2013년 9월 30일 월요일

[a PPT: Mary Mellor's] Misunderstanding Debt (2012)

MMT
지은이: Mary Mellor
날짜: 2012년 7월 (추정)
자료: PPT-style PDF

※ 발췌 (excerpt):

References
  • John Kenneth Galbraith (1975), Money: Whence it came and Where it went, Penguin
  • David Graeber (2011), Debt: The First 5000 Years
  • Hanlon, Joseph, Armando Barrientos and David Hulme (2010), Just Give Money to the Pooer, Kumarian Press
  • Geoffrey Ingham (2004), The Nature of Money, Macmillan
  • L. Randall Wray (2004), Credit and State Theories of Money, Edward Elgar

Further Reading
  • Mary Mellor (2010), The Future of Money: From Financial Crisis to Public Resource, Pluto
  • Mary Mellor (1020), "Could the money system be the basis of a sufficiency economy?", Real-world economic review, 54 
  • Frances Hutchinson, Mary Mellor, Wendy Olson (2002), The Politics of Money, Pluto
  • Josh Ryan-Collins et al (2011), Where Does Money Come From? New Economics Foundation
* * *
( ... )

Without borrowing and lending would we have a society or an economy?

Looking at debt differently:
  • Debt as reciprocityㅡsocial obligation, social linkages.
  • Debt as reparationㅡfines, injury payment
  • Debt as obligationㅡtaxation, tithes
  • Debt as enabling trade
  • Debt issue as money supply
  • Debt itself as credit-debt

Misunderstanding money
  • The misleading gold story: precious metal money as emerging from barter
  • Paper seen as replaceing metal coin leading to inflating, unsustainable money systems
  • Call for a return to a 'gold standard' or similar 'har' 'sound' money
  • Misrepresents the history and nature of money

Understanding money
  • Money has taken many forms: hieroglyphs, clay tablets, tally sticks, paper, electronic
  • Money and banking systems MUCH OLDER THAN precious metal coinage (C7th BCE)
  • Early bankingㅡaccounting and transfer of assets (grain storage)
  • Social mechanism for tribute, reparations (e.g. injury), marriage obligations etc
  • No evidence of widespread barter
  • Precious metal coins were too valuable for most purposes (unless debased)
  • Commodity basis of precious metal coinage confuses its money function
  • Function of money is not to embody actual value (commodity as medium of exchange) but to record relative values of ownership, obligations and transfers (Ingham 2004)

Money as a credit-debt token
  • All money is a token, a record of an obligation (debt) and a promise (credit): ' I promise to pay ' ...
  • Even gold/silver coins are only tokensㅡalthough gold/silver can be sold as a commodity
  • Money is a ‘credit’ for future expenditureㅡtherefore a ‘debt’ on society
  • Money only works if people trust itㅡthat they will get goods and services in exchange for it

Social basis of money
  • Money functions WITHIN a money system
  • Money systems can be based on trust (social convention) or some form of authority (fiat)
  • The face value of money (whatever form) is set by social convention or an authority
  • Money systems can collapse if trust/authority is lostㅡthey are social/political systems as much as economic systems

Money as Debt
  • Money as representing social obligations
  • Money as representing authority and public, civic obligationsㅡdebt of people to the rule/authority and vice versa
  • Money as representing economic obligations: based on formal or informal contractsㅡbond(age)

Debt-money: tally sticks
  • Tally sticks are more useful to understanding money than the precious metal story
  • 'from time immemorial, scored or notched wooden sticks have been used ... for ... recording payments' (Glyn Davies, A History of Money 2002: 148) 
  • Used in trade and for state expenditure and revenue in Britain until 1820s
  • Accumulated sticks burned down Parliament in 1834

CF. tally stick
CF. tally sticks
CF. The Day Parliament Burned Down (amazon book info)
CF. Come on Mr. Tally Man

Tally sticks
  • Notched sticks split longwaysㅡcreditor takes stock/stub and the debtor the counterfoil 
  • Creditors can use the stock/stub to buy goods and services or pay taxes
  • Debtors can hand on the counterfoil to others instead of taking payment
  • Tally sticks are cancelled when the two parts are reunited. The debt is then cleared and the sticks destroyed
  • Non-intrinsic money more prevalent than coin: 1698 coin=£11.6m: Tally sticks, bank notes, trade bills=£15.0m (Davies 2002)
  • Discount houses bought stubs at less than face value or lend money by replacing lower value foils with higher value ones
  • The treasury and discount houses acted as clearing houses squaring off payments between the crown, taxpayers and tradersㅡfew further debts/payments needed to settle balances

Debt and money issue
  • Money does not appear fully formed in society
  • It has to be originated (issued)
  • People-issued money: records of deposits, loans, trades, obligations (social trust/bond-age)
  • Fiat-issued money: tax obligations to rulers, rulers payment for goods and services (power)
  • Bank-issued money [:] 'original debt'ㅡembodying as well as representing debt (bank bond-age)

Fiat money and taxation
  • Taxation is central to the circulation of fiat money
  • People accept fiat money as payment for goods and services because they need to access that money to pay their taxes (Knapp 1924, Wray 2004)
  • Where fiat money is also the sole authorized mechanism of general economic exchangeㅡthe money issuer must not claim as tax all the money issued (i.e. must run a monetary deficit)

Lessons for the crisis
  • Sole-authorized money systems need a substantial issue of money that is not reclaimed as debt or taxed to enable monetary circulation
  • Money systems are not household where the issue point of money is external (handbag economics)
  • Money systems are baby-sitting circles with internal issue of money (tokens)
  • Fiat issued money is debt free at the point of issue (e.g. quantitative easing)
  • Bank-issued money is 100% debt+interest
  • Taxation in a fiat money system is never 100%
  • Taxation can be a monetary as well as a fiscal instrument: it can prevent inflation by removing surplus money that is not matched by goods and services

State lose control: fiat to bank
  • Fiat money issue depends on state/ruler capactity to enforce the taxation circuit or get people to take the fiat money in payment
  • Precious metal coinage seemed to solve the latter problem, but depended on supply of precious metal (led to mercantilism, war, piracy)
  • Commodity-based coins also leaked from the money system (based on commodity value)

State lose control: tax to debt
  • Where states/rulers spent beyond their capacity to raise taxes or get their money/credit accepted, the obligation of payment to states/rulers became replaced by extensive state/ruler borrowing from the banks/merchant class
  • State fiat money became replaced by sovereign/national debt to the modern banking system (Graeber 2011)
  • The Bank of England (a private company until 1946) lent £1.2 millin to the King in 1694 to be repaid by Parliament not the King

( ... )

Private moneyㅡstate debt
  • State money and trade money came together in the modern banking system when the commercial bank paper system became authorised as legal tender through the invention of bank notes that could circulate as cash guaranteed by the state 'I promise to pay'
  • Most money is now intangible as ‘sight accounts’ (97%)ㅡbut underpinned by state

Bank-issued money: original debt
  • 'the process by which banks create money is so simple that the mind is repelled' (Galbraith 1975: 29)
  • Where states no longer issue fiat moneyㅡnew money can only be created through bank loans
  • Banks do not create new money by intermediating between depositors and borrowersㅡthis would not create new money
  • New money must be continually created as existing loans are repaidㅡwith interest
  • New money is created by setting up a deposit account for the borrowerㅡthis money gets trasnferred to other deposit accounts and seems to be 'real' debt free money 
  • Banks are supposed to lend in ratio to their capital assets and central bank reservesㅡbut this is hard to control in practice
  • Jane d'Arista calculated the US reserve ratio at the height of the boom as 0.1%ㅡbut only a reserve of 100% is adequate if there is a run
  • All bank issued money therefore carries two levels of debt: generalised social/public/economic credit-debt obligations and an original debt to the issuing bank
  • Social/state/fiat money does not require repayment to the issuer as a condition of its issue (but tax and/or repayments may be demandedㅡe.g. returning baby sitting tokens on leaving the system)

Original debt as money supply
  • Nearly all money in circulation today has been issued as debt through the banking system
  • Money supply therefore depends solely on debt demand (from people/ businesses/ governments) and bank willingness to lend
  • In the run up to the crisis UK money supply was growing rapidly (up to 17% a quarter)
  • After the crisis fell rapidly as debts were repaid (8% a quarter)

Privatisation of money issue
  • Ideological hegemonyㅡnew money can only be issued through the banking system as loans
  • States must not 'print' debt free moneyㅡcertainly not for public expenditure
  • But OK to 'quantitatively ease' the banks
  • Even social policy based on debt (microcredit) creates huge inequalities depending on who is judged to be 'creditworthy'

The contradiction of original debt
  • Debt embodied money issue demands constant money supply growth to repay debts with interest
  • Without such growth money supply will rapidly shrink as debts are repaid
  • Vast increase in money supply has created inflated asset prices and unsustainable levels of debtsㅡmainly for households and the financial sector

Undermining the public
  • The public sector is seen as dependent on the private 'money creating' sector (sic)ㅡyet in the crisis it has underpinned it
  • All forms of money are based on legal tender which the state effectively underwites
  • States and monetary authorities support to financial sector at least $15 trillion worldwide
  • Countries bankrupted: Iceland financial sector 10×GDP; In UK RBS alone=GDP

Public responsibility
  • It is impossible to distinguish different types of moneyㅡthere is no 'real' money
  • In a systemic crisis the whole money system must be supported (Lehman Brothers)
  • State responsibility for the integrity of its national money means it has to continually bail out the privatised money system
  • Major problem if borrowings are in another currency or money issue is externally controlled (e.g. euroㅡplus ECB has very limited remit)

The Money System is not Private
  • The public clearly sees states/authorities as responsible for the whole banking system: Northern Rock, Icesave, Iceland, eurozone, IMF
  • States now have to take on 'sovereign debt' to rescue private debtㅡironically borrowed from the self-same banks and 'money markets'
  • States/households are even seen as responsible for the avalanche of debtㅡhence austerity

Public responsibility without power
  • State is denied its original money issue role by 'handbag economics' which sees the state as a household without money creating powers
  • States are dependent on the 'money markets' (i.e. financial sector) if they cannot raise sufficient taxes (deficit)
  • Arbitrary 'rules' are developed on how much a state can borrow (Maastricht)

Debt cannot fund a money system
  • There is a distinction between money as a token representing debts between citizens and money issue based on original debt
  • Somewhere in the system money must be issued that is not reclaimed by the issuer otherwise the system only has two positions: growth or crisis
  • People will be burdened with unnecessary debt until the role of privatised original debt in money issue is understood

Summary: The Public Nature of Money
  • The financial system is not private
  • It administers a public resourceㅡmoney as legal tender
  • Its final resource is the taxation/money issue capacity of states
  • Money is a social constructㅡa system of trust in debt-credit relations within a money system supported by public authority
  • If that trust is destroyed it cannot easily be rebuilt

Money as a Public Resource
  • Money should be seen as a 'commons'ㅡa social resource in the same way as air or water can be seen as a natural resource
  • Need to reclaim money as a debt-free public resource with democratically determined priorities
  • Money could be issued through public expenditure, public/social/commercial investment to provide goods and services, as a citizen's income and to alleviate poverty (Hanlon 2010)
  • Money issue and banking should be a public service under democratic control
  • We can then concentrate on removing all the other inequalities associated with debtㅡso that we are left with money as representing credit-debt solidaristic social obligations
  • This could enable the creation of a socially just, sufficiency economy

2013년 9월 29일 일요일

[발췌: L.R. Wray's] Understanding Modern Money (2001)

MMT
지은이: L. Randall Wray
출처: WORKSHOP-Understanding Unemployment in Australia, Japan and the USA: A Cross Country Analysis, 10 and 11 December 2001, Centre for Full Employment and Equity, The University of Newcastle, Australia.

※ 발췌 (excerpt):

* * *

In my recent book (Wray 1998), I attempted to explain how a modern monetary system works through revival and extension of the old Chartalist or State Money approach endorsed by Keynes and best exposited by Knapp. My book has since been the subject of several reviews (Lavoie, Mehrling, Niggle, Togati, Rossi) and related ideas were examined in several articles (Kadmos and O'Hara, Dalziel, Lavoie, Aspromourgos, Danby, Davidson). The approach has been variously dubbed "neo-Chartalist" or "taxes-drive-money" (TDM). 

   In this article I intend to correct some errors of interpretation while clarifying and extending some of the issues. Due to space constraints, I will limit the focus of this article to theoretical issues, leaving to the side related policy issues except where it is absolutely necessary to introduce them. ( ... )


1. What is money?

Defining money is a constantly vexing problem for monetary theorists. Readers are quite familiar with the two usual approachesㅡdefining money by its functions (the textbook approach), or by simply and arbitrarily choosing some empirical definition (as Keynes did in the GT: “we can draw the line between ‘money’ and ‘debts’ at whatever point is most convenient”, Keynes 1964 p. 167 {ㄱ}). However the critical distinction that must be made is between money as a unit of account and money as a thing that is denominated in a unit of account (as did Keynes in the ^Treatise^: “the money-of-account is the description or title and the money is the thing which answers to the description”, Keynes 1930, p. 3 {ㄴ}). Most theorists, and several of my reviewers (most notably, Mehrling) makes no such distinction and thereby become entangled in a morass of confusion as they use the term money to sometimes refer to the "thing" and other times to refer to the "title" (reminiscent of the mistake Keynes identified: "like confusing a theatre ticket with the performance", Keynes 1983, p. 402 {ㄷ}). In order to avoid adding to the confusion, throughout this articel, I will carefully distinguish among 'money' (the 'title, or dollar in the US), high powered money (HPM, a particular money thingㅡreserves and currency, or what I confusingly called fiat money in the book), and bank money (another money thingㅡdemand deposits or private bank notes). When I use the term money without a qualifier, I mean the unit of account; in the case of the US, "money" (without qualifier) is the dollar; in the UK, it is the pound.
  • CF{ㄱ} General Theory, Chapter 13, footnote no.1.
  • CF{ㄴ} Treatise on Money, Chapter 1
  • CF{ㄷ} Keynes(1914a) says: 
[Friedrich Benedixen says that the] old 'metallist' view of money is superstitious, and Dr Benedixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance. With the exception of the last, the only true interpretation of which is purely dialectical, these ideas are undoubtedly of the right complexion. It is probably true that the old 'metallist' view and the theories of regulation of note issue based on it do greatly stand in the way of currency reform, whether we are thinking of economy and elasticity or of a change in the standard; and a gospel which can be made the basis of a crusade on these lines is likely to be vary useful to the world, whatever its crudities or terminology.(Keynes 1914a: 418) ─“Theorie des Geldes und der Umlaufsmittel by Ludwig von Mises; Geld und Kapital by Friedrich Bendixen”(review), Economic Journal 24.95 (Sep.): 417–419. From a blog.
   In my view, money is not simply a handy numeraire in which prices, debts, contracts (or, indeed, HPM and bank money) happen to be denominated. My approach can thus be contrasted with, say, a GE approach, in which we may choose any one good to serve as numeraire, converting relative values to nominal values. Indeed, the typical story of the origins of money is really based on a numeraire approach, in which Robinson Crusoe decides to use "tobacco, leather and furs, olive oil, beer or spirits, slaves or wives. ... huge rocks and landmarks, and cigarette butts" as "money". (Samuelson 1973, pp. 275-6) When, say, seashells are chosen as money by Crusoe, he has simultaneously chosen a numeraire and designated what will serve as the money-thing. Similarly, the orthodox account of the gold standard conflates the money-thing with the money-description (unit of account). It is only later in the story that the goldsmith succeeds in blurring the line between the object and the numeraire by issuing circulating receipts backed by gold. And we do not really achieve complete separation, and thus, a pure unit of account until the evil government comes along with a fiat money. A sharp distinction is thus made between a "commodity money"ㅡwhich is nothing but a GE numeraireㅡand a fiat money denominated in a unit of account. In my view, this is the wrong distinction that results from conflating money with the money-thing. (See also Heinsohn and Steiger 2000, p. 97.)

   Unfortunately, Mehrling proposes an equally unhelpful distinction, originally advanced by Schumpeter as a credit theory of money versus a monetary theory of credit. In Mehrling's hands, this becomes "fiat money" versus "credit". By fiat money, Mehrling appears to means nonconvertible money-things issued by government; by credit he appears to mean nonconvertible money-things issued by private entities. Further, he seems to believe that my own theory is of a "modern money" system based on "fiat money", so defined, and is contrasted with his own theory of a "modern money" system based on "credit", so defined. Actually, my approach is a neo-Chartalist or State money, or taxes-drive-money, approach and applies to any monetary system in which the state determines the unit of account in which the money-things are denominated (whether these are "fiat money" or "credit"). Certainly there are differences between what Mehrling calls "fiat money" and "credit", however, both these money-things are issued into a "modern money" or "chartal" or "state money" system. As Keynes argued, the state money system has existed "for some 4000 years at least", beginning when the state claimed the right to name the money, as well as "the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to timeㅡwhen, that is to say, it claims the right to re-edit the dictionary". (Keynes 1930, p. 4) While we can easily imagine a state money system that operates only with "credit" money-things, in point of fact all existing nation states actually issue some of the money-things. Because Mehrling conflates money-things with money, he fails to recognize the important characteristics of a state money system. The important distinction to be made is between a system in which the state designates the unit of account, versus the (probably only imaginary) system based on a numeraire that might have evolved out of some competitive market process. (Klein and Selgin 2000) Mehrling's "credit money" can exist in either sort of system. However, in all modern state money systems, there is a hierarchy of money-things and it is no coincidence that HPM (or "fiat" money-things) sits at the top.

   In this article I want to avoid historical debate as much as possible, but I will assert that the conjectural history propagated by Samuelson (and others, and apparently mostly believed by some of the reviewers) is dismissed by all serious historians and anthropologists. Interested readers are referred to accounts (Cook 1958; Crawford 1970; Davies 1997; Goodhart 1998; Grierson 1965, 1977, 1979; Heinsohn and Steiger 1983; Hoppe and Langton 1994; Hudson 1998; Ingham 2000; Kraay 1964; Kurke 1999; Magubane 1979; McIntosh 1988; Neale 1976; Redish 1978; Rodney 1974; Zarlenga) that emphasize the social nature of the origins of money, including the role played by the precursor of the modern state.

   What I wish to do is to call attention to the substantial logical problems entailed in the typical approach taken by economists. So far as I know, there are only two lines of research that attempt to derive a numeraire from private maximizing behavior.[:]
  • The first is the Austrian school, which supposes that an evolutionary process could have selected for the transactions-cost-minimizing medium of exchange. (Parguez 2000, Klein and Selgin 2000, Dowd 2000, Wray 2000) However, it is widely recognized by the Austrians, themselves, that no satisfactory exposition yet exists. 
  • The second, more fruitful, approach is that taken by Heinsohn and Steiger (1983; and also adopted in Wray 1990, and updated in Heinsohn and Steiger 2000) that traces development of the unit of account from private loans of grain. I now view this as a satisfactory explanation of the origins of private credit (money-things) denominated in a pre-existing social unit of account, however, I believe it still suffers from logical problems involved in hypothesizing a spontaneous choice of a universal unit in which debts would be denominated. Further, I fear it hypothecates a later societal form of organization to the distant past. I believe it is unlikely that an economy based on private ownership of productive land pre-existed civilization and its accoutementsㅡwriting, money, and rudimentary "state". While we all know and love the Lockeian story of the origins of private property, it is fanciful at best. (Henry 1999)
   In any case, the primary purpose for examining history and pseudo-history is to shed light on the nature of modern money.
  • In my view, a system based on a commodity money is not a "money economy" as Keynes defined it. Rather the commodity money economy is an (imagined) economy in which money serves as nothing more than a numeraire; it is what Keynes called a non-money or barter or real wage economy. 
  • Thus, even if there really has been a historical stage in which there was a commodity (numeraire) money, I would argue that it sheds no light on the operation of our modern money system (and recall that Keynes argued that the modern money system is at least 4000 years old). 
The useful dichotomization of theory is that between what Goodhart (1998) has called C-form (Chartalist) and M-form (Metalist, or commodity money)ㅡthat is to say, between a system in which money is a social unit of account or that in which money is nothing more than a numeraire adopted for convenience. The State theory, or taxes-drive-money (TDM), or neo-Chartalist approach insists that the state “writes the dictionary” in all modern economies. This goes a long way toward explaining what would appear to be an otherwise extraordinary coincidence: the one-nation-one-currency rule. As Mundell's work makes clear, if money is simply a numeraire chosen to facilitate exchange, then one would expect use of a particular numeraire within an ‘optimal currency area’. (Mundell, Goodhart)   There is no reason to expect such to be coincident with nation states. In fact, however, the one-nation-one-currency rule is violated so rarely it borders on complete insignificance. Further, those few cases are easily explained away as special cases, as Goodhart demonstrates.

   Finally, a word about the Post Keynesian preoccupation with the link between uncertainty and the use of money. It is often argued that money is used BECAUSE the future is uncertain. However, it is normally recognized that the future in a monetary economy is uncertain in a very particular way. That is, the individual in a monetary economy is mainly concerned with uncertainty about nominal things: nominal inflows and outflows, nominal prices, values of nominal wealth, future nominal interest rates. These uncertainties exist only in money-using economies (and, tellingly, do not exist in GE models that use money only to facilitate exchange). It would be thus rather circular to argue that we use money to protect us from a kind of uncertainly that exists only in a money-using economy. Given organization of production around money (that is, a monetary production economy) use of money may well reduce individual uncertainty (even as it raises society's uncertainty), but this cannot explain the origins of money. Acknowledgment of existence of this particular kind of uncertainty, thus, sheds little light on the NATURE of money, nor, ultimately, on the USE of money.

  I do, however, agree with Davidson's (2001) argument that given uncertainty and use of money, use of enforceable monetary contracts is a viable means of reducing uncertainty. Davidson also recognizes, as did Keynes, that "in a 'cooperative economy' where all parties trusted all other parties, there would be no need for money as we know it", while in "a market economy", most buyers and sellers do not have such familiar, trustworthy relationships." (Davidson 2001, p. 425) In such entrepreneurial economies, "state enforcement of voluntary obligations if either party reneges is a necessary condition for a monetary economy ..." (ibid) Danby (2001) labels Davidson's approach "contractual chartalist", as opposed to my "tax-based chartalist", because the primary role of the state in Davidson's view is to enforce private monetary contracts. However, I do not deny the practical importance of state enforcement, nor do I deny the significant role played by such contracts and enforcement in reducing individual insecurity. I simply insist that one cannot logically derive the origins of money from such concerns.


2. Taxes Drive Money

This leads us to an explanation of the use of money: why is money used? My dissertation advisor, Hyman Minsky, continually warned me against rewriting Genesis, good advice that I've been ignoring for almost two decades. The orthodox story of Genesis, begins, as we've seen, with the Garden of Eden and Crusoe and Friday who grow tired of the inconveniences of barter. In any case, money comes out of the market. In the Heinsohn and Steiger version, it derives from private loans of property (a view apparently favored by Mehrling). The shared understanding of each of these is a non- or even anti-social methodological individualism (Danby 2000; Parguez 2000; Ingham 2000)  Such methodology is clearly antithetical to the approach taken by most heterodox economists, and in particular by institutionalists, social economists, and Marxists. Post Keynesians appear to be more willing to adopt methodological individualism, for reasons beyond the scope of this article. However, there is a tradition even within Post Keynesian thought that embraces a cultural, anthropological, social approach to money (Danby 2000; Davidson 2000; Ingham 2000).

   For the record, I believe that money derived out of the pre-civilized practice of wergild; or to put it more simply, money originated not from a pre-money market system but rather from the penal system.[n1] (Grierson 1977; Goodhart 1998) [:]
  • An elaborate system of fines for transgressions was developed in tribal society. 
  • Over time, authorities transformed this system of fines paid to victims for crimes to a system that generated payments to the state. (Innes 1932)
[n1] Hudson (2001) has developed an alternative thesis for the origins of the money of account in Babylonia. Rather than locating the origins in wergild, he argues it was created within the temple and palace communities for internal accounting purposes. Clearly, however, his argument also focuses on the social nature of the origins.
Until recently, fines made up a large part of the revenues of all states. (Maddox 1769) Gradually, fees and taxes as well as rents and interest were added to the list of payments that had to be made to authority. To be clear, I do not imagine an all-powerful state (as Mehrling implies), but rather a gradually evolving institution that at times was more, and less, accepted as a legitimate authority and that was more, and less, operated on democratic principles. All that is necessary is to posit that some sort of authority exists that can levy obligations on a populationㅡanything from fines or tithes to fees and taxes. Such an authority can range from a powerful Egyptian pharo to a beleaguered Greek city state trying to wrest power away from an elite (Kurke 1999), to a weak English crown, and from a fascist 1930s era government to a new millennium democratically elected representative form of government in which a supreme court intervenes to award the presidency to a previous ruler's electorally-challenged scion.

   Thus, when the neochartalist approach is identified as TDM, this is not meant to narrowly limit the scope to the special case of, say, ability to impose high income taxes by some authoritarian 1984-ish state. Quite the contrary. All that is required is an ability to create and impose an obligationㅡthe exact nature of which is defined by the authorityㅡno matter how weak that authority might otherwise be.[n2] Whether this obligation take the form of payment of a tithe (the penalty for nonpayment of which is believed to be eternal damnation), a fine for activities that are mostly unavoidable (say, hunting deer in the king's forest to obtain protein needed for survival), or a head tax (required to maintain one's head on one's shoulders) is rather immaterial.
[n2] Kregel has pointed out to me that English kings were very inventive in creating all sorts of obligations imposed on their subjects. He emphasizes that we would not have patents or corporate charters without these clever inventions of rights to the fruits of such imposed obligations.
   The TDM approach has quite wrongly been characterized as narrowly applying only to income taxes. In fact, income taxes alone cannot possibly explain the genesis of money for the obvious reason that an income tax would have been entirely avoided by not earning money-denominated income. The key is the unavoidable nature of the obligiation, and the head tax is probably the best motivating device knownㅡas was well understood by Africa's colonizers. (Rodney 1976) This does not mean it is essential that no one can ever avoid the obligationㅡsome have always escaped the gallows, others have not felt constrained by the threat of life in hell. Nor is it necessary to impose this obligation on all members of society. Even if only a small percent of society can be compelled to feel it necessary to "pay up", such obligations can monetize an economy and move resources to authorities. Apparently, a significant portion of the population still feels it necessary to pay the 'obligatory' tithes to religious institutions to keep the clergy rich in the finer objects of life. Still, the threat that the IRS will tap wages and confiscate assets seems to serve as a more efficient motivating device than the threat of eternal damnation. And one suspects that, as I argued in my 1990 book, creation of modern democratic government and belief in social obligations has proven to be evolutionarily superior to any other system; after all, the tithes is only 10% of income, but highly democratic states in societies with high development of feelings of social responsibility have at times been able to achieve marginal tax rates as high as 90%. (It is telling in the US today, the sense of social obligation has deteriorated sufficiently that our President can proclaim that no one should feel obligated to pay more than 33% of her marginal income to the federal government.)

   What do we mean by TDM? We mean that [:]
  • the "state" (or any other authority able to impose an obligationㅡwhether that authority autocratic, democratic, or divine) imposes an obligation in the form of a generalized, social unit of accounta moneyused for measuring the obligation
  • The important step, then, consists of movement from a specific obligationㅡsay, an hour of labor or a spring lamb that must be deliveredㅡto a money obligation.
  • This does not require the pre-existence of markets. Once the authorities can levy such an obligation, they can then name exactly what can be delivered to fulfill this obligation. They do this by denominating those things that can be delivered, in other words, by pricing them. To do this, they must "define" or "name" the unit of account.[n3] 
This resolves the conundrum faced by methodological individualists like the Austrians and some Post Keynesiansㅡonce we have a unit of account and a price we can finally have a numeraire without a spontaneous virgin birth.[n4]
[n3] As Keynes argued, "A money of account comes into existence aling with debts. ... and price lists" (Keynes 1930 p. 3); it is clear that the monetary obligation imposed by the authority is the important debts so far as my approach is concerned, although Keynes was using the term more broadly). 
[n4] Mehrling cites Braudel's workㅡon 13th~15th century Europeㅡas evidence against Chartalist speculation on the history of money. However, the origins of money lie deep in the distant pastㅡ3000 or maybe 10000 years before medieval Europe. Others hint that the State theory of money cannot apply to the case of the US before 1913, because before that date we did not have a central bank; others link the TDM view to an income tax, arguing that since the US did not have an income tax before WWI, the TDM approach cannot be applied to the US before that date. All of these arguments are spurious. Even if a country only had a customs house and a tariff on necessary imports, this can "drive" money.

3. The Gold Standard and State Money Things

Thus far we have only explained the money of account (the description). Once the state has named the unit of account, and imposed an obligation in that account, it is free to choose “the thing” that “answers to the description”. It could, for example, say that it will accept 27 grains of gold in payment of one unit of tax obligation. By doing so, it has monetized gold, rendering it a “money-thing” (gold money) denominated in the unit of account.
  • Note that even if gold is the only money-thing that answers to the description, gold is not merely a conveniently chosen numeraire, one good among many chosen by acclamation of individual barterers. Rather the state must denominate gold in its unit of accountㅡthe unit in which taxes are denominated. 
  • Note, also that the state can make anything it wants answer to the description, and, as Knapp emphasized, can change "the thing" any time it likes: "Validity by proclamation is not bound to any material" and the material can be change to any other so long as the state announces a conversion rate (say, so many grains of gold for so many ounces of silver). (Knapp 1924, p. 30) 
The State money stage begins with the state writing the dictionary and naming the thing that answers to the description; the modern money stage is fully achieved when the state actually issues the money-thing answering to the description it has providedㅡthat is, HPM. Economists often distinguishe between a "commodity money" (say, a gold coin) and a "fiat" paper money. However, in my view, the material from which the money thing issued by the state is produced does not matter (at least in determining the nominal value of the money thing)ㅡin both cases, the state must announce the nominal value of the money thing it has issued (that is to say, the value at which the money-thing is accepted in meeting obligaions to the state).

   It is frequently argued that a gold standard is an example of a commodity money system. However, it is actually a state money system in which the state denominates gold in the money of account; and it is a modern money system so long as the state issues the gold money thing accepted in payment of taxesㅡtypically gold coins or notes issued against warehoused gold. The state might limit its own spending to the quantity of gold it can obtain (either directlu coining the gold, or issuing redeemable notes against gold held on reserves) at a fixed rate of nominal spending against its gold.[n5] Because the states's spending is then limited to the quantity of gold it can obtain, it will almost certainly require gold (or gold-backed notes) in payment of taxes. The populatioin will have to obtain gold from the state's spending, from domestic mining activity, from abroad, or by melting down jewelry and other valuables. As conventionl theory makes clear, interest rates will tend to be endogenously determinedㅡwhen a nation faces a gold drain, it can raise interest rates to try to reverse gold flows. If a nation does not maintain a full bodies gold-money but rather adopts a fractional reserve, it must always worry that it cannot convert all outstanding money-things to the gold-money. Hence its interest rates is endogenous and spending by state (though emission of money-things) is constrained. As we will discuss below, it is not the material from which gold money is manufactured, but rather the fixed exchange rate against a relatively scarce commodity that is significant. This the rel import of a gold standardㅡnot because it is "alchemistically" turns gold into money (reversing Mehrling's characterization) but rather because it ties the hands of the state and endogenizes the interest rate.

[n5] A gold standard in which the state picks an arbitrary reserve ratio of gold to be held against notesㅡsay 25% gold backing against notes issuedㅡbut in which the notes are irredeemable may not actually tie the hands of government at all if it is free to change the reserve ratio any time it likes. The following discussion does not apply to this sort of system.

   However, in spite of the amount of ink spilled about the gold standard, it was actually in place for only a relatively brief instant.
  • Typically, the money-thing issued by the authorities was not gold-money nor was there any promise to convert the money-thing to gold (or any other valuable commodity). 
  • Indeed, throughout most of Europe's history, the money-thing issued by the state was the hazelwood tally stick. Other money-things included clay tablets, leather and base metal coins, and paper certificates. 
  • Why would the population accept otherwise "worthless" sticks, clay, base metal, leather, or paper? Because the state agreed to accept the same "worthless" items in payment of obligations to the state.
   Knapp distinguished between “definitive” money accepted by the state in ('epicentric') payments of obligations to the state, and “valuta” money that is the money-thing used by the state in its own payments ('apocentric').
  • In today's modern money systems, HPM fulfills both functions. Of course, it appears that the US government accepts bank money (demand deposits) in payment of taxes, but in reality payment of taxes by bank check leads to a reserve drain from the banking system. Government spending normally takes the form of a treasury check, which when deposited leads to a reserve credit. Note that so long as government does accept bank money in epicentric payments at par with high powered money, from the point of view of the nonbank public there is no essential difference between bank money and HPM. This is not true for banks, which lose reserves when taxes are paid by bank check and gain reserves whenever treasury checks clear. 
  • Finally, Knapp defined as 'paracentric' payments made between nongovernment entities. In all modern economies, these mostly involve use of bank money and other money-things issued by the non-governmental sector (what can be called "inside" or "credit" money as one prefers). 
  • There is of course a hierarchy or pyramid of money-things with non-banks mostly using bank liabilities for net clearing and with banks using HPM for net clearing with other banks and with the government (handled on the books of the central banks). Note that "monies" are denominated in the money of account, that is, the account in which obligations to the state are enumerated.
   Once [1] the state has created the unit of account and named that which can be delivered epicentrically to fulfill obligations to the state, it has generated the necessary pre-conditions for development of markets.
  • All the evidence suggests that in the earliest stages the authorities provided a full price list, setting prices for each of the most important products. Once prices in money were established, it was a short leap to creation of markets. 
  • This stands orthodoxy on its head, by reversing the order: first money and prices, then markets and money-things (rather than barter-based markets and relative prices, and then numeraire money and nominal prices). 
[2] The next step was the recognition by government that it did not have to rely on the mix of goods and services provided by taxpayers, but could issue the valuta money-thing to purchase the mix it desired in apocentric payments, then receive the same money thing (this time acting as definitive money) in the epicentric tax payments by subjects/citizens (in Keynes's terminology, this is the act of naming what thing answers to the description). This would further the development of markets because those with tax liabilities but without the goods and services government wished to buy would have to produce for market to obtain the means of paying obligations to the state. Again, this point was well-recognized by Africa's colonizersㅡimposition of monetary tax liabilities played a key role in monetizing Africa.


4. Money and Government Spending

Post Keynesians frequently argue that only money economies have unemployment, and sometimes identify uncertainty as the underlying cause of unemployment. Note that as we argued above, uncertainty cannot explain the origins of money, nor can it be the ultimate cause of unemployment. If the state imposes a tax liability and then lets its spending of the money-thing accepted in tax payments expand until all who wish to obtain the money-thing have been satisfied, there will be no unemployment even in a money economy (in the sense that anyone can provide goods or services to obtain the money thing from government). If however the state were to limit its spending below the level that would provide subjects/citizens with the means of tax payment desired, there could remain a 'queue' of those willing to 'work' to supply goods and services to government and/or markets, but unable to find a demand for their goods and services. They are effectively 'unemployed' because of insufficient government spendingㅡthe source of means of tax payment.[n6]  Note also that this unemployment could exist even in the case of an 'ergodic' future. ( ... ... ) [n7]
[n6] Government restriction of supply of HPM is a necessary but not sufficient condition for the existence of unemployment. Even in the presence of government restriction, if private markets supplied enough work for all who want to work, full employment could be maintainedㅡat least for a while.
   As mentioned above, there is a hierarchy of money-things in all modern economies. Usually, one uses liabilities higher in the pyramid to discharge one's won liabilities. But in any case, any private entity must use third party liabilities to discharge its own money-denominated liabilities. The case of a state that imposes a tax obligation is quite different, however.
  • When it spends by issuing the money-thing (valuta and definitive) accepted in dispensation of that obligation to pay taxes, the state does not need a third party liability to 'discharge' its own 'liabilities'. 
  • Indeed, while HPM is often said to be the 'debt' or 'liability' of government (central bank and treasury), it is not a liability in the normal sense of the term, for the government is not 'liable' to deliver anything to retire high powered money. When government issues HPM to buy something, it is 'liable' only to accept that same HPM in epicentric (i.e. tax) payments to the state. 
  • Thus, when Rossi argues, "As a matter of fact, it is plain that no agent whatsoever can really pay by acknowledging his/her debt to another agent. ... The emission of modern money is never a purchase for the issuer", he is clearly confusing the position of a user of HPM with that of the issuer. (Rossi p. 484) When the state issues HPM, the only sense in which government is 'in debt' to holders is that it must allow taxpayers to retire their obligations by delivering HPM.  Once they have done so, the government is no longer 'liable' for anything. 
  • What Rossi and many others forget is that unlike a bank, the state creates and imposes a tax liability on its population,[n8] making the population liable to deliver any money-thing designated by the state as acceptable at state pay offices. It is true that no private agents can "buy" anything simply by issuing their own liabilities, for they would remain "indebted" by so doing.  
  • The apparent difference between a privately issued money-thing and the state's HPM money-thing lies not so much in the money-things themselves but rather in the different ability to impose money-denominated liabilities. This is the true source of sovereign power, and this is what puts the state's money thing at the top of the hierarchy. The relations in a "free market" economy that are based on "voluntary" money-denominated contracts do not give sovereign power to private entities. However, it is easy to find examples throughout history in which, say, a feudal lord or an owner of a company town is able to exercise sovereign power in its jurisdiction, and hence able to "buy" through issuing its own "liabilities".[n9]
[n8] Again, it may be necessary to note that I am not assuming an "all powerful" or fascist state. Even the most democratic forms of government "impose" tax obligationㅡeven if the taxpayers vote unanimously for such levies.
[n9] Government can, if it so chooses, attempt to tie its own handsㅡand thereby reduce its sovereigntyㅡby promising to redeem its HPM on demand for something elseㅡgold, foreign currencyㅡin which case it chooses to make itself "liable" for delivering such. See below.
   Mehrling similarly paints a fancifyl, if not bizarre, picture in which government is nothing more than a large "ongoing business"ㅡperhaps a giant Microsoftㅡfrom which we buy "a variety of services". (Mehrling 2000, p. 402) Further, "we are all willing to extend credit to the government", temporarily accepting its liabilities because we will use these to buy its services. (Mehrling 2000, p. 402-403) Mehrling is obviously conflicted about this, however, adding a footnote recognizing "that government spending is not limited in any simple way by its ^current^ taxation". (Mehrling 2000, p. 402, n. 4; emphasis added)  Lest we fear that he has retreated into some sort of Barro-Ricardian equivalents argument, he admits that government spending is not even limited by "the present value of all future expected taxes". (ibid.) What then determines willingness of the private sector to extend "credit" to government? Given his earlier discussion, one would expect it to be the discount flow of government services the public expects to purchase over the infinite horizon. But no, Mehrling finally concludes that willingness to accept HPM is a function of the state's "taxing authority" and the amount of "credit" the public will extend exceeds current taxes if there is "unused" taxing authority. In the final analysis, then, he merely accepts a convoluted version of the state money approach he wishes to criticize, substituting "unused taxing authority" for tax obligataions, and his vision of government as nothing but a large Microsoft that produces services for purchase proves to be nothing but a diversion.[n10]

   If, as I have argued, HPM is accepted from inception because government first imposes a tax liability, then why will the private sector accept more than is required for immediate needs to fulfill obligation to government? The most obvious reason is that HPM is universally accepted as a medium of exchange and means of payment, hence, (a) one can purchase goods and serves (not just from government, but also from the private sector), (b) one can retire liabilities to nongovernment entities, and (c) one can hoard it for unspecified future use. Of course, (a) and (b) only shift it from pocket to pocket; ultimately all the HPM must be voluntarily held as net hoards for unspecified future use. In order for the nongovernment entities to net hoard HPM, government must provide more HPM than it drains through tax paymentㅡin other words, government must run a deficit. What happens if the desire to net hoard HPM is zero? In that case, government would find that once the private sector has received all HPM it requires to pay taxes, government would offer HPM to buy goods and services, but would find no takes. (Or, incomes must rise until the desire to net hoard equals the government deficit.) On the other hand, what if government's provision of HPM left an unsatisfied demand for HPM for hoarding? The government would see queues of those offering goods and services for sale for HPM. As we discussed above, this could be defined as unemployment, as there would be people willing to work to supply goods and services to obtain HPM. Note the relation of this argument to Keynes's claim that unemployment results because people want the moonㅡliquidityㅡand that the solution is to operate a green cheese factor to meet the demand.


5. Financing Government Deficits

It is not quite so simple in our modern economy, of course, because for the most part HPM is used mostly for account clearing (plus illegal activities). There is little reason for nonbanks to hoard HPM if bank liabilities exchange, and are expected to continue to exchange, at par against HPM, and if bank money is accepted in tax payments. Hence, most of the time HPM will be held within the banking system. Under this arrangement, is there still a reason to expect a desire for net hoards of HPM? Yes, for two reasons. First, the banking system uses HPM for net clearing among banks and with the government, hence, one would expect to see a positive balance of HPM held as assets of the banking system. Of course, adding a reserve requirement ensures a legal imperative for positive balances, although banks would almost certainly desire some positive balance unless there exists a smoothly functions overdraft facilities through which government lends HPM required for clearing on demand.

   The second reason to expect accumulation of HPM balances is a bit more complicated, and is related to the desired portfolio balance of the private sector. In a closed economy, all 'inside' financial wealth is offset by 'inside' debt, and the surpluses of some entities over any period are exactly offset by the deficits of other units.{*}  When government deficit-spends, this allows the private sector's income and wealth to increase without requiring any private entity to incur deficits or debt. Thus, government deficits can increase national income and allow net wealth to rise above zero. This may well encourage some private entities to increase spending, incurring deficits and inside debt, while at the same time encouraging other private entities to "surplus spend", taking up private sector inside debt. We would normally expect that the nongovernment sector will want to accumulate some outside, or net, wealth in the form of HPM, perhaps as a ratio to inside wealth, and/or as a ratio to income flows. Depending on the government's spending and taxing rules (Are taxes set as a percent of nongovernment income flows? Is spending countercyclical?), the size of the government deficit or surplus (hence the net quantity of HPM it injects or drains) may be endogenously determined by the nongovernment sectors' desire to "net save" in HPM.
CF{*} 중앙은행을 제외한 자금순환표 (중앙은행의 세 가지 통화정책)
   However this is still too simple because thus far we have assumed government spends by emitting HPM, some of which is then drained in tax payments such that the outstanding stock of HPM depends on the budget surplus or deficit. However, in most modern economies, government issues government bonds equal to a significant portion of its deficit (or retires bonds as it runs surpluses). This means the private sector accumulates (or loses) some government bonds in addition to HPM. This is usually called 'government borrowing' and is thought to be necessitated by government deficits. This also brings up the issue of government payment of interest, thought to be required to enable government to "borrow" and deficit spend. Most orthodox and even may heterodox economists believe that the market dictates to government what interest rate it must pay: Mehrling goes so far as to claim government does not have "the ability to set ... the rate of interest as an exogenous policy datum", and while he admits that "the state borrows at the lowest rate of interest", he insists "its debt must compete with privately issued debt". (Mehrling 2000, p. 403) Similarly, Asmpromourgos gop[?] insists "the issuing of securities is an essential part of the complete process of effecting the rise in public expenditure" (Aspromourgos 149, see also 150-151). [n11]
[n11] He also says (Aspromourgos p. 151) that bond issue is essential to "funding", "or, if one prefers, 'sustaining', 'supporting' or 'effecting'", to come up with a way of avoiding the fact that since the deficit spending has occurred ^before^ the bond sales logically can take place, bond sales ^cannot^ have been required to allow the deficit spending to occur, or any normal use of the meaning of terms he uses or of interpretations of the concept of causation.
   In my book, I called bond sales an 'interest rate maintenance operation', not a financing operation. The government does not 'need' to 'borrow' its own HPM in order to deficit spend. This becomes obvioius if one recognizes that government bond sales are logically impossible unless (a) there already exist some accumulated HPM with which the public can buy the government bonds, or (b) government lends HPM used by the public to buy the government bonds, or (c) government creates some other mechanism to ensure that sales of bonds to the public do not lead to a debit of bank reserves of HPM. Therefore, government bond sales cannot really 'finance' government deficits. This is recognized by most heterodox economists; even Aspromourgos admits "government expenditure is effect entirely by creation of injection of outside money" (Aspromourgos 149), however he then incongruously rejects the obvious conclusion that "tax and bonds do not 'finance' government expenditure". He does this by arguing that those who receive HPM may not wish to accumulate hoards of HPM, thus, government must sell government bonds to drain the 'excess or undesired liquidity'. (Aspromourgos p. 149; See also Dalziel 2000, who argues this "excess liquidity" can cause inflation.) While he weaves, dodges, and floats all around the point, never really telling us how the public forces government to sell government bonds "to restore a final or complete equilibrium position for all agents in the system", Aspromourgos does seem to vaguely recognize that it has something to do with "an interest-setting procedure" adopted by government. (Aspromourgos p. 149)  Hence, while it is not clear exactly what he has in mind, he does not seem to accept Mehrling's belief that the government's bonds "compete" with private debt.

   It is really quite simple. Government deficit spending generates hoards of HPM to satisfy the nongovernment sectors' desire to 'net save' in the form of non-interest earning HPM. The government could leave things there (as Japan does today), but might instead choose to pay a positive interest rate by draining some of the HPM through sale of interest earning government bonds. Clearly, government can set the interest rate anywhere it likes; rather than 'competing' with private debt, this will instead set the base rate below which private borrowers normally will not be able to borrow by issuing debt with similar maturity. While it is not at all necessary, government can issue debt with a wide range of maturities and then peg the interest rate on each of these. Normally, in the US, government only pegs the shorter bill rate. How does that work? In the US, the Fed announces a fed funds target and then supplies/drains reserves to keep just the amount of HPM in the system that is required by banks and the nonbank public, allowing the Fed to hit its overnight target. The Fed can always tell whether there is too much/too little HPM in the economy simply by watching the fed funds rate. If it moves above the range, the system wants to sell bonds to the Fed in order to obtain more HPM; if the fed funds rate moves below target, the system wants the Fed to drain some HPM through bond sales. Hence, the short term government "borrowing" rate will be administered through central bank targeting of the fend funds (overnight) rate.

  Note that I do not deny that government's ability to sell government bonds (in other words, to substitute interest-earning bonds for non-interest earning HPM) might be somewhat interest rate sensitive. At a low interest rate, many of those with HPM might prefer to remain fully liquid; at a high interest rate, most might prefer to hold government bonds over HPM. Another way of stating the same thing is to say that the banking and nonbanking public's "portfolio allocation" between HPM and interest-bearing government debt might be influenced by the Fed's overnight rate target. What I do deny, however, is that the government deficit places upward pressure on interest rates (the hoary crowding out argument). Indeed, unless government drains excess reserves that can result from deficit spending, the overnight rate will be driven toward zero. This is because excess HPM will always flow first to banks (any nonbank entities with excess HPM will deposit it into the banking systemㅡalthough in reality because government spends by crediting bank reserves, government spending does not directly increase HPM held by the nonbank public, but rather directly increases bank reserves). Banks with excess reserves offer them in the fed funds market, but find no biddersㅡhence the fed funds rate will be quickly driven toward zero. Of course, this is how the Bank of Japan keeps the overnight rate at zero in the presence of huge government deficits; all it needs to do is to keep some excess reserves in the system.

  This makes clear that the process through which holders of excess 'liquidity' 'force' government to 'borrow' really has to do with the interest rate setting mechanism (as Aspromourgos's intuition told him, unfortunately, his faulty analysis led him astray as he searched for 'equilibrium' portfolio relations). If the government is happy with a zero-bid condition in the fed funds market, it can simply leave some excess reserves in the system. Again I would not deny that the public's appetite for HPM and government bonds might be interest rate sensitive, which could increase the ability of government to deficit spend and issue HPM and interest paying debt. In the real world, however, we have not seen a situation in which the post-Civil War US government has offered dollars to buy goods and services without drawing forth some goods and servicesㅡwhich indicates that the nongovernmental sector's desire to net hoard (HPM plus government bonds) has never been reached. Nor even in the recent case of Japan, with zero overnight rates and a deficit in excess of 8% of GDP, has such a limit ever been reached. While such a limit might be a theoretically interesting constraint, apparently it is not a practical constraint. Nor is the theoretical constraint determined by "unused taxing authority" but rather by the nongovernment sector's desire to hold a combination of non-interest earning HPM and interest-earning bills and bonds.


6. Coordination and Consolidation of Treasury and Central Bank Balance Sheets

Some might argue that this is still too simple, and bring in the technical details of coordination between the central bank and the treasury. For example, Lavoie (2000) makes a distinction between the "neo-chartalist" and what he calles the "post chartalist" positions, the first of which applies to a nation in which the treasury spends by drawing upon accounts at the central bank (hence, government spending directly increases bank reserves) while the second applies to nations in which the treasury spends by writing checks drawn on private banks. According to Lavoie, this is an important distinction because in the neo-chartalist system it is true that the government spends first and then borrows, while in a post-chartalist system it is true that the government first issues debt held as an asset by private banks, which then create deposit accounts on which the treasury draws. Most importantly, Lavoie argues that the US and Euro systems are actually post chartalist, not neo-chartalist, precisely because both the Fed and the European Central Bank are prohibited by law from buying government debt directly from their national treasuries.

   Actually, the detailed coordination between the Fed and the US Treasury is examined in both my book and in Bell (2000), and there is no need to develop a separate "post" chartalist theory to deal with operating rules developed to minimize the "reserve effect" that results from fiscal operations. It is clear that the Fed and Treasury have developed their procedure to avoid the huge fluctuations of reserves that would otherwise result from timing mismatches between receipt of tax payments and emission of Treasury checks and their deposits in private banks. In reality almost all US federal government spending takes the form of writing checks on the Fed, and when these are deposited at private banks, reserves are increased. It is true that the Treasury engages in "advance selling" of bonds to Special Depositories, but this is not undertaken to provide "funds" to the Treasury so that it might spend; rather this is done in anticipation that reserves will be withdrawn soon through a tax and loan call (that drains reserves from Special Depositories). As Bell argues: " "It is impossible to perfectly balance (in timing and amount) the government's receipts with its expenditures. The best the Treasury and the Fed can do is to compare ^estimates^ of ^anticipated^ changes in the Treasury's account at the Fed and to transfer approximately the correct amount to/from tax and loan accounts. Errors due to excessive or insufficient tax and loan calls are the norm. ... When the Treasury is unable to correct these errors on its own, the Federal Reserve may have to offset changes in the Treasury's closing balance." (Bell 2000, p. 616)  This is done through open market and discount window operations. While we don't have the space to go through all of these coordinating activities, it should be clear that all of this is monetary policy and has to do with maintaining stable fed funds rates, while it has nothing to do with fiscal operations. Hence, Lavoie's distinction between neo- and post chartalist is not helpfulㅡin either case, bond sales are an interest rate maintenance operation and not a financing operation.

   The perceptive reader will object that there is indeed a financial constraint on government's ability to deficit spend: the inflation barrier. This is mostly correct. In a strictly technical sense, even if the inflation barrier is reached, government can still 'finance' its deficit spending so long as anyone will deliver goods and services in exchange for HPM. Still, the government might find that it is unable to increase real purchases because its additional spending only causes wages and prices to riseㅡwhat Keynes defined as "true inflation" : "When a further increase in the quantity of effective demand produces no further increase in output and entirely spends itself on an increase in the cost-unit fully proportionate to the increase in effective demand. ... " (Keynes 1964, p. 303)  Thus, the inflation barrier is more properly thought of as a real constraint (full employment barrier) than a financial constraint, although at high enough (hyper-) inflation, the government might find nothing for sale for HPMㅡthat is, when the entire monetary system breaks down.


7. Horizontal Money and Neo-Chartalism

There has been some concern that the neo-Chartalist approach is not consistent with the Post Keynesian horizotal approach, or, at least, that I have not achieved a successful integration. Aspromourgos (2000, p. 144) claims my attempt to integrate the two (primarily in Chapter 5 of my book) "is not very helpful".  While Mehrling did appreciate the "soybean futures parable of money" presented in that chapter, he has several complaints. First, he argues that consolidating the balance sheets of the Treasury and Fed obscures the difference between "money" and "state finance". Instead, he would keep them separate and would treat government-issued currency as a liability of the central bank rather than as an outside asset.  In his view, "state money is not a fiat outside money...but, rather, an inside credit money because it is the liability of the central bank".  (Mehrling 200, p. 405)  This appears to be quite incorrectㅡthe central bank is no more 'inside' than is the treasury, which is why the private sector uses HPM for net clearing. Further, while hi is not explicit, his statement seems to suggest that he rejects the horizontal approach, which insists that the central bank has no separate discretionary power over its balance sheet. Mehrling proposes to treat HPM as "the liability of the central bank", or "as promise to pay". But, as discussed above, for what is the central bank liable, or, what does the central bank promise to pay? It only promises to accept its 'liabilities' in payments made to itself or to the state. Mehrling seems to imagine that the central bank 'promises' to pay foreign currencies, but this is true only on a fixed exchange rate systemㅡand even there it is only partially true. He also claims that "Wray's state theory of money ... Exists in {sic?} resolved tension with his nascent theory of money as nothing more than the open interest in fiat money." [n12] (Mehrling 2000, p. 405)  He seems to believe that I view banks as "purely intermediary", which if true would require that I now reject everything I have previously written on endogenous money. [n13] (Wray 1990, 1992)  However, Mehrling goes on, arguing "Viewing the bank money supply as the open interest in currency tends to shift our attention away from reserve requirements and money multipliers, and forces us instead to confront head-on the credit character of modern money, and its consequence." This does seem to recognize the "horizontal" nature of bank money.

   Most Post Keynesians accept the horizontal view of central bank provision of reservesㅡif the central bank operates with an overnight interest rate target, it has no choice but to supply reserves on demand for otherwise the overnight rate would be pushed or pulled away from target. ( ... ... ) 

2013년 9월 28일 토요일

[A snapshot, Germany] A monetary economy cannot grow without positive growth of credit

출처: @StephanieKelton
날짜: 27 September 2013

※ The exact text source cannot be searchable today.

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M1 and Credit...

For all of those who get carried by e.g. rising business climate indices and the like this may serve as a little reminder.

  A monetary economy (and its incomes and corporate profits), by definition(!), cannot grow without positive growth of credit, which in turn leads to growing deposits. As reported earlier today, in Germany loans to private households and businesses shrank a negative 2.8.pc in August. Credit to the public sectors fell a negative 0.9pc y-o-y. Total loans were down a negative 3.2pc vs. the year-ago level (red graph in below chart).

   All of this spells trouble for overly optimistic earnings forecasts and it should, on the other hand, portend a (much) better bond market. Today the Bund future violated its long-term down trend line.

  Total Eurozone credit to the non-financial sector also fell and marked a new all-time low.

  M1 growth rates declined further (blue graph) thus reducing hopes of higher economic activity in the months ahead.


2013년 9월 27일 금요일

[발췌: L.R. Wray's] The Credit Money and State Money Approaches (2004)

MMT
지은이: L. Randall Wray 
자료: http://www.cfeps.org/pubs/wp-pdf/wp32-wray.pdf (Working Paper No. 32, April 2004)

Author's note:
This paper presents a summary of Chapter 8 of my book, L.R. Wray (ed), Credit ad State Theories of Money: the contributions of A. Mitchell Innes, Cheltenham, Edward Elgar, pp. 223-262. It was presented April 1, 2004 at “The Nature, Origins, and Role of Money” conference sponsored by the Center for Full Employment and Price Stability.

※ 발췌 / Excerpt of which:

The primary purpose of this article will be to draw out explicitly the link between the state money and credit money approaches, after first discussing the nature of money via historical and sociological analysis.


THE IMPORTANCE OF THE HISTORICAL RECORD

Many analysis of money begin with some story about the evolution of money from sea shells, to precious metals, to bank deposits and finally to modern "fiat" money. Why do economist feel a need to turn to history? I suppose it is primarily to shed light on the nature of money, to focus attention on those characteristics of money that they believe to be essential. The barter story highlights the medium of exchange and store of value functions of money. A natural propensity to truck and barter is taken for granted. Attention is diverted away from social behavior and toward individual utility calculation. Social power and economic classes are purged from the analysis, while "the market" is exalted. Fundamental change, if it exists at all, is transactions-cost reducing except where government interferes, creating inefficiencies.

   By contrast, the credit approach locates the origin of money in credit and debt relations, while markets are secondary or even non-existent.
  • The analysis is socialㅡat the very least it requires a bilateral relation between debtor and creditor. 
  • The unit of account is emphasized as the numeraire in which credits and debts are measured. 
  • The store of value functions could also be important, for one stores wealth in the form of others' debts. 
  • On the other hand, the medium of exchange function is de-emphasized; indeed, one could imagine credits and debits[? debts] without a functioning market.
   Most of those adopting a credit approach would want to push social analysis much farther. Innes (1913, 1914, 1932) suggests that we can locate the origins of credit and debt relations in the elaborate system of tribal wergild designed to prevent blood feuds. Wergild fines were paid directly to victims and their families, and were established and levied by public assemblies. A long list fines for each possible transgression was developed, and a designated "rememberer" would be responsible for passing it down to the next generation. Note that each fine was levied in terms of a particular good that was both useful to the victim and more-or-less easily obtained by perpetrator.

   As Hudson (2004) reports, the words for debt in most languages are synonymous with sin or guilt, reflecting these early reparations for personal injury. Originally, until one paid the wergild fine, one was "liable" or "indebted" to the victim. We still think of a traffic fine as an "obligation" to pay, and speak of the criminal's debt to society. Hudson also makes it clear that the words for money, fines, tribute, tithes, debts, manprice, sin, and, finally taxes are so often linked as to eliminate the possibility of coincidence. It is almost certain that wergild fines were gradually converted to payments made to an authority. This could not occur in an egalitarian society, but had to await the rise of some sort of ruling class. As Henry (2004) argues for the case of Egypt, the earliest ruling classes were probably religious officials, who demanded tithes (ostensibly, to keep the gods happy). Alternatively, conquerors require payments of tribute by a subject population. Tithes and tribute thus came to replace wergild fines, and fines for "transgressions against society", paid to the rightful ruler, could be levied for almost any conceivable activity.

   Eventually, taxes would replace most fees, fines and tribute. These could be self-imposed as democracy swept away the divine right of kings to receive such payments. "Voluntariy-imposed" taxes proved superior to payments based on naked power or religious fraud because of the social nature of the decision to impose them "for the public good". The notion that such taxes "pay for" provision of "public goods" like defense or infrastructure added another layer of justification, as did the occasionally successful attempt to convert taxes from a "liability" to a "responsibility". In any case, with the development of "civil" society and reliance mostly on payment of taxes rather than fines, tithes, or tribute, the origin of such payments in the wergild tradition have been wiped clean from the collective consciousness.

   The key innovation, then, lay in the transformation of what had been the transgressor's debt to the victim to a universal "debt" or tax obligation imposed by and payable to the authority. The next step was the recognition that the obligations could be standardized in terms of a unit of account. At first, the authority might have levied a variety of fines (and tributes, tithes, and taxes), in terms of goods or services to be delivered, one for each sort of transgression. When all payments are made to the single authority, however, this wergild sort of system becomes cumbersome. Unless well-developed markets exist, those with liabilities denominated in specific goods or services could find it difficult to make such payments. Or, the authority could find itself blessed with an overabundance of one type of good while short of others.

   Denominating payments in a unit of account would simplify mattersㅡbut would require a central authority. As Grierson (1977, 1979) remarked, development of a unit of account would be conceptually difficult. (See also Henry 2004.) It is easier to come by measures of weight or lengthㅡthe length of some anatomical feature of the ruler (from which, of course, comes our term for the device used to measure short lengths), or the weight of a quantity of grain. By contrast, development of a money of account used to value items with no obvious similarities required more effort. Orthodoxy has never been able to explain how individual utility maximizers settled on a single numeraire. (Gardiner 2004; Ingham 2004) While use of a single unit of account results in efficiencies, it is not clear what evolutionary processes would have generated the single unit. Further, the higgling and haggling of the market is supposed to produce the equilibrium vector of relative prices, all of which can be denominated in the single numeraire. However, this presupposes a fairly high degree of specialization of labor and/or resource ownershipㅡbut this pre-market specialization, itself, is hard to explain. Once markets are reasonably well-developed, specialization increases welfare; however, without well-developed market, specialization is exceedingly risky, while diversification of skills and resources would be prudent. It seems exceedingly unlikely that either markets or a money of account could have evolved out of individual utility maximizing behavior.

   To be sure, we will never "know" the origins of money. First, the origins are lost "in the mists of time"ㅡalmost certainly in pre-historic time. (Keynes 1930, p. 13) It has long been speculated that money predates writing because the earliest examples of writing appears to be records of monetary debts. Recent scholarship indicates that the origin of writing is exceedingly complexㅡit is not so simple to identify what is "writing". (Schmandt-Besserat 1989) Similarly, it is not clear what we want to identify as money. Money is social in nature and it consists of a complex social practice that includes power and class relationships, socially constructed meaning, and abstract representations of social value (More below.) As Hudson (2004) rightly argues, ancient and even "primitive" society was not any less complex than today's society. (And Gardiner (2004) argues that ancient languageㅡthe most social of all behaviorㅡwas more complex than modern language.) Economic relations were highly embedded within complex social structures that we little understand. When we attempt to discover the origins of money, we are identifying institutionalized behaviors that appear similar to those today that we wish to identify as "money". Orthodox economists see exchange, markets, and relative prices wherever they look. For the orthodox, the only difference between "primitive" and modern society is that these early societies are presumed to be much simplerㅡrelying on barter or commodity monies. Hence, economic relations in earlier society are more transparent; innate propensities are laid bare in the Robinson Crusoe economy for the observing economist. While heterodox economists try to avoid such "economistic" blinders, tracing the origins of money necessarily requires selective attention to those social practices we associate with moneyㅡknowing full well that earlier societies had complex and embedded economies that differ remarkably from ours.

   This negative assessment does not mean that I believe we can learn nothing from a study of money's history. Far from it. Nonetheless, we must be modest in our claims. Further, we should always keep in mind the purpose of the historical analysis: to shed light on the nature of the social institution we call "money".


MONEY AS A SOCIAL RELATION

While Institutionalists have long viewed money as an institution, indeed, as the most important institution in a capitalist economy, most economist have not delved deeply into this. (Dillard 1980) However, if we are to understand the nature of money, it is important to uncover the social relations that are obscured by this institution.

   As discussed above, the typical economic analysis starts with barter and the innovative use of money as a medium of exchange. On the surface, this appears to be an "evolutionary" approach that recognizes human agency. However, the orthodox economists turn money into a "natural" phenomenon free from social relationships.
Although economists allow that money is a human invention assuming different forms in different times and places, they adopt an evolutionary perspective that de-emphasizes money's contingency and its ultimate foundation in social convention. As capitalist economies became more complex, money 'naturally' assumed increasingly efficient forms, culminating in the highly abstract, intangible money of today. (Carruthers and Babb 1996, p. 1558)
The innate propensity to "truck and barter" leads naturally to the development of market. The market, itself, is free of social relationsㅡone checks ideology, power, and social hierarchies at the door when one enters the market place. It is then "natural" to choose a convenient medium of exchange to facilitate impersonal transactions. The ideal medium of exchange is a commodity whose value is natural, intrinsicㅡfree from any hierarchical relations or social symbolism. Obviously, precious metal is meant to fit the bill. The value of each marketed commodity is denominated in the medium of exchange through the asocial forces of supply and demand. Regrettably, nations have abandoned the use of intrinsically valuable money in favor of "fiat" monies. Some economists (Wanniski, Greenspan before he headed the Fed) advocate return to a gold standard, but most accept that this is politically infeasible. Hence, it is necessary to remove as much discretion as possible from monetary and fiscal authorities, to try to ensure that modern fiat money operates in a manner similar to operation of a commodity money. Monetary growth rules, prohibitions on treasury money creation, balanced budget requirements, and the like (not to mention currency boards and dollar standards for developing nations), are all attempts to remove discretion and thereby restore the "natural", asocial, monetary order. Even some "pure credit" theorists argue that government is, or should be, in the same situation as any other "individual", with "liabilities" that have to compete in frictionless financial markets. (Merhling 2000; Rossi 2000)

   Thus, many "forget" that money is a social creatin, with social relations hidden under money's veil. As Hilferding put it:
In money, the social relationships among human beings have been reduced to a thing, a mysterious, glittering thing the dazzling radiation of which has blinded the vision of so many economists when they have not taken the precaution of shielding their eyes against it. (Quoted in Carruthers and Babb, 1996, p. 1556)
Simmel put it more concisely: money transforms the world into an "arithmetic problem". (Quoted in Zelizer 1989, p. 344) The underlying relations are "collectively 'forgotten about'" in order to ensure that they are not explored. (Carruthers and Babb 1996, p. 1559) Doubters need only examine how money is introduced into modern macroeconomic ("arithmetic") analyses (and recall Friedman's 1969 famous presumption that money is simply dropped by helicopters).


THE CREDIT THEORY OF MONEY

Schumpeter made a useful distinction between the "monetary theory of credit" and the "credit theory of money". The first sees private "credit money" as only a temporary substitute for "real money". Final settlement must take place in real money, which is the ultimate unit of account, store of value, and means of payment. Exchanges might take place based on credit, but credit expansion is strictly constrained by the quantity of real money. Ultimately, only the quantity of real money matters so far as economic activity is concerned. Most modern macroeconomic theory is based on the concept of deposit multiplier that links the quantity of privately created money (mostly, bank deposits) to the quantity of high powered money, HPM. This is the modern equivalent to what Schumpeter called the monetary theory of credit, and Friedman (or Karl Brunner) is the best representative.

   The credit theory of money, by contrast, emphasizes that credit normally expands to allow economic activity to grow. This new credit creates new claims on HPM even as it leads to new production. However, because there is a clearing system that cancels claims and debits without use of HPM, credit is not merely a temporary substitute for HPM. Schumpeter does not deny the role played by HPM as an ultimate means of settlement, he simply denies that it is required for most final settlements.

   Like Schumpeter, Innes focused on credit and the clearing system. Innes mocked the view that "in modern days a money-saving device has been introduced called ^credit^ and that, before this device was known all purchases were paid for in cash, in other words in coins." (1913, 389) Instead, he argued "careful investigation shows that the precise reverse is true". (1913, 389) Rather than selling in exchange for "some intermediate commodity called the 'medium of exchange'", a sale is a really "the exchange of a commodity for a credit". Innes called this the "primitive law of commerce": "The constant creation of credits and debts, and their extinction by being cancelled against one another, forms the whole mechanism of commerce..." (1913, 393) The following passage is critical:
By buying we become debtors and by selling we become creditors, and being all both buyers and sellers we are all debtors and creditors. As debtors we can compel our creditors to cancel our obligation to him by handing him his own acknowledgment [sic] of a debt to an equivalent amount which he, in his turn, has incurred. (1913, 393)
The market, then, is not viewed as the place where goods are exchanged, but rather as a clearing house for debts and credits. Indeed, Innes rejected the typical analysis of the village fairs, arguing that these were first developed to settle debts, with retail trade later developing as a sideline to the clearing house trade. On this view, debts and credits and clearing are the general phenomena; trade in goods and services is subsidiaryㅡone of the ways in which one becomes a debtor or creditor (or clear debts).

Finally, banks emerge to specialize in clearing:
Debts and credits are perpetually trying to get into touch with one another, so that they may be written off against each other and it is the business of the banker to bring them together. This is done in two ways: either by ^discounting bills^, or by ^making loans^. (Innes 1913, 402)
There is thus a constant circulation of debts and credits through the medium of the banker who brings them together and clears them as the debts fall due. This is the whole science of banking as it was 3000 years before Christ, and as it is to-day. (Innes 1913, 403)


THE STATE THEORY OF MONEY

Another useful distinction is made by Goodhart (1998), between the metallist approach and the chartalistㅡor state moneyㅡapproach. The latter emphasizes that money evolves not from a pre-money market system but rather from the penal system (Grierson 1977, 1979; Goodhart 1998; Wray 1998) Hence, it highlights the important role played by “authorities” in the origins and evolution of money. More specifically, the state (or any other authority able to impose an obligation) imposes a liability in the form of a generalized, social unit of accountㅡa moneyㅡused for measuring the obligation. This does not require the pre-existence of markets, and, indeed, almost certainly predates them. Once the authorities can levy such obligations, they can name what fulfils this obligation. They do this by denominating those things that can be delivered, in other words, by pricing them. This resolves the conundrum faced by methodological individualists and emphasizes the social nature of money and marketsㅡwhich did not spring from the minds of individual utility maximizers, but rather were socially created.

   Note that the state can choose anything to function as the "money thing" denominated in the money of account {*} : "Validity by proclamation is not bound to any material" and the material can be changed to any other so long as the state announces a conversion rate (say, so many grains of gold for so many ounces of silver). (Knapp 1924, 30) Knapp called the State money stage begins when the state chooses the unit and names the thing accepted in payment of obligation to itself. The final step occurs when the state actually issues the money-thing it accepts. In (almost) all modern developed nations, the state accepts (a) the currency issued by the treasury (in the US, coins), plus (b) notes issued by the central bank (Federal Reserve notes in the US), plus (c) bank reserves (again, liabilities of the central bank)ㅡHPM.{**} The material from which the money thing issued by the state is produced is not important (whether it is gold, base metal, paper, or even digitized numbers at the central bank). No matter what is made of, the state must announce its nominal value (that is to say, the value at which the money-thing is accepted in meeting obligations to the state).
  • {*} CF: “Wray goes too far when he states that "the state can choose anything it likes to function as the 'money thing'" (p. 243). ...” (Goodhart's review)
  • {**} HPM=(a)+(b)+(c) : (a)+(b) = 현금통화(currency in circulation) ; (c) 은행지준금(bank reserves). IF 은행시재금=0, HPM=현금통화(=통화발행액)+지준예치금
   Innes insisted that even state money is credit, however, it is a special kind of credit, "redeemed by taxation". (1914, p. 168) For the government, a dollar is a promise to 'pay', a promise to 'satisfy', a promise to 'redeem,' just as all other money is. Innes argues that even on a gold standard it is not gold that government promises to pay. If government paper money is submitted in exchange for gold, government promises to pay have not been reduced:
It is true that all the government paper money is convertible into gold coin, but redemption of paper issues in gold coins is not redemption at all, but merely the exchange of one form of obligation for another of an identical nature. (1914, p. 165)
   Whether the government's IOU is printed on paper or on a gold coin, it[=government] is indebted just the same. What, then, is the nature of the government's IOU? This brings us to the very nature of credit throughout the world, which is “the right of the holder of the credit (the creditor) to hand back to the issuer of the debt (the debtor) the latter's acknowledgment or obligation”. (1914, p. 161)
The holder of a coin or certificate has the absolute right to pay any debt due to the government by tendering that coin or certificate, and it is this right and nothing else which gives them their value. It is immaterial whether or not the right is conveyed by statute, or even whether there may be a statute law defining the nature of a coin or certificate otherwise. (1914, p. 161)
   What, then, is special about government? The government's credit "usually ranks in any given city slightly higher than does the money of a banker outside the city, not at all because it represents gold, but merely because the financial operations of the government are so extensive that government money is required everywhere for the discharge of taxes or other obligation to the government." (1914, p. 154) The special characteristic of government money, then, is that it is "redeemable by the mechanism of taxation" (1914, p. 15): "[I]t is the tax which imparts to the obligation its 'value' ... A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it". (1914, p. 152)

   By contrast, orthodox economists are "metallist" (as Goodhart 1998 calls them), who argue that until recently, the value of money was determined by the gold used in producing coins or by the gold backing paper notes. However, in spite of the amount of ink spilled about the gold standard, it was actually in place for only a short period. Typically, the money-thing issued by the authorities was not gold-money nor was there any promise to convert the money-thing to gold. Indeed, as Innes insisted, throughout most of Europe's history, the money-thing issued by the state was the hazelwood tally stick: "This is well seen in medieval England, where the regular method used by the government for paying a creditor was by 'raising a tally' on the Customs or on some other revenue getting department, that is to say by giving to the creditor as an acknowledgment [sic] of indebtedness a wooden tally." (1913, p. 398) Other money-things included clay tablets, leather and base metal coins, and paper certificates. Why would the population accept otherwise "worthless" sticks, clay, base metal, leather, or paper?
The government by law obliges certain selected persons to become its debtors. ... This procedure is called levying a tax, and the persons thus forced into the position of debtors to the government must in theory seek out the holders of the tallies or other instrument acknowledging a debt due by the government, and acquiring from them the tallies by selling to them some commodity or in doing them some service, in exchange for which they may be induced to part with their tallies. When these are returned to the government treasury, the taxes are paid. How literally true this is can be seen by examining the accounts of the sheriffs in England in the olden days. They were the collectors of inland taxes, and had to bring their revenues to London periodically. The bulk of their collections always consisted of exchequer tallies, and though, of course, here was often a certain quantity of coin, just as often there was, one at all, the whole consisting of tallies. (1913, p. 398)
Contrary to orthodox thinking, then, the desirability of the money-thing issued by the state was not determined by intrinsic value, but by the nominal value set by the state at its own pay offices.

   Once the state has created the unit of account and named what can be delivered to fulfill obligations to the state, it has generated the necessary pre-conditions for the development of markets. The evidence suggests that early authorities set prices for each of the most important products and services. Once prices in money were established, it was a short technical leap to creation of markets. This stands orthodoxy on its head by reversing the order: first money and prices, then markets and money-things (rather than barter-based markets and relative prices, and then numeraire money and nominal prices). The next step was the recognition by government that it could issue the money-thing to purchase the mix it desired, then receive the same money thing in the tax payments by subjects/citizens. This would further the development of markets because those with tax liabilities but without the goods and services government wished to buy would have to produce for market to obtain the means of paying obligations to the state.


IMPLICATIONS FOR OPERATION OF MODERN MONEY SYSTEMS

When a modern government spends, it issues a check drawn on the treasury;
  • its liabilities increase by the amount of the expenditure and its assets increase (in the case of a purchase of a good produced by the private sector) or some other liabilities are reduced (in the case of a social transfer). 
  • The recipient of the check will almost certainly present it to a bank for (1) currency or (2) deposit. 
  • In the former case (1), the bank's reserves are first increased and then are reduced by the same amount. [※ the bank's reserves are increased perhaps because government checks are treated as bank reserves, and its reserves are reduced because the same amount of currency are handed out to the recipient.]
  • In the latter case (2), reserves are credited in the amount of the deposit. 
  • The reserves credited as the bank's asset and as the central bank's(CB) liabilities are nothing less than a claim on government-issued money, or a leveraging of HPM
  • In other words, treasury spending by check really is the equivalent of “printing money” in that it increases the supply of HPM. Unless bank required reserves increase by an equivalent amount, the banking system finds itself with excess reserves after the treasury has spent.
  The important thing to notice is that the treasury can spend before and without regard to previous receipt of taxes or prior bond sales. In the US,[,]
  • taxes are received throughout the year (although not uniformly as tax payments are concentrated around April 15). These are mostly paid into special tax accounts held at private commercial banks. (Bell 2000) 
  • It is true that the treasury transfers funds to its account at the CB when it wishes to spend, but this is really a reserve maintenance operation designed to minimize effects on reserves. When the treasury spends, bank reserves increase by approximately the same amount (less only cash withdrawals) so that simultaneous transfer from tax accounts[i.e., special tax accounts held at private commercial banks] to the CB neutralizes reserve effects. Tax payments lead to a reserve drain as the treasury submits checks received to the CB for clearing, at which point the CB debits bank reserves.
   These additions to (and subtractions from) reserves are carefully monitored and regulated by coordination between the CB and the treasury. Things would be much simpler and more transparent if tax receipts and treasury spending were perfectly synchronized. In that case, the treasury's spending would increase reserves, and the simultaneous tax payments would reduce them. If the government ran a balanced budget there would be no net impact on reserves, so there would be no need for complex coordination between the CB and treasury using tax and loan accounts. However, when spending exceeds tax revenues (a budge deficit), there is a net injection of reserves. It is possible that the extra reserves created happen to coincide with growing bank demand for reservesㅡin which case the treasury and CB need do nothing more. More probably, the net injection of reserves leads to excess reserves, offered in the overnight market. Excess reserves cause he overnight rate to fall below the CB's target, inducing it to drain reserves either through an open market sale or by reducing its discounts. When the treasury runs a sustained deficit, the CB must continually intervene, eventually running out of bonds to sell. This is why, over the longer run, responsibility for bond sales to drain excess reserves must fall to the treasuryㅡwhich faces no limit to its own sales of bonds as it can create new bonds as needed.

   While it may sound strange, we conclude that treasury bond sales are not a borrowing operation at all, but are a reserve draining operation (that substitutes one kind of government liability for another). Indeed, the treasury cannot really sell bonds unless banks already have excess reserves, or unless the CB stands ready to provide reserves the banks will need to buy the bonds. If the treasury typically tried to first "borrow" by selling bonds ^before^ it spent, it would be draining reserves it will create only ^once^ it spends. As it drained required or desired reserves, it would cause the fed funds rate to rise above the CB's targetㅡinducing an open market purchase and injection of reserves.

   Another way of putting it is that government spends by issuing IOUs, and the private sector uses those IOUs to pay taxes and buy government bonds. Obviously, if government spending were the only source of these IOUs, the private sector could not pay taxes or buy bonds ^before^ the government provided them. In the real world, government spending on goods and services is the main, but not the only, source of the IOUs needed by the private sector to pay taxes and buy government bonds. In addition, the CB provides reserves through discounts or open market operations (or, gold and foreign currency purchases), and these IOUs are perfect substitutes for treasury IOUs.

   We conclude that the purpose of government bond sales is not to borrow reserve, but to offer an interest-earning alternative to undesired reserves that would otherwise drive the fed funds (overnight) rate toward zero. Note that if the CB paid interest on excess reserves, the treasury would never need to sell bonds because the overnight interest rate could never fall below the rate paid by the CB on excess reserves. Note also that in spite of the widespread belief that government deficits push up interest rates, they actually reduce the overnight rate to zero unless the treasury and CB coordinate efforts to drain the resulting excess reserves. (For proof, note that for many years the overnight interest rate in Japan has been kept at zero, in spite of government deficits that reached 8% of GDP, merely by keeping some excess reserves in the banking system.) On the other hand, budget surpluses drain reserves, causing a shortage that drives up the overnight rate unless the CB and treasury buy and/or retire government debt. Needless to say, orthodoxy has got the interest rate effects of government budget exactly backwards.


CONCLUSION: AN INTEGRATION OF THE CREDITARY AND STATE MONEY APPROACHES

To put it as simply as possible, the state chooses the unit of account in which the various money things will be denominated. In all modern economies, it does this when it chooses the unit in which taxes will be denominated and names what is accepted in tax payments. Imposition of the tax liability is what makes these money things desirable in the first place. And those things will then become the money-thing at the top of the "money pyramid" used for ultimate clearing.

   Of course, most transactions that do not involve the government take place on the basis of credits and debits, that is, privately-issued money-things. This can be thought of as leveraging activityㅡa leveraging of HPM. However, this should not be taken the wrong wayㅡwe are not hypothesizing some fixed leverage ratio (as in the orthodox deposit multiplier story). Further, in all modern monetary systems the central bank targets an overnight interest rate, standing by to supply HPM on demand to the banking sector (or to withdraw it from the banking sector) to hit the target. Thus, both the CB and treasury supply HPM. However, the central bank never drops HPM from helicopters. It either buy assets or requires collateral against its lending, and it may well impose other "frown" costs on borrowing banks. Hence, while central bank provision of HPM provides a degree of "slop" to the system, the value of HPM is ultimately determined by what the population must do to obtain it from government.

   Likewise, the privately-supplied credit money is never dropped from helicopters. Its issue simultaneously puts the issuer in a credit and debit situation, and does the same for the party accepting the credit money. For example, a bank creates an asset (the borrower's IOU) and a liability (the borrower's deposit) when it makes a loan; the borrower simultaneously becomes a debtor and a creditor. Banks then operate to match credit and debits while net clearing in HPM. Borrowers operate in the economy to obtain bank liabilities to cancel their own IOUs to banks. There is an important hierarchical relation in the private debt/credit system, with powerㅡespecially in the form of command over society's resourcesㅡunderlying and deriving from the hierarchy. Ultimately, the ability to impose liabilities, name the unit of account, and issue the money used to pay down these liabilities gives a substantial measure of power to the authority. There is, thus, the potential to use this power to further the social good, although misunderstanding or mystification of the nature of money results in an outcome that is far below what is economically feasible.

   Far from springing from the minds of atomistic utility maximizers, money is a social creation. The private credit system leverages state money, which in turn is supported by the state's ability to impose social obligations mostly in the form of taxes. This allows society to marshal resources for the public purpose. While it is commonly believed that taxes "pay for" government activity, actually obligations denominated in a unit of account create a demand for money that, in turn, allows society to organize social production, partly through a system of nominal prices. Much of the public production is undertaken by emitting state money through government purchase, although extra-monetary means are also invoked (conscription for the military; eminent domain; "nationalization" of resources; control exercised through rules and regulations). Much private sector activity, in turn, takes the form of "monetary production," or M-C-M' as Marx put it, that is through monetary purchase of required inputs with a view to realizing "more money" with the sale of final product. The initial and final purchases are mostly financed on the basis of credits and debitsㅡthat is, "private" money creation. Because money is fundamental to these production processes, it cannot be neutral. Indeed, it contributes to the creation and evolution of a "logic" to the operation of a capitalist system, "disembedding" the economy to a degree never before encountered. At the same time, many of the social relations can be, and are, hidden behind a veil of money. This becomes most problematic with respect to misunderstanding about government budgets, where the monetary veil conceals the potential to use the monetary system in the public interest.


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