Tuesday, July 19, 2011

Coin of the Realm

Anybody else having trouble with the post-scheduler in the new blogger interface?

An interesting development: Supposedly, the U.S. Treasury could have a couple trillion-dollar coins minted on the cheap, and deposit them at the Federal Reserve. That would increase the balance in the Treasury's checking account. It would let the Federal government get around the debt ceiling limit -- because the coins are not debt.

Most interesting.

But anyway, context: The idea is spreading on MMT blogs, so I take it for an MMT idea. And therefore I must bring up another MMT idea, one that disturbs me immensely: the notion that "all money is debt".

Here's the rub: The beowulf coin is a way to get around the debt limit because the coin is not debt. But the people most in love with the coin are the same people who go around saying "all money is debt". So I have to ask, is the coin money? Because if it is money, then it must be debt. That, or the "all money is debt" thing is wrong.

The "all money is debt" idea is some kind of philosophical definition, I think. It is not an economic definition. To me, to most people, a debt is something that must be repaid. Money that you borrow, for example, must be repaid, which is why the lender keeps track of it. And the amount the lender tracks is a debt.

But if you or I or the Federal government happens to have a dollar, that dollar is not debt. Money that you earn is an example of money you do not have to pay back. You are not obligated to "pay it back" to anybody simply because you have it.

I object to the "all money is debt" notion for one reason: it blurs an important distinction. It says that money you have to pay back, and money you don't have to pay back, are exactly the same.

Arthurian economics is based on the distinction between money and debt, and on the increasing cost of money in the economy as a whole, as usage shifts away from money you don't have to pay back, to money you do have to pay back.

But it is much easier to understand what I have to say if you allow me to use the word "money" to mean I don't have to pay it back, and the word "debt" to mean I do have to pay it back. Then it becomes quite simple.


Jazzbumpa said...

Every month, I receive a pension check. They owed it to me - until I received it. This gave me some money. Suppose I pull a dollar out of my pocket, and stare at it in all it's faded, wrinkled, Washingtonian loveliness.

To whom do I owe it?

Who owes it to me? - No - wait . . . I already have it!

Silly me -- I just don't get it.

Or, perhaps, MMT is a religion, not an economic theory. I DO get that.


The Arthurian said...


Clonal said...


the MMT people most definitely do not say that all money is debt. What they say is that in today's world, the government is the sole issuer of currency, and it spends it into existence, and destroys it by taxation. This is what used to be known as high powered money.

What is also acknowledged is that non government banks can also create money, and that money is debt.

Government debt comes about because of the congressional law that mandates that all deficit financing be done through the issuance of government debt. This is a leftover from the gold standard days. Also it should be noted that since the government creates money by spending and destroys money by taxation, the only way to increase the money supply is by means of deficit spending. And since by law the government can only run a deficit by borrowing money, the government "debt" grows.

As a MMT corollary, smaller deficits mean a slower increase in money supply, and a surplus means a decrease in high powered money. Thus should government debt be considered debt at all?

This is the self imposed straitjacket that the US currently finds itself in.

However, this is where the platinum coin loophole comes in. Coin sales are considered to be miscellaneous income for the Treasury, and thus equivalent to income. However, historically, the coinage that can be issued by the Treasury is tightly constrained as to the denomination, size etc. THe only exception it appears is in the case of platinum coins, where the Secretary of the Treasury has full authority to determine the size and denomination of the coin.

It is only incidental that the coin gambit came from the MMT people. It is the pure and simple exploitation of a loophole in the law, but serves to highlight the ideas of how government creates money as espoused by the MMT economists.

See Scott Fullwiler's article - QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

The Arthurian said...

Thanks, Clonal.

"...the only way to increase the money supply is by means of deficit spending."
"...smaller deficits mean a slower increase in money supply, and a surplus means a decrease..."

All of my "debt relative" graphs show this. Also, my DPD graph shows an adjustment in the FDR years which I can only attribute to the increase in Federal debt.

However, for me, to move from "I can only attribute X" to your "the only way to increase the money supply is X" is a move I am not yet prepared to make.

For the record, my focus on 'all money is debt' is a reaction to Rodger Malcolm Mitchell here.

Clonal said...


You might also find the Mecpoc site useful to understand MMT. In particular, What monetary economics is about from the Monetary Economics Primer

Clonal said...

Also, since you talk of the FDR years, for the record, US went off the gold standard domestically in 1935, off the silver standard in 1964, when coinage stopped being silver, and completely off the gold standard in 1971.

Calgacus said...

Jazzbumpa: You have a dollar in your pocket. The dollar in your pocket is an accepted indication that you are the creditor of Uncle Sam. That he has a one dollar debt towards you. A dollar is a standardized credit/debt relationship.

As a "reasonably decent husband", you probably have a gold wedding ring on your hand. Is this gold wedding ring your marriage? Just the same way as a wedding ring is evidence of a marriage, but not the marriage itself, the dollar bill is evidence of a credit/debt relationship, not the relationship itself.

That's what Austrian/Commodity theory/Metallist/Neoclassical economics is all about: mistaking a wedding ring, a thing, for a marriage, a relationship.

Calgacus said...

Clonal:the MMT people most definitely do not say that all money is debt. They most definitely do. (Some not often enough). Currency is a form of government debt. There is nothing to MMT but consistently thinking about money as what it is and always was: debt (= credit, promises, bonds, favors, brownie points). The one who is clearest on "money is debt" is Wray, in many publications. He has said that Mitchell-Innes' two papers are the best ever written on money. Those two old papers are an excellent place to grasp the idea from.

Thanks for the link to the Mecpoc site.

Clonal said...


Thanks for the clarification. Yes, obviously when looked at from a double entry accounting perspective. Which is of course the right way to look at it.

In fact it was mentioned the other day, I forget where, that the notion of capital only came about as a result of the invention of double entry accounting (I will have to research that!)

Clonal said...

OK here is the reference on the linking the origin of the concept of capital to double entry accounting

The original reference was a paper by Werner Sombart (1863-1941) He wrote in "Medieval and Modern Commercial Enterprise" that "The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping. Capital can be defined as that amount of wealth which is used in making profits and which enters into the accounts."

Lane, Frederic C; Riemersma, Jelle, eds (1953). Enterprise and Secular Change: Readings in Economic History. R. D. Irwin. p. 38.

The Arthurian said...

Oh! I wrote: "The 'all money is debt' idea is some kind of philosophical definition, I think. It is not an economic definition." Reminds me of something I read yesterday:

As Bertrand Russell put it at the end of his long life devoted to philosophy, “Roughly speaking, what we know is science and what we don’t know is philosophy.” -- Rudolf Kalman, quoted by Lars P. Syll.