The Big Picture

One of the biggest challenges I have confronted in trying to discuss money is the difficulty many people have in thinking of money as a type of debt. On a personal level we use money in ways that can make this concept very counter-intuitive. We use currency to settle debts and make purchases. We get paid in money. There’s no obvious creditor and debtor relationship with money as there is with the contract for a housing loan or a car loan.

When a person has paid for something with money I don’t think it’s easy for them to reconceptualise that transaction as actually being an assignment of a debt. Yet, on a system level we can clearly show that money is a type of debt. We can identify the sources of the stock of money and point to their balance sheets where the liabilities (debts) reside that correspond to the total stock of money in the economy.  (Incidentally we can, as Jacques Rueff does in “Balance Of Payments”, also apply these insights to the international monetary, financial and trade system.)

My interim solution to this problem is to apply two different approaches to defining money. I think we need to use multiple functional definitions of money to describe people’s personal relationship with it as a way to try to establish some common ground. But we cannot discuss money from a monetary system perspective without agreeing that it is a type of debt regardless of where that system lies on the spectrum between ‘realist’ and ‘nominalist’. We need a “systems thinking” approach to get the big picture perspective.

I provided an example of system thinking in the discussion thread of the first post in this series on Jacques Rueff’s theories. I used money creation in the banking system to demonstrate that inferring how a system works by extrapolating from the operation of a single bank leads to a false perception of the way a banking system operates. This is the comment I posted:

IMO the educational challenge is analogous to the debate about money creation in the banking system. Each bank borrows to lend. The "loanable funds" model of banking looks sound if you are looking at one bank in isolation. However, the moment you zoom out and look at the system this model fails and we have to acknowledge an "endogenous money" model wherein banks lend money into existence in the form of deposits.

You would think it would be obvious to everyone once they look at a model using two bank balance sheets instead of one. Yet Paul Krugman is still flogging "loanable funds" despite the Bank of England (among many other CBs) publishing papers that state that endogenous money is the correct model.

(You can tap into a discussion about the BoE’s paper and a link to their paper here!)

Armed with this system thinking approach we can see there are two “manufacturers” of the money in this system – banks and governments. The process they use is similar. This debt money is created on a balance sheet. Therefore this money stock could also be described as balance sheet money. Without going into fine detail, our money is currently produced in four ways:

1. Government Treasuries issue currency that circulates in the form of notes and coins. (A Central Bank may issue this type of money instead of a Treasury.)

2. A Central Bank credits client banks’ reserve accounts with currency secured against acceptable collateral.

3. Governments borrow money by issuing bonds with no genuine intention to redeem them from recurring revenue (e.g. taxes). Instead they issue fresh debt to rollover older, maturing debt.

4. For several decades international banks (primarily in London and Europe) made “eurodollar” loans (denominated in US dollars) that were created on their balance sheets. (I include this source in the list because the US dollar is the dominant global international reserve and trading currency.)

Jacques Rueff’s monetary theories lead us to the conclusion that what is lacking in these balance sheets today are real assets of equal exchange value supporting the face value of the currency liabilities. This is what makes our current system a ‘nominalist’, token money system as opposed to a ‘realist’ monetary system.

So we arrive at a point in our discussion where we now have a monetary system in which money is in essence a debt (“manufactured” by specific debtors) that performs many different functions for creditors. We can understand money from the top-down and also as we experience it in our daily lives - hopefully with no conflict in these different perspectives of money.

Earlier I described this as my interim solution because I think there is still a missing element in this part of the conceptual framework. We have the what (it is) and how (it functions) but we lack the why (it exists) – the raison d'ĂȘtre of money. We lack a clear, central purpose for money. The key word I choose to express this purpose is ‘convertibility’. In my opinion this is the defining feature of a viable payment system. And, first and foremost, monetary systems are (or should be) effective payment systems.


costata said...

This link is to a discussion of "the Eurodollar standard". The author, Jeffrey P. Snider has been studying this market for several years. According to some reports there may be up to $9 trillion of Eurodollar loans outside the USA. This creates a dollar short position that may help to explain why demand for US dollars and Treasuries and bonds has been so robust in the years since the GFC.

Slow Loris said...

I am happy to announce that, courtesy of the Australian University Inter-Library Loan system and Murdoch University over in Perth, Western Australia, I have now been able to make a .pdf file of Jacques Rueff's “Balance Of Payments".

Warren has make it available for download at the following URL:


Slow Loris Larry

costata said...

Thank you!