“In the Beginning…Was the Unit of Account” – Twelve Myths About Money

Jan Kregel presented a great dinner speech at the recent Modern Monetary Theory Conference, touching on some of the fundamental ways we think about money and economics. (Sorry, no recording or transcript available.) I had a brief conversation with him afterwards, and we followed up with a few emails.

The quotation in the title of this post is condensed from the final line of one of his emails — a line that made me laugh out loud:

“So I guess we start from that — in the beginning was the word, and the word was the unit of account?”

Okay, yes: money-dweeb humor. But the implications are kind of profound.

The Word. LogosIndeed. I’ve written about this before — how writing in its earliest forms emerged from tally sheets, accounting. Even, that its emergence was the first step on the road to outsourcing our memory onto iPhones, maybe even (only somewhat tongue in cheek) causing human brains to shrink over millennia.

Jan’s great line, and our conversations, prompt me to set down some thoughts on this ever-vexed subject. Herewith, twelve widespread usages and conceptions that, in my experience, tie our money discussions in knots. Please assume that anything you don’t like here is mine, not Jan’s, and apologies to those who have heard some of this from me before.

(A proleptic response to an inevitable digression: I’m assuming a closed national or world economy for simplicity. The “rest of world” sector, and the exchange rate with Martian currency, are not considered.)

#1. Money was invented around 700 BCE. No. That’s when coins were invented — handy physical tokens making it easy to transfer assets from one person’s (implicit) balance sheet to another’s. Money existed on something like balance sheets — tallies of who owns what and who owes what — long before that; those tallies go back thousands or tens of thousands of years. Mentions of monetary values in written documents — designated in staters, drachms, whatever — were widespread long before anyone thought of using coins for asset transfers.

The earliest coins, by the way, may well have been badges of honors and offices issued by religious authorities. Somehow people started exchanging them, and voila: physical currency. This had little or nothing to do with butchers and bakers or convenient time-shifting of purchases. That’s a made-up armchair myth (though the convenience benefit is real). Wampum, likewise, wasn’t used for trade exchange until Europeans captured that “money” system and transformed it.

#2. Money is a “medium of account.” (Whatever “medium” means in that phrase…) Money was invented when some clever tally-keeper, totting up cows and horses and bags of grain, invented the arbitrary unit of account — a unit that allows those heterogenous goods to be tallied on a single sheet, in a common unit of value. We find price lists of assorted goods on some of the earliest Sumerian tablets, for instance, and price lists can’t exist without a unit of account. It’s hard to know, but it seems like this clever technology might have been invented multiple times over the millennia.

If this historical tale holds water, the earliest forms of money were just…the value of tallied (balance-sheet) assets, with the value designated, denominated, in a unit of account. In the beginning…

By this thinking, an “asset” is a labeled balance-sheet entry, designating the value of an ownership claim — again, designated in a unit of account. These “asset” things only exist on balance sheets. The claims themselves may be informal — you own the apple on your kitchen counter by norm, convention, and common law. Or they may be formal, inscribed in one or more legal instruments and a supporting body of law and norms. The forms and terms of these ownership-claim instruments are myriad and diverse.

Money in this sense is the UofA-designated value of an ownership claim (perhaps formally recorded in an asset entry).

Ask a real-estate zillionaire, “how much money do you have”? The answer has nothing to do with physical dollars in wallets, or any particular class of ownership claims/assets that are tallied up in “monetary aggregates.” It’s about total assets or net worth — necessarily, designated in a unit of account.

The problem arises when we confute these two common meanings of the word. Start watching: you’ll often see it happen even within a single sentence. This ubiquitous muddle — trying to talk about two different things using the same word — has engendered unending confusion.

Both uses of the word are perfectly valid and useful; they just mean completely different things.

#3. There is such a thing as non-fiat money. Nope. (A better description is “consensus” money. The consensus is usually enforced by the fiat powers of a government, temple authorities, etc.) The consensus exchange or “face” value of precious-metal coins must always be higher than the market value of the metal substrate. If the reverse were true, people would just melt them down. Outside the fiat/consensus purview of the issuer, those coins many only retain their substrate value. So they’re still valuable for far-flung trade, or if authority breaks down, because the commodity may still retain consensus value. (That security in itself can contribute to holding up their consensus face value.)

Ditto cigarettes in POW camps. There are physical things called cigarettes, but there’s also this conceptual thing that emerges when people start using them in general trade: a cigarette.” Or “the cigarette.” It’s a unit that can be used to designate the value of other things.

The consensus value of coins and currency is based on the stability of the unit of account. (See: Brazil.) The coins are just physical tokens representing a unit of exchange — an asset that can be transferred, and that’s designated in the unit of account. In the beginning…

#4. Money “is” debt. Or, “you are paying with liabilities.” Money, by any definition, is always and everywhere an asset of the holder. The $5 bill in your pocket or the five dollars in your checking account are assets on your balance sheet. Paying, spending, is transferring assets to someone else — from the lefthand side of your balance sheet to the lefthand side of theirs.

Now of  course money issuance is often associated with the creation of new balance-sheet liability entries — think government deficit spending — but those liabilities are posted to the money issuer’s balance sheet. The recipient gets an asset: the credit half of the tally stick. That’s what gets passed around in spending and payments. The debt side is generally held on the balance sheet of large, powerful creditors or institutional authorities.

This isn’t just true of “cash”; government bondholders are obviously holding assets. The debt is on the government balance sheet. “Holding debt” is a handy shorthand for finance types, but considered even briefly, it makes no literal sense at all. How could you hold or own something you owe?

Ditto “paying with liabilities.” If you transfer a liability from the righthand side of your balance sheet to the righthand side of another’s, you are unlikely to receive much thanks, or any value in return.

These usages can be useful, stylized ways of referring to particular economic, financial, and accounting relationships. Which is fine as long as users are perfectly clear on how the thinking is stylized. But on their face they don’t make sense, and they engender great confusion. Money is always an asset of the holder.

#5. People “spend out of income.” Spending, payments, always come from asset balances. That’s what payments are — asset transfers. When you write a check, you withdraw from your checking-account balance. When you buy a bag of Doritos at 7-11, the money’s coming out of your wallet. It’s impossible to “spend out of” the instantaneous event of somebody handing you a five-dollar bill. Once it’s in your hand, once it’s an asset you own, you can spend it.

“Spending out of income” is another of those common usages — a useful shorthand way to talk about spending more or less than you receive over a period. It’s an unconsidered commonplace that deeply confuses our conversations about money.

#6. There’s a difference between “inside” and “outside” money. After new money is issued, its origin is immaterial in the particular. Where did the $100 in your checking account “come from,” originally? Say I borrowed it, or got it in a tax refund, or whatever, then paid it to you. It’s impossible to say, and it doesn’t matter, where it came from.

New assets appear in account balances from 1. government deficit spending, 2. bank lending, and 3. holding gains. Then people swap them for other assets, or transfer them to pay for newly produced goods and services. Whether the money came from “inside” or “outside” sources (or holding gains), once it’s circulating among accounts, it’s just…money. As we all know, money is fungible.

Certainly, newly created liability entries associated with money issuance can be economically significant. And some particular financial instruments retain a meaningful and influential financial or economic (ultimately institutional) relationship to particular liability entries. But in the big picture once the money’s out there, it’s disconnected from its “inside” or “outside” origins.

#7. Monetary aggregates tell us how much “money” we have. The various monetary aggregates so beloved of monetarists (M0, M1, MZM…) share a common, unstated definition of “money”: financial instruments whose prices are institutionally pegged to the unit of account — physical coins and currency, checking account and money-market deposits, etc. Remember the 2008 headlines: “Money Market Fund ‘Breaks the Buck.’” The institutional powers and practices of pegging are diverse, and institutional pegging can fail.

This particular subset of assets — fixed-price, UofA-pegged financial instruments — comprise only about 9% of U. S. households’ $111 trillion in assets. They play a particular role in individual and aggregate portfolio allocation (more below), and they’re quite handy for buying new goods. But their stock quantity is swamped by even the price-driven change in other assets; capital gains on variable-priced instruments added $7 trillion to household balance sheets in 2013 alone. Monetarists’ fetishization of these “currency-like” financial instruments, and their aggregates, is…misplaced.

#8. If people save more money, there is more money (or “savings,” or “loanable funds”). Obviously, if you save (spend less than your income over a period), you have more money. But we don’t. Just, the money’s in your account. If you spent it instead of saving it, it would be in somebody else’s account.

Spending — even spending on consumption goods that you’ll devour within the period — is not consumption. The money isn’t, can’t be, “consumed” by spending. It’s created and destroyed by other, financial, mechanisms. If you eat less corn, we have more corn. If you spend less money, we have no more money.

#9. Saving “funds” investment. Investment spending, like all spending, comes from asset balances. “Funding” from flows is harder to nail down: If a firm this year has $1M in undistributed profits (saving) and borrows $1M, spends $1M on wages and buys $1M in drill presses, which inflow “funded” which outflow? Firms borrow to make payroll all the time. (Don’t even get me started on stock repurchases.)

I can’t resist quoting one of the best financial and economic thinkers out there (read the whole thread):

Individual money-saving isn’t even really a flow; it’s a non-flow — not-spending — just an accounting residual of income minus expenditures. (Though of course it’s a flow measure: tallied over a period of time, not at a moment in time.)

#10. Portfolio allocations — and spending — are determined by “demand for money.” The relatively small stock of monetarists’ “money” — instruments whose prices are pegged to the unit of account — is sort of a fulcrum around which portfolio preferences and total asset value (wealth) adjusts. But the vague gesture toward the unmeasurable and dimensionless notion of “demand” is not illuminating. Here in more concrete terms:

Suppose government deficit-spends $1 trillion into private-sector checking accounts. The market’s portfolio is overweight cash (assuming portfolio allocation preferences are unchanged). But the market can’t get rid of those fixed-price instruments — certainly not by spending, which just transfers them — or change their aggregate value (their price is fixed, pegged to the unit of account).

So people buy variable-priced instruments — stocks, bonds, titles to real estate, etc. — bidding up their values competitively until the desired portfolio allocation is achieved. (This, by the way, is exactly how things work in the more advanced Godley/Lavoie-style, “stock-flow consistent” or SFC models.)

The economic implications of this: A trillion-dollar deficit-spend results in $1T more in private-sector assets (the “cash”), plus any asset-value runups from portfolio adjustments triggered by that cash infusion. (This is before even considering any effects on new-goods spending — the so-called “multiplier” — or the proportion of spending devoted to investment — Keynes’s particular fixation.)

Sure, if wealthholders are feeling nervous — more concerned with return of their wealth than returns on their wealth — they may prefer instruments that by their very nature guarantee stability, non-decline relative to the unit of account. They’ll sell variable-priced instruments, running down their prices until the market reaches its preferred portfolio allocation. “Liquidity preference” is one rather strained way to refer to this straightforward idea of portfolio allocation preferences.

Likewise, “demand for money” is a cute conceptual and verbal jiu-jitsu, flipping straightforward understandings of portfolio preferences on their heads. Demand is supposed to influence price and/or quantity. But it can’t influence the “price of money” or the aggregate stock of fixed-price instruments — only the prices, hence aggregate total, of variable-priced instruments. This notion does far more to confuse than to enlighten.

Takeaway: holding gains and losses — which are almost universally ignored in economic theory even though they’re the overwhelmingly dominant means of wealth accumulation — are the very mechanism of aggregate portfolio allocation. If you’re only considering “income”-related measures (which ignore cap gains), there’s no way to think coherently about how economies work.

#11. The interest rate is the “price of money.” This is like saying a car-rental fee is the price of a car. The price of a dollar (a unit of exchange) is always one, as designated in the dollar (the unit of account). The cost of borrowing is something else entirely. Like “demand for money,”  “the price of money” is just verbal and conceptual gymnastics, inverting the very meaning of the word “price,” and trying to shoehorn money-thinking into a somewhat inchoate notion of supply and demand (that’s constantly refuted by evidence). It’s not helping.

#12. Central bank asset purchases are “money printing.” Not. Sure, the Fed magically “prints” a zillion dollars in reserves to purchase bonds. But then it just swaps those reserves for bonds, which are “retired” from the private sector onto the Fed’s balance sheet. Private-sector assets/net worth are unchanged; the private sector just has a different portfolio mix: more reserves, less bonds.

Ditto when the Fed sells the bonds back (as it’s now doing and promising to do, a bit); it re-absorbs the private sector’s reserve holdings and releases bonds in return, disappearing the reserves back into its magic hole in the ground. (As Milton Friedman observed, banks have both printing presses and furnaces.) Again: no accounting effect on private-sector assets or net worth.

QE and LSAPs do have some asset-price, hence balance-sheet, effect, at least while they’re happening; the central bank has to beat market prices by a smidge to play the whale and buy all those bonds. Bond prices go up and yields go down. Which will push investors’ portfolio allocations more into equities and other “risk assets,” driving up their prices some. But the first-order accounting effect is just to change private-sector portfolio allocations.

So there: twelve conceptions about money that have made it difficult or impossible for me, at least, to think coherently about the subject. Here’s hoping these thoughts are useful to others as well.

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I’d like to end this post with the same question for my gentle readers that I went to Jan with. Units of account are very odd conceptual constructs indeed. They’re not like other units of measurement — inches, degrees centigrade, etc. — which generally have some physical objective correlative: “length” or “warmth” or suchlike. Units of account tally “value,” which basically means value to humans, a function of human desire. And human desires, of course (“preferences”), vary.

So my question: what’s a good metaphorical or figurative comparison to help us understand and explain this strange conceptual thingamabob? Is money an invention like algebra? Are there other conceptual constructs that are similar to units of account, comparable mental entities that can help us think about what these things are? I can’t think of any good analogies. It’s vexing.

Extra points question: what is “the bitcoin”?

Yes: In the beginning was the word. Words are one of the main things, maybe the main thing, that we use to think together. All thanks to my gentle readers for any help in doing that.

  1. David G
    November 19th, 2017 at 13:47 | #1

    Steve, 1. Still trying to grok #9, even though I totally get endogenous money. What is investment?

    2. “The Bitcoin” is a digital commodity. It’s very much like gold, actually. You have to mine it. It takes an outrageous amount of energy to mine. It has a completely illogical following that borders on mania. They insist it’s money even though no state accepts it for taxes. The only difference is gold actually has some intrinsic value while bitcoin doesn’t. Still, it’s a consensual deal so it clearly has value.

    3. Maybe a baseball analogy is apt? There’s all sorts of ways to use statistics to value baseball players. Some like batting average, home runs, or runs batted in. More sophisticated fans like on-base percentage, on base plus slugging, or even WAR (wins above replacement). There’s a million different ways to value a baseball player both tangible and intangible. So I’m going with that.

  2. November 19th, 2017 at 17:31 | #2

    @David G
    David:

    Thanks very much for the thoughts.

    1. Yeah I’ve spent 15 years struggling with this saving/investment thing, cause like so many other people, it just never made sense to me. I think the key go-to is: saving of STUFF is ultimately about production (yeah, minus consumption). Creation of goods within a sector, whose value is added to that sector’s balance sheet. It’s not about money transfers (or lack of same). Money can’t be consumed; spending doesn’t consume it. You can’t equate money saving and corn saving.

    2. In the thinking here, Bitcoin is just another type of financial instrument, a legal claim with particular terms associated. It’s not monetarists’ “money,” cause its price isn’t pegged to the unit of account (dollar). Though of course you could say it’s pegged to the alternate unit of account, The Bitcoin. But yeah no.

    3. If Moneyball traders all agreed on which one of those measures designated a player’s value, that measure would be much like a unit of account. But…

  3. November 19th, 2017 at 17:49 | #3

    @David G
    A better answer on #1 (#9):

    Sure, you can save up money and use it to build a house.

    But we can’t. We can create more money to spend on house building through the financial mechanisms of gov def spending, bank lending, holding gains. But saving doesn’t create more collective money. So it can’t fund investment.

    Once the money’s created — there’s more wealth — it can be transferred to pay for new-stuff creation. But that’s portfolio churn, not saving.

  4. Calgacus
    November 19th, 2017 at 17:51 | #4

    #4 engenders and exposes more confusion than it erases. Money certainly is debt, because money is credit, and credit is debt. Credit or debt [or (financial) asset or (financial) liability] are words for the same thing viewed from different perspectives, none of the 4 should really be distinguished from the other 3. At one point it might be more natural to use one or the other, but they all generally do make perfect and literal sense. The confusion comes from people trying to resist obvious, ordinary language, making things much more complicated than they really are, due to overexposure to the confusions of modern economics, not the reverse.

    So “money issuance is often associated with the creation of new balance-sheet liability entries” is wrong. Money issuance is identical to the creation of new balance-sheet liability entries, not just “associated”. That sentence is like saying “having a child is often associated with becoming a parent.”

  5. jrbarch
    November 19th, 2017 at 18:17 | #5

    $money in my mind is a concretisation of human energy, therefore consciousness is involved.

    Besides basic living, remember it is desire we are trying to absolve.

    $money is the materialisation of the desire to be content. Spiralling down, it consolidates as material power, lust, and greed; until people no longer see a human being anymore. Spiralling upwards it leads to sharing. It doesn’t work either way in terms of contentment but one direction leads towards it, and the other leads further and further away. But that doesn’t seem to deter anyone!

  6. Andre
    November 19th, 2017 at 20:26 | #6

    “#3. There is such a thing as non-fiat money. Nope”

    Well, that is a big claim. Sometimes gold coins were indeed traded for a face value superior to their bullion value. Sometimes not. So maybe there could be non-fiat money at times. Also, cocoa beans were heavly traded in Aztec society. Maybe they were fiat (sometimes they were required as taxes), but maybe they were not (they were used to produce a popular drink – chcolate). Hard to tell. Even after profound, competent research conducted by proper anthropologists we will not know for sure.

    “#6. There’s a difference between “inside” and “outside” money.”

    You claim there is no difference. Well, there is. A gold certificate is not gold. They are different in very important ways – even when the issuer of the gold certificate enjoys such a big confidence that the document is traded as if it was gold itself. I believe I don’t even need to explain what is the distinction between gold and gold certificates (like, one is a precious metal, the other is a piece of paper that represents a special kind of IOU). The same is valid for government currency (outside money) and bank deposits (inside money). Even if some people sometimes consider them the same, it is certainly not the case.

    #11. The interest rate is the “price of money.” 

    Very good way of putting your point!

    #12. Central bank asset purchases are “money printing.” 

    Well, they are government money printing. Government money is the one you need to pay taxes. No other kind of money can do that job for you. Not directly.

  7. David G
    November 19th, 2017 at 21:07 | #7

    @Asymptosis
    I think I’m just going to disagree here. I understand that loans create deposits. I understand that if I put my savings in a bank that the bank isn’t lending those funds out to others to do this thing called “investment.”

    BUT…when you say that “saving doesn’t create more collective money. So it can’t fund investment” well, that just runs counter to the way my business works. This isn’t 2005. Last I checked, banks weren’t creating loans (and therefore deposits) with 0 down. Now, it may work that way with a credit card or other unsecured loan, but if I want to buy a house and make improvements to it, i.e invest in capital goods to force appreciation of that asset, then I need to have some savings to make it happen. I have to, for example, save 10 grand in order to leverage that to 100 grand to buy the asset and make improvements to it. That, in my world, is investing. And it requires savings to make it happen. It seems to me, very directly, to be funding investment with savings.

    So maybe I’ll be a lot better off if I disabuse myself of that notion, but until I see it work another way (please show me) I’m going to stick with it.

  8. November 20th, 2017 at 07:56 | #8

    @Calgacus “money is credit, and credit is debt. Credit or debt [or (financial) asset or (financial) liability] are words for the same thing viewed from different perspectives”

    An asset on your balance sheet can have an offsetting liability on another balance sheet. (This is the definition of a “financial asset.” It’s a claim against assets on another balance sheet. That’s why the matching liability is over there.) The balance sheet is the “perspective” you mention. But that doesn’t mean that the asset on your balance sheet “is” the liability on another balance sheet.

    The Target gift card in you wallet is your asset. Target has an offsetting liability. I don’t understand how they can be “the same thing,”

    > people trying to resist obvious, ordinary language

    “The money in your wallet or your checking account is an asset on your balance sheet.” How much more obvious and ordinary can you get?

    > Money issuance is identical to the creation of new balance-sheet liability entries

    Your stock portfolio goes up in value by $100,000 over the years. You have more money. But no new liabilities have been posted to any balance sheet — yours or others’. Explain.

  9. November 20th, 2017 at 08:03 | #9

    @Andre “Sometimes gold coins were indeed traded for a face value superior to their bullion value.”

    The key point here: the reverse is never true. If it was, people would just melt down the coins. Face value of coins always and everywhere equals or exceeds their substrate value.

    “Maybe they were fiat (sometimes they were required as taxes), but maybe they were not (they were used to produce a popular drink – chcolate).”

    Trying here to distinguish between conceptual entitites: a cocoa bean (a consumable commodity, or a unit of exchange) and the cocoa bean (a unit of account).

    “government currency (outside money) and bank deposits (inside money). ”

    Does the balance in your checking account consist of inside or outside money?

    “#12. Central bank asset purchases are “money printing.”
    Well, they are government money printing. Government money is the one you need to pay taxes.”

    You can’t pay taxes with Fed reserves, any more than you can with Treasury bonds.

    But that’s kind of aside from the point. Swapping reserves for bonds doesn’t change private-sector total assets or net worth; just the private-sector portfolio mix.

  10. November 20th, 2017 at 08:16 | #10

    @David G “runs counter to the way my business works. … if I want to buy a house and make improvements to it, i.e invest in capital goods to force appreciation of that asset, then I need to have some savings to make it happen.”

    This is obviously right. When individuals save money, they have more money. But again: we don’t. That’s not how money is created.

    That’s the fundamental error of composition here.

  11. Andre
    November 20th, 2017 at 10:03 | #11

    @Asymptosis
    “Face value of coins always and everywhere equals or exceeds their substrate value.”

    If face value equals substrate value, then you cannot claim that the money is fiat. In that case, people are exchanging the coins for their metal content, not because some authority decree. It happened sometimes in history – usually between foreign traders. Hard to tell if it was the rule or the exception. But I find it troubling when one makes the general claim that money was always fiat. It’s a big claim and you need big evidence.

    “Does the balance in your checking account consist of inside or outside money?”

    It consists of inside money. It doesn’t mean that it is the same as outside money. For an individual it may seem the same, but it isn’t. For a policy maker, it is actually dangerous to not see the difference.

    I would be more satisfied if it was said something like “There is no difference between inside and outside money for an individual like you and me, but there is a big difference between inside and outside money for policymakers and bankers”.

    “You can’t pay taxes with Fed reserves, any more than you can with Treasury bonds.”

    Wait, what? You can pay taxes with bank reserves (or ask your bank to do that in your name), but you or your bank will never be able to pay taxes with Treasury bonds!

    Of course, because the central bank will always try to keep the nominal interest rates at the target, it will be easy for banks to swap between bonds and bank reserves, but that doesn’t mean they are the same thing.

    The thing is that the Treasury issues bonds out of thin air. That could be called “money printing” depending on your definition (if you define that a bond is money). But sometimes people don’t consider that bonds are money, so those people would not claim that the Treasury issues money.

    However, in any definition of the word, “bank reserves” are always considered money. And when buying bonds, the central bank do issue bank reserves out of thin air. It is money printing. I don’t know why would you deny it.

    If you consider that bond is money, than you can claim that the Treasury issues some kind of money and the Central Bank issues another kind of money. And also that the Central Bank usually is the institution responsible for exchanging those different kinds of money. That’s the farthest you can go if you make some concessions to the definitions. But to claim that “central bank asset purchases are not money printing” is incorrect…

  12. David G
    November 20th, 2017 at 13:42 | #12

    @Asymptosis
    It’s a semantic thing. “We” don’t have more money if I save from the existing stock. But “we do” have more money if I save from the existing stock and then leverage that savings, as opposed to someone who saves and then trades existing financial assets.

    So I find the notion of saying that “savings don’t fund investment” to be counterfactual.

  13. November 21st, 2017 at 04:07 | #13

    “Money is always and everywhere an asset of the holder.”
    GOOD line!

    It makes sense to me that words would arise to indicate standard measures of value, or “units of account” as you call them. If two horses were equal in value to 9 goats, and one horse was equal in value to 17 bushels of hops, it would be convenient to have one standard of measurement that applied to horses and goats and hops. From the reading I’ve done, it seems such standards of value did exist in ancient times.

    But I don’t think a “unit of account” becomes “money” until some commodity or token is used to represent it. When the unit of account turns into a medium of exchange, it becomes money.

    Inflation is not possible until there is a “token” that can lose value. It is the token, not the value, that is money. That’s how the value of a dollar is able to change when there is inflation.

    To the extent that “other” financial assets (the NOT “fixed-price, UofA-pegged” ones) are used as a medium of exchange without being converted by an additional transaction, they serve as a measure of the decline of the “sovereign” monetary economy (a cycle-of-civilization phenomenon).

    RE #11: The interest rate is the price of credit, not the price of money. (Remember #4, money is NOT debt … despite what Calgacus says!)

  14. November 21st, 2017 at 07:22 | #14

    @Andre “It happened sometimes in history – usually between foreign traders.”

    Right: “Outside the fiat/consensus purview of the issuer, those coins many only retain their substrate value. So they’re still valuable for far-flung trade, or if authority breaks down, because the commodity may still retain consensus value. (That security in itself can contribute to holding up their consensus face value.)”

    >“Does the balance in your checking account consist of inside or outside money?”
    It consists of inside money.

    Where does the stock of outside money live? Is there a measure we can look at?

    >For a policy maker, it is actually dangerous to not see the difference

    Certainly the levels and locations of liabilities resulting from inside and outside money issuance are darned important for policy. Big bank balance sheets vs big gov balance sheets have importantly different effects.

    > You can pay taxes with bank reserves (or ask your bank to do that in your name),

    Again this is a stylized usage. I get what you’re saying, but many won’t. You pay taxes with checking deposits. Sure: All the checking xfers get consolidated and resolved nightly using a relatively tiny amount of reserve-balance transfers. But even a Fed account holder can’t “transfer reserves” to the Treasury account to pay taxes. In a very stylized sense you’re “paying with reserves” (you could say that of all payments) but it’s very removed from what a (tax)payer does.

    > The thing is that the Treasury issues bonds out of thin air.

    Sure. It swaps those new assets for checking account deposits. Private-sector assets/NW are unchanged. Just changes the PS portfolio mix. “Don’t know why you’d deny it”? That’s why.

    http://evonomics.com/heck-money-printing-anyway/

    “That could be called “money printing” depending on your definition…in any definition of the word, “bank reserves” are always considered money.”

    The whole point of this post is to reach common (and coherent) understanding, definition, and usage. Especially to avoid multiple conflicting usages. Hoping no offense, but I think your reply doesn’t help with that.

  15. November 21st, 2017 at 07:44 | #15

    @David G “It’s a semantic thing.”

    This whole post is a semantic thing. That’s the point. See the fifth paragraph. And the last. We think together using words. And the words at play here get used every which way from Sunday, with conflicting (and often incoherent) meanings. (Why I really object to “that’s just semantics” responses. Semantics is often the very problem a discussion is struggling with.)

    >“we do” have more money if I save from the existing stock and then leverage that savings

    Yes! A higher individual saving rate may (does) have (complex) economic effects. But it has no direct accounting effect on our collective stock of private-sector assets/NW. It doesn’t create money.

    This may help: the Integrated Macroeconomic Accounts’ derivation of ∆NW:

    http://www.asymptosis.com/wp-content/uploads/2017/10/delta-net-worth.png

    There are (at least) four different economics mechanisms at play here. Notably, 1. real capital formation (“investment”), creation of new real assets, and 2. net lending/borrowing (accumulation of claims against other sectors’ balance-sheet assets) are utterly distinct economic behaviors. The conflation of these two into sectoral “saving” (importantly different and distinct from individual saving) is the source of endless confusion.

    I find you’re saying “the creation of new stuff funds the creation of new stuff.” In a stylized sense, okay: those new goods’ value is posted to their owners’ balance sheets. But as you can see in the image above, that’s a quite small part of where BS assets come from.

  16. November 21st, 2017 at 08:18 | #16

    @Arthurian Hi Arthur!

    >”I don’t think a “unit of account” becomes “money””

    I def wouldn’t say that. I don’t think it makes sense as a statement. Just: the technology “money” (a tool/method for social accounting of who owns what and who owes what) arose when tally sheets started using arbitrary units of account.

    > …until some commodity or token is used to represent it.

    “Mentions of monetary values in written documents — designated in staters, drachms, whatever — were widespread long before anyone thought of using coins for asset transfers.”

    >”When the unit of account turns into a medium of exchange”

    I just can’t figure out what “medium” means in that phrase. See link from above:

    http://www.asymptosis.com/medium-of-account-vs-unit-of-account-brazil-anyone.html

    I distinguish between a unit of exchange (a dollar) and the unit of account (the dollar). The former is designated, literally denominated, in the latter. I’m not 100% happy with that, but I think it imparts a key conceptual distinction pretty clearly. They’re different types of thing. Doesn’t make any sense to say one “is” the other.

    >”Inflation is not possible until there is a “token” that can lose value.”

    Disagree. Inflation = decline in the basket of goods corresponding to the unit of account. A unit of exchange (a dollar, necessarily designated in the dollar) can buy less stuff. That could/can certainly happen in an economy that doesn’t use any convenient physical tokens representing balance-sheet assets.

    > NOT “fixed-price, UofA-pegged” ones) are used as a medium of exchange without being converted by an additional transaction,

    Not “converted”! Swapped. Swap treasuries for “cash.” (Say, checking-account deposits.) Swap cash for whatever. Those swaps don’t change the aggregate stocks of the things swapped. (Though of course those swaps trigger economic effects.) Again, think aggregate, not individual.

    That error of composition is pervasive and pernicious. Hard to wrap one’s brain around.

    >”they serve as a measure of the decline of the “sovereign” monetary economy (a cycle-of-civilization phenomenon).”

    I’d like to hear more about that thinking.

  17. Andre
    November 21st, 2017 at 09:13 | #17

    “Hoping no offense, but I think your reply doesn’t help with that.”

    What doesn’t help in when someone claims that those affirmations are false:

    #3. There is such a thing as non-fiat money.

    #6. There’s a difference between “inside” and “outside” money.

    They are not false. There can be non-fiat money (as history shows us) and there is a big difference between inside and outside money. When you claim that those facts are actually false, you don’t help the society in advancing important economic and political issues.

  18. Andre
    November 21st, 2017 at 17:04 | #18

    Also, I want to talk about another, unrelated subject. I don’t want to mess it with the other ones, because it is much more complex, so it is here in a separated post.

    The word “money” is very, very ambiguous (maybe the most ambiguous economic word ever? I don’t know). The consequence is that communication is heavily impaired, because usually one person defines money as one thing, and the other as another, and hence no meaningful conversation can take place.

    The most common (but not the only one) definition people use is that a thing is money in the proportion as it fulfills the roles of unit of account (also called medium of account for some people like Nick Rowe), medium of exchange and storage of value. The more a thing fulfills these three characteristics, the more it is considered money. You may have something that is more or less money, because it more or less fulfills those characteristics – and so some people created the concept of “moneyness”.

    The problem when a thing fulfills partially those functions is that it is considered money by some people and not by others.

    For example, in Iliad, we know that oxen is used as a widespread unit of account (a female slave skilled in fine handiwork is worth 4 oxen, and, if I remember right, a bronze armor has a value equivalent of 10 oxen, while a gold armor has a value of 100 oxen). However, it does not seem that people actually commonly traded oxen. It was not similar to the dollar, where you sell something, earn some dollars, and then buy another thing with those dollars (goods-currency-goods pattern). The ox was just a reference of value, used to compare two goods (a gold armor is worth ten times a bronze armor).

    Is oxen money in that context? Well, for a lot people, no, it is not, because it only fulfills the unit of account part, and not the other two. However, some authors do consider it some kind of money, because it fills the unit of account role – go figure.

    Then you have Aztec cocoa beans. They were also used as a unit of account, in the sense that a lot of things were valued compared to cocoa beans. Also, it was used somehow as a medium of exchange by some Aztec merchants. And they were also used sometimes as a store of value (people did store cocoa beans probably for “selling” it later). But it was not as widespread or universal as the dollar. It fulfills more money roles than Iliad’s oxen, so it can be considered more closely related to the concept of money.

    The dollar is a unit of account, a medium of exchange and a store of value. So you cannot say that “money is a ‘medium of account’” is a myth, I guess. Money is indeed a “medium of account” (an unit of account) and much more.

    Also, “money was invented around 700 BCE” and “Money is debt” are claims dependent on the concept of money. Depending on how you define it, it was invented earlier or later, and it is or is not “debt” (or liabilities).

    You can use another definition: money is any token accepted as tax payment. It changes everything… So you see how complex it is!

    Maybe some people have another definition for the word money and are understanding everything wrong.

  19. John
    November 23rd, 2017 at 02:18 | #19

    @Andre
    I would question that the Dollar is a store of value. It’s merely a number – a RECORD of value, just as a mile is a record of distance and mph is a record of speed. Miles are not a store of distance. Perhaps a Dollar is a store of information about value, but it’s not a store of value.

    This is another problem with economics, there’s not enough questioning of earlier erroneous terminology.

  20. November 23rd, 2017 at 03:50 | #20

    @Asymptosis
    Steve,
    For me money is primarily a medium of exchange. For you it seems to be primarily a unit of account. Perhaps this is the source of our differences. But I agree with you that the “a dollar”/”the dollar” terminology is important.

    “Mentions of monetary values in written documents — designated in staters, drachms, whatever — were widespread long before anyone thought of using coins for asset transfers.”

    I agree with that. I said: “It makes sense to me that words would arise to indicate standard measures of value, or “units of account” as you call them… From the reading I’ve done, it seems such standards of value did exist in ancient times [i.e., before coins existed].” However, when the unit of account is used to figure out how many cabbages to trade for a goat, it is not really acting as money, not on my definition.

    When people started accepting lumps of precious metal in exchange for a goat or some cabbages, the medium of exchange came into existence. Then, if the total number of lumps suddenly doubled you could have inflation. But not before that. Before there was a medium of exchange, if cabbage farmers had a bumper crop, it might cost more cabbages to get a goat. But that wasn’t inflation.

    You can hoard lumps of gold, but you cannot hoard units of account. I may have many dollars in saving, but they are all instances of one unit of account. The “medium” can be hoarded. The “unit” cannot. And “medium of account” is a confusion of terms.

  21. November 23rd, 2017 at 07:22 | #21

    @John “It’s merely a number – a RECORD of value”

    I think that’s close. Money is a technology, like algebra, for designating the value of heterogenous goods. It allows for tallies (yes: records) of value owned and value owed. Arbitrary units of account were the key invention that allowed for that.

    In one very common usage, it’s used to mean wealth — total balance-sheet assets or NW. Ask a zillionaire “how much money do you have”?

    It’s used to refer to pieces of physical currency. “How much money do you have in your pocket?”

    And it’s used to refer to financial instruments that are currency-like: their prices are pegged to the unit of account. This is monetarists’ “money,” tallied in various monetary aggregates.

    All of these are fine meanings. The problem is they’re all jumbled together in our discussions. This post is an effort to untangle that.

    Challenge for all: remove the word “money” from any statement you want to make. Replace it with something else that’s very precise and clear. (MoA, MoE, and MoS don’t meet that requirement, btw.) eg: “Financial instruments whose price is pegged to the unit of account.” Or “balance-sheet assets/net worth.” Or…?

  22. Andre
    November 23rd, 2017 at 07:23 | #22

    @John
    Well, I have stored in my wallet some notes and coins. And I can spend them tomorrow, next month and next year. They are not just an unit of account or measure like the meter or kilo. They are indeed a store of value

    But of course, even if I had no currency in my wallet, I can still claim that “my car is worth the equivalent of 20,000 dollars”. So, in that context, I’m using the dollar as an abstraction, as an unit of account. I’m using the abstract idea of equivalence – one thing is equivalent to another – and I don’t need to own the objects to compare them.

    Some people try to separate the unit of account dollar for the objects (notes and coins), as if they were different concepts. I don’t believe it is possible. They are the same.

    Once (in medieval times) the coins did not have a face value (and they had no numbers written on it). The face value was defined by a decree, and the king could change it. He could declare “now the silver coin is not worth 1 dollar anymore – it is worth 0,5 dollars now”. So it made sense to discern between the object (silver coin) from the unit of account (dollar). To claim that a horse was worth 100 silver coins was not the same as to claim that the horse was worth 100 dollars, because the silver coin value could change. Nowdays, things are not like this.

  23. November 23rd, 2017 at 07:39 | #23

    >money is primarily a medium of exchange.

    Again, I can’t figure out what “medium” means in that statement. See link to post wrestling with that.

    Request: replace “medium of exchange” with a different (probably longer) phrase stating what it means precisely.

    >For you it seems to be primarily a unit of account.

    No. To repeat from last comment:

    “Money is a technology, like algebra, for designating the value of heterogenous goods. It allows for tallies (yes: records) of value owned and value owed. Arbitrary units of account were the key invention that allowed for that.”

    (But read the rest of that comment, on other meanings for “money.”)

    “when the unit of account is used to figure out how many cabbages to trade for a goat, it is not really acting as money, not on my definition.”

    Did you see what you did there? The point here is to figure out clear, coherent, shared definitions.

    You’re circling around the monetarists’ (unstated) definition of “money” here: financial instruments whose prices are institutionally pegged to the unit of account. Those instruments are used for payment because of that pegging; everyone knows that if you send me a certain amount (designated in the unit of account), I’ll receive that same amount. Cause their prices are fixed.

    But now ask, for instance: how much money do we have (collectively)? The monetarists’ definition doesn’t let us answer that.

  24. November 23rd, 2017 at 07:46 | #24

    @Andre “the coins did not have a face value”

    Yes, I used “face value” as a shorthand for fiat or consensus value. Apologies for that. Didn’t mean “designated on its physical face.”

  25. Andre
    November 23rd, 2017 at 08:32 | #25

    @Asymptosis
    Oh yes, I did understand that. The “coins did not have a face value thing” was to answer John

  26. Andre
    November 23rd, 2017 at 08:47 | #26

    @Arthurian
    “For me money is”; “For you it [money] seems to be”; “not on my definition [of money]”.

    You see how the word “money” is ambiguous and makes discussions difficult. Anyone has his/her own definition of money. Depending on the definition, everything can change. What is a “myth” in one definition may not be a “myth” in another.

    Everything would be better if people first declare what definition for the word “money” they are using, or maybe tried to employ more specific words (like “demand deposits”, “narrow money”, “notes and coins”, “medium of exchange”…

  27. November 23rd, 2017 at 09:34 | #27

    @Andre
    Eliezer Yudkowsky has a killer-great recommendation (which I’m too lazy to find the link for right now):

    When a conversation is tied in knots by the meaning of a word or term, ban that word from the conversation.

    Make everyone say exactly what they mean instead, in some annoyingly longer phrase. This post and discussion is trying to do basically that.

  28. November 23rd, 2017 at 09:42 | #28

    @Asymptosis

    Here are four meanings I find:

    • Physical currency/coins.

    • Monetarists’ money: financial instruments whose price is institutionally pegged to the unit of account.

    • Wealth. Assets or net worth.

    • [Revised:] Steve’s money: a social-accounting technology, tallies using arbitrary units of account, for totting up the value of heterogenous claims and obligations — who owns what and who owes what.

    None of these, by the way, uses or benefits from the use of the word “medium.”

  29. Andre
    November 23rd, 2017 at 13:11 | #29

    “Here are four meanings I find:”

    Good. Now the discussion is going somewhere. The declaration of a definition is essential.

    Economists use the M0, M1, M2, M3 and M4 (and other) definitions, depending on the context. The more restrictive definition is M0 (called “narrow money”) and includes only notes, coins and bank reserves. It does not include bank deposits.

    Another definition, usually employed in introductory books, is that money is everything that performs the three functions of unit of account (sometimes called the medium of account), medium of exchange and store of value.

    Physical currency/coins is considered an unit of account (or medium of account), medium of exchange and store of value. O don’t see why not. It makes sense.

  30. Creigh Gordon
    November 26th, 2017 at 09:52 | #30

    @Calgacus
    Here’s what I’m thinking about money and debt. There are precisely three ways to extinguish a debt. The first is forgiveness, the second is in kind (I repay the borrowing of a cup of sugar with a different cup of sugar) and the third is by cancellation with another debt. Money is the third kind.

  31. Creigh Gordon
    November 26th, 2017 at 10:03 | #31

    @Asymptosis
    Your stock portfolio goes up in value by $100,000 over the years. You have more money. But no new liabilities have been posted to any balance sheet — yours or others’. Explain.

    You don’t own $100,000, you own stock. Stock is a real asset. Real assets, unlike financial assets, do not have a corresponding liability.

  32. November 26th, 2017 at 11:11 | #32

    @Creigh Gordon
    K, you just silently and implicitly defined “money.” Did you notice?

    “Assets that have a corresponding liability on another balance sheet.” IOW, they are claims on other balance sheets’ assets. (That’s what a righthand-side liability is: a claim against the lefthand-side assets.) That is also the definition of a financial asset.

    So you’re saying that money = financial assets. Okay, run with that.

    So government bonds are money? Corporate junk bonds? Collateralized Debt Obligations?

    None of those financial instruments is included in any monetary aggregate (MB, M0, M1…MZM…). But they’re money by your definition?

    > do not have a corresponding liability

    What do you call a firm’s righthand-side Shareholders’ Equity? You could certainly say it’s not a liability, in an important sense; by the terms of equity issuance, it’s not forced-redeemable by the asset holder, or on a specific date. But it certainly constitutes a legal claim against the issuer.

    Take a look at the Firms-sector balance sheet here, line 133:

    https://www.bea.gov/national/nipaweb/Ni_FedBeaSna/TableView.asp?SelectedTable=14&FirstYear=2013&LastYear=2017&Freq=Qtr

    They’ve got $25 trillion in equity liability, right there on the righthand side of their balance sheet. (Just for a sense of comparative magnitude, household-sector assets total $110 trillion.)

    Similarly consider the liability on the Treasury balance sheet offsetting outstanding currency. That liability is likewise not forced-redeemable by the asset holder. So you might say it’s just pro-forma. But…

    Saying “that’s not money cause that’s not how I’m defining money,” then giving a not-very-well-thought-through definition of money doesn’t help with the conversation.

    My best shot at it: Money is the value of ownership claims, designated in a unit of account.

    (That UofA-designated value is recorded on the lefthand side of balance sheets, as labeled asset entries.)

    Those legal ownership claims are embodied in financial instruments (including titles to land). The terms of those instruments — rights and obligations — are wildly diverse.

    Among those terms and conitions: The price of a subset of those financial instruments is institutionally pegged to the unit of account. The price of one dollar in a checking account is always one dollar.

    The aggregate value of those fixed-price instruments is what’s tallied up in monetary aggregates.

    But that definition is far narrower than “financial assets.”

    ??

  33. Creigh Gordon
    November 26th, 2017 at 15:41 | #33

    @Asymptosis
    “you just silently and implicitly defined “money.” Did you notice?” I’ll accept that. I believe money to be “a promissory note denominated in units of currency” with the caveat that not all money is equal. In particular, state money and bank money are more important in the economy than, say, an IOU from my brother-in-law.

    Yes, I’d accept Government bonds as money, albeit with a contingency.

    Interesting question about shareholder equity. On a firm’s financial balance sheet the dollar value of real assets (land and buildings) is listed as an asset, and that same number appears on the liability side as owner’s equity, or perhaps as a mortgage-type entry. But say you personally own a plot of land. On what balance sheet would that appear as a liability?

    Sorry if this answer is only partial, I may be able to say more later.

  34. Creigh Gordon
    November 26th, 2017 at 18:00 | #34

    @Asymptosis
    “Money is the value of ownership claims, designated in a unit of account.” A title or deed to real property is certainly a claim of ownership, but it’s not a claim denominated in a unit of account and does not constitute a liability to any other person and therefore is not money, right?

  35. November 27th, 2017 at 07:57 | #35

    @Creigh Gordon

    >A title or deed to real property is certainly a claim of ownership, but it’s not a claim denominated in a unit of account

    See lines 84 and 98:

    https://www.bea.gov/national/nipaweb/Ni_FedBeaSna/TableView.asp?SelectedTable=3&FirstYear=2009&LastYear=2016&Freq=Year

    Titles to real estate have market value (necessarily designated in financial statements in the UofA).

    (The accounting method to estimate those values — purchase price, book value, marked-to-market value as in the above, estimated replacement cost of structures, etc. etc. — is a separate issue.)

    > does not constitute a liability to any other person

    “Constitute” is a problem here IMO. Whole point is that “has an offsetting liability” /== “is a liability.”

    > therefore is not money, right?

    By the definition you’ve bruited, right. But I don’t think that’s a useful definition. We have a perfectly good word for financial assets already (those with offsetting liabs on other balance sheets): “financial assets.”

    I don’t think money = financial assets gets us anywhere.

  36. Creigh Gordon
    November 27th, 2017 at 10:41 | #36

    I’ll grant that real estate and other kinds of real property are wealth, and that is why the national accounts are interested, but wealth and money are not the same thing. And the difference is more than just liquidity, it has to do with an actual vs. potential distinction. It’s the potential that creates the liability, actual simply is what it is and requires nothing else to back it up.

    “I don’t think money = financial assets gets us anywhere.” What I struggle with is how to explain money to people who would find “financial assets” confusing. The kind of people who if asked, would say money is “umm, kinda like gold, only made out of paper, or something.” (Wanna see deer in the headlights? Ask a BANKER what money is). Money = financial assets is probably exactly right, (gotta think a bit more about that) but it doesn’t seem like a helpful explanation for Joe Sixpack at the bar.

  37. November 27th, 2017 at 10:59 | #37

    @Creigh Gordon

    “would say money is “umm, kinda like gold, only made out of paper, or something.” ”

    Agree. The core problem is the irresistible desire to equate money with currency and currency-like financial instruments. (Those whose price is pegged to the unit of account.) “We’ve always called coins money, they must be money.”

    That’s a fine meaning for the word, but clinging to it inevitably leads to two meanings for the same word, and unavoidable confusion.

    Ask the owner of twelve apartment buildings (say with with near-zero financial assets or “cash” holdings), “how much money do you have?”

    The answer is not zero.

  38. Andre
    November 27th, 2017 at 13:49 | #38

    “how much money do you have?”
    Well, I don’t know, everyone has his/her own definition of money, and it changes depending on the context. But I guess most people associate money with currency and some financial instruments, and not real state. I don’t think it matters. What is really important is knowing what definition of “money” is employed in the discussion.

    If you define money as currency (dollar notes and coins and bank reserves) than you would have to rewrite the “myths”. A lot of things would change.

  39. Creigh Gordon
    November 27th, 2017 at 17:11 | #39

    “Ask the owner of twelve apartment buildings (say with with near-zero financial assets or “cash” holdings), “how much money do you have?” The answer is not zero.”

    Ask to borrow some. He’ll change his tune.

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