Prof. Paul Krugman mentions MMT again in What Are Taxes For? He says:
Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)
So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.
[Emphasis added]
Here is my response in his comment section:
Prof. Krugman, it is you who can't seem to fit the two pieces together. A monetarily sovereign government that is the monopoly provider of nonconvertible floating rate currency is not operationally constrained since it funds itself (although it is constrained by inflation and the exchange rate). Political restraints can be imposed, but this does not change the operational reality of the present monetary system; Political restraints simply hobble it, leading to political kerfuffles like the debt ceiling controversy that threaten the economy needlessly.
Taxes do not — and cannot — fund the federal government, since it is the currency issuer, unlike state and local government, and households and firms, which are currency users. Taxes are not revenue for the federal government as they are for state and local governments. Nor is borrowing required to finance the federal government. Nongovernment net financial assets are injected through federal expenditure (spending and transfers) and are withdrawn by taxation. Addition and subtraction on spreadsheets.
Treasury issuance shifts the composition and maturity of government liabilities, providing interest as subsidy to bondholders. Tsy issuance is not operationally required under the present system, so this subsidy for bondholders could be eliminated. Congress could remove the no-overdraft rule, and the Fed could carry negative equity. Tsy issuance is monetary operation to drain excess reserves to allow the Fed to hit its target overnight rate. The Fed can do the same by paying a support rate on reserves, as its does now.
You say you cannot figure out MMT. Have you read any of the literature? For example, consult Warren Mosler's "Soft Currency Economics" and Mosler and Forstater, "A General Analytical Framework for the Analysis of Currencies and Other Commodities."
This is important because the problem of the debt and deficit is a pseudo-problem, and accounting mirage. The only problem the US faces is the availability of real resources. Right now, the US has enormous idle resources while we are wasting time arguing over pseudo-problems. The opportunity cost of this is huge.
UPDATE: Traders Crucible responds, Paul Krugman, just read this post
I think you're missing the point of his confusion or going into more detail than you have to. I think in size 100 font you just have to say to him "MMT recognizes too much spending can lead to hyperinflation, a de facto form of default." Once he acknowledges this, say "But recognizing the government technically can print as much as it wants, regardless of the consequences, it makes more sense to say taxes regulate aggregate demand than fund the government, since the government doesn't technically need tax to spend (regardless of the consequences). They create that money in the first place!" It's just a matter of consistency in the framework. You establish the correct operational reality, then you say within that operational context, we admit you can still have inflation, but that doesn't mean taxes fund spending.
ReplyDeleteI don't know why he hasn't picked up on this though. This is how it is normally presented on MMT blogs. Maybe he just hasn't read them (enough) or has read the wrong ones or has just heard things by word of mouth.
I also wish MMT would approach his comments in a more professional, friendly manner. He very graciously, respectfully gives MMT the mention again. MMT just de-legitimizes itself when it uses abrasive language.
ReplyDeleteLast thought for now. It is quite revealing that the economics professions are still relatively unclear on what "taxes are for." I mean, there should be a pretty clear answer given this is a first-principles, man-made concept...
ReplyDeleteAndrew makes several points with which I agree. Unless one is an alert and rather careful economist who employs language upon which all other such economists can agree, misunderstanding is an all-too-frequent outcome. It seems as if various slang, idioms and the like facilitate multiple interpretations. It also seems as if Paul Krugman is inviting the MMT-advocates to present an unambiguous justification for certain aspects of their 'insightful' concepts.
ReplyDeleteIt seems as if this simply reflects an opportunity to provide a clear explanation;i.e., another request that the MMT-advocates employ tools such as more effective visual/audio/written tools and media that may be understood by non-economists such as politicians or scientists (such as I).
PK: "So taxes are, first and foremost, about paying for what the government buys (duh)."
ReplyDeleteThis makes no sense. Logically, govt spending has to come first so that citizens in the non-govt sector have the dollars to be able to then pay taxes. So he cant say that taxes are 'first' about the govt 'paying' for something.
SPENDING is first and foremost about paying for what the govt buys. DUH!! for real.
It is only in a system (like here in the US) where the govt itself requires a positive balance in its accounts at the Central Bank where someone can get confused with logical precedence. Apparently even prizewinners....
Tom, any thoughts on what he is up to?
Matt, much better, simpler explanation than mine. I would just add you first need to do the size 100 font bit about hyperinflation. I think he is still assuming MMT says hyperinflation can't result from too much spending.
ReplyDeleteWhat does he mean by 'limits on seignorage' ? Is he referring to international currency agreements as described in previous posts by Ramaman?
ReplyDeleteSpeaking of Ph.D.s in economics who can throw around a lot of jargon, what does he mean by limits on seignorage? I'm afraid it's hyperinflation argument, and I agree with Andrew Rogers and others here that that is a simple misunderstanding of MMT on his part, and in no way refutes the MMT position on taxes...
ReplyDeleteAnd I wouldn't give him to much comment for addressing the MMT in parentheses with an incoherent aside...
ReplyDeleteArgh! Sorry for the typos. What I meant to is:
ReplyDeleteAnd I wouldn't give him too much credit for addressing the MMT in parentheses with an incoherent aside...
What I meant to SAY is...
ReplyDelete(I empathize with Krugman. This writing thing isn't always easy.)
Another opportunity to repeat and reinforce MMT in 'prime time', in that case may Paul have a lengthy and much publicized learning curve.
ReplyDeleteMatt, Krugman is simply confused on this. He has been taken in by the illusion. That is what I was pointing out to him.
ReplyDeleteDetroit Dan, the seignorage thing applies to the gold standard but he is using it for hyperinflation.
I think Krugman is basically saying that seignorage (creating some unit of value for less than it's intrisic value) is inherently inflationary. MMT asserts that the sovereign can do this without constraint (credit bank accounts), and Krugman implies that this is ultimately inflationary. MMT says inflation is not necessarily the outcome because the sovereign can sustain demand to a degree that ensures a sufficient output of goods and services so that there needn't be inflation.
ReplyDeleteObviously, too much "seignorage" (which I guess is equivalent to the more common "money printing") can be inflationary. Everyone agrees on this, so why doesn Krugman act like we don't?
ReplyDeleteThat's right. At the point where inflation arises, taxes can reduce demand to a level that is consistent with a lower inflation rate. MMT defined.
ReplyDeletehttp://en.wikipedia.org/wiki/Seignorage
ReplyDeleteIt's a tax.
Inflation and hyperinflation have been covered in previous replies to Paul's blog. This is the third round of the same debate that began last year!
Matt, though Krugman doesn't mean it that way, his phrasing is vague and confusing enough to be interpretable as meaningful and correct. :) He uses "first and foremost" as meaning the "primary purpose". Taxes are about creating the demand for the money the government spends.
ReplyDeleteLaura, I think his "limits on seignorage" refers to Fed "money printing", which he wrongly thinks is more inflationary than "borrowing" and "bond printing", which he wrongly doesn't consider "seignorage" also. He probably does not understand the mechanics, and therefore unconsciously accepts mainstream lunacies.
The problem is that he does not understand that government spending creates the money (currency) it "borrows back", that the Treasury's "bond printing" is just as (really more) important than the Fed's money printing, and that bonds are just another kind of money, so "borrowing" simply is not the right word for bond/currency swapping.
Concerning Ramanan, he has managed to confuse himself with imaginary economic foreign trade constraints. Foreign trade is just a kind of domestic trade, and the only conceivable constraints are legal, which IMHO he misinterprets. Could have the same kind of constraints domestically that he worries about internationally- with the same bad effects. But the point is whether MMT correctly analyzes the economic situation, constrained or not, not whether MMTers' legal analyses are correct or not.
Paul Krugmans writes:
ReplyDeleteApril 21, 2011, 4:41 pm
Comment Gremlins
The Times blog team informs me that the whole comment system has gone down, possibly taking a number of submitted comments with it into oblivion. So if you posted a comment and it never shows, it’s not because I don’t like you; it’s because the gods of IT don’t like you.
"Seignorage" is a canard. It is a relic of the convertible system that gives money more value than what it is convertible into.
ReplyDeleteThere is no seignorage in this sense in a fiat system in which the money is intrinsically worthless. Fiat money gets value from the fact that government accepts only its own liability to satisfy liabilities to it — taxes, fines, and fees. In this way the monopolist sets the price of a piece of otherwise worthless paper, except maybe to collectors.
This is just Krugman fretting about inflation from "money printing."
too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)
The answer is functional finance. Krugman doesn't seem to get that yet.
So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.
Krugman should perhaps read some Adam Smith
ReplyDeleteThe purpose of taxes is in the words of Adam Smith to give fiat currency a value. The quote from Adam Smith (II.2.104)
Quote:
A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind might thereby give a certain value to this paper money, even though the term of its final discharge and redemption should depend altogether upon the will of the prince. If the bank which issued this paper was careful to keep the quantity of it always somewhat below what could easily be employed in this manner, the demand for it might be such as to make it even bear a premium, or sell for somewhat more in the market than the quantity of gold or silver currency for which it was issued.
End Quote
My new favorite blog.
ReplyDeleteThanks Mike and Tom and all...
Calg,
ReplyDeleteTo continue with the language theme, Ram posted this quote from Waldeman via DeLong over at Warrens:
"Enthusiasts sometimes present MMT in a manner that’s too complete and hermetically sealed. While some MMT theorizing is based on “double entry accounting” or “obvious, unarguable facts”, when MMT adherents offer non-trivial conclusions, they rely upon assumptions about human behavior that are in fact contestable…”
See when I read something like this I have no idea what they are talking about, similar to Krugman here. I could read this 100 times and would never get it. It reads like they used a "gibberish generator" after plugging in a few key jargon terms.
What is being "too complete"? How can one theorize about double entry accounting? it is not science. What are "non-trivial" conclusions, conclusions that are other than trivial? Where does MMT bring "human behavior" into it?
This type of writing is pure sophistry. Why dont they address the issues they have with MMT head on? (btw like Ramanan does)
These uber lefty published economists (Krugman/DeLong/Waldeman/Stiglitz, whoever, etc...) are THE most intellectually corrupt bunch of egomaniac BSers I've ever come across in the realm of public policy discussion... they are adept at writing a lot without really saying anything. It is hurting their own causes of the left at this point imo.
So far, none of the people commenting on MMT or criticizing it have read any of the MMT literature, including the most introductory presentation, Warren's book. They are just reacting to blog posts and comments.
ReplyDeleteThis is not taking MMT seriously, and I don't take them seriously. Anyone serious about taking one MMT has to be familiar with the basic literature which deals in detail with what they bring up. This is just a bad joke.
The ability to add comments to Krugman's blog has returned.
ReplyDeleteWhat are taxes for then ?
ReplyDeleteThey are needed to put brakes on speculation and unregulated banks like Goldmans, Bears, and any others.
More importantly, where did all the "easy credit" come from over the past 15 years ??
Was this from tax receipts or Fed crediting the banks ?
From treasury debt backed by China, OPEC, Japan, and Britain ?
Goog,
ReplyDeleteIt seems to me the easy credit came from a breakdown in lending standards.
All "lenders" transitioned to an 'originate-distribute' model. They would origniate the loans and then as quickly as possible lay them off on someone else (yes some foreigners) including laying some off on the govt (FnMA, Freddie, etc..).
At that point everyone at the lender (including the CEO) is on commission. And they are effectively lending other people's money. Bad combination.
HOW WOULD HAVE MMT SOLVED THE LAST ECONOMIC CRISIS OR HAVE PREVENTED IT?
ReplyDeletewould crediting ( aka "printing" )
controls have prevented the commission game ?
are you serious about commissions ? like the banking system was Avon or pyramid with downlines and all that ?
and the tea party is on a "free market" platform ? how much more freedom to destroy do they want ?
they are smoking what ?
"So far, none of the people commenting on MMT or criticizing it have read any of the MMT literature, including the most introductory presentation, Warren's book. They are just reacting to blog posts and comments.
ReplyDeleteThis is not taking MMT seriously, and I don't take them seriously. Anyone serious about taking one MMT has to be familiar with the basic literature which deals in detail with what they bring up. This is just a bad joke."
yep.
but i do take krugman's readers seriously (and i don't doubt you do as well).
which is why i disagree with commenters who evaluate responses to krugman based on how he might respond.
imo, the majority of responses to krugman are best written for his readers -- most of whom also haven't read any of the MMT literature -- in order to attempt to 1) state clearly that krugman is wrong and 2) engage the readers and the material sufficiently to spark their interest to do their own investigation (rather than relying on krugman's statements).
it would be great if krugman were persuaded and informed enough to use his perch at the nyt to educate his readers. but i'm afraid that may be wishful thinking on my part. and besides, i'm tired of attempting to appeal to TPTB. mostly useless and always personally degrading.
just my 2 cents....
In response to googleheim's question "HOW WOULD HAVE MMT SOLVED THE LAST ECONOMIC CRISIS OR HAVE PREVENTED IT?"
ReplyDeleteMMT is not the solution to all the world's problems, or even all the world's macroeconomic problems. There are distributional issues (allocation of national income to labor and capital, for example) that are not part of MMT. Also, globalization presents challenges that are not directly addressed by MMT, as far as I know.
The employer of last resort (ELR) is one offshoot of MMT that could have kicked in to stabilize incomes for workers at the time of the financial collapse. Even before the financial collapse, unemployment was high, and ELR would have helped with that. Most MMT advocates, even if not sold on the ELR, favor automatic stabilizers which would cool the economy when it is overheating and generate employment at times of low aggregate demand...
About seignorage and the difference between commodity money and fiat money, have you read William Hummel's explanation on his site?
ReplyDeleteHe calls it the unified view and it is based on an analysis done by Swedish economist Per Berglund.
http://wfhummel.cnchost.com/unifiedview.html
Commodity money and fiat money are commonly viewed as two quite different kinds of money. The transition from commodity to fiat money occurred in the mid-20th century when the State ended the gold backing of its notes. But are they really as different as most people think? In the following we abstract from the analysis of the Swedish economist Per Berglund to show how the two kinds of money actually fit into a single framework, based on the State theory of money.
Money as a Claim on the State
When the State declares what kind of asset it accepts in payment of taxes, it assumes a liability equal to the outstanding stock of those assets. At the same time, the declaration creates financial claims on the State by the holders of the assets. Those claims exist as tokens known as money. The tokens may have a material value as in precious metal coins, or may simply be paper certificates with no intrinsic value. The former is referred to as commodity money, and the latter as fiat money.
The Seigniorage Gap
ReplyDeleteThe State sets the face value of the tokens, and accepts them in payment of taxes at that value. The difference between the face value and the material value of a token is normally positive, and known as the seigniorage gap. A positive gap will exist only if the production of the tokens is brought under State control and limited in quantity. In the case of fiat money, the gap is large. In the case of commodity money, the gap is small and may even be negative. A negative gap means the token is more valuable as a commodity than it is as money. If the gap becomes too negative, the public will hoard the tokens, or it will convert them to their material use and thus end their role as money.
The Material Value of Commodity Money
The material value of a token is a real asset without a corresponding liability. An important question then is: who actually owns the real asset? Surprisingly, we will see that it should be credited it to the State. By agreeing to accept the tokens in payment of taxes, the State automatically assumes a liability equal to their face value. But if the State has a liability of that amount, then the bearer must have a claim on the State of the same amount. However the bearer cannot simultaneously have a claim on the State and the material use of the real asset. That would clearly be double-counting.
Real versus Financial Assets
The claim on the State is inextricably tied to its token, e.g. the coin. No records are kept of who owes what to whom, so there is only one way of exercising the claim, and that is to surrender the coin. If one melts the coin instead, the claim is gone, and so is the State's liability. All that remains is a lump of metal whose material value obviously belongs to the bearer. Melting thus transforms a financial asset into a real asset from the bearer's point of view. From the State's point of view, melting cancels a financial liability but also eliminates the prospect of recapturing the real asset.
Resolving the Accounting Dilemma
The logical way to reconcile the accounting then is to credit the material value of the token to the State's balance sheet, even though the bearer has physical possession of the token. The State retains title to its material value as long as the token exists as a liability of the State. Keynes once defined the rupee, the Indian currency, as a "note printed on silver" implying that the holder of the rupee could either use it as money or as silver, but not both.
Melting then involves two things: (1) cancellation of the financial asset-liability relation, and (2) transfer of the real asset from the State's balance sheet to the bearer's. The State loses the real asset but also the liability. The bearer gains a real asset but loses the financial claim. The net gain or loss depends on the size and sign of the seigniorage gap between face value and material value.
This comment has been removed by the author.
ReplyDeleteKrugman's post was not just about MMT, although he mentioned it. I was also about the zero-sum adherents such as Steve Landsburg.
ReplyDeleteSo what is worse? Zero summers like Lansburg or confused economists like Krugman?
"HOW WOULD HAVE MMT SOLVED THE LAST ECONOMIC CRISIS OR HAVE PREVENTED IT?"
ReplyDeleteAccording to MMT'er Bill Black, this was a control fraud perpetrated by the CEO's of the big banks with the collusion of regulators who were in many cases (Black's word) "suborned."
Warnings were sent and ignored, and now no prosecutions even though people like Black, Yves Smith, Janet Tavakoli, Elliot Spitzer and others have documented the wrong doing during the run up and after the crash. They are still on the case.
Hummel is out of paradigm. There is no way to reconcile convertibility with nonconvertibility, fixed rate and floating rate. The only "unification" is that they both function equally as money of the denominated value. The liability is totally different. In the case of convertibility, there is a claim on the state's real assets and in the latter, not.
ReplyDeleteSo what is worse? Zero summers like Lansburg or confused economists like Krugman?
ReplyDeleteThe problem with K's post is that he is promoting the false idea that taxes are chiefly revenue necessary to fund government (prevent insolvency), when they don't function this way at all.
Tom - Are you sure? The way Hummel reconciles it is not about convertibility but as the State Theory of Money.
ReplyDeleteThe State Theory of Money is part and parcel to MMT.
Matt Franko has been talking about the State Theory when he brings up the Roman tokens in previous posts.
So he and Per Berglund is unifying both commodity money and fiat money as different forms of State Money.
Hummel's site is linked on the front page here so his views are important enough to not just dismiss as being out of paradigm.
PS - It was Hummel who actually led me to MMT.
PPS- He also replied to Krugman's post on his email exchange. Not much different from other MMT responses.
Yes, convertibile fixed rate and non-convertibile floating rate currencies are both state money. MMT says this. MMT holds that they both derive their value from being tax credits not any asset backing.
ReplyDeleteHe explains this in terms of claims on the state:
When the State declares what kind of asset it accepts in payment of taxes, it assumes a liability equal to the outstanding stock of those assets. At the same time, the declaration creates financial claims on the State by the holders of the assets. Those claims exist as tokens known as money.
There is no asset claim on the state in state money. State money functions simply a "tax credit" (Warren) in the view of MMT.
Adam,
ReplyDeleteI'm not sure about Hummel but I'm starting to believe that there has somewhere in history occured a disconnect if you will or perhaps some 'revisionist history' or a concerted propaganda campaign/deception where we in the west once knew how to run an economy via perhaps termed "state money" and now we have become all confused.
It looks to me like Rome knew how to do this. And then there is Clonal's comment above (Thanks!!) where it looks like Adam Smith knew it... I've pulled out my old Alexander Hamilton biography and am looking thru that and it looks like he followed Adam Smith where there was paper bank notes that were redeemable for coins. (parallels with today's T-Bonds redeemable for Reserve balances facilitated by modern IT)
Then somewhere we became obsessed and/or deceived by gold and silver so-called "hard money"..... and this looks like where it all went bad for us... we lost track of the authorities of civil government and instead focused on metals? Something like that....
This huge historic misunderstanding of how to run a monetary system may be a large part due to public brainwashing by propaganda from the gold-sellers.... it is still happening today by Glenn Beck commercials and Steve Forbes to just name 2.
I'm going to continue to look at this and hopefully do some blogs..
Matt,
ReplyDeleteLook also at the history of Tally Sticks
Quote:
King Henry the First produced sticks of polished wood, with notches cut along one edge to signify the denominations. The stick was then split full length so each piece still had a record of the notches.
The King kept one half for proof against counterfeiting, and then spent the other half into the market place where it would continue to circulate as money.
Because only Tally Sticks were accepted by Henry for payment of taxes, there was a built in demand for them, which gave people confidence to accept these as money.
He could have used anything really, so long as the people agreed it had value, and his willingness to accept these sticks as legal tender made it easy for the people to agree. Money is only as valuable as peoples faith in it, and without that faith even today's money is just paper.
The tally stick system worked really well for 726 years. It was the most successful form of currency in recent history and the British Empire was actually built under the Tally Stick system, but how is it that most of us are not aware of its existence?
Perhaps the fact that in 1694 the Bank of England at its formation attacked the Tally Stick System gives us a clue as to why most of us have never heard of them. They realised it was money outside the power of the money changers, (the very thing King Henry had intended).
end quote
Hi Tom, You might not have read all of Hummel's article. Here it is.
ReplyDeleteThe Seigniorage Gap
The State sets the face value of the tokens, and accepts them in payment of taxes at that value. The difference between the face value and the material value of a token is normally positive, and known as the seigniorage gap. A positive gap will exist only if the production of the tokens is brought under State control and limited in quantity. In the case of fiat money, the gap is large. In the case of commodity money, the gap is small and may even be negative. A negative gap means the token is more valuable as a commodity than it is as money. If the gap becomes too negative, the public will hoard the tokens, or it will convert them to their material use and thus end their role as money.
The Material Value of Commodity Money
The material value of a token is a real asset without a corresponding liability. An important question then is: who actually owns the real asset? Surprisingly, we will see that it should be credited it to the State. By agreeing to accept the tokens in payment of taxes, the State automatically assumes a liability equal to their face value. But if the State has a liability of that amount, then the bearer must have a claim on the State of the same amount. However the bearer cannot simultaneously have a claim on the State and the material use of the real asset. That would clearly be double-counting.
Real versus Financial Assets
The claim on the State is inextricably tied to its token, e.g. the coin. No records are kept of who owes what to whom, so there is only one way of exercising the claim, and that is to surrender the coin. If one melts the coin instead, the claim is gone, and so is the State's liability. All that remains is a lump of metal whose material value obviously belongs to the bearer. Melting thus transforms a financial asset into a real asset from the bearer's point of view. From the State's point of view, melting cancels a financial liability but also eliminates the prospect of recapturing the real asset.
Resolving the Accounting Dilemma
The logical way to reconcile the accounting then is to credit the material value of the token to the State's balance sheet, even though the bearer has physical possession of the token. The State retains title to its material value as long as the token exists as a liability of the State. Keynes once defined the rupee, the Indian currency, as a "note printed on silver" implying that the holder of the rupee could either use it as money or as silver, but not both.
Melting then involves two things: (1) cancellation of the financial asset-liability relation, and (2) transfer of the real asset from the State's balance sheet to the bearer's. The State loses the real asset but also the liability. The bearer gains a real asset but loses the financial claim. The net gain or loss depends on the size and sign of the seigniorage gap between face value and material value.
Matt, gold was almost never used as a currency (coin). The preference was overwhelmingly for silver, probably because while silver was scarce it was more plentiful than gold. The seignorage for silver was huge in the ancient world because it was mined by slave (non-wage) labor at virtually no cost to the state.
ReplyDeletemy comments appear to be going into never never land????
ReplyDeleteClonal - min too.. But I see your comments in my email
ReplyDeleteHi Matt. Here is Hummel's article on the "Metallism vs Chartalism"
ReplyDeleteMetallism vs Chartalism
The following was excerpted, with some editing, from the paper titled The Hierarchy of Money by Stephanie Bell, written for The Jerome Levy Economics Institute.
There is no shortage of views on the nature and role of money among the different schools of economics. However subtle the differences may be, they can all be associated with one of two basic theories, metallism or chartalism. Chartalism is a term derived from the Latin word 'charta' meaning a ticket or token. Chartal money is the token for value, while metallist money is the thing of value itself.
Precious Metal Viewed as Money
Metallists believe money developed spontaneously as a medium of exchange in order to eliminate the obvious limitations of barter. Society is thought to have settled on precious metal as currency so that money would have intrinsic value. Money's value then is explained in terms of its precious metal content or backing.
As a producible commodity, metallist money was really no different from any other commodity. To guarantee the weight and purity of precious metal as money, a stamp certifying its integrity came to be required before it could circulate widely. The State could play a role in terms of producing stamped coinage, but its power was viewed as limited to supporting the will of the private sector.
Money as A Neutral Medium of Exchange
Early metallists and modern metallists, including monetarists, treat money as irrelevant to 'real' analysis in economics. They believed money's ability to operate as the medium of exchange depended on its being a commodity with an exchange value independent of its form as currency. Milton Friedman declared "nothing is so unimportant as the quantity of money expressed in terms of the nominal monetary unit. . . The situation is very different with respect to the real quantity of money." In other words the economy behaves, at least in the long run, as though money were merely a neutral medium of exchange.
A Problem with the Metallist Theory
When coins or paper with no precious metal content came into use, metallists explained the transition on the basis that they were 'backed' by precious metals which would imbue them with value. When the community continued to accept intrinsically worthless paper after the elimination of metal backing, metallists were left with a fundamental problem.
Read the rest here
http://wfhummel.cnchost.com/metallismchartalism.html
Hummel's site is linked on the front page here so his views are important enough to not just dismiss as being out of paradigm.
ReplyDeleteClarification: I did not mean that all of Hummel's stuff is out of paradigm but some is. I got this from Warren. I have interacted with Hummel personally a couple of times and so has Warren on many occasions. So don't take what you find there as MMT gospel.
Hummel comes close, but he doesn't completely understand MMT. But Adam (& Hummel & Berglund) are right on this point. Wray has a lot on this, here and there, along with Bell(Kelton) 's article(s).
ReplyDeleteFundamentally there is no "fiat money", no "commodity money". There is just "money", which is intrinsically and essentially fiat money, credit money. The illusion, the constraint called "commodity money" is just when the state sets a fiat money price for some commodity. A gold coin is just a constant offer you can put in your pocket of the bullion therein for the face value. If bullion is worth more, you melt it. If not, not.
Commodity money in the Austrian / mainstream fairy tale sense is something that never existed anywhere, as Mitchell-Innes for one pointed out. And as Warren just said at DeLong's, the "Modern Money" in MMT is in the sense of Keynes' "Modern money is 4000 years old."
Matt,
ReplyDeleteLook also at the history of Tally Sticks - http://www.xat.org/xat/moneyhistory.html
Quote:
King Henry the First produced sticks of polished wood, with notches cut along one edge to signify the denominations. The stick was then split full length so each piece still had a record of the notches.
The King kept one half for proof against counterfeiting, and then spent the other half into the market place where it would continue to circulate as money.
Because only Tally Sticks were accepted by Henry for payment of taxes, there was a built in demand for them, which gave people confidence to accept these as money.
He could have used anything really, so long as the people agreed it had value, and his willingness to accept these sticks as legal tender made it easy for the people to agree. Money is only as valuable as peoples faith in it, and without that faith even today's money is just paper.
The tally stick system worked really well for 726 years. It was the most successful form of currency in recent history and the British Empire was actually built under the Tally Stick system, but how is it that most of us are not aware of its existence?
Perhaps the fact that in 1694 the Bank of England at its formation attacked the Tally Stick System gives us a clue as to why most of us have never heard of them. They realised it was money outside the power of the money changers, (the very thing King Henry had intended).
end quote
Fundamentally there is no "fiat money", no "commodity money". There is just "money", which is intrinsically and essentially fiat money, credit money.
ReplyDeleteRight, and convertible fixed rate is fundamentally different from nonconvertible floating rate operationally.