Typography

Cartoon from 1864 poking fun at politicians and greenbacks ( source and explanation ) During the greenback era, the Union government issued irredeemable paper money to help pay for its war against the Confederates. What many people don't realize is that there were actually two different strains of greenbacks—those printed before March 1862 and those printed after. Although these two strains had only slightly different properties, they were not fungible with each other and would go on to have drastically different values in the marketplace. Looking at the respective properties of each type gives some insights a thorny problem: why do colored bits of paper money have value? One classic explanation for the value of fiat money is so-called 'tax-backing.' If the government stipulates that taxes must be paid using government-issued chits of paper, then that will be sufficient to give those chits a positive value. Back in 1910 economist Philip Wicksteed was one of the first econom...

by Paul Conrad When we talk about bitcoin, one thing we need to ask ourselves is this: can worthless things circulate and be accepted in trade? If so, how? And can this state of affairs continue indefinitely? An intrinsically useless, unbacked, and costless fiat object might be accepted in trade, but only if it already has a positive price. A history of positive prices will generate sufficient expectations among potential acceptors that they will be able to trade that object on tomorrow. But how might our fiat object earn a positive price to begin with? If we reply that early adopters expected it to be widely accepted by others in trade, how did these early adopters ever form these expectations if that object didn't already have a positive price? We're dealing with a problem of circularity. There is no way to "break into" a dynamic that might generate a positive value for a fiat object. So logically, worthless things cannot trade in the market at a positive value. How...

While it somewhat lacked in structure, a good time was had by everyone in the live chat section of the big Warren Mosler vs Bob Murphy debate last night. You can see a replay of the debate here . One of Mosler's running themes (and which Murphy turned into a running gag) was the idea that he (Mosler) could give his business card a positive price by requiring members of the audience to hand over said card to Mosler's bouncer should they wish to leave the room unmolested. Voilà, modern fiat money. In order to get his fiat cards out into the audience, presumably Mosler would have had to spend them into existence by purchasing stuff from the the audience. Only then would audience members be able to afford to leave the room without being subjected to the bouncer's whims. In the MMT literature, this is called twintopt .* A state imposes an obligation on its citizenry to pay a tax, and then dictates what good or item (the "twintopt") will be sufficient to discharge that ...

This post may get a bit rambling. It's an attempt to tie together a couple of different strands that I've been thinking and reading about. Modern monetary theory (MMT) in a nutshell, at least as far as I see it, goes something like this. Back in the 1990s a couple of clever guys came up with the idea of a government-provided jobs guarantee. They realized that this program would be seen by the public as an expensive boondoggle requiring sky-high taxes and huge debts. Could they outflank these criticisms by finding another way to fund the jobs guarantee? To find the funds the early MMTers worked backwards through the labyrinthine relationship between the Federal Reserve and the Treasury. What they claimed to have discovered at the end of their trek was certainly shocking. The US Treasury, they said, funds itself not by the conventional route of taxes and bonds, but by creating and directly spending fiat (i.e. inconvertible) money. Furthermore, it is not only the government's ...

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...

A few comments at MMT blogs on the subject of consolidating the nation's central bank and its treasury. See here and here . This argument could probably go on forever, but it is an interesting one. MMT's "general case" is one in which there is a government and at some sub-level a treasury and central bank. The government reigns supreme as a currency issuer since it consolidates both institutions. I don't know why this setup must be the "general case" and everything else anomalous. Why not call an independent central bank and a non-issuing treasury the "general case" and then reason from there? It seems ad hoc to me. I prefer thinking not in terms of hierarchies, nor in some sort of tiered progressions away from the general case, but in terms of poles. At one extreme is a totally independent central bank, at the other is a totally consolidated central bank. In the real world, every institutional setup lies somewhere in between. This reminds me ...

David Glasner had an article called Wicksteed on the Value of Paper Money . David discusses the idea that it is the imposition of taxes by government, payable in fiat money tokens, that gives fiat money its value. This is chartalism, the very same idea that MMTers trumpet as their unique addition to economic discussion. This is one theory for why fiat money has value. Another is Mike Sproul's backing theory in which, just as a mutual fund's assets give its units value, a central bank's assets support the value of its liabilities. When it comes to explaining modern money, I'm partial to the latter. I'm not averse to the MMT explanation, but only as science fiction. I don't think any real monetary system has actually worked in this way. David mentions that Adam Smith advocated the taxes-drive fiat money theory. Incidentally, Randall Wray says the same in his book Understanding Modern Money . I disagree. To make a long story short, in Smith's world, fiat money...

heteconomist.com has a post on MMT's openness and political neutrality. See A Clarification on Political Openness . Heteconomist: "I prefer to see MMT as an open framework (basically an understanding of the monetary system and national accounting) within which – or out of which – various policy approaches could be developed and pursued." Reply: I’m no expert, but I decompose the monetary component of MMT into chartalism and endogenous money. These ideas are so old… you can go back centuries to find the origins of chartalism in Locke and Berkeley (money as a ticket, agreement, or sign). Endogenous money’s roots traces to the banking school of the 19th century. MMT doesn’t own these individual ideas… they are diffused into the general body of economics. There are no intrinsic reasons why the ideas of Locke, Berkeley, and the banking school need be associated with a particular political slant. The chartalist version of Locke/Berkeley’s token theory of money surely appeals to...

I entered the fray at a couple of MMT blogs. There was some interesting discussion concerning consolidation of the Treasury and central bank, and how MMT portrays/misportrays the actual institutional details of modern central banking in order to make their message easier. Between Depression and Hyperinflation at Winterspeak. From the comments: technical details on MMT at Winterspeak. The General and the Specific in MMT at heteconomist.com Even with the BoE, the old way by which it could lend directly to government - via its "ways and means" advance/overdraft facility - has been effectively neutered. That facility was frozen in 1997 and has since been almost completely repaid. The upshot is that MMT can't look to the BoE as an example of its idealized "consolidation", and it can't give policy recommendations as if these institutional rigidities didn't exist. Relevant link: The Treasury-Fed Accord: A New Narrative Account by Hetzel and Leach