Money as a Public Monopoly

By L. Randall Wray

What I want to do in this blog is to argue that the reason both theory and policy get money “wrong” is because economists and policymakers fail to recognize that money is a public monopoly*. Conventional wisdom holds that money is a private invention of some clever Robinson Crusoe who tired of the inconveniencies of bartering fish with a short shelf-life for desired coconuts hoarded by Friday. Self-seeking globules of desire continually reduced transactions costs, guided by an invisible hand that selected the commodity with the best characteristics to function as the most efficient medium of exchange. Self-regulating markets maintained a perpetually maximum state of bliss, producing an equilibrium vector of relative prices for all tradables, including the money commodity that serves as a veiling numeraire.

All was fine and dandy until the evil government interfered, first by reaping seigniorage from monopolized coinage, next by printing too much money to chase the too few goods extant, and finally by efficiency-killing regulation of private financial institutions. Especially in the US, misguided laws and regulations simultaneously led to far too many financial intermediaries but far too little financial intermediation. Chairman Volcker delivered the first blow to restore efficiency by throwing the entire Savings and Loan sector into insolvency, and then freeing thrifts to do anything they damn well pleased. Deregulation, which actually dates to the Nixon years and even before, morphed into a self-regulation movement in the 1990s on the unassailable logic that rational self-interest would restrain financial institutions from doing anything foolish. This was all codified in the Basle II agreement that spread Anglo-Saxon anything goes financial practices around the globe. The final nail in the government’s coffin would be to preserve the value of money by tying monetary policy-maker’s hands to inflation targeting, and fiscal policy-maker’s hands to balanced budgets. All of this would lead to the era of the “great moderation”, with financial stability and rising wealth to create the “ownership society” in which all worthy individuals could share in the bounty of self-regulated, small government, capitalism.

We know how that story turned out. In all important respects we managed to recreate the exact same conditions of 1929 and history repeated itself with the exact same results. Take John Kenneth Galbraith’s The Great Crash, change the dates and some of the names of the guilty and you’ve got the post mortem for our current calamity.

What is the Keynesian-institutionalist alternative? Money is not a commodity or a thing. It is an institution, perhaps the most important institution of the capitalist economy. The money of account is social, the unit in which social obligations are denominated. I won’t go into pre-history, but I trace money to the wergild tradition—that is to say, money came out of the penal system rather than from markets, which is why the words for monetary debts or liabilities are associated with transgressions against individuals and society. To conclude, money predates markets, and so does government. As Karl Polanyi argued, markets never sprang from the minds of higglers and hagglers, but rather were created by government.

The monetary system, itself, was invented to mobilize resources to serve what government perceived to be the public purpose. Of course, it is only in a democracy that the public’s purpose and the government’s purpose have much chance of alignment. In any case, the point is that we cannot imagine a separation of the economic from the political—and any attempt to separate money from politics is, itself, political. Adopting a gold standard, or a foreign currency standard (“dollarization”), or a Friedmanian money growth rule, or an inflation target is a political act that serves the interests of some privileged group. There is no “natural” separation of a government from its money. The gold standard was legislated, just as the Federal Reserve Act of 1913 legislated the separation of Treasury and Central Bank functions, and the Balanced Budget Act of 1987 legislated the ex ante matching of federal government spending and revenue over a period determined by the celestial movement of a heavenly object. Ditto the myth of the supposed independence of the modern central bank—this is but a smokescreen to protect policy-makers should they choose to operate monetary policy for the benefit of Wall Street rather than in the public interest (a charge often made and now with good reason).

So money was created to give government command over socially created resources. Skip forward ten thousand years to the present. We can think of money as the currency of taxation, with the money of account denominating one’s social liability. Often, it is the tax that monetizes an activity—that puts a money value on it for the purpose of determining the share to render unto Caesar. The sovereign government names what money-denominated thing can be delivered in redemption against one’s social obligation or duty to pay taxes. It can then issue the money thing in its own payments. That government money thing is, like all money things, a liability denominated in the state’s money of account. And like all money things, it must be redeemed, that is, accepted by its issuer. As Hyman Minsky always said, anyone can create money (things), the problem lies in getting them accepted. Only the sovereign can impose tax liabilities to ensure its money things will be accepted. But power is always a continuum and we should not imagine that acceptance of non-sovereign money things is necessarily voluntary. We are admonished to be neither a creditor nor a debtor, but try as we might all of us are always simultaneously both. Maybe that is what makes us Human—or at least Chimpanzees, who apparently keep careful mental records of liabilities, and refuse to cooperate with those who don’t pay off debts—what is called reciprocal altruism: if I help you to beat the stuffing out of Chimp A, you had better repay your debt when Chimp B attacks me.

OK I have used up two-thirds of my allotment and you all are wondering what this has to do with regulation of monopolies. 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. Let me make that just a bit broader because US Treasuries (bills and bonds) are just HPM that pays interest (indeed, Treasuries are effectively reserve deposits at the Fed that pay higher interest than regular reserves), so we will include HPM plus Treasuries as the government currency monopoly—and these are delivered in payment of federal taxes, which destroys currency. If government emits more in its payments than it redeems in taxes, currency is accumulated by the nongovernment sector as financial wealth. We need not go into all the reasons (rational, irrational, productive, fetishistic) that one would want to hoard currency, except to note that a lot of the nonsovereign dollar denominated liabilities are made convertible (on demand or under specified circumstances) to currency.

Since government is the only issuer of currency, like any monopoly government can set the terms on which it is willing to supply it. If you have something to sell that the government would like to have—an hour of labor, a bomb, a vote—government offers a price that you can accept or refuse. Your power to refuse, however, is not that great. When you are dying of thirst, the monopoly water supplier has substantial pricing power. The government that imposes a head tax can set the price of whatever it is you will sell to government to obtain the means of tax payment so that you can keep your head on your shoulders. Since government is the only source of the currency required to pay taxes, and at least some people do have to pay taxes, government has pricing power.

Of course, it usually does not recognize this, believing that it must pay “market determined” prices—whatever that might mean. Just as a water monopolist cannot let the market determine an equilibrium price for water, the money monopolist cannot really let the market determine the conditions on which money is supplied. Rather, the best way to operate a money monopoly is to set the “price” and let the “quantity” float—just like the water monopolist does. My favorite example is a universal employer of last resort program in which the federal government offers to pay a basic wage and benefit package (say $10 per hour plus usual benefits), and then hires all who are ready and willing to work for that compensation. The “price” (labor compensation) is fixed, and the “quantity” (number employed) floats in a countercyclical manner. With ELR, we achieve full employment (as normally defined) with greater stability of wages, and as government spending on the program moves countercyclically, we also get greater stability of income (and thus of consumption and production)—a truly great moderation.

I have said anyone can create money (things). I can issue IOUs denominated in the dollar, and perhaps I can make my IOUs acceptable by agreeing to redeem them on demand for US government currency. The conventional fear is that I will issue so much money that it will cause inflation, hence orthodox economists advocate a money growth rate rule. But it is far more likely that if I issue too many IOUs they will be presented for redemption. Soon I run out of currency and am forced to default on my promise, ruining my creditors. That is the nutshell history of most private money (things) creation.

But we have always anointed some institutions—called banks—with special public/private partnerships, allowing them to act as intermediaries between the government and the nongovernment. Most importantly, government makes and receives payments through them. Hence, when you receive your Social Security payment it takes the form of a credit to your bank account; you pay taxes through a debit to that account. Banks, in turn, clear accounts with the government and with each other using reserve accounts (currency) at the Fed, which was specifically created in 1913 to ensure such clearing at par. To strengthen that promise, we introduced deposit insurance so that for most purposes, bank money (deposits) functions like government currency.

Here’s the rub. Bank money is privately created when a bank buys an asset—which could be your mortgage IOU backed by your home, or a firm’s IOU backed by commercial real estate, or a local government’s IOU backed by prospective tax revenues. But it can also be one of those complex sliced and diced and securitized toxic waste assets you’ve been reading about. A clever and ethically challenged banker will buy completely fictitious “assets” and pay himself huge bonuses for nonexistent profits while making uncollectible “loans” to all of his deadbeat relatives. (I use a male example because I do not know of any female frauds, which is probably why the scales of justice are always held by a woman.) The bank money he creates while running the bank into the ground is as good as the government currency the Treasury creates serving the public interest. And he will happily pay outrageous prices for assets, or lend to his family, friends and fellow frauds so that they can pay outrageous prices, fueling asset price inflation. This generates nice virtuous cycles in the form of bubbles that attract more purchases until the inevitable bust. I won’t go into output price inflation except to note that asset price bubbles can fuel spending on consumption and investment goods, spilling-over into commodities prices, so on some conditions there can be a link between asset and output price inflations.

The amazing thing is that the free marketeers want to “free” the private financial institutions to licentious behavior, but advocate reigning-in government on the argument that excessive issue of money is inflationary. Yet we have effectively given banks the power to issue government money (in the form of government insured deposits), and if we do not constrain what they purchase they will fuel speculative bubbles. By removing government regulation and supervision, we invite private banks to use the public monetary system to pursue private interests. Again, we know how that story ends, and it ain’t pretty. Unfortunately, we now have what appears to be a government of Goldman, by Goldman, and for Goldman that is trying to resurrect the financial system as it existed in 2006—a self-regulated, self-rewarding, bubble-seeking, fraud-loving juggernaut.

To come to a conclusion: the primary purpose of the monetary monopoly is to mobilize resources for the public purpose. There is no reason why private, for-profit institutions cannot play a role in this endeavor. But there is also no reason to believe that self-regulated private undertakers will pursue the public purpose. Indeed, as institutionalists we probably would go farther and assert that both theory and experience tell us precisely the opposite: the best strategy for a profit-seeking firm with market power never coincides with the best policy from the public interest perspective. And in the case of money, it is even worse because private financial institutions compete with one another in a manner that is financially destabilizing: by increasing leverage, lowering underwriting standards, increasing risk, and driving asset price bubbles. Unlike my ELR example above, private spending and lending will be strongly pro-cyclical. All of that is in addition to the usual arguments about the characteristics of public goods that make it difficult for the profit-seeker to capture external benefits. For this reason, we need to analyze money and banking from the perspective of regulating a monopoly—and not just any monopoly but rather the monopoly of the most important institution of our society.

* Much confusion is generated by using the term “money” to indicate a money “thing” used to satisfy one of the functions of money. I will be careful to use the term “money” to refer to the unit of account or money as an institution, and “money thing” to refer to something denominated in the money of account—whether that is currency, a bank deposit, or other money-denominated liability

25 Responses to Money as a Public Monopoly

  1. Nick Szabo has written a lot on the historical origins of money. George Selgin's recent book "Good Money" seems to support a version of Menger's theory as having actually occurred during the Industrial Revolution.Of course, it is only in a democracy that the public’s purpose and the government’s purpose have much chance of alignment.Really? Hasn't Hong Kong had very good policy going back to its days as a colony (isn't it actually a rare case of a country not going down the tubes with decolonization)? Haven't Singapore and Dubai done rather well under authoritarian leaders? The few remaining monarchies in Europe seem fairly well run compared to the democracies.

  2. TGGP,It's interesting to see that you only reveal your agreements with Mencius Moldbug on other blogs – never on UR.

  3. I occasionally express agreement with something he says there when I think it a particularly good point (I did this a lot more in the early days). Usually though he's good enough at arguing his own point that it would be redundant to make similar arguments. At a site like this one most will assume democracy is good and undemocratic governance bad. If I kept bringing up what a disaster the Congo Free State and North Korea are/were and how prosperous first-world democratic states are, the reaction would be "duh". I would say that relatively good and bad governments exist in both democratic and undemocratic forms and so there is a burden of proof on those who want to make sweeping claims.In keeping with this theme, I sometimes reference Post-Keynesian ideas at the Money Illusion, as Sumner is generally unaware or dismissive of them. Here I am more likely to respond from a more neo-classical or New Keynesian perspective.

  4. Well, judging from your second paragraph, it sounds like you just like to argue.Like you, I'm no partisan in my economics, and prefer a heterodox blend. However, I have seen your prolific comments throughout the blogosphere, and your economic views do come off as somewhat schizophrenic.Perhaps you can provide a brief summary of your positions on economic theory on your blog. I'd be interested in reading it.

  5. Hmmm, after seeing it mentioned here, I popped over to the "money illusion" blog. Wow, is that guy deluded. And the sad thing is, he seems to be really smart, really well read, with no obvious axes to grind a la most Chicago types – but has a mental block that prevents him from understanding the monetary system. It's reading stuff like that that makes me despair that the modern money viewpoint will ever get anywhere…

  6. OK sorry i have to admit I do not know what a menicus goldberg might be.I have actually reviewed (my good friend) George Selgin's book. It is by no stretch of the imagination a defense of Menger. It is all about private coinage of a STATE MONEY, mostly even under contract to the state. It has absolutely nothing to do with Crusoe and Friday bartering coconuts for fish and settling on commodity money. Indeed, the book emphasizes use of base metal to coin coins with essentially no intrinsic value but substantial nominal value. LR Wray

  7. Speaking strictly in terms of economics, I didn't think my writing was that schizophrenic. I'm not knowledgeable enough about Post-Keynesianism to actually give an endorsement or argument for it, so I just bring up contrasting ideas to see what others think of them. I'm willing to accept the existence of sticky wages (the microfoundation of New Keynesianism), but I'm not wedded to the idea and often bring up the great flexibility during the crash and recovery of 1920-1921.My general heuristic is to defer to the expert consensus. My own impulses are radically libertarian, but I'm not going to say "Global warming is a myth!" just because I might like it to be so. I think that collective action problems and externalities can exist, but government failure does as well. I think the Austrians are absolutely wrong about empiricism, and many of them have wrapped up their beliefs with a bunch of weird cultishness and ethical/political positions, much like the Objectivists that Rothbard aptly mocked.

  8. I favor small decentralized polities pursuing their own experiments in governance because even though many will turn out horribly, that's how we acquire knowledge. Furthermore, people have different preferences and as an emotivist I don't think there's any objectively "right" or "wrong" version of them, so its more efficient to let diff'rent folks to their diff'rent strokes rather than each fighting to impose their own on others. In terms of "Liberalism's Divide" (as Jacob Levy put it) I am entirely on the pluralist end, and my distrust for rationalism meshes with my preference for empiricism. I think people are too riddled with biases of the sort discussed at Robin Hanson's to rely on their own judgment on many matters and instead should rely on evidence (selected before its value is known) and simple rules. I try to take the "outside view" whenever the opportunity arises. That's not all quite "economics" but that's where I'm coming from.

  9. I haven't read Selgin's book (though I did watch him give a talk on it). From what I recall, he said that coiners attempted to get contracts with the government, but that fell through. There ended up being a large number of competing coiners who relied on their own reputation, rather than the state. It was the issuer who was responsible for backing their currency.I admit to not having read much Menger either. I thought his theory was that merchants started using a means of exchange because it was useful to them and had value (because Selgin's coins were backed and stylishly designed, they did as well) rather than the government creating currency.

  10. Jimbo . . . agree completely. Well put.Knapp . . . thanks for the endorsement. Always good to see you here.TGGP . . . couldn't tell if you already knew this or not from your comments (apologies if so) . . . PK don't argue that fixed nominal wages are destabilizing, neither did Keynes (which makes it quite disgraceful that this is the prevailing view of Keynes's theory of recessions among neoclassicals including New Keynesians). In fact, Keynes said the opposite, that, if anything, fixed wages could be stabilizing. Also, appreciated your summary of your approach . . . good to know where you're coming from as sometimes we make erroneous assumptions about the intentions of commenters and end up feeling stupid later.Best,Scott

  11. Old white men are very clever in how they want to control societies!

  12. I read a review linked once (I believe from the Money Illusion) of one of those books explaining "What Keynes really meant" making that point about sticky wages. The thesis of the book is that the most "splenetic" sections of the General Theory give the most insight. Googling has been no help in finding it again though.The ambrosini critique links to a paper claiming that downward-flexible prices were bad during the Great Depression:

  13. I just want to thank L Randall Wray, Mosler, Palley, Tcherneva and the rest here and at Levy for their work. bob mcmanus

  14. The problem with Chartalism that has plagued it since its inception when it was first articulated by Knapp is that it confuses causation.It begins by observing correctly that throughout history many diverse physical objects have performed the function of 'money.' It then observes quite appropriately that 'money' in its various forms has historically served to extinguish liabilities and debts to the government. But it then infers incorrectly from this that the government's requirement that liabilities and debts to it be paid in a particular object somehow causes that particular object to 'money.' There's no reason to believe why the causation can't be precisely backward – that a particular object's preexisting status as money causes the government to require liabilities/debts to it be paid in units of that object.The Chartalists don't really have good empirical evidence in their favor and thus have to resort to sifting through history for obscure elements like the "wergild tradition" Randall Wray refers to above. And the rest of their analysis rests on taking a snapshot of how monetary operations really work in practice today (which I largely agree with) but this analysis conveniently ignores the fact that the current fiat currency regime they analyze evolved (or devolved depending on how you look at it) from an earlier commodity standard, so in this sense it could be argued that the causation ran counter to how the Chartalists claim it runs.

    • Kato – “but this analysis conveniently ignores the fact that the current fiat currency regime they analyze evolved (or devolved depending on how you look at it) from an earlier commodity standard,”

      What “commodity standard”?
      Who/how is it issued?
      Who/how is it valued?
      How does a commodity as “commodity money” differ from it as a commodity?
      How/who chooses it?
      Why would others accept it or use it as a unit of account to denominate debts?

      What supporting evidence can you muster?

  15. Hi Kato:OK if you accept that chartalism actually describes "how monetary operations really work in practice today (which I largely agree with)" then the battle is won. We can agree to disagree on how money originated and operated in the "mists of time". Who really cares about that, anyway? Forget the commodity money and coconuts for fish story. We both agree that has nothing to do with money today.On Selgin: the coins were a) denominated in the state's money of account and b) made convertible into the state's own currency. Neither of these facts is consistent with the Menger story. That is why I said the purpose of the book is not to promote the Austrian view (that Selgin has not given up–it just is not relevant to this book). It is a book about PRIVATE COINAGE of state money. He admits it is simply a book about a manufacturing process (coins). Nothing more.LR Wray

  16. Randy is quite right to insist that there's not much overlap between the story I tell in Good Money and Menger's account of money's origin–and I say so despite being a fan of Menger. What's more, while I treat the episode I describe as evidence of the advantages of private over state coinage, Menger, took for granted the need for state coinage monopolies (see his article "Geld," english translation by Leland Yeager in Latzer and Schmitz, _Carl Menger and the Evolution of Payments Systems_).On the other hand, I think the British private coiners were doing something beyond merely manufacturing representatives of state-sponsored money. For one thing, they not only manufactured coins but also issued them and otherwise administered the token coinage. Also, the gold standard on which their coins were based, far from having been intentionally erected by the British government, was the quite unintended outcome of its bimetallic legislation: had the government had its way, the pound sterling would have remained a silver unit, as it had been prior to Newton's reforms. Indeed, the government would not issue a gold "pound" coin (the sovereign) until a decade after private coinage was suppressed. It's true, on the other hand, that the government did insist on monopolizing production of gold guineas and half guineas–coins that did not conform to the standard pound unit (whereas a pound was equivalent to 20 shillings, the guinea was rated at 21). But had the government been prepared to tolerate it it isn't hard to imagine private coiners having ventured to produce standard gold coins as well as redeemable tokens–as they did, for instance, in California during the gold rush.Market forces tend to compell competing coiners to make coins conforming to established monetary units. But the establishment of those units itself doesn't depend on state intervention. The pound monetary unit, for instance, began as a simple application of its weight-unit namesake, which originated in ancient Rome.

    • I realize that this discussion is old but nonetheless…

      Anonymous – “If a private coiner were to issue a full bodied gold coin with a stamp to indicate fineness, and if you are willing to call such a thing money, then I do not doubt that it could be used at least for some exchanges. ”

      If the price paid for raw gold is the market price & if the value of a finished gold coin is the same as its market price as bullion, then the price paid for raw gold would be the same as the value of received for the finished coin which, given the costs of production, means that the minting of coins can only occur at a loss.
      As no sane person would ever operate at a permanent loss, gold coins then, should not exist.

      What am I missing?

  17. To George Selgin:I’m wondering if you could comment more directly on the subject of this post;Knapp’s Chartalism and Money as a Public Monopoly?Following Schumpeter you appear to favor a “legal restrictions” interpretation of Chartalism. For example you site approvingly Von Mises:“The Law may declare anything it likes to be [legal tender]. But bestowing the property of legal tender on a thing does not suffice to make it money in the economic sense. Goods can become common media of exchange only through the practice of those who take part in commercial transactions; and it is the valuations of those persons alone that determine the exchange ratios of the market. Quite possibly, commerce may take into use those things to which the state has ascribed the power of payment; but it need not do so. It may, if it likes, reject them.” (from Selgin: On Ensuring the Acceptability of a New Fiat Money). Here Mises appears to downplay the power of the state. But can you “reject” state money if you need to acquire it to settle tax obligations?

  18. George: Thanks for the comment, and clarification. I agree with you that it is unlikely that the British government intentionally created a gold standard–nor is that very important. A more important question is whether we can find examples of gold standards that are NOT administered by an authority. As you know, I agree with your comment quoted by "Knapp" above that declaration of legal tender is not sufficient. But imposition of a tax is. I do not say that imposition of a tax is necessary. If a private coiner were to issue a full bodied gold coin with a stamp to indicate fineness, and if you are willing to call such a thing money, then I do not doubt that it could be used at least for some exchanges. I would see this as closer to barter (coconuts for fish; cigarettes for candy in a POW camp). And if the private coiner denominates the full bodied coin in the state money of account (pound, dollar) then I would say this is even weaker evidence that private money has been created in this case. LR Wray

  19. Dear Knapp,Of course one must be willing to acquire "state money" in order to surrender the same to tax authorities if they insist on it, but tax transactions don't necessarily dictate what things are generally received in payment. The government might insist that we all start paying taxes in wampum each April. That would certainly raise demand for and the market price of wampum, especially in April when there'd be a scramble for the stuff; but it need not cause wampum to be generally employed in exchange.Today, by the way, the U.S. Treasury asks us not to pay taxes with Federal Reserve Notes or official U.S. coins (if you don't think so, check the back of the tax return envelope). Yet those instruments are certainly money!Of course, as a "big player" the government has a disproportionate influence on the choice of exchange media–that it should is a necessary consequence of money's status as a "network good." But a big influence isn't the same as power to dictate what's money and what isn't. History offers many illustrations of this point.

  20. Randy's point about the distinction between "necessary" and "sufficient" is an important one, and is usually misrepresented by critics of chartalism.For instance, banks are required to deliver reserve balances to settle their customers' tax liabilities. This is sufficient for a non-trivial demand for reserve balances to exist, and thus for the rate set by the Fed at which banks can acquire reserve balances from the Fed or other banks to "matter" when other rates are set. But no chartalist ever suggested liabilites of other institutions not accepted in the payment of taxes would not also be used in settling private transactions . . . it's self evident that this does happen in many instances and particularly in the area of wholesale payment settlement I am using as an example here. (And in these cases, as Randy also points out, we have to consider which unit of account has been used, as there are certainly degrees of "private moneyness".)

  21. George: Scott makes the point I would have made in response. True, our Treasury doesn't want a shipping container full of dimes in payment of taxes. Instead, banks act as intermediaries between taxpayers and govt (and between recipients of govt spending and govt)–as they always have done. Indeed, that is a primary function of banking. But when banks do this, they use "govt money" to make those payments; specifically, they use reserves. I agree with you that govt could declare that it will now accept only wampum; I think you understate the degree to which wampum would then be used in "private" transactions. I hypothesize that private debts and credits would soon be denominated largely in units of wampum. It is only a hypothesis, of course, but it is backed by thousands of years of real world examples.LR Wray.

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