Thursday, 21 September 2017

We did basic logic at school.

Me, a few days ago:

Rather counter-intuitively, government issued 'money' does not require any asset-backing whatsoever, all the government needs is a system of whereby people HAVE TO hand those notes back to the government which effectively 'unprints' them again. The mistake that the Weimar Republic et al made was not taxing enough.

There followed a lively discussion where people desperately tried to disprove this truism by giving examples of lots of other things that are used as money.

Bayard finished with this supposed killer counter-argument:

For a currency to have value, it simply has to be generally accepted for the payment of debts.

Correct.

The government doesn't have to be involved.

Correct.

There are loads of examples of this: cowrie shells, cigarettes, Maria Theresa dollars, LETS, C18th private currencies, the ones previously mentioned, etc etc.

Correct. But so what?

We did basic logic at school, as well as Venn diagrams. I remember the teacher saying things like "Milk is a drink. But not all drinks are milk. And milk isn't always used for drinking."

In other words, you can't disprove that milk is a drink by saying that whiskey is a drink. And just because people drink milk doesn't mean it can't be used for other things (like making other dairy products).

So let's go back to Bayard's argument part 1:

For a currency to have value, it simply has to be generally accepted for the payment of debts.

Government printed money (be it paper or electronic) has value because it can be used for payment of tax debts. This is why it has value, which is exactly what I said. Those other things are also used as money for various reasons entirely irrelevant to the discussion.

Take a Bond Bug, they are truly shit cars, but you have to pay about £8,000 for one in good nick. Or you could buy a brand new one of these for about £8,000.

So we have two "cars", both worth about £8,000. The Bond Bug has scarcity/sentimental/novelty value. The other has four seats, airbags and a decent stereo. Same basic thing, same value/price, but for totally different reasons. You can't disprove that Bond Bugs sell for about £8,000 by comparing them with a brand new Kia Picanto or vice versa.

23 comments:

Dinero said...

The predominant form of money in the economy is commercial bank deposits, not government issued money. People dont have access to central bank deposits and rarely use notes for large purchases. The Government taxes deposits, spends deposits and borrows deposits. The population uses deposits for spending, borrowing and saving. And so really its commercial bank deposits that are the predominant form of money used in the economy.

Lola said...

It's the 'legal tender' laws that makes what you say true. Without those the government cannot mandate money or more accurately currency. From memory HMRC will accept anything in payment of tax debts as long as it an be converted to GBP. So you can pay in cows, chickens, classic cars, etc. etc. or gold. Gold is universally acceptable as a medium of exchange (we have got out of the habit in the UK) so it is by definition money. We have got conditioned to valuing gold in GBP, but actually it was previously (until maybe 1914 and certainly from 1971) the other way about, GBP was valued in gold.

Money is the invention of the 'market'. Princes and Governments saw how they could exploit it and nationalised it. Some princes and governments realised that if you mess with Money bad things happen and don't. Most, throughout history, cannot keep their sticky fingers off it and always perpetrate all sorts of frauds on the public by way of unsound money. (Apropos of which I was reading about Darius III the other day and he seems to have understood the need for sound money and the coinage of his Empire was used all over the ancient world outside his Empire.)

FtAoD I am NOT a 'gold bug'. But I trust governments no further than I can spit a rat.

Mark Wadsworth said...

Din, did you not do Venn diagrams and logic at school? Of course most payments are made bank to bank. So bloody what? I can't be bothered to explain it again.

L, agreed.

Dinero said...


Venn diagrams , the circle for government money would be very small. Used by banks for clearing debts between each other and by the population for small cash purchases. Bank deposits outnumber, government money by multiples of ten.

The payments are not just made from bank to bank , the payments are the deposits themselves.

Mark Wadsworth said...

Din. You've missed the point and neither of those statements are remotely correct.

Dinero said...

The point is in the first post 11/9/17 you said that money gets its value from government taxation , I am pointing out that is incorrect as the predominant form of money used in the economy is bank deposits. And the value of bank deposits is the borrowers commitment to sell things to deposit holders that deposit holders value.

Mark Wadsworth said...

Din, I said absolutely nothing of the sort!!

I said "government issued 'money' does not require any asset-backing whatsoever, all the government needs is a system of whereby people HAVE TO hand those notes back to the government which effectively 'unprints' them again."

Please note the words "government issued money".

The same way, "bank issued money" has value because depositors can use it to buy things from mortgage borrowers.

Mark Wadsworth said...

Din: "Venn diagrams , the circle for government money would be very small."

Nope, govt collects and spends about 40% of nominal GDP. A chunk of nominal GDP is made up figures for non-cash transactions, so on a day to day basis, there is about 1 government £ being spent for every £2 real economy pounds being spent.

"Used by banks for clearing debts between each other and by the population for small cash purchases."

I'm not just talking about notes and coins, I mean all government money included the electronic stuff.

"Bank deposits outnumber, government money by multiples of ten."

Nope. Not true. Total household and business deposits with banks and total government debts are both around £1.5 trillion, give or take 20%, I can't be bothered looking it up.

Even if any of your statements WERE true, which they are clearly NOT, it would still not be germane to my basic point.

Mike W said...

'It's the 'legal tender' laws that makes what you say true. Without those the government cannot mandate money or more accurately currency.'

Gosh Lola you really are forcing the tail to wag the dog today.Guv invents into existence the legal tender laws too. Surely? As some bloke said, the state chooses the unit of account and edits the dictionary. You know who :)

'From memory HMRC will accept anything in payment of tax debts as long as it an be converted to GBP. So you can pay in cows, chickens, classic cars, etc. etc. or gold.'

I have often wondered how many farmers have dropped half a ton of carrots on the desk of their local HMRC and said 'there you go! Paid 1975/76 in full.' Again surely the state says,' 'nope - sell them at the market and come back with the money!' In the end (dont pay) Guv will take your stuff (see laws above), but it still converts property into currency, bankruptcy or forced sale, in the market, that money pays your tax bill for you.


'Money is the invention of the 'market': No, No, No, no no....no It is the invention of the state. Sure it (the state) does what you hate most - 100% - (ie spunks the real goods and services that it has 'purchased' with the self-defined currency, but that is a different matter.

Darius story - I like the story of Roman coins, bookkeeping and units of account being used in Dark Ages 'Warlord Britain' long after the Empire collapsed. In the end the gold and silver coins had been long traded away, but the terms and units and language remained even though debts could never be exchanged/ extinguished by Roman coin.

Going back to MW starting point. The State/Tax provides the constant demand for the currency. I still think about what MMT 'tax drives the currency' means.Well everyone will need it during the year sure. I think it also provides the stabilty that allows the market to playout within the state. We serfs are not forced to provide goods and services AND be currency speculators every day of the week.This is what we get out of the bargain. Perhaps we should move at it from that direction? Final point.Mr Lola I may well wish to buy in your financial services one day. But I certainly will never promise to pay my debt to you, in say, 60, 90 days, in BitCoin. What the fuck will be on the invoice? :)

Dinero said...

>Mike W

Money is not the invention of the state. Coins are but they have always been a smaller subset of circulating liabilities.

Bayard said...

Mark, as I pointed out at the end of the comments from which you quote, I wasn't disagreeing with you, but with one of the other commenters, hence your failure to find any congruence between your original points and my comments "disproving" them.

Mike W, as Mark points out by quoting me, money has often existed without any intervention by the state. All money is is a debt token. Why do you need the state for that?

Dinero said...

> Mark W

What are you referring to when you say government money, in your last comment you are including treasury bonds as money. People don't use Treasury bonds as money.
What you call "The electronic stuff" CB deposits is small compared to commercial bank deposits.
When the BoE intervenes to regulate the value of money it is controlling the amount of commercial bank deposits. That illustrates again that the money in the economy is bank deposits. Money is that what is used to facilitate transactions. When a transaction occurs between two deposit holders of bank, the banks assets including CB deposits where they are present, are not effected. In the UK there are no mandated CB reserve requirements, ie a bank can operate with no "government money" Thus illustrating again that most money is commercial bank liabilities. What I am referring to starts with the 1800s Real Bills Doctrine historically associated with the 19th century Directors of the Bank of England , and is similar to that often discussed as Monetary Realism on the pragcap.com website.

Mike W said...

Thanks Din, Bayard,

'Money is not the invention of the state. Coins are but they have always been a smaller subset of circulating liabilities.'

I was reading your thread as well. But I was not sure what was at stake. I read MarkW as not simply meaning: MO money (notes and coins).I read you as meaning something more but could not get at your point. Sorry. However I agree with the idea of gold/ silver coins as a special case. My reading at the moment is that they appear at times of distrust and mercenary wafare: Aristole's Greece and 15th century Italy as examples.where old debt agreements breakdown. So going back, could you give me three core examples of your 'money' not 'commodities', detached from the major states taxing subjects say, anydates from 1066 to today.

Lola said...

It might be useful in this discussion to separate the terms 'currency' and 'money'.

History tells us that money - medium of exchange, store of value, unit of account - 'emerged' from private trading. This included private coinage from trusted mints. There's a good book on this by (I think) a Mr Stigler. This emergence of money in the private market is irrefutable. And most of this money was based on a universally acceptable commodity, usually gold for obvious reasons.

Private money also existed in England then the UK up to about 1840 until the various Bank Charter Acts made the issuing of bank notes a monopoly of the B of E.

At which point we get into 'currency', and the legal tender argument.

Returning for the nonce to the 'value of money' it may well be mandated by the State as £1 or whatever but the actual 'value' of any currency unit is a reflection of the value created by production.

Overall, as I have said, governments are utterly untrustworthy. Necessary, but deeply untrustworthy. 'Put not your trust in princes' as the Bible says., and for good reason. And one of the prime reasons for not trusting governments is the perennial - millennial - abuse of money by the manufacture of bad currency. To achieve that they have some core tools. Legal tender laws, captive central banks, taxation. And in that latter sense currency does get its value from government, but that is not its 'value' as created by value creation by private business.

IMHO life would be a whole lot better if the state got right of the money business, but of course that would also make reform of the banking system necessary.

Mark Wadsworth said...

Din:

"What are you referring to when you say government money, in your last comment you are including treasury bonds as money. People don't use Treasury bonds as money."

It is irrelevant for these purposes whether you count treasury bonds as money or not.

But they follow the general observation that they only have value because the government that issued them can collect taxes.

The rest of your rant about the banking system is completely irrelevant.

You seem to think that you can defeat an argument by constantly changing the topic to something that has fuck all to do with the original statement. I do wonder for your sanity.

MikeW, thanks for back up.

Dinero said...

The discussion had moved on.

Mike W said...

Bayard,

Why do you need the state....?

I was thinking about this, I guess Minsky shapes my point of view.

He famously says:

'Anyone can create money (but) the problem lies in getting it accepted'.

So this is the pivot if you like. The first part is the market (your) view. Money is invented into existence to trade with, it happens all the time throughout history.No problem.
The second part is the state bit, but why do some units of account, tokens, etc, etc survive and most disappear? Because there is a force 'outside the market' that means some get accepted, but most do not.This is: State Tax Debt.

I was impressed by a memory of T H Huxley. At least I think it was attributed to him. Teaching Victorian students biology they were asked: Why is the world not full of elephants? They are big hard to kill,etc, etc why are we not drowning in them? As you can imagine after an hour or two of working out why, even the dullest English public schoolboy would have a good grasp of Darwin's great theory.
It seems to me Minsky forces us to work in the same direction. If money can be invented so easily, at all times, in all places, why are we not actually drowing in competing currencies?

Just asking :)

Dinero said...

from the the original post "...whatsoever, all the government needs is a system of whereby people HAVE TO hand those notes back to the government which effectively 'unprints' them again...."

Referring to the process of tax payment ,that is not correct, The money is either in the account of the Tax payers bank or the Treasury’s account , at no point is it "unprinted" .

Mark Wadsworth said...

Din, you keep talking about 'deposits' as if they were something real or fixed.

They are not, they can be created and destroyed at the stroke of a pen or the touch of a button, provided the bank can find a counter-party on each side.

Consider - Miss A wants to sell her house. Mr B takes out a mortgage of £100 with Bank C and Miss A deposits her sale proceeds with Bank C.

The deposit and mortgage have appeared out of nowhere.

Miss A and Mr B then fall in love and get married. They pool their assets and liabilities, so she gives him her £100 and he uses it to pay off the mortgage.

The deposit and mortgage now disappear in a puff of smoke.

It's the principle with bank notes and coins. You could in theory pay your tax bill with £20 notes and the taxman could throw them on a bonfire. They are gone. Then the government prints some more notes and pays people's wages or pensions with them.

Bayard said...

Mike W,

to continue with your evolution comparison, I would guess that we are not drowning in competing currencies, because there is no demand for them. Most people are happy using the currencies that states provide. It is only when these mechanisms break down that people resort to other forms of currency, which are less convenient than state currencies, but better than nothing at all. In the C18th, the shortage of small change from the Royal Mint meant that some large employers and towns and cities minted their own coins. When the Royal Mint was sorted out, these coins disappeared again.

Now that people are getting unhappy with state currencies again, because of general government restrictions and snooping, once again alternative (crypto)currencies have appeared and we will soon be drowning in them.

Mark Wadsworth said...

B: " Most people are happy using the currencies that states provide."

For the most part, we do not use pounds that the UK government has provided. We merely use it as a unit of measurement when setting our prices or recording private debts, because it is convenient if everybody uses the same units.

(For sure, if you are a state employee or pensioner, the money you get is provided by the government in a very real sense, but that's about one-third to one-half of the economy).

For example, when all those European countries converted everything to Euros, that's about as exciting as road signs in miles being replaced with road signs in kilometres. They just used a different unit of measurement.

Money is not really a thing in itself, it is a unit of measurement of something else (relative prices or indebtedness).

Mike W said...

Bayard,

I agree with what you say above. Which sails, I think, very close to agreeing the money we use 'mostly' is a creature of the state and of its laws for good reasons :)

I agree with your prediction too. We are about to be hit by a wave of new currencies to 'buy' into. It may even have been you on the recent Steve L BitCoin thread here who pointed out the only folks who will get rich will be the sellers of the 'gold panning equipment'.Yep.

I would like with Lola and youself and all radical Libertarian's etc that the first bit of the M quote, 'Anyone can create money', to be true, in and of itself. Because the next bit would be, 'right lets get on with it.' But you have that stability problem. Am I always relying on the 'greater fool' to take the tokens and 'buy' into the system with me? And that drives the currency year in year out?

Just as an anecdotal but also shaped my accepting the state theory. I heard an argument by someone who had been involved in many 'lets' type schemes.It was at a group fighting for the 'City Pound' here. The main thing I got out of it was how suddenly they could collapse under the weight of cheating and failure of trust etc, etc.
I left the meeting knowing the scheme was dead in the water, until this 'Northen pound' could be used to pay the council tax of course!

Lola said...

MikeW. There is no problem in me and you creating money. (I have actually explored it as a business opportunity, would you believe. My business is a sort of proto private bank. All I need is enough gold in my vaults and I would have so many customers using 'my' money I wouldn't know where to turn - whilst I (we?) profit from seignorage). But we will be prevented from doing so by The Powers That Be because we would be making 'good' money and as it was not at a fixed price with their 'bad' money people would choose ours.