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.