Randy Wray: American Colonial Currency (Debt Free Money, Part 4)

By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally published at New Economic Perspectives

In Part Three I argued that the government issues currency as its liability and imposes tax liabilities on its subjects/citizens that can be paid in that currency. When taxes are paid, both the government and its taxpayers are “redeemed”. I cited Innes’s argument that the universal law of credit is that the issuer of a debt must take it back. This is the fundamental notion behind redemption of debts.

To be sure, debt is much older than money. No human has ever escaped debt. At birth, you are indebted to your parents, your kin, and your gods. You spend your lifetime incurring new debts and repaying old debts and accumulating credits that are the debts of others. If you earn enough credits, you join the Redeemer and make it to the Promised Land after death; if you don’t you join Satan—the original tax collector–in hell.

Our modern rituals and accounting and terminology evolved from these ancient origins. Debts began to be monetized and recorded at least six millennia ago. The monetization probably grew out of the Tribal practice called Wergild–the assessment and collection of fines paid for transgressions—with the rise of class society and the emergence of authorities. Writing was apparently invented to keep track of debts; in other words, it was an accounting invention.

Over time, the technology used for accounting changed—from scratches on rocks and bones, to chalk tallies on slate, to tokens pushed into clay balls, to clay shubati tablets, to notched tally sticks, to stamped and milled coins, to paper notes, and finally to entries on computer tapes. Part—but not all–of the impetus for technological evolution was to keep up with the counterfeiters.

What we call “money” (coins, tally sticks, paper notes, electronic entries on bank balance sheets) is simply the record of debt, “accounted for” in the money of account. The line between what we want to count as “money” debts or merely as “money denominated” debts is and always has been arbitrary. Most will include a checkable bank deposit in their definition of “money”; most will not include a non-checkable certificate of deposit in that definition.

Typically, people want to apply the term money to those money-denominated liabilities that can be used immediately as a medium of exchange—that is, to buy something,  passing hand-to-hand. I am sympathetic. If we look at the modern economy, and focus only on transactions of households, it works pretty well. But going back through time and including transactions of private and public institutions, it gets quite messy.

As a simple example, private banks make payments to each other using central bank liabilities—reserves. No household can buy anything with reserves, yet reserves are in all other respects equivalent to central bank notes—both are liabilities of the central bank and instantly “redeemable” in payments to the central bank (more later). At the other end of the spectrum we have bills of exchange, which were used in market purchases even when made payable in the future, in distant markets, and in foreign currency. Are they “money”, then?

I try to avoid the confusion that arises from the arbitrariness by using more specific terms: currency (coins, central bank notes, treasury notes, central bank reserves), bank notes, bank deposits. In any case, it is clear that the non-checkable CD is a liability of the issuing bank, recorded in the money of account, whether or not it can be used as a medium of exchange. So what we are going to focus on is the nature of the liability behind the money-denominated debt—and leave to the side for now whether the record of the debt can be used as a medium of exchange.

I’m also going to stay focused on the sovereign’s debt, since the proposal for “debt-free money” is largely about sovereign currency. I will include the treasury and the central bank as under sovereign control, each of which issues sovereign debt. I realize there is a faction that denies that the Fed is a branch of Uncle Sam’s government, taking the supposed “independence” of the Fed literally and then carrying it to a ridiculous extreme. But that’s a topic I’ve already dealt with and will only assert here that it is nonsense.

Returning to the blog by Lonergan that I discussed in Part 3, he argues that: “Accounting convention, in this case an accident of history (and a mechanical transfer of commercial bank accounting), treats the bank deposits at the central bank as ‘liabilities’ of the central bank. Now let’s apply some simple ‘Buffett tests’. First, does the CB owe anything? No.”

I won’t go into his defense of Buffett’s preference of putting his liabilities on the asset side of his balance sheet. Nice trick if the accountants, lawyers, regulators, creditors and IRS will let you do it. Accounting conventions are more than “accidents” of history. They follow a logic. Every financial asset held in a portfolio must be offset by a financial liability on another portfolio. The Fed’s reserve deposits are assets held by banks, offset by the Fed’s liability; the Fed’s notes are held as assets by banks, households, firms, and foreigners and are offset by the Fed’s liability. Trying to move the Fed’s reserves over to its asset side means that they’ve suddenly become liabilities of the holders. As I said, I don’t do philosophy but this just makes no sense.

What does the central bank owe? Redemption!

Lonergan goes on to quote from me:

Wray: Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal. […] Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money. As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper,  hazelwood stick, or metal. If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it? A “debt-free money” would not be evidence of a debt. What would it be?”

His response to my argument runs as follows:

Lonergan: “Now Derrida tells us to look in the footnotes. There aren’t any. Fortunately, there is something close enough – a hidden definition slipped in between dashes. ‘Debt’ has been defined by L Randall Wray as “a promise to redeem yourself in tax payment”. What?! That is NOT the definition of ‘liability’. The ability to pay taxes is a feature of money issued by sovereigns – a very important feature and part of how the government establishes its monopoly in the creation of money, but just because the government accepts money in payment for taxes (what else would they accept?) does not make the money they issue their ‘liability’.”

Note how he has taken my specific statement that refers to the exchequer’s refusal to make good on his promise to accept his debt when presented in tax payment (allowing you as taxpayer to redeem yourself), as a “hidden definition” of “liability”. Of course, I was not defining liability as a promise to redeem yourself in tax payment. I was referring to the exchequer’s specific promise to accept his own coins in tax payment. If he refuses to do so, you cannot redeem yourself.

Let us back up a bit. Our word “to pay” comes from “pacify”, reflecting payment of Wergild fines owed to victims in order to avoid blood feuds. When you “pay” taxes, you “pacify” the treasury so that Elliott Ness doesn’t come gunning for you. How do you pacify the treasury? Well, the treasury can name what it will accept in tax payment, but historically it has accepted its own liabilities. Today, tax payments take the form of debits to bank reserves and credits to the treasury’s deposit account at the Fed. The US treasury no longer issues its own liabilities when it spends, relying instead on its banker, the Fed.

It wasn’t always so, of course. The Fed was created in 1913. Many of our debt-free money folk want to return to the old days—when the treasury spent by issuing its own notes. Many of them refer to the era of Greenbacks. Fine and dandy. It would be quite inconvenient and inefficient. But it could be done. However, it would not change the fact that currency is still debt.

Whether the currency is issued by the central bank or the treasury, it is a debt that must be redeemed. Let’s look at a specific historical example.

Fortunately, Farley Grubb has just authored a very nice paper on American colonial currency. Farley is a, or perhaps the, expert on the topic. I’ll include some extended quotes from his paper. His exposition confirms my account, both in the details and in the terminology.

Here’s the background. The colonies were prohibited by England from issuing coin, so as to protect the King’s monopoly of coinage. The colonies obtained coin from export, but of course as a major mercantilist power, England wanted to limit exports to the raw materials she needed. The colonies had to import finished goods, shipping the coins back to England. The King wanted to limit expenditures on its empire, so the colonies were largely responsible for funding their expenses, which included fighting wars with the French, the Canadians, and Native Americans. Colonial governments were chronically short of coins, obtained through taxes such as poll taxes and taxes on imports of slaves and tobacco.

To increase fiscal capacity, the colonial governments began to issue paper money. According to Grubb, “Virginia referred to its paper money as treasury notes. Other colonies referred to their
paper monies as bills of credit…. [Virginia’s] treasury notes were the same as bills of credit..”

Virginia’s colonial government passed a number of acts to authorize the issue of treasury notes. The law would include the total value of notes (denominated in Virginia pounds) to be issued. It would also set a date for final “redemption” (the term used by Farley as well as by the lawmakers). And, interestingly, the law would impose a new set of taxes at the time of the note issue:

Every paper money act included additional new taxes, typically a land tax and a poll tax, that were operative for a number of years. The number of years over which these new additional taxes were operative was chosen so as to generate enough funds to fully redeem the notes authorized by each respective paper money act. The date in each paper  money act set for the final redemption of the notes authorized by that act closely matched the end to the taxing period set by that act…. From 1755 through 1769, the taxes imposed by the paper money acts included a poll tax, a land tax, a slave import duty, and a tobacco export duty.

Now hold on a minute. The Paper Money Acts that allowed the treasury to issue notes also imposed new taxes that would be of sufficient size and over a period long enough so that all the notes would be redeemed? Does it sound like maybe, just maybe, the colonial government understood that the purpose of the taxes was to “redeem” the currency, by accepting that paper money in payment of taxes?

Well, let us see. The answer will depend on the colonial government’s use of the term “redemption”.

Colonial paper money could be “redeemed” (remember, this is the term used by the Acts) in two ways: payment of taxes or presentation for payment in (British) coins. The treasury would spend the new issue paper money into the economy. Those receiving the treasury notes could use it to pay taxes, or spend it, or submit it to the Treasury in exchange for coin.

What did the Treasury do with the notes it received in tax payment? Grubb reports that the “notes were removed and burned.” Yep. Burned:

Most redemption taxes were collected in the fall, and so notes reported in the Journals of the House of Burgesses as burned were likely removed via tax payments in the prior year.

Grubb’s careful research shows that most taxes were paid using the paper money, and most paper money was “redeemed” in tax payment:

Were redemption taxes paid in notes or in specie? The treasury accounts provide some evidence to answer this question. The clearest statement in the treasury accounts was made on 15 June 1770: ‘It appears to your Committee, that the Balance in the Treasurer’s Hands of Cash received of the several Collectors for Taxes appropriated to the Redemption of the old Treasury Notes [those issued before 1769], amount to Ten Thousand Three Hundred and Twenty-six Pounds Eleven Shillings, of which they have burnt and destroyed Seven Thousand Eight hundred Pounds, and have left in the Treasury, on that Account, in Specie, a Balance of Two Thousand Five Hundred and Twenty-six Pounds Eleven Shillings to be exchanged for old Treasury Notes.’


From this evidence, Grubb concludes (emphasis added):

A redemption tax of 10,327£VA was collected, of which 2,527£VA was in specie that was explicitly set aside in a dedicated account to be used to redeem notes brought to the treasury. The rest of the tax payments were burnt, implying that those tax payments  were made in notes. Therefore, 76 percent of this tax was paid in notes, and 24 percent  was paid in specie.

So, three-quarters of taxes were paid by “redeeming” the notes.

The specie (coins) received in tax payments could be used to “redeem” the notes that were not “redeemed” in tax payments. What about the notes that were not “redeemed” by either method? They continued to circulate. Grubb asks, “Were Virginia’s notes used as a circulating medium of exchange? The denominational structure is consistent with such usage. Virginia’s notes were issued in relatively small denominations, small enough to make paying yearly tax assessments easy with said notes, and small enough to make it an easy domestic circulating medium of exchange in terms of being able to make change with said notes.” He concludes:

The above analysis establishes that redemption taxes generated specie sums that were to be held in the treasury until the final redemption date legislated for each paper money act, at which time holders of those notes could cash them in at face value for the specie held in the treasury for that purpose. However, at the final redemption date holders of the respective notes did not rush to the treasury to exchange them for specie. The notes continued in circulation and note holders could cash them in at the treasury at their leisure. Robert Nicholas Carter, Virginia treasurer after 1766, noted this behavior, Most of the Merchants as well as others, … preferred them [Virginia’s treasury notes] either to Gold or Silver, as being more convenient for transacting the internal Business of the Country.” (William and Mary College Quarterly Historical Magazine 1912, p. 235)

Adam Smith had argued that if the colonies were careful to ensure they did not create too much paper money relative to taxes, it would not depreciate in value (indeed it might even circulate at a premium, he argued). Redemption of the notes in tax payment would remove them from circulation—keeping them scarce. Grubb argues that this was well-recognized by the colonial government:

The Virginia legislature took note redemption and its effect on controlling the value of its paper money seriously. Such is illustrated in the March 1760 paper money act which stated, ‘And whereas it is of the greatest importance to preserve the credit of the paper currency of this colony, and nothing can contribute more to that end than a due care to satisfy the publick that the paper bills of credit, or treasury-notes, are properly sunk, according to the true intent and meaning of the several acts of assembly passed for emitting the same; and the establishing a regular method for this purpose may prevent
difficulties and confusion in settling the publick accounts,… Be it therefore enacted, by the authority aforesaid, That Peyton Randolph, esquire, Robert Carter Nicholas, Benjamin Waller, Lewis Burwell and George Wythe, gentleman, or any three of them, be, and they are hereby appointed a committee, to examine at least twice in every year (and oftener, if thereto desired by the treasurer for the time being) all such bills of credit, or treasury-notes, redeemable on the first day of March, one thousand seven hundred and
sixty five, as have been or shall be paid into the treasury, in discharge of the duties and taxes imposed by any former act of assembly; and upon receipt of the said bills or notes, the said committee shall give to the treasurer for the time being a certificate of the amount thereof, which shall avail the said treasurer in the settlements of his accounts as effectually, at all intents and purposes, as if he produced the said bills or notes themselves: And the said committee are hereby required and directed, so soon as they have given such certificate, to cause all such bills or notes to be burnt and destroyed.’ (Hening 1969, v. 7, p. 353)

Yep, to protect the value of the government’s paper currency, you’ve got to redeem it in taxes and burn the revenues generated.


Let us recap what we can learn from the early Colonial American experience. The government imposed taxes payable in its own paper notes (its liabilities) or “specie” coin (liabilities of the crown of England). It issued its paper notes in payments by the treasury. When it received its tax revenue in the form of its own paper notes, it burned them. When it received coin in tax payments, it held them until an announced redemption day, to exchange for paper notes.

The paper notes were thus “redeemed” in two ways: payment of taxes, or exchanged for coin. A large majority of the notes were redeemed in tax payment; a small minority were redeemed for coin.

The government recognized that it spent the paper currency into existence. It recognized that the purpose of the taxes imposed (by the same Acts that authorized issuing paper notes) was to redeem as many notes as possible. The taxes were not to “raise revenue”, indeed, when the paper notes were received in tax payments, they were burnt, not spent.

The government also realized it needed to receive a portion of tax revenue in the form of coin. This was to ensure that it could meet its promise to redeem notes for coin.

Redemption of the tax obligations by returning paper notes to the treasury not only redeemed the colonial government, but it also redeemed the taxpayers who owed taxes. The Redemption is mutual and simultaneous. Hallelujah!

Creation of the notes preceded their redemption in tax payment. As I said, Creation always comes before Redemption. Indeed, it would have been literally impossible for the colonists to pay the new taxes given the chronic shortage of coin. They needed the treasury to spend the notes first before the taxes could be paid.

Nor would the governments have needed to impose the new taxes if they were not going to spend the notes! But if they were going to engage in an act of Creation, then they had to follow that with an act of Redemption.

My use of the word “redemption” conforms to use by monetary historians, as well as those who wrote the laws that authorized issuing paper money. It is not a “fantastic linguistic contortion”, a “pure semantic confusion”. It is an accurate description and is the correct use of the term.

The American Colonial experience with note issue verifies what MMT has been saying for the past quarter century. Careful study of other examples will confirm MMT’s approach.

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  1. Praedor

    Thank you! Great post. I understood it enough to get the gist and gain an almost instinctual understanding of MMT.

    1. washunate

      Curious, are you the same poster that made a comment below on BIG? Wray and others who advocate jobs as the delivery mechanism for the social safety net are not exactly receptive to basic income ideas.

  2. washunate

    At birth, you are indebted to your parents, your kin, and your gods.

    Or, we could reject the conservative protestant work ethic and replace it with the equality and mercy and humanity of grace…

    Or in more secular language, this gets at the fundamental flaw in MMT’s advocacy of moar work. Money is not about production of material things; that is merely one consequence thereof. This used to be the primary economic problem, but we now live in a time of remarkable abundance, in aggregate, and so this is a rather trivial and tangential issue. Distribution is the problem of the contemporary human condition.

    Money is about time; it is a measure of the value of human labor. To say that debt is older than money is nonsensical outside of carefully crafted academic definitions of money. A debt, a promise, an IOU, is simply one form of that concept, that idea called money, of valuing human labor and transporting that value across spacetime.

    We spend time with parents, kin, and gods not because we owe it to them but because it is fun, right, enjoyable, valuable, meaningful. We don’t need more formal work; if anything, we need less. People should spend more time doing the things they are called to do in life, the stuff that is valuable to them specifically, rather than spending more time in formal employment having someone else ordering them around based on some outdated sense of authoritarian, paternalistic hierarchy.

    1. MyLessThanPrimeBeef

      If you are starting a new country, in a new planet, and you want to issue new money, where is the money coming from for the government to borrow in order to issue debt-money?

      Who has money to lend to the government for its debt-money?

      How do we get started in our new world?

      1. washunate

        From the people!

        That’s the thing about the universe. It doesn’t charge a currency-based fee to use its resources, terrestrial or otherwise. It merely requires human labor, the fundamental form of money.

        1. MyLessThanPrimeBeef

          Agreed, from the people.

          I don’t see how it could get started in that new world with debt money.

      1. washunate

        Other than the years that Wray and company have spent arguing against it?

        At anyrate, did you mean to reply to someone else? I don’t support UBI (my preferred approach is social insurance – namely, universal health insurance and universal unemployment insurance – because I believe there should be eligibility requirements rather than checks sent to everyone). But I am intrigued at why MMTers dismiss basic income so casually and arrogantly. It gets at the implicit assumption that people have a duty, an obligation, a debt, to work. I view the basic essentials of life as a fundamental human right, not as something contingent upon employment.

        For example:

        …to the extent that BIG supporters insist on the absence of a work requirement, we object to such a proposal on the grounds that it devalues the currency…


        MMTers believe that the working poor should shoulder the burden of maintaining price stability. That is a mindbogglingly mainstream view, a view I reject, a view I think all leftists and most centrists should reject quite thoroughly.

        1. digi_owl

          Either i am reading MMT differently, or i am reading different “MMT”ers, but my impression is that their primary focus is towards government having the capability to spend a nation out of a recession.

          That is, with the assumption that they are truly sovereign, as in they can print their own currency, and its done via spending on domestic products and services.

          Now i get the latter part may indicate a focus on keeping people at work, but i do not see how it would preclude the government to spend on basic income like programs, as it in turn is highly likely to end up in local shops and service providers.

  3. diptherio

    First off, thanks for the post. This is about as understandable for a lay-person as anything I’ve read.

    I’d like to pick up a conversation we had when you posted the first of these articles. You are, of course, quite correct that money is a debt by definition. However, what the “debt-free money” people are talking about is not anything to do with that accounting identity, but rather the practical fact that in the present day, the only way that new currency gets injected into the real economy is through the mechanism of bank loans.

    Because everyone wants to spend less than they earn in income (i.e. have a positive savings preference) and because we’re a net importer and because we have a growing population, we need a constantly increasing amount of currency actually circulating in the real economy to maintain wages and prices at current levels. Since Treasury “sterilizes” it’s spending through taxes and borrowing, to ensure that is has no net effect on the amount of currency in the real economy, we’re dependent on the mechanism of bank loans to provide for that increase.

    The problem that the “debt-free money” crowd is pointing to, although clumsily, is that every additional dollar of currency that comes into the real economy comes with a debt to a financial institution attached to it. The problem isn’t the debt attached to a money at its inception, it’s the debt on consumers and businesses that the financial sector extracts from the real economy as the price of making that currency available to the rest of us.

    I think we can all agree that is a problem. Right?

    1. YankeeFrank

      I’m with you diptherio. It is a problem. The government has all but entirely given us over to the rapacious loan-issuing banks and so most of us live in monetary shackles to these institutions.

      1. YankeeFrank

        Damn, I was trying to fix my response and it timed out.

        Okay, my point was that the OP is really moving towards the same goal that you are when you describe debt-free money as being money created outside of the bank-loan debt/interest payment system.

        If we can acknowledge what Wray is showing us, then it is clear that government can issue whatever amounts of currency public purpose / the political economy demands, and that it does NOT fund its spending with tax receipts but by simply issuing currency. Thus while its not technically debt-free money, it is bank loan/interest-payment free money, and should be issued and spent into existence as needed, thereby replacing large amounts of bank-issued interest-bearing currency. Perhaps the debt-free money movement should more appropriately be called the interest-free / bank-free money movement.

        1. diptherio

          Bingo. We need to recognize that the Federal gov’t has no fixed financial limits to its spending, and that if we want to keep the economy running along smoothly we need to be injecting money constantly and that the best way to do that is through the fiscal mechanism (direct funding from Treasury), not the monetary mechanism (Fed buying paper assets from banks).

          Some combination of Job Guarantee and Basic Income could ease a lot of suffering, but the PTB don’t want to admit that it’s an option.

          1. washunate

            But that’s not the debate. It’s not a matter of quantity. No one in Washington thinks the government can’t deficit spend. We’re all chartalists (except for a few hard money holdouts who are so rare they prove the point).

            Rather, the issue is how the money is spent. And in that regard, JG/ELR, BIG/UBI, social insurance, the national security state, and so forth are all competing options that emphasize different priorities and decision making processes.

            Indeed, Wray has written for years dismissing alternatives to JG like basic income and social insurance. He wouldn’t have been doing that if he didn’t think there were meaningful differences.

        2. MyLessThanPrimeBeef

          This, I think, is interesting:

          The number of years over which these new additional taxes were operative was chosen so as to generate enough funds to fully redeem the notes authorized by each respective paper money act.

          That it turned differently (not 100% redeemed) was not the original intention – the original thought seems to be one of funding today’s (i.e. in the 1700s) government spending with future taxes. Here, the people had some control, via representatives, on how much paper money there would be, through their consent to more taxes.

          Was it an accidental discovery or a back door way of introducing fiat currency with nothing to back it (not even future tax revenues)?

          1. René

            There is no reason that 100% should be redeemed. In fact it is highly unrealistic for it to be possible at all. It implies a perfect distribution of these tax tokens in respect to tax obligations. Depending on the consequences of defaulting on tax obligations, money could become extremely expensive (i.e. deflation) when policy would be to redeem all notes outstanding. And what if one of these tokens gets lost or destroyed? That would just be a game of musical chairs, wouldn’t it?

            As long as people hoard these tax tokens (money) for future payments (i.e. redeem tax obligations), there is a trade deficit and/or and government spending for the benefit of multiple generations that should all pay their fair share (e.g. infrastructure), it makes perfect sense not to redeem 100% of the circulating tax notes, even if that were theoretically possible.

            Problems will only occur when there is no more taxation at all. That would basically reduce the chances of survival for that currency to that of Bitcoin.

          2. René

            There is no reason that 100% should be redeemed. In fact it is highly unrealistic for it to be possible at all. It implies a perfect distribution of these tax tokens in respect to tax obligations. Depending on the consequences of defaulting on tax obligations, money could become extremely expensive (i.e. deflation) when policy would be to redeem all notes outstanding. And what if one of these tokens gets lost or destroyed? That would just be a game of musical chairs, wouldn’t it?

            As long as people hoard these tax tokens (money) for future payments (i.e. redeem tax obligations), there is a trade deficit and/or and government spending for the benefit of multiple generations that should all pay their fair share (e.g. infrastructure), it makes perfect sense not to redeem 100% of the circulating tax notes, even if that were theoretically possible.

            Problems will only occur when there is no more taxation at all. That would basically reduce the chances of survival for that currency to that of Bitcoin.

  4. Jim Haygood

    Randy Wray’s elaborate revisionist history conveniently ignores the widespread use of Spanish “pieces of eight” silver coins, which remained legal tender in the U.S. until 1857.

    These coins were neither liabilities of the colonial and succeeding federal government, nor were they redeemable by those governments.

    Evidently the cultural deviancy of “full fiat” imposed on us in 1971 has inspired a retroactive campaign to claim that “it’s always been this way.”

    Lots of credulous young folks at UMKC will get sucked in. Hell, as a naive teenager, I actually mistook this rock ‘n roll fantasy for history:

    Well you know in the old days
    When a young man was a strong man
    All the peo-PLE
    They stepped BACK
    When a young man wah-alked by …
    — The Who

    Rock ‘n roll econ, comrades — it’s all about the punch bowl!

    1. Pespi

      What are you saying? I don’t understand the thrust of your argument here. Because spanish coins were used, this is invalid?

      1. Jim Haygood

        I’m claiming that debt-free money not only exists, but has been the norm for most of human history.

        Coins made of precious metals embody the value of labor and capital used to extract, refine and coin scarce metals.

        Coins are assets, not debt.

        1. washunate

          But the irony Jim is that the move to fiat has sparked an explosion in the use of precious metals by people who have money. Humans have been using metals for thousands of years, yet much of the gold and silver above ground today has been mined in just the past century.

          Don’t fight the fiat future. Embrace it. :-)

          The issue isn’t monetary, it’s political; the issue is the distribution of resources. People with money have plenty of protection from stagflation. It’s people whose wages are rising more slowly than productivity plus inflation that bear the burden of looting. And that’s caused by public policy which would be the case regardless of whether the dollar was defined by a weight in gold or not.

          1. OpenThePodBayDoorsHAL

            Wray saying “What we call money is simply the record of debt” is the same assertion we hear over and over. It’s simply not accurate.
            I have a gold coin in my hand. Where’s the debt? I would be fascinated to know who I somehow owe money to in return for my gold coin.
            If you talk to monetary historians like Bernard Lietaer he will point out that the longest-lived, most stable, and most widespread money system was the cowrie shell. The Chinese symbol for “money” incorporates a representation of one.
            So let’s try again: I have a cowrie shell in my hand. Where’s the debt?
            We can all assert that the Earth is the center of the universe, too, but that does not mean it is so. The sooner people get the idea that we can separate “money” from “credit” then the sooner we can leave the debt-based money doomsday machine behind. Take a look at the headlines: *negative* interest rates. Does money as a confiscation vehicle sound sustainable to you? Or the “war on cash”, where they want to outlaw the physical manifestation of their debt-based scheme because it prevents people from tumbling down the abyss where money automatically loses its value.
            We’re only a year or two away from a system that can use any store of value as a means of exchange: pay for dinner with 2.25 shares of Proctor & Gamble. The sooner we leave behind the notion that “only debt can be money” the better.

            1. YankeeFrank

              Here’s the debt: how did you obtain that gold coin? By purchasing it with US dollars, or another government’s currency, or by exchanging another thing for it that was obtained by swapping government issued currency for it. Is there a way to obtain gold without govt issued currency? Sure. How common is it? Exceedingly rare so as to be almost unheard of.

              1. washunate

                You are describing secondary markets, though, which is the value of fiat currency: it is great for transactional purposes. The original act of obtaining the gold to make the coin was an act of human labor. The Earth doesn’t have a vending machine where you insert fiat currency and out pops a lump of rock.

                Thanks to specialization of labor, at a micro level, almost everything we have is made by someone else, especially in the industrialized world. and bought with currency units, so the big picture can get forgotten easily. But at a macro level, everything we have is made by somebody, some human being exerting labor to render the universe more to our liking.

                1. YankeeFrank

                  Sure, my words described secondary markets, but govt-issued currency paid the mine workers, bought the mining equipment and engineering skills, etc., etc. Even the profit margin earned by the mining companies was paid in govt currency. I just don’t get the whole precious metals thing. Sure, it worked at some point in history, sort of, for a small amount of the populace. It no longer has much relevance.

                  1. washunate

                    Transactionally, sure, fiat “paid” the mine workers in a micro accounting sense. But what use is the accounting sense at a micro level when we have systemic problems in how we distribute resources in society?

                    In the big picture, what paid the mine workers was food grown by farmers and houses built by construction workers and schools staffed by teachers and so forth. Fiat makes these exchanges of labor more efficient, and that’s valuable in and of itself, but it doesn’t inherently create these things. Fiat can just as easily be used for war mongering and financial fraud and tax cuts for the wealthy.

                    I think when you say ‘the precious metals thing’, you are describing a hard money standard, defining a national currency unit in terms of the mass of an element on the periodic table? I don’t get it either (I oppose all monetary standards equally), but I do sympathize with the goldbug concern that a currency unit needs a buffer stock to serve as a price anchor lest deficit spending spiral out of control.

                    Indeed, Wray and Mosler agree with the gold bugs on that front. They’re hard money advocates, too. They just want to employ a different buffer stock than gold or NAIRU.

                1. Skippy

                  Barter is a good example of this i.e. – A barter economy is a cashless economic system in which services and goods are traded at negotiated rates.

                  “Economists since Adam Smith, looking at non-specific archaic societies as examples, have used the inefficiency of barter to explain the emergence of money, the economy, and hence the discipline of economics itself.[2] However, ethnographic studies have shown no present or past society has used barter without any other medium of exchange or measurement, nor have anthropologists found evidence that money emerged from barter, instead finding that gift-giving (credit extended on a personal basis with an inter-personal balance maintained over the long term) was the most usual means of exchange of gifts and services.”

                  It would be better if people had a sound knowlage of history before studying economics, economics has a very bad habit of distorting events due the perception of it. Especially when it makes out all humans from time immortal have been so. The wealth of knowlage we have today is manifold what the classical’s had, and as such a much more precise depiction of the past is available – to draw conclusions on.

                  Yet. Still today there are those that prefer a more quasi religious purview of the “good old days” that never actuality happened and then want to recreate the illusion that never was…..

                  Do try 5000 years of Debt, it would be a start and always challenge personal bias… imo.

                  Skippy…. Jim Its important to keep concurrent with advances in knowlage.

            2. MyLessThanPrimeBeef

              The traditional Chinese word for cowrie is 貝.

              The traditional Chinese word (not the simplified version) for treasure is 寶 – one can see the ‘cowrie’ radical at the lower half of the character.

              The traditional Chinese word for wealth is 財 – one can see the ‘cowrie’ radical on the left side.

              The traditional Chinese word for money is 錢 – here, no ‘cowrie’ radical in this word; however the traditional Chinese word for currency (and indirectly, money) is 貨幣 – here, we encounter the cowrie radical again, in the lower half of the first character of this compound word.

              1. Jim Haygood

                ‘The traditional Chinese word for money is 錢 – here, no ‘cowrie’ radical in this word.’

                Correct. The radical on the left means ‘gold’ — ‘jin’ in Chinese, ‘kin’ or ‘gin’ in Japanese (as in 日本銀行 — Nihon Ginko, Bank of Japan — with the gold radical on the left in the third character).

                Got 金?

                1. MyLessThanPrimeBeef

                  And the Chinese first encountered paper money, in the Tang dynasty (I believe), they were so impressed they called it ‘fly money.’

                  Soon, it flew away.

                  1. OpenThePodBayDoorsHAL

                    Debt-based paper money is really useful stuff, the problem is the urge to print is waaaay too hard to resist.
                    If we replaced the Fed with a laptop that printed 2% more each year (per M. Friedman) then it might be sustainable. Until then perhaps physical scarcity might have to substitute.

                    1. Skippy

                      Well it seems repetitive to have the wealthiest in society start religions [FEE, taxes are thief mobs, money is democracy, libertarianism, et al] and play boom – bust by stealing all the oxygen in the political economy.

                      But yeah is all fiats fault….

                      Skippy…. bimetallism never stopped this, so why the romanticism?

        2. diptherio

          Coins made of precious metals embody the value of labor and capital used to extract, refine and coin scarce metals.

          …plus a seignorage; i.e. difference between the “embodied” value and the face value.

          Good to know you’re a labor theory of value guy though, comrade.

          1. Jim Haygood

            Seigniorage charges on gold coins are modest — typically a 3 to 5 percent premium over metallic value — and are subject to international competition from more than half a dozen countries.

            This ‘branding’ provides a service, relieving the buyer from having to weigh and assay each coin.

            As compared to the embodied labor of a coin, government bonds represent a promise to forcibly extract labor in the future. Buy now, make some sucker pay later.

            1. MyLessThanPrimeBeef

              You can have people and no government.

              But you can’/t have a government and without (tax paying) people.

              That is, the answer to ‘which came first, government or the people,’ is the people.

              And if there is to be any free money, that free money belongs to the people (to spend or to help a financially over-extended government).

              The people should always be kind to their government, re ready to help it in its times of need.

        3. steelhead23

          Jim, you are confusing the issue by layering in an intrinsic value argument. Colonial Virginia’s government paid some of its debts in fiat, effectively a government IOU, and redeemed those IOUs by accepting them back to pay taxes. It would be interesting to know how well such notes were received outside of the colonies – their exchange was likely not well received by the King – he certainly would not accept them to pay his taxes.

          One of the things I find very interesting as regards monetary science is international exchange. There is a belief among some that by issuing debt, the U.S. is debasing the currency. In fact, since 2005, the U.S. has doubled its national debt. If, as marketeers believe, value is inverse to abundance, shouldn’t the doubling of the national debt have halved the value of the dollar in international exchange? So, given your penchant for market-based solutions, why is Bucky so darn strong, Jim? Also, Dr. Wray, as this debasing argument appears to be HUGE – having driven global economies into the toilet, perhaps a detailed explanation, similar to the above, for the seeming lack of effect of debt issuance on the value of the buck would be helpful.

          1. bob

            Have you seen muni yields? Rationalize that while you’re talking about big guv.

            How more isn’t written about THAT, I have no idea. “It’s too local”. No, it’s happening everywhere.

            My shoot from the hip speculation is that a lot of the clients, and possibly well paid employees of the TBTF banks realized just how screwed banks were, and, at the same time, how completely powerless they were to actually demand payment from them when the SHTF.

            Problem solved! Keep your money with a gov who also funds a police dept. Bonus add on- tax free income.

          2. Robert Dudek

            Check the price of gold in 2005 in US dollars versus today. You might find a curious consistency with “halved value”

    2. washunate

      Yep, silver was a huge part of the system. That does seem a bizarre oversight. And even after the collapse of the London Gold Pool and the closing of the Gold Window in the 20th century, you still had silver quarters and dimes and copper pennies in domestic circulation for a few more years.

      What fascinates me is how slow the process has been of moving to a full fiat system, but instead of commenting about that process overall, the slowness is used as evidence that things have always been this way.

      But of course that’s what’s so weird about this whole thing; it’s all academic semantics. It doesn’t matter in the real world whether currency is fiat or backed by some kind of buffer stock. At the margins, people will always be converting state IOUs into physical wealth, whether we’re talking pieces of eight or slaves or silver eagles or baseball cards or paintings or private islands or yachts or whatever. MMT correctly identifies that the gold standard doesn’t work. Yet instead of recognizing the universal principle that monetary standards inherently don’t work, it proposes using a different one, as if government directed full employment of people would solve problems that government directed full employment of gold does not.

      1. diptherio

        Gold doesn’t need jobs, people do. Gold can’t starve to death. Gold can’t become homeless. People can.

        Failure to distinguish between gold and people is a real problem…

        The fact that superstition can drive the value of some type of money-equivalent, as in the case of gold and silver, doesn’t invalidate Wray’s account of how the actual money that we use today functions, or about how what we call money came to be in the first place.

        1. washunate

          So you accept the value judgment that “jobs” should exercise a monopoly on providing people with food and shelter? That’s fine; it’s just important to see that is a personal preference, an opinion, not some kind of universal economic law.

          My opinion is different, namely that we possess certain inalienable rights as human beings that ought to (and do) exist independent of employment status in the formal economy.

          Plus, the issue is at the margins. I’m not saying ban jobs; work can be very valuable in moderation for the right purposes. I’m simply pointing out that adding a few million crap jobs doesn’t fundamentally change a system designed to promote inequality. We have lots of food and housing. The issue is merely one of distributing those resources equitably.

          1. Praedor

            I go further. Work/jobs should be truly optional. Guaranteed basic income. No job required. You want more money? THEN you can get a job that pays better than the basic income. It would also force companies to pay more because why work for shit pay if you can actually live (living wage) on basic income? It spends just as well as unearned dividend income or unearned inheritance, or any other income. Income = income.

            As automation becomes more and more deeply and widely entrained in the economy, guaranteed basic income becomes necessity AND the answer.

          2. jsn

            Your rights have and always will be only as good as your ability to claim them. At present, here in the US, people who don’t have any wealth at birth are born into a system in which they can claim few of the rights guaranteed them. So, fine, we don’t need jobs, we need to equitably distribute wealth at birth and hold it in trusteeship until proper adulthood with adequate education for all to understand the points in the debate here so the unprincipled can’t strip everyone of their birth right.

          3. MyLessThanPrimeBeef

            Free money to cover one’s ability to survive and exist, as a human being, in a healthy way.

            That should come before free college tuition.

            Without the former for all, what good is the latter for some (perhaps many, but not all)?

      2. zapster

        You guys missed the point tho. While some coins were around, England demanded them in taxes to the extent that it suppressed the economic activity of the colonies. The paper money issued was the cure for that. Most colonists didn’t have pieces of eight. They needed a money of account to proceed with normal commerce. The paper money very effectively provided the missing currency, and business proceeded with neither hindrance nor concern that the stuff wasn’t a precious metal. That’s the whole point.

        1. MyLessThanPrimeBeef

          You’re right, and the bad luck was they didn’t live near El Dorado.

          So, they had to back up the paper money with 100% future taxes (it turned out to be less than 100%, but the full faith and trust of any paper money – at least for the people around that time and the time of the Constitution – demanded that).

          The intention of the people, at that time, was no free money for the government to spend. If you, the government, wanted to spend more than you currently collected now, you had to put it back with future taxes – just to be clear – within certain number of years.

          That same intention was there when the phrase ‘Congress shall coin money’ was written. The government was to manage the money supply – which was a separate issue as to the ownership of any new money that could be created at almost zero cost.

          That’s my understanding anyway.

          It will probably take the Supreme Court to decide this.

        2. washunate

          The paper money issued was in no small part to cover debts incurred fighting wars :)

          While some coins were around…

          The Spanish dollar – pieces of eight – had a profound impact on the development of the American system. Quite an impact for ‘some coins’, from US quarters to 1/8 fractional stock pricing to the replacement of pounds with dollars itself.

          England demanded them in taxes to the extent that it suppressed the economic activity of the colonies…

          So, the problem was colonization. Not a very efficient way to run an economy from the perspective of those living in the colonies.

          …business proceeded with neither hindrance nor concern that the stuff wasn’t a precious metal

          Not sure what you mean here. First, the reason concerns were mitigated was because the paper was taxed back; that is the opposite of permanent deficit spending. But when it wasn’t taxed back, there absolutely were many contemporary concerns, voiced both in Great Britain and in North America.

          And then the money printing was taken to such extremes in the revolutionary era that the value of the Continental dollar (notice that they weren’t called continental pounds) dropped even more precipitously than the colonial currencies had. It was noted contemporaneously that this inflation had acted to fund activities of the continental congress similarly to a tax itself. This is not some new observation. Government spending = taxation + money printing. All the fancy academic jargon in the world doesn’t change that basic constraint that all spending is paid for; the only choice is how payment is made.

    3. Thure

      But they were redeemable,

      Just not to colonial governments. Your argument actually supports Randy Wray since it prefigures foreign exchange transactions and the idea that currency is “fungible”.

      I can spend US Dollars in any country today precisely because they are redeemable via FX markets.

  5. diptherio

    There’s still one aspect of this particular example that I think might be a little confusing. One might assume that the British coins had some intrinsic value, but of course those coins only had value (beyond the use value of the raw metal) because they could clear tax obligations to the crown.

    I think the situation is made more clear by Graeber in the example of African colonies that he presents in Debt: The First 5000 Years. The Brits take over a region militarily and desire to extract material resources from the inhabitants for their own use, so they declare a head tax, payable in shillings. The African locals, of course, don’t have any shillings to pay this debt which has suddenly been imposed on them. The Brits say, “No problem! We’ll buy stuff from you in exchange for shillings.”

    So we can imagine an African going to the British HQ with three pigs, selling them to the British for 10 shillings a piece, and then going down the hall to the tax office and giving the 30 shillings to the British taxman to “redeem his debt”, i.e. pay his tax. It’s obvious that the point of the whole exercise is to appropriate material goods from a population for government use. The British could have just as easily just gone around and demanded the material resources directly. There are reasons, however, to prefer the tax/money shell game.

    For one, it provides a convenient medium of exchange, but more importantly (to my mind), is that it provides a level of abstraction that makes it difficult to see what is really happening: appropriation of material goods and services from the rest of society by the government. In the case of the British in Africa, they thought that God’s approval gave them the right to that appropriation. In modern times, we assume that it is the fact that we have a democratic government that legitimizes their appropriation and use of societies resources, supposedly for everyone’s benefit (however, as Gilens and Page have shown, that fiction is no longer tenable).

    Imagine if taxes were required to be paid in kind and every citizen and business had to lug something they owned down to the tax office and hand it over to the government. Wouldn’t go over too well… But you put the obligation in dollar terms and then justify it by saying “the government must balance it’s budget like a household” and you can demand a lot more from people without resistance (mostly because they are just confused).

    1. Jim Haygood

      ‘Imagine if taxes were required to be paid in kind.’

      This is called the corvée, and has been used for centuries. In some colonial and territorial areas of the U.S., taxes could be satisfied by working on public roads, in lieu of monetary payment.

      It’s surprising how much humans accomplished, before the blight of fiat currency and its claque of apologists darkened our days.

      1. Paul Boisvert

        Hmmm… Let me see if I have this straight: in the good old days, before the current “darkened”, “blighted” fiat-currency days, things were better, and we should return to them. For example, I would be much better off today if I could just round up some of the (many) pigs that live in my Chicago neighborhood, and carry them down to the IRS office as my “corvee” to pay some of my taxes. And then hook up with a chain-gang to go do public road-work like Cool Hand Luke in the blazing July sun, to pay off the remainder…

        Ah yes, how easy and wonderful those alternatives would be–I’m a 58-year-old with a bad back and severe chronic arm pain, but far from those injuries impeding my pig-herding and road-pounding, I believe the agonizing physical challenge involved would inspire me to far greater happiness than the ominously “dark” act of …writing a check on the fiat-currency in my bank account and mailing it to the IRS.

        Dark days indeed…

        If you think fiat currency is distributed inequitably (as I do, due to ruling class exploitation of labor) then by all means organize politically to distribute the currency more justly (as I advocate, like all MMT’ers.) But those of us who do have a relatively equitable and fair amount of fiat currency (a situation that is simple to extend to all citizens if we have the political will) find that using fiat currency is a perfectly rational and efficient way to run our economic affairs. By contrast, utilizing pig-barter and pick-axe duty to meet our tax obligations seems increasingly unlikely to make a comeback…

          1. tegnost

            S.S. to look forward to, i mean…whatever with your crying, have a banana, none of this impacts your real life except in hindsight, looking for a better way is natural and may have some benefits

        1. susan the other

          Wray is making a case for money as a medium of exchange that is not a store of wealth except insofar as it facilitates commerce. He is making the case that the value of money is controlled by its redemption which makes perfect sense. Burn it to extinguish inflation which lessens its practical “value”. Fiat was invented to facilitate market economies but over time it has become a commodity which bankers can create for their own industry. Maybe we are at a point where redemption is impossible. Effectively money has no value without redemption. Money’s only purpose is to maintain the value of… money.

  6. Jim A.

    During the Civil War, the US issued Legal Tender Notes with the legend. “This note is legal tender at its face value for all debts public and private, except duties on imports and interest on the public debt” So the government HAS issued money that can’t be used to pay taxes. (duties were the main form of federal taxes at the time)

    1. MyLessThanPrimeBeef

      If you had supported the losing side, you’d have wished the money was silver or gold coins.

      No one honors a loser’s paper money greatly.

  7. Jamie

    Your displeasure with Wray is clear, but I can’t see how the circulation of foreign currency invalidates what he says. How does the fact the U.S. dollars can be spent in some foreign countries alter the fact that those dollars were issued by the U.S. government and can be redeemed in tax payment to the U.S. government? (As Spanish Dollars were issued by Spain and certainly could be redeemed by paying Spanish taxes?) What is your “truer” account of how money works?

    1. washunate

      It provides a check on the system. I don’t personally agree with using any buffer stock as a check (whether we’re talking gold, silver, NAIRU, or JG), but if you are being intellectually honest, surely you do understand Jim’s basic desire of backing a national currency unit with gold (or silver or whatever)?

      Checks and balances should be part of the political process, not the monetary one, IMO, and that’s where I differ from Jim. But it most definitely is true that having circulating coins that use metal does place a logistical monetary check on things. Which is why our own political system has removed silver from quarters and dimes and copper from pennies.

      The deficit spenders in Washington don’t want people to notice how much authoritarianism costs. That’s why you never see a penny from before 1982 anymore, nevermind silver quarters and dimes; they are worth more than what the government will give you for them!


      1. Praedor

        Ugh. Money backed by magic metals is crap and…basically magic. No intrinsic value to gold beyond use in caps on teeth, in some limited nanotech designs, in electronics. Money is whatever the government says it is.

        Gold-backed currency guarantees mass starvation, mass death due to no medical care at all, economic destruction. No way to provide a NECESSARY safety net, no way to provide NECESSARY deficit spending in wartime or to recover from economic crash (gold-backed currency did NOT prevent depressions/recessions).

        Gold bugs forget another thing about gold-backed currency: the necessity that THEIR personal gold stashes get confiscated and held by the government. The necessity that the government arbitrarily assign a value to gold in government-issue money. “We declare that 1 oz of gold is worth $50”.

        Gold is ridiculous. Silver is marginally more useful than gold. Platinum is even more useful than gold or silver (catalyst for chemical reactions, as electrodes in electrophoresis devices in biomed). None are worth a crap as basis for money because their “value” is arbitrarily assigned.

        1. washunate

          Were you meaning to reply to Jim on something? I don’t support a gold standard…in fact, I don’t support any monetary standard. Value judgments are made (and maintained) by political processes, not technical standards.

          Now if you are saying that gold more generally simply has no inherent value, great, I’m happy to give you multiple FRNs for your valueless gold. Say we swap at a ratio of $20 per ounce?

        2. washunate

          P.S., you may like one of my more radical ideas in monetary policy. I think the USFG should give away its gold hoard. There are approximately a quarter of a billion adult Americans, and loosely speaking the USFG claims about a quarter of a billion ounces of gold in reserve. That’s a neat symmetry.

          Keep a small gold stash for a true financial emergency, and then mint a special commemorative coin and give one to each adult American. Get the government out of the business of hoarding gold.

        3. OpenThePodBayDoorsHAL

          No, money is what people say it is. Governments pile on, asserting that their taxes must be paid in their scrip. As for “mass starvation” I suggest you look at the historical record. Money as a monopoly right of governments is only about 100 years old…seems to me we had a pretty good record of feeding more and more people in the prior period, too. “But there’s not enough gold in the world”, um, didn’t the MMT’ers recently propose the idea of a trillion-dollar platinum coin? It’s not about the quantity, it’s about the price.
          As far as “value being arbritarily assigned”, yes, governments can do that. US gold is currently held at a value of $42.00/oz. But there’s something called “the market”, controlled by billions of people’s individual buying and selling decisions each day, that assigns a much different, more durable, and more accurate price.
          Japan has a system called furrea kippu. It’s an elder care currency, where you earn and spend based on one hour of taking care of an elderly person. You earn them, and when it’s your turn, you spend them. The system has been running for decades. Since taking care of an old person is a task (a unit of labor) that changes very little over time, it’s difficult to debase (unless of course they change the unit of time, where an “ancien heure” is now 1 1/2 hours…I wouldn’t put it past them.

          1. Yves Smith Post author

            Stop making stuff up. Counterfeiting has been illegal for centuries. In his later career, when he was head of England’s Mint, Isaac Newton became an expert gumshoe in tracking down counterfeiters and took great pleasure when they were executed.

            1. washunate

              I don’t think the comment was talking about counterfeiting, maybe I misunderstood? The observation was that government can’t simply decree the value of money; money comes from people, not from government. Even fiat money is ultimately valued by the citizenry, or at least it requires substantial buy-in by the citizenry.

              As government goes to extremes, from Continental dollars to contemporary ones, the government accounting (the face value) deviates from the usage in the real world.

              You are not suggesting that gold is bought and sold in the real world for $42 an ounce, are you? That’s an accounting entry which no government decree could actually enforce today. Nevermind questions about manipulations and anti-competitive practices in commodities trading, the actual prices even those manipulated markets produce exceeds $1,000 per ounce of gold.

      2. zapster

        I see that ‘backing’ with a commodity that is primarily only available to the rich definitely favors the rich. Whereas one backed by the goods and services of the entire nation is much more equitable. Backing with metal is also proven deflationary, which serves very well to enrich those that have money and deprive the rest of the population. So frankly, no. I regard gold-standard talk as propaganda by and for the rich.

        1. washunate

          I agree with you that a gold standard is a nonstarter, but how exactly do higher prices help low-income households?

          Inflation, not deflation, is the mechanism of the looting in our time.

      3. Jamie

        surely you do understand Jim’s basic desire of backing a national currency unit with gold (or silver or whatever)?

        Well, no, I don’t think I do understand it. I think I first heard something about gold “backing” money when I was a kid in the sixties, and I didn’t understand it then, maybe because I was just a kid and that was adult conversation, but somehow, after all these years, that picture has never gotten any clearer for me. What I understand is that money is an arbitrary token that stands in for what we might call “real wealth”. And I think I understand the desire to connect the token to the thing it signifies… but I don’t see the rationality in that desire. It seems to me, that the token is abstract is the very thing that gives it use. The impulse to make it concrete contradicts the impulse to abstract it.

        OK, I’m just thinking out loud here, trying to understand it. Jim wants money to be stuff, not just represent stuff (?), because he’s uncomfortable with the arbitrariness of a unit of account that can fluctuate (?), and he thinks the value of the stuff, even though it also fluctuates (!), makes the money “more stable” (?) because somehow the stuff’s fluctuations in value are historically (?) or inherently (?): smaller (?), take place within a smaller range (?), are market driven (?), some other reason I don’t grasp (?).

        But the arbitrariness of the unit of account is arbitrary. If the value of the dollar is “pegged” to the value of gold, I could hold gold or dollars equivalently, but holding gold wouldn’t be a hedge against a drop in the value of dollars, because they are pegged… if the value of dollars drops so did the value of the gold I hold… and my eyes are starting to glaze over. I *really* don’t understand why Jim thinks “gold backed” dollars are “better” than the dollars we have now. What is it he thinks he can do with gold backed dollars that he can’t do with ordinary dollars?… buy a fixed amount of gold for a fixed amount of dollars? Why does he want to do that? Is it really the value of the dollar he wants to “stabilize”? or is it the price of gold? And either way, who cares? Most people use dollars to buy food and pay rent… I don’t give a flying … about the price of gold. I care about our purchasing power at the grocery store. When prices go up, we want more dollars, not “more stable” dollars. And I discount the response that “stable” dollars will keep prices from going up because: 1) I don’t believe it… no matter how stable the dollar is, people “on top” are always going to be extracting net value from people “beneath”, and 2) it doesn’t matter if prices never change if you don’t have the dollars you need… stability is not the primary desiderata (at least not in current circumstances). Equitable distribution and easy access to (at least essential) goods is what we’re after. Once we have that let’s talk about stability. Now if Jim’s gold backed dollars can deliver that, I want to know. But all on my own, I can’t see how. If that’s intellectually dishonest, so be it.

        1. washunate

          WTF mate, you don’t understand the desire for price stability? It’s in the name of Wray’s effort at UMKC; the Center for Full Employment and Price Stability(!).


          Mosler calls the need to pick a buffer stock the MMT Insight. Wray and Tcherneva have written for years about the inflationary problems (as they see it) of BIG. Are you just hoping I’m not familiar with this topic? Or do you genuinely not understand the desire to employ a buffer stock in some form to anchor prices?

          I agree with you that a gold standard doesn’t work well. Where I differ from MMT is I apply that insight to all buffer stocks (not just gold, silver, copper, and NAIRU). Buffer stocks are irrelevant because they fail at price stability at precisely the times they are needed because they are overridden by political expediency. And in the meantime, they allow excessive and growing inequality to become entrenched. Buffer stocks that hand formal employment a monopoly on income (like NAIRU and ELR) in particular are especially problematic on this front since they put the burden of maintaining price stability so squarely on the shoulders of low-income households. That’s why the proposals for the JG wage are so low relative to what our nation’s tenured economists and police chiefs and prison wardens and pension managers and other workers in cushy jobs funded by government spending make. Wake me up when an MMT economist proposes a $100K a year JG wage!

          The solutions to the problems in our system of political economy are not found in monetary policy, no matter how much highly paid academics and investment professionals wish it to be the case.

          1. Jamie

            I appreciate your response. I am not familiar with the concept of buffer stocks anchoring prices. I do understand why inflation is almost universally considered “bad”. And, so, I do understand, I think, why price stability is “better” than inflation (and so desirable in that sense) and also why deflation may be equally bad or worse than inflation, so yeah, I guess I understand the desire for price stability more than my previous post may indicate. But every real system is in a particular state in every moment of time. When the system’s way off kilter, isn’t it better to restore balance first, and then stabilize the system in that fairer, more balanced state? Stability per se can’t be what we care about. Or at least not the end of what we care about. It doesn’t help me if prices stabilize at levels that keep me from participating in the market.

            We need, I think, a theory of value and optimal distribution that understanding accounts can never provide. But understanding accounts is really useful when trying to figure out who’s lying to you and who’s telling the truth (or deluding themselves).

            How is it possible to share the burden of maintaining price stability equitably? Why does maintaining price stability need to be a burden on anyone, anyway? Does price stability imply a steady-state economy? If we had a persistent equitable distribution, would price stability follow automatically? Would we care?

            1. washunate

              Jamie, I left a detailed comment that I assume will appear, but in case it doesn’t, I just wanted you to know I appreciate your comment and very much agree with you. You are describing one of my fundamental critiques of MMT; it is way too focused on money as a technical matter rather than one of value judgments and balance.

              MMT’s deployment of full employment in the name of fighting inflation makes no more sense to me than a gold standard does.

  8. Detroit Dan

    Good description of what money is. I have been using Wray’s “pyramid of liabilities” description of money for years, and it’s the best I’ve encountered. It always fits the facts, as it does in the historical account discussed above.

  9. Jabawocky

    Well for what it’s worth I’ll tell you where I am with this. I get the potential mathematical equivalence of treasury balances with money destruction. I think I get the link between currency and debt. However there are facets of MMT i still wrestle with.

    Firstly the idea of liabilities of the fed. If we are considering the treasury and fed as consolidated and then that taxes destroy money. This works if a model considers the treasury balance as a boundary condition, such that when taxes are paid the treasury balance does not increase. Fair enough, I can code such a model. However how then under these boundary conditions to consider the concept of a liability of the fed. If the consolidated account balance is a boundary condition then it also cannot go negative, ie fed liabilities are a boundary condition and do not increase with money creation. This is simply because the fed can create money de novo. Basically I fear that mathematically, under the consolidated scenario either the fed can have liabilities and the treasury can have a positive balance (taxes do not destroy money) but that we can’t have a scenario where the fed can have liabilities but taxes necessarily pass through a boundary condition of money destruction.

    In this view MMT confuses accounting rules with laws of nature. And this seems to be the root of the issues discussed here. The debt free money people see money creation as a boundary condition. You create money and then it is something, you take it back and it is gone, or you could still count it if you like,it’s up to you and not relevant which choice you make.

    MMT suggests money creation to be bound with the creation of anti-money. In accounting this is how it is written. If the two meet they disappear. This is fine but the simple fact is that if the treasury balance can be non-zero and taxes are paid to the treasury then taxes don’t destroy reserves. They simply transfer reserves from the accounts of private banks to the treasury. Eric’s account last week showed clearly that treasury balances can be wildly in credit. This sequestered reserves from private banks but did not destroy them, by the treasury’s own accounting. Fundamentally it then comes down to this: if the fed has a liability (measured in reserves) and the treasury has these reserves in its account do the reserves exist? MMT says no, debt free money says yes, if you like or no if you don’t. It doesn’t really matter.

  10. Russell Scott Day/Founder of Transcendia

    I love these essays so much. I wrote a lengthy essay of my own in consideration of these revelations to me. (Russell Scott Day) Facebook, I use the Public Setting.
    All I know that Ben Franklin had to say about paper money was that he liked it because it put more money in circulation.
    Us working classes only have money. For us the world is not economics but finances. I embarked on my studies of economics and finances most seriously when making a Transcendia Passport commonly available. In it I had reinvented the insurodollar I had originally invented in 2003 to finish a more cogent document.
    I think the insurodollar beats the Future Tax Credits and will be what could supplant the petrodollar if we want a true break with fossil fuels.
    Seeing the big picture that includes the edifice of Wall Street and London finance and economics regulated onwards I see fiat as to fail with the lack of trust for the financial engineering practices of our times being Meyer Lansky methodology that leaves out national benefits that are shared with citizens.
    World Citizens own their own islands.
    The Passports that people like Sir Richard Branson are recognized and he can pass into and out of any territory and could go anywhere a Virgin airliner goes even if he could not enter the other territories.
    So the currency and the money, and the freedom of travel are supporting his passport. I am going to be increasing the price of the passports as soon as they are supporting insurance policies.
    It is these on paper that are not to be ever burned.

  11. Schofield

    Systems biologists now tell us that life runs on hardware and software with the latter being “relational information.” We would all be much wiser if we could get our heads round the idea that the core function of money is to also act as “relational information” and having enough of it in active circulation and sufficiently equitably distributed is a prime task of governments.

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