Sunday, 18 October 2020

"Money and Cryptocurrencies"

From J W Mason's blog:

In the quantity view, “money” is something special. The legal monopoly of governments on printing currency is very important, because that is money in a way that other assets aren’t. Credit created by banks is something different. Digital currencies are a threat or opportunity, as the case may be, because they seem to also go in this exclusive “outside money” box.

But from the Minsky-Mehrling-Graeber point of view, there’s nothing special about outside money. It’s just another set of tokens for recording changes in the social ledger. What matters isn’t the way that changes are recorded, but the accounts themselves. From this perspective, “money” isn’t an asset, a thing, it is simply the arbitrary units in which ledgers are kept and contracts denominated.

The starting point, from this point of view, is a network of money payments and commitments. Some of these commitments structure real activity (I show up for work because I expect to receive a wage). Others are free-standing. (I pay you interest because I owe you a debt.) In either case money is simply a unit of account. I have made a promise to you, you have a made a promise to someone else; these promises are in some cases commitments to specific concrete activities (to show up for work and do what you’re told), but in other cases they are quantitative, measured as a certain quantity of “money.”

Good summary. It's what I've always said. Things like gold or the metal in coins have an intrinsic value, but they aren't "money" in the true sense. True "money" is just a measure of indebtedness. I go to work, my employer owes me my wages. For every hour I work, he owes me a bit more. This accrued debt is formally settled at the end of each month when the balance in his account goes down and the balance in mine goes up. If - coincidentally - I use the same bank as they do, then as regards the outside world, absolutely nothing has happened. It's just a ledger entry.

Thought experiment #1. I am free to agree with my employer that he will pay part of my salary in Tesco vouchers. In which case Tesco's bank balance goes up by the amount he paid for the vouchers. Those vouchers are "money" in the narrow sense (no intrinsic value). I can take them to Tesco and exchange them for food.

Tesco is now indebted to me - they owe me some food. The outstanding vouchers which I haven't used yet show up as liabilities on Tesco's balance sheet and are assets from my point of view, I tuck them into my wallet alongside a few fivers or tenners. Tesco and I are both heartily indifferent whether I pay for my shopping with their own vouchers or with fivers and tenners. If I don't use them this week, I'll use them next week instead.

Or instead of giving me vouchers, my employer could pay Tesco to deliver me certain staple food items each week (and cut the salary payment into my bank account). My employer's bank balance goes down and Tesco's goes up - they now owe me some food, exactly the same as if my employer gave me Tesco vouchers. Once delivered, that debt has been paid (in kind rather than in "money") and we are back to where we would have been.

Thought experiment #2. All bank balances and debts (including govermnent bonds) are simply cancelled, bank notes in circulation are declared invalid. Every adult is given a small amount of the new notes in cash and we all start again. A modified version of this actually happened in Germany in 1948, and it did them their economy the world of good. As unfair as it might seem, did the total real wealth of that country plummet or even change in 1948 (ignoring balances held or owed by foreigners)? Clearly not. One man's loss is another man's debt relief and it cancels out to zero.

It would be quite a different thing if the German government had confiscated all gold in the country and dumped it in the Marianas Trench. Gold has intrinsic value and Germany as a whole would have clearly been a lot poorer afterwards.


Graeme said...

I knew this from A level economics in the 1980s. Money is a medium of exchange, a unit of account and a store of value. Depending on the transaction, one of these things is more important than the others. But the other functions still exist.

Ralph Musgrave said...

“True "money" is just a measure of indebtedness”??? That’s true of commercial bank created money, but it’s very debatable as to whether it’s true of CENTRAL bank created money.

Commercial banks create money when they grant loans (as a Bank of England (BoE) article explains). What they grant or give to the borrower is a promise by the bank to supply central bank money to anyone in possession of that promise. E.g. a possessor can go to an ATM and demand central bank created money (e.g. £10 notes).

But government / central bank created money (with which the above article started is very different). That is, what exactly does the BoE owe you in respect of your £10 notes? Nothing much!

Lola said...

Money is anything that is universally acceptable for exchanges and store of value. For example, cigarettes in prisons ans prison camps.

And what Central Banks and governments willfully deny is that money is the invention of the market, not them. But down the ages governments, aka the state, aka the sovereign have always tried to monopolise money and in every instance, every single one, where they have succeeded in attaining that monopoly money has 'failed'. None of them can ever resist 'clipping the coinage'. All of them have inflated the value away. Except, possibly, in West Germany from 1948 until 1999, scarred as they were were by the currency collapse of the interwar years and the consequential (arguably) rise of Nazism. The lesson being that you cannot trust governments or government agencies with the production and management of money. At least not if you want a free society with secure property rights.

The only way, so far discovered, to keep any 'national' money good is to make its value measure something that governments cannot tamper with - that easily - and generally that has been achieved by basing the value on gold and or silver. This was tacitly recognised at Bretton Woods, but that resulted in a fake gold standard based on USD convertibility at a fixed rate that was undone by policies like the Great Society and actions like the Vietnam War which could only be financed by printing money.

So your man is right.

The problem is what to do about The Problem now? Seeing as what I do for a living is directly affected by bad money and directly affects my customers these are questions that exercise me every day.

Mark Wadsworth said...

G, RM, see next post for my reply.

L, my view is less radical. Governments shouldn't run deficits, full stop. Whereby printing notes willy nilly like in Weimar Republic or Zimbabwe is just deficit spending and doomed to fail.

Lola said...

MW - That as well

Robin Smith said...

The Weimar Republic and the Reichsbank did similar on a much larger scale in the 20's too.

And they did confiscate all the gold up to a point. To prevent a run on the new currency.

The big thing is they effectively abolished all the hyper notes and issued rentenmarks against mortgages(just like Location Value Covenants propose).

I have my own 1923 Rentenmark

As soon as poss after they returned to the gold standard, so dredged all the gold from the bottom of the ocean.

This cured hyper inflation within weeks. Sadly, they couldn't bring themselves to proceed with the LVC's (special interests etc)

Hjalmar Schacht was the genius behind it all, a forerunner of Dr. Adrian Wrigley.

What you didn't mention above is important: what creates the root demand for the money people are most likely to use in exchanges? Tescos vouchers don't have much demand, because most people will not accept them in exchange unless they are near Tesco and urgently need food. So poor analogy.

Given money is not a thing, what do you think creates the root demand for it? What's behind this must be the most essential aspect of it.

Please try to refrain from rudeness because some of this is not invented here, or I'll have you moderated :)

Mark Wadsworth said...

RS: "Tescos vouchers don't have much demand, because most people will not accept them in exchange unless they are near Tesco and urgently need food."

You sadly lack imagination. What about a shopping voucher that could be used in every shop and would be accepted as payment by every business, or redeemed at Amazon, eBay etc? And Tesco sells a lot more than just food.

"Given money is not a thing, what do you think creates the root demand for it?"

"Money" constantly re-invents itself because it makes exchange of goods and services so much easier than barter, it enables people to smooth their consumption patterns to maximise marginal utility etc.

Anomalous Cowshed said...

Root demand for money?

It's a network effect. Once any particular form begins to be accepted, then the value of that form rises according to the number of transactions it gives you access to. More potential transactions, the more demand for money.

Mark Wadsworth said...

AC, good point, once it's kicked off somehow, we have the 'network effect' as well.