You decide to make a new monetary system from scratch. You give everyone a chequing account on your computer, with an initial balance of 0 units. If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance. The Net money supply remains at 0 units, but the Gross money supply is now 200 units.
If every individual's payments and receipts of money (which is not the same as income and expenditure, because we buy and sell non-money assets for money too) were perfectly synchronised (so that Andy sells 100 units worth of apples to Carol, who sells 100 units worth of carrots to Betty, who sells 100 units worth of bananas to Andy, all at exactly the same time) then the Gross money supply would always be zero. In a representative agent model (like the simplest version of the New Keynesian model) that perfect synchronisation is exactly what happens (which is why money seems to disappear from the simplest New Keynesian model).
But if agents are heterogenous, perfect synchronisation of payments and receipts of money won't happen automatically. And it is costly for individuals to synchronise their payments and receipts of money. So the Gross money supply will be strictly positive, and will be an increasing function of the extent of non-synchronisation of payments and receipts of money.
One way for individuals to increase the degree to synchronisation is for individuals with positive balances in their chequing accounts to lend to those with negative balances. Their incentive to synchronise depends on the spread between the interest rate paid on positive balances (the "deposit rate") and charged on negative balances (the "bank rate"). The larger the spread, the bigger the incentive for individuals to borrow and lend to each other directly. But if the spread is zero, and if the central bank sets no limits on how large a negative balance an individual can hold, there is no incentive for individual borrowing and lending.
If the central banker who creates the monetary system sets no limits on how large a negative balance an individual can hold (overdraft limits), the system is open to abuse. Transversality conditions won't just enforce themselves. Each individual has an incentive to buy an unlimited amount of consumption goods and then die with an infinitely large negative balance and negative net worth. And if accounts were numbered anonymous accounts, that could not be traced to any specific individual, individuals would have an incentive to open an unlimited number of numbered accounts, with a negative balance in each, unless the central bank restricted numbered accounts to having a non-negative balance. (The numbered accounts would work like paper currency, which is equally anonymous, and cannot be held in negative quantities.)
It is not easy to understand why individual borrowing and lending would exist. If the central bank is unwilling to allow an individual to have a larger negative balance, why would some other individual be willing to lend to him? The central bank has an additional penalty that it can impose on those who default: it can threaten to deny future access to the payments system. Perhaps the individual lender has private information on the borrower's credit-worthiness? And why should the central bank charge a spread between deposit rate and bank rate leaving gains from trade to individual borrowing and lending? Wouldn't the central bank prefer to capture those gains for itself? Perhaps because the central bank has monopoly power, faces a downward-sloping demand curve, and cannot or will not price-discriminate by offering smaller spreads to those who have better ability to borrow or lend?
If the limits on negative balances are non-binding, the gross money supply responds automatically to accommodate fluctuations in the degree of synchronisation of payments and receipts, even if the central bank keeps the net money supply fixed exogenously. But in the real world, where limits on negative balances are sometimes binding, the central bank must adjust the net money supply to accommodate fluctuations in the degree of synchronisation.
Worthwhile Canadian Initiative 
Antti (Oct.31 04:34): You seem to understand most of the nuances of the national-gift-certificate model.
The goal of the model is to provide another perspective of money, making monetary discussion easier and more uniform. Your questions are certainly valid and dealing with some of the nuances.
Here are my answers:
1. Question: Who is USBS? The United States acting as a Big Store. Background: Only the owner of a store can issue a gift certificate which will be valid in his store. This makes a gift certificate a limited value instrument. USBS does not have store ownership but it does have taxing authority. Taxing authority is (in my mind) a type of ownership; taxing authority enables a wide range of control over the distribution of resources within the bounds of the authority. Like a store issuing gift certificates, only USBS can issue money (acting through the CB and Treasury) which is valid only in the limits of authority by ownership.
2. Question: Is the gift certificate an IOU? Yes. The store has committed to paying-in-kind upon presentation of the gift certificate. It could be valid on the date of issue but more likely will be presented sometime in the future.
3. Question: Am I trying to explain government borrowing? Not really, but because the government does borrow to spend more than it receives in taxes, the national-gift-certificate model needs a mechanism to explain borrowing by the issuer. As you say, borrowing your own debt has the effect of delaying the date of payment.
(Still 3.) Does “credit≠debt” in this situation? Hmmm. How will we describe the number of issued gift certificates during the period between borrowing back a gift certificate and issuing the second gift certificate? It seems like during this period, store debt would double and surrendered-gift-certificate-owner would own a credit but there would be NO Gift certificate outstanding. No, I see what you mean: the store would record this transaction as an extension of debt. The store would record that the gift certificate has changed from a presentation-upon-demand into an obligation to provide a gift certificate in the future. As you say, credit=debt but I guess we could add that delayed-credit=delayed-debt.
4. Question: Does “credit≠debt” from another perspective? Yes, the best reason for borrowing gift certificates is to delay presentation. The only reason to borrow gift certificates is to protect liquidity, not to make available gift certificates for future spending. As you say, there is no need reissue gift certificates when the store can identically issue new certificates. Does this liquidity protection mechanism unbalance credit=debt. We saw from question 3 that it does not.
It seems to me that I cannot justify my claim that “credit≠debt”. Thanks to your persistence, examples, and maybe the national-gift-certificate model. We do need to be very careful on how we distinguish ownership of credit and debt, with the time period of potential presentation playing an important role.
I can’t see that Nick’s premise that credit-plus-debt-equals-two-money is supported by any of this. Credit and debt seem like two very different things but his point about synchronization seems valid.
How does your model compare now?
TMF: What you describe is a world without money as we know it today. For us who don’t view gold bullion as money (because it has nothing in common with money as we understand it), your economy is pure barter; pure in the sense that there is not even credit (such an economy has never existed, and never will — credit is always present in a human society). Of course there are no liabilities. I don’t see where you’re trying to get with this.
Oliver, and others: Would you find it interesting if I wrote a couple of blog posts about the world I’ve been studying? Perhaps we could continue our discussion that way. I’d be of course very happy if Nick would join in, too. I’ll anyway refer to this post of his.
Roger: We are getting closer. Agreeing on credit=debt was important. I don’t agree with you here, though: “credit=debt but I guess we could add that delayed-credit=delayed-debt”. Debt/credit is always delayed, by definition. That’s why we talk about different maturities. But I think I know what made you say so, and there we come to what I view perhaps the most fundamental problem with this gift-certificate metaphor of yours. I’ll try to explain:
A real gift-certificate, instantly redeemable, isn’t primarily used by its issuer to delay payments (or to “borrow money”). The issuer has very little control over the redemption date, and in most cases the certificate is redeemed (or should I say “presented for redemption”? The issuer redeems?) promptly. There could be some “gift-certificates-as-a-float” elements (as with insurance companies) here for larger issuers, and like I said, some of the certificates are never redeemed which is a “plus”, but I would still argue that the main goal for the issuer is to increase sales by making gift-giving easier. If you think that taxation is comparable to redeeming a gift-certificate (a view made popular by MMT), then the difference is that “USBS” (which seems to be the government to you?) can control the timing of taxation through adjusting its deficit/surplus. So if “money” was a gift-certificate, then it would be a strange gift-certificate indeed: without a “redeemed only after/before” -date, but still it would be the ISSUER who would control — at least partly (timing of taxation is somewhat random) — the redemption date. This would be comparable to you walking into the hardware store with your gift-certificate and the owner turning you away, saying “Try later!”. Do you see what I mean?
As I explained above, in my world IOU (I owe you guys) ≠ UOM (you guys owe me) (guys = all you others, but none of you in particular). But your gift-certificate is both at the same time: debt to its issuer and an asset to its holder. In my world, if you hold what we are used to call money, you cannot walk to anyone and say “You owe me, and now its time for payment”.
If I try to use your terminology, I might say that in my world the holder of the “gift-certificate” can use it to BUY goods whenever he finds something interesting offered for sale, at the right price. So far we could as well be in your world. But when we look at things from the perspective of the SELLER, we move away from your world: In my world, the seller of the goods, the “store-owner”, is not the issuer of the gift-certificate. This is what I mean by IOU≠UOM. The seller might end up with a “gift-certificate” after the sale (ie. his account balance is positive) or might not. Only in the latter case you could suggest that the seller redeemed his “(indirect) gift-certificate”, and that would bring us to the previous version of my theory where I, too, would have said that the seller redeemed his “indirect IOU”. One of the reasons why I abandoned that version of my theory was that the buyer might NOT have been holding the seller’s “indirect IOU” before the purchase (ie. his account balance might have been non-positive), in which case he would have actually issued his own “indirect IOU” and handed it over to the seller. At this point I asked myself: Whose “indirect IOU” is it then? The answer must be either “It was the indirect IOU of both the seller and the buyer” or “There was no IOU changing hands at all” (I had earlier abandoned the possibility that it was a bank’s IOU, which lead me to think in terms of “indirect IOUs” in the first place).
Now it’s clear to me that there is no IOU changing hands. We must look at the situation (account balance) of the seller and the buyer separately, which brings us to the “gift-economy model”. Nothing moves from the buyer to the seller. Each separately might be sitting with an IOU (negative balance) or an UOM (positive balance) before, and after, the transaction.
How does this sound?
On a more personal note: I quit my job in early 2014 in order to pursue this theory full-time, so I do think I’m working on something very important and promising. (An even more personal note within a personal note: I’d like to work on a PhD soon; I’m tired of reading and writing by our kitchen table, and my wife is, understandably, constantly nagging at me about me getting a job.) I’ve struggled to explain my ideas to others, not least because the ideas are in stark contrast with the daily experience and received wisdom of us all (e.g, “money” is not a means-of-payment and it doesn’t flow/circulate). I consider this discussion I have had here, with all of you, a sign that I’ve come again one step further in making myself understood. Thank you all for your feedback and comments so far!
Antti: yes, you should write it up (in English, not Finnish, or whatever!).
The PhD question is trickier; you strike me as being the right person to do it, but it can be a long road with uncertain rewards. Especially if you have few economics courses and are required to start from scratch.
“your economy is pure barter; pure in the sense that there is not even credit”
No, it is a monetary exchange economy. I just made gold to be the money (MOA and MOE).
“The asset swap part of your argument is not relevant. Currency is a “portable credit/positive balance”, no more an asset than the credit balance on your account in the bank’s ledger is.”
“I don’t see where you’re trying to get with this.”
I put the gold example up with entities exchanging for gold to make the asset swap part very relevant.
It is a savings and income economy. Entities do asset swaps.
When Andy gets 100 units of gold, he buys 100 bananas from Betty who gets 100 units of gold. Betty buys 100 carrots from Carol. Carol gets 100 units of gold.
The gold gets passed around in peoples’ pockets as an asset. It does not matter there is no credit.
Antti, do write it up! And yes, in English (or German :-)).
Antti: Again thanks for your comments. Frankly, they seem to still fit within the national-gift-certificate framework but obviously some bridges are needed. The first bridge needed is that you seem to be trying to do without money. Am I right?
Nick’s positive-negative model is perfect here. Each Betty and Andy begin with zero balance in a ledger and we assume that Betty has off-record bananas.
Now if there is a ledger, there should be an entity maintaining that journal and making recordings into it. This entity is taking the role of judge and decider, using standards of some kind to make a permanent record. The names of both Betty and Andy are known, as is their trade of bananas for nothing.
Using the standards Nick has described, the recording entity assigns a positive entry to Betty’s account and a negative entry to Andy’s account. No money has changed hands.
Now we need to build a bridge to money. Assume that both Betty and Andy want to go “off-record”. How could they do this? The recording entity could give Betty a record (probably paper) showing, that at the time of going off-book, she had 100 units. The recording entity would give Andy a record (probably paper) that he had a negative 100 units.
I think we could count these probably-paper-records as potentially money.
Now we pose questions: If Betty and Andy want to return to the books kept by an new entity who does not know them, what record would each present? What incentives would each have to present their honest record?
If we used the national-gift-certificate model, I don’t think either party could claim to have a gift certificate because there is no link to any accepting party with goods or services to sell.
Is this a bridge?
Off subject. Like others, I tried to read your post. Unfortunately, Google translates macroeconomics VERY poorly and I got no understanding of your theory. That disappoints me.
Too Much Fed:
What if Carol (who now seems to have the gold) doesn’t want any of the current commodity offerings? Trading appears to come to a halt! But should we realistically assume trading would stop until Carol decides to buy something? At least I don’t think so. Hence, Andy or Betty or whoever could continue trading without needing to pass on Carol’s gold. Credit may as well come back to the story. In the minimalist sense, with some consideration of gold continuing as a MOA: If Andy and Betty don’t want Carol to take on the function of a bank (this would probably already be credit-debit territory), they could promise to pay Nick to dig out some more gold. But in that case, the need for gold as a MOE isn’t there anymore. Andy and Betty could obviously try to dig themselves… but they would probably still have to promise something to the one who delivers them the necessary mining equipment – unless the provider accepts commodities in exchange (whereby gold as a MOE isn’t there either).
Credit appears to come back once we consider the possibility of an uneven distribution of the MOE relative to trading needs and some social organizing for the purpose of producing stuff; either by promises to “pay” after the work is done; or promises to work after “payment” is done. Assuming, of course, that some social organizing – i.e. labor – is necessary for tradable commodities to appear in the market in the first place.
TMF: As I said, I don’t view gold bullion as money. It’s just a commodity to me (even if it was used as a numeraire, ie. other goods were priced in terms of it). That’s why I don’t really have much to say to you, unless you are getting back to a world with credit (perhaps via discussion with Johan?).
What I view as a crucial step in order to get from a commodity (barter economy) to money (monetary economy) is taken when we have a numeraire which ceases to be a numeraire because its price in terms of “itself” changes. A short explanation:
Imagine a closed, fairly small community where the numeraire is a kilogram of salt; the price of a a watermelon might be 1.5 salt-kilos — “s-kilos” in short. All goods are priced in s-kilos (the unit of account is “s-kilo”). Naturally, the price of the “numeraire good”, a kilogram of salt, is 1 s-kilo. Goods are exchanged against other goods, and salt doesn’t need to appear as one of the goods in a transaction (it’s not “money” as Clower and Nick would define it). When we have established (sticky) market prices expressed in s-kilos for most of the traded goods, it becomes feasible to denominate debts/credits in s-kilos (which arguably makes the prices even more sticky). In most cases these debts didn’t arise because the debtor bought salt “on credit”, neither do the debts need to be re-paid by delivering salt to the creditor. The debtor can deliver a sack of flour, for instance. (Both sides can sue each other if they don’t agree on the price, but usually they come to an agreement as trade is seen as mutually beneficial.)
This kind of system works as long as the real cost of procuring salt remains more or less stable, so that prices of other goods don’t need to constantly fluctuate; even more importantly, outstanding debts/credits (usually short-term; < 1 year) don’t need to be adjusted (a necessity in a fair system; goods taken = goods given). But one day (well, abruptly anyway) the real cost of procuring salt, due to a technological “shock”, is reduced by 50 %. The community faces a choice: Should they adjust prices of all goods (except salt) and debts — a formidable task including “menu costs” and mental costs –, or should they only adjust the price of a kilogram of salt? The majority are flexible thinkers, so they choose the latter option: the new price of a kilogram of salt is 0.5 “skilos”! What is a “skilo”? It’s nothing you can touch, nothing you can point at. It’s just an abstract unit of account.
What I say above has quite clear parallels in monetary history, but I’m not claiming anything about history here — just presenting a “myth”. I tried to explain what I view a necessary condition for a “full-grown” monetary economy: the divorce of the unit of account from its commodity link.
Nick: This is how the price of bananas could have ended up being 100 units (an explanation you seem to lack). We could start over, for instance by defining 1 skilo (think of a ‘dollar’) = 100 units (‘cents’). Andy gets bananas from Betty. What is being recorded by the central bank? Does Betty get something in return for her bananas — and what?
Roger: If Andy has a debt, why would he, the debtor, get a paper stating he has a debt? The accountant needs to know who’s debt it is, so the entry on Andy’s account must remain. Betty’s case is clear: She had a credit balance, and the accountant doesn’t have anything against this credit balance becoming a BEARER INSTRUMENT/document. The accountant doesn’t know who has the credit balance, but still knows that someone has a credit balance (“currency in circulation” on the RHS of central bank balance sheet). One might need to track down a debtor, but the creditor will show up on her own initiative.
Thanks, guys. I’ll start blogging in English then! I’ve been writing (notes/drafts) — and thinking — my theory mainly in English, but one year ago I switched to my mother tongue, Finnish, for two reasons: (1) I found it somehow refreshing, it even gave me new insights I dare to say, as I had to translate my theory (I didn’t know half of the Finnish terms) and use only meaningful words: in English it’s easier to bullshit oneself and other non-native speakers. (2) I, of course, tried to cater to the Finnish audience, in hope of being noticed; it’s a lot harder to get noticed when you write in English.
Nick: Thanks. The PhD goal of mine is mainly about financing my research. In Norway, where I currently reside with my family, nearly all PhD students get a salary of $50,000 per year, for four years. (Cost of living is high, of course.) I’ve been also thinking that I could try to find an open-minded Accounting department somewhere to do the PhD, as I majored in that subject, and my theory is very much accounting-related — even though my goal is to revolutionize Economics 😉 I also think that I can talk Economics nowadays with any Professor, but perhaps I’m just being old-fashioned as I think that formal education / grades shouldn’t matter when judging the (potential) scientific contribution of people.
Antti (Nov. 2, 0745); I completely agree with your comment. I see this as the flaw in the negative-account model of money. Money seems (required by human nature) to be always positive.
In the National-Gift-Certificate (NGC) model, the gift certificate is always positive, a credit, and redeemable at the issuing entity.
Now what happens if my hardware-store-issued gift certificate is redeemable with nothing I want? Well, I could just put the gift certificate in the drawer (which the hardware store would like) or I could trade it to a friend who did want something at the issuing store . As a practical matter, the certificate could be traded several times before ending up at the issuing store and disappearing upon redemption.
What happens if USBS (or any issuing government) issues the NGC? The holder (of the NGC) would have surrendered real goods and services and accepted the NGC in return. No money has changed hands. Hmmm. I guess we could say that the NGC is “money”.
Is this making any sense?
BTW, I am looking forward to your post in English!
Johan said: “What if Carol (who now seems to have the gold) doesn’t want any of the current commodity offerings? Trading appears to come to a halt! But should we realistically assume trading would stop until Carol decides to buy something?”
I would say Carol has the gold as an asset and stores it herself (in possession of it).
If she doesn’t want any of the current commodity offerings, then she saves and the gold is her savings vehicle.
Assume she saves and that is the reason why (there could be other reasons she saves).
Trading stops until:
1) Carol stops saving and spends with the gold.
2) Someone finds more gold.
3) Someone borrows from Carol.
Are there any other scenarios? Not sure.
I assumed away 3) to try to show Antti assets can move and there can be no negative balances while the economy can still function.
“Credit may as well come back to the story.”
Let’s relax the no private debt assumption.
Andy and Carol agree to terms so that Andy borrows from Carol. Andy creates a new bond (IOU) using paper. There is an asset swap. Carol gets the new paper bond as an asset and stores it herself. Andy gets the saved existing gold as an asset and stores it himself. He now spends with the gold.
Lastly, I assumed (unstated) that gold can be “mined” with no cost.
“TMF: As I said, I don’t view gold bullion as money. It’s just a commodity to me (even if it was used as a numeraire, ie. other goods were priced in terms of it). That’s why I don’t really have much to say to you, unless you are getting back to a world with credit (perhaps via discussion with Johan?).”
Credit may exist. It does not have to exist.
Plus, I don’t see why currency can’t be considered a commodity.
“What I view as a crucial step in order to get from a commodity (barter economy) to money (monetary economy) is taken when we have a numeraire which ceases to be a numeraire because its price in terms of “itself” changes. A short explanation:
Imagine a closed, fairly small community where the numeraire is a kilogram of salt; the price of a a watermelon might be 1.5 salt-kilos — “s-kilos” in short. All goods are priced in s-kilos (the unit of account is “s-kilo”). Naturally, the price of the “numeraire good”, a kilogram of salt, is 1 s-kilo.”
I am not getting that part at all.
See here:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/10/medium-of-account-vs-medium-of-exchange.html
“[Update: just to clarify terminology: in my model, gold is the medium of account; and (say) an ounce of gold is the unit of account.]”
I agree with Nick.
I want to use a similar model here. MOA is gold. UOA is 1 oz of gold.
However, MOE is gold, not silver. MOA and MOE are the same.
TMF said: “I assumed away 3) to try to show Antti assets can move and there can be no negative balances while the economy can still function.”
You have misunderstood me. I’m not saying your economy cannot function. I’m just saying that credit is always present in a human SOCIETY. Johan explained how, in practice, debt/credit is involved when people get together to work for a common goal (investment & production).
As long as you define gold bullion as money, we don’t have anything to talk about. Of course there is an asset swap in that case, without there being any debt involved. What I’m talking about is currency as it is today used (coins and notes): for today’s currency, there always exists a negative, offsetting balance somewhere (in the case of coins you have to look carefully, though; coins are comparable to Treasury bonds, at least in the US).
Roger: Yes, your NGC is money (an IOU). And in my theory I’m trying to get rid of that kind of money, WITHOUT losing any real phenomena. The problem I see with your approach is how to explain why we would call a piece of paper a “gift-certificate”, when it entitles the holder of it to nothing else than being relieved of his tax obligation (or fines or other charges collected by the government). I do see some sense behind that kind of thinking, but there are many people who don’t. I think this discussion between Eric Lonergan and Randall Wray is very good example: http://positivemoney.org/2016/03/debt-free-money-brief-reply-randall-wray/ .
I view my theory as a synthesis of Lonergan’s and Wray’s viewpoints. But there’s no use in explaining it to them, as Lonergan cannot see how money is related to debt, and Wray cannot see how money is not really an IOU (there’s no “I” behind it). It’s nearly impossible to get them to see money in a new way, as both have strong convictions, having written whole books about money.
Perhaps needless, but I’ll add this anyway: I’m more in agreement with Wray than with Lonergan. My theory can be classified as a “Credit theory of money” (see Wikipedia). Wray is rightly focusing on the accounting, whereas Lonergan tries to dismiss it.
Antti (Nov. 3 04:37 AM)
I decided my response was much too long for Nick’s blog so I built a new post. It can be found at http://mechanicalmoney.blogspot.com/2016/11/national-gift-certificates-as-analog-to.html
I hope everyone has time to read it and comment.
“You have misunderstood me. I’m not saying your economy cannot function. I’m just saying that credit is always present in a human SOCIETY. Johan explained how, in practice, debt/credit is involved when people get together to work for a common goal (investment & production).”
If Carol does not save (spends with the gold), there is no problem (at least with this simple model). Someone produces. Someone else consumes.
“As long as you define gold bullion as money, we don’t have anything to talk about. Of course there is an asset swap in that case, without there being any debt involved.”
OK.
“What I’m talking about is currency as it is today used (coins and notes): for today’s currency, there always exists a negative, offsetting balance somewhere (in the case of coins you have to look carefully, though; coins are comparable to Treasury bonds, at least in the US).”
Same assumptions (no commercial banks, no private debt, no gov’t debt, no stocks) except add a central bank with no central bank reserves, only currency. Fix gold and currency at 1 oz of gold to $1 of currency both ways with a 100% reserve requirement. That means the central bank only holds gold as an asset.
The system now has 2 MOA’s and 2 MOE’s with a fixed exchange rate. All prices in terms of gold and currency are the same (if it costs 1 oz of gold for something, then the price is $1 of currency). People can choose whether to use currency or gold. Currency is more convenient, so everyone uses it.
Andy takes his 100 oz of gold to the central bank and gets $100 of currency. He now spends the currency with Betty (asset swap and they store the assets themselves). The economy functions just like with 100 oz of gold.
The central bank balance sheet is:
A: 100 oz of gold
L: $100 of currency
Eq = 0
Is there $100 of currency as a liability? Yes.
I don’t consider that a “negative balance”. I don’t consider that debt.
I consider currency a commodity. Currency and gold are 2 commodities with a fixed exchange rate.
TMF: You have now arrived at what I consider a special case in my theory. On the RHS of the bank balance sheet all the credit balances belong to an entity other than the bank itself. But on the LHS some debit balances represent real assets (property, plant & equipment, sometimes gold). These are clearly not debts of other entities. One possibility would be to say that these represent debts of the bank itself (just like one can say that a company owes its real assets to the entities on the RHS of its balance sheet). How would that sound?
What you have presented above is the case of the famous “London goldsmith” taking deposits, while NOT over-issuing deposit-receipts. Did that kind of business model make the London goldsmith a bank? No, it didn’t. The story has it that the goldsmith became a bank when it started to over-issue deposit-receipts (ie. make loans). You can call the deposit-receipts “currency”, but you don’t yet have a bank in your model.
Roger: First, thanks for all the acknowledgements! Very kind of you. I might be repeating myself, but here are some comments on your post:
From the point-of-view of the HOLDER of a NGC, the USBS metaphor works quite well. But from the point-of-view of the ISSUER, I can’t make it work. To start with, you should define what kind of money you are talking about: only fiat money, or also “bank money”? Then, you must decide how a NGC can be redeemed: say, by buying goods for sale in any store in the US, or just by paying taxes (latter is what Randall Wray suggests, having in mind fiat money). “(private) Bank money”, deposit, can disappear when you use it to buy something from any store in the US. Fiat money doesn’t, so in that case you’d only trade the (fiat-money-as-a) NGC with a non-issuer (This begs a question: How can a commercial bank deposit disappear when you buy something from a non-issuer?).
If we only talk about fiat money, and by this we mean “central bank IOUs” (not my terminology), then we face a problem Wray/MMT seem to face, too: If fiat money is a “CB/government IOU”, then why does it disappear when a private entity behind the MBSs on Fed’s balance sheet makes a mortgage payment? Does the government not only allow its IOUs to be used in tax payments, but in mortgage payments too?
As you see, I see problems on the “issuer side” both when it comes to your NGC interpretation and when it comes to interpretation of money as an IOU. I think those problems are very, very hard to solve if we stay within those frameworks.
Antti (Nov. 3, 04:09 PM);
Thanks for reading my post and commenting.
You will be surprised when I say that all of these issues are easily incorporated into the analogy. The difficult part is to explain in a comprehensive way. I begin with a brief background:
Fiat money is nothing more than circulating paper printed by the government. Period. It is given legitimacy by taking care that a bond is issued at the same time circulating paper (or electronic equivalent in every case) is printed. Therefore, it is possible for the central bank to meet with the Treasure (two people from two departments) and exchange products: The CB delivers currency and the Treasure issues a promise to pay it back. Period.
The duration of this distributed paper will depend upon the tax rate charged. Assume that a tax is charged at each transaction (income tax, sales tax, VAT tax). After each tax, less currency remains in circulation.
If there is no tax on a transaction (such as on the expense side for income-tax-on-business-profits), there is no reduction in outstanding currency. This enables the duration of any issued paper to be VERY long.
Banks do not issue money. They only have the character of increasing the amount in measured circulation. Take gold as the example. If gold is the money in use, it is very difficult to increase the amount of gold in-hand. It is easy to write a gold certificate and lend it (as if it were gold in-hand) without telling the owner of the original gold. If this is done repeatedly, the amount of gold on deposit will remain unchanged but the amount of gold CLAIMED will increase. The role of central bank reserves comes into play here to control this process.
With this background complete (in a very sketchy fashion), we need to deal with each of your gaps from the issuers standpoint. We group concerns:
1. Money disappears that can be identified as originating with a bank. This occurs when a loan is paid away. Until the loan is paid, the money issued can circulate between users including government (both as a user and destroyer of money).
2. Money disappears that can be identified as originating with government. Taxes are the mechanism already described.
3. I don’t understand the MBS mortgage question so I will skip that (perhaps to my peril).
4. It remains to tie fiat money to NGCs.
It is easy to see that government can allow everything-mentioned-so-far to occur. Not everyone will agree with me but I think everything described already occurs on a routine basis. The question then, is whether a private store that issued gift certificates could put in place each of these processes and procedures? I think this has happened already, visible and embodied in the form of company stores and company towns. The early development of America had several examples of small communities that were basically owned by one entity. In come cases, the community used company money which was the equivalent of paying bills with gift certificates.
This was not a good deal for the workers. The company had control of the interaction of company currency and the greater currency of the central government.
There is no question that private stores can issue gift certificates. It certainly seems possible for the private use of gift certificates to expand to include borrowing, banking and complete use in trade exchange. This expanded use of gift-certificates creates what I would like to call “A National Gift Certificate Economy”, even if is limited in size to be no more than a company town.
I have attempted to tie fiat money to NGCs. Is the analogy making more sense now?
“TMF: You have now arrived at what I consider a special case in my theory. On the RHS of the bank balance sheet all the credit balances belong to an entity other than the bank itself. But on the LHS some debit balances represent real assets (property, plant & equipment, sometimes gold).”
OK. I think. I am not sure I would say represent. Gold is an asset of the central bank and is stored at the central bank.
“These are clearly not debts of other entities.”
Yes.
“One possibility would be to say that these represent debts of the bank itself (just like one can say that a company owes its real assets to the entities on the RHS of its balance sheet). How would that sound?”
Not sure. I would to need to think about that one.
Now can I say gold and currency move between entities as long as they store the gold and currency themselves (like in their pockets)?
Antti: I should revise one line to introduce the actual issuance of fiat money. Issuance does not occur when the money is created (creation is all within the confines of government). Issuance occurs when government spends the newly created money.
The line “The duration of this distributed paper will depend upon the tax rate charged.” would be much more informative if it read ” After issuance (by government paying it’s obligations), the duration of this newly distributed paper will depend upon the tax rate charged. “
TMF: I used word ‘represent’ to distinguish between accounting and “reality”. Gold is not on/in an account, it’s in a vault (hopefully). These gold holdings are recorded in the ledger, and a balance sheet is just a useful way to present the “big picture” of the ledger. All this is just a minor detail, but I’ve noticed that sometimes people think of the balance sheet as more real than it really is. For instance, it’s up to us to decide whether we want to present negative/debit bank account balances on the LHS or the RHS. I find it most natural to have a bank account “jump” from the RHS to the LHS when the balance becomes negative (debts/”loans” belong to the LHS). If we don’t do that, but present those accounts always on the RHS, subtracting negative balances from positive balances, then the balance sheet loses its beautiful balance where all debit balances are on the LHS and credit balances on the RHS. We could as well then present everything as a list of accounts (no sides), the balances of which should add to zero.
To the point… I think this all started from me insisting that a “transfer of funds” in the books of the bank isn’t really an asset swap, where a certain asset changes its holder. My argument was not about gold or physical currency. If you hold gold or currency, you definitely have an asset which you can transfer to another person by handing it over to him. The other person ends up holding the same asset you held earlier. Why do I insist on looking at the “book-transfer” differently? Here’s why:
Scenario 1: Andy buys bananas from Betty. Andy’s zero balance (no asset) becomes a negative balance ($100 debt). Betty’s zero balance (no asset) becomes a positive balance ($100 asset). No asset swap.
Scenario 2: Andy buys bananas from Betty. Andy’s positive balance ($50 asset) becomes a negative balance ($50 debt). Betty’s zero balance (no asset) becomes a positive balance ($100 asset). Not really an asset swap, because Andy had a $50 asset and Betty ended up with a $100 asset.
Scenario 3: Andy buys bananas from Betty. Andy’s positive balance ($100 asset) becomes a zero balance. Betty’s negative balance ($100 debt) becomes a zero balance (no asset). Not an asset swap, because Andy lost a $100 asset but Betty didn’t get an asset.
Scenario 4: Andy buys bananas from Betty. Andy’s positive balance ($100 asset) becomes a zero balance. Betty’s zero balance (no asset) becomes a positive balance ($100 asset). This might look like an asset swap, but when we look at the previous examples, we might as well conclude here, too, that an asset was written off Andy’s account (it disappeared) and a new asset was created on Betty’s account. Looking at it this way ensures that our interpretation in all the scenarios can follow the same, simple rules.
I think we come now to Nick’s “observational equivalence”. Nick would probably say that there is an asset swap in all cases because WE CAN IMAGINE that the bank first creates a $100 asset on Andy’s account (if there isn’t one) and then this asset is transferred to Betty(‘s account). If Betty’s balance happens to be negative prior to the transaction, then WE CAN IMAGINE that Betty’s account receives an asset from Andy’s account but the bank takes the asset from Betty’s account, because Betty owed the bank. My answer to this would be that nothing can keep us from imagining things, and using our imagination can often be useful, but it might also be useful if we could come up with an interpretation of the PHENOMENA — which clearly doesn’t include the bank creating or taking away this kind of assets — where we didn’t need to imagine so many things. Why do I think it would be useful? Because no one has yet solved the “money problem” in economics by imagining those said things, while very few seem to have been able to resist imagining those things.
Roger: The example of a company town is a good one. There the issuer of the money/LGC (Local Gift Certificate) owns the store(s) where the money/LGC can be presented for redemption; it is redeemed for GOODS by the issuer. Almost everyone has to regularly buy something from the issuer’s store, which makes the money also acceptable in transactions where the issuer is not one of the parties. What bugs me is how to explain that you get something from the government for your NGC when you use it to pay taxes? In that case its more like a Stay-out-of-jail card than a gift-certificate. This is where Lonergan and Wray disagreed, and I’m arguing Lonergan’s case which I believe has some merits. The big question is: If you hold money (or NGC), who owes you and what?
About your definition of “fiat money”: You talk only about paper, but we have to include bank reserves, right? All “high-powered money”.
Antti, Nick seems to think there is a difference between an overdraft of a checking account and a loan.
What happens if Andy gets a loan from the central bank instead of an overdraft?
Antti (Nov. 4 10:52 AM): Antti writes “What bugs me is how to explain that you get something from the government for your NGC when you use it to pay taxes?”.
I can’t argue an explanation here. The best I can do is to suggest a philosophy. I would suggest that tax on land (we pay annual property taxes in America) and trying to get something from government in exchange for my NGC are the same. One rational philosophy is that both are a payment of “rent”. Using land as the example, the American land owner is more-accurately sub-leasing the ground from the government who is the REAL OWNER. This basic philosophy underlays the entire NGC-USBS framework.
Following this philosophy, we could claim that a tax on each exchange of money is a payment of rent for the privilege of using money. Wild?!
Now I would like to change the focus to fiat money, banks, and government.
As I thought about my previous reply, particularly about the timing of issuance, I began to place more importance on this observation: both banks and government create money in a private fashion, which means “behind closed doors”. Let me elaborate: Both banks and in the CB-Treasury-trade create money in a “back-room”, low visibility, event where they prepare to issue money.
Using the NGC example, the issuing store prepares to sell a gift certificate by printing the certificate. Then the store has a choice: recognize the increase in inventory and expense of production immediately OR wait until actual sale and then recognize the event. The first choice makes sense if the intended use of the gift-certificates is to pay for goods and services; the second choice makes sense if the intended use is to sell the gift-certificate for money in the future.
In either case, the actual creation of money or NGC is not visible to the usual measuring tools available to the public. The actual issuance of new money is more visible but identical to using old money; issuance is just another exchange of goods and services for money/NGC.
Turning now to central bank reserves, I think this FED maintenance manual is helpful:
https://www.federalreserve.gov/monetarypolicy/reservereq-reserve-maintenance-manual.htm
I understand the manual to require a reserve deposit at the central bank that increases proportionately to the increase in bank deposits. In other words, it acts like a tax paid in positive money. What is positive money? I think it is money issued by the government but how do you separate it from bank issued money? Well, if positive money is taxed at each reissue/new-loan, the positive money will eventually all be back at the CB. This gives the CB a lot of control.
NICK! In an old post you write: “The red bits of paper are a liability of the owner, but are not an asset of anyone.”
Your red money is my “IOU” and your green money is my “UOM”. See what I wrote above (October 30, 2016 at 10:26 AM):
Let me put it this way:
IOU. I owe you. “I” is me, “U” is society. This is a negative balance on my bank account.
UOM. You owe me. “U” is, again, society at large. “M” is me. This is a positive balance on my bank account.
Negative balance = IOU.
Positive balance = UOM.
IOU ≠ UOM.
When people like Milton Friedman and Eric Lonergan say that UOM is not an IOU, they are right. If they say that there is no offsetting entry for the UOM, and that makes the UOM net wealth for the community, they are wrong. There always exists an IOU for every UOM out there (credit=debit).
What I don’t understand:
1. Why 100 RED UNITS + 100 GREEN UNITS = 200 UNITS (your gross money supply after Betty sold bananas to Andy)? You are adding apples and oranges.
2. Why “garbage” — why not just DEBT? You say, after all, that the red bits of paper are a liability of the owner. One is expected to get rid of one’s debt eventually; the same is true about your garbage. The difference is that you need to DELIVER/TRANSFER garbage to someone else whereas debt can be WRITTEN OFF when you, say, deliver goods to someone else.
3. Somewhat related to the first point: Don’t I have “red units” on my loan account if I agree with my bank on a loan WITHOUT a set repayment schedule and the bank credits my checking account and debits my loan account? In other words, can “red units” only reside on a checking account which has a negative balance?
4. To continue from the previous point (I’m mostly repeating my earlier comment to you somewhere): What makes “green units” and “red units” symmetrical in your system? It’s a lot easier to get rid of “green units” (to buy) than “red units” (to sell). You can try to demand that I get rid of my “red units”, but I’m unemployed and the line of willing buyers of my “expertise on monetary system” has so far been non-existent; so you might need to wait for a long while.
Anyway, it seems we are modelling the same world (this is what you meant with your “observationally equivalent”?). Can you see how it looks a lot like a “multilateral gift economy” (multilateral — not bilateral — trade balance required)? Going back to my iPad/iPhone example above: If I give you a gift, and there’s an expectation that you have to give a counter-gift — not necessarily to me but to someone — then I give you not only a gift but “GARBAGE” too. In my terminology, you are in debt, and you can repay the debt by giving (selling) goods (incl. services) to someone else.
I’m writing a blog post on this, but I wanted to check this with you first.
TMF: My comment to Nick answered, at least partly, your question to me? Let’s see what Nick says.
Antti, what is the link to the old post?
“If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance. The Net money supply remains at 0 units, but the Gross money supply is now 200 units.”
Antti, since you asked, I don’t agree with that.
Andy actually got a loan.
The gross money supply is 100 units. The gross bond supply is 100 units.
Betty’s positive balance is/shows the money of 100 units.
Andy’s negative balance is/shows the bond of 100 units he owes.
“To the point… I think this all started from me insisting that a “transfer of funds” in the books of the bank isn’t really an asset swap, where a certain asset changes its holder.”
Yes.
“My argument was not about gold or physical currency. If you hold gold or currency, you definitely have an asset which you can transfer to another person by handing it over to him.”
OK.
“Scenario 1: Andy buys bananas from Betty. Andy’s zero balance (no asset) becomes a negative balance ($100 debt). Betty’s zero balance (no asset) becomes a positive balance ($100 asset). No asset swap.”
Let’s say Andy gets a loan to borrow currency from the central bank that he puts in his pocket, then Andy buys bananas from Betty with the currency.
TMF: Here’s the link: http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/01/negative-money-in-an-olg-model.html
I agree with you that the gross money supply — if we stick to terminology I find misleading — is 100 units. I don’t understand where Nick gets the idea that an overdraft and a “traditional loan” are different IN KIND, and that an overdraft is “negative money” and can be counted as part of the money supply.
To me, currency is secondary and accounting is primary. Currency is a way to make the accounting more de-centralized. You insist that Andy could take out currency, but I’d rather insist that Andy, or Betty, can take currency to the central bank and the bank will adjust its records accordingly (an anonymous credit balance, currency, is netted against its previous holder’s account balance). Without modern communications technology, and in the absence of currency, Andy and Betty would have needed to visit the central bank (in our imaginary world where they have central bank accounts) to finish their transaction: Andy would instruct the CB to make the entries, and Betty would want to make sure that the entries have been made. Currency made trading a lot easier, but it doesn’t change the logic behind the accounting.
So yes, currency is a specific asset which can “change hands”, but because it refers to central bank accounting — NOT the other way around; account balances don’t tell us how much currency each account owner holds –, this makes the accounting primary.
“My argument was not about gold or physical currency. If you hold gold or currency, you definitely have an asset which you can transfer to another person by handing it over to him.
OK.”
Antti, gold standard scenario I described. Add a costless storage facility (SF for short) for currency.
Andy does not use SF. Betty and Carol do.
Andy gets currency for gold. Gives it to Betty for bananas. Betty takes it to SF. Betty and Carol do an exchange (currency/carrots) using SF for currency. Carol has to withdraw the currency. Gives it to Andy.
Sound good?
TMF: I’m sorry, but we’ve come to a point where I refuse to discuss gold. If you can say something about our current monetary system, or imaginary systems based on the current system, then I’m all ears. It seems you are now in a corner where you don’t have banks but only storage facilities for gold or for “currency” 100 % backed by gold (which is different from a gold STANDARD). If you can’t even have currency only partly backed by gold, then I don’t see banks nor money in your world.
Antti, I have a central bank that creates currency. The gold standard limits the amount of currency that can be created. It just happens that the gold is stored at the central bank. I set it up that way so the central bank would be solvent. That is not really about where the gold is stored.
I can do away with the gold standard except that makes the central bank insolvent. The central bank gives Andy $100 in currency. Trading starts with the conditions of my 1:03 p.m. comment.
There are differences between the central bank and the SF.
One other thing. Are you using ledger to mean balance sheet?
TMF: Can Andy redeem gold from the CB with the currency? (Btw, I’d appreciate a language lesson on word ‘redeem’. Redeem with gold/currency, redeem for gold/currency, redeem in gold/currency, CB redeems, Andy redeems, etc…) Here I am, discussing gold. Empty threats… I’d really like you to explain what makes the CB a CB, other than you naming it so? The history of central banks shows that the institution is more or less inseparable from government debt. One of the debit balances has nearly always been what we call “government debt”. There is no central bank that started as a depository of gold, nor do I know of any that at any point in time happened to have only gold stock as a debit balance in its ledger/books. (In Fed ledger, there is an account for “Gold stock”, and that account has a debit balance.)
I think that you get confused because you insist that your entity is a central bank. It doesn’t make sense to say that the central bank would be INSOLVENT without the gold. It would make sense to say that there would be no central bank nor currency if there were no accounts with debit balances in the CB ledger. A short lesson on Accounting: ACCOUNTS are needed for accounting. We make credit and debit ENTRIES on those accounts to record something. Many accounts form a LEDGER (a “book”). I’d say that’s all there is to accounting itself: accounts and entries. FINANCIAL REPORTING is just that: reporting — not RECORDING. The two most important financial reports are the profit&loss statement and the BALANCE SHEET. Balance sheet is just a way to present the account balances, the “big picture”, in a meaningful way in the end of a chosen day. You probably see the balance sheet as a model of reality, and you talk about it as if it was the reality? This would be understandable. But I think it might also be somewhat misleading.
Here is finally my first blog post in English: http://gifteconomics.blogspot.com/2016/11/a-new-monetary-system-from-scratch-part.html
I believe we must deal with the “unit-of-account/numeraire” question before we proceed, so the first post is only about that.
Nick: I might have taken on a “Sisyphean task”, but I am going to show you what you really mean with your negative and positive “money” 😉