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Great Leap Forward

DEBT-FREE MONEY: A NON-SEQUITUR IN SEARCH OF A POLICY

While we are on the topic of monetary cranks, I thought it might be useful to quickly address a cranky idea that often comes up in comments to my blogs and also during Q&A after presentations: so-called “debt-free money”.

The first time I heard it, my immediate reaction was “Say what?”, and the second was puzzlement at the non-sequitur.

I am not sure exactly which of the crank approaches explicitly adopt the notion, but it seems common to a lot of them. I’m not going to address any particular approach but instead will address only the idea that we can have a “money” that is not a “debt”.

But first I want to tie up a loose end from my last blog, Something is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke, which was carried at GLF, NEP, and Naked Capitalism.

Most of the comments to that piece were about a particular (“crank”, in the endearing sense) approach called Positive Money. I did not directly comment on that approach in any kind of detail; I borrowed a quote from Ann Pettifor and directed my comments only to one particular aspect: a centralized committee that is to control “thin air money creation”. I provided my objections to that one aspect.

First, I don’t like centralized committees and I certainly don’t like centralized committees headquartered at the thoroughly undemocratic and inflation-obsessed central banks. Second, I like highly decentralized and mostly small, heavily regulated and supervised, community lenders making decisions over how much lending and whom to originate loans for. I also wondered about the apparent loanable funds framework PM appears to adopt—but I’m not sure if that is indeed the framework.

I’m prepared to be dissuaded from those positions. And I do not hold a general position on PM. I’m surprised that so many of the comments were about PM, while my piece only briefly mentioned it.

I said I do like the idea of carving out a small part of the financial system—the payments system—which is what Narrow Banking is all about (at least, in most of its versions, dating back to Fisher, and more recently with Phillips and Minsky). I suggested a Postal Saving System achieves that goal and until I’m persuaded that Narrow Banking is better, I choose PSS.

Yes, I’ll probably do a blog related to that topic and will tangentially address public banking. I don’t have anything against the general idea. Just as I’m not against the narrow banking proposal, in general.

OK, with that preface, let’s look at the problem with “debt-free money”.

The Cloakroom Debt Token

In discussing money, G.F. Knapp (one of the developers of the State Money Approach, adopted by Keynes and by MMT) made a useful analogy with the cloakroom token. When you drop off your coat at the cloakroom, the attendant offers you a token, usually with an identification number. The token is evidence of the debt of the cloakroom, which owes you a coat.

Some hours later you return with the token. The attendant returns your coat. If you feel generous, you tip the attendant for the service.

By accepting the token and meeting the obligation to return your coat, the attendant has “redeemed” herself or himself. The slate is wiped clean. The debt is destroyed.

At this point the token is simply warehoused, put back on an empty coat-hanger, waiting to be reused.

When the token is in the cloakroom, it is not a debt. It is a circular piece of cardboard, perhaps enclosed in a metal ring.

Or maybe it is a square chunk of plastic.

Or a shiny brass coin.

Some cloakrooms instead use paper tickets, split into stock and stub at the time a coat is deposited. On your return to the cloakroom, the stock and stub are matched, the coat is returned to the rightful owner, and the stock and stub are thrown away.

It makes no difference what form the token takes—it is just evidence of a debt, a “coat debt” that is redeemed by return of the coat.

Note that you could pass the token to your spouse or even to a stranger, with instruction to fetch your coat from the cloakroom.

If coats were homogenous, the tokens would be valuable to anyone who might want your coat. They could become a sort of currency passing from hand-to-hand at the value of a coat debt, so Knapp’s analogy is not so far-fetched as it might first appear.

However, coats are not uniform, and the attendant cannot simply return “a coat”, but must return “your coat” in redemption for the token.

Dry cleaners also use tokens, but they make an additional promise. Not only will they return your coat, but they also will clean it. They cannot redeem their debts simply by returning your dirty coat.

Ditto the seamstress, who redeems her token debt by returning your coat with sleeves shortened.

The point here is that the token is representative of debt, with the specific obligation spelled out by custom or contract and enforced if necessary in the courts.

Money as a Token of Debt

Let us begin with the closest analogue to the cloakroom token: the tally stick. Tally sticks were commonly issued for hundreds of years in Western Europe—by Kings but also by others (my 2004 book cover shows a photo I took of tallies that were used on private estates in Agrigento, Sicily in 1905) as records of debt. The sticks were split into stock and stub, matched at the time of redemption and then destroyed.

In the case of the King’s tallies, Redemption Day was tax day when the King’s representative (the exchequer) arrived in the village, spread cloth on the ground, and matched stock and stub. Hallelujah, the tax was paid.

The tally stick had value because it could be used to “redeem” oneself on Redemption Day. You owed the king his taxes, and he owed you the right to deliver evidence of his debt (recorded on the stick) to pay your taxes. The sticks circulated because this debt was “homogenous”, unlike the debt redeemed by the cloakroom that took the form of your specific coat. Anyone with a debt to the King needed a tally stick (any tally stick so long as it was issued by that King) to pay taxes.

A.M. Innes explained the significance of tallies, quoted in my 2004 book:

For many centuries, how many we do not know, the principal instrument of commerce was neither the coin nor the private token, but the tally, (Lat. talea. Fr. taille. Ger. Kerbholz), a stick of squared hazel-wood, notched in a certain manner to indicate the amount of the purchase or debt. The name of the debtor and the date of the transaction were written on two opposite sides of the stick, which was then split down the middle in such a way that the notches were cut in half, and the name and date appeared on both pieces of the tally. The split was stopped by a cross-cut about an inch from the base of the stick, so that one of the pieces was shorter than the other. One piece, called the ‘stock,’ was issued to the seller or creditor, while the other, called the ‘stub’ or ‘counter-stock,’ was kept by the buyer or debtor.

Both halves were thus a complete record of the credit and debt and the debtor was protected by his stub from the fraudulent imitation of or tampering with his tally.

The labours of modern archaeologists have brought to light numbers of objects of extreme antiquity, which may with confidence be pronounced to be ancient tallies, or instruments of a precisely similar nature; so that we can hardly doubt that commerce from the most primitive times was carried on by means of credit, and not with any ‘medium of exchange.’ (See Wray, “Credit and State Theories of Money”, Edward Elgar, 2004.)

Now, what were coins? As Innes emphasizes, coins were never very important—in spite of all the ink spilled in writing about them. They are bright shiny tallies that can last a long time and still garner interest when discovered centuries after being lost and forgotten. Collectors love them. By contrast, tally sticks are burned or simply rot away; ditto papyrus or paper evidences of debts. But coins were typically a nearly insignificant part of the “money supply”, and most tax collections brought in far more hazelwood tally sticks than coins.

Economists focus on coins only because they outlasted the sovereigns that issued them and many of them contained bright shiny metal that blinds reason. If bovine droppings had been stamped, instead, they would have served perfectly well as coins but no one would be interested in them after the demise of the empires that issued them.

Coins were evidence of debt that solved the problem of counterfeiting not through splitting a notched stick but rather through the technology of stamping or, later, milling coins. High quality craftwork and then milling the edges made “fraudulent imitation” more difficult. In addition, the use of precious metals (which were more easily monopolized by the sovereign) made counterfeiting more difficult and more expensive. (I won’t go further into the history of coinage here—and all the myths about value being determined by embodied precious metal—as I already did that in my 2012 book, Modern Money Theory.)

The sovereign spent coins into circulation, then accepted them alongside tallies in tax payment. Coins circulated more freely than tally stocks because the coin by itself contained all the evidence of the crown’s debt (in the case of a tally stick one needed both the stock and the stub).

In addition to promising to take back coin token debts, the sovereign issuer could also promise to exchange them for foreign currency or for precious metal on demand. This is an additional promise added to the promise to accept the coin in payment of taxes. It is similar to the additional promise made by the dry cleaner or seamstress: not only do you get your coat back, but you also get it cleaned and stitched. In the case of the coin, the sovereign not only promises to accept in taxes, but also might promise to exchange it for gold, and might also impose a legal tender law that proclaims the coin is good for private payments, too.

Paper Money Token Debts

Paper money has been around for a long time, but became common in the west only in the past few centuries. Most of it was issued by private banks, in the form of bank notes. You did not owe your bank taxes. So what debt was evidenced by the bank note?

The bank issued notes when it made loans. It held your “note” (the IOU you signed; we still use the term to refer to the documents associated with loans) as evidence of your debt to the bank. It issued its own “note” as evidence of the debt of the bank. You could spend the note, passing it to a third party. That third party could present it to the issuing bank to pay down debts owed to that bank.

With a clearing system, you could repay your debt to Bank A by presenting for “Redemption” notes issued by Bank B. The bank notes were circulating private “tallies”. The system clearer would return notes to the issuers as banks cleared debts with one another.

Like the cloakroom tickets, the notes might be destroyed by their issuers when they were returned. Or they could be stockpiled in bank warehouses for use later (just as the cloakroom’s token might be warehoused on empty coat hangers).

Eventually government central banks would do much of the clearing, originally issuing their own notes. The first central banks were explicitly created to issue notes to finance government spending, with the notes collected in tax payment.

Not liking competition, governments taxed private bank notes out of existence. Banks moved to deposit-based banking (rather than note-based banking). And, eventually, we got to the present day when it is mostly keystroke entries of debits and credits.

But, folks, it is all “debt money”.

“Bank Money” is an electronic entry on the liability side of the bank’s balance sheet, and an electronic entry on the asset side of the depositor’s balance sheet. (Called double entry book-keeping, the “keystroking” of deposits when a bank makes a loan means there will be four entries—the “note” of the borrower is the bank’s asset, and the bank’s “deposit” is its liability; the deposit is the borrower’s asset, and the note is the borrower’s liability.) Depositors can write checks on these deposits to pay down their own debts, including debts to banks.

“Central Bank Money” is generally comprised of two forms: paper notes and electronic reserves. The paper notes are the central bank’s liability and the asset of the holder. FRNotes are mostly used outside the USA, and are mostly used for illegal activities. (To increase the circulation of FRNotes, we need to raise the denomination of the largest denomination notes—the almighty dollar is being replaced by larger denomination Euro notes as the preferred medium of exchange by global drug dealers, although Bitcoins are making a dent—see below.)

FRReserves are keystroke entries, representing the Fed’s liability and the asset of depositors. Unless you are a bank, a foreign central bank, or some other special entity, you cannot hold these. In theory, the government should accept its central bank notes in tax payment. In practice, US taxpayers make tax payments using their banks—either with checks or direct withdrawal. The Fed then debits the private bank’s reserve deposits. So whether taxes are paid with FRNotes or FRReserves, in either case, the Fed’s liabilities to the US private sector are reduced. (There is also internal accounting involving the Fed’s and the Treasury’s balance sheets—the Fed credit’s the Treasury’s deposit account at the Fed. As I’ve said, this is like the husband owing the wife some dishwashing.)

“Treasury Money” is now mostly coins; in the past treasuries issued notes (and some still do). What is a coin? Stamped evidence of the Treasury’s debt. Some have pointed out that the US Treasury records coins as “equity”. Equity, of course, is on the liability side of the balance sheet. In theory, one should be able to pay taxes by returning the King’s coins. In practice, hardly anyone does that. I used to think that the IRS would not accept coins in payment of taxes, but apparently Tea Baggers are doing just that. According to a news report one of them delivers, each year, a bag full of coins in payment of taxes, with the stated intention of wrecking the day of some IRS agent, who presumably has to spend a few hours stacking and counting (tallying?) the coins.

So it is apparently possible to push a wheelbarrow to the IRS steps to pay your taxes in coins. In any event, most US taxes are paid as described above. You can certainly deposit coins (and FRNotes) at your bank and write a check to the IRS—Redeeming yourself in the eyes of Uncle Sam without pissing off IRS agents.

Debt-Free Tokens?

Now, with that background let us try to make sense of the call for “debt-free money”.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the tokens discussed above, but they are not debts. You can return them to the cloakroom, but you don’t get a coat.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper.

Imagine a sovereign that issues “debt-free” tallies. They look like the tallies discussed above, but when you return them to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt, but rather as a stick—perhaps fuel for a fire, but not a means of Redemption.

What is a debt-free tally? It is a hazelwood stick.

Why would you want the debt-free cloakroom token? Why would you want the debt-free tally stock?

As MMT says, “taxes drive money”.

(I’m not going through that again here. See the series that begins with this post: http://www.economonitor.com/lrwray/2014/05/15/1856/.  Note, however, that “TDM” is short-hand for “obligations to the sovereign drive money”. You can pay fees, fines, tribute, tithes and taxes owed to the sovereign by delivering back his debt tokens (tallies, notes, coins, electronic records of liabilities). Note also that we claim that taxes are sufficient to drive a currency; we do not say they are necessary. Some commentators note that there are a few sovereigns (typically noted are oil-producing nations in which the sovereign monopolizes ownership of oil) that don’t impose taxes but still issue currency. But as we have long pointed out, if the sovereign can monopolize necessities of life, the sovereign can name what must be delivered to get the necessities. The Chicago water monopolist can designate what you must pay to quench your thirst; the heroin pusher can dictate what you need to get your fix. Maybe Bitcoins?)

If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk.

I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money.

I don’t think our debt-free money cranks want government to “issue” bananas. I think they want a “money” that is a record. But a record of what?

From what I gather, they want government to issue notes (many love to refer to Lincoln’s Greenbacks) or electronic “money”. But what are notes or electronic entries? They are records of indebtedness—debts that can be redeemed in payments to the issuers. They are debt tokens.

A Non Sequitur in Search of a Policy

When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks seem to hate payment of interest by government.

I’m not sure, but I think what they really want to do is to prohibit government payment of interest.

That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds.

We don’t need a non sequitur in search of a policy.

Debt-free money advocates also hate debt. Fine, in many religions, debt is sinful—for both creditor and debtor. Monetary cranks (rightly) attribute our current economic predicament to excessive private sector debt. I agree.

Some also fear public debt—which has no basis if we are talking about sovereign currency-issuing government.

However, there are some advocates of debt-free money who understand MMT’s point about sovereign government. Some of these even recognize that the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our net financial (dollar) wealth.

But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding.

Hence the idea is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat.

While I’m sympathetic to the view of political realities, the operational realities are quite different from what is imagined.

Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds, we will have already achieved what our “debt-free money” champions want.

However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins).

There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.

For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds. I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent.

Again, we don’t need a non sequitur in search of a policy.

18 Responses to “DEBT-FREE MONEY: A NON-SEQUITUR IN SEARCH OF A POLICY”

helsworthJuly 1st, 2014 at 7:54 pm

Mr. Wray, a lot of people (at least on the internet) equate debt-free money with the US greenbacks. Whenever I mention "debt-free money" when explaining Chartalism to people, is in the context in which I give Thomas Edison as an example of his policy choice – wanting the government to issue banknotes and giving them directly to the workers instead of issuing interest bearing bonds to fatten bankers. I give them a link to Edison's quote in order to better shed some old light on a present issue – that the issuance of public debt is an idiosyncratic leftover custom from the metal standard period. It's not some implacable operational necessity. Of course, all money is debt. A promise made and unfulfilled, we call a debt. The citizens owe fiscal obligations to the state, and the only way to extinguish those obligations is with the government's own tax-credits.
All in all, debt-free money might mean different things to different people. Most people I've seen who are in favor of debt-free money (greenback policy) want the creation of money to NOT be left in the hands of the opulent minority, money creation at interest. These people want no interest to be attached to the new issued money, money they would like to see issued by congress.
Your article does away with any uncertainties on the matter. As always, a pleasure reading you, sir.

Kind regards from a little MMT bloke from Bucharest, Romania. ^_^

NeilWJuly 2nd, 2014 at 5:10 am

We already have a name for that. They are called 'Ways and Means Advances', and we've had them since Central Banking came into being.

The UK government has a Ways and Means Account with the Bank of England and has had since the thing came into being. All the laws are already in place to use it and we just need a government to say that they are going to fund their operations via the existing Ways and Means Account.

I'm not quite sure why we need an incorrect name for something that we already have a good name for, or why people are dressing something up as a new idea that has been around for centuries.

And of course there is the small matter that if you fail to issue government bonds how are private pensions going to get paid out?

CezaryWJuly 2nd, 2014 at 8:30 am

Prof. Wray,
Its not surprising at all that 'debt-free money' can't exist, at least for those who got a grip on MMT or those who follow your contribution to the very idea of money.

As its usually not particularly useful stance "to teach a father how to make kids" I'd like to comment on evaluation process of an economic policy effectiveness.

I found no correlation between a policy maker's political system and effectiveness of its policies. Same with the level of centralization (decentralization) of a regulator and policy effectiveness. Example: China, North Korea represent a political system, let's call it 'dictatorship of one party", and they demonstrate two completely different levels of effectiveness of their economic policies.

US Government, Congress make a good examples of a centralized policy maker. Its political structure hasn't essentially changed for 2 centuries although its plain that in terms of economic policies effectiveness, sharp differences between gov administrations are easy to spot.

That said I'm jumping to the conclusion that while evaluating a particular policy its of no importance who designed it. What counts is rather evaluation if objectives of a policy have been achieved, with as little unintentional negative consequences as possible. That's ex-post analysis and could be quite robust if based on reliable data and reasoning process. In highest demand are those ex-ante analyses (as they allow to decide which policy to choose ). And here starts the game of forecasting uncertain future.

L. Randall Wray L. Randall WrayJuly 2nd, 2014 at 11:22 am

Neil: in my mind the only issues surrounding elimination of interest-paying govt debt is how pension funds, insurance funds, college savings funds, etc will earn interest on safe assets. That is what the discussion should be about. I’d eliminate the bonds but have special accounts at Treasury for such public purposes. Actually the US Treasury has dozens of such accounts already.

CezaryWJuly 2nd, 2014 at 12:46 pm

Prof. Wray, your post made me think about whether earning interest by pension funds, insurance funds, college funds, etc is a public purpose ?

I'm strong proponent of MMT and actually marketing it on two fora I administer. So no battle, just creative inquiry intended. :-)

Why not paying an interest to all guitar players in order to make the world more melodious ? Yes, I know. Its a political decision.

Why people desire to accumulate govt tax credits ? Perhaps they think they accumulate wealth. Perhaps they think of money as drawing rights on goods, services, assets available and yet to be produced ?
We know that private sector desire to net save financial assets has adverse effect on economic output (real wealth) if not compensated by deficit spending.
We know that non-govt economic agents are limited in their ability to borrow and only govt is not constrained to deficit spend.
Good, govt can do it with no adverse effect on economic growth. Ok still, I'm not convinced why whole public has to promote paying interest on govt securities ? No other explanation come to my mind than subsidizing income stream of less rich but not so pure (middle class ?). That's good idea to increase income to those less rich but why on the expense of those who did or want to stimulate economic growth i.e. private debt holders ? Yes, I'm ZIRP proponent.

Benefiting savers over debtors is not consistent with MMT view, rather consistent with mainstream financial position toward investment, namely "you got to sacrifice your income, save and then you can invest".

On the personal level i support short-term savings as a means to balance income stream with actual expenditures stream. Good thing. Why should I benefit from moving spending decisions into the future ?
The answer is: to support life-style toward living below my means in the long-run.

Not consistent with my worldview – we came hear to experience all wealth possible (including unmonetized wealth) and desire for more. :-) And its IMO, public purpose to promote this worldview (everybody deserves to be as wealthy as one wants ) as there is no systemic limit to permanent economic growth (except thinking patterns opposing this belief). This planet is abundant in natural resources streamlined in time, affluent with opportunities to innovate ANY area of human life. No need to sacrifice NOW for making sure one have enough funds to pay taxes. :-).

NeilWJuly 2nd, 2014 at 12:56 pm

Same here in the UK. We already have National Savings and Investments.

Indexed linked saving certificates used to be known as 'Granny Bonds' – because they were aimed at providing a consistent income to people over retirement age.

In fact I remember being able to buy Government Gilts on the primary market via National Savings – and if you did it this way the interest was tax free. Again to provide income directly to people.

That was scrapped a number of years ago because the City of London didn't like the competition.

bendyson2013July 2nd, 2014 at 4:36 pm

This is mainly a semantic argument around the difference between "liability" and "debt".

Old fashioned banknotes (prior to 1931 in the UK) were redeemable for gold. The Bank of England effectively 'owed' gold to the holder of the banknotes, and could rightly be said to be in debt to holders of banknotes.

But now, someone redeeming a banknote will receive another identical banknote.

If you have an IOU to someone, but they have no right to redeem anything other than another identical IOU from you, then you owe them nothing. You cannot be 'in debt' to them. In the same way, banknotes (and electronic sovereign money, if it were issued in the way we're suggesting) would not be a debt of the state or the central bank. That's the meaning of the phrase 'debt-free'.

Now, you claim that the state is in debt to the holders of money because it accepts money in payment for taxes. But this is false. Your tax obligations are calculated on the basis of what you earn (and various other rules). Beyond that obligation you have to the state, you have no right to hand over more money and demand more services in exchange. (Try it at the IRS sometime.)

If state-issued money was a debt of the state, then the (federal) state's obligation to provide services to you would depend on how much money you held. Those willing to pay more taxes (voluntarily) would receive more services. It clearly doesn't work this way: the STATE decides what obligation it has to you, regardless of how much money you hold. In fact, in many circumstances (via means testing), the more money you hold, the LESS service the state will provide (think of old-age care, where someone's savings are assessed before the state provides assistance).

To be crystal clear, we see a difference (which is more than just semantic) between:

a) something being recorded as a liability on a balance sheet (which is an accounting convention), and
b) a debt, which implies a contractual obligation of one party to give you something of a certain value (other than the promise that you're already holding).

Money can be recorded as a liability on a central bank's balance sheet without implying that the central bank (or government) actually 'owes' anything to the holders of money. In other words, this money is just a token, used by the public to trade.

helsworthJuly 2nd, 2014 at 6:17 pm

@Neil Wilson
I don't think we can blame people who actually think outside the box for the semantics they choose. Ultimately, the various proponents of debt-free money (a la greenbacks) mean money that doesn't have to be paid by the public with interest to private financiers. They are not against the notion of debt itself or government taxation – they're against arbitrary constraints on the representative government to issue its own money for public purpose. They're against the oligarchs having more or less complete control over the Money Supply. Of course, I don't think that the proponents of greenbacks are familiar with the notion of endogenous money – still, light needs be shed on operational reality. If the mainstream media and politicians and the academic establishment would start speaking in facts and not in economic myth or ideology, mayhaps the average citizens would be more aware of the actual problems facing society itself – and would be better equipped to demand from his politicians actual solutions. For starters, hey mr. president, or mr. PM, stop cutting spending and stop increasing taxes; because I, the citizen, your voter, want to have a job, net save, and create a future for my family.
Financing private pensions isn't a problem, it's a political problem, but it's not an operational problem money-wise. All that matters is that in the future, labor and resources still exist to produce goods and services.

L. Randall Wray L. Randall WrayJuly 2nd, 2014 at 7:07 pm

BECAUSE BEN’S COMMENT WAS LONG AND DETAILED, I AM PUTTING MY RESPONSES TO IT IN ALL CAPS HERE:

This is mainly a semantic argument around the difference between "liability" and "debt".
THERE ISN’T ANY? IF THERE IS, CAN YOU PROVIDE DEFINITIONS FOR EACH, AND SHOW THEY ARE NOT IDIOSYNCRATIC?

Old fashioned banknotes (prior to 1931 in the UK) were redeemable for gold. The Bank of England effectively 'owed' gold to the holder of the banknotes, and could rightly be said to be in debt to holders of banknotes.
YES IT IS AN ADDITIONAL PROMISE. TODAY SOME COUNTRIES PROMISE TO EXCHANGE FOR FOREIGN CURRENCY AT FIXED RATE. JUST AS THE DRY CLEANER HAS ADDITIONAL PROMISE.

But now, someone redeeming a banknote will receive another identical banknote.
THAT ISN’T REDEMPTION. IT IS EXCHANGED. THE ISSUER OF THE BANKNOTE REDEEMS IT WHEN ACCEPTING IT IN PAYMENT. OTHERWISE, THE ISSUER IS STILL IN DEBT.

If you have an IOU to someone, but they have no right to redeem anything other than another identical IOU from you, then you owe them nothing. You cannot be 'in debt' to them. In the same way, banknotes (and electronic sovereign money, if it were issued in the way we're suggesting) would not be a debt of the state or the central bank. That's the meaning of the phrase 'debt-free'.
SO FRNOTES ARE ALREADY EXACTLY WHAT YOU WANT.

Now, you claim that the state is in debt to the holders of money because it accepts money in payment for taxes. But this is false. Your tax obligations are calculated on the basis of what you earn (and various other rules). Beyond that obligation you have to the state, you have no right to hand over more money and demand more services in exchange. (Try it at the IRS sometime.)
NON SEQUITUR. ANYONE OWING A PAYMENT TO GOVT CAN PAY USING THE STATE’S OWN LIABILITIES. YOU CANNOT HAND OVER TWO TOKENS TO THE COATCHECK ATTENDANT AND DEMAND ONE COAT PLUS A CAR WASH OR A BRAZILIAN WAX JOB. IF YOUR TAXES ARE $1000 YOU CANNOT DELIVER $2000 AND TELL THE IRS YOU ALSO WANT A FLIGHT TO TAHITI.

If state-issued money was a debt of the state, then the (federal) state's obligation to provide services to you would depend on how much money you held. Those willing to pay more taxes (voluntarily) would receive more services. It clearly doesn't work this way: the STATE decides what obligation it has to you, regardless of how much money you hold. In fact, in many circumstances (via means testing), the more money you hold, the LESS service the state will provide (think of old-age care, where someone's savings are assessed before the state provides assistance).
NO. THE COAT CHECK ATTENDANT DOESN’T DECIDE WHAT OBLIGATION SHE/HE OWES BASED ON YOUR INCOME, THE SIZE OF YOUR HOUSE, OR THE HORSEPOWER OF YOUR CAR. IT IS TRUE THAT HIGHER INCOME PEOPLE NEED MORE GOVT DEBT TOKENS BECAUSE THEIR TAXES ARE HIGHER. YOU MAY WELL ALSO GET MORE SERVICES FROM GOVT (OR FEWER) BUT THAT IS ON THE SPENDING SIDE OF THE GOVT BALANCE SHEET.

TO BE SURE THERE ARE “FEES FOR SERVICES” WITH PRICE LISTS. YOU WANT TO GO THRU THE TOLL BOOTH, YOU PAY $2.45. SAME AS ANYBODY ELSE.

To be crystal clear, we see a difference (which is more than just semantic) between:
I DON’T SEE IT. DISTINCTION WITHOUT A DIFFERENCE?

a) something being recorded as a liability on a balance sheet (which is an accounting convention), and
YES, IT IS DOUBLE ENTRY ACCOUNTING
b) a debt, which implies a contractual obligation of one party to give you something of a certain value (other than the promise that you're already holding).
THIS ISN’T PRECISE. YOU MIGHT HOLD MY PROMISE TO GIVE YOU COCAINE WORTH $1000 BUT YOU WILL NOT FIND THAT LEGALLY ENFORCEABLE. IN GENERAL, COURTS ENFORCE PAYMENT IN “LAWFUL MONEY”, INTERPRETED AS WHATEVER THE SOVEREIGN HAS DECLARED TO BE SUCH. IN PAYMENTS TO THE SOVEREIGN, THE SOVEREIGN’S OWN LIABILITIES ARE ACCEPTABLE. THERE ARE OF COURSE CASES OF DEFAULT AND SUITS AGAINST THE SOVEREIGN MAY NOT END SATISFACTORILY. (“OFF WITH HIS HEAD” IS SOMETIMES THE SOLUTION TO SOVEREIGN DEBTS.)

Money can be recorded as a liability on a central bank's balance sheet without implying that the central bank (or government) actually 'owes' anything to the holders of money. In other words, this money is just a token, used by the public to trade.
BUT THAT IS CLEARLY FALSE. IT IS NOT JUST A “TOKEN USED IN TRADE”. THAT IS THE DUPE A DOPE ARGUMENT. CURRENCY IS DRIVEN BY OBLIGATION TO THE ISSUER.
BUT IN ANY CASE, IN MY PREVIOUS BLOG I DID SAY THAT YOU COULD EITHER SEE ALL “MONEY” AS “DEBT FREE”, OR YOU COULD SEE NONE OF IT AS DEBT FREE. I THINK THE SECOND VIEW IS FAR BETTER. BUT IF YOU WANT TO STICK TO THE FIRST THAT IS FINE. IN WHICH CASE THE FED ALREADY ISSUES GREENBACKS, SO WE DO NOT NEED. THEM. WE DO NOT NEED ANY “MONETARY REFORM” BECAUSE THE FED IS ALREADY ISSUING DEBT FREE MONEY, ON YOUR DEFINITIONS.

CezaryWJuly 3rd, 2014 at 8:12 am

@helsworth,
I agree with your line of thought completely although I see inconsistency (indeed of minor importance than real output growth) in your support of interest bearing treasuries policy.

Its a leftover from pegged, sovereign currency regime. In that system it makes perfect sense while in fiat currency its idiosyncratic that public owes anything to savers. The policy favoring savers against debtors runs counter to the policy of maximizing real output. Savers decrease real output by their decision to save while debtors stimulate real output by their decisions to deficit spend.

Interest rate determines how much debtors' future fixed savings (repayment of debt principal plus interest) will affect their income stream. The more they got to pay back the less they will spend on future real output.

Individual austerity policy is as detrimental to economic growth as public austerity, i.e. no matter which pocket it comes from, a dollar saved is the dollar not spend on the real output.

Economy is sluggish because rich people live below their means, i.e. below their income stream capabilities. Riches live too poor life :-) in comparison to their income. Other reasons encompass income deflation to middle class, and poor people living too rich life (going into too high debt relative to their income stream).

Off the record, I can't understand why some people envy riches ? What's the point in owning 50mln$ passenger cruiser with all management problems incurred while I can enjoy a cruise to the Caribbean Islands, served meals, exotic drinks, beautiful views, pretty women, relaxed chats in nice companion for as low price as 1500 $ ? And that's just one out of thousands options to enjoy life in exchange of tax credits. :-) Enjoy you vacations.

CezaryWJuly 3rd, 2014 at 9:27 am

@bendyson2013,

I had a discussion with a libertarian 2 days ago. They define inflation as increase in money supply. Doesn't it sound weird to say "despite huge inflation CPI increased by just 1,4% annually " ???

Positive Money sounds nice to me as a term. IMO a robust financial reform policy must address huge disparity between public and private sector debts without choking economy as well as disparity between financial and real economy investments.

IMO restricting private sector money creation may work well on the assumption that MCC will supply all the necessary funds (new money) private sector needs to pursue its purposes. Also, MMC must be sensitive enough to tighten new money supply just before economy is overheated. Moreover MMC must determine the volume of government deficit spending at least. MMC takes whole responsibility for national financial system. It should modify tax policy as its automatic, anti-growth factor. All the government does in terms of national financial policy is to decide where the funds flow specifically. MCC job in your proposal is that of Finance Minister in my country. :-)

I can't see how the second issue (more real investment, less financial investment) is addressed by PM proposal.

PZ_July 4th, 2014 at 12:53 pm

I think there is this nearly universal conception that good economic management is moral oblication of the government. This view is held by almost all from the common people to the policy makers and their advisers.

According to this view, state is 'indebted' to fullfill this mandate and is in debt until debt is settled, that is to say, economy is mended. So the state owes to its citizens to issue that amount of money that restores economic wellbeing.

This is moral debt as opposed to accounting debt but when we think about it this way real deficit is not the budged deficit, it is unfullfilled public oblication.

bal5047July 8th, 2014 at 4:08 pm

Prof Wray, I have a question about the "disconnect" over money.
I am currently taking a M&B class, at a mainstream, non heterodox school and we were discussing assets and liabilities, and how one is another person's… how money is legal tender for debt, thus money is debt and that we all have a debt, taxes.

While it wasn't said it in class, that implies taxes drive money, at least partly, and since the gov issues it…it's demanding its own money so of course can't run out.
Sounds like what many of you MMTers describe.
I know not all departments/schools are the same, but is this standard? Where has the disconnect come from? Since so many don't seem to get how things really work, what has gone wrong? I am just curious if it is taught differently at more elite institutions, ideology? Misinterpretation?

TomUsherJuly 9th, 2014 at 6:05 am

"When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks seem to hate payment of interest by government. I’m not sure, but I think what they really want to do is to prohibit government payment of interest. That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds."

I'm glad to see you say you agree.

As for the use of the term "cranks" while pointing out an issue of semantics, why? The use of the term debt as applying to interest owed by the government is a perfectly legitimate connotation. I often say interest-free money or debt- and interest-free just so the general public might start to draw any connection at all.

You went on a long time trying to prove that money is always debt. It does not have to be. It can be nothing more than a medium of exchange. I have money that is owed to no one. That money is not a debt, per se. No one can look at it and rightly say that someone or group owes something as a result of the fact that it is simply money sitting there, with the exception of the mere existence of Treasurys, which one might rightly argue has some attachment to that money; but that really is a collective argument (the "debt" in debt-free) where I'm discussing the money on my individual level only. So what I just said represents two connotations, both different from yours (which I also consider valid but obviously not to the exclusion of my two connotations mentioned here). Perhaps I'm not as arbitrary as are you when thinking about these matters.

I recall your discussion on the Money Multiplier being dead and that when I attempted to engage a bit concerning the semantics and some other points, you dismissed it and didn't engage upon my follow-up. I was criticized in the LinkedIn MMT group for thinking that you "owed" me a reply, you being a professor of economics while I'm apparently a nobody. Of course, I didn't tell the group that you owed me anything but simply that you had not yet replied. I was simply anticipating anyone wondering whether you had answered.

My question concerning the Money Multiplier was far from unreasonable, and I was fully open to hearing something from you that I might not know about how the Fed actually handles its legal ability to sanction banks (at the Fed's discretion) that don't have sufficient reserves. It was not a question about which comes first: the horse or the cart. Is the multiplier dead because the Fed has chosen not to enforce it? I'm not claiming to know. I have heard you about loans being made first. It's not completely the same issue. That banks can create credit first does not actually answer the question.

A clear explanation about the mechanics would be helpful. Maybe you don't know either on that level. I've considered putting it to the Fed, but maybe you could do it since you're not a "nobody" and let me know their answer.

Back more directly to topic of your article, what you wrote above is not lost on me. I have understood for a long time your point about taxes being the practical reason why Federal Reserve Notes (tangible or cyber units) are sought. It's fine. I also have understood the accounting principles.

You actually stated a great deal of common ground in very few words (not your debt argument portion) but in the process, thumbed so many in the eye over nothing but an issue of semantics concerning which you cannot win or lose.

Why not make your next post about advocating for public policies and practices to stop issuing Treasury bills and bonds? That's what I've been advocating for many years now.

Thank you in advance for your consideration.

L. Randall Wray L. Randall WrayJuly 9th, 2014 at 12:00 pm

Tom: doesn’t look like you understood what I wrote. First, take a look at the New Palgrave entry on monetary cranks. It would certainly include “debt free money” as well as “100% money” and, yes, “MMT”. Second THERE ARE NO MONIES THAT ARE JUST MEDIA OF EXCHANGE! All monies are on 2 balance sheets–liabilities of issuers and assets of holders. You are thinking of bananas, not monies. Try to shake the bananas out of your head. That is an imaginary world of dupe the dope. You cannot drive money by duping dopes.

Frances GriffithsJuly 15th, 2014 at 11:40 pm

There is a sense in which all money is a token of debt. It is a proof that you have contributed something into the common pot of goods and services and are owed goods or services in return. Note that it is the community that owes the money holder on production and surrender of the money, not the government. Possession of money does not necessarily signify that money is owed by the money holder to anyone, although he may do, if he borrowed the money in the first place. A proportion of money is owed in taxes to the government as it is spent or earned but this is a bit different from saying all money is a debt owed to the government. The point that Positive Money is making is that quite apart from these essential debtish characteristics of money, most of our money, 97% in the UK, starts off as loans made by commercial banks so that in order for some of us to be able to earn the money we need to buy things other people have to suffer the anxiety and interest costs of going into debt. If everybody made a supreme effort and we all helped each other to pay our debts then there would be no money left. Positive Money does not think this is right and I don’t think it is right and what is more it really doesn’t have to be like that. The government could create the money and spend it, then tax it_ then spend it again.