I have been writing about the concept of money today. For several good reasons, I cannot share what I wrote as yet. This sentence, written in an email to a colleague, did, however, summarise the claims:
The key idea is that money is always intangible, is always debt, and can never be anything else, and is always subject to the constraint that if double entry cannot record what we claim for it then that supposed use is not possible: money is an epiphenomenon of accounting and must therefore obey its laws, and sequencing.
Discuss, as some people say....
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Money is always debt. Money is subject to double entry bookkeeping.
When money is created by government, by directing the central bank to pay (rather than the charade of issuing debt and then central bank buying it back), is this debt? I guess the central bank might frame it as a debt, as an overdraft. But the government can run up an infinite overdraft. Furthermore since the government owns the bank is this really a debt?
It is technically debt: it is between a bank and their customer.
If it is not debt, what else is it?
Why would you want an infinite overdraft with the inflation crisis this would induce?
“When money is created by government” the implicit cancellation of the debt on consolidation (BoE and Treasury), which is never explicitly carried out; doesn’t cancel the money created. Somebody outside Government uses it. Every pound they possess says, “I promise to pay the bearer”; there is a debt, and a creditor.
Correct
The general thrust of the sentence is certainly in my wheelhouse, although I am not sure about the language of epiphenomenon and laws (‘by-product ‘is a term I may have carelessly used my self, but it is I think rather an inevitable consequence of double-entry) in a fiat currency. The principal I think , for a fiat currency seems to me sound (at least as I cautiously understand the sentence). I think the problem, and the difficulty in resolving the problem why the proposition is not conventional wisdom may be found in the history.
The transformation of money and banking only came with the Italian Renaissance; and its most important product for our digital modern world was the diffusion of Luca Pacioli’s exposition throughout Europe of the Venetian merchants seminal and transformative innovation of double-entry in his ‘Summa de arithmetica, geometria, proportioni et proportionalita’ (1494). Pacioli was one of the great, but almost uncelebrated Renaissance thinkers. He was both a friend and teacher of Da Vinci. The Summa (Ch.8 is the exposition of double entry bookkeeping) became the standard text on double-entry and its power for merchants was transformative. Soon enough it came to London; which retained the thread of special Italian wisdom on finance with Lombard Street becoming the centre of London Banking. Intellectual historians tend to look to Machiavelli as perhaps the most enduring Renaissance influence on modern political thought; but I believe this is wrong. It is Pacioli. He did what Adam Smith did almost three hundred years later; he didn’t invent double-entry; he observed it, analysed and provided the first great expository text of the concept. It is all there; journals, day-books, balance sheets etc. The Summa, and Ch.8 is one of the great texts of Western Civilisation; but has been overlooked, and certainly its implications have been overlooked (perhaps why it has escaped the attention of economists, who know virtually nothing about accounting, and very rarely study its principles in university).
It has taken a long time to move from tally-sticks in England to fiat currency, and even now in making the required connections between double-entry and money. The problem I think is twofold; first, in medieval and Renaissance Europe Governments raised money principally to make war, and war requires a common currency, typically sustaining value across many countries, often with axes to grind against each other. This means a mutually agreed standard of value, that rests not essentially on an individual currency as debt; but on an independent secure, high value commodity; typically gold and silver, which had the consequence of conflating the concept of currency with commodity. There was no other reliable, secure way in a dangerous and volatile world to compare different national currency values for a merchant trader. You take what you can use, and trust. Second, confidence in the currency itself was not to be taken for granted, even within the country of issue. It was too easily undermined by the activities of the sovereign issuer of the currency , in search of easy short-cuts to seignorage (for example Henry VIII’s debasement of the coinage, or James II and VII defaulting on debts), or the fraudster discrediting it.
You are so right that economists know almost nothing of all this, or much else to do woth money, come to that
Richard,
You raise an interesting point. In economic theory, in virtually all its manifestations, extraordinarily money is not essential to economic activity. This is quite wrong, but echoes down through all the major, defining texts, and the textbooks. It is for this reason; ie., protecting economics from its essential connection to money that economics (from Adam Smith onwards), invented the myth of ‘barter’ as representing the essence of economics; the story is there to excise money from the script. Here is the irony; for economics and economists, it is money itself that is the epiphenomenon; and I mean this in the specific sense of a by-product not directly connected to the phenomenon with which it is associated.
Agreed
Thank you both for this kind of exchange. I’m sure there are some readers other than myself without the accounting or economics background to whom the historical context, the ‘ideas of money’ approach helps bring the technicalities to life … much appreciated.
Thanks for saying so.
Correction for accuracy; the major default was in 1672, so obviously Charles II; and I thought I had landed that one blooper free. Hey, ho.
For currency users I have no issues. I agree with your post.
For the currency creator I am less sure. Maybe that’s because I don’t understand (sorry). But if I don’t understand, unless I’m being very stupid (quite possible), others may not understand too.
You say, “It is technically debt: it is between a bank and their customer.”
OK, I get that. Makes good sense.
But, in this case, the bank and the customer are effectively one and the same. So the debt is between the government/bank and themselves. So, I guess, what I struggle with is whether someone can owe themselves money. Doesn’t it just cancel out?
I shall think about it.
If I am just being stupid, perhaps it is best just to take this “offline”; no point in clogging up your blog with nonsense.
Asw John Wareen ahs already pointed out, they are not the same. The can be cionciolidated into a single entity – bit the reality is that they are legally distinct and the debt created between them – inclduing notes and the money creation disguised by QE – exist in the world beyind them – so you just cannot pretend them away. Notes are real, after all, and there is still £800 billion or so on central bank reserve accounts.
Hmm. OK, I understand the words, I can grasp the meaning, as a lexicographer’s entry it makes sense – but is it useful in the real world where “we” use money as a tangible?
In my long arguments on social media about MMT I have found it useful to think about spending power – users – and purchasing power – issuers – (which I think have a subtle difference but the wording is eluding me), and transactions – the “value” attribute of money.
I have no idea if the above is useful or just noise, one day I hope to create something towards a narrative as per your earlier blog. Keeps the brain occupied.
I agree tnhat it is not widely useful.
I offgered it for those who like the techy stuff, to be honest. I diud not share that oist in social media for that reason.
The tangible bit may be reassuring to you but in a digital world, even in everyday life it isn’t tangible any longer. The tangible part really is not the important part, even to you. Why do I say that? Because you do not use money because it is tangible; you use it because you trust it implicitly and consistently, day in, day out to allow your life to function in the real, tangible world; in the community. The trust, which is critical here, to you – is not tangible. That is the nature of money.
Very well said. I like that.
The challenge of course is to try and explain it in a way that someone going to vote in the next General Election might understand
I think I follow and accept the ‘money as promise to pay’ (fiat currency) definition; and the post-1971 detachment of that from any sense of metallic commodity backing, especially as regards the effect of that on exchange rates. I appreciate your clear presentations of this and the current money-creation-by-banks-via-loans (also the BoE’s explanation in 2014 of course).
I also understand your statement that UK government debt is a safe and convenient place for long-term savers (in the UK) to put their money, with a guaranteed (nominal) return; putting it there either directly or in the majority of cases via funds of various sorts, primarily pensions.
You also suggest that the level of government debt is unimportant – IF the government uses its seigneurage rights to create whatsoever it needs for its expenditure; with the proviso that it pulls sufficient out of the economy (by tax, ‘destroying’ that money) to avoid ‘cash-driven’ inflation.
I’m interested to know your views on the level of foreign ownership of our UK national debt (‘gilts’) which I understand now exceeds 25% according to the OBR; and (as they point out) the volatility that this introduces. (Mark Carney spoke of the UK ‘depending on the kindness of strangers’ buying gilts… or not selling them off.) See https://obr.uk/frs/fiscal-risks-and-sustainability-july-2023/#chapter-4
If the UK government were to direct the BoE to drop interest rates (and plan to control inflation by fiscal measures rather than a credit squeeze) would this not potentially lead to a flight of this foreign capital from gilts, depressing their value, raising their yields again, diverting money from corporate bonds and stocks, thus further limiting private business investment; along with a sell-off of the GB £, a fall in its value and ‘imported inflation’ on all the commodities and products that we import?
Is a government that tries to ‘balance the books’ by selling gilts to make up the net PSBR effectively putting us increasingly into a sort of international debt slavery to the global money markets and their interest rates? Actually, in practice, a lack of monetary sovereignty?
Is there some way to stop this increasing tendency? Controls on international capital flows, a transaction tax to slow it down, or…?
Perhaps this is a question for another blog thread sometime? Instant answers are not demanded!
Thanks very much for your work and considering my perhaps amateur or confused commentary.
I am not sure I have ever said the level of debt does not matter. I have said the interest rate does.
Am I worried about foreign holdings? Not at all. Overseas holdings are normal for almost all sovereign debt now. It is how foreign reserves are held. There is nothing very odd about the UK situation, IMO.
And if interest rates are reduced to their natural rate (which is now near zero based on the 500 year trend) what does debt slavery mean?
Thanks for the clarification about the interest rate rather than the level of government debt.
The foreign holdings of 25% excludes other government’s reserves in sterling, however, according to the OBR. They expressed concern (since it’s grown a lot in recent years and is bigger than elsewhere) but perhaps that’s their job to sound ‘prudent’.
And thanks for the reminder to think about real rather than nominal interest rates (ie. zero real rate, which is what I assume you’re saying?)
The CDS, derivatives and shadow banking are clearly the worst part of the whole system: unregulated money creation that sits, extractively, on top of everything else – until another GFC.
I totally agree with what money is these days – the more intangible nature of it and how it has become more fiat based and as its distribution has been narrowed. Also, it digitisation makes it even more intangible of course. And of course debt – yes – I get that too.
But money is many things and one of those things is that it is a phenomena in its own right. Money can be observed by what it does.
You may not be able to see it, smell it and touch it even, but you can see what it does and what happens when it is not there. You can see how it gets transformed into ‘things’ or notes and coins, even cheques. Or things needed but not delivered.
What you describe to me above is strictly accounting in an accounting sense but to me one of the things that makes money tangible is it use or how it is put to use.
Money can be quantified as power. This to me at least makes money (or its lack) tangible.
I don’t see how that relationship with accounting has to be separated. It is the more abstract notions of money that attach a mystical quality to money and make it harder to pin down, separate it from reality. That’s got to stop which is why I found the potential of resource accounting so positive.
First there is there is the bean counting I suppose; then a reflection on what money has been doing for ill or good.
But to call money intangible is risky as it helps us to evade the moral questions about what money is being used for. And that is a big question in our society at the moment.
(Not sure if my contribution fits in, but it is an honest reaction nonetheless).
I like an honest reaction
And it helps
The political economic dimensions of this were in the piece I was referring to. It was 5 pages long.
Pilgrim!
The way I see it….
it only gives power when the structure of the social order allows it to. That is when work – paid for by corporations- is part of that structure. And tax.
Were there to be a UBI or a BIG – guarantee then many aspects of the power relationship would disappear.
Rather like in the beginning of the modern economy, when Adam Smith got seriously agitated over the skill of yeomen who with one cow and a few other animals could live quite happily in their homestead in the village, make their own shoes and stuff and not have any demand for employment in the satanic mills that were emerging.
That money confers power – I agree it does and that it is wrong – is a historical artifact that needs reconfiguring.
Right now, money gives you the power and right to buy machines that deplete the climate.
Off topic but I thought you might be interested in this:-
https://www.nakedcapitalism.com/2023/10/exxon-apple-and-other-corporate-giants-will-have-to-disclose-all-their-emissions-under-californias-new-climate-laws-that-will-have-a-global-impact.html
Good
Ben says: Off topic, but I thought you might be interested in this:-
https://www.nakedcapitalism.com/2023/10/exxon-apple-and-other-corporate-giants-will-have-to-disclose-all-their-emissions-under-californias-new-climate-laws-that-will-have-a-global-impact.html
You wrote: “the consequences of decisions [on economics, accounting and tax] made on these issues by a tiny number of people have profound consequences in their lives. Because of *climate-related issues*, those decisions will also have similar consequences for generations to come. (There has to be a better story to tell. October 10)
‘Taxing Wealth’ is absolutely right – but is it enough? Most of us in the wealthier half(?) of the British population are, I suggest, carbon-pollution ignorant and reckless of own safety and that of our young people, let alone that of generations to come.
Every activity of my local U3A group (which organises activities for retired people) appears to depend on motor travel. There is so much local traffic that main streets are difficult, dangerous and tedious to cross. Snatches of conversations: Holiday in Africa … Children’s camp in New York State … visit new girlfriend … in Australia! Wedding celebration in Latvia … Superb! You’ve got to go!
The trend of the graph of atmospheric carbon dioxide concentration at the Mauna Loa Observatory in Hawaii is relentlessly upward. https://gml.noaa.gov/webdata/ccgg/trends/co2_data_mlo.pdf Avoidance of human catastrophe requires the trend to be reversed – to be relentlessly downward.
I suppose that the debate about a proper understanding of money is critical to that change. Could something more be said about the connection please? Where is the restraint – that must be on a huge scale – for our own good, as well as for billions elsewhere?
The world has a globalised economy with multiple sovereign states, most of which exercise nominal monetary independence as regards issuing their own money-as-debt; so there are multiple moneys, which are exchanged with each other at variable rates (since there is no commodity backing, post 1971; although what existed before was perhaps also something of a fiction or a ‘belief system’).
Why should one money be preferred over another? Because of some ‘sense’ of the ability to actually pay (in something else: another desirable money, a commodity or a product or service) of the issuer of a particular money?
Is this why countries have ‘strong’ or ‘weak’ currencies? That their central banks, governments and whole economies are rated by the global financial markets?
I recall reading the late J K Galbraith’s book ‘Money’, in which he described the early US system of ‘dollars’ created by banks in different states; and that a ‘dollar’ (banknote: ie. promise) from a bank in a mid-western pioneer state was not useable as a dollar on the east coast: it had to be exchanged at a discount. This despite that those same dollars were circulating and accepted at 100% face value in the region where they were created.
Nowadays with the near-instant flow of electronic data, it seems that this kind of differential is eliminated (due to ‘arbitrage’). And the global value of a particular state’s money is enforced by a system bigger than any one actor; with flows larger than many countries internal money circulation for real production and consumption.
Doesn’t this mean that we have reached a condition where international finance is both parasitic on ‘real’ economies and is also almost out of control? Can a country even as ‘strong’ as the UK enforce its own sovereign (democratic?!) will?
You are right about the system being out of control, but the issue is shadow banking, derivatives and swaps.
There is a hierarchy of currencies; with the US$ at the top. That is a matter of trust in the world, and money is more important than the politics – and that is a fact. China follows this; it pegs the renminbi to the dollar. It does this because money matters. Britain’s power in the world in the 19th century when at the summit of its power was built as much or more on money and its currency dominance, than Empire.
Below the hierarchy of currencies there is the hierarchy of money within a currency (Mehrling): ‘The hierarchy of Money’.
Let’s just say that if the finished piece is as interesting as some of the subsequent discussion that the initial “teaser” provoked then I very much look forward to reading it 🙂
It may emerge at some time
I am unsure whether the cogitation required to grasp these ideas is good brainwork against dementia or the mental struggle indicates dementia’s first knockings.
On a par with learning Welsh for brainwork!
Now, Welsh is hard
And I try, occassionally
The answer is 1600. Give or take.
That is the number of working hours in the year for those in the labour force (60%?).
The money issued as credit that some will provide work of some kind to cancel it.
This is the labour theory of value.
If no-one worked (we can include work as being exploiting others labour) there would be no economy.
> money is an epiphenomenon of accounting
Isn’t it the other way round? Or, at the very least, a corollary? In the same way no one would want to invent lawyers unless they had to, no one would want to invent accountants (not that I have anything against lawyers or accountants!!)
Lawyers and accountants are necessaryu for functioning statews and economies
Why would you want to do without them?
As I argued, the language of epiphenomena is not helpful and serves only to confound and confuse. Money chronologically preceded double-entry, obviously; but the relationship is close, and direct. Double-entry presupposes money; it is wholly a money process; but more, it brings out, reveals the essential nature of money, as debt. It transformed the shape and form of economic activity, and the complete financialisation of the world; a process that has developed relentlessly and unfalteringly for over six hundred years; and that is unprecedented; as the power – of a technique. The modern world is a product of money and double-entry as the most powerful weapons in the armoury of economics; digitisation is simply the next transformative step, taking us – where?
I’m not sure that money predated double-entry. Yes – as regards double-entry as a precise, numerical accounting method; which therefore needs some sort of unit (ie money). No – if I recall and understand one of David Graeber’s points in ‘Debt: the first 5000 years’, debt (ie. obligation to pay) preceded money, in so-called ‘primitive’ societies, usually with closely-integrated relationships. Was there not implicitly therefore a ‘double entry’ system of giving, receiving and repaying (not ‘returning a favour’ voluntarily as we might say, but an obligation, determined by a set of social norms)? And the ‘double entries’ in some sense recorded – in the memories of chiefs and tribal elders and heads of houses; if not actually in any written or token form?
As a side note, I think some of what was ‘traded’ in societies of that sort may have itself been ‘intangible’ – for example ‘honour’ – sometimes but perhaps not always symbolised by a transfer of tangible objects or people.
As the number and complexity of relationships expanded, and their reliability declined inversely, more precise record-keeping would be necessary; hence ultimately money. When a relationship has NO reliability, a transaction becomes a closed contract, with immediate settlement in money. Some commonly-agreed validation of the ‘promise to pay’ implied by the tokens of that money would be a prerequisite to its common use; eg. the sovereign’s imprimatur, or a trustworthy institution (the Knights Templar) or a note from a reputable banker.
(We can all agree to dismiss the ‘barter myth’, I think: it seems to be a product of colonialism – perhaps with racist elements – created out of the interaction with the unknown and therefore untrustworthy alien colonists, whose usual money would often have been meaningless to the indigenous people; so the explorers and colonists bartered with them. Then projected that back in time, incorrectly, onto their own pre-history, pre-money, ‘primitive’ society.)
Debt did, I am sure predate money.
But money only got meaning when there were ledgers – which existed in Babylon.
I am not sure how the intangibility of money could exist without ledgers
It took time, but the morphed into double entry. When is not precisely known. We know when it was documented.
Thank you all for the illuminating discussion, I think it’s vital work. I hadn’t considered accountancy as the process of laying down and recording debts, so fascinating to think that accountancy can precede money.
“I’m not sure that money predated double-entry”.
Pacioli did not invent double-entry, but the Venetian merchants he studied almost certainly did. Their innovation, once published in the Summa, ‘went viral’, at least the Renaissance equivalent; so most likely 15th century. The innovation could not be kept quiet forever when Venice was so obviously a rich trading powerhouse.
“A coin is a piece of money made of metal which conforms to a standard and bears a design” (Christopher Howgego, ‘Ancient History fromCoins’, 1995). There is some uncertainty whether the first coins were created in Lydia (Turkey), 7th century BCE, or India or Greece 4th/3rd century BCE (Howgego).
“debt (ie. obligation to pay) preceded money” (paraphrasing Graeber).
It is important, however to make a distinction. All money is debt; but not all debt is money.