From the comments to the previous post:
Graeme: I knew this from A level economics in the 1980s. Money is a medium of exchange (1), a unit of account (2) and a store of value (3). Depending on the transaction, one of these things is more important than the others. But the other functions still exist.
(1) and (2) are clearly true. That would apply to things with intrinsic value as well, gold in historic times or cigarettes in prison. "Money" has no intrinsic value (numbers on your bank statement or bank notes or shopping vouchers) but is still (3) a store of value, because it is a claim on something else. The fact that you can swap these for goods and services gives them value. If a shop sells vouchers, it has cash in the bank and an equal and opposite liability to provide goods in future. It does not make a profit by selling the vouchers (unless they lapse, in which case it's a win for the shop and a loss to whoever let them lapse) and the existence of those vouchers does not change the total amounts of goods available to consume now or in future.
Ralph Musgrave: 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!
The BoE is part of the government. When it's time to pay your tax, you could pay it in bank notes which the self-same government printed in the first place. Once you've paid your tax, they could throw all those bank notes on a bonfire. Basic Modern Monetary Theory. The same logic applies to numbers on bank statements, they appear out of nowhere (printing) and disappear into nothing (incinerating).
What's in it for the government and what gives those bank notes value?
You can see them as permission slips to earn money. If you want to earn £100,000 real money in the private economy, you need to acquire £40,000's worth of those permits by the end of the year to hand back as income tax. Even if you invoice only in foreign currencies and earn €110,000 or $120,000 or whatever, you will still need to get your hands on £40,000's worth of permits.
The government puts the permits into circulation by printing them (out of nowhere) and using them to pay public sector salaries, old age pensions, welfare etc (and increasingly, giving money to their mates for nothing in return). Businesses and workers have to get hold of those permits to pay their tax and they do this by providing a certain fraction of their output to public sector workers, pensioners etc in exchange for the permits. Those salaries and pensions transfer output from private businesses to public sector workers and pensioners, which is the whole idea.
If you yourself have more permits than you need to pay tax, you use them to buy goods and services from a business which needs more. The logic applies just as well to rationing vouchers. A non-smoker who wants to bake a cake swaps his tobacco vouchers with a smoker who doesn't need his full quota of eggs or flour. Or the non-smoker can sell them to a smoker and use the cash to buy something else that isn't rationed. The rationing vouchers have no intrinsic value and cost very little to create, but they still have value. Once used, they go on a bonfire.
Monday, 19 October 2020
"Money" again
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38 comments:
Which, IMHO, is exactly why nationalised money (and the current commercial FRB settlement - they are inextricably interlinked, interdependent even) is such a disaster and needs scrapping. It cannot be 'reformed'.
L, how else is the government supposed to pay for stuff?
And FRB is only harmful if it is used to inflate land prices. As regards the private sector, banks are just glorified debt collectors. The depositors are the ultimate lenders, and the bank collect debts from borrowers and charges a commission i.e. it charges borrowers interest, keeps some for itself and pays the rest to depositors.
This is a pretty good expose.
https://www.econlib.org/library/Columns/y2019/Hummelmonetarytheory.html
I'm curious why no one in the land lubbers movement is talking about it. I know some are, but the in the movement generally the absence of discussion is conspicuous. Maybe it is because the idea is 'not invented here' which is typical for an ideological institution.
Also, are you sure it goes on the bonfire? Often income from selling guilts will be re spent. The balances between central bank and treasury just being an accounting fraud. Playing for time to eat away at inflation.
I think, or would like to believe, that govt money mostly ends up in land values. Even if true, convincing the common man of it has been a resounding failure of Georgian.
Here's an interesting thought: if fiat money is ok for government to use for spending, then why is it not for you or I? That government are more trusted than an individual to spend on the good is not a credible position to stand on. It's a bit like saying boldly that democracy is an inherently good thing
RS, a "gilt" (please note correct spelling) is the same as a bank note or a number in a computer, it's just a bit of paper or a number in a computer.
What do think happens when the government redeems a gilt? It just swaps it for a different number in a different computer. Or they could redeem it with bank notes and throw the original bit of paper on a bonfire.
MW. It can tax land for a start. A user charge even. I think someone has already thought of that.
I said the 'current FRB settlement'. I did not say scrap/outlaw FRB. I do say that banking and money needs to be reformed, especially the bit where when you deposit money in a bank it becomes the banks money. Banks can me made to operate as 'warehouses' for current accounts, i.e. demand deposits. They can offer whatever terms they like for term deposits, interest rate and risk would then be related.
I actually do not mind governments borrowing money, real money that is, too much. What I do mind is government spending money. Once you (I?) scrap the Bank of England the government would have to operate prudently.
...as would the banks, come to that.
Or to look at it another way the current money and banking settlement is MMT light. In which it is absolutely bound to fail.
Going back to RM's question about what the BoE gives you for your £10, I actually asked one of their apparatchiks that question. "If I come to you and exercise your 'promise to pay the bearer on demand the sum of £10' what will you give me?" "Another Tenner" quoth the apparatchik.
The 'promise' is / was a promise to deliver specie to the value of £10. And from 1844 to 1916 that was true. The UK came off TGS in 1916 (to pay for a war - surprise surprise) https://en.wikipedia.org/wiki/Gold_standard#Impact_of_World_War_I . Churchill then brought it back in 1925, at the pre-war price., which collapsed in 1931. Then Bretton Woods, that failed.
To see that malodorous effects just look at the inflation rate in the UK from say 1750 to 2020 https://monevator.com/wp-content/uploads/2013/08/UK-inflation-history-graph.jpg
As can be seen wars = inflation.
So which was the most expensive war in history?
Hi Mark, you are not an observer of irony right :) ?
All the stuff on the bonfire gets re-spent. So how much gets withdrawn is the question. I agree with you I think in that its just an exchange of proxies for the money. I'm asking if there's really inflation going on, who in the end is paying for it, and more still, who is benefitting. I think its rent seekers like me. And why are the MMT nut cases not discussing it?
The way things are, I see government creating money and spending it is not better than me doing it and it being called forgery. Words, just words. And beliefs which help us to think the words are reality.
Lola, agreed on your points, particularly MMT light. I just wish the MMT folks would come to terms with that and stop fannying about with it.
For example, suggest to them the best way to legitimately control finances is to withdraw the money created by confiscating the unearned rents (just like Location Value Covenants purport) and you'd get a bitter and spiteful response I expect for scrutinising their doctrine so well.
Wars? The current one - A stealth war of conquest by the stimulus, where the people of all nations are the enemy.
I agree, Mark. The facts (that money is a means of exchange, unit of account, store of value, etc.) are all true but the fundamental reason a £1 coin has a value is that it is a government IOU that you can use to pay your debts to the government or the banks. And because nearly everyone has debts with the government, the banks, or both, nearly everyone will accept it in payment for debts you owe them.
Does it matter whether the government collects all the IOUs and reissues them instead of burning them and creating new ones? Not at all. The coins and notes were just proof that the government owed you something. Once the government gets them back, the government doesn't owe you anything any more, so it doesn't care about the proof any more.
L: " It can tax land for a start" Yes obviously :-) but the logic still applies. If you have a £10,000 LVT bill, you have to scrape together £10,000's worth of govt issued vouchers to be able to settle it.
"Going back to RM's question about what the BoE gives you for your £10, I actually asked one of their apparatchiks that question. "If I come to you and exercise your 'promise to pay the bearer on demand the sum of £10' what will you give me?" "Another Tenner" quoth the apparatchik."
Not really. What the government gives you is £10 off your tax bill. if you don't have a tax bill, you give the note to somebody who does have a tax bill and he gives your £10 of goods or services in return.
D, thanks, exactly!
RS, dumb statement "All the stuff on the bonfire gets re-spent"
I refer you to Derek's summary:
"Does it matter whether the government collects all the IOUs and reissues them instead of burning them and creating new ones? Not at all.
The coins and notes were just proof that the government owed you something. Once the government gets them back, the government doesn't owe you anything any more, so it doesn't care about the proof any more."
" L: " It can tax land for a start" Yes obviously :-) but the logic still applies. If you have a £10,000 LVT bill, you have to scrape together £10,000's worth of govt issued vouchers to be able to settle it.
Why?
If thems vouchers are a paper receipt for a know weight of gold (say) you have to deliver that know weight of gold or silver or whatever. GBP is/was a receipt for a certain quantity of specie. Only since 1971 has that totally gone by the board.
The government only enacts legal tender laws to make its life easier, not the lives of its citizens. You have to understand that government exists to enforce laws. Once it runs out of laws to enforce it invents some more to give it more opportunity for extortion. Legal tender laws are double bubble as far as government is concerned. It nationalises money and makes privet money illegal. It's a racket.
privet (ho ho) = private
'Privet' money being what we have now. (See HHGTTG and the Golgafrinchams and the B Ark and what happened next)
Off topic, but re my previous comment....
https://hitchhikers.fandom.com/wiki/Golgafrincham
It might be coming true here...oooo eerr...
Isn't this topic is the mother of all rabbit holes?
Privet money. That's money that you get from hedge funds, isn't it?
B, it is a typical rabbit hole subject, academics and think tanks earn good money spouting contradictory and incorrect garbage on the topic, so it's no wonder people are confused.
My view is, and Derek appears to agree, that it is all very simple.
MW D Trouble is when you do put the government in charge of money, it always messes it up. Deliberately. For its own ends. And as you two, rightly, identify that's where we are now.
What do you land lubbers think about Modern Monetary Theory?
RS Not a lot. I try not to.
RS, MMT is perfectly simple. It is a good description of how things actually work. What it does not do is give any guidance as to economic policy.
It's like describing how an atomic bomb works. That doesn't tell you whether you should ever use one, and if so, when and why.
"It nationalises money and makes privet money illegal. "
AFAIK, private money is not illegal, viz the various exchange schemes using local currencies, e.g. the Stroud pound, that were poular a few years ago.
B, most money is "private money". We just denominate it in the same units as the UK govt uses for convenience. Tesco vouchers, Nectar points, bank deposits, shares and bonds in companies, private debts etc. All effectively "money".
MW Indeed. That is an interesting observation, about stuff like Tesco vouchers. Money, strictly speaking, needs to be universally acceptable as a way for paying for a good or service. As far as I know you can't spend Tesco vouchers at Sainsbos. Or the dentists. OTOH there was a private trade in luncheon vouchers (remember them?) possibly because they were accepted in payment in multiple outlets both for 'lunch' and for staples like bread and cakes. But strictly speaking they aren't 'money'.
At the same time all that credit creation by (notionally) private banks is clearly money. It looks to me like they have been given special powers by the national money authorities to make more national money. Some people (Rothbard e.g.) think that that is fraud, or counterfeiting.
Shares are interesting. They are strictly part ownership of an enterprise with a face value which mostly bears no relationship to their market price. The question is would you take a share in a publicly quoted enterprise in payment for your services? I think, yes, in certain circumstances and most like at a discount to its market price. But to the creditor that would be second best to cash. I am not sure then that shares are money.
L, OK, luncheon vouchers might be a better example. They were very much "money". They had no intrinsic value, but were a claim on [whatever you chose to spend them on]. See also "Traveller's Cheques".
Imagine that LV's were universally acceptable as payment, and you were paid your wages in cash (like in the good old days). You'd be happy if you got a load of LV's in your pay packet (which your employer in turn had received in payment from its customers).
Banks, in a perfect world, would issue truly private money i.e. backed by claims on other people's private money (loans) with all risks shared between borrower, bank and depositors.
But banks are:
1. Insured by the government "for free", clearly bad.
2. Most of their assets are loans secured on inflated land prices, which would be much lower if we had LVT, clearly also bad.
Shares are arguable, of course. I stuck that in for fun.
That's the thing: money is always an IOU. so Tesco's vouchers, Luncheon Vouchers, Clydesdale Bank tenners and Bank of England fivers are all money. But some of them are better money than others. You can use the BoE voucher anywhere in the UK, you can use the Clydesdale voucher anywhere in Scotland, you can use the LV anywhere that shows the symbol, and you can use the Tesco's voucher at any Tesco's. So the BoE £5 note is worth more to you than a Tesco £5 voucher, especially if you live a long way from a Tesco, or you owe the government money.
Anyone can create and issue money but other people will usually only accept it when it can be widely used to settle debts, the widely the better.
Totally @Derek
Its also why commodities are worse as proxies for money. Take gold, would you want to carry an acid test kit around with you just to buy food.
Also, for the Scottish fiver, who would believe its worth less than an English fiver, in Glasgow. I know cos I used to carry one with me to test this experiment on the street. Scots still find the English fiver a teeny bit more valuable because it's a teeny little bit more likely to be accepted by others
Am still curious what you land lubbers think creates the root demand for the most valuable money tokens?
Landlords, Robin. With the Landlord-in-Chief being the government. A landlord can insist that we pay rent to him of any type he wants. And we must pay if we want to continue to use his land.
So if he says the rent is 6 tons of wheat per year, his tenants have to find 6 tons, even if they're not farmers. Once he has issued that demand, he can issue vouchers for pounds of wheat in payment to the non-farmers who do work for him. The non-farmers can then give him those wheat vouchers on rent day, along with a reduced amount of wheat. In fact if they've collected 13,440 pound vouchers, they don't have to give him any wheat, just the vouchers. And he doesn't have to give them any wheat for the vouchers.
A more eccentric landlord might say that he wants the rent paid in unicorns. Which will cause problems if the tenants have to come up with actual unicorns, seeing as there aren't a lot around. But provided that the landlord issues unicorn IOUs as payment, the tenants will still be able to pay their rent, even though unicorns don't actually exist.
That's the basis for root demand. In the UK everybody owes the Landlord-in-Chief so many pounds of sterling silver per year but never actually has to hand it over because the government will also accept its vouchers for sterling silver. And as a(n intended) consequence, the government never has to give anyone any silver for their vouchers.
D et al.
The portability of gold, or other metallic element suitable as money.
The origin of paper money is claims on gold (say).
Gold (say) creates an entirely neutral 'value' for money that is difficult to distort.
Derek, thanks for more excellent examples!
L, gold is not "money" as it has intrinsic value. Paying with physical gold is like barter. What if I need some silver, and I go to the shop to buy it and pay with gold coins? That's just a swap of one real thing for another real thing.
"The origin of paper money is claims on gold (say)."
Almost certainly true, but as Derek explains, governments soon worked out that if you pay in "vouchers" and demand tax (or rent) in the same "vouchers" they don't need to be backed by anything. It is up to taxpayers to provide goods and services in exchange for enough vouchers to be able to pay their tax. Which is the whole point.
MW. Yes. That's the point. Gold has intrinsic value which all market actors can agree on and can measure exchanges in. Gold is, was, 'money'. As was silver and copper (mostly as a fraction of the gold price - and yes, bi-metallic standards do have issues). The commonly rated intrinsic value and its properties made it very suitable as money.
Over time a system of 'bank notes, was developed by 'gold warehouses' - goldsmiths mainly - to enable exchanges to take place without actually having to carry gold coins about with you. The value of Sterling was as such and such weight of 'good gold'- the 'I promise to pay the bearer on demand the sum of One Pound' bit. It was not governments that worked out paper money, it was The Market.
Up until about 1844 any bank could issue Bank Notes, as long as what they issued was backed by gold (plus a balance not backed by gold) The Bank Charter Acts overturned that right for new banks and gradually private Bank Notes died out. (the last were being issued up until about 1925).
After the Gold Standard was first abandoned in 1914 to permit the BoE to issue notes not backed by specie to pay war workers wages there were several attempts to get back on it. Notably Churchill's, which failed because he wanted to use the pre-1914 gold price as the standard, ignoring the fact that the rampant money printing from 1914 had halved the value of Sterling. And its all bee downhill since then. And you can see the effect in the inflation figures. Sterling has lost ~98% of its value since 1945, mostly from 1971.
Whatever way you cut it Gold was and remains the fundamental universally acceptable 'money'. Everyone trusts it.No-one trusts nationalised currencies like GBP.
Of course this is the 'commodity theory of money'. There is also the 'credit theory of money'. And this latter fits with MW's comments - IMHO.
My prejudice is that I do not believe that you can trust governments with money, unless there is some independent way of ensuring the consistent value of that money that cannot be corrupted.
L, maybe people don't trust "GBP" as much as they trust gold, that's personal preference. But there will always be demand for GBP because you need some to pay your tax - see Derek's explanation. That's all that's needed for these purposes.
Whether you trust "the government" is another topic. The UK government has been getting steadily more wasteful and corrupt for thirty years, but it still gets most of what it does right, just rather expensively and inefficiently.
I agree with all that, Lola. Gold was money before 1971. Partly because people like it (thus giving it intrinsic value), partly because it doesn't rust or rot (making it extremely savable), and partly because governments could use it for international trade purposes (high value/volume ratio so very transportable). Plus its value has been independent of national government policy, so it's even more widely acceptable than any national currency. Or at least it was until the Second World War set the US Dollar up as THE international currency, because of the amount of them owed to the US and to its agents, the World Bank and the IMF.
But since WW2, countries have needed USD even more than they have needed gold, so while gold hasn't gone away, the only governments seriously collecting it are countries that want to get out from under the US stranglehold on international finance.
So gold is still money today. It's probably more widely accepted than Luncheon Vouchers but not so widely accepted as US dollars.
D. I was in conversation with a Belgian hotelier about this topic some years ago. I asked which whether he'd accept god as payment for our stay. he said absolutely. Or USD? he's prefer gold he said...
MW. Yes. But. The origin of GBP as a weight of gold. And even though the government might want to insist that they price your tax in 'official' money they'd still accept the god equivalent if offered.
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