Typography

I am a big fan of coinsplainers like Andreas Antonopoulos. Listening to Andreas explain how bitcoin works is a great learning opportunity for folks like myself who know far less about the topic. I am less impressed when bitcoiners engage in fiatsplainin', since they generally have an iffy understanding of the actual financial system and central banking in particular. So for the benefit of not only bitcoiners, but anyone interested in the topic of money, I'm going to fiatsplain' a bit. (I really like this term, I got it from an Elaine Ou  blog post ) Paul Krugman recently had this to say about the difference between bitcoin and fiat money: "So are Bitcoins a superior alternative to $100 bills, allowing you to make secret transactions without lugging around suitcases full of cash? Not really, because they lack one crucial feature: a tether to reality. Although the modern dollar is a “fiat” currency, not backed by any other asset, like gold, its value is ultimately back...

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...

Michigan Central Railroad 3.5% Bearer Bond with attached coupons, 1902 David Glasner is frustrated that there is no satisfactory theory of the value of fiat money, noting that "it's just a mess, a bloody mess, and I do not like it, not one little bit." According to David, the core problem is the backward induction argument . Say that a valued fiat object provides no non-monetary services so that its price depends entirely on the expectation of future resale. This is a highly precarious situation since it it inevitable that someday no one will want to exchange for that fiat object. But if it is certain that no one will accept it at some point in the future, then why accept it in the first place? The explanation for the object's value rests on an "unlimited supply of suckers", as David puts it, hardly good fodder for a long term theory of asset prices. David proposes tax acceptability as his way out of the problem, although he doesn't seem to be entirely ...

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 ...

One of the world's newest monies has been born. A cryptocurrency (these seem to be coming out every week), our new unit goes by the currency code XRP . What makes this even more interesting is that XRP is a chartal currency. Unlike commodity monies, chartal currencies are intrinsically worthless. The only reason they have a positive market value is because people must get their hands on them in order to pay taxes. Just so with XRP—people must pay their "Ripple taxes" with XRP. But more on that later. XRP and Ripple go hand-in-hand. I wrote about Ripple last week . Ripple is an online environment which allows individuals to exchange IOUs denominated in bitcoin, US$, ₤, or any other unit of account. I'm not going to go into more depth on Ripple but if you're interested, click through last week's post or read this very well-written article from Bitcoin Magazine . What is interesting is that in order to make use of the Ripple environment, Ripple developers have re...

A few weeks ago, David Beckworth egged me on to write about Somalian currency. I can't resist—it's a fascinating subject. The material I'm drawing on comes from Luther & White (2011), Luther (2012), Symes (2005), and Mubarak (2003) Orphaned banknotes When Somalia collapsed into civil war in January 1991, the doors of the Central Bank of Somalia were blown apart, its safes were blasted, and all cash and valuables were looted.* But something odd happened—Somali shilling banknotes continued to circulate among Somalians. To this day orphaned paper shillings are used in small transactions, despite the absence of any sort of central monetary authority. The strange case of circulating Somali shillings forces us to ask some fundamental questions about money. If the Federal Reserve and all other branches of the US government were to be suddenly swallowed up into the sea, would Fed banknotes, like Somali shillings, continue to be used? What forces conspire to keep coloured ...

I've been playing the game of Settlers of Catan for ages. Over time I've gotten less cutthroat and more philosophical about the game. What I've come to realize is that Settlers is a great tool for both thinking about monetary phenomena and building different sorts of monetary economies. In this post I'll assume a basic knowledge of Settlers—if you haven't played the game by now, you're living on the moon. 1. Catan isn't a barter economy The first thing worth noting is that Catan is not a barter economy—it's a monetary economy. This might seem like an odd thing to say . After all, the trades that we see in a typical Settlers game are all commodity-for-commodity trades. To see why it's a monetary economy, imagine the case of autarky , or a Catan in which trade is prohibited. Here, players can only build structures using cards earned from tiles on which they have a settlement. The value of a lumber card in an autarkical economy is derived solely from ...

Rai at the Bank of Canada - part of Canada's foreign reserves As I pointed out in my previous post , all sorts of economists have incorporated the example of Yap stones into their monetary discourse. One of the more peculiar uses of these stones can be found in neo-chartalist L. Randall Wray's Understanding Modern Money (1998). In Chapter 4 of his book, Wray claims that an economy becomes monetized by the introduction of state-issued tokens (what I call coupon instruments ). To provide empirical support for his claim, Wray repeats the story about German administrators marking all Yap stones with paint (see previous post , #9). The Germans did so in order to motivate the Yapese to build roads. After all, in order to get the state to remove these markings from their valuable stones, the Yapese were required to provide their labour. The implications of Wray's chapter are that instead of requiring labour, the German government could just as easily have required payment in gove...

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...

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...

In the name of monetary experimentation I bought some bitcoins a while back and have been watching them fluctuate in value. Bitcoin is a digital form of exchange created back in 2009 that has since grown to considerable proportions. One bitcoin is worth around $11 these days, up from a fraction of a penny just two years ago. With around 10.2 million coins outstanding, the entire value of bitcoin stands at around $120m. That's small fry compared to $1 trillion paper US dollars in circulation, or the $5 trillion or so worth of gold, yet it's big enough to deserve attention. Bitcoin creates problems for two theories that attempt to explain why a new fiat money might gain traction and continue to have value - the Regression Theorem and chartal theory of money. In order to delve into these two theories, here's some data on the debut of bitcoin as a currency that should help out. Back in March 2010, someone tried to offer bitcoin for pizza in but never managed to get a bid . Late...