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.
3 comments:
http://www.alhambrapartners.com/2015/08/10/still-no-going-back-eighth-anniversary/
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.
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:
http://screwtapefiles.blob.core.windows.net/public/1967_JACQUES_RUEFF_Balance_Of_Payments_english_translation.pdf
Enjoy!
Slow Loris Larry
Thank you!
Post a Comment