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.
