Sunday, November 2, 2014

"At the start" versus "Since the first moment"

Endogenous Money: The Evolutionary versus Revolutionary Views
Louis-Philippe Rochon and Sergio Rossi

Page 8 of 17:
Every bank note corresponds as a matter of fact to a double-entry in the books of the issuing bank, a record of which the note is the material representation circulating outside the bank issuing it. As Innes (1913, p. 407) cogently pointed out in this respect, “[a] bank note differs in no essential way from an entry in the deposit register of a bank. Just like such an entry, it is an acknowledgment of the banker’s indebtedness [...]. The only difference between a deposit entry and a bank note is that the one is written in a book and the other is on a loose leaf; the one is an acknowledgment standing in the name of the depositor, the other in the name of ‘the bearer.’” This is a point that Courbis et al. (1991, p. 329) very clearly illustrate referring to British monetary history, particularly at the time of the first goldsmiths in London, around 1660–65. The authors (pp. 324–5) are also clear in noting that book-entry payments existed long before bank notes or their ancestors, say a goldsmith’s certificates, appeared on earth. Indeed, “[t]here is little doubt that money had existed for at least 3000 years before coins were struck, taking a wide variety of forms”(Wray, 2004, p. 235).

Money had existed for at least three thousand years before coins were struck.

I can buy that. Money arose and became part of the culture first, and governments adopted it later. Sure, why not? That's a politician's idea of leadership, right?

Rochon and Rossi, page 3 of 17:
The purpose of this paper is therefore to shed further light on the endogenous nature of money. Contrary to the established post-Keynesian perspective – what we call here the evolutionary view – we argue that money has always been endogenous, irrespective of the historical period. This discussion may be important for both theoretical and policy reasons, a point that we address later in the paper. Overall, however, showing that money has always been endogenous is important in particular for post-Keynesians, since it will help to put the role of central banks and other monetary institutions, as well as financial innovations, in their proper theoretical perspective.

Money has always been endogenous.

Money may have arisen spontaneously, say, some 3000 years before coin. That means money was endogenous at the start. It does not necessarily mean money has been endogenous since the start.

It does not mean that money has always been endogenous.

It's a weak argument to claim that money is always endogenous because it started out endogenous. When governments adopted it, money took on a dual role, endogenous and exogenous. Ever since, private sectors have been struggling with governments over money.

When a government assigns a name to a unit of value -- "the dollar", for example -- they create a standard for the private sector to nibble away at, just as a thousand years ago we were nibbling gold off the edges of coins before passing them along.

When the nibbled coins got generally unacceptable there would be a "recoinage". New, full-bodied coins were issued, and the nibbling would start again. But the government lost gold in the process. Eventually, you would expect to see the government fail.

Today we've taken the gold out of money. Nibbling has taken a different form. But the essential, underlying process is the same: Everybody tries to do better for himself, at the expense of others; and governments ultimately fail. In that process, for better or worse, endogeneity wins out over exogeneity.

That's why, when you look at the world today, you see endogenous money and a failing dollar.

Endogeneity of Money
by Hyman P. Minsky, 1990.

Page 3 of 9:
There are periods in history and economic conditions where the money supply was mainly endogenous and other periods and conditions where the money supply was largely exogenous... Typically the money supply is in part endogenous and in part exogenous.

1 comment:

Auburn Parks said...

Great piece Art-

What is your basis for saying that the dollar is failing? Is it based on the decreasing GDP growth per dollar of debt?

If so, the problem I see with that is the conflation of a stock (debt = money) with a flow (spending = GDP).

If all the stock is in the hands of the non-spending wealthy, than we would naturally assume that the flow per unit of stock would decline. But this doesnt indicate failure of the currency, it indicates that income inequality is increasing (a social failure).

What do you think?