DEBT-FREE MONEY: A NON-SEQUITUR IN SEARCH OF A POLICY

By L. Randall Wray

While we are on the topic of monetary cranks, I thought it might be useful to quickly address a cranky idea that often comes up in comments to my blogs and also during Q&A after presentations: so-called “debt-free money”.

The first time I heard it, my immediate reaction was “Say what?”, and the second was puzzlement at the non-sequitur.

I am not sure exactly which of the crank approaches explicitly adopt the notion, but it seems common to a lot of them. I’m not going to address any particular approach but instead will address only the idea that we can have a “money” that is not a “debt”.

But first I want to tie up a loose end from my last blog, Something is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke, which was carried at GLF, NEP, and Naked Capitalism.

Most of the comments to that piece were about a particular (“crank”, in the endearing sense) approach called Positive Money. I did not directly comment on that approach in any kind of detail; I borrowed a quote from Ann Pettifor and directed my comments only to one particular aspect: a centralized committee that is to control “thin air money creation”. I provided my objections to that one aspect.

First, I don’t like centralized committees and I certainly don’t like centralized committees headquartered at the thoroughly undemocratic and inflation-obsessed central banks. Second, I like highly decentralized and mostly small, heavily regulated and supervised, community lenders making decisions over how much lending and whom to originate loans for. I also wondered about the apparent loanable funds framework PM appears to adopt—but I’m not sure if that is indeed the framework.

I’m prepared to be dissuaded from those positions. And I do not hold a general position on PM. I’m surprised that so many of the comments were about PM, while my piece only briefly mentioned it.

I said I do like the idea of carving out a small part of the financial system—the payments system—which is what Narrow Banking is all about (at least, in most of its versions, dating back to Fisher, and more recently with Phillips and Minsky). I suggested a Postal Saving System achieves that goal and until I’m persuaded that Narrow Banking is better, I choose PSS.

Yes, I’ll probably do a blog related to that topic and will tangentially address public banking. I don’t have anything against the general idea. Just as I’m not against the narrow banking proposal, in general.

OK, with that preface, let’s look at the problem with “debt-free money”.

The Cloakroom Debt Token

In discussing money, G.F. Knapp (one of the developers of the State Money Approach, adopted by Keynes and by MMT) made a useful analogy with the cloakroom token. When you drop off your coat at the cloakroom, the attendant offers you a token, usually with an identification number. The token is evidence of the debt of the cloakroom, which owes you a coat.

Some hours later you return with the token. The attendant returns your coat. If you feel generous, you tip the attendant for the service.

By accepting the token and meeting the obligation to return your coat, the attendant has “redeemed” herself or himself. The slate is wiped clean. The debt is destroyed.

At this point the token is simply warehoused, put back on an empty coat-hanger, waiting to be reused.

When the token is in the cloakroom, it is not a debt. It is a circular piece of cardboard, perhaps enclosed in a metal ring.

Or maybe it is a square chunk of plastic.

Or a shiny brass coin.

Some cloakrooms instead use paper tickets, split into stock and stub at the time a coat is deposited. On your return to the cloakroom, the stock and stub are matched, the coat is returned to the rightful owner, and the stock and stub are thrown away.

It makes no difference what form the token takes—it is just evidence of a debt, a “coat debt” that is redeemed by return of the coat.

Note that you could pass the token to your spouse or even to a stranger, with instruction to fetch your coat from the cloakroom.

If coats were homogenous, the tokens would be valuable to anyone who might want your coat. They could become a sort of currency passing from hand-to-hand at the value of a coat debt, so Knapp’s analogy is not so far-fetched as it might first appear.

However, coats are not uniform, and the attendant cannot simply return “a coat”, but must return “your coat” in redemption for the token.

Dry cleaners also use tokens, but they make an additional promise. Not only will they return your coat, but they also will clean it. They cannot redeem their debts simply by returning your dirty coat.

Ditto the seamstress, who redeems her token debt by returning your coat with sleeves shortened.

The point here is that the token is representative of debt, with the specific obligation spelled out by custom or contract and enforced if necessary in the courts.

Money as a Token of Debt

Let us begin with the closest analogue to the cloakroom token: the tally stick. Tally sticks were commonly issued for hundreds of years in Western Europe—by Kings but also by others (my 2004 book cover shows a photo I took of tallies that were used on private estates in Agrigento, Sicily in 1905) as records of debt. The sticks were split into stock and stub, matched at the time of redemption and then destroyed.

In the case of the King’s tallies, Redemption Day was tax day when the King’s representative (the exchequer) arrived in the village, spread cloth on the ground, and matched stock and stub. Hallelujah, the tax was paid.

The tally stick had value because it could be used to “redeem” oneself on Redemption Day. You owed the king his taxes, and he owed you the right to deliver evidence of his debt (recorded on the stick) to pay your taxes. The sticks circulated because this debt was “homogenous”, unlike the debt redeemed by the cloakroom that took the form of your specific coat. Anyone with a debt to the King needed a tally stick (any tally stick so long as it was issued by that King) to pay taxes.

A.M. Innes explained the significance of tallies, quoted in my 2004 book:

For many centuries, how many we do not know, the principal instrument of commerce was neither the coin nor the private token, but the tally, (Lat. talea. Fr. taille. Ger. Kerbholz), a stick of squared hazel-wood, notched in a certain manner to indicate the amount of the purchase or debt. The name of the debtor and the date of the transaction were written on two opposite sides of the stick, which was then split down the middle in such a way that the notches were cut in half, and the name and date appeared on both pieces of the tally. The split was stopped by a cross-cut about an inch from the base of the stick, so that one of the pieces was shorter than the other. One piece, called the ‘stock,’ was issued to the seller or creditor, while the other, called the ‘stub’ or ‘counter-stock,’ was kept by the buyer or debtor.

Both halves were thus a complete record of the credit and debt and the debtor was protected by his stub from the fraudulent imitation of or tampering with his tally.

The labours of modern archaeologists have brought to light numbers of objects of extreme antiquity, which may with confidence be pronounced to be ancient tallies, or instruments of a precisely similar nature; so that we can hardly doubt that commerce from the most primitive times was carried on by means of credit, and not with any ‘medium of exchange.’ (See Wray, “Credit and State Theories of Money”, Edward Elgar, 2004.)

Now, what were coins? As Innes emphasizes, coins were never very important—in spite of all the ink spilled in writing about them. They are bright shiny tallies that can last a long time and still garner interest when discovered centuries after being lost and forgotten. Collectors love them. By contrast, tally sticks are burned or simply rot away; ditto papyrus or paper evidences of debts. But coins were typically a nearly insignificant part of the “money supply”, and most tax collections brought in far more hazelwood tally sticks than coins.

Economists focus on coins only because they outlasted the sovereigns that issued them and many of them contained bright shiny metal that blinds reason. If bovine droppings had been stamped, instead, they would have served perfectly well as coins but no one would be interested in them after the demise of the empires that issued them.

Coins were evidence of debt that solved the problem of counterfeiting not through splitting a notched stick but rather through the technology of stamping or, later, milling coins. High quality craftwork and then milling the edges made “fraudulent imitation” more difficult. In addition, the use of precious metals (which were more easily monopolized by the sovereign) made counterfeiting more difficult and more expensive. (I won’t go further into the history of coinage here—and all the myths about value being determined by embodied precious metal—as I already did that in my 2012 book, Modern Money Theory.)

The sovereign spent coins into circulation, then accepted them alongside tallies in tax payment. Coins circulated more freely than tally stocks because the coin by itself contained all the evidence of the crown’s debt (in the case of a tally stick one needed both the stock and the stub).

In addition to promising to take back coin token debts, the sovereign issuer could also promise to exchange them for foreign currency or for precious metal on demand. This is an additional promise added to the promise to accept the coin in payment of taxes. It is similar to the additional promise made by the dry cleaner or seamstress: not only do you get your coat back, but you also get it cleaned and stitched. In the case of the coin, the sovereign not only promises to accept in taxes, but also might promise to exchange it for gold, and might also impose a legal tender law that proclaims the coin is good for private payments, too.

Paper Money Token Debts

Paper money has been around for a long time, but became common in the west only in the past few centuries. Most of it was issued by private banks, in the form of bank notes. You did not owe your bank taxes. So what debt was evidenced by the bank note?

The bank issued notes when it made loans. It held your “note” (the IOU you signed; we still use the term to refer to the documents associated with loans) as evidence of your debt to the bank. It issued its own “note” as evidence of the debt of the bank. You could spend the note, passing it to a third party. That third party could present it to the issuing bank to pay down debts owed to that bank.

With a clearing system, you could repay your debt to Bank A by presenting for “Redemption” notes issued by Bank B. The bank notes were circulating private “tallies”. The system clearer would return notes to the issuers as banks cleared debts with one another.

Like the cloakroom tickets, the notes might be destroyed by their issuers when they were returned. Or they could be stockpiled in bank warehouses for use later (just as the cloakroom’s token might be warehoused on empty coat hangers).

Eventually government central banks would do much of the clearing, originally issuing their own notes. The first central banks were explicitly created to issue notes to finance government spending, with the notes collected in tax payment.

Not liking competition, governments taxed private bank notes out of existence. Banks moved to deposit-based banking (rather than note-based banking). And, eventually, we got to the present day when it is mostly keystroke entries of debits and credits.

But, folks, it is all “debt money”.

“Bank Money” is an electronic entry on the liability side of the bank’s balance sheet, and an electronic entry on the asset side of the depositor’s balance sheet. (Called double entry book-keeping, the “keystroking” of deposits when a bank makes a loan means there will be four entries—the “note” of the borrower is the bank’s asset, and the bank’s “deposit” is its liability; the deposit is the borrower’s asset, and the note is the borrower’s liability.) Depositors can write checks on these deposits to pay down their own debts, including debts to banks.

“Central Bank Money” is generally comprised of two forms: paper notes and electronic reserves. The paper notes are the central bank’s liability and the asset of the holder. FRNotes are mostly used outside the USA, and are mostly used for illegal activities. (To increase the circulation of FRNotes, we need to raise the denomination of the largest denomination notes—the almighty dollar is being replaced by larger denomination Euro notes as the preferred medium of exchange by global drug dealers, although Bitcoins are making a dent—see below.)

FRReserves are keystroke entries, representing the Fed’s liability and the asset of depositors. Unless you are a bank, a foreign central bank, or some other special entity, you cannot hold these. In theory, the government should accept its central bank notes in tax payment. In practice, US taxpayers make tax payments using their banks—either with checks or direct withdrawal. The Fed then debits the private bank’s reserve deposits. So whether taxes are paid with FRNotes or FRReserves, in either case, the Fed’s liabilities to the US private sector are reduced. (There is also internal accounting involving the Fed’s and the Treasury’s balance sheets—the Fed credit’s the Treasury’s deposit account at the Fed. As I’ve said, this is like the husband owing the wife some dishwashing.)

“Treasury Money” is now mostly coins; in the past treasuries issued notes (and some still do). What is a coin? Stamped evidence of the Treasury’s debt. Some have pointed out that the US Treasury records coins as “equity”. Equity, of course, is on the liability side of the balance sheet. In theory, one should be able to pay taxes by returning the King’s coins. In practice, hardly anyone does that. I used to think that the IRS would not accept coins in payment of taxes, but apparently Tea Baggers are doing just that. According to a news report one of them delivers, each year, a bag full of coins in payment of taxes, with the stated intention of wrecking the day of some IRS agent, who presumably has to spend a few hours stacking and counting (tallying?) the coins.

So it is apparently possible to push a wheelbarrow to the IRS steps to pay your taxes in coins. In any event, most US taxes are paid as described above. You can certainly deposit coins (and FRNotes) at your bank and write a check to the IRS—Redeeming yourself in the eyes of Uncle Sam without pissing off IRS agents.

Debt-Free Tokens?

Now, with that background let us try to make sense of the call for “debt-free money”.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the tokens discussed above, but they are not debts. You can return them to the cloakroom, but you don’t get a coat.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper.

Imagine a sovereign that issues “debt-free” tallies. They look like the tallies discussed above, but when you return them to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt, but rather as a stick—perhaps fuel for a fire, but not a means of Redemption.

What is a debt-free tally? It is a hazelwood stick.

Why would you want the debt-free cloakroom token? Why would you want the debt-free tally stock?

As MMT says, “taxes drive money”.

(I’m not going through that again here. See the series that begins with this post.  Note, however, that “TDM” is short-hand for “obligations to the sovereign drive money”. You can pay fees, fines, tribute, tithes and taxes owed to the sovereign by delivering back his debt tokens (tallies, notes, coins, electronic records of liabilities). Note also that we claim that taxes are sufficient to drive a currency; we do not say they are necessary. Some commentators note that there are a few sovereigns (typically noted are oil-producing nations in which the sovereign monopolizes ownership of oil) that don’t impose taxes but still issue currency. But as we have long pointed out, if the sovereign can monopolize necessities of life, the sovereign can name what must be delivered to get the necessities. The Chicago water monopolist can designate what you must pay to quench your thirst; the heroin pusher can dictate what you need to get your fix. Maybe Bitcoins?)

If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk.

I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money.

I don’t think our debt-free money cranks want government to “issue” bananas. I think they want a “money” that is a record. But a record of what?

From what I gather, they want government to issue notes (many love to refer to Lincoln’s Greenbacks) or electronic “money”. But what are notes or electronic entries? They are records of indebtedness—debts that can be redeemed in payments to the issuers. They are debt tokens.

A Non Sequitur in Search of a Policy

When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks seem to hate payment of interest by government.

I’m not sure, but I think what they really want to do is to prohibit government payment of interest.

That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds.

We don’t need a non sequitur in search of a policy.

Debt-free money advocates also hate debt. Fine, in many religions, debt is sinful—for both creditor and debtor. Monetary cranks (rightly) attribute our current economic predicament to excessive private sector debt. I agree.

Some also fear public debt—which has no basis if we are talking about sovereign currency-issuing government.

However, there are some advocates of debt-free money who understand MMT’s point about sovereign government. Some of these even recognize that the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our net financial (dollar) wealth.

But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding.

Hence the idea is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat.

While I’m sympathetic to the view of political realities, the operational realities are quite different from what is imagined.

Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds, we will have already achieved what our “debt-free money” champions want.

However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins).

There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.

For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds. I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent.

Again, we don’t need a non sequitur in search of a policy.

68 Responses to DEBT-FREE MONEY: A NON-SEQUITUR IN SEARCH OF A POLICY

  1. Randall,

    coins are counted as assets by the Treasury, aren’t they?

    • eric tymoigne

      If treasury creates, usd100 of coins the following occurs:
      1- in textbook (to simplify): asset of treasury goes up by 100 and equity of treasury goes up by 100
      2- in reality: coins are shipped to fed after production and fed credits treasury account for 100. Balance sheet of treasury see +100 in fed balance (asset) and + 100 equity. Fed records +100 in coins (asset) and +100 in treasury balance (liability)

    • In another post, Eric Tymoigne wrote the following:

      “Now let’s assume that the Treasury wants to eliminate all its financial liabilities: no more public debt! What are the means to do so?

      1. Let securities mature and do not repay securities holders: 100% tax => FADP = 0 (the U.S. domestic private sector lost a bunch of financial assets!)

      2. Switch to a Treasury financial instrument not considered a liability (Coins are treated as equity by the Federal Accounting Standards Advisory Board)”

      In the comments section, Eric then says: “This is a totally arbitrary, and in my view incorrect, way to classify coins. Coins are metallic US notes. Coins should be counted as a liability of the treasury.”

      However, coins are not counted as government liabilities, or debts. Rather they are counted as government assets. When the government issues coins, it is like a company selling shares, or paying people with shares – not like a company issuing debt.

      http://www.bbc.co.uk/news/entertainment-arts-16871764

      This may be a purely technical distinction with very little practical consequence, but it shows that debt-free money is technically possible, if you consider equity and debt to be different things.

      http://neweconomicperspectives.org/2013/01/public-debt-debt-ceiling-and-monetary-sovereignty-some-accounting-realities.html#comment-94456

      • golfer1john

        “When the government issues coins, it is like a company selling shares, or paying people with shares – not like a company issuing debt.”

        No, it’s like a company selling their products. The proceeds in excess of the cost of production (profit, seigniorage) becomes equity on the liability side of the balance sheet, and a Fed account balance on the asset side. In the case of Treasury, they don’t try to keep it around like a company would try to do. In the course of their operations they tax some and spend more until their assets get down near 0, and then replenish the assets by selling T-bills, mostly, and only incidentally by selling more coins according to the demand for them.

    • Phillippe as I said in the piece, US Treasury treats it as equity, which is on the other side of the balance sheet–liability side. It is your asset, not the Treasury’s.

      • Randall,

        Equity is not quite the same thing as debt though, is it? Issuing coins is like issuing company shares, rather than issuing debt. Companies choose to issue shares rather than debt because the two are not the same.

        • Phil: I’ll let eric provide the detailed answer. Equity is on the liability side of the balance sheet; it is the asset of the holder. The coins we hold are our assets (net financial assets). the US Treas treats these as equity–so you are like a shareholder in the firm, an “owner” of the US Treasury. I hope that makes you feel pretty good!!
          In truth I do not know why Treas treats it this way but I suppose it has to do with coins being the residual item (or one of them) of the balance sheet since A=L+E, and you tally up the items in A, and the other items in L and E is the remainder.
          As Eric showed above, before Treas spends, it has an asset which is its deposit at the Fed. When it pays SocSec it draws down that asset (conceptually, it reduces its liability to seniors which is the offset to drawing down its deposit asset).

        • There is very little difference between a preference share and corporate bonds, and the line over what is treated as equity and what is treated as debt large falls down to the discretion over the coupon or the repayment of the principal.

          It’s an arbitrary line over what you call a ‘share’ and what you call a ‘bond’.

          Ultimately there is a return on the item and the item is ultimately repaid at some point.

        • Eric Tymoigne

          Philippe,
          That’s right, coins are not considered a debt (liability) but the treasury is nonetheless liable. the treasury is liable because the coins contain a promise; that the treasury will accept coins (directly, or indirectly via the banking system) in payments from debtors. If the treasury does not fulfill that promise, lawsuits will fly left and right.
          Federal reserve notes also contain only this promise but are counted as debt of the Fed. The point here is that the difference between what is classified as equity or debt is not relevant at that point. Issuance of a monetary instrument makes the issuer liable to the holders. Calling it debt or equity is really irrelevant for the purpose at end.
          In the past, Kings tried the debt/liability-free coins. They issued coins that embedded no promise whatsoever; kings would not even promise to take back their coins in payments. That experiment did not end well…
          Quickly on the shares of company analogy, remember that shares are not the assets of corporations, they are the assets of equity holders. When companies issue shares they get bank-issued monetary instruments. Treasury creates its own monetary instrument so the coins are on its assets (in the simple example) and but this creation also simultaneously raises equity. Then the treasury spends by paying with coins which become the assets of non-treasury agents (who give up something in exchange of the coins).

          • Eric,

            if the Treasury minted coins and gave them away to people for free (i.e. a fiscal ‘transfer’), it seems that no associated liability would be recorded on the government’s balance sheet.

            simple example:

            1- Treasury mints coin. Asset of treasury goes up by 100 and equity of treasury goes up by 100.
            2- Treasury issues coins to people for free. Balance sheet of treasury sees -100 in assets and – 100 in equity.

            The same appears to be the case if the coins are issued through the Fed, and the Treasury gives the associated Fed dollars away to people for free (i.e. does a fiscal ‘transfer’).

            This also seems to be the case if the Treasury spends the coins/Fed dollars employing people to do work which doesn’t result in an increase in assets on the government balance sheet. ..

            Is this correct?

            • Eric Tymoigne

              Sure the accounting is right but the treasury is still liable to take its coins back in payments (it is an off-balance sheet liability in your example). See my point, the equity or debt classification is really not that important as a practical purpose, do what you want Mr. Gov (and Mr. Gov already does that by choosing to classify its monetary instruments as both debt (fed) and equity (treasury)).
              Moreover, here we moved into the policy real. Why would the Treasury do that (the accounting example you present)? Are there no other ways for the Treasury to help the economy that are more beneficial? The income-guarantee vs. employment-guarantee debate is related to this.
              Reading through all the comments and passing this debt-or-equity silly debate, I see that what the DFM crowd really wants is for the Treasury to issue its own currency more systematically; that’s all. DFM I guess is a hype way to say that.

    • golfer1john

      Treasury reaps the seigniorage from coins. When they mint coins, they sell them to the Fed at face value, and they’re done. They don’t pay interest on them, and don’t have to redeem them like they do T-bills. There is a law that says they could mint platinum coins in any face value, say $60T, but for reasons known only to them the President and SecTreas don’t want to do it.

      Unissued coins might be an asset to Treasury, but by accounting rules, probably valued at their cost of production. Once sold to the Fed, the Treasury asset is in the form of a Fed account balance, the amount of which is the face value of the coins. The reason the Fed buys them is to sell them to banks who sell them to their customers, so ultimately any coins in circulation appear nowhere on the Fed balance sheet or on the consolidated government balance sheet, nor is there any liability related to them on any government balance sheet.

      • golferjohn,

        coins do appear as assets on the Fed’s balance sheet.

        scroll down to see: 8. Consolidated Statement of Condition of All Federal Reserve Banks

        http://www.federalreserve.gov/releases/h41/current/

        • ah, my mistake, you meant coins in circulation outside the Fed.

          • golfer,

            “nor is there any liability related to them on any government balance sheet.”

            what Eric and Randall are saying is that the equity on the government balance sheet due to coin creation and issuance represents a liability of the government to the coin owner, like owner’s equity on a company balance sheet. My point is simply that this is not the same thing as a debt, so debt-free money is technically possible (and does exist). However it has been noted above that there is no practical difference between debt and equity in this case..

            • golfer1john

              You’re trying to apply the rules of accounting to an entity that doesn’t do accounting that way. And shouldn’t. It’s meaningless.

              If it did try to do a balance sheet for just the financial stuff, equity would be large and negative. Government financial assets are quite small compared to the $17T of treasuries outstanding. And even if real assets were included, it would still be negative, because the cost basis of those assets, mostly acquired 100 or more years ago, is also so small.

          • golfer1john

            Yes, I would have said that yesterday if my internet was working. By “in circulation” I meant in the hands of the public.

  2. Great as always Professor Wray.

    Perhaps not directly related, but something I’ve wondered. We all know the wonderful sectoral balances, going back to ’52 I believe. Has there been any work done on a sectoral balances going back farther/covering older years? While I can take a guess at the picture, would love to see it from the 20s through 40s.

    Per the article, seems obvious how in our current situation, (with that of Japan and Euroland) ZIRP is no problem, but it still would not be an issue during the “boom”? What if hypothetically we had a JG, with permanent full employment and high demand and spending, ZIRP even then?
    Apologies for I’m sure this has been discussed and I probably missed it.

  3. Pingback: "Debt-Free Money" – A Non Sequitur in Search of a Policy

  4. Arnold Wentzel

    So, if you thought of money as being “debt-free” you would believe that money should have intrinsic value (or insist that it should have intrinsic value)? I remember listening to Perry Mehrling’s lectures on Coursera, where he placed gold at the top of the money hierarchy, explaining (if I remember correctly) that it is at the top because it is someone’s asset without simultaneously someone else’s debt.

  5. golfer1john

    I was at Old Sturbridge Village the other day. It represents life in a Massachusetts town in the 1830’s. There’s a bank there.

    This was during a time when banks issued their own notes, and kept gold in their vaults to “back” them. The unit of account for their loans and deposits was the US dollar, but banks did not create dollars, and if the bank went under its notes became worthless.

    In several instances, the historians who worked (or volunteered) there, in costume, claimed that a lot of the commerce in the town was done by barter, either because people didn’t trust the bank notes, or because there was not enough money to support the volume of commerce. If you needed a book for your child to use at school, you might promise the book binder some quantity of corn at harvest time, or that you would shoe his horse some day. Such debts were recorded in ledgers (paper versions of computers) by both parties. I suppose some “countersign” procedures must have been used to prevent forgery or other misdeeds. It’s a case of everyone creating their own money, and getting it accepted at least once. There was no indication that such private debts were traded.

    The printer would print unbound copies of books by local authors, more than could be sold locally, and trade them for like items from distant places like Philadelphia. The out-of-town books would be bound and sold locally, either to individuals or to the local retail merchant. That way the heavy materials used in binding the books didn’t need to be transported. Again, a barter-type exchange without use of either government or bank money. I imagine the printers may have had some sort of “book of the month club” arrangement, where each might send the other 10 copies of a new, unbound book on each stagecoach.

    • Auburn Parks

      I really like this comment John. A nice summary by you and further examples that money is a social relationship \ unit of measurement and not a physical thing.

      Its interesting to consider just how much more efficient the current system is. A system with a common unit of measurement is much better positioned to grow over time. Instead of each individual subjectively valuing each transaction of one commodity in terms of another. Like in your example, where the first family is valuing a book in terms of corn and vice versa for the counter party. This is the part of the system that I assume would prevent widespread trading of private debts.

      Its just too bad that we have still not evolved Our understanding of the economy to a level that that allows us to accurately expand the number of social credits in accordance with private and public commerce needs.

  6. golfer1john

    Making the semantic argument against “debt-free” money seems to me just more quarreling for its own sake.

    You do understand the two flavors: one is money creation other than by banks creating deposits along with loans, and the other is money creation by government without issuing Treasury securities. To argue that neither is “debt-free” misses the point. To their discredit, they often accept the terms you have laid down and engage in meaningless quibbling.

    There are real issues to be discussed.

    • Golfer: apparently you did not read this one carefully either. And you get your history lessons from period-dressed actors? Come on.

    • Please clarify. What point is it that you are saying “debt free” money misses?

      • golfer1john

        I’m saying the semantic argument misses the point that the debt-free money people are trying to make. They want government to issue money but not bonds and/or they want banks not to reap profits by creating money from thin air and imposing a debt on the non-bank sector.

  7. Charles Fasola

    Randall,
    Are you stating that a monetary sovereign cannot simply spend money into existence? Are you stating that a monetary sovereign cannot take control of the creation of its own money rather than having private banking create the vast majority of it through the issuance of loans; debt vehicles? Are you agreeable to the current means by which private banks create most of our money supply? Do you believe private bankings ability to issue loans should be restricted by their intake of deposits or is the current system they utilize agreeable to you? Just asking?

    • charles: No to the first question, which should be obvious from this piece and the thousand before it. The other questions are too confused to attempt to answer.

    • Auburn Parks

      Charles –

      As soon as the Govt gives you any money, they have issued a liability. They owe you that amount of tax credit or Govt service etc.

      It makes no difference if the Govt issues securities or not. Securities can only be “bought” with reserves.
      Here’s the logic:
      T-Securities can only be “bought” with reserves =>
      T-Securities can only come from the TSY =>
      Reserves can only come from the Fed=
      The reserves that the TSY “borrows” come from another Govt agency, the Fed and as such, the Govt doesn’t “borrow” money as the money the TSY spends can only come from the Fed at a macro level.

      Now if the TSY didn’t issue securities, but just spent interest free reserves created for it by the Fed, this would not change the Govt’s balance sheet. Both reserves and securities are on the liability side of the Govt’s balance sheet. If the USA never issued a single security or “debt” in the way you are using the term in our entire history, the Govt would have about $18T in liabilities (reserves) and the non-Govt would have $18T in assets. And we’d have no “debt”.

      Compare this to today’s world where the Govt has about $18T in liabilities ($14 T in securities and $4T in reserves) and the non-Govt has $18T in assets ( ($14 T in securities and $4T in reserves).

      So you tell me, what is significantly different about our current “debt” model with securities and your idealized “debt-free” model? Govt liabilities are the same in either case, but citizens don’t have the opportunity to earn risk-free interest in the “debt-free” model by ‘buying” securities.

      Note:
      I understand that the Govt owns some of its own “debts” effectively cancelling those out and things aren’t this exact in real-life, I’m just trying to illustrate the point about the liabilities.

      • “Compare this to today’s world where the Govt has about $18T in liabilities ($14 T in securities and $4T in reserves) and the non-Govt has $18T in assets ( ($14 T in securities and $4T in reserves).

        So you tell me, what is significantly different about our current “debt” model with securities and your idealized “debt-free” model? Govt liabilities are the same in either case, but citizens don’t have the opportunity to earn risk-free interest in the “debt-free” model by ‘buying” securities.”

        In the debt free model the non gov would have 18T in assets like now and the gov would not have 18T in liabs. The gov would have 18T in equity.

  8. The point here seems to be that since there can be no such thing as “debt-free” money, the people advocating it simply don´t know what they are talking about. And government created money can never be debt-free, because government is liable to accept its money in payment of taxes. So these people are just confused?

    I think it is you professor Wray who is confusing the meaning of words. A debt means an obligation to pay someone, it is something owed and due, but in your texts it equally means an obligation to accept something as payment. I think an obligation to pay and an obligation to accept something as payment are two different things entirely and I think it is simply incorrect to call them both debts.

    It is one thing to point out that the latter is also a form of obligation but it is something else to suggest that people who think there is a difference between these two just don´t understand this stuff.

    If money doesn´t represent a promise to pay something, then it is not a debt. At least according to Knapp:

    ” There is also another objection which is often raised against non-material Chartal money. Such
    tickets as paper money pure and simple are, it is said, acknowledgments of the State’s indebtedness. Pay-
    ment in such tickets is therefore only a claim on the State, a provisional satisfaction still leaving something
    to be done on the part of the State… The question is, how these pieces stand in the eye of the law. On their face they may admit that they are debts, but in point of fact they are not so if the debts are not meant to be paid. In the case of paper money proper the State offers no other means of payment; therefore it is not an acknowledgment of the State’s indebtedness, even if this is expressly stated. The statement is only a political good intention, and it is not actually true that the State will convert it into some other means of payment… The answer is that the notes are still not a debt of the State in the legal sense, but at most appear to
    be so…” (50-51) http://socserv.mcmaster.ca/econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf

    • Ville: One is universal and the other is not. I prefer the universally applicable definition, and my use is explained in this piece as well as preceding pieces. Here is perhaps the best statement, from A.M. Mitchell:
      “Debts due at a certain moment can only be cancelled by being offset against credits which become available at that moment; that is to say that a creditor cannot be compelled to accept in payment of a debt due to him
      an acknowledgment of indebtedness which he himself has given and which only falls due at a later time….The method by which governments carry on their finance by means of debts and credits is particularly interesting. Just like any private individual, the government pays by giving acknowledgments of
      indebtedness drafts on the Royal Treasury, or on some other branch of the government or on the government bank….the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to ‘payment,’ that is to say, to satisfaction for the credit, and on the
      obligation of the debtor to ‘pay’ his debt, and conversely on the right of the debtor to release himself from his debt by the tender of an equivalent debt owed by the creditor, and the obligation of the creditor to accept this
      tender in satisfaction of his credit…A government dollar is a promise to ‘pay,’ a promise to ‘satisfy,’
      a promise to ‘redeem,’ just as all other money is. All forms of money are identical in their nature….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.

      • Sorry: Meant to say A.Mitchell Innes (left off the last name); his 2 articles are in my 2004 book.

        • Thank you for your reply.

          I am not saying you and Mitchell Innes don´t have a point, the concept of “debt-free” money can be seen as problematic for sure.

          But keep in mind that groups like Positive Money who have introduced the concept are usually not academics like you but political activists who aim to popularize the issues of money and banking and change the general public’s opinion, so the language used is bound to be different than it would be in an academic conference. In this sense I see no problem in using the phrase “debt-free”, because in the general public´s mind debt is an obligation to pay something and an obligation to accept something as payment is not really a debt, so claiming the money would be debt-free is true enough and besides, the phrase is catchy and it is simple enough to understand.

          How true it holds in a deeper philosophical sense is another matter, but I think it would be wrong to dismiss the whole proposal just for using the phrase “debt-free money”, since I believe this reform could bring great benefits.

          I am myself halfway done with writing a book on this issue and I still have not even decided what to call this new money, since in the Finnish language the phrase “debt-free money” does not really work and because I agree that the concept is somewhat problematic.

          I do agree with many of your other criticisms as well, like that of the independent central committee. I really wish you would take the time to study some of these proposals in detail, like maybe this short new one by Positive Money: http://www.positivemoney.org/our-proposals/sovereign-money-creation/
          You would see that they do understand something about money and that the money reform movement is not about some commodity view on money or milton friedman type of strict monetarism but it is about believing that money should work in the public´s interest and that problems resulting from simple lack of money should be eliminated. These proposals actually have a lot in common with MMT, and it is a pity that you MMTers find the phrase “debt-free money” to be so outrageous.

      • golfer1john

        ” ‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ” — Lewis Carroll

        ISTM that in order to have this conversation, you must first agree on the meaning of the word.

    • Eric Tymoigne

      Nice catch Ville. Ok knapp is incorrect, the state does promise something: to accept coins in payments due to the states. That’s what the states owes the coin holders. The idea that conversion into something else or payment of interest are necessary to make someone liable is a bit strange.
      Olivecrona, who wrote a book on money that I consider one of the best ever written, also makes the same mistake by stating that unconvertible central bank money contains no promise. Innes is the one who got it right on that point.

    • “I think an obligation to pay and an obligation to accept something as payment are two different things entirely and I think it is simply incorrect to call them both debts. “

      The debt itself is an obligation to pay. The general nature of acceptable debt is that an issuer must accept their own IOUs as payment (if they don’t accept their own IOUs, why would anyone else?)

      The Knapp quote seems to be a counter-point against those who would freak out upon discovering that all official government currency is a liability of the government. It is debt in the technical sense, in that it can be redeemed for payment. But the dictated terms are that the payment only comes in the form of tax relief (extinguishing debt with debt), and the government itself controls the level of taxation. So it’s unlike our typical layman understanding of ‘debt’ which usually resolves into payment of some higher-level asset.

      Perry Mehrling described this concept in the more general sense in a nice way:


      Some entities have the ability to force a cash inflow in their direction. This is what makes states special. That means that your liabilities are money. If you can force a cash-flow in your direction, people want your liabilities because they want to be able to give them back to you.

      But states are not the only ones that can force a cash-flow in their direction. There are private entities that can do this too. Not through the power of the state and taxation, but through other mechanisms. One of the most common in banking is if you have a lot of short-term assets and you just don’t renew them: people have to pay you, and there’s a net cash-flow in your direction. This was banking in the 19th century; the ‘real bills’ notion of banking.

      The quote by Minsky, “everyone can issue money, the problem is getting it accepted”, this is the point: how do you get it accepted? It’s because people need to pay you in your own IOUs.

      http://www.modernmoneynetwork.org/seminar-1-money-as-hierarchical-system.html

    • “I think an obligation to pay and an obligation to accept something as payment are two different things entirely and I think it is simply incorrect to call them both debts. “

      But the reality is they do because of accounting terminology, although I agree with you. “Debt” is used to mean two different things, and ordinary people go cross-eyed at the way economists and MMTers sling both words around without distinction.

      Ordinary folk hear “debt” and think ‘something I have to pay back with interest or I am going to lose my house’. Or car. And they’re right.

      But look at it from the point-of-view of the US Treasury. “And in the Beginning was the Word.” Go right back to the beginning, Ville. The very beginning. The government uses double-entry accounting to record its monetary affairs, the old Italian accounting method of stopping cheats that people have been using for centuries.

      Let’s say you and I are starting this new country called the USA. We have to issue money to hire Harry to build some roads. Exactly what column are we going to put the issuance of 1,000,000 Villabucks in? The asset is going to be the roads Harry builds for us. So we put the 1,000,000 Villabucks in the right column, called Liabilities. It’s interest-free money because no one has to pay it back. And because we are accounting nerds, we call it our ‘debt’ because it’s easy for us to refer to the money we created in accounting terms.

      However, separate and apart from that, we want Harry to build those damn roads and accept our Villabucks for doing it. So we impose a tax. That tax goes up and down depending on how well the rest of the people in our new country are doing, whether they have jobs, et cetera. We could beat Harry, and keep him in chains until he does our bidding, but a tax is much more enlightened. Harry can spend some of his Villabucks buying from Janet who bakes bread and Ronald who builds houses, spreading the wealth. Janet and Ronald will take his Villabucks because they, too, have to pay a tax…in return for the things that we, you and I, are making available to the new citizens of the USA: roads, street lights, courts, military, education, et cetera. Because we keep issuing Villabucks to get these things for our citizens; we are provisioning our new country with the talents that they have, and the resources they represent. Win-win for everybody.

      I completely, 100%, agree with you about the sloppiness of using the word “debt.”

      We have such a limited language. “Ruler” and “ruler” mean two entirely different things, but the average person can figure it out by the usage in context. Not so “debt” and “debt.” Because it hits too close to the bone, it strikes such fear in the lives of ordinary people who have to meet those debts, those obligations, every damn month. Or they’re going to lose something, from actual physical property to reputation.

      If only MMT would figure out a way to let people know that treasury securities are money, like what you get when you cash in your bank CD. And the interest the government pays on treasury securities is no skin off the government’s teeth or the taxpayer. The government pays that interest by issuing more treasury securities (the amount of which it determines once a year, think it’s August) and they are gobbled up on auction day just like the rest of the treasury securities, because treasury securities are so damn safe.

  9. What does that even mean, “taxpayer’s equity”? What does the existence or lack thereof of such equity allow or disallow the federal gov’t to do not do? And if, for some reason, Congress legislates some meaning for it, wouldn’t it also need to invent another rule to block itself from stuffing a colossal “goodwill” number, also completely fabricated, in the asset column?

    • entreposto

      Hopefully it was clear that, by “taxpayer’s equity”, I meant whatever balance sheet entry the federal gov’t might decide to call “equity”. For a business, equity represents a liability of the business to the owner(s). It can also be roughly looked at as the liquidation value of the business. Equity does not charge a fixed or even a variable interest rate, but when dividends are paid, equity is reduced, and when profits are booked, equity is increased. But, what does equity mean on the balance sheet of the federal gov’t? Does its existence or lack thereof have any bearing on what the federal gov’t can do or not do?

  10. J Christensen

    I think this post has really got people thinking about the definition of debt, which is good. Some of the most important concepts are so simple they tend to befuddle us; and when we get befuddled by simple yet important concepts we become easy marks for fraudsters.
    With that understanding, I tend to agree with Ville, the concept of debt is probably worthy of more than one word to distinguish between meanings especially when it’s important to be able to communicate with the general public.

  11. Jack Foster

    The title of the article seems to me to insinuate that those who advocate for “debt free” money are so dumb that that they don’t understand: the “debt free” money that could be issued by the treasury issuing “greenbacks”, “treasury notes”, or derived from using a $60T-PCS, they are all “STILL” just a debt of the government by a different name.

    But I think the point the MMT guardians seem to take lightly, is that interest owed under the current method of issuing currency is no problem at all. But Interest “IS” the whole problem, and I believe that is the point those who advocate for “debt free” money attempt to convey upon apparently deaf ears of MMT guardians.

    Since 1988, over $9.2T has been paid in interest on the Federal debt. Considering the total debt is at $17.5T, we can assume more than 50% of the National debt has been issued to pay interest. This is a MASSIVE WASTE of resources that could have funded projects to build and modernize infrastructure and many more noble causes other than paying money changers rent….for not spending money.

    Can we ask JDalt if the USA would be better off having spent $9T on infrastructure projects or paying interest on debt?

    • golfer1john

      I’m pretty sure JD would say there’s nothing preventing us from doing both.

  12. the currency issuer must be in debt. it must at least have a liability to ensure the stability of the financial/payment system.

  13. “Debt-free money” is also used by people who think the federal government ‘borrows’ from the Federal Reserve. They think that the federal government has to pay interest to the Federal Reserve in return for that cash (I’ve heard anywhere fro 7-10%). So they invoke the Constitution’s edict that the federal government should be in charge of creating cash and coin, and that the federal government should issue “debt-free money” and tell the private bankers who own and run the Federal Reserve to go screw themselves. Then the federal government wouldn’t be in debt to the Federal Reserve, and the vicious creeps who secretly control it from London would be foiled and we would have our country back.

    I encounter this line of thinking more than anything else. It is pervasive.

    You MMT leaders need to get a bunch of us in a room with a bar over a weekend in Kansas next fall, and listen to us tell you what you’re doing wrong explaining it.

  14. Pingback: “Debt-Free Money” and “ZIRP Forever” | New Economic PerspectivesNew Economic Perspectives

  15. Brent Irving

    Sorry if this is too far off topic but I have been unable to find an explanation (or maybe I am confused).

    Can anyone here explain (or point me to an explanation) where the interest from private issued debt comes from?

    I understand that when a bank issues a loan it is simply a double entry in accounting, and that this is essentially reversed when the principle is paid back, but how is the interest accounted for and where does it come from?

    Does there have to be enough sovereign government money/debt issued to cover this interest payment requirement on private issued loans or there will be “guaranteed bankruptcies” (as I have heard)? If so how is this determined?

    Thanks in advance for any help provided

  16. Glenn Ierley

    I have considerable sympathy for the points that Ville makes, particularly the impetus behind the political drive to “coin” a phrase (so to speak!) that dispels the primal fear conjured up by that bogeyman “the national debt”. It would be too prolix and unwieldy to constantly be writing of (1) “the total number of pieces of paper outstanding of which the government is monopoly issuer and that it agrees to accept back in payment of taxes” and then of (2) “the number of pieces of paper I borrowed from my local credit union, exchanged for a car, promised to repay in 2 years time, and have no means of obtaining except by working my tail off” but if you did, apart from people thinking you long-winded, no one would ever fail to see the distinction between (1) and (2). For linguistic convenience we use the same word “debt”, reducing the distinction down to an adjectival modifier: public debt and private debt. Convenient? Yes. Confusing in practice? You bet. Tell people the national debt amounts to $50K a person, as I see in periodic letters to the editor in my local paper, and the rest of such letters is always that YOU, yes YOU!, will sooner or later have to fork over that $50K from your own pocket, those pieces of paper you work so hard to get, quite often at minimum wage. The notion that public debt = private wealth is literally inconceivable in this worldview. So “debt-free money” may not be the mot juste, but something short and punchy that preserves the distinction of (1) and (2) is badly needed because “public debt” and “private debt” don’t cut it, except among economists, and maybe even then only among MMT folk!

    • Glenn: While I agree that the terms ‘public debt’ and ‘private debt’ on their own don’t imprint themselves easily on the mind, I think there is a way this can be done. And this is to link them to simple equivalences. This can be accomplished by emphasizing the direction of the debt relationship. And this can be done quite simply. Public debt = what the government owes its creditors, while private debt = what you owe your creditors.

      To further spell this out, you can then elaborate who the creditors are in each case. In the case of the public/government debt, the primary creditor is the public as a collective, and this is shown on the so-called national debt clock. In the case of private/individual debt, there may be many creditors – in short, anyone you owe money to, which would include the government.

      When spelled out in this way, it is easy to see that the debt relationship goes both ways. While their are differences, there is a fundamental similarity and this similarity is highlighted when you explicate the two debt relationships in this way. Or so I would argue.

  17. “Can anyone here explain (or point me to an explanation) where the interest from private issued debt comes from?”

    It comes from the circulation of that debt around the economy.

    Interest is charged in $/month whereas debt is charged in $. This is like the difference between miles per hour and miles.

    So what happens is that the firm spends the debt with its workers. The workers then buy the firms products, and the firm pays the bank, its owners and the workers again. The bank pays its workers/owners and all the workers and owners buy the firms products. The firm then pays the bank, its owners and the workers again. Rinse and repeat.

    The faster the turnover the more everybody earns and the more stuff gets made. But it is really just the same amount of debt getting cycled around the system. Interest is just a chunk of the profit share and both come from the circulation of debt.

    If you think of the oil in an engine then you’re not far away.

  18. Brent Irving

    @ Neil Wilson

    Thanks Neil, but unfortunately I am still dazed and confused, and now I may have to add thick as well.

    I understand that money is just a measure that the issuer cannot run out of but if you take a simplified scenario, like “Robinson Crusoe” with one more player, the Govt’t, Private one (P1) and Private two (P2), does this not create an issue?

    Gov’t issues $100.00 to P1 for services rendered. P1 starts a bank and lends any amount to P2, say $1000.00, and requires P2 to repay $1200.00 in x days. P2 can get part of the interest payment from P1, the $ 100.00 that P1 has. Does P2 not have to get the outstanding $100.00 from Gov’t in x days or he is bankrupt?

    • golfer1john

      You’re right, in this simplified example P2 must earn enough money somehow to afford the payments on his loan. If x is not long enough for him to do that, then P1 needs to do better underwriting.

      In a more complex example, x is long enough for P2 to save the required money, and it comes to him from others in the society who have borrowed from the bank to pay P2 for his services, or earned it by working for the government. Or perhaps by working for P1 at the bank.

      In the aggregate, unless government (or outsiders, or the bank) spend or lend money into this economy, the banker ends up with all the money and/or all the real goods, as people default on their loans.

      Our system is not in a death spiral because of this. Government and banks combined do spend more money into the economy than they take away from it in taxes and interest. Bankruptcies also reduce the principal owed to the banks, and reduce future interest payments. And the quantity of outstanding bank loans does increase over time, almost every year, and some of that additional lending goes to pay interest on previous lending (after cycling through the economy, usually, from a new borrower to an old borrower).

      But it is possible to make assumptions to simplify it too much, and “prove” that it is unsustainable.

      • Brent Irving

        “You’re right, in this simplified example P2 must earn enough money somehow to afford the payments on his loan.”

        My point is that P2 must not only earn enough money somehow, but ultimately, in whatever round about way, earn it from the money issuer. I recognize that the real world is virtually infinitely complex, but essentially does not the aggregate of the privately demanded interest ultimately have to come from the money issuer, not as you state outsiders or the bank spending or lending it into the economy, and thus there results a shortfall if the government does not inject enough money into the economy to cover this, in aggregate, and hence a certain amount of defaults may be inevitable? Or is the point in capitalism? The winners “earn” the necessary money (presumably because they are so wonderful in so many ways… I won’t go down that tangent) and the losers cannot possibly (it is not available unless the gov’t has injected enough) so go bust.

        This is appearing counter intuitive. It is my understanding that MMT advocates the gov’t increasing spending when the capitalist economy turns down, hence increasing economic activity, presumably resulting in the next boom, increased private credit and interest for economic expansion, at which point the gov’t pulls back, less new money injected, interest that can’t be paid and the inevitable bankruptcies. Or does the gov’t step in early enough to keep the economy booming and growing, essentially kicking the can down the road? Is this essentially the perpetual growth model? Is this incompatible with the Steady State Model http://steadystate.org/discover/definition/ ?

        Am I hopelessly confused and need to re-study the MMT primer? Be honest.

        Is this compatible with a Steady sta

        • golfer1john

          Steady state, no economic growth, may be a desirable objective at some time in the distant future, but I think that for now we still need to grow the economy at least to keep up with the population, if not to create prosperity for those who lack it today.

          MMT advocates full employment, achieved by a job guarantee program, which is a more powerful automatic stabilizer that those we have today. I believe, based on no mathematical studies, that it would dampen the business cycle, not kick the can down the road when the economy overheats. It would be a growing economy, not a stable one, as population and productivity and technology continue to advance, but the growth rate would be less variable. I suspect that it might eliminate periods of negative growth altogether, but probably nobody can realistically make such a claim or prediction without trying it.

    • It takes a while to get it in your head.

      What you are doing is static analysis.

      But the money to pay the interest comes from the dynamic flow – which in business is called Turnover.

      It has nothing to do with the government. The private circuit is stable on its own.

      The bank pays $1000 to a firm, but it also has to pay $25 to its workers that week, then that firm will spend $1000 dollars with its workers, who will then spend $1000 with the firm in return for goods that week. In addition the bank workers spend $25 with the firm in return for goods that week. Next week is the same the firm spends $1000 and receives $1025. And so on.

      Then at the end of the month the firm spends the $100 it has accumulated with the bank as interest.

      So the money to pay banker interest comes from bankers. That’s because, contrary to popular belief, bankers are human too and need to consume.

      Similarly the money for government debt comes from government spending and the money for profit comes from capitalist consumption.

      If you think of interest and profit as the wages of bankers and capitalists then you’re not far off the mark.

      • golfer1john

        The bank makes no profit from its lending?

      • Brent Irving

        Thanks for sticking with it Neil. As you say it takes a while to sink in so I will take it somewhat on “faith” for now and hopefully it will eventually penetrate the thickness (maybe with continued effort). Will it happen like a Eureka moment 🙂 ?

        Perhaps I am suffering from the Stock-Flow failure, what do you think?

        Excerpt from http://www.hss.cmu.edu/departments/sds/ddmlab/papers/gonzalezwong2011.pdf:

        “Unfortunately, there is increasing and robust evidence of a fundamental lack in the human
        understanding of accumulation and rates of change: a difficulty called the stock–flow (SF)
        failure (Cronin et al., 2009). The SF failure occurs even in simple problems, such as
        evaluating the level of water in a bathtub given the amounts flowing in (inflow) and out
        (outflow) over time (Booth Sweeney and Sterman, 2000). Researchers have used simple
        problems to ask individuals for their basic interpretations of a stock’s behavior. For example,
        researchers often use graphical representations of the inflow and outflow over time, and ask
        students to answer questions about the stock or to draw it. Despite the simplicity of these
        problems, individuals with strong mathematical backgrounds exhibit poor performance: less
        than 50 percent of them answer the stock questions correctly (Cronin and Gonzalez, 2007).”

        So maybe it’s a cerebral wiring problem and 50 percent of us are doomed? You may have to genetic engineer one of us to get the 50% + 1 for the democracy to exist 🙂

        I will read the rest of the article to see if there is some insight.

        Perhaps this ?

        Domestic Private Financial Balance + Foreign financial Balance = Gov’t Balance -> is a stock equation?

        All the other brouhaha that I am not absorbing are the flows? Like your oil analogy?

  19. @ Randy

    When you say that taxes are a sufficient condition for driving money and not a necessary condition, do you mean this: if x is a tax, then x drives the currency system? And not this: if x drives the currency system, then x is a tax? The first formulation is of taxes as a sufficient condition and the latter of taxes as a necessary condition.

    From the latter, it follows if x is not a tax, then x doesn’t drive the currency system. In saying this, you are saying that from a non-tax, one can’t derive a conclusion about the motion of the currency system.

    From the former, one is driven to conclude that if x doesn’t drive the currency system, then x isn’t a tax. If x is viewed quite generally, then anything that doesn’t drive the currency system can’t be viewed as a tax (or one of its substitutes).

    Is this what you mean when you contend that taxes are a sufficient but not necessary condition for the driving of the currency system?

    • larry: economists often use the “necessary” and “sufficient” conditions. If I said “taxes are a necessary and sufficient condition” then that means you must have taxes and nothing else will do. I don’t say that.

      If I said taxes are a necessary condition, then that means you must have taxes, but maybe that alone is not enough. I don’t say that.

      If I say taxes are a sufficient condition then that means if you have taxes you will drive a currency. However something else might drive it, too.

      I am the sovereign and can throw you in prison if you don’t pay your tax in my currency. You will want my currency, so the tax is sufficient. However there could be other reasons you want the currency. Maybe you can use the currency and “In and Out” burgers and you personally do not need to pay any taxes.

  20. Ville: The authors of the paper you link to thanks the credit money group of UCL. With the exception of Victoria Chick, who is something of a Keynesian, the others mentioned are not. Many in the econ department at UCL are neoclassical economists. I realize that this is an ad hominem remark, but that in itself does not discredit it; it only adds a further reference point. Something to keep in mind as one reads the positive money group’s report.