Synchronisation and the Gross Money Supply

You decide to make a new monetary system from scratch. You give everyone a chequing account on your computer, with an initial balance of 0 units. If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance. The Net money supply remains at 0 units, but the Gross money supply is now 200 units.

If every individual's payments and receipts of money (which is not the same as income and expenditure, because we buy and sell non-money assets for money too) were perfectly synchronised (so that Andy sells 100 units worth of apples to Carol, who sells 100 units worth of carrots to Betty, who sells 100 units worth of bananas to Andy, all at exactly the same time) then the Gross money supply would always be zero. In a representative agent model (like the simplest version of the New Keynesian model) that perfect synchronisation is exactly what happens (which is why money seems to disappear from the simplest New Keynesian model).

But if agents are heterogenous, perfect synchronisation of payments and receipts of money won't happen automatically. And it is costly for individuals to synchronise their payments and receipts of money. So the Gross money supply will be strictly positive, and will be an increasing function of the extent of non-synchronisation of payments and receipts of money.

One way for individuals to increase the degree to synchronisation is for individuals with positive balances in their chequing accounts to lend to those with negative balances. Their incentive to synchronise depends on the spread between the interest rate paid on positive balances (the "deposit rate") and charged on negative balances (the "bank rate"). The larger the spread, the bigger the incentive for individuals to borrow and lend to each other directly. But if the spread is zero, and if the central bank sets no limits on how large a negative balance an individual can hold, there is no incentive for individual borrowing and lending.

If the central banker who creates the monetary system sets no limits on how large a negative balance an individual can hold (overdraft limits), the system is open to abuse. Transversality conditions won't just enforce themselves. Each individual has an incentive to buy an unlimited amount of consumption goods and then die with an infinitely large negative balance and negative net worth. And if accounts were numbered anonymous accounts, that could not be traced to any specific individual, individuals would have an incentive to open an unlimited number of numbered accounts, with a negative balance in each, unless the central bank restricted numbered accounts to having a non-negative balance. (The numbered accounts would work like paper currency, which is equally anonymous, and cannot be held in negative quantities.)

It is not easy to understand why individual borrowing and lending would exist. If the central bank is unwilling to allow an individual to have a larger negative balance, why would some other individual be willing to lend to him? The central bank has an additional penalty that it can impose on those who default: it can threaten to deny future access to the payments system. Perhaps the individual lender has private information on the borrower's credit-worthiness? And why should the central bank charge a spread between deposit rate and bank rate leaving gains from trade to individual borrowing and lending? Wouldn't the central bank prefer to capture those gains for itself? Perhaps because the central bank has monopoly power, faces a downward-sloping demand curve, and cannot or will not price-discriminate by offering smaller spreads to those who have better ability to borrow or lend?

If the limits on negative balances are non-binding, the gross money supply responds automatically to accommodate fluctuations in the degree of synchronisation of payments and receipts, even if the central bank keeps the net money supply fixed exogenously. But in the real world, where limits on negative balances are sometimes binding, the central bank must adjust the net money supply to accommodate fluctuations in the degree of synchronisation.

Comments

[Majromax]

> But in the real world, where limits on negative balances are sometimes binding, the central bank must adjust the net money supply to accommodate fluctuations in the degree of synchronisation.

When limits on negative balances are binding, the central bank must also adjust the net money supply to accommodate fluctuations in the risk premium.

> It is not easy to understand why individual borrowing and lending would exist.

> Perhaps because the central bank [...] cannot or will not price-discriminate by offering smaller spreads to those who have better ability to borrow or lend?

That one's it.

The central bank does not conduct an assessment of creditworthiness when allowing overdrafts – they're provided at a uniform rate or not at all. In reality, the central bank permits commercial banks to have a negative balance in exchange for tight regulation, such as being summarily wound up if ever near insolvency.

This opens up the secondary market for individuals that can't be "wound up" as easily, whereby they are charged a premium over the central bank's rate to compensate for credit risk.

[Miguel Madeira]

"Gross money supply would always be zero"

In this model (in the first version, without limits to debt) the supply of money is really zero? Or is more infinity?

Put it in another way - imagine that you have 100 persons, each with an initial account of 0, and there is a limit to negative accounts of -200. What is the money supply in this case? 0? Or 20.000?

[JKH]

Nick,

“But in the real world, where limits on negative balances are sometimes binding, the central bank must adjust the net money supply to accommodate fluctuations in the degree of synchronization.”

a) This is the first time you mention net money supply *adjustment* in the post. I assume you mean something like OMO?

b) Does the “the degree of synchronization” correlate with the velocity of money?

i.e.

Perfect synchronization with no gross money =

The limit of synchronization as gross money supply shrinks and the velocity of money goes to infinity ?

[Nick Rowe]

Majro: I think that's right.

Miguel: Gross money supply would be zero, only if all agents perfectly synchronised their payments and receipts, which happens automatically with identical agents, who always spend the same amount of money at exactly the same time, so the same amount of money enters as leaves an agent's pocket.

JKH: I guessed you would say: "just like the BoC and commercial banks!"

a. Yes, by OMO.

b. Yes. Velocity approaches infinity as sychronisation becomes perfect.

[Market Fiscalist]

Quick question: what could be done via OMO that couldn't be done just by varying the interest rate paid/received on positive/negative balances with the CB "lending" money into existence and "borrowing" it out of existence.? They could both equally used to vary the money supply and it seems interest rates would be less bother.

[Too Much Fed]

"If every individual's payments and receipts of money (which is not the same as income and expenditure, because we buy and sell non-money assets for money too)"

At first glance, I am not getting that part.

Can you expand on it?

[Nick Rowe]

MF: When the CB lends, it buys an IOU, which is the same as the CB buying a bond (because a bond is an IOU), which is the same as OMO (though OMO normally refers to government bonds only)

TMF: if I buy your house for $1m, that does not mean your income is $1m.

[Antti Jokinen]

Nick, now we are talking!

You said: "You decide to make a new monetary system from scratch. You give everyone a chequing account on your computer, with an initial balance of 0 units. If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance. The Net money supply remains at 0 units, but the Gross money supply is now 200 units."

I've been working on a similar model for the last 12 months pretty much 24/7 (it took me 24 months to arrive at it, though).

If we are doing this from scratch, why not get rid of the "money problem" in economics by first declaring that there is no money in this system? None of the agents get paid in "units". Look at it this way: Betty gives bananas to Andy and gets nothing in return (no money, nothing). Why would Betty do this? Not knowing Andy too well, Betty nevertheless gives bananas to Andy because (a) both agree on the price of the bananas, and (b) it is recorded in a central ledger that Betty has given up something priced at 100 units, without receiving anything in return, and that Andy has received something priced at 100 units without giving anything in return. Think of a "multilateral gift economy", with explicit records of the gifts given and received.

There is no money in this system. The seller never gets paid. The only way for her to get paid is to buy something. It's "give and take". Nothing is transferred between the accounts (= no money flows). Entries are made on individual accounts when the account holder either gives or takes (= there is a transaction).

Show me the money?

[Antti Jokinen]

I have something to say about more practical matters, too. Let's start with this:

How do the agents price goods? What is the value of a "unit"? In a system like this there is no well-defined numeraire (an abstract "unit" can never perform that role). The price level in a general equilibrium model ends up indeterminate. But that doesn't need to be a problem in practice, if there is a history of pricing goods, and debts, in "units". Then all goods with "sticky prices" form a "numeraire bundle" of sorts.

Do you assume that kind of "price history", or how do you deal with the lack of a numeraire?

[Nick Rowe]

Antti: "How do the agents price goods? What is the value of a "unit"?"

Let me rephrase your question: How does the central bank control the price level (the price of goods in terms of units)? Suppose it wanted to target 2% inflation; how would it do this? What would it need to do to tighten/loosen monetary policy if inflation started to rise above/fall below the 2% target?

It has 4 instruments:
1. The interest rate paid on positive balances
2. The interest rate charged on negative balances (or the spread)
3. OMO's to adjust the net money supply
4. Overdraft limits to adjust the gross money supply

Which one(s) should it use?

Stay tuned (I'm trying to keep my posts shorter and simpler)!

[Roger Sparks]

"If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance. "

It is interesting to notice that in the real world (with QE) Andy can sell his negative balance to the FED and get 100 units (or close to 100) in exchange.

I must admit that the FED might not buy the negative balance from Andy but they certainly would buy the negative balance if the name on the account was "Federal Government".

[Too Much Fed]

"TMF: if I buy your house for $1m, that does not mean your income is $1m."

OK. That I get.

"because we buy and sell non-money assets for money too"

That is more difficult to understand.

[Too Much Fed]

"You decide to make a new monetary system from scratch. You give everyone a chequing account on your computer, with an initial balance of 0 units. If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance."

Is Betty allowed to convert 10 "units" to currency and withdraw it?

[Antti Jokinen]

Nick: Does "rephrasing" mean that you change my question to another one which you'd like to answer? :-)

First you have to establish a price level. Only then we can talk about inflation and price level controls. How do you establish a price level? Remember that the initial gross balances are zero. Why did Betty and Andy agree that the price of the bananas was 100 units? Why not 10 units? Notice that 'units' don't exist. They are an abstract unit of account.

If you want to design a system from scratch, you should avoid carrying unnecessary baggage -- terms like "money" and "money supply" -- from the previous system. Eugene Fama put it this way in his 1980 paper "Banking in the theory of finance" (p. 55):

"Suppose we have a completely unregulated banking system in the sense of section 2, and an advanced society in which it is economic to carry out all transactions through the accounting system of exchange provided by banks. The system finds no need for currency or other physical mediums of exchange, and its numeraire has long been a real good, say steel ingots. The society is so advanced that terms like money, medium of exchange, means of payment, and temporary abode of purchasing power have long ago fallen from its vocabulary, and all written accounts of the ancient ‘monetary age’ were long ago recycled as part of an ecology movement."

"Suppose now that, for whatever reason, the government of this society decides that it would be more aesthetic to replace steel ingots as numeraire with a pure nominal commodity which will be called a ‘unit’ but which has no physical representation. Although monetary theory has long since passed away, value theory has strengthened with time, and the government’s economists realize that the ‘unit’ cannot be established as numeraire by simple decree. It must be a well-defined economic good, that is, the ‘unit’ needs demand and supply functions which can determine its equilibrium value in terms of other goods."

Unlike Fama, I don't think your 'unit' needs to be a well-defined economic good. A numeraire needs to be that, but the 'unit' doesn't need to be a numeraire. Fama is thinking within the framework of general equilibrium, so he needs a numeraire (at all times, right?) in order to determine the price level, but I'm thinking in terms of the real world and there we don't need a numeraire because we have a history of prices. If you want to start from scratch, with no history of pricing goods in 'units', then you need a numeraire -- initially. You can set the price of a certain good at '1 unit'. Once you have this way established a general price level, and you probably have existing debts denominated in 'units', then you a can severe the link between the particular numeraire good and the 'unit'. The prices are "sticky", which ensures that even if the price level is indeterminate (in Arrow-Debreu world), it doesn't tend toward infinity.

This became again more like a short blog post than a comment. Main point: Don't make a "monetarist leap of faith" from zero gross balances to controlling the price level. First you have to explain how the initial price level is determined. We cannot make assumptions about how the price level can be controlled before we have an idea how the price level is determined.

[Antti Jokinen]

Nick said: "If every individual's payments and receipts of money... were perfectly synchronised"

It sounds like you are describing a mirror image in a world without mirrors. There is no need for money if every individual's SALES AND PURCHASES OF GOODS are perfectly synchronised. Not only money seems to disappear, but it never needs to exist.

What you seem to do here is define 'a sale' (~delivery of goods) as a "receipt of money" and 'a purchase' (~receipt of goods) as a "payment of money". Right? This is unnecessary. Why would you need to introduce some imaginary, useless "money" in your model?

[Nick Rowe]

TMF: there is no currency.

Antti: If all trade were perfectly synchronised *pairwise*, we would have a barter system, where Andy swaps his apples for Betty's bananas. But imagine instead a Wicksellian triangle (or a Wicksellian circle), where Andy wants Betty's bananas, and Betty wants Carol's carrots, and carol wants Dan's dates, and Dan wants Eric's eggs.....and Xavier wants Andy's apples. All at the same time. But it is very inconvenient for all 26 agents to meet in one place, and they can only meet pairwise. Remember that money is not just a unit of account; it is a medium of exchange -- everything else gets bought and sold for money -- precisely because barter is so inconvenient. Stop thinking like an accountant (or finance guy)! ;-)

[By the way: in English, "price controls" has come to mean something quite different, like passing laws making it illegal to buy or sell something above or below the legal price.]

On price level determinacy: I find it helpful to follow Patinkin. Consider a system of equations describing agents' (net) demands for each good. If the agents are rational, and do not suffer from money illusion, each equation will be Homogenous of Degree One in $ (or whatever the nominal units are). This means that any solution (equilibrium) to the system of equations will be indeterminate in nominal variables. (Start in one equilibrium, double all the nominal variables, and we get another equilibrium.) The only way to make the price level determinate is to assume that the equation describing the central bank's behaviour is *not* HD1. In a standard "green money" world, one way to make the central bank's behaviour not HD1 is to assume the central bank fixes the initial nominal stock of money M. (Bitcoin might or might not be an example). But in my red/green world here, the net money supply is initially fixed at 0 by the CB, so that won't work, because that equation is still HD1. Fixing the gross money supply (or putting on an upper limit in nominal terms) might work, because that equation is not HD1.

[BTW, I always get HD1 and HD0 muddled, but you know what I mean.]

Stay tuned.

[Antti Jokinen]

Nick, as you probably remember, I am an accountant. I suggest you stop thinking like an economist if you want to understand our accounting system aka "the monetary system" ;-)

I did imagine a "Wicksellian circle", not pairwise trading, when I talked about the perfect synchronisation of sales and purchases. If trading takes place in sequential pairwise meetings, then there should be no "quid pro quo" -constraint (sequential budget constraint) if we want to be efficient. Ostroy & Starr put it like this ("The Transactions Role of Money", 1990):

"Even though each person aims to execute an overall net trade with zero market value, the most efficient way to accomplish this in a sequence of pairwise trades is not to constrain the value of each bilateral commodity transfer to be zero. […] An individual who takes more than he gives at some pairwise meeting is simply executing a part of the overall plan to which the members of the economy have submitted themselves."

Now look at your monetary system, where we start from zero gross balances. What does Betty give Andy? Bananas priced at 100 units. What does Andy give Betty? Nothing. Going into the meeting, Andy has nothing to give; no "units", no "medium of exchange", nothing. Your "central bank" is an accountant. It makes entries in a ledger. Accounting is, by definition, always about recording events/phenomena happening outside of the accounts. What event does the accountant record when Betty gives bananas (priced at 100 units) to Andy? He records that Betty gave goods (priced at 100) to Andy without receiving anything in return. That's what Betty's account balance will reflect after the meeting. The accountant also records that Andy received goods without giving anything in return. That's what Andy's negative account balance tells us.

There are no commitments between Andy and Betty. But both have committed, as members of the society, to aim for a balanced lifetime budget ("an overall net trade with zero market value", in the language of Ostroy & Starr). Betty gave bananas to Andy because she expects to get carrots from Carol; she expects this because she knows that Carol has similarly committed to a balanced lifetime budget and that Carol has no problem with giving carrots to Betty if only this "gift" of hers is duly recorded by the central bank/accountant. It should also be noted that Carol doesn't need to know about Betty's "banana gift" to Andy, because what matters to Carol is her own account balance, not Carol's balance. This is why Andy didn't need a positive balance (what you call "money") in order to get the bananas from Betty; Betty only cared about the credit entry on her account. Once that entry is made, Betty has no claim against Andy. Neither does she have a claim against any particular entity -- just a claim against the "system", or "society". She can choose the "counter-gift" she wants, which in this case is carrots from Carol, and once she receives the carrots she has no more claims against the system (let's assume the carrots were priced at 100 units). Her account balance is zero.

Is there something in my description which you don't agree with?

On price level determinacy... The question remains: Why was the price of the bananas 100 units and not 10 units? If I'm not mistaken, in your paragraph about Patinkin you say that the initial price level in your world is indeterminate. You cannot make it determinate by creating an initial positive stock of money, because M is determined by the trading (incl. pricing) history of your agents. M is a dependent variable. After Betty has given bananas to Andy, M could be 100 units or it could be a million units. In the latter case, Milton Friedman might say: "Of course the bananas cost one million units because the central bank has printed one million units!". And we would all laugh at this otherwise brilliant man.

[Antti Jokinen]

Btw, Nick: As an accountant I appreciate nitpicking, and as a scientist I'm obsessed with learning to pick not only the right words but the perfect ones, but when you talk about "controlling the price level" and I refer to this by "price level controls" -- not by "price controls" --, I don't see how anyone could misunderstand me. Nevertheless: point taken :-)

[Antti Jokinen]

"what matters to Carol is her own account balance, not Carol's balance"

Should of course read "... not Betty's balance". You've made me insecure, Nick! I feel I need to correct these, even if there is no risk of misunderstanding.

[Nick Rowe]

Antti: "But both have committed, as members of the society, to aim for a balanced lifetime budget ("an overall net trade with zero market value", in the language of Ostroy & Starr)."

Who enforces that commitment? Each individual has an incentive to have a large negative balance on death.

Garbage is not a good; it's a bad. Imagine an economy where people use garbage as money "if you give me your apple, I will also take 10 ounces of your garbage in exchange". Then a bank creates red paper money convertible into garbage on supply (the bank promises to exchange 1 red note for 1 ounce of garbage -- "I will redeem your red note for garbage"). Then people keep their red notes in a shoebox at the bank for convenience. Then the bank keeps a record of how many red notes are in each person's shoebox. If someone says the red notes don't really exist, it doesn't matter whether they are right or wrong. It's observationally equivalent.

[Antti Jokinen]

TMF: How would it change the system if there was currency?

[Antti Jokinen]

Nick said: "Who enforces that commitment? Each individual has an incentive to have a large negative balance on death."

The system enforces that commitment. Who stands to lose in case of a fraud? If the positive balances are insured, then "the taxpayer" (incl. holders of positive balances) stands to lose. "The taxpayer" instructs the accountant (central bank) to take care that negative balances don't lead to any large credit losses. There are many ways to achieve this.

The question about enforcement, and who performs it, doesn't affect the logic behind my description. It's still about "gifts and "counter-gifts", but naturally with limits on how much "gifts" one can receive without giving any "gifts". The seller still doesn't get paid in "money".

I don't want to go to your red/green world. If you think it's equivalent to what I say, then be it. I find my world a lot simpler; there's no weird metaphors like "garbage".

[Oliver]

Antti
I don't see why you don't incorporate banks. You have nothing to lose and everything to gain. For example, you do not have to rely on some moral sauce to enforce balanced lifetime budgets. That might work in small communities but hardly seems realistic in an anonymous, modern economy. Banks, otoh have a self interest not to let any of their clients extend their credit lines beyond what seems realistically serviceable and also no interest on having to write down assets upon the death of a client. You're committing the opposite error as Nick is, if I may humbly say so :-).

[Too Much Fed]

Nick, is Betty allowed to save?

Antti, currency is a physical item. Entities store it themselves. There is an actual exchange (asset swap). I buy a DVD. I get the DVD. The seller gets currency.

Where things are stored matters.

[Antti Jokinen]

Oliver: Good that you mentioned "moral sauce". I forgot to mention above that enforcement is taken care partly by the shared norms of the society. Most people like to be liked and be considered as good citizens/members of the community. This is essential in a "gift economy" without explicit gift bookkeeping, where "mental accounting", and rumors by which this "mental ledger" is shared, play an important role.

You're right about an anonymous, should we say "faceless", economy. I haven't discussed it yet. When me move there, I can bring in more banks (now I only have the central bank, just like Nick has). But these banks, just like the central bank, performs the combined role of an accountant and a "lifetime budget enforcer" (I include "gatekeeper" role in this). There is no "money", and the banks are not owed to by non-banks, neither do banks owe non-banks (just like in the case of our central bank accountant). Banks themselves never stand to suffer any credit losses, but entitities on the RHS of the bank's balance sheet do (shareholders and other credit balance holders and/or taxpayers -- the latter is usually added on the RHS when absolutely necessary). The accountant's risk is a risk of losing his job.

How anonymous is our economy, I wonder? I haven't seen that any considerable amount of credit ("overdraft limit") has been extended to anonymous entities. The bankers (someone working in a bank, today) at least think they know their customers, even if they haven't always met them face-to-face. The world of "three C's of credit", Character, Capital and Capacity, hasn't totally vanished.

[Antti Jokinen]

Nick: One thing about "garbage" (It wasn't fair to say that I don't want to play your game, so I should explain.)

I give you an iPad as a birthday gift. You feel that you should return the gift, say by giving me an iPhone, when my birthday comes. You might be pissed at me for giving you such a valuable gift, but still you want to return the gift (perhaps because otherwise you'd feel inferior -- to you gift-giving is a sign of power). You feel you owe me one and/or you think I think you owe me one.

I gave you an iPad and garbage. Right? I don't see why we need to bring in garbage in this model, but I see what you mean by it.

[Antti Jokinen]

TMF: I hear you, partly. Where things are stored matters. And the accountant loses the "big picture" (assuming no numbered, anonymous accounts), because he doesn't know who holds the currency.

The asset swap part of your argument is not relevant. Currency is a "portable credit/positive balance", no more an asset than the credit balance on your account in the bank's ledger is.

[Roger Sparks]

Nick,

We might enhance the discussion to add reserve requirements to your model. I think it would work like this in the U.S.:

" If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance." The bank making the positive balance is required to place 10% of that amount on reserve deposit at the central bank. (see https://www.federalreserve.gov/monetarypolicy/reservereq-reserve-maintenance-manual.htm) The deposit must be in positive account.

To do this in your model, the bank would create another account in it's own name and the CB's name. The bank would then credit the CB 10% of the amount that Betty received, and take the negative balance in the bank's account.

Somewhat following Antti's comments, we now see that we have two gatekeepers. The positive accounts are more and larger than just Betty. Negative accounts are now held by both Andy and the Bank.

[Oliver]

Antti
I agree with you more than I disagree with you. So how about this definition: money = goods receivable.

[Oliver]

The bankers (someone working in a bank, today) at least think they know their customers, even if they haven't always met them face-to-face. The world of "three C's of credit", Character, Capital and Capacity, hasn't totally vanished.

Which is precisely why they belong in the model.

[Too Much Fed]

Antti, are you saying if Betty has currency in her pocket that the currency is not her asset?

[Antti Jokinen]

Oliver: You say that banks belong in the model? I agree with you. My model has banks. Real banks. But how I interpret them, how I describe their role in the economy, differs from the conventional interpretation (which is based on the implicit model we all use when we think of banks and money, and which we have been building since we were children). Money and banks as entities which lend money and are owed to by debtors, and owe to depositors, don't belong in my model. But still all bank-related phenomena (which consists mostly of accounting and contracts) is in my model. Within that framework, it just doesn't make any sense to talk about money as a means of exchange/payment, nor about "money" being deposited or lent.

Regarding "money = goods receivable"... Well, kind of. But we should avoid "kind ofs" (there are enough of those in all texts about money). What we are after is a precise definition. If we cannot define 'money' in a precise way, then we should avoid using the word altogether. Money means something to everyone, so if we use the word 'money' but the concept differs from the concept people have in their minds, then we will have trouble communicating.

What you mean is that "money = positive bank account balance = goods receivable" -- am I right? Now, what can we say about a "positive bank account balance"? It's within the realm of accounting. It's a result of cumulative positive and negative entries made on the account (arithmetics). It is not an object (a thing) which can be moved from one account to another. Once we make an entry on the account, the previous balance disappears and a new balance emerges. To call this account balance, which cannot be touched or moved and which disappears once an entry is made, 'money' would be problematic, because this would be money which cannot flow, which cannot be transferred from the buyer to the seller, and which isn't a "means of payment".

"Goods receivable"... If I have ordered goods from you / you owe me goods, then I have "goods receivable", right? I might have an account in my own ledger named "Goods receivable", and there I would have recorded the nominal value of those goods. But I would probably also have a contract which defines the goods I'm to receive. On the other hand, a positive bank account balance doesn't tell us from whom I'm to receive goods nor what kind of goods. It doesn't even guarantee that I will receive goods, because it is not an explicit claim on goods (say, I'd be in coma for years and after regaining consciousness, I'd notive that a hyperinflation has taken place).

As I said, "kind of". But we have to be careful when choosing words. Terminology plays a crucial role in a theory. When we look at our current monetary theory, there is too much inaccuracy and ambiguity in the terminology: money is a "social construct/contrivance"; money is debt/an "IOU", even though the central bank doesn't really owe anything to its holder; "money is what money does"; etc. The courageous people who try to give a precise definition for money end up where Pesek&Saving, Friedman&Schwartz, and for instance Eric Lonergan ended up: money is fiat money, an asset to its holder but in no real sense debt to anyone, which in their minds makes money net wealth of the community. (Btw, just like Nick, Lonergan too has something against accountants... Accountants have ruined their "money", I believe.)

Just thinking out loud here. Does anyone find any sense in this?

[Antti Jokinen]

TMF: No. It's an asset. In our system, a record which tells the community around you that you have given up goods (with a certain nominal value) without receiving anything in return, yet, is an asset to you. But if you're a buyer, the seller doesn't care if you have such an asset or not, or if you have earned it by really giving up goods or not. What the seller cares about is only that a record will be created which tells the community that she has given up goods without receiving anything in return. To be precise, the seller might have a negative balance from before, in which case she won't end up with an asset at all. So it's really the individual entry which matters -- not the "positive bank account balance" as an asset. The hand-over of currency to another person can be viewed as a credit entry on the recipient's account. What we are really interested in is the recipient's net balance (bank account balance + currency).

In all I say I assume, for now, a world where there are no bilateral debts denominated in the unit of account between non-banks. It is also helpful to consider the banking system as a whole, as One Bank.

[Oliver]

What you mean is that "money = positive bank account balance = goods receivable" -- am I right?

I mean that real money, for lack of a better term, is that which one earns by giving up goods or services at t=0 in hope of receiving goods or services of equal value at t=0+x. At the same time it is promise by society to deliver those goods. Whether the promise pans out and indeed who controls to what extent it does, are separate questions.

Does anyone find any sense in this?

I do.

[Roger Sparks]

Antti, Oliver. These comments continue to make sense if we consider money as if it were a "national gift certificate".

This money model is based on a merchant-gift-certificate specific to one store or chain of stores. A rudimentary development can be found at http://mechanicalmoney.blogspot.com/2016/09/money-is-like-national-gift-certificate.html.

Nick, When comparing your model with the national gift certificate model, Andy takes the role of a merchant issuing the gift certificate. Therefore, red money (negative balance) = gift certificate obligation = bond.

Betty takes the role of purchasing a national gift certificate. Therefore, bananas = green money (positive balance) = gift certificate in hand = money

Quoting Oliver, " Does anyone find any sense in this? I do."

[Antti Jokinen]

Good, Oliver. We are on the same page. I still suggest we talk about 'positive account balances' instead of 'money', because everyone is used to think of money as something (a good, an object, an item, a digital item, etc) that is transferred from a buyer to a seller, and this transfer is a "transfer of funds" which constitutes a payment. In other words, perhaps because of our childhood learning, when we think of money we think of physical cash/currency. When we move into the realm of "pure accounting", there is no money as we used to know it.

Look at the way you put it above. It's not really something no one has ever before suggested? But still it seems to me that no one has taken that as a starting point and built a macro model where the monetary system is part of the "real economy". At least I haven't seen that kind of model. Have you? In my opinion, the best way to approach this is through comparison with a "gift economy". That's where I ended up, after using "Occam's razor" for about 24 months on various versions of the theory I was working with (in previous versions there were "indirect, fungible IOUs" of non-banks flowing between bank accounts).

[Antti Jokinen]

Let me put it this way:

IOU. I owe you. "I" is me, "U" is society. This is a negative balance on my bank account.
UOM. You owe me. "U" is, again, society at large. "M" is me. This is a positive balance on my bank account.

Negative balance = IOU.
Positive balance = UOM.

IOU ≠ UOM.

When people like Milton Friedman and Eric Lonergan say that UOM is not an IOU, they are right. If they say that there is no offsetting entry for the UOM, and that makes the UOM net wealth for the community, they are wrong. There always exists an IOU for every UOM out there (credit=debit).

How does this sound?

[Oliver]

Sounds fine to me. You might want to look into some Bernard Schmitt. Here's Claude Gnos on Schmitt:

With reference to bookkeeping Schmitt (1984) points out a double flaw in this view.

First, the double-entry principle does not allow banks to extend credit to borrowers without gaining an equivalent credit from depositors. This is an argument Keynes made in the General Theory and that on the post-Keynesian side has been confirmed by Moore (Moore, 1988). As a consequence, banks’ liabilities, that is, deposits, are the source of bank financing, and match the credit they grant to borrowers. Depositors are creditors of banks and ultimately the creditors of bank borrowers. Banks (as Moore also emphasises) are thus one type of financial intermediary; they are not the actual source of the credit granted to borrowers. Money creation has to be seen for what it really is: bookkeeping entries — debits and credits that banks record in their books in nominal units of account, and that resolve into banks’ assets and liabilities denoting (indirect) financial relations between borrowers and depositors. Bank money is therefore a dual entity, and not one and the same thing as considered in monetary flows (payments) and stocks (assets).

The second point, which is closely related to the first, concerns the nature of the circuit. The common circuitist view in a sense maintains the (neo)classical approach by which economic transactions are exchanges achieved by means of a peculiar good or asset that is deemed to be money. The rigorous reference to bookkeeping delivers a more original view, so much so that Schmitt came to distance himself from other circuitists (cf. Rossi, 2004).

[Roger Sparks]

Antti, (Oct. 30, 10:26 AM)

I am comparing the IOU ≠ UOM model to national-gift-certificate model, and find it nearly identical.

However, we need a mechanism because "There always exists an IOU for every UOM out there (credit=debit)." is incorrect. The mechanism to render credit≠debt occurs from/when the issuer of debt borrows from the holder of debt. In national-gift-certificate theory, this occurs when the gift certificate issuer borrows a gift certificate and reissues it. This constitutes reuse of the gift certificate so the physical number of gift certificates does not increase, only the accounting number of gift certificates issued increases. Thus credit no longer equals debt on the positive account side.

How does this sound?

[Too Much Fed]

Antti, if currency is an asset and exchanged for goods (like the DVD example or other things), then there is an asset swap (balance sheet transactions) and the currency moves from one person's pocket to another person's pocket (storage).

Let's assume no entity has a negative balance. Entities only have a positive balance or zero balance. Now what happens?

[Antti Jokinen]

TMF: Some entity must have a negative/debit balance. Otherwise currency wouldn't be in circulation. Currency is a credit balance on the CB balance sheet. What kind of debit balance you have in mind? Treasuries or gold, for instance?

[Antti Jokinen]

Roger: I read your blog post about "national gift certificates". Interesting! I need to think about it, but it really doesn't sound that far off from what I'm saying. A thorough comparison of these two ideas could be fruitful!

I'm still trying to get my head around your "credit≠debt" argument. First I have to point out, that I just stated an accounting identity, credit=debIt. It might be that I had in mind a broader definition of "IOUs" and "UOMs" than you had. Let's see. I have some problems with matching your terminology with mine... Who is the "issuer of debt"? Is it "United-States-as-a-big-store", or who? And who is the "holder of debt"? In my "multilateral gift economy with explicit record-keeping" there are those who are in debt to the society and those who hold credits against the society.

It sounds to me that you might think of "gift certificates" as (physical) currency, because you talk about the physical number of them? I'm not interested in currency at the moment, because it can be modelled as "pure accounting", by netting it against the account balance. We lose anonymity, but I don't view it essential to what I'm trying to study at the moment.

So I'd like you to elaborate a bit (meanwhile, I'll do some additional thinking). What you mean by your sentence "credit no longer equals debt on the positive account side" isn't clear to me, either.

[Antti Jokinen]

Oliver: I've been reading some Bernard Schmitt lately, too (three times someone has mentioned Quantum Economics when I've presented my ideas). There are clear parallels, but something seems to be missing, though I can't say what before I've read him again. Even the name Quantum Economics sounds too complicated, but perhaps it was considered just a catchy name and the theory itself is simpler? From your quote:

"denoting (indirect) financial relations between borrowers and depositors"

I guess I mentioned earlier that I was at one point thinking in terms of "indirect IOUs" flowing between accounts/holders. If you hold money, that would be an "indirect IOU" of, say, a non-bank business with a "loan" from a bank. But I had to conclude that even this indirect relationship breaks down because of explicit and implicit guarantees of most of the credit balances in banks' ledgers. This is related to some "loanable funds" models, too. Holders of positive balances have clearly not lent goods to holders of negative balances, because they don't hold any explicit claims against goods, and they might as well receive goods ("counter-gifts") from people with non-negative balances.

[Antti Jokinen]

Roger: I had missed your comment "October 30, 2016 at 09:50 AM". That clarifies, at least partly. I'll get back to you later. But please elaborate meanwhile, if you find time.

[Too Much Fed]

I was thinking of the central bank being technically insolvent and doing an equity transfer to Andy.

A = L + Eq

0 = 100 + (-100) for the central bank.

Andy's assets of currency go to 100 from 0 plus his other assets.

[Too Much Fed]

Also, assume gold is MOA and MOE (it was explained to me that gold is no entity's liability). There are no demand deposits and no currency. There is no private debt, no gov't debt, and no stocks.

There are no commercial banks and no central bank.

No entities "spend" more than they "earn". They can "spend" what they "earn" or less.

I don't think there are any liabilities here and no negative balances here.

[Roger Sparks]

Antti: Thanks for reading my post about "national gift certificates". Yes, it sounds like our models compare well.

Yes, the "United-States-as-a-big-store" can issue gift-certificates=money. Why would USBS issue gift-certificates? We follow Nick's model; someone provides USBS with services or resources and USBS pays with a gift-certificate. Our local hardware store could do the same thing, no longer paying for services with money. Instead, our local hardware store begins paying for services with gift-certificates good only at the issuing store.

If our local hardware store did this often, it could find itself with a dangerous amount of gift certificates issued. A solution would be to borrow gift certificates from those who held them. The store would get the gift certificates back and issue a credit=bond to the person who surrenders gift certificates. The store can then reissue the surrendered certificates in trade for additional services and resources.

You would do the accounting better than I but think that following the reissue, accounting for the store would show: Store owes 2 certificates issued; recent service providers hold one certificate, past service providers hold one certificate. In addition, both store and past certificate providers also must show on their books a record of their trade of gift certificate for a store issued bond. (The bond is a promise to return the borrowed gift certificate).

I think this mechanism fits into Nick's model but he has not yet discussed the process. Does it fit into your model?

[Antti Jokinen]

Roger: OK. That clarified things. I see some problems here, though, when I try to fit your ideas into my model.

1. Who is USBS? The central government or just any "Andy"? If USBS hands over a gift certificate to a service provider, in which store does it tell the certificate is valid, and what makes the certificate valid in that store? If "all stores", then what makes it valid in a store which the issuer doesn't own? The buyer of the services has to be an entity we can name.

2. Your local hardware store seems to be paying "in kind" for services, and if the certificate is valid on the issuing date, then the role of the gift certificate is diminished: it's an IOU ("I owe you hardware of your choice"), but redeemable right away. (See next point for more on maturity.)

3. It seems you are trying to explain government borrowing when you talk about borrowing gift certificates (which are your "high-powered money"?) -- correct? Anyway, it seems to me that by borrowing a gift certificate the issuer in effect extends the maturity of the gift certificate (here is a parallel to government taking high-powered money from circulation and replacing it with Treasuries). I don't see how this kind of action would lead to "credit≠debt". And when I said "extends the maturity", what I really mean is that the issuer makes sure that the gift certificate is redeemed EARLIEST at the date when the issuer is due to return the gift certificate. A gift certificate has, in one sense, usually a zero maturity. But what is beautiful (from the issuer's point-of-view) about gift certificates is that some of those are NEVER redeemed. If the issuer doesn't set "must be redeemed by" -date, then the certificate might be forever outstanding (not necessarily circulating) -- not wholly unlike in the case of fiat money.

4. Whether the store re-issues a borrowed certificate (the same physical object ends up in circulation again) or issues, instead, a new certificate, doesn't make any difference. I haven't heard of stores running out of their own gift certificates (no doubt this is possible, just like in Weimar they didn't manage to print enough central bank notes to meet the demand even though they worked in three shifts). So the only reason I can see for "borrowing" a certificate would be to make sure that the certificate is not redeemed yet. This could be achieved in the first place by issuing a certificate with a "can be redeemed starting on" -date. As I said above, in no way do I see how "credit≠debt" would be true in this case. A gift certificate in the hands of the recent service provider + a promise to return a gift certificate to the past service provider = store's debt = service providers' credit. Right?

[Antti Jokinen]

TMF: I don't follow you now. You redefined 'currency' as equity or gold, just to avoid the existence of any liabilities? Nice trick :-) Why would equity be worth anything if the bank is insolvent (LHS of balance sheet is zero)? And what is the offsetting entry on the RHS -- 100 + (-100)? One of those is Andy's equity, but the other?

[Too Much Fed]

Let's skip the currency part for now.

Assume Andy, Betty, and Carol use gold as MOA and MOE (it was explained to me that gold is no entity's liability). Gold can only be used as "money" or as a savings vehicle (no other use). There are no demand deposits and no currency. There is no private debt, no gov't debt, and no stocks.

There are no commercial banks and no central bank.

Andy, Betty, and Carol don't "spend" more than they "earn". They can "spend" what they "earn" or less. They can spend more if they find more gold.

I don't think there are any liabilities here and no negative balances here.

Andy finds 100 oz of gold. He then uses it to exchange with Betty and so on.

[Roger Sparks]

Antti (Oct.31 04:34): You seem to understand most of the nuances of the national-gift-certificate model.

The goal of the model is to provide another perspective of money, making monetary discussion easier and more uniform. Your questions are certainly valid and dealing with some of the nuances.

Here are my answers:

1. Question: Who is USBS? The United States acting as a Big Store. Background: Only the owner of a store can issue a gift certificate which will be valid in his store. This makes a gift certificate a limited value instrument. USBS does not have store ownership but it does have taxing authority. Taxing authority is (in my mind) a type of ownership; taxing authority enables a wide range of control over the distribution of resources within the bounds of the authority. Like a store issuing gift certificates, only USBS can issue money (acting through the CB and Treasury) which is valid only in the limits of authority by ownership.

2. Question: Is the gift certificate an IOU? Yes. The store has committed to paying-in-kind upon presentation of the gift certificate. It could be valid on the date of issue but more likely will be presented sometime in the future.

3. Question: Am I trying to explain government borrowing? Not really, but because the government does borrow to spend more than it receives in taxes, the national-gift-certificate model needs a mechanism to explain borrowing by the issuer. As you say, borrowing your own debt has the effect of delaying the date of payment.

(Still 3.) Does "credit≠debt" in this situation? Hmmm. How will we describe the number of issued gift certificates during the period between borrowing back a gift certificate and issuing the second gift certificate? It seems like during this period, store debt would double and surrendered-gift-certificate-owner would own a credit but there would be NO Gift certificate outstanding. No, I see what you mean: the store would record this transaction as an extension of debt. The store would record that the gift certificate has changed from a presentation-upon-demand into an obligation to provide a gift certificate in the future. As you say, credit=debt but I guess we could add that delayed-credit=delayed-debt.

4. Question: Does "credit≠debt" from another perspective? Yes, the best reason for borrowing gift certificates is to delay presentation. The only reason to borrow gift certificates is to protect liquidity, not to make available gift certificates for future spending. As you say, there is no need reissue gift certificates when the store can identically issue new certificates. Does this liquidity protection mechanism unbalance credit=debt. We saw from question 3 that it does not.

It seems to me that I cannot justify my claim that "credit≠debt". Thanks to your persistence, examples, and maybe the national-gift-certificate model. We do need to be very careful on how we distinguish ownership of credit and debt, with the time period of potential presentation playing an important role.

I can't see that Nick's premise that credit-plus-debt-equals-two-money is supported by any of this. Credit and debt seem like two very different things but his point about synchronization seems valid.

How does your model compare now?

[Antti Jokinen]

TMF: What you describe is a world without money as we know it today. For us who don't view gold bullion as money (because it has nothing in common with money as we understand it), your economy is pure barter; pure in the sense that there is not even credit (such an economy has never existed, and never will -- credit is always present in a human society). Of course there are no liabilities. I don't see where you're trying to get with this.

[Antti Jokinen]

Oliver, and others: Would you find it interesting if I wrote a couple of blog posts about the world I've been studying? Perhaps we could continue our discussion that way. I'd be of course very happy if Nick would join in, too. I'll anyway refer to this post of his.

[Antti Jokinen]

Roger: We are getting closer. Agreeing on credit=debt was important. I don't agree with you here, though: "credit=debt but I guess we could add that delayed-credit=delayed-debt". Debt/credit is always delayed, by definition. That's why we talk about different maturities. But I think I know what made you say so, and there we come to what I view perhaps the most fundamental problem with this gift-certificate metaphor of yours. I'll try to explain:

A real gift-certificate, instantly redeemable, isn't primarily used by its issuer to delay payments (or to "borrow money"). The issuer has very little control over the redemption date, and in most cases the certificate is redeemed (or should I say "presented for redemption"? The issuer redeems?) promptly. There could be some "gift-certificates-as-a-float" elements (as with insurance companies) here for larger issuers, and like I said, some of the certificates are never redeemed which is a "plus", but I would still argue that the main goal for the issuer is to increase sales by making gift-giving easier. If you think that taxation is comparable to redeeming a gift-certificate (a view made popular by MMT), then the difference is that "USBS" (which seems to be the government to you?) can control the timing of taxation through adjusting its deficit/surplus. So if "money" was a gift-certificate, then it would be a strange gift-certificate indeed: without a "redeemed only after/before" -date, but still it would be the ISSUER who would control -- at least partly (timing of taxation is somewhat random) -- the redemption date. This would be comparable to you walking into the hardware store with your gift-certificate and the owner turning you away, saying "Try later!". Do you see what I mean?

As I explained above, in my world IOU (I owe you guys) ≠ UOM (you guys owe me) (guys = all you others, but none of you in particular). But your gift-certificate is both at the same time: debt to its issuer and an asset to its holder. In my world, if you hold what we are used to call money, you cannot walk to anyone and say "You owe me, and now its time for payment".

If I try to use your terminology, I might say that in my world the holder of the "gift-certificate" can use it to BUY goods whenever he finds something interesting offered for sale, at the right price. So far we could as well be in your world. But when we look at things from the perspective of the SELLER, we move away from your world: In my world, the seller of the goods, the "store-owner", is not the issuer of the gift-certificate. This is what I mean by IOU≠UOM. The seller might end up with a "gift-certificate" after the sale (ie. his account balance is positive) or might not. Only in the latter case you could suggest that the seller redeemed his "(indirect) gift-certificate", and that would bring us to the previous version of my theory where I, too, would have said that the seller redeemed his "indirect IOU". One of the reasons why I abandoned that version of my theory was that the buyer might NOT have been holding the seller's "indirect IOU" before the purchase (ie. his account balance might have been non-positive), in which case he would have actually issued his own "indirect IOU" and handed it over to the seller. At this point I asked myself: Whose "indirect IOU" is it then? The answer must be either "It was the indirect IOU of both the seller and the buyer" or "There was no IOU changing hands at all" (I had earlier abandoned the possibility that it was a bank's IOU, which lead me to think in terms of "indirect IOUs" in the first place).

Now it's clear to me that there is no IOU changing hands. We must look at the situation (account balance) of the seller and the buyer separately, which brings us to the "gift-economy model". Nothing moves from the buyer to the seller. Each separately might be sitting with an IOU (negative balance) or an UOM (positive balance) before, and after, the transaction.

How does this sound?

On a more personal note: I quit my job in early 2014 in order to pursue this theory full-time, so I do think I'm working on something very important and promising. (An even more personal note within a personal note: I'd like to work on a PhD soon; I'm tired of reading and writing by our kitchen table, and my wife is, understandably, constantly nagging at me about me getting a job.) I've struggled to explain my ideas to others, not least because the ideas are in stark contrast with the daily experience and received wisdom of us all (e.g, "money" is not a means-of-payment and it doesn't flow/circulate). I consider this discussion I have had here, with all of you, a sign that I've come again one step further in making myself understood. Thank you all for your feedback and comments so far!

[Nick Rowe]

Antti: yes, you should write it up (in English, not Finnish, or whatever!).

The PhD question is trickier; you strike me as being the right person to do it, but it can be a long road with uncertain rewards. Especially if you have few economics courses and are required to start from scratch.

[Too Much Fed]

"your economy is pure barter; pure in the sense that there is not even credit"

No, it is a monetary exchange economy. I just made gold to be the money (MOA and MOE).

"The asset swap part of your argument is not relevant. Currency is a "portable credit/positive balance", no more an asset than the credit balance on your account in the bank's ledger is."

"I don't see where you're trying to get with this."

I put the gold example up with entities exchanging for gold to make the asset swap part very relevant.

It is a savings and income economy. Entities do asset swaps.

When Andy gets 100 units of gold, he buys 100 bananas from Betty who gets 100 units of gold. Betty buys 100 carrots from Carol. Carol gets 100 units of gold.

The gold gets passed around in peoples' pockets as an asset. It does not matter there is no credit.

[Oliver]

Antti, do write it up! And yes, in English (or German :-)).

[Roger Sparks]

Antti: Again thanks for your comments. Frankly, they seem to still fit within the national-gift-certificate framework but obviously some bridges are needed. The first bridge needed is that you seem to be trying to do without money. Am I right?

Nick's positive-negative model is perfect here. Each Betty and Andy begin with zero balance in a ledger and we assume that Betty has off-record bananas.

Now if there is a ledger, there should be an entity maintaining that journal and making recordings into it. This entity is taking the role of judge and decider, using standards of some kind to make a permanent record. The names of both Betty and Andy are known, as is their trade of bananas for nothing.

Using the standards Nick has described, the recording entity assigns a positive entry to Betty's account and a negative entry to Andy's account. No money has changed hands.

Now we need to build a bridge to money. Assume that both Betty and Andy want to go "off-record". How could they do this? The recording entity could give Betty a record (probably paper) showing, that at the time of going off-book, she had 100 units. The recording entity would give Andy a record (probably paper) that he had a negative 100 units.

I think we could count these probably-paper-records as potentially money.

Now we pose questions: If Betty and Andy want to return to the books kept by an new entity who does not know them, what record would each present? What incentives would each have to present their honest record?

If we used the national-gift-certificate model, I don't think either party could claim to have a gift certificate because there is no link to any accepting party with goods or services to sell.

Is this a bridge?

Off subject. Like others, I tried to read your post. Unfortunately, Google translates macroeconomics VERY poorly and I got no understanding of your theory. That disappoints me.

[Johan Meriluoto]

Too Much Fed:

What if Carol (who now seems to have the gold) doesn't want any of the current commodity offerings? Trading appears to come to a halt! But should we realistically assume trading would stop until Carol decides to buy something? At least I don't think so. Hence, Andy or Betty or whoever could continue trading without needing to pass on Carol's gold. Credit may as well come back to the story. In the minimalist sense, with some consideration of gold continuing as a MOA: If Andy and Betty don't want Carol to take on the function of a bank (this would probably already be credit-debit territory), they could promise to pay Nick to dig out some more gold. But in that case, the need for gold as a MOE isn't there anymore. Andy and Betty could obviously try to dig themselves… but they would probably still have to promise something to the one who delivers them the necessary mining equipment – unless the provider accepts commodities in exchange (whereby gold as a MOE isn't there either).

Credit appears to come back once we consider the possibility of an uneven distribution of the MOE relative to trading needs and some social organizing for the purpose of producing stuff; either by promises to "pay" after the work is done; or promises to work after "payment" is done. Assuming, of course, that some social organizing – i.e. labor – is necessary for tradable commodities to appear in the market in the first place.

[Antti Jokinen]

TMF: As I said, I don't view gold bullion as money. It's just a commodity to me (even if it was used as a numeraire, ie. other goods were priced in terms of it). That's why I don't really have much to say to you, unless you are getting back to a world with credit (perhaps via discussion with Johan?).

What I view as a crucial step in order to get from a commodity (barter economy) to money (monetary economy) is taken when we have a numeraire which ceases to be a numeraire because its price in terms of "itself" changes. A short explanation:

Imagine a closed, fairly small community where the numeraire is a kilogram of salt; the price of a a watermelon might be 1.5 salt-kilos -- "s-kilos" in short. All goods are priced in s-kilos (the unit of account is "s-kilo"). Naturally, the price of the "numeraire good", a kilogram of salt, is 1 s-kilo. Goods are exchanged against other goods, and salt doesn't need to appear as one of the goods in a transaction (it's not "money" as Clower and Nick would define it). When we have established (sticky) market prices expressed in s-kilos for most of the traded goods, it becomes feasible to denominate debts/credits in s-kilos (which arguably makes the prices even more sticky). In most cases these debts didn't arise because the debtor bought salt "on credit", neither do the debts need to be re-paid by delivering salt to the creditor. The debtor can deliver a sack of flour, for instance. (Both sides can sue each other if they don't agree on the price, but usually they come to an agreement as trade is seen as mutually beneficial.)

This kind of system works as long as the real cost of procuring salt remains more or less stable, so that prices of other goods don't need to constantly fluctuate; even more importantly, outstanding debts/credits (usually short-term; < 1 year) don't need to be adjusted (a necessity in a fair system; goods taken = goods given). But one day (well, abruptly anyway) the real cost of procuring salt, due to a technological "shock", is reduced by 50 %. The community faces a choice: Should they adjust prices of all goods (except salt) and debts -- a formidable task including "menu costs" and mental costs --, or should they only adjust the price of a kilogram of salt? The majority are flexible thinkers, so they choose the latter option: the new price of a kilogram of salt is 0.5 "skilos"! What is a "skilo"? It's nothing you can touch, nothing you can point at. It's just an abstract unit of account.

What I say above has quite clear parallels in monetary history, but I'm not claiming anything about history here -- just presenting a "myth". I tried to explain what I view a necessary condition for a "full-grown" monetary economy: the divorce of the unit of account from its commodity link.

Nick: This is how the price of bananas could have ended up being 100 units (an explanation you seem to lack). We could start over, for instance by defining 1 skilo (think of a 'dollar') = 100 units ('cents'). Andy gets bananas from Betty. What is being recorded by the central bank? Does Betty get something in return for her bananas -- and what?

[Antti Jokinen]

Roger: If Andy has a debt, why would he, the debtor, get a paper stating he has a debt? The accountant needs to know who's debt it is, so the entry on Andy's account must remain. Betty's case is clear: She had a credit balance, and the accountant doesn't have anything against this credit balance becoming a BEARER INSTRUMENT/document. The accountant doesn't know who has the credit balance, but still knows that someone has a credit balance ("currency in circulation" on the RHS of central bank balance sheet). One might need to track down a debtor, but the creditor will show up on her own initiative.

[Antti Jokinen]

Thanks, guys. I'll start blogging in English then! I've been writing (notes/drafts) -- and thinking -- my theory mainly in English, but one year ago I switched to my mother tongue, Finnish, for two reasons: (1) I found it somehow refreshing, it even gave me new insights I dare to say, as I had to translate my theory (I didn't know half of the Finnish terms) and use only meaningful words: in English it's easier to bullshit oneself and other non-native speakers. (2) I, of course, tried to cater to the Finnish audience, in hope of being noticed; it's a lot harder to get noticed when you write in English.

Nick: Thanks. The PhD goal of mine is mainly about financing my research. In Norway, where I currently reside with my family, nearly all PhD students get a salary of $50,000 per year, for four years. (Cost of living is high, of course.) I've been also thinking that I could try to find an open-minded Accounting department somewhere to do the PhD, as I majored in that subject, and my theory is very much accounting-related -- even though my goal is to revolutionize Economics ;-) I also think that I can talk Economics nowadays with any Professor, but perhaps I'm just being old-fashioned as I think that formal education / grades shouldn't matter when judging the (potential) scientific contribution of people.

[Roger Sparks]

Antti (Nov. 2, 0745); I completely agree with your comment. I see this as the flaw in the negative-account model of money. Money seems (required by human nature) to be always positive.

In the National-Gift-Certificate (NGC) model, the gift certificate is always positive, a credit, and redeemable at the issuing entity.

Now what happens if my hardware-store-issued gift certificate is redeemable with nothing I want? Well, I could just put the gift certificate in the drawer (which the hardware store would like) or I could trade it to a friend who did want something at the issuing store . As a practical matter, the certificate could be traded several times before ending up at the issuing store and disappearing upon redemption.

What happens if USBS (or any issuing government) issues the NGC? The holder (of the NGC) would have surrendered real goods and services and accepted the NGC in return. No money has changed hands. Hmmm. I guess we could say that the NGC is "money".

Is this making any sense?

BTW, I am looking forward to your post in English!

[Too Much Fed]

Johan said: "What if Carol (who now seems to have the gold) doesn't want any of the current commodity offerings? Trading appears to come to a halt! But should we realistically assume trading would stop until Carol decides to buy something?"

I would say Carol has the gold as an asset and stores it herself (in possession of it).

If she doesn't want any of the current commodity offerings, then she saves and the gold is her savings vehicle.

Assume she saves and that is the reason why (there could be other reasons she saves).

Trading stops until:

1) Carol stops saving and spends with the gold.

2) Someone finds more gold.

3) Someone borrows from Carol.

Are there any other scenarios? Not sure.

I assumed away 3) to try to show Antti assets can move and there can be no negative balances while the economy can still function.

"Credit may as well come back to the story."

Let's relax the no private debt assumption.

Andy and Carol agree to terms so that Andy borrows from Carol. Andy creates a new bond (IOU) using paper. There is an asset swap. Carol gets the new paper bond as an asset and stores it herself. Andy gets the saved existing gold as an asset and stores it himself. He now spends with the gold.

Lastly, I assumed (unstated) that gold can be "mined" with no cost.

[Too Much Fed]

"TMF: As I said, I don't view gold bullion as money. It's just a commodity to me (even if it was used as a numeraire, ie. other goods were priced in terms of it). That's why I don't really have much to say to you, unless you are getting back to a world with credit (perhaps via discussion with Johan?)."

Credit may exist. It does not have to exist.

Plus, I don't see why currency can't be considered a commodity.

"What I view as a crucial step in order to get from a commodity (barter economy) to money (monetary economy) is taken when we have a numeraire which ceases to be a numeraire because its price in terms of "itself" changes. A short explanation:

Imagine a closed, fairly small community where the numeraire is a kilogram of salt; the price of a a watermelon might be 1.5 salt-kilos -- "s-kilos" in short. All goods are priced in s-kilos (the unit of account is "s-kilo"). Naturally, the price of the "numeraire good", a kilogram of salt, is 1 s-kilo."

I am not getting that part at all.

See here:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/10/medium-of-account-vs-medium-of-exchange.html

"[Update: just to clarify terminology: in my model, gold is the medium of account; and (say) an ounce of gold is the unit of account.]"

I agree with Nick.

I want to use a similar model here. MOA is gold. UOA is 1 oz of gold.

However, MOE is gold, not silver. MOA and MOE are the same.

[Antti Jokinen]

TMF said: "I assumed away 3) to try to show Antti assets can move and there can be no negative balances while the economy can still function."

You have misunderstood me. I'm not saying your economy cannot function. I'm just saying that credit is always present in a human SOCIETY. Johan explained how, in practice, debt/credit is involved when people get together to work for a common goal (investment & production).

As long as you define gold bullion as money, we don't have anything to talk about. Of course there is an asset swap in that case, without there being any debt involved. What I'm talking about is currency as it is today used (coins and notes): for today's currency, there always exists a negative, offsetting balance somewhere (in the case of coins you have to look carefully, though; coins are comparable to Treasury bonds, at least in the US).

[Antti Jokinen]

Roger: Yes, your NGC is money (an IOU). And in my theory I'm trying to get rid of that kind of money, WITHOUT losing any real phenomena. The problem I see with your approach is how to explain why we would call a piece of paper a "gift-certificate", when it entitles the holder of it to nothing else than being relieved of his tax obligation (or fines or other charges collected by the government). I do see some sense behind that kind of thinking, but there are many people who don't. I think this discussion between Eric Lonergan and Randall Wray is very good example: http://positivemoney.org/2016/03/debt-free-money-brief-reply-randall-wray/ .

I view my theory as a synthesis of Lonergan's and Wray's viewpoints. But there's no use in explaining it to them, as Lonergan cannot see how money is related to debt, and Wray cannot see how money is not really an IOU (there's no "I" behind it). It's nearly impossible to get them to see money in a new way, as both have strong convictions, having written whole books about money.

[Antti Jokinen]

Perhaps needless, but I'll add this anyway: I'm more in agreement with Wray than with Lonergan. My theory can be classified as a "Credit theory of money" (see Wikipedia). Wray is rightly focusing on the accounting, whereas Lonergan tries to dismiss it.

[Roger Sparks]

Antti (Nov. 3 04:37 AM)

I decided my response was much too long for Nick's blog so I built a new post. It can be found at http://mechanicalmoney.blogspot.com/2016/11/national-gift-certificates-as-analog-to.html

I hope everyone has time to read it and comment.

[Too Much Fed]

"You have misunderstood me. I'm not saying your economy cannot function. I'm just saying that credit is always present in a human SOCIETY. Johan explained how, in practice, debt/credit is involved when people get together to work for a common goal (investment & production)."

If Carol does not save (spends with the gold), there is no problem (at least with this simple model). Someone produces. Someone else consumes.

"As long as you define gold bullion as money, we don't have anything to talk about. Of course there is an asset swap in that case, without there being any debt involved."

OK.

[Too Much Fed]

"What I'm talking about is currency as it is today used (coins and notes): for today's currency, there always exists a negative, offsetting balance somewhere (in the case of coins you have to look carefully, though; coins are comparable to Treasury bonds, at least in the US)."

Same assumptions (no commercial banks, no private debt, no gov't debt, no stocks) except add a central bank with no central bank reserves, only currency. Fix gold and currency at 1 oz of gold to $1 of currency both ways with a 100% reserve requirement. That means the central bank only holds gold as an asset.

The system now has 2 MOA’s and 2 MOE’s with a fixed exchange rate. All prices in terms of gold and currency are the same (if it costs 1 oz of gold for something, then the price is $1 of currency). People can choose whether to use currency or gold. Currency is more convenient, so everyone uses it.

Andy takes his 100 oz of gold to the central bank and gets $100 of currency. He now spends the currency with Betty (asset swap and they store the assets themselves). The economy functions just like with 100 oz of gold.

The central bank balance sheet is:

A: 100 oz of gold
L: $100 of currency
Eq = 0

Is there $100 of currency as a liability? Yes.

I don’t consider that a “negative balance”. I don’t consider that debt.

I consider currency a commodity. Currency and gold are 2 commodities with a fixed exchange rate.

[Antti Jokinen]

TMF: You have now arrived at what I consider a special case in my theory. On the RHS of the bank balance sheet all the credit balances belong to an entity other than the bank itself. But on the LHS some debit balances represent real assets (property, plant & equipment, sometimes gold). These are clearly not debts of other entities. One possibility would be to say that these represent debts of the bank itself (just like one can say that a company owes its real assets to the entities on the RHS of its balance sheet). How would that sound?

What you have presented above is the case of the famous "London goldsmith" taking deposits, while NOT over-issuing deposit-receipts. Did that kind of business model make the London goldsmith a bank? No, it didn't. The story has it that the goldsmith became a bank when it started to over-issue deposit-receipts (ie. make loans). You can call the deposit-receipts "currency", but you don't yet have a bank in your model.

[Antti Jokinen]

Roger: First, thanks for all the acknowledgements! Very kind of you. I might be repeating myself, but here are some comments on your post:

From the point-of-view of the HOLDER of a NGC, the USBS metaphor works quite well. But from the point-of-view of the ISSUER, I can't make it work. To start with, you should define what kind of money you are talking about: only fiat money, or also "bank money"? Then, you must decide how a NGC can be redeemed: say, by buying goods for sale in any store in the US, or just by paying taxes (latter is what Randall Wray suggests, having in mind fiat money). "(private) Bank money", deposit, can disappear when you use it to buy something from any store in the US. Fiat money doesn't, so in that case you'd only trade the (fiat-money-as-a) NGC with a non-issuer (This begs a question: How can a commercial bank deposit disappear when you buy something from a non-issuer?).

If we only talk about fiat money, and by this we mean "central bank IOUs" (not my terminology), then we face a problem Wray/MMT seem to face, too: If fiat money is a "CB/government IOU", then why does it disappear when a private entity behind the MBSs on Fed's balance sheet makes a mortgage payment? Does the government not only allow its IOUs to be used in tax payments, but in mortgage payments too?

As you see, I see problems on the "issuer side" both when it comes to your NGC interpretation and when it comes to interpretation of money as an IOU. I think those problems are very, very hard to solve if we stay within those frameworks.

[Roger Sparks]

Antti (Nov. 3, 04:09 PM);

Thanks for reading my post and commenting.

You will be surprised when I say that all of these issues are easily incorporated into the analogy. The difficult part is to explain in a comprehensive way. I begin with a brief background:

Fiat money is nothing more than circulating paper printed by the government. Period. It is given legitimacy by taking care that a bond is issued at the same time circulating paper (or electronic equivalent in every case) is printed. Therefore, it is possible for the central bank to meet with the Treasure (two people from two departments) and exchange products: The CB delivers currency and the Treasure issues a promise to pay it back. Period.

The duration of this distributed paper will depend upon the tax rate charged. Assume that a tax is charged at each transaction (income tax, sales tax, VAT tax). After each tax, less currency remains in circulation.

If there is no tax on a transaction (such as on the expense side for income-tax-on-business-profits), there is no reduction in outstanding currency. This enables the duration of any issued paper to be VERY long.

Banks do not issue money. They only have the character of increasing the amount in measured circulation. Take gold as the example. If gold is the money in use, it is very difficult to increase the amount of gold in-hand. It is easy to write a gold certificate and lend it (as if it were gold in-hand) without telling the owner of the original gold. If this is done repeatedly, the amount of gold on deposit will remain unchanged but the amount of gold CLAIMED will increase. The role of central bank reserves comes into play here to control this process.

With this background complete (in a very sketchy fashion), we need to deal with each of your gaps from the issuers standpoint. We group concerns:

1. Money disappears that can be identified as originating with a bank. This occurs when a loan is paid away. Until the loan is paid, the money issued can circulate between users including government (both as a user and destroyer of money).

2. Money disappears that can be identified as originating with government. Taxes are the mechanism already described.

3. I don't understand the MBS mortgage question so I will skip that (perhaps to my peril).

4. It remains to tie fiat money to NGCs.

It is easy to see that government can allow everything-mentioned-so-far to occur. Not everyone will agree with me but I think everything described already occurs on a routine basis. The question then, is whether a private store that issued gift certificates could put in place each of these processes and procedures? I think this has happened already, visible and embodied in the form of company stores and company towns. The early development of America had several examples of small communities that were basically owned by one entity. In come cases, the community used company money which was the equivalent of paying bills with gift certificates.

This was not a good deal for the workers. The company had control of the interaction of company currency and the greater currency of the central government.

There is no question that private stores can issue gift certificates. It certainly seems possible for the private use of gift certificates to expand to include borrowing, banking and complete use in trade exchange. This expanded use of gift-certificates creates what I would like to call "A National Gift Certificate Economy", even if is limited in size to be no more than a company town.

I have attempted to tie fiat money to NGCs. Is the analogy making more sense now?

[Too Much Fed]

"TMF: You have now arrived at what I consider a special case in my theory. On the RHS of the bank balance sheet all the credit balances belong to an entity other than the bank itself. But on the LHS some debit balances represent real assets (property, plant & equipment, sometimes gold)."

OK. I think. I am not sure I would say represent. Gold is an asset of the central bank and is stored at the central bank.

"These are clearly not debts of other entities."

Yes.

"One possibility would be to say that these represent debts of the bank itself (just like one can say that a company owes its real assets to the entities on the RHS of its balance sheet). How would that sound?"

Not sure. I would to need to think about that one.

Now can I say gold and currency move between entities as long as they store the gold and currency themselves (like in their pockets)?

[Roger Sparks]

Antti: I should revise one line to introduce the actual issuance of fiat money. Issuance does not occur when the money is created (creation is all within the confines of government). Issuance occurs when government spends the newly created money.

The line "The duration of this distributed paper will depend upon the tax rate charged." would be much more informative if it read " After issuance (by government paying it's obligations), the duration of this newly distributed paper will depend upon the tax rate charged. "

[Antti Jokinen]

TMF: I used word 'represent' to distinguish between accounting and "reality". Gold is not on/in an account, it's in a vault (hopefully). These gold holdings are recorded in the ledger, and a balance sheet is just a useful way to present the "big picture" of the ledger. All this is just a minor detail, but I've noticed that sometimes people think of the balance sheet as more real than it really is. For instance, it's up to us to decide whether we want to present negative/debit bank account balances on the LHS or the RHS. I find it most natural to have a bank account "jump" from the RHS to the LHS when the balance becomes negative (debts/"loans" belong to the LHS). If we don't do that, but present those accounts always on the RHS, subtracting negative balances from positive balances, then the balance sheet loses its beautiful balance where all debit balances are on the LHS and credit balances on the RHS. We could as well then present everything as a list of accounts (no sides), the balances of which should add to zero.

To the point... I think this all started from me insisting that a "transfer of funds" in the books of the bank isn't really an asset swap, where a certain asset changes its holder. My argument was not about gold or physical currency. If you hold gold or currency, you definitely have an asset which you can transfer to another person by handing it over to him. The other person ends up holding the same asset you held earlier. Why do I insist on looking at the "book-transfer" differently? Here's why:

Scenario 1: Andy buys bananas from Betty. Andy's zero balance (no asset) becomes a negative balance ($100 debt). Betty's zero balance (no asset) becomes a positive balance ($100 asset). No asset swap.

Scenario 2: Andy buys bananas from Betty. Andy's positive balance ($50 asset) becomes a negative balance ($50 debt). Betty's zero balance (no asset) becomes a positive balance ($100 asset). Not really an asset swap, because Andy had a $50 asset and Betty ended up with a $100 asset.

Scenario 3: Andy buys bananas from Betty. Andy's positive balance ($100 asset) becomes a zero balance. Betty's negative balance ($100 debt) becomes a zero balance (no asset). Not an asset swap, because Andy lost a $100 asset but Betty didn't get an asset.

Scenario 4: Andy buys bananas from Betty. Andy's positive balance ($100 asset) becomes a zero balance. Betty's zero balance (no asset) becomes a positive balance ($100 asset). This might look like an asset swap, but when we look at the previous examples, we might as well conclude here, too, that an asset was written off Andy's account (it disappeared) and a new asset was created on Betty's account. Looking at it this way ensures that our interpretation in all the scenarios can follow the same, simple rules.

I think we come now to Nick's "observational equivalence". Nick would probably say that there is an asset swap in all cases because WE CAN IMAGINE that the bank first creates a $100 asset on Andy's account (if there isn't one) and then this asset is transferred to Betty('s account). If Betty's balance happens to be negative prior to the transaction, then WE CAN IMAGINE that Betty's account receives an asset from Andy's account but the bank takes the asset from Betty's account, because Betty owed the bank. My answer to this would be that nothing can keep us from imagining things, and using our imagination can often be useful, but it might also be useful if we could come up with an interpretation of the PHENOMENA -- which clearly doesn't include the bank creating or taking away this kind of assets -- where we didn't need to imagine so many things. Why do I think it would be useful? Because no one has yet solved the "money problem" in economics by imagining those said things, while very few seem to have been able to resist imagining those things.

[Antti Jokinen]

Roger: The example of a company town is a good one. There the issuer of the money/LGC (Local Gift Certificate) owns the store(s) where the money/LGC can be presented for redemption; it is redeemed for GOODS by the issuer. Almost everyone has to regularly buy something from the issuer's store, which makes the money also acceptable in transactions where the issuer is not one of the parties. What bugs me is how to explain that you get something from the government for your NGC when you use it to pay taxes? In that case its more like a Stay-out-of-jail card than a gift-certificate. This is where Lonergan and Wray disagreed, and I'm arguing Lonergan's case which I believe has some merits. The big question is: If you hold money (or NGC), who owes you and what?

About your definition of "fiat money": You talk only about paper, but we have to include bank reserves, right? All "high-powered money".

[Too Much Fed]

Antti, Nick seems to think there is a difference between an overdraft of a checking account and a loan.

What happens if Andy gets a loan from the central bank instead of an overdraft?

[Roger Sparks]

Antti (Nov. 4 10:52 AM): Antti writes "What bugs me is how to explain that you get something from the government for your NGC when you use it to pay taxes?".

I can't argue an explanation here. The best I can do is to suggest a philosophy. I would suggest that tax on land (we pay annual property taxes in America) and trying to get something from government in exchange for my NGC are the same. One rational philosophy is that both are a payment of "rent". Using land as the example, the American land owner is more-accurately sub-leasing the ground from the government who is the REAL OWNER. This basic philosophy underlays the entire NGC-USBS framework.

Following this philosophy, we could claim that a tax on each exchange of money is a payment of rent for the privilege of using money. Wild?!

Now I would like to change the focus to fiat money, banks, and government.

As I thought about my previous reply, particularly about the timing of issuance, I began to place more importance on this observation: both banks and government create money in a private fashion, which means "behind closed doors". Let me elaborate: Both banks and in the CB-Treasury-trade create money in a "back-room", low visibility, event where they prepare to issue money.

Using the NGC example, the issuing store prepares to sell a gift certificate by printing the certificate. Then the store has a choice: recognize the increase in inventory and expense of production immediately OR wait until actual sale and then recognize the event. The first choice makes sense if the intended use of the gift-certificates is to pay for goods and services; the second choice makes sense if the intended use is to sell the gift-certificate for money in the future.

In either case, the actual creation of money or NGC is not visible to the usual measuring tools available to the public. The actual issuance of new money is more visible but identical to using old money; issuance is just another exchange of goods and services for money/NGC.

Turning now to central bank reserves, I think this FED maintenance manual is helpful:
https://www.federalreserve.gov/monetarypolicy/reservereq-reserve-maintenance-manual.htm

I understand the manual to require a reserve deposit at the central bank that increases proportionately to the increase in bank deposits. In other words, it acts like a tax paid in positive money. What is positive money? I think it is money issued by the government but how do you separate it from bank issued money? Well, if positive money is taxed at each reissue/new-loan, the positive money will eventually all be back at the CB. This gives the CB a lot of control.

[Antti Jokinen]

NICK! In an old post you write: "The red bits of paper are a liability of the owner, but are not an asset of anyone."

Your red money is my "IOU" and your green money is my "UOM". See what I wrote above (October 30, 2016 at 10:26 AM):

---------------------------------------------------------------
Let me put it this way:

IOU. I owe you. "I" is me, "U" is society. This is a negative balance on my bank account.
UOM. You owe me. "U" is, again, society at large. "M" is me. This is a positive balance on my bank account.

Negative balance = IOU.
Positive balance = UOM.

IOU ≠ UOM.

When people like Milton Friedman and Eric Lonergan say that UOM is not an IOU, they are right. If they say that there is no offsetting entry for the UOM, and that makes the UOM net wealth for the community, they are wrong. There always exists an IOU for every UOM out there (credit=debit).
-------------------------------------------------------------------

What I don't understand:

1. Why 100 RED UNITS + 100 GREEN UNITS = 200 UNITS (your gross money supply after Betty sold bananas to Andy)? You are adding apples and oranges.

2. Why "garbage" -- why not just DEBT? You say, after all, that the red bits of paper are a liability of the owner. One is expected to get rid of one's debt eventually; the same is true about your garbage. The difference is that you need to DELIVER/TRANSFER garbage to someone else whereas debt can be WRITTEN OFF when you, say, deliver goods to someone else.

3. Somewhat related to the first point: Don't I have "red units" on my loan account if I agree with my bank on a loan WITHOUT a set repayment schedule and the bank credits my checking account and debits my loan account? In other words, can "red units" only reside on a checking account which has a negative balance?

4. To continue from the previous point (I'm mostly repeating my earlier comment to you somewhere): What makes "green units" and "red units" symmetrical in your system? It's a lot easier to get rid of "green units" (to buy) than "red units" (to sell). You can try to demand that I get rid of my "red units", but I'm unemployed and the line of willing buyers of my "expertise on monetary system" has so far been non-existent; so you might need to wait for a long while.

Anyway, it seems we are modelling the same world (this is what you meant with your "observationally equivalent"?). Can you see how it looks a lot like a "multilateral gift economy" (multilateral -- not bilateral -- trade balance required)? Going back to my iPad/iPhone example above: If I give you a gift, and there's an expectation that you have to give a counter-gift -- not necessarily to me but to someone -- then I give you not only a gift but "GARBAGE" too. In my terminology, you are in debt, and you can repay the debt by giving (selling) goods (incl. services) to someone else.

I'm writing a blog post on this, but I wanted to check this with you first.

[Antti Jokinen]

TMF: My comment to Nick answered, at least partly, your question to me? Let's see what Nick says.

[Too Much Fed]

Antti, what is the link to the old post?

[Too Much Fed]

"If Andy buys bananas from Betty and pays her 100 units, Betty now has a positive balance and Andy now has a negative balance. The Net money supply remains at 0 units, but the Gross money supply is now 200 units."

Antti, since you asked, I don't agree with that.

Andy actually got a loan.

The gross money supply is 100 units. The gross bond supply is 100 units.

Betty's positive balance is/shows the money of 100 units.

Andy's negative balance is/shows the bond of 100 units he owes.

[Too Much Fed]

"To the point... I think this all started from me insisting that a "transfer of funds" in the books of the bank isn't really an asset swap, where a certain asset changes its holder."

Yes.

"My argument was not about gold or physical currency. If you hold gold or currency, you definitely have an asset which you can transfer to another person by handing it over to him."

OK.

"Scenario 1: Andy buys bananas from Betty. Andy's zero balance (no asset) becomes a negative balance ($100 debt). Betty's zero balance (no asset) becomes a positive balance ($100 asset). No asset swap."

Let's say Andy gets a loan to borrow currency from the central bank that he puts in his pocket, then Andy buys bananas from Betty with the currency.

[Antti Jokinen]

TMF: Here's the link: http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/01/negative-money-in-an-olg-model.html

I agree with you that the gross money supply -- if we stick to terminology I find misleading -- is 100 units. I don't understand where Nick gets the idea that an overdraft and a "traditional loan" are different IN KIND, and that an overdraft is "negative money" and can be counted as part of the money supply.

To me, currency is secondary and accounting is primary. Currency is a way to make the accounting more de-centralized. You insist that Andy could take out currency, but I'd rather insist that Andy, or Betty, can take currency to the central bank and the bank will adjust its records accordingly (an anonymous credit balance, currency, is netted against its previous holder's account balance). Without modern communications technology, and in the absence of currency, Andy and Betty would have needed to visit the central bank (in our imaginary world where they have central bank accounts) to finish their transaction: Andy would instruct the CB to make the entries, and Betty would want to make sure that the entries have been made. Currency made trading a lot easier, but it doesn't change the logic behind the accounting.

So yes, currency is a specific asset which can "change hands", but because it refers to central bank accounting -- NOT the other way around; account balances don't tell us how much currency each account owner holds --, this makes the accounting primary.

[Too Much Fed]

"My argument was not about gold or physical currency. If you hold gold or currency, you definitely have an asset which you can transfer to another person by handing it over to him.

OK."

Antti, gold standard scenario I described. Add a costless storage facility (SF for short) for currency.

Andy does not use SF. Betty and Carol do.

Andy gets currency for gold. Gives it to Betty for bananas. Betty takes it to SF. Betty and Carol do an exchange (currency/carrots) using SF for currency. Carol has to withdraw the currency. Gives it to Andy.

Sound good?

[Antti Jokinen]

TMF: I'm sorry, but we've come to a point where I refuse to discuss gold. If you can say something about our current monetary system, or imaginary systems based on the current system, then I'm all ears. It seems you are now in a corner where you don't have banks but only storage facilities for gold or for "currency" 100 % backed by gold (which is different from a gold STANDARD). If you can't even have currency only partly backed by gold, then I don't see banks nor money in your world.

[Too Much Fed]

Antti, I have a central bank that creates currency. The gold standard limits the amount of currency that can be created. It just happens that the gold is stored at the central bank. I set it up that way so the central bank would be solvent. That is not really about where the gold is stored.

I can do away with the gold standard except that makes the central bank insolvent. The central bank gives Andy $100 in currency. Trading starts with the conditions of my 1:03 p.m. comment.

There are differences between the central bank and the SF.

One other thing. Are you using ledger to mean balance sheet?

[Antti Jokinen]

TMF: Can Andy redeem gold from the CB with the currency? (Btw, I'd appreciate a language lesson on word 'redeem'. Redeem with gold/currency, redeem for gold/currency, redeem in gold/currency, CB redeems, Andy redeems, etc...) Here I am, discussing gold. Empty threats... I'd really like you to explain what makes the CB a CB, other than you naming it so? The history of central banks shows that the institution is more or less inseparable from government debt. One of the debit balances has nearly always been what we call "government debt". There is no central bank that started as a depository of gold, nor do I know of any that at any point in time happened to have only gold stock as a debit balance in its ledger/books. (In Fed ledger, there is an account for "Gold stock", and that account has a debit balance.)

I think that you get confused because you insist that your entity is a central bank. It doesn't make sense to say that the central bank would be INSOLVENT without the gold. It would make sense to say that there would be no central bank nor currency if there were no accounts with debit balances in the CB ledger. A short lesson on Accounting: ACCOUNTS are needed for accounting. We make credit and debit ENTRIES on those accounts to record something. Many accounts form a LEDGER (a "book"). I'd say that's all there is to accounting itself: accounts and entries. FINANCIAL REPORTING is just that: reporting -- not RECORDING. The two most important financial reports are the profit&loss statement and the BALANCE SHEET. Balance sheet is just a way to present the account balances, the "big picture", in a meaningful way in the end of a chosen day. You probably see the balance sheet as a model of reality, and you talk about it as if it was the reality? This would be understandable. But I think it might also be somewhat misleading.

[Antti Jokinen]

Here is finally my first blog post in English: http://gifteconomics.blogspot.com/2016/11/a-new-monetary-system-from-scratch-part.html

I believe we must deal with the "unit-of-account/numeraire" question before we proceed, so the first post is only about that.

Nick: I might have taken on a "Sisyphean task", but I am going to show you what you really mean with your negative and positive "money" ;-)