Typography

David Andolfatto had a provocative and open-ended tweet a few days back: The difference between money and debt. pic.twitter.com/CSQuLzUJPU — David Andolfatto (@dandolfa) April 26, 2019 We see two coloured pieces of paper, both with an old dead President on it. They each have a face value of $500. Both are issued by a branch of the government, the $500 McKinley banknote (at right) by the Federal Reserve while the $500 Treasury bond (at left) by the Treasury. Both are bearer instrument: anyone can use them. So why do we bestow one of them the special term "money" while the other is "credit"? I mean, they seem to be pretty much the same, right? The word money is an awful word. It means so many different things to different people that any debate invoking the term is destined to go off-track within the first fifty characters. So I'm going to try and write this blog post without using the term money. Why are the two instruments that David has tweeted about fundament...

The (Great) Tower of Babel , 1563, Bruegel the Elder. "Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth" People bandy the term fiat currency around a lot, but what exactly does it mean? None of us wants to live in a Babel where people use fiat to indicate twenty different thing. So let's try to zero in on what most people mean by playing a game called fiat-or-no t. I will describe a monetary system as it evolves away from a pure commodity arrangement and you will tell me when it has slipped into being a fiat system. (The technique I am using in this post cribs from a classic Nick Rowe post ). So let's start the game. 1) An economy in which gold coins circulate as the medium of exchange. Fiat or not? I think we can all agree that there is nothing fiat at all here. (For simplicity's sake let's assume for the duration of this post that taxes can be paid with anything, and that there is no legal tender.)...

LSD tabs like these ones have an incredibly high value-to-weight ratio When bitcoin first appeared, it was supposed to be used to buy stuff online. In his 2008 whitepaper , Satoshi Nakamoto even referred to his creation as an electronic cash system . But the stuff never caught on as a medium-of-exchange: it was too volatile, fees were too high, and scaling problems resulted in sluggish speeds. Despite losing its motivating purpose, bitcoin's price kept rising. The bitcoin cognoscenti began to cast around for a new raison d'etre. Invoking whatever they must have remembered from their old economics classes, they rechristened bitcoin as the world's best store of value . Store of value is one of the three classic functions of money that we all learn about in Money and Banking 101: money serves a role as a medium of exchange, unit of account, and store of value. So presumably if bitcoin wasn't going to be a medium of exchange (and certainly not a unit of account thanks to it...

Nick Rowe points out that if a central bank wants to control the economy's price level, it needn't issue any actual money—it can just edit the dictionary every morning, announcing the meaning of the word "dollar" or "yen" or "pound" to the public. To a modern ear trained on a steady diet of central bank verbiage about interest rates, QE, and open market operations, the idea of conducting monetary policy by simply editing the meaning of a word seems odd. But I've got news for you: starting from Caesar's time and extending into the 1700s, the sort of dictionary money that Nick describes has been the dominant form of money in the West. How has this system worked? People have historically advertised prices for wares using a word, or unit of account, the LSD unit being the most prevalent. In the case of Britain this meant pound/shilling/pence while in France it was livre/sous/denier, both of which come from the Latin librae/solidi/denarii. Th...

Narayana Kocherlakota, formerly the head of the Federal Reserve Bank of Minneapolis and now a prolific economics blogger, penned a recent article on the abolition of cash. Kocherlakota makes the point that if you don't like government meddling in the proper functioning of free markets, then you shouldn't be a big fan of central bank-issued banknotes. For markets to clear, it may be occasionally necessary for nominal interest rates to fall well below zero. Cash sets a lower limit to interest rates, thus preventing this rebalancing from happening. I pretty much agree with Kocherlakota's framing of the point. In fact, it's an angle I've taken before, both here and in A Libertarian Case for Abolishing Cash . Yes, my libertarian and other free-marketer readers, you didn't misread that. There is a decent case for removing banknotes that is entirely consistent with libertarian principles. If you think usury laws are distortionary because they impose a ceiling on int...

Canadians will all know what Canadian Tire Money is, but American and overseas readers might not. Canadian Tire, one of Canada's largest retailers, defies easy categorization, selling everything from tents to lawn furniture to hockey sticks to car tires. Since 1958, it has been issuing something called Canadian Tire Money (see picture above). These paper notes are printed in denominations of up to $2 and are redeemable at face value in kind at any Canadian Tire store. Because there's a store in almost every sizable Canadian town, and the average Canadian make a couple visits each year, Canadian Tire money has become ubiquitous—everyone has some stashed in their cupboard somewhere. Many Canadians are quite fond of the stuff—there's even a collectors club devoted to it. I confess I'm not a big fan: Canadian Tire money is form of monetary pollution, say like bitcoin dust or the one-cent coin. I just throw it away. It's the monetary oddities that teach us the most abo...

Imagine waking up in the morning and checking the hockey scores, news, the weather, and how much the central bank has adjusted the gold content of the dollar overnight. This is what a 21st century gold standard would look like. Central banks that have operated old fashioned gold standards don't modify the gold price. Rather, they maintain a gold window through which they redeem a constant amount of central bank notes and deposits with gold, say $1200 per ounce of gold, or equivalently $1 with 0.36 grains. And that price stays fixed forever. Because gold is a volatile commodity, linking a nation's unit of account to it can be hazardous. When a mine unexpectedly shuts down in some remote part of the world, the necessary price adjustments to accommodate the sudden shortage must be born by all those economies that use a gold-based unit of account in the form of deflation. Alternatively, if a new technology for mining gold is discovered, the reduction in the real price of gold is f...

Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank Negative interests rates are the shiny new thing that everyone wants to talk about. I hate to ruin a good plot line, but they're actually kind of boring; just conventional monetary policy except in negative rate space. Same old tool, different sign. What about the tiering mechanisms that have been introduced by the Bank of Japan, Swiss National Bank, and Danmarks Nationalbank? Aren't they new? The SNB, for instance, provides an exemption threshold  whereby any amount of deposits that a bank holds above a certain amount is charged -0.75% but everything within the exemption incurs no penalty. As for the Bank of Japan, it has three tiers : reserves up to a certain level (the 'basic balance') are allowed to earn 0.1%, the next tier earns 0%, and all remaining reserves above that are docked -0.1%. But as Nick Rowe writes , negative rate tiers—which can be thought of as maximum allowed reserves—are si...

The Federal Reserve may be in a bit of a bind. With the Bank of Japan reducing rates to -0.1%, many commentators are calling on the Fed to reverse its policy of rate normalization and follow Japan into negative territory.  The problem is this. Thanks to the rules laid out in the Federal Reserve Act, the Fed may lack the technical means to dive into negative rate waters. Let me restate this in different terms. If the Federal Reserve were to reduce the rate at which it pays interest on reserves (IOR) to -0.25% or so, the overnight rate may not follow very far. Monetary policy is useless, or at least less effective than it would otherwise be. Not only would monetary policy lose some of its potency when IOR falls below 0%, but an unapproved fiscal transfer from the Fed to another set of government institutions could occur. This is because negative IOR has the potential to provide a large subsidy to a narrow range of governments sponsored-entities that are allowed to keep 0%-yielding depos...