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?
After having offered a simple story to back a state view of currency issuance in our previous post, we will offer an equally short account of how a trading circle might start without the help of government in the following. “Joe the governor”, shall now be merely “Joe the banker”. As with government services, his services will presumably not be free. But, unlike in the previous story, he cannot, due to lack of power, begin to consume on behalf of the public. So, the story cannot begin with him. Rather, it is Adam who must seek permission to consume first because he wishes to receive breakfast from Betty but cannot offer repayment until the evening, when he plans to make dinner that he believes Charlie will like. Instead of relying on personal IOUs to coordinate[2], the group, with an eye to future gains from multilateral trade, decides to take advantage of Joe's bookkeeping skills by granting him a licence to work as a public accountant (banker). They agree on a set of rules that allows for multilateral credit with centralized monitoring[3]. Having done so, Adam now asks Joe whether he believes him to be creditworthy. Joe makes some phone calls and decides Adam is a trustworthy person and so agrees to credit Betty with 1, in form of a banknote, for the breakfast given and debit Joe with 1, in form of a ledger entry, for the breakfast received under the condition that he proves by nightfall that he has repaid his debt. Adam, Betty and Charlie’s records are thus: Adam: -1 (debt) Betty: +1 (banknote) Charlie: 0 This is reflected on the bank’s ledger as follows: Adam’s account = -1 banknotes in circulation = 1 At lunch, Betty eats Charlie’s meal which she acknowledges by passing on the banknote, so that: Adam: -1 (debt) Betty: 0 Charlie: +1 (banknote) The bank’s records do not reflect this transaction because it is not privy to it (hence the account: “banknotes in circulation”). In the evening, Charlie consumes Adam’s dinner which is acknowledged by passing on the banknote as a receipt. Adam: -1(debt) +1(banknote) = 0 Betty: 0 Charlie: 0 To prove that he has repaid his debt and to net his own account, he quickly brings the banknote by Joe, who then updates the accounts as follows: Adam’s account = 0 banknotes in circulation = 0 Adam expresses his gratitude towards Joe for believing in him (i.e. for granting him credit in the name of the community; note that Joe himself never was a creditor, merely a monitor) with an extra portion of dinner he has put aside.[4] Those readers who are familiar with our paper will likely have noticed the similarity between the above example and the babysitting cooperative. The meals which Adam, Betty and Charlie produce for each other are analogous to the babysits in the cooperative and the common, or public good, in both cases, is the service of the community banker. The main difference between these two settings and the previous example, in which we described government spending, is that, unlike Joe the governor, Joe the banker does not act as a first mover by initially assuming a deficit position / consuming the first meal. Instead, it is Adam who seeks initial trust from the community so that he may consume the first meal before providing one of his own. And it is based on this act that the trading circle between Adam, Betty and Charlie must rely, as neither Betty nor Charlie have been granted credit by Joe. In terms of language, we have made a distinction between government tokens, as in the previous post, and bank tokens here. This choice of language has two reasons. For one, government tokens are issued by a government and thus reflect public debt (public tokens might be a more appropriate term?) whereas bank tokens, in this particular setup, are backed by private debts only. But since these are merely model setups and real bank balance sheets may comprise a diverse set of assets, the more general reason is the division of labour between institutions that have come about historically. Put differently, for the purposes of the recordkeeping apparatus (and that alone), the distinction between government and corporate banking activity is less clear than current institutional arrangements suggest. Granting credit always involves a fiduciary responsibility towards a broad set of stakeholders. All multilateral credit is, ultimately, social credit. So while, nowadays, neither bankers nor central bankers may decide whether the public should take on debt, neither the government nor the central bank may decide whether Adam is a trustworthy member of his community. This division of responsibilities has emerged historically -- for good reason, we assume -- but, to us, it is by no means as fundamental as other monetary theories suggest. This is also why we have chosen the “One Bank” view to make our argument throughout in which all three institutions are collapsed into one “bank”. Regarding theory, one can say that neither state- nor bank-centered approaches are wrong in their intuition, but that we believe we have managed to capture the phenomena of both under one, unified framework. If one wanted to rank both approaches, one would have to decide on a common unit of measurement. A bank-centered approach regards government / the public as merely another class of debtor and thus may, arguably, be seen as the more general of the two, as it relies on an absolute minimum of necessary criteria to explain how a monetary system may emerge (see footnote 3). Depending on one’s definition of government / the public, a state-centered view arguably captures concrete historical precedents more precisely. Of course, there is also a more prominent story that posits that money (proper) originated neither with the state nor from bank credit, but rather as a result of market forces in which a special type of commodity evolved as the “medium of exchange”. This story acts both as a stand-alone description of how commodity money may have evolved as well as an intermediate step in the genesis of “fiat money” as argued in the bullionist tradition. While it is not congruent with what we have coined the “Money View”, which is much more pervasive, in that it pops up in various traditions, it is certainly closely related and perhaps its clearest exposition. As such, it is at odds with our ‘Accounting View’ and cannot be incorporated. While we do not refute the possibility that money may have evolved as an efficient alternative to spot barter, we believe it cannot be considered a commodity. It is a way of recording transactions.Antti & Oliver
[1] We take our cue from Frederick Soddy who wrote: “Money … is the nothing you get for something before you can get anything.” From “The Role of Money”, pp. 24-25. See also our previous explainer on this topic. [2] A personal IOU (Adam owes Betty) would run into the problem that Charlie might not accept it, rendering it worthless to Betty who doesn’t like Adam’s dinner. This is more intuitive if one assumes a larger community. To overcome this problem, participants must collectively agree to accept what then automatically becomes non-personal, multilateral credit. [3] The minimum requirements are the imposition of a central accountant / monitor (the banker) by the community, who determines and enforces credit limits and repayment schedules. [4] Joe’s payment can be understood as a cut which all of the users of the trading circle pay for the service rendered. As payment is always in kind, this is the easiest way to handle such a payment. Decentralised payment is beyond the scope of this example but can be understood analogously to decentralised tax payment which we covered in our previous post.
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