By L. Randall Wray

In Part Three I argued that the government issues currency as its liability and imposes tax liabilities on its subjects/citizens that can be paid in that currency. When taxes are paid, both the government and its taxpayers are “redeemed”. I cited Innes’s argument that the universal law of credit is that the issuer of a debt must take it back. This is the fundamental notion behind redemption of debts.

To be sure, debt is much older than money. No human has ever escaped debt. At birth, you are indebted to your parents, your kin, and your gods. You spend your lifetime incurring new debts and repaying old debts and accumulating credits that are the debts of others. If you earn enough credits, you join the Redeemer and make it to the Promised Land after death; if you don’t you join Satan—the original tax collector–in hell.

Our modern rituals and accounting and terminology evolved from these ancient origins. Debts began to be monetized and recorded at least six millennia ago. The monetization probably grew out of the Tribal practice called Wergild–the assessment and collection of fines paid for transgressions—with the rise of class society and the emergence of authorities. Writing was apparently invented to keep track of debts; in other words, it was an accounting invention.

Over time, the technology used for accounting changed—from scratches on rocks and bones, to chalk tallies on slate, to tokens pushed into clay balls, to clay shubati tablets, to notched tally sticks, to stamped and milled coins, to paper notes, and finally to entries on computer tapes. Part—but not all–of the impetus for technological evolution was to keep up with the counterfeiters.

What we call “money” (coins, tally sticks, paper notes, electronic entries on bank balance sheets) is simply the record of debt, “accounted for” in the money of account. The line between what we want to count as “money” debts or merely as “money denominated” debts is and always has been arbitrary. Most will include a checkable bank deposit in their definition of “money”; most will not include a non-checkable certificate of deposit in that definition.

Typically, people want to apply the term money to those money-denominated liabilities that can be used immediately as a medium of exchange—that is, to buy something,  passing hand-to-hand. I am sympathetic. If we look at the modern economy, and focus only on transactions of households, it works pretty well. But going back through time and including transactions of private and public institutions, it gets quite messy.

As a simple example, private banks make payments to each other using central bank liabilities—reserves. No household can buy anything with reserves, yet reserves are in all other respects equivalent to central bank notes—both are liabilities of the central bank and instantly “redeemable” in payments to the central bank (more later). At the other end of the spectrum we have bills of exchange, which were used in market purchases even when made payable in the future, in distant markets, and in foreign currency. Are they “money”, then?

I try to avoid the confusion that arises from the arbitrariness by using more specific terms: currency (coins, central bank notes, treasury notes, central bank reserves), bank notes, bank deposits. In any case, it is clear that the non-checkable CD is a liability of the issuing bank, recorded in the money of account, whether or not it can be used as a medium of exchange. So what we are going to focus on is the nature of the liability behind the money-denominated debt—and leave to the side for now whether the record of the debt can be used as a medium of exchange.

I’m also going to stay focused on the sovereign’s debt, since the proposal for “debt-free money” is largely about sovereign currency. I will include the treasury and the central bank as under sovereign control, each of which issues sovereign debt. I realize there is a faction that denies that the Fed is a branch of Uncle Sam’s government, taking the supposed “independence” of the Fed literally and then carrying it to a ridiculous extreme. But that’s a topic I’ve already dealt with and will only assert here that it is nonsense.

Returning to the blog by Lonergan that I discussed in Part 3, he argues that: “Accounting convention, in this case an accident of history (and a mechanical transfer of commercial bank accounting), treats the bank deposits at the central bank as ‘liabilities’ of the central bank. Now let’s apply some simple ‘Buffett tests’. First, does the CB owe anything? No.”

I won’t go into his defense of Buffett’s preference of putting his liabilities on the asset side of his balance sheet. Nice trick if the accountants, lawyers, regulators, creditors and IRS will let you do it. Accounting conventions are more than “accidents” of history. They follow a logic. Every financial asset held in a portfolio must be offset by a financial liability on another portfolio. The Fed’s reserve deposits are assets held by banks, offset by the Fed’s liability; the Fed’s notes are held as assets by banks, households, firms, and foreigners and are offset by the Fed’s liability. Trying to move the Fed’s reserves over to its asset side means that they’ve suddenly become liabilities of the holders. As I said, I don’t do philosophy but this just makes no sense.

What does the central bank owe? Redemption!

Lonergan goes on to quote from me:

Wray: Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when      you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a    bit of base metal. […] Why would you want the debt-free coin? Only for its wealth-value        (whatever that might be). It is not money. As MMT says, “taxes drive money”. If you            cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper,           hazelwood stick, or metal. 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?”

His response to my argument runs as follows:

Lonergan: “Now Derrida tells us to look in the footnotes. There aren’t any. Fortunately, there is something close enough – a hidden definition slipped in between dashes. ‘Debt’ has been defined by L Randall Wray as “a promise to redeem yourself in tax payment”. What?! That is NOT the definition of ‘liability’. The ability to pay taxes is a feature of money issued by sovereigns – a very important feature and part of how the government establishes its monopoly in the creation of money, but just because the government accepts money in payment for taxes (what else would they accept?) does not make the money they issue their ‘liability’.”

Note how he has taken my specific statement that refers to the exchequer’s refusal to make good on his promise to accept his debt when presented in tax payment (allowing you as taxpayer to redeem yourself), as a “hidden definition” of “liability”. Of course, I was not defining liability as a promise to redeem yourself in tax payment. I was referring to the exchequer’s specific promise to accept his own coins in tax payment. If he refuses to do so, you cannot redeem yourself.

Let us back up a bit. Our word “to pay” comes from “pacify”, reflecting payment of Wergild fines owed to victims in order to avoid blood feuds. When you “pay” taxes, you “pacify” the treasury so that Elliott Ness doesn’t come gunning for you. How do you pacify the treasury? Well, the treasury can name what it will accept in tax payment, but historically it has accepted its own liabilities. Today, tax payments take the form of debits to bank reserves and credits to the treasury’s deposit account at the Fed. The US treasury no longer issues its own liabilities when it spends, relying instead on its banker, the Fed.

It wasn’t always so, of course. The Fed was created in 1913. Many of our debt-free money folk want to return to the old days—when the treasury spent by issuing its own notes. Many of them refer to the era of Greenbacks. Fine and dandy. It would be quite inconvenient and inefficient. But it could be done. However, it would not change the fact that currency is still debt.

Whether the currency is issued by the central bank or the treasury, it is a debt that must be redeemed. Let’s look at a specific historical example.

Fortunately, Farley Grubb has just authored a very nice paper on American colonial currency. Farley is a, or perhaps the, expert on the topic. I’ll include some extended quotes from his paper. His exposition confirms my account, both in the details and in the terminology.

Here’s the background. The colonies were prohibited by England from issuing coin, so as to protect the King’s monopoly of coinage. The colonies obtained coin from export, but of course as a major mercantilist power, England wanted to limit exports to the raw materials she needed. The colonies had to import finished goods, shipping the coins back to England. The King wanted to limit expenditures on its empire, so the colonies were largely responsible for funding their expenses, which included fighting wars with the French, the Canadians, and Native Americans. Colonial governments were chronically short of coins, obtained through taxes such as poll taxes and taxes on imports of slaves and tobacco.

To increase fiscal capacity, the colonial governments began to issue paper money. According to Grubb, “Virginia referred to its paper money as treasury notes. Other colonies referred to their
paper monies as bills of credit…. [Virginia’s] treasury notes were the same as bills of credit..”

Virginia’s colonial government passed a number of acts to authorize the issue of treasury notes. The law would include the total value of notes (denominated in Virginia pounds) to be issued. It would also set a date for final “redemption” (the term used by Farley as well as by the lawmakers). And, interestingly, the law would impose a new set of taxes at the time of the note issue:

“Every paper money act included additional new taxes, typically a land tax and a poll tax, that were operative for a number of years. The number of years over which these new additional taxes were operative was chosen so as to generate enough funds to fully redeem the notes authorized by each respective paper money act. The date in each paper  money act set for the final redemption of the notes authorized by that act closely matched the end to the taxing period set by that act…. From 1755 through 1769, the taxes imposed by the paper money acts included a poll tax, a land tax, a slave import duty, and a tobacco export duty.

Now hold on a minute. The Paper Money Acts that allowed the treasury to issue notes also imposed new taxes that would be of sufficient size and over a period long enough so that all the notes would be redeemed? Does it sound like maybe, just maybe, the colonial government understood that the purpose of the taxes was to “redeem” the currency, by accepting that paper money in payment of taxes?

Well, let us see. The answer will depend on the colonial government’s use of the term “redemption”.

Colonial paper money could be “redeemed” (remember, this is the term used by the Acts) in two ways: payment of taxes or presentation for payment in (British) coins. The treasury would spend the new issue paper money into the economy. Those receiving the treasury notes could use it to pay taxes, or spend it, or submit it to the Treasury in exchange for coin.

What did the Treasury do with the notes it received in tax payment? Grubb reports that the “notes were removed and burned.” Yep. Burned:

“Most redemption taxes were collected in the fall, and so notes reported in the Journals of the House of Burgesses as burned were likely removed via tax payments in the prior year.”

Grubb’s careful research shows that most taxes were paid using the paper money, and most paper money was “redeemed” in tax payment:

Were redemption taxes paid in notes or in specie? The treasury accounts provide some evidence to answer this question. The clearest statement in the treasury accounts was made on 15 June 1770: ‘It appears to your Committee, that the Balance in the Treasurer’s Hands of Cash received of the several Collectors for Taxes appropriated to the Redemption of the old Treasury Notes [those issued before 1769], amount to Ten Thousand Three Hundred and Twenty-six Pounds Eleven Shillings, of which they have burnt and destroyed Seven Thousand Eight hundred Pounds, and have left in the Treasury, on that Account, in Specie, a Balance of Two Thousand Five Hundred and Twenty-six Pounds Eleven Shillings to be exchanged for old Treasury Notes.’


From this evidence, Grubb concludes (emphasis added):

A redemption tax of 10,327£VA was collected, of which 2,527£VA was in specie that was explicitly set aside in a dedicated account to be used to redeem notes brought to the treasury. The rest of the tax payments were burnt, implying that those tax payments  were made in notes. Therefore, 76 percent of this tax was paid in notes, and 24 percent  was paid in specie.

So, three-quarters of taxes were paid by “redeeming” the notes.

The specie (coins) received in tax payments could be used to “redeem” the notes that were not “redeemed” in tax payments. What about the notes that were not “redeemed” by either method? They continued to circulate. Grubb asks, “Were Virginia’s notes used as a circulating medium of exchange? The denominational structure is consistent with such usage. Virginia’s notes were issued in relatively small denominations, small enough to make paying yearly tax assessments easy with said notes, and small enough to make it an easy domestic circulating medium of exchange in terms of being able to make change with said notes.” He concludes:

The above analysis establishes that redemption taxes generated specie sums that were to be held in the treasury until the final redemption date legislated for each paper money act, at which time holders of those notes could cash them in at face value for the specie held in the treasury for that purpose. However, at the final redemption date holders of the respective notes did not rush to the treasury to exchange them for specie. The notes continued in circulation and note holders could cash them in at the treasury at their leisure. Robert Nicholas Carter, Virginia treasurer after 1766, noted this behavior, Most of the Merchants as well as others, … preferred them [Virginia’s treasury notes] either to Gold or Silver, as being more convenient for transacting the internal Business of the Country.” (William and Mary College Quarterly Historical Magazine 1912, p. 235)

Adam Smith had argued that if the colonies were careful to ensure they did not create too much paper money relative to taxes, it would not depreciate in value (indeed it might even circulate at a premium, he argued). Redemption of the notes in tax payment would remove them from circulation—keeping them scarce. Grubb argues that this was well-recognized by the colonial government:

The Virginia legislature took note redemption and its effect on controlling the value of its paper money seriously. Such is illustrated in the March 1760 paper money act which stated, ‘And whereas it is of the greatest importance to preserve the credit of the paper currency of this colony, and nothing can contribute more to that end than a due care to satisfy the publick that the paper bills of credit, or treasury-notes, are properly sunk, according to the true intent and meaning of the several acts of assembly passed for emitting the same; and the establishing a regular method for this purpose may prevent
difficulties and confusion in settling the publick accounts,… Be it therefore enacted, by the authority aforesaid, That Peyton Randolph, esquire, Robert Carter Nicholas, Benjamin Waller, Lewis Burwell and George Wythe, gentleman, or any three of them, be, and they are hereby appointed a committee, to examine at least twice in every year (and oftener, if thereto desired by the treasurer for the time being) all such bills of credit, or treasury-notes, redeemable on the first day of March, one thousand seven hundred and
sixty five, as have been or shall be paid into the treasury, in discharge of the duties and taxes imposed by any former act of assembly; and upon receipt of the said bills or notes, the said committee shall give to the treasurer for the time being a certificate of the amount thereof, which shall avail the said treasurer in the settlements of his accounts as effectually, at all intents and purposes, as if he produced the said bills or notes themselves: And the said committee are hereby required and directed, so soon as they have given such certificate, to cause all such bills or notes to be burnt and destroyed.’ (Hening 1969, v. 7, p. 353)

Yep, to protect the value of the government’s paper currency, you’ve got to redeem it in taxes and burn the revenues generated.


Let us recap what we can learn from the early Colonial American experience. The government imposed taxes payable in its own paper notes (its liabilities) or “specie” coin (liabilities of the crown of England). It issued its paper notes in payments by the treasury. When it received its tax revenue in the form of its own paper notes, it burned them. When it received coin in tax payments, it held them until an announced redemption day, to exchange for paper notes.

The paper notes were thus “redeemed” in two ways: payment of taxes, or exchanged for coin. A large majority of the notes were redeemed in tax payment; a small minority were redeemed for coin.

The government recognized that it spent the paper currency into existence. It recognized that the purpose of the taxes imposed (by the same Acts that authorized issuing paper notes) was to redeem as many notes as possible. The taxes were not to “raise revenue”, indeed, when the paper notes were received in tax payments, they were burnt, not spent.

The government also realized it needed to receive a portion of tax revenue in the form of coin. This was to ensure that it could meet its promise to redeem notes for coin.

Redemption of the tax obligations by returning paper notes to the treasury not only redeemed the colonial government, but it also redeemed the taxpayers who owed taxes. The Redemption is mutual and simultaneous. Hallelujah!

Creation of the notes preceded their redemption in tax payment. As I said, Creation always comes before Redemption. Indeed, it would have been literally impossible for the colonists to pay the new taxes given the chronic shortage of coin. They needed the treasury to spend the notes first before the taxes could be paid.

Nor would the governments have needed to impose the new taxes if they were not going to spend the notes! But if they were going to engage in an act of Creation, then they had to follow that with an act of Redemption.

My use of the word “redemption” conforms to use by monetary historians, as well as those who wrote the laws that authorized issuing paper money. It is not a “fantastic linguistic contortion”, a “pure semantic confusion”. It is an accurate description and is the correct use of the term.

The American Colonial experience with note issue verifies what MMT has been saying for the past quarter century. Careful study of other examples will confirm MMT’s approach.


  1. Thank you Randal for a very clear and interesting exposition. To examine the other side of the coin (pun intended), if the Virginia House of Burgess had simply spent “debt free money” without imposing liabilities (tax obligations), their treasury notes would have almost certainly circulated with decreasing value (inflation) as happened when the rebellious colonies saw their “Continentals” decrease in value when the British started counter fitting Continentals during the Revolutionary War. Of course the Continental’s value fluctuated with the Colonies war fortunes, but the issuance of counter fit Continentals was a deliberate attempt to undermine the war effort and overlay-ed an inflationary effect that was independent of the Colonies battlefield successes and failures.

    • Quote:”… if the Virginia House of Burgess had simply spent “debt free money” without imposing liabilities (tax obligations)…”That is not the “debt free money” people are concerned with. The “debt free money” folk want is sufficient money spent into the economy by the government to enable operation of the economy without “bank money.” That requires banks to become trust institutions and not be given the unique power to create money by loans. The process for accomplishing that goal is described in Taxes will always be necessary to maintain price stability and move money around in the economy by spending to “A” and taxing “B”.

      • Thanks for the link. I haven’t had time to study it thoroughly, but a quick read leads me to conclude that their proposal is for money creation free of bank debt, not money creation free of all debt (ie., government tax obligation). Is that correct? If it is, then the proposal is not exactly for “debt free money” but for “bank debt free money”, or am I missing something here?

        • I think that is correct. And I think all money is subject to taxes! They did not borrow, they created, spent and set up the mechanisms to redeem the monies they spent. There was apparent flexibility in the quantity of redemption. They did not have to support a central bank and, hence, were not obligated to establish a national debt.

          • Yes, since they were Virginia issued treasury notes, they were probably meant to circulate primarily within the colony and would only have been redeemable for Virginia taxes, although the convertibility to British Pounds probably gave them value in neighboring colonies also, at least in border areas. There probably wasn’t a need for a central bank since most trade was local and of course they had the British Pound for colony wide trade which was cleared in a central bank in London. I wonder if the Bank of England had any branches in the Colonies at that time.

            • Interesting question. I don’t know. I know England had problems exporting their culture to the colonies. The excuse for forming William and Mary College was to train locals for the clergy because the Church of England had problems getting volunteers to serve in the colonies.

              • That is interesting also. Usually C of E clergy were second or later sons of nobility who would not inherit land or titles. If they stayed in England they would at least enjoy privileges and perks not available in the Colonies, not all of which welcomed C of E clergy. A quick reading of the history of the Bank of England did not reveal whether it had any branches in the Colonies, but banks often had corresponding banks that acted as agents or clearing houses for them, so that might have been B of E ‘s arrangement with some American bank.

      • Ahh the evil hand of Kotlikoff is at the controls of this real money group. Oh my the US government is $200 trillion in debt! We cannot afford Grandma! These are nutters. A front for Wall Street, you can be sure.

        • I find it very hard to believe that “Wall Street” would support converting all commercial banks to trust institutions, negating their power to create money by making loans.

          • Believe it. The Wall St model is NOT commercial banking.
            Oh, and note that Kashkari, new Fed Prez at Minn has suddenly come out in favor of breaking up the big banks. He’s a Goldman boy, who was at Treasury overseeing the bailout of Goldman Sachs, now moving on to the Fed to oversee breaking up of Goldman’s investment banking competition. The big boys do not want commercial banking–there isn’t enough profit in it. So might as well finish it off.
            Kotlikoff’s role is to get rid of Social Security. Again, looking out for Wall Street’s interests. Look at who’s behind “real money” and you’ll see it is Wall Street.

  2. Being British this is never a question that arises.

    On all my paper money the facts are written in ink. It says on a Bank of England £10 note “I promise to pay the bearer on demand the sum of ten pounds”.

    The note is a promissory note. A receipt for the Bank’s liability to deliver ten pounds. That promise is why its an asset in my hands.

    People just need to get used to the idea that bank accounting is backwards from other entities. This should be clear from the notion of being ‘in credit’ with a bank. ‘in credit’ is a description of an accounting liability!

    For banks currency and deposits are liabilities and loans are assets. They are the yang to the ying of commerce.

    And the government is really just a particular sort of bank.

  3. Dr. Wray, I posted a similar comment over at NC. When I talk about MMT to folks who have wholly bought into the commodity (asset) view of money, they frequently bring up supply and demand arguments – if the government spends more money into the economy it would increase the money supply without increasing production of goods, thereby reducing the value of the money. When I explain that were government spending to actually cause such inflation, the money supply could be reduced through taxation, they argue that U.S. dollars are chasing goods all over the globe and that even if internal price inflation were tamed, the foreign exchange value of the dollar would decline. Would you mind directing me to a discussion of how MMT would function in foreign exchange so I could better respond to such arguments.

    • Yep, as if we’ve got runaway inflation in the USA and abroad because of all those trillions of dollars that have been printed up recently! The advantage we have is that reality has an MMT bias.

    • It seems to me that, with a floating exchange rate, a devalued (inflation driven) dollar would not be able to “chase” as many goods and that would relieve the pressure on both raw materials and finished goods. Operation of the law of supply and demand, something MMT critics claim to understand thoroughly.