Sorry that it has taken me a while to get back to my multi-part series on debt-free money. This is the third part of the current series, although I had previously written several other blogs on the related topics of debt-free money, positive money, and 100% money. See links at the bottom.

This post will focus on the concept of “redemption” as the most fundamental requirement of indebtedness. This seems to confuse readers. For example, Eric Lonergan calls this a “fantastic linguistic contortion”, a “pure semantic confusion”, a “hidden definition slipped in between dashes”.

I’ll demonstrate that my use of the term redemption is consistent with the use both in scholarship and American law. I note that Lonergan has written his own book on Money, so it is surprising that he is unfamiliar with the proper use of the terms debt and redemption—which even predate religion and civilization. See, for example, the great book Margaret Atwood, Payback: Debt and the shadow side of wealth for a short history of the subject (and serious scholars should of course read David Graeber’s Debt: the first 5000 years.)

The most important point is that the debtor must redeem himself. I suppose Lonergan does not get out much—at least not enough to have ever “redeemed” his airline’s debt to him in the form of frequent flyer miles. He claims that the issuer of debt does not need to accept his own debt in order for that debt to have value. Really? Would he accumulate airline miles debt if the airlines refused to redeem it for miles?

He goes on to argue that we’d still use the government’s currency even if it could not be “redeemed” (in my sense of the term).

Well, as P.T. Barnum says, there’s a sucker born every minute. It adds up. But it is not going to drive a currency. Besides, the dopes already have debt-free bitcoins. They don’t need debt-free, non-redeemable frequent flyer miles or currency. The “fair value” of non-redeemable frequent flyer miles or debt-free bitcoin currency is zero, as Eric Tymoigne has demonstrated.

Yes, suckers and speculators can cause prices to deviate from fair value. For a while.

Lonergan’s website is titled Philosophy of Money. Philosophy is beyond my paygrade—I’ve read Simmel, who wrote the book on the topic, but won’t pretend to have fully digested it. I have instead relied heavily on the work of the autodidactic, A. Mitchell Innes, who wrote what I consider to be the best two articles ever written on the “nature” of money (in 1913 and 1914). His speculation on the history of money has largely been confirmed over the century that followed publication of his articles.

I also adopted his use of terms like redemption and debt—which conformed to their use through history from Babylonian times. And, as I’ll show, scholars of the history of currency still use the terms in the same manner. It is not me who is “contorting linguistics” in some fantastic way. Our nation’s founding fathers (and mothers) would have no problem following my arguments.

But let me first recount the exposition I have offered before on this site. In Part Four I’ll get to the nitty gritty history. Don’t worry, it will be posted close on the heels of this one. However, since the previous expositions are strung across blogs written since 2014, I want to provide a few extracts (with very minor editing) to remind readers of the position MMT takes on the topics of debt, redemption, and currency.

Background Extract #1. The Basics of MMT


For the past four thousand years (“at least”, as John Maynard Keynes put it—modern scholarship pushes it back at least 6000 years), our monetary system has been a “state money system”. To simplify, that is one in which the authorities choose the money of account, impose obligations denominated in that money unit, and issue a currency accepted in payment of those obligations. While a variety of types of obligations have been imposed (tribute, tithes, fines, and fees), today taxes are the most important monetary obligations payable to the state in its own currency….

For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. All of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment. Or cut tally sticks; or printed paper notes. Then spent them before they received them back in tax payments. (Ditto the American colonies, as I’ll demonstrate.)

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing.

When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.

MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, preventing overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.

You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.

So, much like the relation between taxes and spending—with tax collection coming after spending–we should think of bond sales as occurring after government has already spent the currency and reserves

Background Extract #2. Creation and Redemption


In this instalment I will examine three analogous questions (each of which has the same answer):

  1. Does the government need to receive tax revenue before it can spend?
  2. Does the central bank need to receive reserve deposits before it can lend?
  3. Do private banks need to receive demand deposits before they can lend?

As we’ll see, these are reducible to the question: which comes first, Creation or Redemption?

…. It has long been believed that we accept currency because it is either made of precious metal or redeemable for same—we accept it for its “thing-ness”. In truth, coined precious metal almost always circulated well beyond the value of embodied metal (at least domestically); and redeemability of currency for gold at a fixed rate has been the exception not the rule. Hence, most economists recognize that currency is today (and often was in the past) “fiat”.

Further, and importantly, law going back to Roman times has typically adopted a “nominalist” perspective: the legal value of coins was determined by nominal value. For example, if one deposited coins with a bank one could expect only to receive on withdrawal currency of the same nominal value. In other words, even if the currency consisted of stamped gold coins, they were still “fiat” in the sense that their legal value would be set nominally.

The argument of Adam Smith, Knapp, Innes, Keynes, Grierson, and Lerner is that currency will be accepted if there is an enforceable obligation to make payments to its issuer in that same currency. Hence, MMT has adopted the phrase “taxes drive money” in the sense that the state can impose tax liabilities and issue the means of paying those liabilities in the form of its own liabilities.

Here there is an institution, or a set of institutions, that we can identify as “sovereignty”. As Keynes said, the sovereign has the power to declare what will be the unit of account—the Dollar, the Lira, the Pound, the Yen. The sovereign also has the power to impose fees, fines, and taxes, and to name what it will accept in payment. When the fees, fines, and taxes are paid, the currency is “redeemed”—accepted by the sovereign.

While sovereigns also sometimes agree to “redeem” their currency for precious metal or for foreign currency, that is not necessary. The agreement to “redeem” currency in payment of taxes, fees, tithes and fines is sufficient to “drive” the currency—that is to create a demand for it. I will say more about this other kind of redemption in Part Four.

Note we also do not need an infinite regress argument. While it could be true that I am more willing to accept the state’s IOUs if I know I can dupe some dope, I will definitely accept it if I have a tax liability and know I must pay that liability with the state’s currency. This is the sense in which MMT claims “taxes are sufficient to create a demand for the currency”. It is not necessary for everyone to have such an obligation—so long as the tax base is broad, the currency will be widely accepted.

There are other reasons to accept a currency—maybe I can exchange it for gold or foreign currency, maybe I can hold it as a store of value. These supplement taxes—or, better, derive from the obligations that need to be settled using currency (such as taxes, fees, tithes, and fines).

The Fundamental “Law” of Credit: Redeemability

Innes posed a fundamental “law” of credit: the issuer of an IOU must accept it back for payment.

We can call this the principle of redeemability: the holder of an IOU can present it to the issuer for payment. Note that the holder need not be the person who originally received the IOU—it can be a third party. If that third party owes the issuer, the IOU can be returned to cancel the third party’s debt; indeed, the clearing cancels both debts (the issuer’s debt and the third party’s debt).

If one reasonably expects that she will need to make payments to some entity, she will want to obtain the IOUs of that entity. This goes part way to explaining why the IOUs of nonsovereign issuers can be widely accepted: as Minsky said, part of the reason that bank demand deposits are accepted is because we—at least, a lot of us—have liabilities to the banks, payable in bank deposits.

Background Extract #3. Creation and Redemption


Before the sovereign can issue tallies or coins, he must put taxpayers in sinful debt by imposing a tax obligation payable in his tally stick or coin. This creates a demand for his tally or coin.

When the central bank lends reserves to a private bank, it puts that bank in sinful debt, crediting its account at the central bank with reserves, but the bank simultaneously issues a liability to the central bank.

When the private bank lends demand deposits to the borrower, it credits the deposit account but the borrower records a liability to the bank.

So each “redemption” simultaneously wipes out the sinful debt of both parties. The slate is wiped clean. Hallelujah!

You see, folks, it’s all debits and credits. Keystrokes. That record bonds of indebtedness, with both parties united in the awful sinfulness.

Until Redemption Day, when the IOUs find their ways back to the issuers.

  • Those who think a sovereign must first get tax revenue before spending;
  • Those who believe a central bank must first obtain reserves before lending them;
  • And those who believe a private bank must first obtain deposits before lending them
  • Have all confused Redemption with Creation.

Receipt of taxes, receipt of reserve deposits, and receipt of demand deposits are all Acts of Redemption.

Creation must precede Redemption.


When the sovereign issues currency, she/he becomes a debtor. The sovereign’s currency is debt. The holder of the currency is the creditor. The most fundamental promise made by any debtor is the promise to redeem, by acknowledging his/her debt and accepting it. Those who themselves have debts to the sovereign can submit the sovereign’s debt in payment. Refusal by the sovereign to accept his/her own debt is a default. This will have implications for future acceptance of that sovereign’s debt.

Acceptance by the sovereign of his/her own debt is redemption. Airlines also redeem their frequent flyer miles by accepting them in payment for actual flights. Redemption “wipes the slate clean”. It eliminates the debt. Keystrokes take away the frequent flyer miles from the accounts of passengers. In the old days—as I’ll demonstrate in the next piece—sovereigns burned their debts on redemption. Homeowners commonly used to have mortgage burning parties when they redeemed themselves by paying off their homes. Probably no one lives long enough any more to do that.

We have argued that the sovereign imposes debts—tithes, fees, fines, and taxes—on the population. Those with tax debts can redeem themselves and wipe clean their tax debt by delivering back to the sovereign her/his tallies, coins, or paper notes. Today it is actually done with keystrokes—debits to private bank deposits and the bank reserves at the central bank.

Note that tax payment redeems both taxpayer and sovereign. Isn’t that nice? The sovereign’s currency is burned, and the taxpayer can burn her tax bill. Hallelujah!

Arguing that we should not see the sovereign’s currency as debt, and arguing that the sovereign needn’t redeem her/his debt reflects a fundamental misunderstanding. I think it probably derives from the impulse to focus solely on the use of money as a medium of exchange. This was Friedman’s mistake, who used to argue we can just assume money falls from helicopters. Right! If it did, it would be debt-free and have a fair value of zero. It would be as valuable as the leaves that fall from trees.

Currency must be debt and it must be redeemed to have a determinant nominal value in terms of the domestic money of account.

The sovereign might make other promises when she/he issues debt. There could be a promise to pay interest over time. There could be a promise to redeem her/his debts for the debts of other sovereigns. While uncommon in history, the sovereign could also promise to redeem for precious metal bullion. I do agree that gold coins or paper notes redeemable for gold would have a fair value above zero, although their nominal value would be indeterminant. I’ll say more about this in Part Four.

Related Blogs:


  1. They [monetarily sovereign governments] offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. LR Wray

    How is receiving a risk-free positive nominal return earning anything? Except contempt for receiving welfare not proportional to need but proportional to how much fiat one has to buy sovereign debt with? Professor Bill Mitchell has noted this, btw.

    This is a policy choice, not a necessity. LR Wray

    So is limiting accounts at the central bank to commercial banks, credit unions and other institutions of usury instead of allowing individual citizen, business, etc. accounts at the central bank too. Then excess reserves would not be a problem, would they, since commercial banks, credit unions and other institutions of usury would have to honestly borrow their fiat (aka reserves) from those other accounts instead of receiving them by default*? Then insufficient fiat might be the problem given a politically derived consensus on what interest rates in fiat should be. But that’s easily and justly solved with equal fiat distributions by the monetary sovereign to individual citizen accounts at the central bank, is it not? In addition to normal deficit spending by the monetary sovereign? Financed with trillion dollar coins?

    Btw, thanks for explaining the money system so well that its moral defects are so obvious.

    *Since the monetary sovereign has no other option but to deal through the commercial bank, etc. cartel since individual citizen, business, etc. accounts are not allowed at the central bank.

  2. While uncommon in history, the sovereign could also promise to redeem for precious metal bullion. I do agree that gold coins or paper notes redeemable for gold would have a fair value above zero, LR Wray

    What’s fair about putting the taxation authority and power of government behind someone’s favorite shiny metal? How can gold even have a fair value with such privilege?

    Let’s hear no more about needlessly expensive fiat, except to discredit it, please.

  3. roger erickson

    Reciprocal altruism?

    So a sovereign currency is a aggregate promise distributed to individual members. If all members do their parts as good citizens, then each member gets a credit voucher, to be used as inventively as that member may choose. It’s all about selection, yet on an increasingly distributed scale.

    This works only as long as the aggregate is organized enough to keep growing and FAIRLY distribute the growing return on coordination.

    Well duh! Why can’t we teach this to all 10 year olds?

    The lesson is nearly completed by every director or coach of every sports team, dance team, band, orchestra, military or drama cast. Why not in math, language & literature … let alone political science, banking and finance?

    Why is it “everyman for himself” in banking & accounting, but “there’s no I in team” in many other professions?

  4. roger erickson

    oops, meant to say ‘Why is it “every man for himself” in banking & accounting AND ECONOMICS, but “there’s no I in team” in many other professions?’

  5. I’m obliged to you, Randy, for such an interesting and stimulating post on a subject to which I have been giving a great deal of thought in recent years in my distinctly amateurish and un-academic way.

    I remember a very shrewd Edinburgh lawyer once said to me that there were only two things to understand – rights and obligations – and that everything else is commentary.

    Credit Instrument
    I define a ‘Credit Instrument’ as a promise issued in exchange for value received which the promissor will accept in exchange for value he provides in the future.

    Essentially, his counter-party has prepaid him for future supply.

    But note that the acceptor of a credit instrument as defined does NOT have the right to demand value from the promissor.

    If the acceptor of the instrument has further rights then, depending on the obligation imposed on the promissor/issuer the instrument would be rather different:

    Payment in money/currency – Debt Instrument
    Delivery of ‘money’s worth’ – Derivative (forward) instrument; or
    Dividend – eg from a share in a Joint Stock Company – Equity Instrument.

    It’s worth pointing out here that Frequent Flyer Miles – while definitely a credit instrument – do not carry a debt obligation, because it is the airline and not the traveller who sets the terms on which they are acceptable in payment for air travel. ie the holder cannot demand that the airline accepts the Miles for flights which the holder actually prefers to use. I had a similar experience with Bartercard Trade Pounds I had received, but could never find accommodation (or any other value I needed) from Bartercard members at the time I needed it.

    As you will know, there were two types of tally record which recorded two different types of obligation. Firstly, the memorandum tally, which recorded a transfer of value – ie a receipt or proof of payment/past value transfer. This accounting object – like its close cousin the Bitcoin ‘Proof of Work’ – has a neutral or null value.

    The other form of tally was a record of a promise of future value – prepayment.

    Anyone whose credit was good – because he was trusted to provide goods and services or other value at a future point in time – could give his promise, recorded on the tally, and it would be accepted because he was trusted to perform.

    Wealthy merchants and sovereigns were trusted (for different reasons) and it is my thesis that sovereigns became accustomed to asking their subjects to prepay rentals, duties or taxes (in money or money’s worth) which were due. Naturally such prepayment would only be forthcoming if a discount were offered, which the tax etc payer would realise when he paid his tax by returning his ‘stock’ portion of the tally to be matched against the counter-stock.

    Return and Redemption
    This is where the word ‘return’ entered the financial lexicon. Firstly, because the ‘tax return’ was – literally – the physical return and accounting event of settlement of taxes, and secondly, because it gave rise to the expression ‘Rate of Return’ which is where it gets interesting.

    Let us say a taxpayer agreed with the sovereign’s exchequer to prepay £8 for his £10 tax etc obligation. He would therefore make a 25% (£2/£8) profit when he paid his tax: if the tax was due in a year, he would make a 25% per annum rate of return; over two years, 12.5% pa, over five years 5% pa and so on. Simply take the discount and divide by time. It will be seen that there is no compound interest here, in terms of money for the use of money. What is occurring is a swap: the value of the sovereign’s services over time exchanged for the value of the currency or goods & services provided by the taxpayer.

    So in a nutshell, the credit instrument (and the holder’s right of return) is a rather different instrument to the debt instrument and its right of redemption, because the holder has no right to demand payment or delivery and must therefore trust the promissor to perform at some point. This is why either currency (trust in the form of a credit object) or a framework of trust (trust intermediaries aka banks and states) came along.

    Note here also that the tally ‘stock’ therefore recorded a form of investment (which of course stock remains to this day). In my view tallies – which necessarily bore the identity of promissor and acceptor – would therefore have been unlikely to be negotiable instruments. I believe negotiation of paper instruments – real bills – came along subsequently with the double entry book-keeping and registries necessary to keep track of their issuance, negotiation & acceptance, and eventual return & cancellation.

    At this point we saw the evolution of bills of exchange, letters of credit and all the rest, as merchants evolved into merchant banks. Note here that it is possible to settle outstanding credit obligations A to B; B to C; C to D and D to A by identifying and then generating ‘chains’ – A>B>C>D>A which settle all obligations without the need for currency at all, but while still requiring a means of keeping score – aka unit of account or standard unit of measure for value.

    (NB Such chain generation and ‘book-outs’ are precisely how the forward market in UK North Sea Brent crude oil frequently settles upon expiry.)

    But I digress.

    Firstly, as above, it is not strictly necessary to settle credit obligations with generally acceptable credit instruments (aka currency), but of course such a decentralised and dis-intermediated P2P credit issuance & clearing system would lack liquidity.

    As Minsky said anyone may issue currency – the difficulty is in having it accepted.

    In my view, it is possible to imagine currencies consisting of credit instruments returnable in payment for value (money’s worth) which is generally acceptable.

    Firstly, one can imagine a credit returnable in payment for (say) $1.00’s worth of location/land use. This would become generally acceptable if there were a local land use rental or levy. ie a currency local by definition. Secondly, one can imagine generally acceptable credits returnable in payment for (say) natural gas, or another for electricity of a standard amount.

    Such credit instruments/currencies carry no debt obligation because the holder may not demand (or need) delivery of the underlying value, but the currency holder may of course sell them to someone who does utilise the underlying value, and this land or energy user will always buy such credits at the best price below the market price of the underlying land or energy use.

    Finally, concerning the unit of account, this is in my view a purely nominal unit and a standard unit of measure of value in the same way that a metre is a standard unit of measure for length, and a kilogramme is a standard unit of measure for weight. One can never run out of kilogrammes or metres and one can never run out of units of account, However, it is completely possible to run out of the credit instruments which are exchanged by reference to the unit of account.

    Good grief. Well over 1000 words and time to call it a day. Thanks again for such a thought-provoking post.

  6. Dr Wray makes an excellent and logical case that taxes are not used to run government operations. I only wish people and politicians would listen and learn. Next he defines money issued by the government as debt but he does it in terms of a method of counting and keeping records of money. His explanation is as clear and understandable as any I have ever read. However, I do not accept that the way you count something changes its nature and using an accounting method that requires calling issued money debt does not make it debt in the conventional sense of the word. The “debt free” money people talk about would be money spent into the economy in excess of the sum of taxes plus borrowing, money that does not have to be paid back to commercial banks. The government is prevented from doing that by the accounting process that requires spending to equal taxes plus borrowing.

    • “The “debt free” money people talk about would be money spent into the economy in excess of the sum of taxes plus borrowing, money that does not have to be paid back to commercial banks. ”

      We have a name for that. “Government spending”.

      The bit you are missing from the ‘debt free’ money people is that it is not the elected government that determines what money to spend. It is a cabal of the elite running the central bank.

      In other words rather than paying bankers interest so that they can determine which projects to back with government money via a distributed network of money creators, you will instead pay the centralised cabal of the elite to gaze into their magical crystal ball and amazingly come up with exactly the right amount of money required by the economy at any point in time.

      It’s an idea so daft it beggars belief. And it falls foul of a simple issue. There is a supply side issue with Solomons. Because those people proposing the idea certainly are not Solomon. None of them even remotely saw 2008 coming.

      Interest is the wages of bankers. It is paid to them as a wage for determining which projects need backing and which do not. You can argue that the wage is too high, and it is badly calculated. But you cannot argue that the job of working out which projects needs backing and which do not is redundant.

      The correct approach is for government to spend on the required public purpose, which will generate an amount of taxation and an increase in private saving that will precisely match the spending. The private sector is then allowed to work with what is left – via banks that are only allowed to lend for particular capital development purposes. Then whatever the private sector chooses not to use is engaged via a government paid living wage for the ‘nice to have’ public purpose.

      That way the state contains the nuclear power of capitalism in a way that ensures you get maximum power output in your economy without causing devastation.

      • With “debt free money” bankers still get paid and still decide where loans should be made. That does not change. The big change is that privately owned for profit corporations do not enjoy the seigniorage on US money. The seigniorage belongs to the people, not banks. To be more specific, as you probably know, banks earn interest on the seigniorage of the money they create with loans. I don’t think it is rocket science to determine the quantity of money needed in an economy. The Fed technical people with their enormous data gathering capability have no problem with that issue. The really big point is that the federal government has the tools to control the money supply (taxing and spending) but banks and the CB do not have effective tools. We have languished years since 2009 because the banks have no way to put money into the economy when people choose to pay off loans rather than borrowing more. The monetary system we have is silly, tasking the CB to maintain price stability and full employment while the central government holds all the tools to do the chore.

      • roger erickson

        I’m with Charles here,
        More exactly, citizens already have the tools available to do many things. They just don’t select representatives willing or interested in doing the right things.

        The choices made by our current electorate are what’s silly.

        And unfortunately, a foolish electorate and it’s options are soon parted.

        • Thanks, Roger. The problem is, as you say, with an uninformed electorate. We need a national figure who will educate the public about the options. Ezra Pound tried a half century plus ago and he was ostracized and basically run out of the country. People are afraid to breach the subject in public. Many public figures have remarked about the issue such as Henry Ford, but no one has really started a serious challenge to the current, very ancient, system.

  7. As for debt-free money in general it IS possible for a private money form, ie. common stock since Equity is debt-free by definition (Equity = Assets – Liabilities) and thus shares in Equity, common stock, are debt-free too, assuming non-negative Equity.

    By why should those with equity share it when government subsidized private credit creation allows them to steal purchasing power from everyone but especially from the poor, the least so-called worthy of government-subsidized private credit?

    For all their talk about equitable and sharing, it’s rather revealing that many ignore how our money system systematically loots the poor for the benefit of the rich. I guess the problem in their eyes is that they’re not in charge of the looting? Not that it takes place at all?

    • Equity is not debt free. Equity is very much a debt as anybody who has passed a dividend generally finds out to their cost.

      Equity is owed to the owners of the equity. Just as it is possible for debt to act as equity – via extend and pretend – it is possible for equity to act as debt – via an expected dividend that will incur action against the perpetrators if passed.

      It is perhaps time to drop down to the philosophical basis for any of these instruments – which is for one set of human beings to impose an obligation of some kind on another – with consequences for failing to fulfil the obligation.

      It is via the incurring and fulfilling of these obligations that things get done.

  8. «We can call this the principle of redeemability: the holder of an IOU can present it to the issuer for payment.»

    But “payment” here is rather misleading, as it means really “return” of the thing or service borrowed.

    Anyhow while I sort of agree with most of the above, and I really liked the historical details as to the specific case of the medieval british kingdoms in previous comment, but I strongly object as too narrow the use of “sovereign” here.

    Because it is not sovereigns that create “money” or define its acceptability, except at sword/gun point.

    It is is *sellers*. The essential property of “money” is that it has some kind of purchasing power, a specific kind of acceptability. Anything that has purchasing power is “money”.

    What is money and the amount of credit/debt therefore both depend on *sellers*, not the sovereign. And without being accepted by sellers, “money” is not money.

    There are plenty of examples of sovereign powers that have issued “money” that is not accepted by sellers, except perhaps sometimes for trivial purchases.

    Also, I have come to the conclusion that Graeber’s book that explains the distinction between “war money” (commodity money) and “temple money (paper money) can be improved, and this is relevant to some of the comments above.

    There are two similar and partially overlapping in operation, but distinct, forms of “paper money”:

    * “temple money” properly defined, called “ledger money”, where the “temple” keeps a ledger and every transaction involves the parties updating the ledger. The major, and this is pretty big in practice, example of “ledger” money is “budget” money inside a company, which is used to pay for intracompany transactions.

    * “instrument money”, where nobody keeps a central ledger, and purchases are paid by delivering IOUs of various creditability to the seller. This is a much more fluid system.

    The overlap between the two is “cheques” drawn on the ledger at the “temple”.

    Societies can move among all three systems in time, and they can even coexist.

    For example ledger based systems can become instrument based systems when the temple starts issuing receipts against a ledger position, and eventually they lose the “pay the bearer” annotation, and viceversa instrument based systems can become ledger based system when “settling” instruments through a “temple” become convenient (and of course a commodity money system can become a ledger based one).

    An interesting related story:

    • A monetary instrument is like a zero-coupon security with zero-term to maturity. Why does a t-bill has a positive nominal value? Because of the creditworthiness of the issuer (here gov), ie expectation that gov will take back the tbill at face value.
      Nominal value at which an instrument circulates is overwhelmingly determine by confidence in issuer by bearers. The confidence is based on promise of issuer to take back at face value at any time. The issuer does not promise anything else.
      So a $100 banknote will circulate at $100 if it is expected the issuer will take it back at $100 at anytime. Nothing to do with third party (like sellers). And the note will circulate at $100 even if there is hyperinflation.
      Again, money is just like any other securities, follows the exact same logic: core to value (I.e. nominal value) is creditworthiness of issuer.

  9. Basically (or should I say biblically;-)- Creation is also the Original Sin (aka debt)?

  10. «So a $100 banknote will circulate at $100 if it is expected the issuer will take it back at $100 at anytime.»that acceptance by the s

    That’s just circular handwaving and it is meaningless.

    The debate here is about what gives “money”, be it a ledger entry, or a paper instrument, or a disc of metal, its “moneyness”.

    Myself and our blogger agree that is broadly “acceptance”, as Minsky very well wrote. To me that is a special case of Graeber’s point that “money” (and debt in general) is a social construct before being an economic or accounting one, and “acceptance” to me means something more specific, “purchasing power”, because that is what “acceptance” gives.

    The difference seems to me between acceptance by the sovereign for taxes and acceptance by sellers for everything else.

    Now I am sure that, as Graeber and Minsky (and many others before them) point out, there can be many “moneys” at the same time, with different scopes and degrees of “moneyness”, for example one accepted by the sovereign for tax payments, and one accepted by every other seller, but I think that the acceptance by the sovereign is just a particular case of acceptance by sellers. because it is sellers that extend credit to buyers when they accept “money” in payment, whatever the nature of that “money”.

    Because people, including the sovereign government, and every seller, accept money only because they eventually want to use it to purchase something else, so purchasing power in general matters most.

    Anyhow, as to the meaninglessness of «will circulate at $100 if it is expected the issuer will take it back at $100» consider this story:

    * You write on a piece of paper “Note for 1,000 doubloons from the Federal Reserve Bank of Poyais”, and then under it “Will pay to the bearer on demand, signed The Cashier, Eric”.
    * You take that to a shop and tender it in payment for a midrange laptop. It is perfectly valid money, and when the salesperson smiles and asks you to pay the note to the bearer as it says on it, you take out two pieces of paper and you write on each of them “Note for 500 doubloons …” etc., and immediately take back the 1,000 doubloons note giving him the two 500 doubloons notes.
    * When the salersperson laughs at you, you say your money is perfectly good because it “will circulate at 1,000 doubloons if it is expected the issuer will take it back at 1,000 doubloons”, as you have just demonstrated.


    • Acceptance will be broader the more debtor an issuer has. You and I don’t have much debtor (at least I don’t) so a promise I made to take back in payment is meaningless.
      Another way to broaden acceptance is to promise conversion into something.
      Bank monetary instruments contain both promises. Current gov Mon instrument only contain the first one.
      But I am getting ahead of myself. Will do long post later.

      • The point behind acceptance of monetary instrument is that one can paid debt due to the issuer of that instrument. And issuer promises to take it in payment at face value.
        State imposes debt on all of us. Bank create monetary instrument when someone come to ask for an advance and so become indebted to the bank

    • The $1000 $500 etc example you give is about conversion, not redemption. Redeeming means extinguishing the debt owed. Monetary instrument is redeemed by paying the issuer of the monetary instrument.

  11. «* “temple money” properly defined, called “ledger money”, [ … ]
    * “instrument money”, [ … ] IOUs of various creditability to the seller.»

    To some extent the difference is between a centralized ledger, and each such ledger defines a different “money”, and a decentralized ledger, where in effect each IOU is a virtual ledger entry.

    The two largely overlap, because:

    * A purely centralized ledger system is too rigid, and eventually cheques drawn on the centralized ledger happen, and then they “detach” from the ledger (see “receipts of deposit” at gold repository companies :->).

    * A purely decentralized ledger system is too fluid, and eventually it needs clearing via consolidation, in a centralized ledger.

    So most “chartalist” systems are a mixture of “temple money” and “IOU money” in varying degrees, even a large company’s internal budget money (where “budget money transfer notes” inevitably happen), or a private banknote issue system (where settlement rooms inevitably happen).

  12. BTW in case this has not been recognized yet, what I call here “ledger money”, that is strictly-defined “temple money”, is what is usually called “debt-free money”. As indeed in a large company’s internal “budget money”. Which often does not stay “debt-free” for long, as every budget holder has the temptation to create some form of debt to cover their occasional holes.

  13. BTW I think that “acceptance” as motivated by “purchasing” power also is a property of disc-of-metal (or conch-shell, or brass-rod) money. Because very rarely is the disc-of-metal something that is accepted by a seller because the seller wants to consume that metal. It is usually accepted because the same disc-of-metal can be used to buy something from another seller.

    Eventually someone may accept the disc-of-metal because they want to smelt it and make it into jewellery or a cup (or they collect shells, or they play meccano with brass rods), and in that case it is barter, not payment with money. But that’s quite rare.

    Saying this another way, it is acceptance by sellers that gives “money” not just its “purchasing power” (if any) but also its liquidity (if any), rather than any intrinsic property.

  14. «Note for 1,000 doubloons from the Federal Reserve Bank of Poyais”»

    Hint :-):

  15. Put yet again another way: why should sellers *accept* some kind of money? Why should a seller accept a $10 note or a disc of precious metal from a buyer of a book?

    One answer is that because the $10 note or the disc of precious metal has a “fair value” equivalent to that the seller places on the book.

    But that is nearly never the case: sellers only ask themselves whether they can buy food and shelter with the $10 note or the disc of precious metal. Or whether they can buy tax receipts with that note or disc of precious metal. It is a (nearly!) fully circular situation. That’s why “confidence” in the social convention matters, and that’s why seignorage (the difference between “fair value” and exchange value) works and is usually huge.

    In terms that H Minsky would recognize (but not necessarily agree), the bookseller is a “bank” with a “balance sheet” and takes a long position in wholesale books (or in the case of books, retail space actually) hoping for a capital gain to “finance” with “money” a short position in food, shelter and tax receipts.

  16. Sorry to go on and, but I hope that I am making some valid or at least non-ridiculous points. Here is another that it just occurred to me rereading some of the above:

    «One answer is that because the $10 note or the disc of precious metal has a “fair value” equivalent to that the seller places on the book. But that is nearly never the case: sellers only ask themselves whether they can buy food and shelter with the $10 note or the disc of precious metal.»

    Put yet another way, I think that our difference is that I reckon that “acceptance” is *dynamic*, that is is based on the evolution of trading conditions (thus acceptance of sorts continues even if the dollar defaults by 50% every 20 years), while perhaps our blogger thinks that acceptance is *static*, that is is founded on “fair value” redeemability.

    That would perhaps account for the difference between «currency will be accepted if there is an enforceable obligation to make payments to its issuer in that same currency» versus my impression that it is based on on confidence in further acceptance by other sellers by the seller accepting it (where “other sellers” include the issuer of course).

  17. ” I think that our difference is that I reckon that “acceptance” is *dynamic*, ”


    You are unlikely to get melt down because exporters can’t allow it to – and they are in competition with each other so one can gain an advantage over the other by stepping in.

    Warren has mention a 20%ish band that currencies tend to move in and as the linked article above shows you need a lot more than that before you get serious supply side inflation any way. Normally the distributional issues are resolved via an increase in price of luxury items.

    I’d suggest putting in place import and capital control systems that come into action on an extreme movement, which then gives market participants a steer as to what will happen on extreme moves. What that is saying is if the market won’t sort out the distributional battle then the government will step in and force the issue.

    I’d say that is a very sensible policy suggestion based upon a correct understanding of how the exchange system works on the ground.

    Export-led nations have to constantly provide liquidity into the rest of the world to allow others to buy their goods. Otherwise the rest of the world runs out of the particular money that is needed for the export transaction to complete and the export never happens (UK buyers buy Chinese goods with GBP, but Chinese workers are paid in Yuan. The relative shortage of Yuan due to the export differential has to be provided by the Chinese or Chinese goods become, in absurdum, infinitely expensive).

    So the important insight, IMV, is that exporters *need* to export and the central banks that support that policy with ‘liquidity operations’ will ultimately halt any slide for any important export destination – either explicitly or implicitly through their own banking system.

    Every analysis I’ve seen analyses the situation from the point of view of the currency that is being depressed. Almost none look at it from the exporter’s point of view. So where are the goods they no longer can sell to the importer going to go in a world where overall export growth is fundamentally limited by the increase in world income? In a world where ‘export led growth’ is the insane mantra, that is a mistake and leads to a mistaken view and mistaken policy recommendations.

    So its a bit like borrowing from a bank. If you import a little then the exporters own you. If you import a lot then you own the exporters – because they then have nowhere else to go.

    The shift to manufacturing in the 3rd world has generated a huge export overhang with the West. They *need* to export to the West or their economies collapse. And that is one of the reasons why the Western currencies have remained valuable – because the Eastern countries are forced to run up huge stockpiles of the stuff to enable their economies to work.

    And that will continue until they realise they are being had, eliminate the export overhang and move to domestic consumption. You’ll note that the Japanese have only just done that, so it ain’t something that is going to happen overnight.

    For me the policy response to sliding currencies is to control the distributional inflation by temporarily banning the import of ‘luxury’ items. That forces the problem onto the exporters, which they can relieve by systemically intervening and fixing the currency imbalance. Forcing them to do what they normally do through the course of trade.

    No country has an automatic right to import any more than it exports. The corollary to that is that no country has an automatic right to export more than it imports. It has to buy that right – either by stockpiling foreign financial assets or by convincing a bunch of dumb countries into a monetary union so that it can export its unemployment to them – cf. Ecuador vs. USA, Greece vs. Germany and arguably Scotland, Wales and Northern Ireland vs. England.

    So let’s stop looking at this problem from the wrong end.

    It’s the exporters stupid.

  18. Sorry blissex here is the article “above” 🙂

    Never try copy and pasting old stuff without reading it through first.