneau
BTW, there is confusion among some that the credit theory of money is incompatible with the chartalist theory, and that Randy Wray has made this mistake. IIRC Perry Mehrling asserted in a review of one of Randy's Understanding Modern Money (1998).
Randy's paper, Money, specifically states that money is debt, that is, a relationship of credit-debt. MMT espouses the credit theory put forward by Innes, in addition to the chartalist theory put forward by Knapp. They are complementary rather than contradictory. Let us see how.
A purely commodity money is denominated in real terms — amounts of wheat, copper, silver, or gold, for example, whose value is the market value in exchange. This amount may be used as a numeraire in exchange, and it also might be established as the unit of account either by custom and convention, or by law or dictat. The latter is called "fiat," meaning "let it be done," i.e., "make it [such]."
Fiat money strictly speaking is money issued at a nominal value (face value) established by the issuer. The token may be a commodity like silver or gold, but the face value at issuance is usually different from the market value of the commodity used in the token by the amount of minting cost and seigniorage that the issuer adds.
This nominal or face value of a unit becomes the unit of account established by the issuer, regardless of any underlying real worth as a commodity. Thus, a unit of account (nominal value) gets established by law (fiat). This is called chartal by Knapp.
Chartal money is a unit of account (value) that may be represented by various tokens (money things), such as tally sticks, metal coins or paper notes, — or the value may exist simply as accounting entries, e.g., in the records of central banks.
This nominal or face value of a unit becomes the unit of account established by the issuer, regardless of any underlying real worth as a commodity. Thus, a unit of account (nominal value) gets established by law (fiat). This is called chartal by Knapp.
Chartal money is a unit of account (value) that may be represented by various tokens (money things), such as tally sticks, metal coins or paper notes, — or the value may exist simply as accounting entries, e.g., in the records of central banks.
The MMT position is that money as a unit of account has traditionally been state currency whose nominal value as the unit of account in the jurisdiction of the domain in which it is issued is established by the sovereign through law or dictat. Increasingly, the unit of account used in exchange is not represented in the exchange by any money things. It's all done digitally by changing accounting records.
The money issued by the sovereign becomes the "debt" of the sovereign and the "credit" of the users of the currency as the sovereign's debt. The sovereign necessarily accepts its own debt in payment of liabilities to it, and the sovereign may also choose to accept only its own liabilities at its payment offices.
So the credit held by the user functions as a "tax credit." Since those with liabilities to the sovereign must obtain that which is necessary to meet those liabilities, chiefly taxes, there is demand created for the sovereign's tax credits. This demand, created artificially by the power of the sovereign, "drives" the currency.
There is no contradiction in money originating in debt, as Innes explained, and chartal money as described by Knapp. In modern economies, debt is generally denominated in the unit of account of the legal jurisdiction in which it originates, and currencies are freely tradable. So for all practical purposes, economies operate on chartal money that is also credit-debt.
The money issued by the sovereign becomes the "debt" of the sovereign and the "credit" of the users of the currency as the sovereign's debt. The sovereign necessarily accepts its own debt in payment of liabilities to it, and the sovereign may also choose to accept only its own liabilities at its payment offices.
So the credit held by the user functions as a "tax credit." Since those with liabilities to the sovereign must obtain that which is necessary to meet those liabilities, chiefly taxes, there is demand created for the sovereign's tax credits. This demand, created artificially by the power of the sovereign, "drives" the currency.
There is no contradiction in money originating in debt, as Innes explained, and chartal money as described by Knapp. In modern economies, debt is generally denominated in the unit of account of the legal jurisdiction in which it originates, and currencies are freely tradable. So for all practical purposes, economies operate on chartal money that is also credit-debt.
16 comments:
A few notes on this topic:
Knapp was a political scientist and legal scholar, not an economist, and he explicitly denied he was doing economics. That meant he was considering the subject of money independently of the question of what causes it to have value it. He said the State Theory of Money must be kept separate from economic reflections on money.
For Knapp, the question, "What things are money?" is a legal question, a question about what things have a certain kind of legal status, and not an economic question. The State Theory of Money is a wonderful book, full of insights and fine distinctions, but I personally think his determination to keep legal and economic questions separate is a weakness in his account, and that one can't really understand the nature of money without understanding its function within the economic life of the community.
His key idea is that the state is an entity that has the power to impose debt obligations on its subjects, in a unit of value it defines, and therefore by implication has the power to determine what kinds of actions will be taken as discharging those obligations. When those actions consist in handing over certain pieces of engraved paper or metal, those pieces are called "chartal means of payment".
While it is part of Knapp's account that chartal means of payment are means for the subject to discharge debts to the state, it is not part of his theory that those means of payment are themselves representations of a debt of the state to the subject. For example, we use dollar bills which profess themselves on their face to be "obligations of the United States." But such a status is not essential to chartal means of payment on Knapp's account. The state could very well just issue notes with pretty pictures on them, that proclaimed no promise of obligation on their face, and require those notes in payment of tax obligations. (cont.)
Innis's big idea, on the other hand, is that money is itself a debt instrument of some kind, a representation of some debt obligation on the part of the issuer of the instrument, and not just a means for discharging debts. For Innis, the reason we can use money to discharge a tax obligation is that it is always possible for a debtor to discharge a debt to a creditor by releasing that creditor from part of the debt the creditor owes to the debtor - if that creditor does owe a debt to the debtor of an equal or greater amount. So, since a dollar bill is an obligation of Uncle Sam to its bearer for one dollar's worth of value, then when we surrender a dollar bill to Uncle Sam, we are releasing Uncle Sam from one dollar of debt. And if we owe a one dollar debt to Uncle Sam, then realasing Uncle Sam from one dollar of debt is a way of discharging our own debt.
Personally, I think the idea that a dollar bill is a genuine obligation of the United States, despite the fact that that claim is emblazoned on the note, is a quasi-fiction. That message is designed to make us feel comfortable and confident with the note, in the same way putting the pictures of august personages on the note adds a touch of authoritative gravity and comfort to them. In fact, there is no significant binding obligation represented by the note itself, other than the obligation to exchange for the note other notes of exactly the same kind, though perhaps in some other combination of denominations. If the note were the representation of an actual obligation of the United States, then if you still possessed such notes after discharging all of your tax obligations, the government would still owe you something. But in fact, that very well might not be the case.
I think we can understand the chartal status of state-issued money by staying within Knapp's framework and without adopting Innis's theory.
However, there are and have been different kinds of money in our societies, including bank money: bank deposit balances, bank notes, bank bills of exchange, etc. And bank money does derive its legal and practical function as money from the fact that it is a genuine debt obligation of the bank. The debt is for money of another kind, usually state-issued money.
I think that the true nature of chartal is amply illustrated with tally sticks, which including the accounting along with the money token. The sovereign creates the tally stick by dividing it in two and marking the amount. One half is given to some one in the private sector for private resources and the sovereign keeps the other half on account for verification when the holder of the other half decides to exercise its use as a tax credit.
The sovereign indents itself to transfer private resources to public use and then cancels the debt by accepting the private holders tax credit.
This is about as clear as can be about the coincidence of credit-debt at the basis of chartal money.
If the sovereign creates an excess of its tax credits in a period, they have value for future payment of taxes and can be used in exchange at the value established by the unit of account, i.e, value the sovereign sets in accepting them in payment of taxes.
"The sovereign indents itself to transfer private resources to public use and then cancels the debt by accepting the private holders tax credit."
Tom, there is no such sovereign indenture under our current system, and in any cases when taxes are paid that does nothing to lessen the government's transfers of private resources.
Tally sticks have been used by governments, but they were more commonly used for bilateral contracts between private parties.
I don't think we can say that the tally stick represents the "true" nature of chartal money. The concept of chartal money was introduced by Knapp, who defined it without relation to government debt obligation.
I think it's best to avoid essentialist approaches to the true nature of money. Systems of credit, exchange and finance have been continually evolving throughout recorded history, and I don't think it is easy to single out one particular kind of instrument that alone is entitled to the term "money". Historically, people have tended to use the term "money" and its cognates to refer to whatever happened at the time to be the most widely accepted exchange media, whether those media are debt instruments or not, and whether they are state-issued or not. We don't need to ground our understanding of our current monetary system in oversimplified, mythological histories of money.
Should be indents.
The credit that the sovereign extends in exchange for private resource is indeed a debt, since every credits offset by a debt.
The accounting is credit government asset account with the private resource and debit the private seller's asset account. Debit the government's liability or equity account for the tax credit as appropriate and credit the seller's account with the tax credit.
Government is taking an asset in the present on the promise of accepting the tax credit later. The tax credit is transferable so it can serve as a unit of account, medium of exchange, store of value and means of deferred payment.
We tend to associate debt with the conventional meaning of the term, but it has a specific meaning in law and accounting.
Knapp is particularly important in that he points out that modern money is a creature of the state, that is, a legal institution behind which stands commercial law and the law of contracts, along with enforceability that the state provides.
Modern money is first and foremost a legal institution, which is a reason that the currency sovereign has a monopoly on it.
No one wants to hold a currency which is not strongly backed by law and legal institutions that guarantee contracts, etc.
Economists in general miss this point and think that money is chiefly an economic institution. Modern money is not chiefly an economic institution but a legal one.
Law grew out of custom, and ancient money as credit-debt was regulated by custom. Those customs eventually became codified as law.
Oops, my spelling checker converted indebts to indents again!
Should be indebts.
Tom, some of the accounting is just a bookkeeping fiction - about as meaningful in connection with our money as "In God We Trust". The Fed can classify currency in circulation as a "liability" if it likes, in order to preserve the paternalistic fiction that the Fed is something like a private sector bank run on sound banking principles to preserve positive net worth on its so-called "balance sheet", but there is no actual liability. When you receive a federal reserve note from the government you've been paid, end of story. There is no further debt, no obligation, no liability in any truly meaningful sense. Whether the government wishes to impose a chartal tax obligation on you, that is dischargeable with that note, is an entirely independent matter that is independent of the status of the note in itself. The very idea of a financial "balance sheet" applied to the central bank and consolidated government is a myth-based communications strategy analogous to the fiction that the government is like a household. When a government issues a currency note it hasn't incurred a genuine liability, since it is not one iota poorer by the issuance; and when it recovers one of its notes it hasn't obtained a genuine asset, since it is not one iota richer as a result.
On the broader point, economics, social power and political power are all interrelated. You can't understand any of them apart from the others. The system of allocating resources and the system of power that gives control over the allocation of resources are one and the same system. A government can't exert and enforce legal power unless it has amassed economic power, and capital controlling individuals and institutions can't retain their control over and wield economic power without a legal apparatus holding those institutions up.
The state could very well just issue notes with pretty pictures on them, that proclaimed no promise of obligation on their face, and require those notes in payment of tax obligations.
Whether the state calls its obligations "obligations" or not is completely immaterial. They are obligations, debts of the state in the most ordinary, standard dictionary meaning of "obligation"="debt".
Personally, I think the idea that a dollar bill is a genuine obligation of the United States, despite the fact that that claim is emblazoned on the note, is a quasi-fiction.
No, it is one of the most nonfictional, concrete things imaginable, and the core of MMT.
If the note were the representation of an actual obligation of the United States, then if you still possessed such notes after discharging all of your tax obligations, the government would still owe you something. But in fact, that very well might not be the case.
No, it is practically never "not the case". Basically, the only way to "not owe something" in practice is if the currency hyperinflates or the state dissolves or similar catastrophes. And one can then argue that the obligation still exists, although it (looks like it) is unredeemable.
Tom, there is no such sovereign indenture under our current system, and in any cases when taxes are paid that does nothing to lessen the government's transfers of private resources.
There certainly is such a sovereign indenture ( which works as well as or better than indebtment here. :-) ) in our current or any working money system. I do not understand what "that does nothing ..." has to do with it. People accumulate "debts from" the state because that is the "debt from" that they are the most sure will be valuable "debts for" in the future, they think it is the most reliable indenture, the magic lamp whose possession binds the most powerful genie, the state. (see below)
And bank money does derive its legal and practical function as money from the fact that it is a genuine debt obligation of the bank. The debt is for money of another kind, usually state-issued money.
Contains the core of the mistake - the wrong preposition. (a) bank debts are not fundamentally "debts for" they are bank debts to depositors, which ordinarily - but not always - can be and are redeemed for state debt.
(b) What is being called "genuine debts" - "debts FOR" is just not the what the word "debt" ordinarily means. "Debt for" doesn't mean "debt", but "debt + price" and it unconsciously sneaks the commodity theory in the back door. In ordinary parlance and the dictionary, "debt" means "debt TO" (= "debt FROM", or most completely "debt from X to Y") ) It is a purely immaterial, moral, social, ethical, what have you relationship between X and Y. I have to say that although I think the "debt for" theory is wrong, it makes the wrongness so clear that thinking about it was essential for increasing my own understanding, so thanks.
There is a lot more to say and I wrote a long refutation (& praise) of the "debt for" theory a few months ago, and I'll post it on my neglected blog soon.
Historically, people have tended to use the term "money" and its cognates to refer to whatever happened at the time to be the most widely accepted exchange media, whether those media are debt instruments or not, and whether they are state-issued or not. We don't need to ground our understanding of our current monetary system in oversimplified, mythological histories of money.
It is not mythology or oversimplification to say that every single form of money without exception in history has been nothing but a credit-debt relation - from this perspective there has been no change whatsoever in monetary systems in human history. On the other hand, money is not an exchange medium, because as Mitchell-Innes said, "there is no medium of exchange." There is nothing in the middle, the medium of a credit-debt relationship. Looking for a medium of exchange as a physical thing is like looking for "The Good" with a lamp.
The government creates an actual liability for itself in issuing currency and the other side of that liability is an asset for the holder. Since it is a net financial asset, it is equity for non-government. As Stephanie says, the portion of the national debt held by the private sector is private sector equity.
As Warren says, and he just said it today again on RT, the currency is just a bunch of tax credits and until they are used to pay taxes they circulate in the economy or are saved until they are used for tax payment.
The accounting is clear and one can say that accounting is just handwaving but that's nonsense. These terms have actual meaning in accounting, finance and economics. They can be misunderstood since they are technical terms that also have ordinary uses that are somewhat different. But that doesn't change the fact that they are used in a very spefic way in professional literature and MMT economists conform to that usage.
Calgacus: "There certainly is such a sovereign indenture ( which works as well as or better than indebtment here. :-) ) in our current or any working money system."
Right. This is Warren's point about the government creating unemployment if it doesn't provide enough tax credits to meet demand for them to pay taxes and also save at the desired rate.
Good points Dan K this is a waste of time... "what is money?" blah, blah blah...
The word is a metonym this exercise is a textbook fools errand of trying to define a metonym which by definition is abstruce in the first place...
y reported here that the word originates from the Temple of Juno Moneta which was the pagan Temple having authority over the Roman minting operations... here:
"Juno Moneta, an epithet of the Roman goddess Juno, was the protectress of funds. As such, money in ancient Rome was coined in her temple for over four centuries,"
http://en.wikipedia.org/wiki/Temple_of_Juno_Moneta
This word "money" is some sort of a pagan/barbarian metonym we should throw out of our contemporary lexicon once and for all....
rsp,
This discussion about the nature of interest bearing debt as currency or currency as non-interest bearing debt seems to break down into a difference without a distinction at the very front end of the yield curve.
Aside from one half of one basis point, (0.02% annualized), what is difference between $1 million in federal reserve notes and a 3-month T-bill with a face value of $1 million?
Right. Ed. That two trillion in "corporate cash" is sitting in very short term government securities rather than being held in deposit accounts that pay no interest. CFO's aren't that dumb.
Tom:The accounting is clear and one can say that accounting is just handwaving but that's nonsense... Absolutely. I would only differ that the terms have somewhat different ordinary usage. The accounting and ordinary usage are essentially the same. The problem is that as Geoffrey Gardiner says, almost everyone learns accounting without learning the reasons for the rules.
What I meant by sovereign indenture was more like indebtment - the holder of money thereby indentures the sovereign to him. Warren means that the unemployed are indentured by the sovereign to do nothing.
The Rombach Report Yes. As FDR said, government credit and government currency are one and the same thing. As Seymour Harris (now forgotten, but after Alvin Hansen, Keynes's leading American bulldog in the 30s-40s) said, "government securities are quasi-money."
When one understand that state money is a tax credit, then it is clear that one can hold those tax credits either a non-interest bearing or interest bearing instruments, and the difference between them is actually ver slight, e.g., T-bills are treated as cash equivalents. One assumes some interest rate risk in the case of bonds in return for a higher yield, but the liquidity is essentially the same, especially with online banking. But there is upside potential to bonds, too.
Such a deal.
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