WHY IS CURRENCY ACCEPTED? RESPONSES TO COMMENTS ON MMP BLOG #7

So the Telenovela trick worked: many good comments and questions, with no one destroying the plot line.
Let me briefly address them by grouping them into six general areas. And then on Monday we will give an answer to the question: why would anyone accept a sovereign currency? On the comments page I already addressed two questions so will not repeat my answers to those here.

  1. Can gold be money? No. Never. If gold could be money, why not silver? Copper? Coconuts? Fish? Domestic services? A fuller answer will have to wait. In my view, money can never be a “commodity”. For our economistic friends, recall the line from Clower: “goods buy money, money buys goods, but goods never buy goods.” If a commodity could be money, we have a case of “goods buying goods”. There is not, never has been, such a thing as a “commodity money”.
  2. Money is a “custom”, “law”, “norm”, “rule”. Ok, not specific enough for my taste. What is the nature of that custom, law, norm, rule? I do think that referring to “law” is on the right track. In my view, “custom”, “norm”, “rule” does not pin it down. This should be clear from the blogs I have posted the last two weeks. (Hint: why did I use the term “sovereignty”?) Veblen skewered the “leisure class” for its customs and norms—I love his explanation of the development of the custom of growing long fingernails (mostly, but not exclusively, on women—to prove that one is not and cannot be productive). These things are important. But they do not shed much light on money. Laws? Yes, you are getting hot (remember the game you played with your mum?–hide the thimble). But not legal tender laws—nothing but a “pious wish”, as Knapp put it.
  3. Why would those outside the US be willing to use dollars? Very good question. And, yes, it is related to a wish to “join the party” put on by the biggest economy in the world. But it really does beg the question, no? Certainly it must be related to willingness of Americans to accept dollars. But we do not want a “hot potato” or “infinite regress” argument (which Ramanan accuses us of, continuing to misstate the MMT position—her/his “MO”, unfortunately, and she/he does know better). So….why do Americans want dollars? Ah, yes, that is the question.
  4. Are all debts denominated in money, such as the schoolyard debts amongst children? No. For an excellent, and I mean really, truly excellent, book on debt broadly defined, please read Margaret Atwood’s “Payback: debt and the shadow side of wealth”. She documents that chimps keep careful records of debts and credits. If Chimp A helps defend me against an attack but I do not “payback” next time Chimp A is attacked, I cannot count on her when I need help. Yes, we are cousins of chimps, and yes we keep careful track of debts and credits. But many or most of these are not denominated in money terms. So far as we know, Chimps have never come up with the concept of a unit of account. But remember, if a chimp does you a favor, you’d better pay up.
  5. Does it have something to do with accounting systems of credits and debits, denominated in dollars? Bingo. We are onto something here. Credits and debits. Measured in a money of account. Keep that in mind for next week. Ponder this: if currency is related to the sovereign government, what debit/credit relation do we have with that sovereign? Remember the chimps. What do we owe our sovereign chimp?
  6. Soddy: the value of money is determined by the wealth given up when money is accepted. Except for some unfortunate terminology, we’ve again “struck gold”. The value of a currency depends on what we have to “give up” to get it. Be careful here—the value of the currency is not quite the same thing as willingness to accept it. Just because I am willing to accept a currency does not determine its value. “What am I willing to do to obtain it?” That is not the same as: “Why am I willing to accept it?” (Soddy was brilliant and came up with the Soddy principle: debts tend to grow faster than incomes due to compound interest, which is why we need the Year of Jubilee when all debts are forgiven. But we adopted the Roman view of time—abandoning the circular view of time that all previous societies accepted—so that we can never “go back”, debts can never be forgiven because property rights are sacrosanct, including the creditor’s right to squeeze blood out of an orange. So we have to have bankruptcy court, debtor’s prisons, and IMF sanctions. Ain’t Roman civilization grand?)  So I need dollars (why?) and am willing to “give up something” to get them (how much?). Those, as our Hamlet might say, are the key questions about money: why, and how much?

OK, so the suspense is killing you. Four long days to wait for the answer to be revealed. Plot spoilers: go ahead and do your damage.

21 Responses to WHY IS CURRENCY ACCEPTED? RESPONSES TO COMMENTS ON MMP BLOG #7

  1. Got to have it to pay my taxes! Otherwise I loose my property… That is unless I am an oligarch..even then I must pay tribute to experts in tax law to take advantage of loopholes. Taxation creates demand for the currency…right? I am a Social Worker by trade amongst economists. I have had 3 courses in econ..micro/macro & money credit banking. MMT makes sense! The mainstream stuff makes NO SENSE.

  2. "So we have to have bankruptcy court, debtor’s prisons, and IMF sanctions. Ain’t Roman civilization grand?"Without it we'd have to forgo the Merkel/Sarkozy & Obama/Ryan dog and pony shows.What would the papers write about?

  3. "Taxation creates demand for the currency…right?"Or you could be Greece where you struggle to collect tax. So it could be a little more than just 'taxation'. We shall see :)

  4. Greece by joining the European Monetary Union/Adopting the Euro gave up its Sovereign Currency status. Basically the larger states financial/corporate elite are tightening the screws on Greek citizens..Maybe this is why we see open rebellion…

  5. 1. No commodity can be money. From that view, in the era of gold standards, gold and silver coins weren't money they were what money was printed on same as paper. Constraining the amount of currency by the amount of precious metal available to the issuer was an artificial constraint the same as the US debt ceiling.2-5. I eagerly await the full answer because I can't see beyond or around taxation in response to it. What is it I owe my sovereign chimp other than twintopt?On the greek example from comments above…As Greece is a user of currency and not an issuer is there any link between the Greek struggle to collect tax and willingness in the Greek private sector to accept the euro?As a greek citizen in the face of a taxation breakdown I would continue to eagerly accept euros for the same reason I might accept dollars.

  6. OK, how about Bolivia?

  7. Professor Wray, I understand that taxation creates demand for money, but I do not think people accept money really for that reason. Actually I think that people do not have a choice. One cannot simply refuse money. Two examples: 1) I cannot refuse to use money, not so simply. I can't ask my employer to pay me with anything but money; I cannot do my daily grocery by barter; even in the masochistic case I decide to NOT pay taxes and go to jail willingly – and convince all my friends to do the same, that is not sufficient to eliminate my demand for money (e.g. buy cigarettes in jail?). 2) When a kid asks his parents for some money to spend, it is not for paying taxes. He/she wants money to buy something. The demand for money is created by the fact that the parents gave up some wealth when they accepted the money, and now their kid wants to access some of that 'lost' wealth. I understand that taxes have an important role in creating a demand for money. But I have a hard time to apply this principle to what I see in everyday life. I would appreciate if you could clarify this dichotomy in you future posts, thank you.

  8. Govt. as ‘sovereign chimp’ – LoL!!! That’s the best image of the way humans run their affairs on planet earth I’ve ever heard! His portrait should be hung in every parliament … next to say a David Attenborough or the Dalai Lama to remind us the species does evolve.

  9. "Can gold be money? No. Never. If gold could be money, why not silver? Copper? Coconuts? Fish? Domestic services? A fuller answer will have to wait."because more of the other commodities besides gold could be created/mined/whatever leading to price inflation?"In my view, money can never be a “commodity”. For our economistic friends, recall the line from Clower: “goods buy money, money buys goods, but goods never buy goods.” If a commodity could be money, we have a case of “goods buying goods”. There is not, never has been, such a thing as a “commodity money”."But can the medium of exchange supply be traded like a commodity vs. the total amount of goods and/or each good?"Are all debts denominated in money, such as the schoolyard debts amongst children? No. For an excellent, and I mean really, truly excellent, book on debt broadly defined, please read Margaret Atwood’s “Payback: debt and the shadow side of wealth”. She documents that chimps keep careful records of debts and credits."But does "chimp debt" have an interest rate attached and bring something from the future to the present?

  10. Because we need a common yardstick to determine the relative values of various good and services. Money is the yardstick, and our currency is the legally established expression of money. If we didn't accept the currency, we would have to establish some other commonly agreed upon yardstick, ie some other currency. In other words, as noted above we have no choice. We need the yardstick, and whatever form the yardstick takes is currency.

  11. Murrayv, do you mean currency plus demand deposits as your "yardstick"?

  12. Money is accepted because people have things they don't want, and want things they don't have, and the more highly specialized the components of the economy become, the less likely it is that people will be able to find bartering opportunities that will satisfy their wants. So there becomes a need to issue, accept and circulate IOUs (i.e. money loans) which make it possible to trade immediate satisfaction of needs for a deferred satisfaction of needs. Costs of accounting for exchange rates are the incentive to have those circulating IOUs share a common denomination. Taxation only increases the incentive for the medium of exchange to share a common denomination, and together with the lending and spending operations of the government, as well as capitalization requirements in private lending, sets the control of the value of that denomination in the hands of the government.

  13. Pay your taxes in my currency or I will put you in jail; as sovereign, I alone have the monopoly on violence.

  14. Tend to endorse the distinction made by Anonymous of 21 July 5:13. Consider specifically the guy in the "cash" business who dutifully hides his proceeds in a boot in his closet. I suppose there is only one "correct" answer to the questions "What is money and why do people accept it?" within the "sovereign fiat" analysis, but for someone who pays no taxes (rightly or wrongly), the account is just false. He/she might be dogmatic about it, e.g., businesses pay sales taxes, excise taxes, etc., he/she is merely paying the price required – what those to whom he/she gives money is THEIR concern – maybe THEY in turn hide money in a boot in a closet …

  15. I am sovereign. If under my present rules, you do not have to pay taxes, you are not of tax concern to me. But for those that sell you goods and services that owe me taxes, I will not accept barter nor gold – they must pay me in my currency or go to jail. If they accept from you barter or gold, they must convert that to my currency for my taxes or go to jail.I am sovereign. Hiding in a closet is only betting on the effectiveness of me finding you – most loss the bet and suffer more of my sanctioned violence for the attempt.

  16. salsabob said: "Pay your taxes in my currency or I will put you in jail; as sovereign, I alone have the monopoly on violence."Don't most people pay their taxes with a demand deposit (check)?

  17. From Professor Wray's last sentence in his post:"…about money: [..] how much? "Here an answer (from F.S.). Most people deal with two types of wealth: (A) physical wealth that is needed right away for living (food, shelter, clothes, etc.) and (B) wealth that the individual is willing to give up momentarily. Wealth of type B is given up by the individual in exchange of money. In this sense money is just a "placeholder" for wealth one abstains from, voluntarily. The SUM of ALL wealth of type B, over the entire population, gives the TOTAL amount of wealth that the entire population is willing to give up (in exchange for money). That should be precisely equal to the total amount of money at a given moment in time. Not a cent more, not a cent less.I find this concept extraordinarily simple, and yet most people I talked with do not understand it. Why?

  18. One definition of ‘money’ from a Tibetan monk that I know of, is (paraphrasing liberally): ‘the concretisation of vitality or human energy, guided mainly by desire, with a little bit of thought thrown in’.I think this human aspect sub standing money is just as important as any systemic discussion. The thing about money is that it has grown over the millennia from something meant to minister to personal and family needs, to something in the hands of the great capitalistic systems – the future we desire for it is to minister to group and world need.This will be impossible unless greed, selfishness and short-sightedness are overcome.Money currently flows into all of the myriad homes; the great capitalistic systems and monopolies, religious, philanthropic, educational and medical institutions of the world – yet such a teeny proportion of it is spent in reality on betterment of human living; or for the inculcation of values that will lead to Peace and better human relations. These are the true ‘imbalances’ of the world. So much money is deflected into non-essential material aspects of living that are little better than entertainment or indulgence; or money is held back because of separative differences in opinion, or prejudice – such that the true assistance of humanity (one species on one planet earth – the only one for light years around) is overlooked. Not one government has a Department of Peace, or a Department of Ending the Suffering and Starvation with a budget to match the essentialness of its mission. Yet people have always clamoured for peace, justice and a sense of security. In all of this, the right use of money and a realisation on the part of our so-called ‘world leaders’ as to their actual responsibilities would help. This sense of financial responsibility is to be found nowhere other than in a few:– while we wait much of humanity starves, remains uneducated, or is brought up on false values.All because of the wrong use of money.I see no harm in making clear policy statements along with an explanation of MMT (which I applaud).Cheers …jrbarch

  19. had enough,I am sovereign. Pay your taxes in any form of my currency that I CHOOSE, or go to jail.

  20. "The thing about money is that it has grown over the millennia from something meant to minister to personal and family needs"Wrong. But some of your points still stand, even if this wasn't the case.—A lot of comments look like to fall back on the 'medium of exchange' function as a necessity, but this ain't true. In fact, when currencies collapse, bartering and eventually 'monetization' only happens on societies that ALREADY were used to the use of money. There isn't a single case were societies evolved from bartering to money, economists fairy tales.Money is purely an evolution of accounting, and accounting is purely a necessity of debt tracking.

  21. great post! Your blog is really helps for my search and i really like it.. Thanks a lot.