Typography

There is a century's old debate between metallists and chartalists on the origin of money. The metallist view is that the first spark of money emerged through barter and matured when the use of precious metals as money was discovered. The chartalists disagree. According to them, the use of credit preceded the use of precious metals as money. At its core, the metallist/chartalist debate is a battle over the definition of the word money. In a moneyness world, there is no such thing as money. All we have are numerous media of exchange with varying ranges of liquidity. Whether moneyness first gets attached to credit or precious metals is really not important. Imagine that a hunter encounters a trapper. The hunter has a deer. The trapper wants the deer but isn't sure what to offer. On the one hand, he can exchange the two rabbits in his belt for the deer. On the other he can offer his credit. In offering to exchange away his credit, the trapper is simply capitalizing his future ear...

Marriner Eccles There is an idea floating around on the internet that the US Treasury can finance itself indefinitely by borrowing directly from the Federal Reserve. All the President need do, goes the story, is order the Fed to credit the Treasury's account with fresh money, and voilà – the Treasury can spend willy-nilly. This is called the Treasury's overdraft facility. In actuality, the above operations are impossible since the Treasury is legally prevented from borrowing directly from the Fed. The result is that the Treasury can only spend by ensuring that it has already obtained funding through the collection of taxes or the issuance of securities in the open market. The overdraft facility is a myth. But this wasn't always the case. Marriner Eccles's March 1947 hearing before the House of Representative's Committee on Banking and Currency is a great source of US monetary history. In it we learn that from 1914 to 1935, the Federal Reserve had the power to lend ...

Corporate stock: a perpetually inconvertible currency In this post I play around with the distinction between a currency user and a currency issuer . Modern Monetary Theory (MMT) draws a line between currency issuer and currency user. Households and businesses are currency users. They can "run out of money" and become insolvent. Central banks, on the other hand, are currency issuers. Issuers can never run out of money and, as such, face no solvency constraint. As long as the government is not legally separated from the nation's central bank, it too enjoys the benefits of being a currency issuer. After all, the government can always have the central bank issue liabilities to pay for all governmental obligations. The only constraint on a currency issuer is inflation, not solvency. For if a central bank's liabilities inflate to worthlessness, they can no longer be used to meet either the government's or the central bank's obligations. While MMT associates curren...

Christmas is upon us, and so is the seasonal spike in the demand for cash. This Christmas bump relates to the previous post on liquidity and uncertainty. Christmas isn't just about buying presents – it's also about traveling to distant places to meet up with family and friends. We realize that we can't anticipate all eventualities along the way. To insure ourselves against these uncertainties we carry a bigger wad of cash. This liquid wad provides a very real service by comforting us, even if we never end up having to use it. It's illuminating to plot the Christmas spike in cash in order to compare it over decades. See below. The data I'm using is the weekly currency component of M1 from the Federal Reserve. We can eyeball a few trends from the chart. First, we see a consistent seasonal spike in currency in circulation in December and climaxing around New Year's Day. Cash falls heavily in January as people and businesses redeposit it at the bank. While the Chr...

In between my more practical posts, once every week or so I'll do something on the idea of moneyness . Economists have known for a long time that the concepts of uncertainty and money are intimately intertwined. George Costanza knows this too. He holds a bunch of cash to deal with all eventualities... until his wallet blows up. I'll show how we can just as easily replace money with moneyness in this two-step with uncertainty. Uncertainty is an uncomfortable feeling one endures when thinking about an unforeseeable future. One of the ways to shield oneself from uncertainty is to devote a certain portion of one's portfolio to "money" – dollar bills, bank deposits, and such. Because these money items are liquid, it will be relatively easy for their holder to offload them in the future should some unanticipated eventuality arise. Holding money therefore alleviates discomfort about the future. This is the same sort of service that a fire extinguisher provides. Though ...

Hjalmar Schact and Montague Norman  If you were in charge of a central bank during hyperinflation, what would you do to stop it? Here's a brief but detailed account of how the German hyperinflation was halted in November 1923. What is so unusual about the end to the German hyperinflation was its suddenness. Within days of a series of monetary reforms implemented in mid November 1923, price rises came to a dead stop. You have to put this into context to properly appreciate it. A loaf of bread, which cost 30,000 marks on August 30, 1923, rose to 300,000 by mid-September, fifteen million marks by mid-October, and 165 billion marks by early November. And suddenly it stabilized. There were two not-entirely unrelated reforms implemented that month that halted the inflation: 1. the creation of a new unit of account called the rentenmark. 2. the stabilization of the existing unit of account, the paper mark. The Rentenmark With the Reichsbank's paper marks having lost all credibility, i...

While chartalism is usually associated with the state and its ability to tax, there's no reason that this must be so. In fact, I like to think of chartalism as stateless. I call this the McDonald's coupon theory of money . What I'm specifically addressing here is the chartalist idea that paper notes issued by the state have value because the state imposes a liability on its citizens that can only be discharged by the use of this paper. McDonald's Corporation can do the same thing if it imposes an obligation on the burger-eating community to pay for all Big Macs with McDonald's-issued coupons. One coupon buys one Big Mac, say. In order to pay their "tax" and get a burger, Big Mac fans have to somehow acquire these coupons ahead of time. McDonald's pays for a portion of its supplies by printing and issuing these coupons as payment. So one way that Big Mac fans can get their hands on coupons is by providing services to McDonald's... say cleaning floor...

Shillings issued during Queen Elizabeth's reign There are plenty of rumours that Mark Carney will implement some sort of NGDP targeting regime when he arrives at Threadneedle Street. If so, this will mark the seventh medium-of-account used to define the pound sterling since the pound's establishment in the early part of the last millennium. This storied list of media-of-account includes silver, silver/gold, gold, the US dollar, the Deutsche Mark, CPI, and perhaps NGDP. First, some definitions. The pound sterling is a unit-of-account. Think of it as a word, a unit, or a brand name. The unit-of-account is generally defined in terms of some other good. This other good is called the medium-of-account. Some quantity x of the medium-of-account equals the unit-of-account. (See this older discussion of the definition of the word medium-of-account.) 1. Silver The pound's first medium-of-account was silver.  A pound sterling was defined as 5,400 grains of 92.5% fine silver. We don...

Grand Bazaar in Istanbul What should we make of the so-called " gold for gas " trade between Turkey and Iran? Turkey depends on Iranian natural gas to produce a large part of its electricity. In normal times, the Turkish natural gas monopoly BOTAS probably would have paid for Iranian natural gas with euros or dollars. The transaction would have been settled through euro- or US-denominated accounts that both BOTAS and the the National Iranian Gas Company (NIGC) held at a bank in Europe. That's my guess, at least. It's become dangerous for Iranian companies to keep accounts in Europe lest they be frozen. So the NIGC has probably opened an account at a Turkish bank like Halkbank, a large government-owned institution. BOTAS likely keeps an account there too. When natural gas gets delivered across the border, Halkbank settles the trade by crediting NIGC's account and debiting BOTAS's account. What the heck does the NIGC do with all the Turkish lira it accumulates a...

The response to the above question will usually be a barter economy. But I want to show you that this is a tougher question than it seems. The answer depends on whether you're starting from a money view of the world or a moneyness view . (See Why Moneyness? in which I explain these ideas). 1. The money view , which is the standard view, begins by classifying all things in an economy into either money (M) or non-money. Any economy that has M in it is a monetary economy. All exchange in a monetary economy is achieved by trading non-money into M and back into a different non-money. When there is no M, then a non-monetary economy is said to exist. In a non-monetary economy, exchange occurs by trading non-money for non-money, our word for this being barter . So a non-monetary economy is a barter economy. 2. Things are different from a moneyness perspective. An isolated household living in a cave values their inventory of goods solely for its use-value—how each good satisfies the hou...

One of the more archaic features of the US monetary system is that the price of gold continues to be set at $42.22. Ever wondered why that is? This post will work through some monetary history to show why, unlike most countries, the US doesn't mark the gold price to the market price of $1750 or so. I'll give a quick hint. Marking the gold price to market wouldn't be a mere cosmetic change—rather, it would require the Federal Reserve to hand over hundreds of billions of free money to the President. Here's how it all works. The Fed currently holds 261 million ounces of gold. At the archaic price of $42/oz, this stash is valued at a mere $11 billion. With modern day gold trading at $1750, the market value of 261 million oz is actually $457 billion. Doesn't that mean that the Fed would show a huge mark-to-market gain if gold were revalued? No. If you read the fine print, the Fed doesn't actually own gold ounces. Rather, it owns gold certificates that have been issue...

1563, Bruegel the Elder "Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth" This post is written for people in 2013 or 2014 who decide to have a debate on the importance (or not) of monetary injection points. This debate already transpired in early December 2012 across multiple blogs. Rather than starting from scratch, here's a bibliography. The debate kicked off with Scott Sumner's response to this article by Sheldon Richman. From then on, in no particular order, are these posts: Scott Sumner It really, really, really doesn’t matter who gets the money first—part 2 You can start talking about Cantillon effects as soon as central banks start buying bananas A voice of reason from the comment section If I buy T-bonds, their price rises. If the Fed buys T-bonds, their price (usually) falls Bob Murphy Scott Sumner and I Have a Failure to Communicate Resolution of the Sumner/Richman Showdown You Might Be Talkin to ...

Whenever we think of US monetary policy we usually think of the Fed. There's another side to US monetary policy, and its probably just as significant. Being part of the worldwide US dollar clearing & settlement system means having access to the world's most liquid payments medium: the US dollar-denominated bank deposit. As long as a nation's banks are connected to this network, goods that are produced in that nation will be infinitely more saleable. On the other hand, being cut off from it means that the same goods will be a lot tougher to move. The Iranian monetary blockade illustrates the US Treasury's ability to use banishment from the USD network, or the threat thereof, to exert incredible influence over the world. Network view of cross-border banking, IMF, Minoiu and Reyes (2011) PDF To see how this works we've got to understand how the worldwide US dollar deposit clearing system functions. Let's start at the periphery of the network. An Iranian bank (c...

There's a dustup between market monetarists and Austrians over Cantillon effects . See Nick Rowe, Scott Sumner , Bill Woolsey , and Bob Murphy . What are Cantillon effects? One definition is the effect that a change in the money supply has on the real economy due to where money is injected. Rereading Cantillon, I think its better to define the effect he is writing about as the influence that a change in the money supply has given that people are incapable of anticipating that change. Cantillon wrote in a world in which huge discoveries of gold in the Americas had steadily increased the price level. We know that if people perfectly anticipate the arrival of new gold, all prices will immediately rise. Cantillon thought somewhat differently. According to him, the initial discovery of gold would go unnoticed by people: It is also usually the case that the increase or decrease of money in a state is not perceived because it comes into a state from foreign countries by such imperceptib...

Here's why this blog is called Moneyness . When it comes to monetary analysis, you can divide the world up two ways. The standard way is to draw a line between all those things in an economy that are "money" and all those things which are not. Deposits go in the money bin, widgets go in the non-money bin, dollar bills go in the money bin, labour goes in the non-money bin etc etc. Then you figure out what set of rules apply specifically to money and what set of rules apply to non-monies (and what applies to both). The quantity theory of money is a good example of a theory that emerges from this way of splitting up of the world. The quantity theory posits a number of objects M that belong in the relation MV=PY. Non M's needn't apply. The second way to classify the world is to take everything out of these bins and ask the following sorts of questions: in what way are all of these things moneylike? How does the element of moneyness inhere in every valu...

In my other life, I analyze the stock market. I always find it interesting when the stock market reveals its often hidden monetary nature. The common assumption is that monetary analysis should be confined to a narrow range of coins, dollar bills, central bank reserves, and bank deposits. But this ignores the fact that all valuable things in an economy have a degree of liquidity, including stocks. A stock's price can be decomposed into a "fundamental" component and a liquidity component. Fundamental value arises from a stockholder's right to receive any distribution of the assets of a corporation. The liquidity component is the premium on top of fundamental value that arises from the owner's ability to easily sell that stock. Knowing that a stock can be easily sold provides the owner with a degree of comfort that would otherwise be lacking if the stock was less saleable, or not saleable at all. This "comforting service" is built into the stock's pric...