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.

This is how accounting, ie. recordkeeping, works. No money, or medium of exchange, is transferred between the accounts. There are only entries made on each account separately, to record something. That is a fact. What we are trying to do is explain why credit and debit entries are made on the seller’s and buyer’s accounts, without adding any metaphysical level of “money” or “funds” that are being moved between the accounts. 

Like Kocherlakota, we think that the best way to make sense of this recordkeeping is through a thought experiment involving “gifts”. (Thinking in terms of gifts also clarifies the point that the recipient delivers nothing to the giver in the transaction.)

What we could call a multilateral gifting economy[2] works like this: Adam gives a gift of apples to Betty, Betty gives a gift of bananas to Carolyn, and Carolyn gives a gift of carrots to Adam. There are no bilateral debts, but everyone knows that a favor from one should always be returned to someone (that is, they aim at a balanced budget over time). This works in a close-knit community where people can roughly keep track of each others’ balances (implicit recordkeeping), so that they can spot any freeloaders. A larger household is an archetypal example.

When the size of the community increases, trust between its members and the ability to monitor each others’ actions decreases. Explicit recordkeeping, with enforcement of debts, answers this problem. It is not hard to come up with a detailed “origins story” of monetary tokens and/or bank ledgers as recordkeeping of such gifts. And, as we argue, one doesn’t need the concept of a medium of exchange to do so. Money is not traded in this story, and it is certainly not best understood as a thing. Handing over currency to the seller does not constitute a payment, because the seller gives a gift to the buyer — conversely, it would not be a gift if the giver was paid. This gift is just recorded with the help of tokens or a bank ledger.

But ours is not really an argument about the origins of money. It is an argument about the function, or raison d’être, of our current monetary system. A monetary system, where that which is usually called money corresponds with a credit balance in a bank ledger[3]. There is no doubt that this is a recordkeeping system. The main question is whether that which is being recorded is goods transactions, and the related debts of and claims[4] on goods, as we suggest, or whether it is money transfers and money debts to and from banks that are being recorded, as is the more common view. The problem we see with the latter view is that it begs the question: “What is money?”

Antti & Oliver

[1] This might have something to do with the fact that as children, we learnt that money is a thing.

[2] Kocherlakota called it “an interlocking network of gifts” in this working paper.

[3] In the case of a central bank note this is a credit balance on the account “Notes in circulation”.

[4] Claim is a misnomer in the sense that there is no one you can demand the goods from. The claim we refer to arises from the individual’s positive (credit) trading balance, which shows that he should receive goods from others in order to balance his intertemporal budget.