Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin

The monetary systems of nations operate on two types of balance sheet expansion:

  1. National, where the government spends into the economy expanding a national balance sheet
  2. (The sum of) banks’ balance sheet expansions, where bank loans create deposits

The asset side of both of the above are traded around as “money”.

The national government creates the numeraire for the system (the “Dollar” in the US, the “Pound” in the UK etc.) and in addition to spending directly in to the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public but in fact arises from two separate but linked balance sheet expansions.

But why do the tokens from either of these balance sheet expansions have and maintain value?

The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.

The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously – by the obligation to repay bank loans.

Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.

An organized, effective government with a sound legal system that does not use foreign currencies can always maintain the value of its currency. (Hyperinflations are always the result of governments and their legal systems becoming corrupted or destroyed in some way, and never the result of runaway money creation).

What does this mean for Bitcoin and other cryptocurrencies?

Bitcoin is not the result of a balance sheet expansion. There is no inherent obligation for repayment of bitcoin to any government (taxes) or to extinguish private debt (banking system). There is no in-built demand for bitcoin (or any cryptocurrency).

Bitcoin is worth zero dollars (or Yen or Pounds etc).

National currencies will always do two things 1) extinguish tax obligations and 2) extinguish private debt obligations. Even if you have neither, there are always enough people with tax and bank debts that you can be sure that your money will be voraciously sought after by merchants of all types. Unless we are in Mad Max territory, they will give you a loaf of bread for it.

Bitcoin is not part of a balance sheet. It does not inherently extinguish debt of any kind – neither a tax obligation nor a bank debt. Nor do other cryptocurrencies. Once the fad for them subsides, the realization that you can’t pay taxes or repay a debt with them will become evident and their true value of 0 will become evident.

Because they don’t understand money or balance sheets, bitcoin collectors and cryptocurrency creators don’t understand why their tokens are inherently worthless. They won’t understand why, when the fad passes, no one will be willing to take their play tokens for real goods.

The only benefit from the bitcoin fad may be a better understanding of the balance-sheet nature of national economies, and the relationship of this to the real resources of a nation. This will prove to be the real lesson from bitcoin. The sooner it is learned the sooner nations can get on with the real work of using their national balance sheets and good legal environments to improve the real economy.

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P.S.  A common refrain is that yes, Bitcoin and cryptocurrencies are worthless, but Blockchain is really a big deal.

Well, not so much…

The blockchain paradox: Why distributed ledger technologies may do little to transform the economy

Ten years in, nobody has come up with a use for blockchain

As I have said before – blockchain is going to turn out to be the Wankel engine of the finance world. Interesting concept but not that useful in real life, never quite filling a real need.


Check out my new book “1000 Castaways: Fundamentals of Economics,” Aetiology Press. 

A renegade band of Modern Monetary Theorists has overturned mainstream economics in part by emphasizing that there is not one, but two systems of modern money, the “vertical” and the “horizontal.” They conclusively demonstrate how unifying our understanding of these is crucial for grasping modern economics.

“the key to understanding Modern Monetary Theory is this vertical-horizontal relationship”

(Warren Mosler)

1000 Castaways develops Mosler’s statement into a concise, book-length treatment that is accessible to all readers, starting from first principles and, step-by-step, leading the reader up to the complexities of the real world.

Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.

1000 Castaways then contrasts the Island’s “economics” with real-world “economics,” in an enlightening illustration of the last few steps in our common economic understanding that we must take in order to run our modern economies in a way that maximizes wellbeing.


Paperback $9.99 Kindle $2.99 Hardback $21.99 Also available as Barnes and Noble Nook, Kobo etc.

OMFG, MMT & Positive Money Get Along

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{OMFG = Overt Monetary Financing of Government}

 

Introduction

 

Economies run on tokens from two balance sheet expansions:

  1. (The sum of) Banks’ balance sheet expansions, where bank loans create deposits (also called “horizontal” money)
  2. National, where the government spends into the economy expanding the national balance sheet (aka “vertical” money)

Two observations:

1) It is desirable, especially evident after 2008, to more carefully regulate the horizontal sector, which would also reduce its overall size significantly.

2) In the current economic climate it is desirable to expand the vertical balance sheet, both to maintain/increase aggregate demand and to foster activities that the public desires that increase the public’s well-being (infrastructure, education, healthcare etc.).

Note that although more carefully regulating the horizontal side would decrease aggregate demand (especially given the overheated credit impulse/acceleration Steve Keen has so usefully highlighted) this would be balanced by increasing the vertical side.

What do MMT economists and Positive Money propose regarding these two systems?

Both agree that the vertical side should be larger and the horizontal side more regulated with the resulting smaller horizontal component made up for by expanding the vertical side.

 

On The Vertical Side

The crucial fact about the vertical side is that the fact that a nation is not like a household is evident regardless of the operational details. Positive Money is wrong in their belief the current system must be changed to achieve the type of government spending they want.

However, this does not mean that Positive Money is flat out wrong. Key MMT people would be perfectly happy to spend vertically in the way Positive Money wants, which is just PQE/OMF by another name. This is especially so given that OMF procedures would be transparent and thus politically advantageous.

MMT scholars just do not believe it is remotely as urgent as Positive Money because they realize the current system is already capable of spending into the economy in the same way that PM wants to (Wray 2001, Fullwiler 2011 ). Also, many have rejected PM more or less out of hand because of Positive Money views or perceived views on the horizontal system [which we turn to below].

At any rate, regarding the vertical system – The crucial thing is to get the vertical system to do what is good for the economy – functional finance – regardless of the operational details.

From a political point of view it is better to have a clearer more straightforward system [PQE/OMF]. This is a substantially less fundamental problem, however, than what Positive Money thinks it is doing; in saying that, however, the practical and strategic importance of making the changes to a straightforward system perhaps should not be underestimated.

Scott Fullwiler himself has noted the fundamental agreement on vertical money issues:

“interestingly, understanding how DFM [Debt Free Money] works also illustrates the MMT view of government spending and government bond issuance. Logically we should expect that DFM supporters could join MMT in rejecting otherwise widespread concerns about government solvency, China refusing to purchase US national debt, the financial sustainability of entitlement programs, and so forth.” (Fullwiler 2014)

(relatedly and importantly, both Positive Money and many MMT economists propose ZIRP; another post for that though)

On The Horizontal Side 

As noted, MMT rejects Positive Money mainly because of PM views on the horizontal side – in the past PM stated they wanted to eliminate the horizontal altogether and essentially create a loanable funds system. Contrast this to MMT, for which overall pre-2007 regulating the horizontal side was not a primary focus (not to ignore the Minsky-Wray connection and other pre 2007 work of course, but banking regulation was/is not the overarching focus of MMT). [Update: please see Scott Fullwiler’s comments on pre-2007 bank regulation/MMT)

However, both sides have moved closer together on horizontal money, to the point where in practice the horizontal systems they advocate would be similar.

MMT increased the emphasis on limiting the horizontal after 2007 (Mosler 2009, Mitchell 2009, Mitchell  2010, Wilson 2017).   Crucially, the Mosler/Mitchell/Wilson proposals would be far more significant and profound in their effects than they are given credit forEasily enforced common sense rules (that did not exist in 2008) to force banks to hold the loans they make, operate on a single balance sheet, and not accept financial collateral already clears up most of the problems with banking and would leave a drastically shrunk but drastically more healthy horizontal money and funding system in place.

Simply put, this puts MMT closer to the goals of PM on horizontal money than is generally recognized.

Conversely Positive Money has moved to allow what is in effect horizontal money creation (whether “nationalized” or not makes little difference if regulated in the proposed ways). This pushes PM substantially towards the same horizontal system that would result were the Mosler/Mitchell/Wilson proposals to be put into practice.

(The similarity in views on this are evident in these quotes by MMT scholars and Positive Money:

“Right now, we have far more finance than we need. Exactly how much of it we could eliminate as unnecessary is up for debate. I wouldn’t be surprised if our economy would actually run better if finance was downsized by 90%”
L. Randall Wray 2014

“The correct approach, as highlighted by the MMT view, is to reduce bank lending by banning its use for anything that isn’t constructive. Bill Mitchell regularly suggests that 97% of financial transactions should be illegal.”
Neil Wilson 2014

“The central bank would be willing to create additional money, on demand, in response to banks that are able to lend that money to non-FIRE sector businesses. This protects the level of lending to businesses.”
Positive Money 2015)

 

Conclusion

There are two monetary systems, vertical and horizontal. Both MMT and Positive Money want to see the vertical increased in size to maintain aggregate demand and increase the general welfare; both MMT and Positive Money would like to see a more straightforward (PQE/OMF operations) vertical money system that would allow mainstream economists and the public to understand that a nation is not like a household (Positive Money makes the mistake of not realising that the current vertical system can already do what PM wants; MMT could perhaps make even clearer than they already do that the current system can do this without structural change).

Both MMT and Positive Money would like to shrink the horizontal system through reducing it to funding only real production. The two schools of thought come from utterly opposite directions on horizontal money; however in practice both of their suggested horizontal systems would be for all practical purposes the same – limiting banking to a completely safe payments system and to an investment-side that is regulated to only expand enough to fund productive investment but not to allow asset bubbles via a non productive FIRE sector. Whether the horizontal side is “nationalized” or not is merely a distraction – banks under the Mosler/Mitchell/Wilson rules providing for capital development based on solid credit analysis would operate the same regardless of their formal status vis-à-vis government. Positive Money is wrong to think this can be done in a loanable funds system (future post), but plain vanilla 1960s banking works fine.

~~~

March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

 

 

 

 

 

 

MMT & Positive Money Are Converging. That’s a Good Thing

Many common views on macroeconomics are of little use and even harmful because they do not recognize basic facts about the economy. That limits useful macroeconomics to the minority who recognize that loans create deposits, that there is no money multiplier, that the household analogy is false, money is not just a veil over barter etc., and the profound implications of these facts.

Because it is, unfortunately, a minority that understands meaningful macroeconomics, and because of the enormity of the welfare issues that are at stake, it is of the utmost importance that the lucid minority support each other and sort out their differences in order to find the strength in numbers needed to implement sane macroeconomic policies that have the potential to greatly increase the public well being.

Perhaps the two greatest current macroeconomic problems are

  1. a failure to optimally use resources (including people)
  2. the design and/or manipulation of the financial system to divert real resources from producers to a financial class

The logical approaches to these problems are functional finance in the first case and changes in and/or enforcement of regulation of the financial system in the second case.

Two groups that have gained visibility (academic, policy, and/or popular) on these issues are Modern Monetary Theory and Positive Money.

MMT scholars largely focused on the first problem, how functional finance can increase the public’s well being. Positive Money’s main worry has been the second and suggestions for changes that might make resource diversion more difficult.

However, the simple point I want to make is this: in recent years the two groups have moved towards each other’s positions and interests to a significant extent, probably much more than either group or the heterodox community recognizes.

Positive money originally wanted to eliminate bank credit-money creation altogether. Crucially, however, they have modified their plan to allow for a tightly regulated system of credit money creation for individuals and businesses. (see Would a Sovereign Money System Be Flexible Enough?  also Would There Be Enough Credit in a Sovereign Money System? )

MMT, as mentioned, traditionally focused on functional finance solutions to the first problem above. However, after the 2007 financial crisis especially, they addressed the second problem above (which caused the crash) and subsequently Warren Mosler, Bill Mitchell and Neil Wilson all proposed far reaching (and similar) changes to the banking sector (here: Mosler, Mitchell, MitchellWilson )

Crucially, there is now very little difference between the banking system that MMT (or at least Warren Mosler, Bill Mitchell and Neil Wilson) propose and the banking system that Positive Money now propose.

Additionally, Positive Money has always been a proponent of the state spending for the public welfare; indeed, they had to be as this would be the only way money would be introduced into the economy under their proposals. As Positive Money has matured they have continued to develop their ideas on how the government would spend into the economy for the public good – in other words, functional finance perfectly in line with traditional MMT views.

So in short, Positive Money is fighting for functional finance and a banking system like the Mosler/Mitchell/Wilson proposals. MMT is proposing (or at least Warren Mosler, Bill Mitchell and Neil Wilson) a banking system like the one PM has evolved towards (tightly regulated credit-system) and MMT has of course long supported the state spending directly into the economy for the public purpose just as PM has.

Both groups have achieved significant political and popular support as well as media attention. This attention has often been in different places. Combining their message is a win-win and an important step in educating the business, political and internet community and thus eventually winning votes and changing real policies.

~~~

March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

Endogenous money, MMT, Positive Money, & financial reform

Among the Post-Keynesian groups concerned with understanding and fixing problems that lead to the 2007/8 Global Financial Crisis (GFC) and other ongoing economic problems there are different areas of focus by circuit theorists, Modern Monetary Theory (MMT), Steve Keen’s approach to private debt, and other Post-Keynesians. (MMT, while often with a focus on other aspects of the economy [as L. Randall Wray writes, leading from neo-Chartalist and functional finance insights to fiscal policy] is nevertheless firmly grounded in endogenous money theory). Despite these various approaches having important disagreements and areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions.

There is another perhaps small but dedicated and often visible group of reformers that focus on the monetary system. Broadly these are the various groups that want to change the monetary system such as The American Monetary Institute (AMI), Positive Money (PM), economists associated with the New Chicago Plan and others. Their relation with the Post-Keynesian groups mentioned above is somewhat complicated, and the key reason involves endogenous money. Before continuing, it helps to divide these diverse money reforming groups into two broad categories:

I. A significant number of monetary reformers focus on a money multiplier (and often on fractional reserves). They are still stuck in a loanable funds world, probably because orthodox economics has been so successful in teaching their delusion that we live in a loanable funds world, so these reformers, despite being heterodox in their goals, learn their economics from orthodox sources. Of course, we are not in a loanable funds world, so there is no money multiplier (and here). This means this significant section of monetary reformers is (rightfully) dismissed by those who understand how banking works. 

II. There is another group of monetary reformers that do understand that we are in an endogenous money – not a loanable funds – world. Their proposals do not focus on a (non-existent) money multiplier. Their proposals are aimed at actually making the current endogenous money system into a true loanable funds system. This would be a “no reserves” system. (Positive Money and related proposals are examples of this group).

For the second group above, this leads to a somewhat difficult intellectual position. Post-Keynesian economists have been trying to get orthodox economists to understand the way the economy actually works (with endogenous money) in the real world for decades, and have looked on in dismay as orthodox economists have spent whole careers writing about a non-existent loanable funds system and in turn giving terrible, indeed dangerous, policy advice. Thus it is natural to view holders of the loanable funds view as enemies who do real harm to the economy and the public. But it is different to be frighteningly delusional about reality (as orthodox economists are about loanable funds) than to understand that the current system is an endogenous money system and want to make it a loanable funds system (as PM-type proposals do. There are other main reasons many Post-Keynesians reject PM-type proposals. At times, though, it seems mere association with the muddled orthodox view of banking does influence how/whether some Post-Keynesians really weigh the details of PM-type proposals).

I think several points follow from making the above distinctions into two groups. Primarily they concern the possibility for PM type money reformers to strongly support some key MMT proposals for financial reform, and in turn good reasons for Post-Keynesians to be in dialogue with both types of monetary reformers, rather than seeing them as some misguided offshoot of the loanable funds mainstream.

On the AMI, PM, monetary reform side –

  1. Realize the danger of being thought “not to get” endogenous money (or of actually not getting it for those in group I above). Educate those who still talk about “full/fractional reserves” and a money multiplier that these are just not the issue. Irrelevant terms such as full/100%/fractional reserves immediately suggest that the banking system is simply not understood. The loanable funds system PM and others propose is a “no reserves” system, not a full reserve system. PM type proposals are about changing the endogenous money banking system to a (no reserves) loanable funds system.
  2. Strongly support MMT proposals that get part of the way to your goals, even if you ultimately want further changes. Warren Mosler’s proposals go a significant way towards reducing negative aspects of the current endogenous money system and are in accordance with PM type views; two in particular:

“Banks should only be allowed to lend directly to borrowers and then service and keep those loans on their own balance sheets.”

“Banks should not be allowed to accept financial assets as collateral for loans.” (Mosler)

Both of these would significantly alter and restrict the current endogenous money system in ways that move the system towards PM and similar plans’ goals. Indeed, PM itself lays out what their ultimate goals (brief version here) are and separately shorter-term goals that in part are similar to what many MMT and similar proposals for bank reform want.

Also – some MMT (and other Post-Keynesian) proponents are in favor of nationalizing banks, and/or of creating an additional system of narrow banking for those who want it. PM recognizes this as an important step towards their ultimate goals. Creating postal banks or any other narrow banking system as at least an option for the public is a logical and do-able goal that many sides could unite behind.

In other words, if PM type proposals want to move from “A” (today’s system) eventually to “D” (a loanable funds system), and Mosler-type proposals move the system to “B” (significant restrictions on the way endogenous money is currently created; the existence of a parallel narrow banking system for those who want it) then PM should be very much on board.

For Post-Keyenesians:

  1. Try (even) harder to teach monetary reformers that are erroneously still worried about a money multiplier (group I) that there simply is not one in the current system (I know – it seems they just won’t listen to good advice). If they understood endogenous money and that loans create deposits they would see that reforming a “money multiplier” is a waste of time. This might then lead them to see the logic of and support reform proposals such as Warren Mosler’s. Another possibility is that they would become part of group II above and at least understand the issues more clearly. This would make coherent discussions possible, and take one more group out of the spell of orthodox nonsense.
  2. Regarding group “II” above – Post-Keynesians should recognize that group II monetary reformers are different from orthodox economists in a crucial way – they get endogenous money – they just don’t believe it serves the public purpose. They truly believe that a real loanable funds model is possible to create and serves the public purpose better than the existing system. Recognize that real dialogue is possible with them unlike with the vast majority of orthodox economists. If a loanable funds model would not work or would be worse for the public, clearer statements of why could be made. I know there are essays by Post-Keynesians about some of these proposals; I think they could be better (more on this below). For example, usually one of the more conscientious writers of the MMT economists, Bill Mitchell, compares some of these proposals to the gold standard (although he seems to be considering some of the Austrian type proposals in part of the essay). Mitchell writes “There would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces.” While under a true loanable funds system such as PM proposes endogenous private credit-money would not be created, it is obviously still a fiat system, and neo-Chartalist and functional finance insights hold: limitless (except by inflation) money could be pumped into the economy as needed through fiscal policy, tax decreases, and citizens dividends. The gold standard comparison simply does not make sense.* Ditto concerns about PM proposals being deflationary (not in the long run for the reasons mentioned, nor in the short run since the changeover would be portfolio neutral – I think the New Chicago Plan has a good explanation of this, page 49 ).

Although PM and similar proposals are not necessarily among the largest or most influential groups (compared to orthodox economists and their policy groups) they do have some visibility and any additional organized, visible support for much needed reforms, and any addition to coherent discussions of our endogenous money system should be welcome.

Rather than arguing among themselves, Post-Keynesians and PM-type groups should focus on the important overlaps of their bank/finance reform proposals. If those are achieved, then the further changes that PM type groups want can be discussed. And despite seeming to have radically different end goals (a fair, stable endogenous system versus a true loanable funds system) the most pressing immediate bank reforms are agreed on by most sides.

Both MMT and PM-type proposals are to use state money for public purpose. The real contention between MMT and PM lies in whether or not endogenous private credit-money creation also serves the public purpose.

The key issues:

Many of the concerns with the PM proposal I have seen brought up are actually discussed in some detail in the PM literature (and/or related points usefully discussed in the new Chicago Plan) and it often seems that critics of the plan simply do not closely read PM explanations of the details of the plan. However, of course there are serious concerns, perhaps the most consistent being:

Would the new system of exclusively state money be able to create a fair system for large business loans? How would that system differ from the current system?

Concerns with the current endogenous money system:

Does the fact that endogenously created private credit-money dwarfs state money restrict the ability of the government to act in the public purpose in the way MMT believes? (possibly through the inflation limitation – can the government really contain inflation while using state money for public purpose when such huge amounts of private credit-money are created?)  Does this render MMT ideas on the role of the state in the economy unworkable? (An example of these worries is Cullen Roche’s criticism of MMT here). 

Does the inherent instability and procyclical nature of endogenous money have too many social costs?

Does the endogenous money system stealthily but inexorably lead to regulatory capture? Relatedly – Does the endogenous money system have a systemic tendency to funnel wealth upwards & into the FIRE sector? Lead to unsustainable levels of private debt? To highly inequitable wealth distributions? [related post]

On these latter questions, Steve Keen’s work seems especially relevant, suggestive of the way in which in the current system of private credit-money seems to ratchet up private debt and credit-money and create crises and inflate the FIRE sector. (e.g., “Are We It Yet?“, “Deleveraging with a Twist” and others; also see important work towards reconciling MMT & Keen’s work).

There are plenty of critiques of MMT – most of which are completely misguided and due to fundamental misunderstandings of the economy due to orthodox economic blinders. I see the most important debate concerning the balance of state and private credit money in a state theory of money and what follows from a state theory of money. These are a few more discussions that touch on that area:

A debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley

Modern Money Theory and New Currency Theory  (book length version: Modern Money and Sovereign Currency) (the historical discussion of why MMT and PM-type proposals differ on banking is very enlightening; I disagree with Huber on important aspects of the second part of the paper, especially where he still falls into the household analogy trap, and his unfortunate and confusing use of the term “fractional reserve system” when that is just not the issue. He clearly knows the difference between a no reserves system and “full reserves” although I think there are simpler ways of explaining it).

The Credit Money, State Money, And Endogenous Money Approaches: A Survey And Attempted Integration L. Randall Wray

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[Postscript – A few bits I cut from above for readability]

*On Mitchell’s comparison of creating a loanable funds model to a gold standard – Ralph Musgrave makes similar points concerning Warren Mosler’s light dismissal of Martin Wolf’s article on banking reform. (But please Ralph – quit talking about “Full/Fractional reserve! : ) The PM loanable funds model will be a “no reserves” system!)

PM-type proposals & MMT are in essential agreement that the state can and should just spend state money for public purpose, with inflation the limiting factor. This is sometimes unclear because of the operational peculiarities of various countries, not least of the US. Whether this is just through continued deficit spending, or a 60 trillion dollar coin or similar, circulating treasury notes (the same thing really), or whatever, ultimately makes little difference. PM-type proposals have long used the US Greenback – circulating (mostly digital) treasury notes, as a key example, and MMT economists have the same view.

A final note – sometimes in comments here and elsewhere a criticism is made that “there are more technical papers that do deal with ____, since you don’t have them here you don’t know what you are talking about!” and/or “this post only relies on other blog posts and simple sources, it is not useful/serious/informed! etc.” I do try to read more “official” and/or technical papers when relevant. Two points though – 1) If bits and pieces of answers to some of these points are buried in technical papers somewhere, that doesn’t help anyone too much – cite them specifically (& better yet – summarize them and why precisely they matter) and 2) I think when good economists like Keen, Wray, Fullwiler and Mitchell with technical work write their views in plain English those writings reflect – and quite often best reflect – what their technical work tells them is right.

 

Small c chartalism, sovereign money, & public policy space v. private profit space

There is a high degree of disagreement, even within heterodox economics,  on the meaning and relations between monetary terms such as exogenous, endogenous, vertical, horizontal, chartal, monetarism, state, fiat, inside, outside, what money things are, is money debt, whether state money can be considered exogenous and on and on.

Part of the problem is that some try to define concepts through identifying historical examples, others through defining “ideal types” of the concepts and then relaxing or mixing these pure definitions to match real world systems, while still others define concepts based on the use of the words by past writers.

The degree of disagreement is so great as to pose a seemingly insuperable barrier to discussion between anything larger than the smallest of in-groups.

Not only is there immense disagreement on definitions of terms between schools of thought (understandable) but significant divergence of definitions and usage within heterodox and Post-Keynesianism (circuitiste, horizontalists, structuralists, Basil Moore, etc etc) and even within the various branches of these.

Just one example from comments on the last post: Ralph Musgrave writes

“First, I’m bothered about your use of the words fiat (as is Tom Hickey)…My Oxford Dictionary of Economics starts its definition of ‘fiat’ as follows. ‘Money which has no intrinsic value, but has exchange value because it is generally accepted.’ On that definition, central bank created and commercial bank created money is fiat. Thus your claim that ‘we do not have a true fiat currency’ is not correct: our existing system is 100% fiat.”

Yet Wray clearly distinguishes between fiat and bank credit-money, the latter of which

“can be thought as a type of ‘leveraging’ of fiat money” (Wray 1998, 111)

(Later Wray doesn’t even see modern money as fiat at all apparently;  he writes that

“The state’s money is not ‘fiat,’ but rather is ‘driven’ by the sovereign ability to impose tax liabilities…”

{Wray 2007; note, however, that the state imposes taxes by fiat}).

 The Way Forward

I think the only way to even begin discussing these issues is to agree on stipulative definitions that are based on ideal types rather than hagiographic discussions of past works. The latter is a prescription for factionalization; the former is a path to consensus and clarity. In such a complex and contested realm,  stipulative rather than descriptive and etymological definitions are needed. Define pure examples of a concept (even if they never existed) and when discussing mixed systems, just say so.

Example

A pure idea of a state theory of money would be to define it as a system where there is only intrinsically worthless currency decreed to be of value by the state, backed by its power to tax.

Alternatively, there can be commodity money.

Either commodity money or state money can be leveraged by private entities.

Separate names could be given to each type of mixed system (leveraged commodity money, leveraged state money).
If you want to call the latter mix “Chartalism” instead of reserving that term for a pure state theory of money, fine.

But then there should be some name for a system where the only money that circulates is state money.

A Pure State Theory of Money

Wray writes

“Modern money is state money…There is a pyramid of these liabilities, with nonsovereign money liabilities leveraging the sovereign’s currency.”    http://www.levyinstitute.org/pubs/Wray_Understanding_Modern.pdf

In this context Wray is calling private credit-money “nonsovereign money”.  Now Wray on sovereign government currency:

“In the US, the dollar is our state money of account and high powered money (HPM or coins, green paper money, and bank reserves) is our state monopolized currency. I prefer to expand the conventional definition of currency…[to] include HPM plus Treasuries as the government currency monopoly.” (Ibid.)

So “sovereign currency” is HPM plus Treasuries.

If you want to reserve the word “Chartalism” for a hybrid system of sovereign and nonsovereign money (sort of confusing to have a “State Theory of Money” that includes a massive amount of “nonsovereign money”, but whatever) then a system of “state money only” can be called a sovereign money system.

~~~

On private leveraging: In a commodity money system this may be useful.

However, there is no operational reason why state money needs to be leveraged.

A pure state money system is feasible.

MMT and Bank Credit-Money

I think part of the lack of emphasis in MMT on the (negative) role of private bank credit-money in our leveraged state money system stems from earlier bouts with non chartalists, especially metallists, who wanted to prove that money arose privately, and not from the state. As a result, chartalists have a natural tendency to downplay the role of private money in general, including privately created credit-money. Chartalist literature frequently (and often gratuitously, almost a tic)  turns to discussions of metallism. Simultaneously, in highlighting a state theory of money, chartalists needlessly minimize the utterly dominant role of private banks and private credit-money creation for many centuries, leveraging for private gain both commodity and state money in different places and times  (A pernicious dominance that I think vestigial in the current system, and should be excised). With stipulative rather than historical,descriptive definitions of a state money theory, one can recognize the role of private money both now and historically, without weakening a State Theory of Money in the least.

Note – A similar dynamic is evident in Bill Mitchell’s rejection of Full Reserve Banking, where he associates FullRB with the gold standard and Austrians (and says it would be deflationary, a peculiar thing to think considering a sovereign government can always issue currency, and would simply replace existing credit-money with state money with keyboard strokes), when there are plenty of arguments for stopping private credit-money creation that have nothing whatsoever to do with the gold standard or Austrian beliefs.

Sovereign money and public policy space versus private profit space 

There are good reasons to want to remove vestigial private-money creation from state money that have nothing to do with past state money v. private money discussions, debates on metallism etc.

It is hard to understand why a state system of money with private leveraging (a “leveraged state money system”) is somehow more desirable than a system of state money only, a true monopoly by sovereign money. MMT never tires of (correctly) saying that a currency issuer is always solvent. So why is there a need for private leveraging, when the state can always fulfill the money-creating role directly rather than expansion by private leveraging? (the investment and credit purposes of banks are easily carried out with no new credit-money creation).

Éric Tymoigne, in “Chartalism, Stage of Banking, and Liquidity Preference,” writes

“The demand for money-things…ultimately rests, because money-things are debts, on the capacity of their issuers to make them scarce. For the private sector money-things, this means the capacity of the issuers of money-things to make profit…” (Tymoigne 2005, 12).

What purpose is served by letting private entities profit from the public good that is sovereign money? The sovereign cedes policy space for public purpose to private space for private gain. Needlessly and inequitably.

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Tymoigne, Éric, 2005 “Chartalism, Stage of Banking, and Liquidity Preference”

Wray, L. Randall, 1998, Understanding Modern Money

Wray, L. Randall 2007 “Endogenous Money: Structuralist and Horizontalist” Levy Institute Working Paper No. 512

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[This post is written partly in response to comments on https://clintballinger.edublogs.org/2013/01/03/mmt-can-address-operational-realities-or-analyze-a-chartalist-system-but-it-cannot-do-both/]

 

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