Andolfatto vs. Sproul: who was right?

Who else misses the good old days when JP Koning wrote mostly about actual, not fake money, and Nick Rowe experimented with red money?

The debate between David Andolfatto and Mike Sproul below is nearly 12 years old but, considering how little has changed since then, could just as well have taken place yesterday.

David starts his blog post Fiat money in theory and in Somalia (2011) with a correct observation: money serves a record-keeping purpose. David explains: “The money in my possession constitutes information about my past contributions to society”. In other words, money is used to track agents’ trading histories.

What David fails to highlight is that in every single trade, there is a buyer and a seller. By giving up goods, the seller makes a contribution to society while the buyer receives something from society. We might call it a negative contribution, although accepting goods from others is of course nothing to be ashamed of. Anyway, such a negative contribution must also be recorded. When the buyer hands out currency to the seller, the reduction in his holdings of currency is that record. Today, most of the recording takes place in banks’ accounting systems, where a debit entry on the buyer’s account is a record of this negative contribution.

Money, Credit and CBDC

Foreword: When we began writing this post, Saule Omorova’s appointment for the Office of the Comptroller of the Currency and her academic credentials were being dragged through the media. The process famously did not go her way but we are nonetheless grateful for it as it gave us the opportunity to become acquainted with some of her work. So although we're hopelessly late for the party, perhaps this post will contribute to keeping the discussion alive in a more fruitful, i.e. non media-frenetic, manner.

In our previous writing, we have focussed solely on constructing and explaining the Accounting View (AV) of ‘money’. Our claim being, that what is usually considered a ‘special good’, i.e. fiat money, must actually be seen as multilateral credit. So, according to the AV, all things financial, including notes and coins, are actually just types of credit. Money, as it is generally defined, does not exist.

All modern schools of thought of course accept that credit exists and that it forms a large part, if not virtually the whole of the banking system[1]. The difference to the AV is that, because we claim that money does not exist, credit can not be seen in relation to it. Within the AV, credit is not the act of borrowing money! Credit is the act of receiving goods without giving goods of equal value -- a fact which is recorded by an accountant (banker). As we shall argue below, this definition is not only useful for thinking about credit in the abstract or for describing babysitting cooperatives but can be used for studying our actual financial system, including arrangements among firms, banks, governments and even countries as a whole.

Tokens for nothing, free banking version

In this previous post, we showed that when a government issues tokens this necessarily involves public debt. If tokens are a “creature of the state”, then they also function as records of public debt. The act of issuing tokens is always tied to a transaction, following the logic of “something (goods) for nothing (tokens)”[1]. Taxes are paid in meals, whereas tokens are mere receipts for meals provided.

Many monetary theories assume that money, particularly “fiat money”, originates with the state and our interpretation shows that this premise is compatible with the Accounting View. The imposition of a tax obligation can explain why citizens would want to give away goods for government issued, “worthless” tokens in the first place. There is also historical precedent for such theories, as many currencies, for example colonial currencies and, indeed, most coinage throughout history, were issued by the state. There are other theories that posit that money must be understood as a creature of (private) banking activity. Historical examples for such theories might be found in the free banking era in the US. Of course, these differing stories must not be mutually exclusive and can be seen as arguments about the relative importance of parallel processes. Indeed, historical facts demand that both possibilities be accounted for theoretically. The question is, do we need different theories for different processes or can we cover both with one theory? 

Nothing explained

A while ago we managed to sow some confusion by using the word “nothing”, instead of “money”, when describing what a seller receives for the goods sold. In order to avoid unnecessary frustration, we find it is best to elaborate.

If money is a recordkeeping device — as Joseph Ostroy and Narayana Kocherlakota among others have suggested, and as we believe it is — then what is it supposed to record? We suggest that it is used to record goods transactions. But the transaction which is being recorded with the help of money cannot itself involve money. Money can not be used to record a transaction where goods are exchanged for money. That would be circular. That is why we say that money is used to record a transaction where a seller gives goods to the buyer, while the buyer (typically) gives nothing to the seller. If the buyer gives cash to the seller, then that cash is not part of the transaction we refer to. It plays a part in recording the transaction.

Furthermore, recordkeeping with the help of tokens, ie. (physical) currency, is a special case. When bank ledgers are involved, there is no object that is passed from the buyer(‘s account) to the seller(‘s account). The reason we might see an object passing from account to account is probably because we are used to thinking of money in physical terms[1]. If there was an actual object being transferred from an account to another, then an overdraft would not be possible. So, all we can say in general is that the seller has his account credited. The balance of the account can just as easily be negative (debit) or zero after this credit entry. Likewise, the buyer’s account might have had a zero or negative balance before the debit entry was made on it, so no money can be seen to reside there either.

Tokens for nothing and a breakfast for free

Back in 2018, David Andolfatto made a great presentation of what he calls “the recordkeeping aspect of monetary exchange”. Not only do we agree with much of what he says, but we think this is the fundamentally right way to think about monetary exchange. That is why we find it unfortunate that Andolfatto, like Narayana Kocherlakota before him[1], seems to stop short in his description of phenomena from this angle. Similar to what we have done in our paper, we will try again to take this idea to its logical conclusion in the following post. Let us proceed.

Around 25 minutes into the presentation, Andolfatto tells us a story about Adam, Betty and Charlie who specialise in producing dinner, breakfast and lunch, respectively. It’s a really enlightening story, and you should probably watch it to fully understand our sequel. Andolfatto introduces a recordkeeping device, a token[2], and shows how it functions as evidence of its holder’s trading history. So far, so good, although the suggestion that a seller cares about the buyer’s trading history, and demands evidence thereof, does not carry all the way to a wider monetary exchange. There, an individual seller only cares about evidence of his own trading history, which he might need to prove to a dedicated monitor (bank). The traders do not monitor each other, as they do in an informal setting (e.g, the arrangement based partly on trust, which Andolfatto brilliantly explains in the beginning of his story).

What Andolfatto leaves unexplained, is how Adam came into the possession of the token in the first place. This is typical of economists, with money in their models often appearing as a “manna from heaven”. When asked on Twitter about the origin of the token, Andolfatto says Adam might have received it as a “token of appreciation” after having worked for the government. Or he might have found it on the seashore. It doesn’t matter, according to Andolfatto.

Coming from what we could call a “strict accounting school”, we are not happy with his answer. Monetary tokens issued by a government — whether we are talking about coins, treasury notes or stocks of tallies — serve an explicit recordkeeping purpose all the way from the initial transaction, and not just once they start to circulate among the public (from Adam to Betty in the example). This means the transaction where the token is issued results in a credit and a debit entry, as with all transactions. Anything else would be illogical. Let us try to explain, in terms of Andolfatto’s example.

A ticket or a counter?

When Bishop Berkeley in The Querist (1737) asked “And whether the true Idea of Money, as such, be not altogether that of a Ticket or Counter?”, he was clearly on to something important. But if one tries to suggest that money is a ticket, one will run into fierce resistance.

On Twitter, George Selgin is sceptical of the idea that money is some kind of ticket or "credit medium". As he writes: "If Wimpy offers a gold coin for a hamburger today, he's not proposing a credit transaction as he would by offering to make compensation on Tuesday!". Selgin also points out that the restaurant is in no way obliged to give Wimpy anything for the coin.

Point taken, Mr Selgin. You are fighting the last war, though. We are not proponents of Chartalism, nor do we do monetary theory by way of metaphors. That is why we refuse to call money a (government) IOU, liability or a ticket. As you said, metaphors are misleading in that they work only until they don’t.

But what if money is a counter? That is what we mean by a recordkeeping device. Our claim is that money is used to record the cumulative trading histories of agents. They participate in the system of their own free will, and decide whom to sell to and who to buy from. The guiding rule of the system is an intertemporal budget balance (sales = purchases), which we could call "the law of reciprocity"[1]. The participants might not understand how the system works, but the system is usually robust enough to survive despite this ignorance.

Welcome

This blog is dedicated to discussing the idea of money as a recordkeeping device which we call The Accounting View (AV).

For background information, we suggest a preliminary reading of the following paper:

The Money View vs. the Accounting View: The Capitol Hill Babysitting Coop Revisited

Comments to posts are welcome!

Oliver & Antti