DEBT-FREE MONEY AND BANANA REPUBLICS Posted on December 19, 2015 by L. Randall Wray | 42 Comments By L. Randall Wray Some time ago, I labeled the “debt-free money” campaign a non sequitur in search of a policy. (See here.) However, this non sequitur refuses to die. I went on to joke that if they want a debt-free money, they ought to propose that government issue bananas as currency. I frequently am asked to do interviews and I almost always accept them. However, when I was asked last week to participate in a radio show devoted to debt-free money, I struggled mightily to get out of it. As you’ll see, the program’s producer took my idea of banana republics and ran with it. I thought readers might get a kick out of this exchange (the producer’s emails are in italics, my responses are in bold). After the exchange, I’ll summarize my objections to the notion of debt-free money.

>>> Subject: debt based money >>>Dear Mr. Wray, I would like to invite you to our weekly radio show. The show will discuss how to eliminate our debt money system and replace it with a wealth based money system. The basis of the theory is to have governments SPEND money into circulation as opposed to borrowing money into circulation. We would like to hear your views on the matter. >> On 12/1/15 10:24 AM, L. Randall Wray wrote: >>> This sounds confused to me. If bananas were money wealth, government could

spend them into existence. Otherwise, I cannot make any sense of what you’ve

written. I probably wouldn’t be a very good guest. >> Subject: Re: debt based money >> Dear Mr. Wray, >> On the contrary, you would be a wonderful guest. As you are aware, in our current monetary system, all bananas are loaned into existence by commercial banks. And with each loan, our banana supply increases. However, each loan has an interest charge. When a commercial bank makes a loan, the principal is created, but not the interest. Consequently, in order for me to pay back all the bananas I borrowed, plus the interest, I must capture bananas that you borrowed with your principal. Also, governments need to capture bananas from your principal, to make their principal + interest loans, payments. An individual can become free of debt, but collectively, we cannot. >> We are just proposing that governments create bananas from nothing, like commercial banks do now, but spend the bananas for infrastructure needs that everyone wants. Like roads and bridges etc. It has been done before. In 1861 Abraham Lincoln needed bananas to fight a war. Patriotic northern banks offered to lend him the bananas at 35% interest. Instead, Lincoln had the treasury create Green Back dollars. (they have written songs about these ) They were used to pay troops, buy ammunition and supplies. They were made legal tender. Bananas, spent into circulation without debt, without interest. Oh yeah, and he won the war. >> The 1792 coinage act allowed an individual to hike his donkey into the hills, mine silver or gold, bring the metal to the U.S. Mint and the government would turn his metal into legal tender coin, free of Charge. The man preformed the labor, and his labor was directly transformed into bananas. Not as a promise to pay down the road with an interest charge, but as a legal tender banana that could be spent into circulation without debt.

>>Please come on our show. It will be fun. > On 12/1/15 1:15 PM, L. Randall Wray wrote: > Sovereign government can no more borrow its own IOU than you can borrow your

own IOUs. And money is not bananas, except perhaps in monkey republics. Money is

always and everywhere else an IOU. As my prof, Hyman Minsky, always said,

discipline the analysis with balance sheets. Show me the balance sheets in which

government creates and spends money that is not its liability, vs the balance sheets in

which government borrows its own currency from banks. If you provide those, then

we have a place to start the discussion. Otherwise, I cannot make sense of what you

are arguing and wouldn’t know what to discuss. > Subject: Re: debt based money > That’s the point. Money doesn’t always have to be borrowed. It is a violation of natural law for us to be required to borrow money, just to participate in commerce. As a young boy you probably brushed aside an ant hill, built in the crack of a sidewalk. What did you find the next day? A partially rebuilt ant hill, a foreclosure sign or a society that did what was necessary to survive without debt? >This proposal is completely different from what is now being practiced. It requires unlearning, common sense, and approaching the balance sheet and other orthodox systems in a completely different way. If the accounting balance sheet is your main criteria for analysis, the proposal can be manipulated to satisfy the bookkeeper. A Natural Equity or Asset Monetization Account can be created to balance your E+L = A requirements. And please keep in mind, if business man “A” starts a company, on October 1st, with $25,000 of operating equity, there will never be any discussion of where or how that equity came into circulation or existence in the first place. Whether that cash was actually an IOU or a promise to pay, is not important in any accounting system, because the balance sheet only requires data, after October 1st, not before. <<Can you be available for the show? <<On 12/2/15 7:47 PM, L. Randall Wray wrote: <<All money, save bananas in your monkey republic, is debt. It is on the liability side

of issuer and asset side of holder. You cannot change that through confusing

semantics. If all you want is zero interest on government liabilities that is easy to

arrange. You do not have to pervert either accounting or language. A simple new

instruction from Congress to its creature, the Fed: Zirp forever. The deed is done. I

cannot see how that could take up more than 60 seconds of a show. If you want to

schedule 60 seconds, I can probably do it. < Subject: Re: debt based money <Wonderful. We will love to have you on. The host also wanted you to come on to discuss what you have been doing at Modern Monetary Theory. Perhaps you will be willing to stay on longer to go over that part of your work. OK, I couldn’t wiggle out of the interview. So here is my objection to debt-free, wealth-based money.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is “wealth-based”, not “debt-based”. Its value is determined by the value of the plastic, cardboard, or paper.

Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.

Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.

As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal.

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

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

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

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

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

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

When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks hate payment of interest by government. I’m not sure, but I think what they really want to do is to prohibit government payment of interest.

That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds. I’m with them. Advocate ZIRP, not banana money.

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

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

But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding. (I’ll write a blog on that soon.)

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

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

While I’m somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.

Our debt-free money folks (including the producer above) believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.

But that is not true. Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.

When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury’s deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.

Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always “debt-financed” spending, using government debt.

Telling the Treasury to stop selling bonds will not stop the government from going into debt.

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

However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins). Government will be in debt. But it can choose not to pay interest.

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

For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds.

I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent. It doesn’t pervert any accounting. It is simple and follows normal banking practice.

Your overdraft at your bank is a loan; there is no economic reason why the central bank branch of government cannot allow an overdraft by the treasury branch of government to spend funds already budgeted by the elected representatives and signed by the head of the administrative branch of government. Overdrafts are normal banking procedure; they are well-understood and not at all scary. Uncle Sam ought to be able to run an overdraft at his bank. His spending is already checked by the budget. His signature on his debt creates what is without question the most highly esteemed “note” on the planet. It is accepted all over the globe. His banker—Aunt Janet—ought to accept it.

Again, we don’t need a non sequitur in search of a policy. Our debt-free advocates usually do not tell us how they would change procedures to allow treasury to spend without government going into debt. The reference to Lincoln’s Greenbacks is not helpful.

Even if we grant the advocates the perversion of language—to say that paper money issued by treasury is not the treasury’s debt—do they really imagine that we will go back to the 1860s payments system? Uncle Sam will deliver a wheelbarrow full of notes to your mailbox on the first of every month to pay Social Security? Will Uncle Sam send trainloads of cash to Lockheed to purchase fighter jets? (Or will Uncle Sam instead mint the trillion dollar platinum coin. Boy oh boy will someone be in trouble if that gets lost in the wash!)

In a later blog, I will address a proposal to have the Fed provide “transfers” to allow Treasury to spend, crediting the Treasury’s account with hundreds of billions of welfare that can be spent. This, I think, subverts normal bank accounting (the Fed would have no asset to offset the deposit liability to the Treasury) even as it creates a government debt (Fed reserves) transferred to private banks when the Treasury spends. In other words, it really does not eliminate government debt—it just allows government to spend debt that need not pay interest. Still, the most straightforward way to accomplish this is—as I discussed above—to direct the Fed to allow interest-free overdrafts to the Treasury. But this is not a “debt-free” way to spend.

And what about our Monkey Republic that spends debt-free bananas? With only the satiable monkey appetite driving demand for bananas, and with no taxes to be redeemed in banana debts, it would probably end up as a banana republic—putting too many bananas into circulation fueling a banana hyperinflation.

42 RESPONSES TO DEBT-FREE MONEY AND BANANA REPUBLICS

1. Brian | December 19, 2015 at 8:59 pm | Great to see you posting again Prof Wray.

Is it off to think that so much of the debt free money debate is simply that it makes people feel weird? They just can’t, in their gut and DNA, think about because debt is a scary sounding thing or makes them uncomfortable? (Or they are gold bugs and don’t get debt based money still applies to that!)

Guess I lucked out, my Money & Banking class began with “Money is inherently debt” and “We all start with some debt, which is to the government” Was some grad student at Rutgers that I didn’t really think much of, but as I started to get into MMT can’t help but think I had a rare winner in that guy!

2. JohnB | December 19, 2015 at 9:34 pm |

I’m an MMT’er, and am sympathetic to both ways of framing this – I acknowledge the technical accuracy of how you present it, but acknowledge how the political-narrative of ‘debt-free-money’ coins the whole issue in a far easier to understand way than most MMT narrative does (the latter of which tends to extremely strongly induce cognitive dissonance in people – and its discussion of debt is a part of this – so needs much improvement in its narrative if it’s to gain enough traction among the public and in politics).

I think a lot more time needs to be put into picking apart the different TYPES of debt that there are, and distinguishing between them, when describing issues like this.

Remember that the term ‘debt’ carries heavy emotional connotations/reactions to the term (David Graeber’s book ‘Debt’ documents this extensively), which are never going to go away politically – and zero-interest debt, with no timeframe for repayment, is COMPLETELY different to most peoples general understanding of debt (such that it renders most emotional reactions to the term ‘debt’ irrelevant) – so I think the narrative has to be adjusted to account for this, and you MUST distinguish between different types of debt.

If you make these distinctions, I think the term ‘debt free money’ can begin to make a lot more sense – as it’s really about being free of a particular TYPE of debt – and I think it can be quite compatible/complimentary to MMT.

Since the term ‘debt’ is so loaded, I think that developing a new narrative which takes certain types of debt, and just stops calling it debt – to call it something else entirely – is the most sensible way to go; there needs to be a way to shed the moral/emotional baggage that the term carries, and discarding the term is one way.

o Jerry Hamrick | December 22, 2015 at 11:10 am | I agree with you JohnB.

3. Neil Wilson | December 20, 2015 at 12:43 am | “Bananas are not “issued”. They are cultivated, harvested, transported, marketed.”

And before too long preserved and hoarded – because the supply of bananas is under threat from disease. https://youtu.be/9H0dy8fv33M So even banana republics are not going to exist in the future.

4. Neil Wilson | December 20, 2015 at 12:59 am | “Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves.”

There is another way of looking at that. What government can do, by virtue of the licence that pegs the liabilities of commercial banks to the central bank, is force commercial banks to lend money to the government sector.

Bank ‘reserves’ are called reserves because they are a reserve liability of the government sector to the commercial bank. To the commercial bank they are an asset. In effect the commercial bank has made a loan to the central bank arm of government.

And of course by accounting identity when a bank makes a loan it makes a deposit – which ends up in the hands of the person the government is paying.

So what government can do is *force* commercial banks to expand their balance sheets by spending and *force* them to shrink their balance sheets by taxing. In other words the control of a bank’s balance sheet isn’t entirely in the hands of the bank – if they want the bank’s deposits to be known as ‘US dollars’.

So you don’t need the central bank or Treasury at all. They are technically surplus to requirements. All you need is the legal right to force commercial banks to create loans for your benefit – at whatever interest rate and term you demand.

5. Alex | December 20, 2015 at 5:08 am | Instead of talking about “bananas” as a debt-free currency, maybe it would be more relevant to discuss how a Bitcoin-based economy would (not) work. Because some people accept Bitcoin as a medium of exchange, the proponents of crypto-currency say it would work as money. Any thoughts on this?

6. Markg | December 20, 2015 at 7:54 am | Your explanations of MMT are so easy to understand. Thanks. The “greenback” was not debt free money. The government agreed to sell bonds that could be bought with greenbacks that paid 5% interest for twenty years (they were called five-twenties). And the interest was paid in gold. I am starting to wonder if ZIRP is a good thing. Maybe the public desires a certain amount of “safe, free income”. While treasury securities’ principle may be safe, with ZIRP there is very little income. And it is starting to look like ZIRP may have more deflationary forces

which is also bad for growth. Japan at 200+% debt/gdp and the US above historical average but still weak growth. Maybe the treasury (or central bank) should pay around 4% on all govt debt forever (sort of like consols).

o Richard | December 20, 2015 at 2:40 pm | The government could offer certificates of deposit to domestic ‘savers’ — individuals and businesses — at an interest rate equivalent to the current rate of inflation. Of course there would be some minimum time of holding the certificate with a penalty of foregoing an interest payment in the case of early withdrawal. Also, there would have to be a limitation of not being able to use these certificates as hypothecation for credit or a repo-style operation.

The government could then make the claim that its money can indeed function as a store of value.

7. cgordon | December 20, 2015 at 10:37 am | All ‘money’ implies a promise or an obligation. The issuer of money makes an explicit promise of some kind of future benefit to the person who accepts the money. ‘Debt’ is a perfectly valid characterization of that obligation.

8. William Beyer | December 20, 2015 at 11:31 am | Perhaps it’s the negative connotations of debt and “borrowing” that throw us off. For my thinking, you don’t “borrow” your own money; you “manage” it.

9. entreposto | December 20, 2015 at 2:36 pm | Most existing short-term bonds don’t offer a coupon, right? The effective interest rate is then set by the actual and desired liquidity of buyers. The same idea applies to bonds that offer a coupon. The Fed uses OMO to make certain the buyers have the right amount of reserves to choose to buy bonds at the Fed’s desired effective interest rate. With true ZIRP, the only difference between reserves and bonds, is liquidity. Even though bonds can be traded in the secondary market, even with a very deep such market (the size of the market being a chief factor in determining the interest rate), transaction costs are non-zero. That makes bonds in ZIRP always a worse deal than reserves.

10. LRWray | December 20, 2015 at 7:59 pm |

Thanks all. I will be brief, responding to all of you. We are all of us, always, in debt. I like Atwood’s book, Payback: debt and the shadow side of wealth, best. We need to embrace that. Govt’s debt is our asset. It is tempting to finesse that; call it something else (bananas?) but ultimately that will not be satisfying. Debt is the tie that binds us to our fellow humans. However, it is true that no one–govt included–borrows one’s own debts. You owe your parents because they brought you up. You cannot borrow that back. Eric Tymoigne already tore apart bitcoins, in these pages. Nothing more to say. The fair value is Zero. Zip. Nada. These are not debts. Not convinced by Neil. We need a central bank; its liabilities are used for clearing and this is what gives it the ability to come to the rescue every generation (or even more often) as the private banking system self-destructs. There is nothing wrong with our current operating procedures–they work just fine. Treasury spends through the Fed; All treas spending takes the form of reserve credits. The question is whether banks ought to earn interest on reserves. I like Zirp. I understand Markg’s concern that “we” want a risk-free but positive earning asset. But we have it. It is called Social Security. Ramp that sucker up to the point that we can live off it at retirement (Bernie’s platform). I’d eliminate all other government advantages to risk-free saving. You want a positive return? Take the risk. Debt free money is a confusion, advanced by the confused. Sorry to be so harsh. It is like a “debt-free life”. Cannot be done. It is in the nature of life. And money.

o Neil Wilson | December 21, 2015 at 2:19 am | “We need a central bank; its liabilities are used for clearing and this is what gives it the ability to come to the rescue every generation (or even more often) as the private banking system self-destructs”

I’m not suggesting we don’t. A central bank operates like any other central clearing system. It reduces liquidity risk and it acts as the backstop when the private banks stop trusting each other. But that’s a function of a sensible clearing system – and it works whether government spends or not.

What I’m saying is that the government’s ability to direct the private banks to create deposits is a separate from the central bank, and it is that ability to *force* other banks to create deposits in people’s accounts and *force* them to lend to government that is the function government is actually using.

The central bank account held by Treasury is just a more convenient way of achieving the same goal.

I’m not suggesting any change. I’m offering a different viewpoint on the system that separates clearing from the state spending injection process. And it makes it clear that the

whole process doesn’t depend on a central bank, just that a central bank approach is far more efficient.

11. John Hermann | December 20, 2015 at 8:03 pm | I am convinced by the main thrust of the MMT narrative, however in regard to this article I would point out that the word “debt” is not synonymous with the word “liability”. A debt has a payment schedule and a timeline. A liability does not need to have this. With a monetary deposit (taking the form of bank credit money), the depository has a contingent liability towards the depositor — an obligation to provide the depositor with currency on demand. However a deposit is not a borrowing or a debt.

Likewise, the government has a liability towards those who possess currency (or its equivalent) to accept it for the payment of any tax obligations. This is also contingent, because not every citizen in the possession of currency has an obligation to pay tax to the government. It cannot be construed as a debt because no payment schedule is attached to the mere possession of currency by a member of the public.

One can of course argue that even if someone possessing currency has no tax obligations (e.g. children) the mere act of spending this money will ensure that, sooner or later, it finds its way into the hands of those who do possess tax obligations. Nevertheless one can conceive of a community which conducts its transactions using some combination of barter and exchange of currency they happen to possess, in which the currency acts as a medium of exchange but does not represent a liability of the government because none of the citizens qualify for the payment of taxes (perhaps because their respective incomes are too low). At the very least, this matter is debateable.

12. Jonathan | December 20, 2015 at 10:37 pm | Maybe what they want is not, technically, “debt-free” by your definition, but interest-free and repayment-free.

What if the Treasury, henceforth, issued only a 0% coupon perpetual bond redeemable at par on demand, and issued them in whatever amount the buyers of them demanded. And the Fed bought them in sufficient quantity to maintain their par value at all times.

MMT would have no issue with this scheme, except for being as equally unnecessary as the current system. Perhaps the “debt-free” crowd would join the MMT crowd, and both sides can stop the semantic argument.

13. Charles3000 | December 20, 2015 at 11:02 pm | Dr. Wray is speaking to the “top down” debt free money issue. There is a “bottom up” view also, if I may characterize it that way. The modern Chicago Plans requiring trust banks prevents banks from creating money for their own benefit out of thin air is appealing to many people. A good example is described inhttp://www.realmoneyecon.org. I cannot accept the notion that sovereign governments spending money into the economy necessarily will produce inflation as implied in this article. After all, the government has the perfect tools for controlling the money supply; taxing and spending which are sledge hammers compared to a central bank’s puny tools of interest rates and OMO.

14. Stephen Ferguson | December 21, 2015 at 7:28 am | The “debt-free money” campaigner’s (at least here in the UK) other favourite meme is the claim that 97% of ‘all money’ is private bank-created (with the remaining 3% consisting of UK government-created notes and coins).

This too has a whiff of the non-sequitur about it, as it blatantly omits, from from ‘all money’, the hundreds of billions of £s of UK government-created reserves (that end up in private bank deposit accounts).

Unfortunately this meme has legs as this Bank of England paper apparently backs the assertion up…

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

15. Erik | December 21, 2015 at 8:43 am | The state accepting it’s own Money as a means of payment (not only for taxes but also for other transactions where the state is a seller) is fine with me, but I don’t get the conceptualisation of this acceptance as a “debt” properly speaking (the acceptance is an automatic underlying obligation for sure, but nothing you can represent in a Balance sheet as a “debt”).

If I issue an IOU it’s “understood” that anyone in its possession can pay his debts towards me with it. That’s part of the logic of an IOU applied to the situation where the owner of my IOU owes me too. How can this be a special debt besides the dept to pay the promised sum on presentation of the IOU?

The term “debt” used for the acceptance of Money as a means of payment though seems rather a metaphor to me than a Balance sheet reality.

This said I completly agree that there can be no debt-free-money in a Balance-sheet based system and that taxes drive (or rather attract, that is create demand for the currency) Money.

o Charles3000 | December 22, 2015 at 8:29 am | Eric above nails it: “… there can be no debt-free-money in a Balance-sheet based system…” I dealt with those “balance sheet” folks for many years. We called them “bean counters” because they only knew which column to put a number in and addition and subtraction. They had not the slightest notion of where money came from, what it was, why it was needed nor how it was used. All they knew was how to count “beans.” Placing the economic well being of a nation in the hands of such people is ludicrous. Additionally, I know of no law on the books nor any article in the constitution that requires the nation to use balance sheets to determine the status of the monetary system.

16. davidgmills | December 21, 2015 at 11:32 am | As I am sure you are aware, your post has been put on Naked Capitalism.

I responded by arguing, as a lawyer, that when you say there is no such thing as debt free money, you have just overruled the Supreme Court of the United States which for over 150 years has said there is. They don’t call it debt free money. The proper legal term is a bill of credit which is mentioned in the Constitution as a means of issuing “debt free money.” A bill of credit is that antithesis of an IOU.

My irritation is that economists seem to have never heard of or understood this system of money. But it is clearly a system that is not based on debt. I am not going to repost all my comments there here. But you can read them and I will be glad to discuss them with you.

http://www.nakedcapitalism.com/2015/12/randy-wray-debt-free-money-and-banana-republics.html#comment-2526666

17. Justin Synnestvedt | December 21, 2015 at 11:49 am | Prof. Wray, I too am glad you’re back blogging. I believe the best teachers combine mastery and love of their subject with an awareness of its place in the larger picture of life. You have these skills, and add a gift for clarity, and a sense of humor, so that even beginners can share your perspective. Thanks. Let me underscore your point that life is all about debt. I would just add that all debt – both interpersonal and financial – is ultimately social. We need to emphasize this, and stop the trend toward financial debt, which is dehumanizing, and gives unfair power to fewer and fewer owners of the debt.

18. Nat Uerlich | December 21, 2015 at 7:35 pm | Dear Prof. Wray:

I think you’ll find this criticism ( https://rwer.wordpress.com/2015/12/21/randall-wray-attacks-debt-free-money-cranks-based-on-sloppy-arguments/ ) worth answering.

19. John Hermann | December 22, 2015 at 1:27 am | I agree with you Stephen Ferguson.

The monetary reform organisation Positive Money (PM) persists with the claim that new bank credit money is created only through bank lending. If anything is truly crankish, it is this uninformed claim. From the PM website we are told: “… all bank-money is lent at interest: Someone, somewhere, is paying interest on every bit of bank-money in existence.”

However the first proposition is demonstrably false, and it follows that the second proposition is also false. The reason is very simple. In brief, commercial banks create credit money not only when they lend, but also (debt-free) when they spend in order to accommodate their many costs, and when they invest by purchasing securities from the private sector (e.g. from bond dealers). And bank credit money is also created (debt free) whenever the central bank purchases securities from the non-bank private sector, which it does frequently as part of its open market operations (buying Treasuries from large institutional investors) and in quantitative easing.

o Charles3000 | December 22, 2015 at 4:06 pm | John H., are you saying banks create the funds to pay their bills, that their expenses are not paid from income? John Kenneth Galbraith famously noted the singular difference between banks and other businesses. He observed that banks must spend money before they get it where as other businesses must get it before they can spend it. If your statement is true then interest income to banks is 100% profit.

20. John Hermann | December 22, 2015 at 5:20 am | Stephen, the problem here is that we have a dual monetary system in which bank credit money and reserves tag along with each other with every transaction, but do not actually mix. It is incorrect to say that reserves end up in bank deposit accounts. Bank deposits are composed of bank credit money, not reserves.

21. Jerry Hamrick | December 22, 2015 at 11:12 am | So, all government spending is “deficit spending?”

22. Stephen Ferguson | December 22, 2015 at 4:23 pm | John, Many thanks. PM’s 97:3 ratio is as gross a distortion of the truth as someone with an aversion to the colour white loudly claiming the French tricolour is 50:50 red and blue. I understand PM’s, unscrupulous, motivation for pushing it, however why the BoE concluded the same is a complete mystery. Don’t they know where their pay checks come from?

Good point too on crank obsession with interest payments. Steve Keen got so exasperated with the ‘The Principal And Interest On Debt Myth’ that he felt moved to explain why its such a naive line of reasoning…

http://www.forbes.com/sites/stevekeen/2015/03/30/the-principal-and-interest-on-debt-myth-2/ PS Agree on your point about reserves never ending up in private bank accounts – only private bank money exists there. Apologies if I gave that impression.

23. LRWray | December 22, 2015 at 9:51 pm | Yes I glanced at the commentators over at NC–most of the comments were far too silly to respond to. I will make two general responses, which are also related to a couple of comments above.

First, the critics fail to notice that a radio producer wrote to me to come on the show to talk about “debt-free money”. There was no invitation to discuss MMT. Producers can and usually do a “background” before inviting a guest. I suppose the producer found that I had written pieces AGAINST debt-free money but still wanted me to discuss the topic. I honestly told him I do not understand what the advocates are proposing and hence would not be a good guest. I introduced the banana money as my best (humorous) guess at what they want–which was in the last piece I had written criticizing the debt-free money proposal. Rather than being offended or deterred the producer ran with the idea and created an entire alternative history of the USA based on banana money. I continued to try to get out of going on his show to discuss a topic I do not find appealing, but eventually agreed to come on to say that they can achieve everything they want through ZIRP, which I indicated would take a minute. At that point he invited me to talk about MMT. I was not offensive and he took no offense. Of that I am sure. The exchange was all in good humor. We’ve had

a number of exchanges since then. And I assure you every word I posted was in the exchanges; I only deleted identifiers.

Final point on this topic: I do not proselytize. I never go door to door, or radio show to radio show, or blog to blog to convince anyone of anything. I have written hundreds of thousands of words on MMT, including two versions of my primer. Anyone who is really interested in learning something about MMT can read the primer. I don’t use interviews or emails to change people’s minds—it is a duplication of effort in a format that is not suited to the topic, and I do not have the time to do it to please the dozens of people I get unsolicited every week, writing personal emails to me to tell me that I’m wrong.

Second, I can see there is an attempt in some comments to distinguish among debt, credit, debit, IOUs, and liabilities. Fine. Go for it. Call it what you want. Again, the careless commentators have not noticed that the topic of “debt-free money” was introduced by the producer. He used the term, just as all other debt-free money types do. I’m agnostic. My point is that we use double entry book-keeping, and if “money” (however defined) is someone’s financial asset then it is on the liability side of another’s. Call it a “credit” (from the point of the view of one holding it), or a “debit” from the other’s point of view; or a debt; or a liability. What debt-free monetary cranks insist is that the money they want the government to create will show up only on the holder’s balance sheet as an asset, with no liability on anyone’s balance sheet. That is what I object to. Some argue that the Treasury, itself, treats coins as “equity”, not “debt”. Fine. Equity is on the liability of the balance sheet. Twist and mangle the language all you want. But at least do the balance sheets correctly.

o davidgmills | December 23, 2015 at 2:15 pm | When a bill of credit is issued, is it really a liability? Is a tax credit a liability? At most it is a contingent liability. But I don’t think it is that. If Bed Bath and Beyond issues a coupon for 20% off, is it a liability of Bed, Bath and Beyond? I don’t think so.

This is the legal difference between a debt and a tax credit. And I think it is significant. If tax credits float around in circulation, are they real debts of the government before they are used?

I don’t think they are debts. They are just a means of paying taxes instead of something tangible like a horse, a cow, or bushel of wheat.

I think Joe Firestone’s trillion dollar coin was a good idea as far as it went. But it was not an actual bill of credit. I would much rather see the government pay its employees with tax credits, its soldiers with tax credits, its contractors with tax credits and even Congress and the Judiciary with tax credits. Let the tax credits circulate and become our money. It gets the banks out of the equation.

24. financial matters | December 22, 2015 at 10:30 pm | I don’t think this is necessarily what you are addressing but I think the public banking and peoples QE people have a more colloquial use of the term ‘debt free money’.

They start with the concept that most people now have to access money through the private banking system where they have to pay it back with interest.

I think they view ‘debt free money’ simply as the govt sending them a check for say a $1000 that they don’t have to pay back. Or also the govt directly spending money for public purpose such as funding medical care or education.

o Charles3000 | December 23, 2015 at 9:48 am | Financial matters, your statement is precisely correct: ” Or also the govt directly spending money for public purpose such as funding medical care or education.” And the money spent by the government that way stays in the economy and is not subject to being “lost” by repayment of a loan. It can only be removed by taxes or other government fees.

25. Hepion | December 23, 2015 at 11:38 am | I think it would be helpful to distinguish between different kinds of debts. When a private entity goes into debt, his debt is settled in outside assets he does not issue. This can lead to all kinds of trouble including default.

When government issues money it does it to the population that is already indebted to the government by the tax burden. Government is in a special position because it has the power to make laws, to indebt others by degree.

Power, law, obligation. Private debt settled in outside assets. I think these are so different kind of concepts that a clarification would be in order. Can anyone think of reasonable terms we could call these two items?

o davidgmills | December 24, 2015 at 10:19 am | Yes. It is called a Bill of Credit. It is referred to in the Constitution. Our Supreme Court has said nearly a hundred and fifty years ago that Bills of Credit can be issued by the Federal government (Lincoln’s greenbacks were bills of credit).

They are simply a tax credit. They are not debt. The best known historical example of tax credits as money was the British tally stick system, Colonial scrip and Lincoln’s greenbacks.

When a person does something of value for the government, (i.e. soldiers and suppliers of Lincoln’s army) they were issued a tax credit for their service or for the goods they provided. They were easily circulated because they were tax credit for the bearer of the instrument. By governmental fiat (order) they became legal tender. All federal, state and local taxes could be paid with these tax credits and anything else.

When a government issues tax credits as its currency, it does not borrow from banks, and it does not need to tax the citizenry to pay off bank debt. Taxation at that point is only a means to remove money from the system or to redistribute it.

I erroneously thought bills of credit were what MMT was proposing. But I guess not, or their advocates can’t seem to articulate it.

� davidgmills | December 24, 2015 at 10:54 am | One more example where Professor Wray is wrong in his assertion that all money is debt. From history again.

When silver and gold miners took their silver and gold nuggets to the mint and had them converted to coins, where is any creation of debt in that scenario?

There is none. These coins become legal tender and could be used to pay taxes, to satisfy other other debts or to buy goods and services.

It wasn’t until we began replacing gold and silver coins with pieces of paper representing them that we ran into trouble.

� davidgmills | December 24, 2015 at 10:59 am | Let me be a bit more precise. It wasn’t until we created pieces of paper that were IOUs for specifically denominated coins of gold and silver or other gems and jewels of value that we ran into trouble. Then money became debt based.

� Guggzie | December 24, 2015 at 2:32 pm |

To be even more precise, it wasn’t the fact that gold and silver coins were replaced by paper money, it was the fact that the Government condoned and authorised allowing the private banks to use the fractional reserve system. That’s when the nation’s money supply became issued as debt. Davidgmills, above, explains what a lot of people believed when they read up on MMT , and it was definitely not the version pushed by Randall. The accounting process is just the tool for keeping track of the money supply; it is not a process for defining the purpose of having money. The fact that bookkeeping gives names to figures on different sides of a ledger, really doesn’t matter at all, in terms of the purpose for having the money supply a society needs to function effectively. The determining factors for the quantity of money needed are related to population sizes, the productive capacity of the society and the consumption capacity of that production. These factors go directly to the creation of employment opportunities. The money supply is certainly not related to any taxation demands an irresponsible Government wants to apply to a monetary sovereign nation.

26. John Hermann | December 23, 2015 at 5:14 pm | Thanks for the query Charles. This is an issue that many people cannot get their heads around, but the explanation is really quite simple.

We have a dual monetary system in which bank credit money and reserves tag along with each other in every transaction, but do not actually mix. Any payment by the private sector to a commercial bank entails the destruction of bank credit money (this applies in particular to the payment of principal and interest on a bank loan), however the reserves are conserved and merely change owners. The reserves associated with the bank’s interest income are now free reserves, and are accounted as profit for the bank — they can be thought of as making up a temporary increase in the bank’s capital, or net worth.

When the bank spends, to accommodate its many operating costs, it creates new bank credit money in the accounts of the payees. In addition to meeting its operating costs, a relatively small fraction (perhaps 2-3%) of commercial bank income is used for purchasing interest-bearing assets. In the spending process, the free reserves (or their equivalents) representing the bank’s income are transferred to the payee’s bank (assuming this differs from the spending bank).

The conjunction of bank income and bank spending has no impact on net financial assets held by the private sector. By contrast, deficit spending by a sovereign government ADDS TO the private sector’s net financial assets. This difference between the respective impacts on private sector assets of bank spending and government spending is a very important insight that I believe MMT has contributed to economic thought.

When you think about it, spending by the banking system – using financial assets acquired as bank income – implies the restoration of bank credit money to the economy from which it was originally removed.

I hope that all makes sense. If not, I will be happy to expand on it.

27. Blissex | December 24, 2015 at 3:37 am | The people that talk about “debt-free money” obviously mean something else than what an Economist means by “debt-free”, and it is not even “interest-free debt money”.

It is pretty obvious when you see it from the point of view of any greek finance minister, for example Y Varoufakis, who argues strongly for it.

What they want is debt- money denominated in a “hard” currency and where the debt never has to be paid back (Y Varoufakis wants the greek government to have an unlimited, never-to-be-paid-back, “overdraft” at the ECB). It is really as simple as that: debt that never has to paid back; and that be used to buy lots of the good stuff in life from exporters.

Because the “debt-free money” people don’t really have anything substantial against debt as such, only against paying it back; and they want it denominated in “hard” currency so it can actually buy something.

Therefore the proper interpretation of “debt-free money” is really “free money”.

28. John Hermann | December 24, 2015 at 5:56 pm | Blissex,

Surely a debt which never needs to be paid back is not really a debt at all. It seems to me that the essence of a debt is that it has a payment schedule.

o Charles3000 | December 25, 2015 at 5:53 am | John H., how would you classify a demand note?

� John Hermann | December 25, 2015 at 8:53 am |

Charles, in regard to a demand to be paid (in a particular way), it may be thought of as a contingent liability of the entity to which it applies. It is not a payment schedule as such. A payment schedule sets out an agreed term (time-span) during which payment must be effected, and the conditions for the payment of interest, including the amounts and payment times.

� John Hermann | December 25, 2015 at 9:42 am | Charles, a demand for payment (in a particular way) may be thought of as a contingent liability of the entity on which the demand is made. It is not a payment schedule as such. A payment schedule entails an agreement about the time-span (or term) during which payment must be effected, along with the amount and terms of payment (including payment times) of any interest due.

DEBT-FREE MONEY AND BANANA REPUBLICS, PART TWO Posted on December 23, 2015 by L. Randall Wray | 37 Comments By L. Randall Wray

My previous blog sparked a lot of discussion, especially over at Naked Capitalism. I do pity Yves Smith! There’s enough nonsense in the commentary to populate a large nation.

As I have argued, it is very hard to figure out what the debt-free money folks want as they are confused on the accounting, vague on the terminology, and rarely provide details on their proposal. However, a reader has directed me to a fine published article that has mostly got the accounting right, lays out a detailed proposal, and contrasts the proposal against alternatives.

I’ll get to that in a minute. First let me quickly respond to comments on the first piece. I’ll limit my response to two complaints that have been made about Part One of this series. 1. Responses to comments on Part 1

The biggest complaint was that I did not take advantage of a teachable moment that the radio program producer had offered for me to explain MMT to the hosts and audience. Instead I just made fun of debt-free money supporters and insulted the producer.

The critics fail to notice that the producer wrote to me to come on the show to talk about debt-free money. There was no invitation to discuss MMT. Producers can and usually do perform a “background” before inviting a guest. I suppose the producer found that I had written pieces AGAINST debt-free money but still wanted me to discuss the topic. I honestly told him I do not understand what the advocates are proposing and hence would not be a good guest. I introduced the banana money as my best (humorous) guess at what they want–which was in the last piece I had written criticizing the debt-free money

proposal. The banana is a stand-in for all forms of debt-free money, which must take a “real” form rather than a “financial” form—for reasons I discussed and will expand upon later. Rather than being offended or deterred the producer ran with the idea and created an entire alternative history of the USA based on banana money. I continued to try to get out of going on his show to discuss a topic I do not find appealing, but eventually agreed to come on to say that they can achieve everything they want through ZIRP, which I indicated would take a minute. At that point he invited me to talk about MMT. I was not offensive and he took no offense. Of that I am sure. The exchange was all in good humor. We had a number of cordial exchanges after that. And I assure you every word I posted was in the exchange; I only deleted identifiers.

I see nothing unfair about the banana analogy. Many of the debt-free proponents refer to money backed by “real wealth”, goods and services, precious metals. They fantasize about the good old medieval days, when gold was money and men hacked up dragons as they rescued damstrels in distress—as depicted, I think, on-screen in Game of Thrones (if I’ve mischaracterized the program it is unintentional as I stopped watching TV when they cancelled the double-header line-up of Melrose Place and Ally McBeal). Me? If I were to go back to a utopian past, it would be the primitive communism of tribal society, as depicted in The Gods Must Be Crazy, before the Coke Bottle Money was dropped from Friedmanian helicopters, destroying an idyllic way of life. The second most popular complaint was about my use of the word “debt”. But the commentators apparently did not notice that the topic of “debt-free money” was introduced by the producer. He used the term, just as all other debt-free money types do, apparently seeing our current money as debt money. I’m agnostic. My point is that we use double entry book-keeping, and if “money” (however defined) is someone’s financial asset then it is another’s liability. Call it a “credit” (from the point of the view of one holding it), or a “debit” from the other’s point of view; or a debt; or a liability. What debt-free monetary cranks insist is that the money they want the government to create will show up only on the holder’s balance sheet as an asset, with no liability on anyone’s balance sheet. That is what I object to. Some argue that the Treasury, itself, treats coins as “equity”, not “debt”. Fine. Equity is on the liability of the balance sheet. Twist and mangle the language all you want. But at least do the balance sheets correctly. More on that below.

Calgacus had an excellent response on a blog site explaining the use of the term debt. I hope she/he will not mind if I provide a long quote. This is extremely useful not only for the clear explication of the term, but also for links to early expositions of the views now taken by MMT. In particular, Calgacus responds to comments about my use of the cloakroom token (taken directly from G.F. Knapp) as an example of a debt token—a commentator argued that this is not a debt because the cloakroom doesn’t own the coat. And to the claim that coins issued by government are not debts because the taxpayer is the one with debts, not the government that issues the coin. And to the claim that bank deposits are not debts of the bank, because it is the borrower who owes the bank. Here’s Calgacus’s argument:

“Debt” is a word in English – and in every human language. Even nonhuman social animals have some grasp of it. Wray uses the word in the standard very general dictionary meaning of a social, moral obligation. Here is the full definition from the #1 on google online dictionary: 1. something that is owed or that one is bound to pay to or perform for another: 2. a liability or obligation to pay or render something 3. the condition of being under such an obligation: 4. Theology. an offense requiring reparation; a sin; a trespass.

Basically, 4 ways of saying the same thing.

” A cloakroom is not issuing a debt-token.”

It most certainly is. To say it is not is to insist on an alternative meaning of “debt” and to avoid the standard general dictionary meaning, which is Wray’s usage. Alternative meanings involving money & interest are obviously not applicable. Money is credit/debt and obviously this view would be useless & unintelligible gibberish if the latter were defined in terms of the former.

“Nobody will accept this token for payment.” The cloakroom attendant will. Therefore it is a debt, a social, moral obligation, relationship between two moral agents. That is the point.

” the macro-economic substance of the act of issuing the coin is very different from what banks do.”

No, it is precisely the same thing, no more different than the US issuing dollars & the UK issuing pounds. Minsky’s “anybody can create money ….”

“By issuing the coin, the government allows a provider of goods or services to bring forward the settlement of their pre-existing tax debt to the government.” This is not at all what happens. It could not happen that way, the way the rest of the story proceeds. Issuing of a debt in one direction must precede the settlement, the cancellation of the debt, which can only occur by a debt going the other way.

Here the coin recipient pays the coin to settle his subsequent, not pre-existing taxation. I can’t really understand what is being said here in a coherent way. If the coin is considered a receipt, it is a receipt for taxation-in-kind, taxation in real terms, like a government employee being “taxed” of his labor and given government currency in return. Taxation in kind or taxation in real terms is another word for government spending, which is the opposite of financial taxation – which is what “taxation” means nowadays. In any case, in any system, the coinholder of course relinquishes it, rather than merely keeping & showing it – that’s more like how titles of nobility operated, not coins!

“There is no pre-existing debt of the customer taking the loan. By giving the loan, the bank creates new debt (for which interest is to be paid, whether or not it is put to productive uses).” More errors, at least on what seems to me to be the plain meaning.

As above, there was no pre-existing debt in the government / tax case and the bank doesn’t create the new debt of the customer to the bank, the customer does. There are two credit-debt pairs being created in bank loans, but only one in government spending. That’s a difference between monetary and fiscal. Basically, this is just Mitchell-Innes & his great predecessors. But only the MMTers – or circuitist / creditary economists like Ingham, Gardiner etc who contributed to the book on Alfred Mitchell Innes great papers seem to get things right. It is all so simple, so obvious, so natural, so easy, so entirely trivial…. That everyone makes a complete mess of it, by scorning the “trivial” chore of getting the trivialities right!

Thanks, Calgacus. Now let’s turn to a concrete proposal.

The Debt-free Stimulus Proposal It is very difficult to get a handle on the debt-free money proposal because it is hard to find one with any details. However, here is an excellent analysis: “Stimulus Without Debt” by Laurence Seidman, Challenge, vol. 56, no. 6, November/December 2013, pp. 38–59. Now, I cannot be certain whether this is what most debt-free money proponents have in mind. However, Seidman lays out a concrete proposal and contrasts it with alternative methods of stimulus. He even compares his proposal with that of Adair Turner, Chairman of Britain’s Financial Services Authority, who has received a lot of attention for his “overt money financing” of government spending. I know Turner and have great respect for him as a serious critic of our runaway financial system. Many of the debt-free money proponents who have written to me have recommend Turner’s work. Hence, Seidman’s contrast of Turner’s proposal with his own is useful. Finally, as I said earlier, Seidman seems to have a good understanding of accounting. I am going to use long quotes from Seidman’s piece as I would guess that most readers of this blog have not read the original. I’ll provide commentary along the way. For the most part, I find his analysis impeccable.

First, let’s look at Professor Seidman’s stimulus proposal. He is rightly concerned that fear of budget deficits and government debt hamper the ability to mount sufficient fiscal stimulus to counter a deep downturn, such as the one that followed the Global Financial Crisis. So what can we do next time to finance a stimulus without running up debt? In his example, he presumes the stimulus will take the form of a generous tax rebate for households, much like the one that President Bush pushed through earlier. I won’t go through the evidence he presents that this is an effective way to get income into the hands of consumers who will spend it, thereby stimulating demand. We’ll only concern ourselves with the question, “how can the government finance this without debt”. So here’s the proposal:

the stimulus-without-debt plan proposed here—a particular kind of monetary stimulus—is “a dual-mandate transfer” from the Federal Reserve (the Fed) to the U.S. Treasury. In a severe recession the Federal Reserve Open Market Committee (FOMC) would give a transfer to the Treasury in an amount decided by the FOMC that, in its judgment, would promote the Federal Reserve’s dual legislative mandate—enacted years ago by Congress—of promoting both high employment and low inflation. It must be emphasized that the Federal Reserve would not be buying bonds from the Treasury; the Treasury would not be incurring debt—it would be receiving a transfer.

How does this differ from normal procedure? Seidman explains:

Standard fiscal-monetary stimulus works this way. To raise aggregate demand for goods and services through fiscal stimulus, Congress cuts taxes or raises government spending (transfers or purchases), and the Treasury borrows to finance the resulting deficit by selling U.S. Treasury bonds to the public, thereby increasing government (Treasury) debt held by the public. The Fed then buys an equal amount of Treasury bonds from the public in the “open market,” so that the Fed, not the public, ends up holding the increase in Treasury debt. A crucial point is that the Fed’s action does not reverse the increase in Treasury debt: official Treasury debt increases by an amount equal to the deficit that accompanies the fiscal stimulus, whether or not the Fed buys Treasury bonds from the public. Standard fiscal-monetary stimulus entails “monetizing the debt,” not preventing debt.

The Fed is providing a “transfer” to the Treasury, not a “loan”. How does this affect the Fed’s balance sheet?

If the Fed buys a Treasury bond in the open market, it obtains an asset, but if the Fed gives the Treasury a transfer, it obtains no asset. According to conventional accounting, the Fed’s “net worth” or “capital”—defined as assets minus liabilities—would therefore be lower if the Fed gives the Treasury a transfer instead of buying Treasury bonds.

The Obama fiscal stimulus during the GFC amounted to about $400 billion a year for two years. Federal Government debt was increased by approximately the same amount, $800 billion. If the stimulus had been done through a Fed transfer, the Treasury’s debt would not have been increased. Instead, the Fed’s capital would have been reduced by $800 billion—equal to its transfer. On the Fed’s balance sheet, its liability to the Treasury (deposits) would rise by $400B each year, and its equity would fall by $400B each year. As the Treasury’s checks were deposited in household bank accounts, the Fed would debit the Treasury’s deposits and credit bank reserves by the same amount. As households drew down their deposits buying consumer goods, the deposits would shift from bank-to-bank and the Fed would shift reserves from bank-to-bank. (The reserves would remain at the higher level until either cash is withdrawn from the banks, or banks repay loans to the Fed. Note that the nonbank public decides how much cash to hold, which determines the ratio of reserves/Fed reserve notes.)

Why does a Fed transfer to the Treasury reduce the Fed’s net worth? Note that under normal operations, the Fed either lends (reserves to banks) or buys assets (government bonds from Treasury or from banks, or, recently, purchases of MBSs). Its assets go up by the same amount as its liabilities. If the assets earn more than the Fed pays out on its liabilities (reserves; note that Federal Reserve Notes are also Fed liabilities but don’t pay interest), then its net worth rises. The Fed distributes its profits to the Treasury and to its shareholding banks. Transfers, by contrast, increase reserve liabilities without increasing assets; the difference has to be made up by reducing equity. This reduces equity as well as profits since its earnings on assets have not changed but it pays more interest on reserves (unless for some reason the demand for Federal Reserve notes rises by an amount equal to the transfer—which is unlikely). Lower profits mean the Fed distributes less profits to the Treasury, reducing Treasury’s revenue.

(If the total stimulus amounted to $800B and the interest rate on reserves were 1% then the Fed would have $8 billion less profits to turn over to the Treasury, all else equal. To avoid adding more Treasury debt, the Fed would have to transfer more. This is not a major consideration, but should be recognized: reducing Fed profits reduces Treasury “revenue”.)

If the Fed “transferred” more than its total net worth in its stimulus program, it would have negative equity.

Should we care about the Fed’s balance sheet? On one hand, any bank can operate with negative equity—many have done so and probably some of the biggest ones currently are right now, on rigorous assessment of the values of their assets and liabilities. Banking supervisors often adopt the “extend and pretend” approach—extending the life of insolvent banks while pretending they have positive net worth. We can certainly do that with our central bank, and the justification is probably far stronger. With insolvent banks, the biggest danger is that the incentives are aligned to “bet the bank”—take the riskiest bets imaginable, gambling that some might pay off while the downside is that the already insolvent bank fails. Shareholders have already lost, so who cares. But if the Fed is driven into insolvency while bailing-out the economy in a downturn, that can easily be justified as reasonable public policy.

As such, Professor Seidman recommends changing the way we do accounting:

For a household, firm, or governmental unit, it is important to worry about whether its “liabilities” (what it owes others) listed on its conventional accounting balance sheet are greater than its “assets” (what it owns or is owed by others). But there are at least two problems with using a conventional accounting balance sheet to evaluate the Federal Reserve in the same way it is used to evaluate a firm, household, or other governmental unit. First, Congress has given the Fed the power to create money by writing checks and standing ready to print and provide cash (Federal Reserve notes), a power not available to a firm, household, or other government unit. Second, one of the large liabilities listed on the Fed’s conventional balance sheet—Federal Reserve notes—differs in an important way

from the liabilities listed on the balance sheets of firms, households, and other governmental units…the power to create money surely gives the Fed an important tool for meeting its financial obligations not available to firms, households, and government units. A conventional accounting balance sheet alone is therefore inadequate to evaluate the financial position of the Fed.

Second, on the Fed’s conventional accounting balance sheet, the quantity of Federal Reserve notes outstanding is listed as a liability, and it is usually the largest liability on the Fed’s balance sheet. This made sense historically when the Fed promised to pay gold to holders of Federal Reserve notes if the holders requested gold. But this rationale no longer holds because the Fed no longer promises to pay holders of Federal Reserve notes gold or anything else. Thus, it is no longer obvious that Federal Reserve notes are a genuine liability of the Fed—or even if they are still a liability, whether they are as burdensome as other liabilities.

Despite these two problems with applying a conventional accounting balance sheet to the Fed, there will no doubt be concern about any plan that reduces the conventionally measured net worth or capital of the Fed. Advocates of the stimulus-without-debt plan should emphasize these two problems, object to the use of the conventional Fed balance sheet to pass judgment on the stimulus-without-debt plan, and call for new and better ways to evaluate the financial position of the Fed.

OK, accounting is a human invention, although it follows a logic. Congress can, if it chooses, throw logic to the wind and create special accounting for the Fed. It certainly wouldn’t be the first time a government has applied special accounting to itself—it is common in so-called Banana Republics (and maybe appropriate for banana monies!).

But would the Fed’s debt-free stimulus be legal? Seidman discusses the separation of powers that our founders thought important, with the separation further delineated by the creation of the Fed itself in 1913. Seidman downplays the power to create money given by the Constitution to Congress, focusing instead on the apparent intention of Congress to bestow that right on the Fed—something he believes Congress did in order to constrain itself from simply printing up money and causing inflation:

It was therefore a wise and crucial step for Congress, a century ago, to establish an independent central bank that would control the creation of money. Congress thereby gave up the power to cover its deficit by creating money. This has provided an important check against Congress’s setting government spending well above taxes in a normal economy when no stimulus is warranted, creating money to cover the difference, and thereby unilaterally injecting a combined fiscal-monetary stimulus that overheats the economy and generates inflation.

I would guess that this is the view of most economists and I’ll leave it up to our scholars of US legal history to comment (I find it to be a dubious interpretation). I’m also going to

leave to the side the typical belief of economists that Congress is naturally hell-bent on ramping up inflation (again, I’m skeptical); as well as thee typical claim that the Fed is independent (nay, it is a creature of Congress and no more independent of government than are other agencies). What is important is Seidman’s recognition that the Fed’s “right” to create money might not give it the “right” to distribute tax rebates. If that is so, he believes Congress has made a lamentable mistake:

It was, however, unwise for Congress to apparently (if this is the judgment of legal scholars) prohibit the independent central bank from unilaterally deciding to give a dual-mandate transfer to the Treasury. The danger in prohibiting a dual-mandate transfer is that it prevents stimulus-without-debt in a recession or a weak recovery. If legal scholars judge that the current Federal Reserve Act in fact contains such a prohibition, then Congress should amend the Act to specifically authorize a dual-mandate transfer—a transfer that the FOMC judges would implement its dual mandate of high employment and low inflation.

Note that Seidman argues his proposal does respect the separation of powers intended by Congress, for he would have the Fed decide how big the tax rebate would be (hence, decide how much money to create, and when to do it), rather than letting Congress dictate how much, and when, the Fed would stimulate. This would be entirely within the Fed’s “dual mandate” to pursue high employment and price stability; it would ramp up the stimulus when unemployment is high, and cut it off when inflation rises. If this is illegal, he recommends changing the law (and presumably, the Constitution, if need be).

(This would expand the powers of the wise men and women who sit on the FOMC—from interest-rate setting to controlling fiscal stimulus. Well, why not–they’ve done such a “Heck-uv-a-job-Brownie” job so far, missing ten out of the last ten recessions and contributing to ten out of the last ten financial crises. The Fed always “fails upward”, gaining power and prestige when it screws up, so that its next screw up will be even more damaging. But I digress…)

Assessment of the Proposal Seidman has provided us with a coherent proposal for debt-free stimulus. While he uses an example of a tax rebate, there is no reason why the finance method could not be used for a spending stimulus, such as Bernie Sanders’s infrastructure proposal. Instead of Treasury financing using tax revenues or bond sales, the Fed would provide transfers, reducing its net worth. Treasury can treat these as gifts, meaning it will not issue any debt. (Thanks, Aunt Janet!)

In that sense, the proposal is, indeed, “debt-free”. Of course, it is not “debt-free” in a more general sense, because the Fed’s liabilities grow—first in the form of Treasury deposits and then as the Treasury draws those down, in the form of bank reserves. Further, some advocates of “debt-free spending” seem to mean spending financed in a manner that does not commit government to pay interest. However, Seidman’s proposal fails to meet that definition, too, since the Fed pays interest on reserves.

So it is neither debt-free nor interest-free.

As discussed in Part 1 of this series, many argue for use of “debt-free money” to finance government spending. The “money” created by the Fed in Seidman’s proposal also fails that definition since the Fed’s reserve money is the Fed’s liability. Unless we want to invent a quite narrow definition of “debt” to mean something different from “liabilities”, the Fed’s reserves are a “debt money”. We could call them “liability money” and then explain that by “liability” we mean “it is not a debt”. (However, as George Lakoff warns us, if you tell someone NOT to think of an elephant that is the first thing they think of. Our debt-free money folks might consider that as they reframe their meme. Yet another reason to run with the banana money meme?)

Changing the terminology from “debt money” to “liability money” is of course possible. By the same token we could instead invent a definition of “debt” that excludes Treasury liabilities, too. Treasury liabilities such as bills and bonds are much like the Fed’s liabilities: both are presumably backed by the full faith and credit of the Congress and both pay interest. We could invent a new term to cover all such liabilities, replacing the usual term, which is debt. I’m open to suggestions from our wordsmiths. (How about “bananas”? That has the unfortunate disadvantage of bringing to mind bananas, but it does have the advantage that it directs attention away from “debt”. Saying that the government “is trillions of dollars in bananas” sounds so much better than saying it “has trillions of dollars of liabilities”—which sounds an awful lot like debt. Or we could just adopt the convention that if we use words like debt or liabilities, what we mean is bananas. What the bank means when it says I have an onerous mortgage debt is that I have a really big mortgage banana. I feel better already.)

To get closer to the goal of “debt-free money” proposals, Seidman could recommend that the Fed stop paying interest on reserves. In that case, while the Fed’s liabilities would rise with its stimulus, it would not pay interest. Banks would simply hold more reserves but would not receive interest on those reserves. Some of the debt-free money enthusiasts insist that government spending should not generate interest payments—especially to banks. That is easy enough to do in Seidman’s proposal—just return to the pre-GFC practice of the Fed by eliminating interest on reserves. (Some even think this will encourage banks to “lend out” their reserves to business, adding additional stimulus. That is confused, but I won’t go into it here.)

At this point we run into a fundamental problem: if the Fed doesn’t pay interest on reserves and the Fed’s stimulus creates excess reserves, then it will drive the fed funds rate toward zero. Indeed, this is precisely how central banks operate ZIRP (zero interest rate policy)—leaving excess reserves in the system is how you do a ZIRP.

How does a central bank keep the overnight interest rate at a target above zero (non-ZIRP)? It either pays interest on reserves (paying a rate approximately equal to the target) or it offers Treasury bonds in open market sales or REPOs. In normal times (before the GFC and

QE), the central bank holds a limited supply of treasury debt to sell. This means it could run out of treasury debt before it could eliminate all the excess reserves it created by engaging in a Seidman-type “debt-free” stimulus policy. The only way to avoid a ZIRP in this case is either to return to paying interest on reserves, or to ask the Treasury to sell new bonds. (Admittedly, the Fed is now awash in treasuries, and thus facing the opposite problem; still it is paying interest on reserves so can maintain a positive rate even with massive excess reserves.)

Here is our “teaching moment”:

Debt-free stimulus, or more generally a debt-free government finance spending

proposal, actually requires interest payment on debt, unless the central bank adopts a

permanent policy of ZIRP. Either the Fed or the Treasury must pay interest on debt to avoid ZIRP. We can have the Fed issue the debt rather than the Treasury, but it is still debt and it still pays interest. Or we have permanent ZIRP.

This is why I made the claim that all debt-free money proposals reduce to permanent

ZIRP. For a more detailed explanation of why this must be true, see Scott Fullwiler’s piece from last year. That is probably a big enough lesson for today. Let that sink in. In Part 3 I will explain why I think there are other shortcomings in such proposals, especially misunderstanding over monetary and fiscal policy operations. It will be instructive on that count to compare Seidman’s proposal with Lord Turner’s.

37 RESPONSES TO DEBT-FREE MONEY AND BANANA REPUBLICS, PART

TWO

1. Jonathan | December 23, 2015 at 6:20 pm | Seems like issuing “the coin” would accomplish the same thing, without changes to the law or the Constitution.

2. Hepion | December 24, 2015 at 7:39 am | Would it be possible to create second account for the reserves that were not tradable in the interbank market? Banks would not get any interest income on these reserves, they would have to deposit mandatory portion of their reserves in that account and they could still use these funds to make payments to the government, pay taxes for example.

3. Hepion | December 24, 2015 at 7:44 am | When we are talking about government issued money as a liability we are looking at it from government’s perspective. But in fact, no people is the government. All the people are mere citizens, and we don’t look at money as an liability but as an asset. It is the dual nature of debt both as asset and liability that throws people off.

“Money is a tax credit” said Warren Mosler. You could say for example that government has trillions of dollars of issued tax credits outstanding.

4. Jerry Hamrick | December 24, 2015 at 12:12 pm | I have followed Professor Wray’s initial blog on “debt-free money” and all of the comments that have flowed from it, including here and at Naked Capitalism. I have spent at least two hours studying Seidman’s proposal and Professor Wray’s comments about it. I have read several books published by those who regularly blog here and I have learned from them. But I always wind up at the same place. Everyone involved seems to think that our current economic/financial system is a train wreck. Everyone involved seems to think that the current system does not serve the people. I definitely believe these things, and have believed them for more than six decades. For many years I naively believed that the “big boys,” the experts, would set things right. Election cycle after election cycle I believed political candidates when they said that they would take action to aid the people. I was clearly a fool. But, why hasn’t someone done something about it? Why do all the people who blog and comment here and elsewhere stop short of organizing to change things? Perhaps they believe in the political system as I once believed in our economic/financial system. If they do, then they are bigger fools than I am.

The discussions here are extremely convuluted. People go to great lengths to make something within the fixed structure of our current system. What foolishness. When a system is so bad as this one the best thing you can do is through it out and start over.

The present system is not a natural system like the solar system or the universe. It is not a natural law. It is a man-made system and therefore we can change it. What will it take for all you experts to get it done?

Now, I do not mean to overlook some of you here who have made a serious effort to effect change, and others who have worked to explain how our current system works so that guys like me can hope to keep up. I the former case I mean Joe Firestone, and in the latter I mean J. D. Alt. Both writers have helped me immensely, and through me, have helped others to understand.

But it seems to me that we are poised under a giant overhang of mud and snow, and something will set it off. The results won’t be pretty. Now is the time for the experts to take a courageous step and see to it that our systems are changed for the better. For the experts to simply throw their hands up and say, “I have told you what is wrong, I have showed you some ideas that would improve things once they are applied in the current system, and that is far as I go, my responsibility ends there.” is not enough. Somebody has to do something. If not the experts, then who? If not now, then when?

o Jill | December 25, 2015 at 4:49 pm | People who write and people who change things are usually 2 different types of people. One type may be inspired by the other, however.

The biggest problem keeping the current system in place is propaganda. E.g. note the article today in the Libertarian Jeff Bezos’ owned Washington Post, on The Misdirected Anger of College Students, directing college students to aim their anger at older Social Security recipients.

It would take a lot of money and organization to get together a progressive media empire to combat the propaganda that we are immersed in 24/7/365. This propaganda keeps telling us that we can’t afford Social Security, or any kinds of services for the poor, the mentally ill etc.– although we can always afford more pre-emptive wars.

Not many people feel up to the task of organizing and collecting donations to fund media to combat the propaganda.. So they just write their books and articles, which are mostly ignored, while the propaganda keeps being broadcast far and wide, and has persuaded voters to elect the 2 Right Wing dominated Houses of Congress we have today.

o Ray Phenicie | December 26, 2015 at 9:10 am | I am pleased, in a limited way, to know that someone else has struggled with this topic mightily. To share what I have discovered: The Byzantine nature of the United States money system is an artificial construct of the Federal Reserve Act of 1913 which mandates the creation of bond issues to ‘cover’ the debt caused by a Federal Deficit. In other words, when Congress authorizes spending that goes over what the Treasury is taking in as revenue gathering, the Treasury has to ‘sell’ bonds to make up for the overage. But all of that is totally unneeded in a day when our currency is no longer tied to redemption in specie (gold or silver). Long story short: -Federal system only, not relevant for states and municipalities: Taxes do not pay for anything but rather exist as the progenitor factor (creation force) for money even existing. Taxation is also a tool for controlling inflation and job creation

should Congress ever decide to take on that role. Money is created by the Federal Government spending it into existence.

But then there is the Modern Money Primer on the top of this page. And no, politicians do not understand MMT or say they don’t. Reason? In seeking to understanding how the received wisdom of ‘balanced budgets’ even came into existence, keep reading this blog and Nakedcapitalism.com. Bernie Sanders even carries on about balanced budgets and taxes paying for things and he of all people should know better. Or at least he would if he even bother to have a conversation with Stephanie Kelton who runs this blog and is economic adviser to the Senate Budget Committee which Sanders chairs.

5. Kyle | December 24, 2015 at 8:19 pm | “I’m open to suggestions from our wordsmiths.”

How about ’emittance’ for the initial issuance of currency into the economy? Legally that is what it is. When this is done without a debt instrument, I see no cause to call it a liability.

o Jerry Hamrick | December 25, 2015 at 7:06 am | How about “activate?”

� Kyle | December 25, 2015 at 12:07 pm | Alright. Exactly how is the term ‘activate’ more appropriate to the government’s emitting currency into the economy? The term ’emit’ at least has a history in respect to this activity as reflected in the Merriam-Webster definition, “to issue with authority; especially : to put (as money) into circulation”. Why reinvent the wheel?

Also, in counter argument to Mr. Wray’s mention of the need to pay interest as a mechanism of reducing excess liquidity, wouldn’t an increase in reserve requirements have the same effect? I know, there could be nothing more guaranteed to make banker’s howl. I believe it was Warren Mosler who mentioned the problems associated with anticipating changing reserve requirements. I’m just exploring the possibilities.

� Jerry Hamrick | December 26, 2015 at 10:56 am |

Thanks for your response. “Activate” has the advantaged of allowing us to later “Deactivate” money when we seek to drain excess money from our system to guard against inflation. Because money in our new banking system will be strictly computer bits and bytes, we can activate or deactivate it at will.

The double-entry bookkeeping that someone mentioned above will stop being a system for hiding things and revert to its original purpose: to keep track of things such as money as it transfers from one citizen’s account to another. This sentence leads to longer discussions about how a new economic system would work, but that is okay with me, but apparently not okay with those who swear allegiance to MMT. They have complained that Paul Krugman does not treat them with the respect they deserve, and they are right–he doesn’t. So, they should be the first to throw open the discussion to blue-sky ideas for replacing our current failed economic/financial system…

� Kyle | December 26, 2015 at 8:48 am | There’s some necessity to reinvent the wheel? Emit has a history in the context of this activity.

Per Merriam-Webster –

“to issue with authority; especially : to put (as money) into circulation”

� Jerry Hamrick | December 26, 2015 at 11:00 am | You are right, but I will wager that most ordinary Americans will easily understand what “activate” means while they will not have an immediate understanding of “emit.” That is one of the serious failures of our current system, economists. here and elsewhere, bankers, central bankers, politicians, etc. have successfully obscured the true nature of our failed systems by means of opaque language. For example, Ben Bernanke, when accused of giving money to the big banks when he started quantitative easing said he wasn’t giving them money but he was giving them central bank reserves. I kid you not.

6. Keith Rodgers | December 25, 2015 at 5:05 am | I find the Hayek fallacy, the basis of Wray’s argument against debt free money, to be particularly puzzling. Say the government owes a contractor $100,000 for painting a bridge, and pays him with borrowed money (say by electronic transfer of funds). Yes, the contractor may use the profits from this job, say $10,000, to catch up on his taxes. Does that mean all the money the government borrowed is worthless? It is worth something – initially, a paint job. With taxes paid, the government gains $10,000 to spend again, but it

still owes the $100,000 it borrowed. Say, instead, the government uses debt free Treasury issued money to pay the contractor (say by electronic transfer of funds – why would it use ETF in one case and wheelbarrows in the other?). Again, the contractor may use his $10,000 profit to catch up on his taxes. That money is not worthless, and the government can turn around and spend it again. Nor is the other $90,000 the contractor spends into the economy. It’s worth about 7 x $90,000 = $630,000 in GDP. But unlike using borrowed money, the government doesn’t wind up owing anybody a cent. What is the benefit of being too “clever” to understand this?

o Jerry Hamrick | December 25, 2015 at 12:41 pm | You go, Keith Rodgers! I can’t wait to hear the answers to your questions.

o LRWray | December 25, 2015 at 9:18 pm | Keith: you are not paying attention. Sovereign govt does not borrow its own IOUs to make payments. (Neither do you) Forget your math. Repeat after me: Sovereign govt creates what it spends.

Hepion: Banks “not getting interest” on excess reserves is ZIRP.

Jonathon: coins are “debts” or “tax credits” or “liabilities” or “bills of credit” or “equity” (whatever phrase tickles your fancy), same as Fed reserve notes, Fed reserves, or treasury bills and bonds.

Jerry: two hours? That’s nice. Might take more. Solving global warming is relatively easy by comparison. Far more effort has been expended in confusing you and the rest of the public about the horrors of government debt than has been spent by climate change deniers to convince you that global warming is a myth. The debt-free money warriors as well as positive money warriors are helping to muddy the waters, so to speak. Perhaps inadvertently. Put on your mud boots and stick with it.

� Hepion | December 27, 2015 at 5:49 am | “Banks “not getting interest” on excess reserves is ZIRP.”

Yeah but with two accounts government could choose whether to pay interest on any particular spending decision. And dont’t banks need interbank interest rate as a reference to witch set other lending rates to? Don’t the FED need it in order to maintain it’s mission?

And besides calling the second account “a special” account could work wonders with human psychology. The idea that “Government is drawing interest-free money from its special account” could make deficit spending that much easier.

� Hepion | December 27, 2015 at 5:56 am | And why does the power to set interest rates have sit at a technocratic committee at the central bank, my proposal would take some of that power back to the people who were democratically elected to govern a country.

o Neil Wilson | December 26, 2015 at 1:16 am | The fallacy is the fallacy of first use you employ. All of the $100K comes back as taxation for any positive tax rate via the spending chain. The only thing that stops that is people saving the money rather than spending it.

The govt doesn’t owe anybody a cent with ‘borrowed’ money. Government could issue Treasuries as perpetuals. And even if it doesn’t, Treasury always swaps out redeemable bonds for new redeemable bonds in aggregate. Just like if you take a $100 bill to a bank and ‘redeem’ it you’ll find you just get another $100 bill in return. There is no ‘gold’ backing it.

At best Treasury redemption causes a small redistribution in the economy from people who are saving to people who are spending. However since most are held by big financial operations that effect is heavily muted.

7. Herman Meester | December 25, 2015 at 8:45 am | Part of the confusion is that people seem to think that the sovereign ‘borrows money.’ But it doesn’t borrow money, that’s impossible, it ‘borrows’ stuff and labor (from the people, or ‘private sector’ in econospeak), and the money (the numbers) that it uses to pay for the stuff and the labor is the record of the fact that the sovereign owes the people, theoretically, the stuff and the labor.

Obviously it can never pay this back in kind, so what really happens is the government gets real value for mere numbers.

The only thing of importance is to force the government to employ the stuff and the labor it ‘borrows’ for the common good, thus ‘redeeming’ its ‘debt’ by giving its product (the schools, roads, etc.) away for free to all of us for (some of which it already does), rather than waging wars for oil or imprisoning the population or whatever.

Rather than debt-free money, we need crook-free government.

o davidgmills | December 26, 2015 at 9:22 pm | Use the proper legal language. It is called a bill of credit. It is called that very thing in the Constitution. Today we would probably call it a tax credit but it is a tax credit that is in bill form, can circulate throughout the economy, and can be used as a tax credit by the bearer of the instrument anytime the bearer needs to pay taxes of any kind.

Using bills of credit as money was approved by the Supreme Court in the greenback cases after the civil war. Lincoln’s greenbacks were bills of credit, so said the Supreme Court.

� Kyle | December 27, 2015 at 2:30 pm | David,

Thanks for your strict adherence. “It is called that very thing in the Constitution.” And that at Art. I, Sec. X. per http://www.lectlaw.com/def/b099.htm. Note the distinction being made between promissory notes and bills of credit. Promissory notes being similar to a mortgage with the bill of credit similar to a warehouse receipt. The former representing possible future value where the latter represents existing/current value. The one a possible value and thus intangible and the next a ‘real value’, hence the term ‘real bills doctrine’. Also note the discussion of the now defunct term redeemable which today only represents the redemption of one bill for another, leaving in place only it’s function as a unit of account.

8. jonf | December 25, 2015 at 9:02 am | You are boggling my mind. You say the Fed creates money (bank account) for the Treasury and charges its equity account. The Treasury then records the cash in bank versus a credit to its equity account. So then the Treasury (Dept of Defense) buys an F 35 and records the asset and credits the cash in bank account. Easy come, easy go, no messy bonds to fool around with. So when all is said and done the Treasury is left with an F 35 versus it equity account. And they are out of the game, except for the fact the damn thing won’t fly. Oh well.

So at this point Lockheed Martin takes the Treasury check to their Bank. The Bank credits the LM account versus a debit to its reserve account at the Fed to clear the check. The Fed then transfers the original Treasury reserve account to the bank.

Now if we consolidate all this we find that the Fed negative equity zeros out against the Treasury equity account and the government has an F 35 (that doesn’t work) versus a reserve account with the Bank. The Bank has a reserve with the Fed versus the LM checking account, net zero balance. LM, et. al. has gained a net financial asset, namely its account at the Bank that went from the Fed to the Treasury to all the people who built the F 35.

Now my question. Why record the original entry versus equity? An interagency account between the Fed and Treasury would seem to accomplish the same thing, no? And such will not attract so much wringing of hands and gnashing of teeth.

ZIRP accounting or else it gets more complicated as the Fed needs to create more free money. This will never fly you know. How in the world will our plutocrats and China make guaranteed interest if we take away their toys and ability to brow beat poor Janet?

9. Neil Wilson | December 26, 2015 at 1:09 am | It’s interesting that we have an independent central bank, but we don’t have an independent war office or an independent welfare department. I mean if congress/parliament is incapable of controlling spending, surely it is incapable of sending people to their deaths appropriately or keeping pensioners out of destitution.

I look forward to seeing those advocating central bank independence also advocating removing the nuclear button from the politicians and handing its sole use over to an ‘expert’ committee of army generals.

10. Neil Wilson | December 26, 2015 at 1:25 am | I’m very pleased to read this description Randy. Because it means that we already have ‘debt free money’ in the UK.

We were clever enough to nationalise our central bank properly, which means that it is already a subsidiary of our Treasury.

And of course that means in the consolidated group accounts of the government the ‘debt’ held by Treasury is automatically cancelled on consolidation by the asset held by the central bank. Seehttps://www.gov.uk/government/collections/whole-of-government-accounts So not only can we have a central bank with positive equity, we can have group accounts that are ‘debt free’.

MMT had this debt free money thing sorted out before there was even a name for it – by virtue of presenting the government sector as consolidated group accounts.

11. LRWray | December 26, 2015 at 8:28 pm | Neil: as you know, I don’t think it operationally matters much if we properly nationalize the CB (UK) or pretend it is independent (US): the operations will be virtually the same. However, it makes it easier to defend “consolidation” against the nutters who believe the Fed is “private” and that Uncle Sam has to go hat in hand to beg for scraps. And, yes it might help provide a bulwark against the debt-free money types, however I do note that Positive Money is rampant in the UK, much as Ron Paulism is rampant in the US.

Jerry: I think you need to at least double your 2 hours of study of the topic. Activate is something you might do to Frankenstein’s monster. Or to a magazine solicitation. Emit is something govt does–it creates and emits what it spends.

o Jerry Hamrick | December 26, 2015 at 11:40 pm | Professor Wray: I see you continue with your petty game. Even though you do not have the backbone to let others see the comment I made directly to you earlier tonight.

In any case, your snide remark about “activate” is typical of your refusal to let anyone debate with you the weakness of your thinking. But to the point, “activate” is precisely the right term to use. Money exists in unlimited supply, but it is inactive until it is activated by banks, the Fed, or George W. Bush when he distributed about $120 billion directly to citizens in 2008. Whenever we remove money from the supply by taxation we are not actually removing a physical thing, we are merely deactivating computer bits and bytes.

When you create and emit money as you have said, how do you remove it from the system? Do you “uncreate” it? No. Do you “destroy” it? No. Do you “deemit” it? No. Do you “withdraw” it? No. You “deactivate” it.

I have attempted to restore the comment you deleted earlier.

� Kyle | December 27, 2015 at 12:17 pm | Mr. Hamrick,

Please. Let us not, so readily, cast ill intent upon the actions of others. Mr. Wray’s response appears, quite appropriately, constrained to the argument at hand.

I understand your want to have a term more informative to the population at large, but having them adjust to new terms in an effort to do so quite often will cause just as much or more confusion.

Emit, as a term, speaks to the nature of the entity of government, in the context of issuing currency, as well as it would speak to the nature of flint emitting a spark when struck by steel. That is, it speaks not only to the action but also to the nature of the entity in causation of the action. Therefore it is quite appropriate to the subject and replacing it’s use with another term isn’t necessary to the understanding of the subject. Let’s not interpose change where not needed lest we be accused of picking at nits.

The term is emit, a verb; it’s noun is emittance and it’s prepositional phrase is ‘to emit’.

Also, all specializations of knowledge have their own language. As a culture, we will find it to our detriment to be changing those willy-nilly.

� herman meester | December 28, 2015 at 3:25 am | Yes you do, money is created and destroyed. What’s wrong with the idea that information (a non-physical thing) can be created and destroyed?

o Neil Wilson | December 29, 2015 at 5:17 am | “I don’t think it operationally matters much if we properly nationalize the CB (UK) or pretend it is independent (US): the operations will be virtually the same. ”

The operations are indeed virtually identical. And it doesn’t matter for the preparation of group accounts either. As the International Financial Reporting Standard (IFRS 10) states.

“The IFRS requires an entity that is a parent to present consolidated financial statements … The IFRS defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements.

An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the invested.”

What matters is control. There is no doubt that Congress has control over the central bank – sufficient control to require government to offer consolidated accounts including the central bank under the IFRS 10 rules.

Except of course that government is the government and can exempt itself from the normal accounting rules applied to commerce.

Perhaps it would be useful to Congress to require government to conform to IFRS 10 and produce the US version of the ‘Whole of government accounts’.

That way you could save all the negative equity nonsense and people getting needlessly upset about meaningless minus signs.

12. Jack Foster | December 26, 2015 at 10:17 pm | In his discussion, has Randall Wray addressed the fact that in the current system is always deficient of the cash to pay the accumulated interest on the debt created? I am interested in hearing more discussion on this particular point.

Is there a solution to this problem in the existing system or would it require a change to the existing system?

13. LRWray | December 27, 2015 at 2:24 pm | Jack: First, you don’t need “cash” to pay accumulated interest on debt. You “pay” interest on bank loans mostly using bank deposits–not “cash”. However, second, there is a well known problem in a very simple “circuit” model of banking: if interest paid on deposits is less than interest charged on loans (which would be the way banks cover costs and make profits) then it is not possible to pay down all debt (including interest). Think of it this way: bank assets (your loans) grow at 6% but bank liabilities (your deposits) grow at 3%. Is this a problem? Might be. But let us say your wage income grows at 5%. Then might not be a problem. Third, the simple circuit model is too simple–it posits a very simple relationship between stocks (balance sheet) and flows (income, production). In the real world, we never end a “period” by paying down all debts and thereby also “destroying” all the deposits. (Oh, sorry, I mean “deactivating” the money that always sits ready to be “activated” like Frankenstein’s monster.) Instead, the more normal case is for both loans and deposits to grow over time and also for income and production to grow over time. If the growth rates for the stocks and flows are similar, we say “velocity” is relatively constant. There is a whole school of thought–monetarism–based on this relationship between money stocks and spending flows. (I think it is mostly a waste of time.) Jerry: I misunderestimated. Quadruple the effort. Yes, you do “redeem” yourself when you pay down your bank loan using your bank deposits; your bank is simultaneously redeeming itself as its debts to you are “destroyed”. The redemptions are mutual and simultaneous, taking the form today of 4 electronic debits to 2 balance sheets. In the old days, the tally sticks would be matched and then lit with a match. I guess in your language, when the King “raised a tally” you would call that “activate” and when the tallies were burned you’d call that “deactivate”. I guess dead wooden sticks are just waiting for someone to “activate”

them as money. But, whoops, some bypass that step and go straight to the “deactivate” stage in campfires, having never been activated. I think it is clearer to just say the King spent the tally stick IOUs, received them back in tax “returns” (which is where our term comes from), and then burned them.

o Kyle | December 27, 2015 at 5:09 pm | You sir, have the patience of a saint.

See Jerry, it would be so much easier to use the terminology to which most have become accustomed to using it rather than reinventing the wheel. In this instance of describing the balancing out of debts, ‘extinguish’ is the most commonly understood term. All this back and forth does nothing more than distract from the original argument, i.e., debt free money.

I still argue that the initial emittance of currency into the economy, when done without a debt instrument, such as when the govt. buys labor or goods directly, there is no liability. Though it be argued that this cannot follow for accounting purposes, that the govt. must accept said currency in payment of taxes, I suggest that the mere contemplation of the proposition that it could possibly refuse, within law at least, is absurd on it’s face given that the currency is emitted for the purpose of acting as a unit of account, ‘for all purposes, public and private’. Otherwise, where is the burden?

o Jack Foster | December 28, 2015 at 11:00 am | Mr Wray, Ok, I guess i should have used deposits instead of cash. That said, your response leads me to think you are in agreement that at the top macro level, total deposits are always less than total debts (debts being principle owed + interest).

That creates an imbalance at the top macro accounting ledger?……..Yes or No?

And if yes, what is the MMT solution to solving that imbalance issue in the top macro accounting ledger?

I do sincerely appreciate the conversation…..thks

� Neil Wilson | December 29, 2015 at 5:27 am | “That creates an imbalance at the top macro accounting ledger?……..Yes or No?”

No.

What you have forgotten is that bankers consume. Which means they buy the output of businesses, and that is how the interest is recycled.

Salaries are the wages of workers. Interest is the wages of bankers. Profit is the wages of capitalists.

People spend their wages with businesses which then pays salaries, interest and profit to capitalists.

All of these are priced in $/month. Loans are in $. Confusing the two is like confusing miles per hour with miles.

As long as everybody spends their income at an appropriate rate the system is dynamically stable.

I’ve got a little picture that shows how the horizontal circuit within the private sector can remain stable all on its own – as long as certain flow conditions are met:http://www.3spoken.co.uk/2011/12/double-entry-view-on-keen-circuit-model.html The problems start when people decide not to spend all their income and start to accumulate savings. Or they run up too many loans. At some point the flow becomes insufficient to maintain all that and you get a catastrophic collapse.

� Jack Foster | December 29, 2015 at 2:43 pm | Neil thank you for the feedback. I did look at your charts. They are very good in helping to get a visual on the different line items that need to be factored into the “double entry accounting”. However, without actual numbers, it’s hard to see if it really balances, or not.

I can agree that the reality is the “system” is complex and dynamic, but RWray indicated in the simple circuit model, the interest paid does creates an imbalance. The problem I still see is: if it starts with an imbalance in the simple circuit analysis, then arithmetic logic ought to dictate that the result of the entire system’s ledger must be out of balance, as the entire system is the compounded accumulation of multiple simple circuit models, no?

In your last line, where you state “the problems start when people decide not to spend all their income and start to accumulate savings”, I take exception that it’s not the start, but “in addition to”. The structural imbalance of not adding to the system , the interest

which is owed on the debts – debts which only create enough deposits to cover the debt, but never the interest owed…..and this is where the problem truly starts.

And we have seen how a small group of folks can generate ginormous amounts savings that’s so much larger than their spending -which is causing a significant “dynamic instability” to the system. Taxes used to counter this problem, but has effectively been eliminated as a tool for that. Because super duper rich people or companies can now effectively buy tax exemptions to legally dodge taxes.

14. Brian | December 28, 2015 at 7:54 pm | Seems people just find it ooky to hear “money is debt” a bit ironic given the McMansions I see popping up all over town again. Of course it’s even worse for the “sound money” crowd!

Interesting discussion on “debt free stimulus” and leads back to my above point, it seems this can become an unnecessary hold up for people and their understanding. It got into discussion of legality and etc while in the end, it’s still “debt based” Shame it seems to be a struggle to grapple with, discussion of stimulus may be easier if this whole debt free worry wasn’t an issue

15. Keith Rodgers | December 29, 2015 at 9:02 am | Why the opposition to debt free Treasury issued money? Wray has argued there is no such thing as debt free money, meaning Modern Monetary Theory (MMT) money is not debt free money, either. Why is MMT money BETTER? MMT embraces debt and explicitly says debt is necessary for the economy. Wray seems to have stoppped claiming that Treasury-issued money must necessarily take paper form and be transported to payees by the truckload, when challenged on this. MMT requires forcing the Federal Reserve System to heavy up on government treasuries which MMT has no intention of ever seeing repaid – it would harm the economy, they claim – or generating interest… as good a fiduciary choice as interest-generating investments in the real economy? Is MMT’s idea BETTER for the public, or just more profitable for Wall Street?

THE VALUE OF REDEMPTION: DEBT-FREE MONEY PART 3 Posted on February 14, 2016 by L. Randall Wray | 8 Comments Sorry that it has taken me a while to get back to my multi-part series on debt-free money. This is the third part of the current series, although I had previously written several other blogs on the related topics of debt-free money, positive money, and 100% money. See links at the bottom.

This post will focus on the concept of “redemption” as the most fundamental requirement of indebtedness. This seems to confuse readers. For example, Eric Lonergan calls this a “fantastic linguistic contortion”, a “pure semantic confusion”, a “hidden definition slipped in between dashes”. I’ll demonstrate that my use of the term redemption is consistent with the use both in scholarship and American law. I note that Lonergan has written his own book on Money, so it is surprising that he is unfamiliar with the proper use of the terms debt and redemption—which even predate religion and civilization. See, for example, the great book Margaret Atwood, Payback: Debt and the shadow side of wealth for a short history of the subject (and serious scholars should of course read David Graeber’s Debt: the first 5000 years.) The most important point is that the debtor must redeem himself. I suppose Lonergan does not get out much—at least not enough to have ever “redeemed” his airline’s debt to him in the form of frequent flyer miles. He claims that the issuer of debt does not need to accept his own debt in order for that debt to have value. Really? Would he accumulate airline miles debt if the airlines refused to redeem it for miles? He goes on to argue that we’d still use the government’s currency even if it could not be “redeemed” (in my sense of the term).

Well, as P.T. Barnum says, there’s a sucker born every minute. It adds up. But it is not going to drive a currency. Besides, the dopes already have debt-free bitcoins. They don’t need debt-free, non-redeemable frequent flyer miles or currency. The “fair value” of non-redeemable frequent flyer miles or debt-free bitcoin currency is zero, as Eric Tymoigne has demonstrated. Yes, suckers and speculators can cause prices to deviate from fair value. For a while.

Lonergan’s website is titled Philosophy of Money. Philosophy is beyond my paygrade—I’ve read Simmel, who wrote the book on the topic, but won’t pretend to have fully digested it. I have instead relied heavily on the work of the autodidactic, A. Mitchell Innes, who wrote what I consider to be the best two articles ever written on the “nature” of money (in 1913 and 1914). His speculation on the history of money has largely been confirmed over the century that followed publication of his articles. I also adopted his use of terms like redemption and debt—which conformed to their use through history from Babylonian times. And, as I’ll show, scholars of the history of currency still use the terms in the same manner. It is not me who is “contorting linguistics” in some fantastic way. Our nation’s founding fathers (and mothers) would have no problem following my arguments.

But let me first recount the exposition I have offered before on this site. In Part Four I’ll get to the nitty gritty history. Don’t worry, it will be posted close on the heels of this one. However, since the previous expositions are strung across blogs written since 2014, I want to provide a few extracts (with very minor editing) to remind readers of the position MMT takes on the topics of debt, redemption, and currency.

Background Extract #1. The Basics of MMT Source: http://neweconomicperspectives.org/2014/06/modern-money-theory-basics.html:

For the past four thousand years (“at least”, as John Maynard Keynes put it—modern scholarship pushes it back at least 6000 years), our monetary system has been a “state money system”. To simplify, that is one in which the authorities choose the money of account, impose obligations denominated in that money unit, and issue a currency accepted in payment of those obligations. While a variety of types of obligations have been imposed (tribute, tithes, fines, and fees), today taxes are the most important monetary obligations payable to the state in its own currency….

For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. All of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment. Or cut tally sticks; or printed paper notes. Then spent them before they received them back in tax payments. (Ditto the American colonies, as I’ll demonstrate.)

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing.

When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.

MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, preventing

overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.

You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.

So, much like the relation between taxes and spending—with tax collection coming after spending–we should think of bond sales as occurring after government has already spent the currency and reserves

Background Extract #2. Creation and Redemption Source: http://neweconomicperspectives.org/2014/06/creationism-versus-redemptionism-money-issuer-really-lends-spends.html: In this instalment I will examine three analogous questions (each of which has the same answer):

1. Does the government need to receive tax revenue before it can spend? 2. Does the central bank need to receive reserve deposits before it can lend? 3. Do private banks need to receive demand deposits before they can lend?

As we’ll see, these are reducible to the question: which comes first, Creation or

Redemption? …. It has long been believed that we accept currency because it is either made of precious metal or redeemable for same—we accept it for its “thing-ness”. In truth, coined precious metal almost always circulated well beyond the value of embodied metal (at least domestically); and redeemability of currency for gold at a fixed rate has been the exception not the rule. Hence, most economists recognize that currency is today (and often was in the past) “fiat”.

Further, and importantly, law going back to Roman times has typically adopted a “nominalist” perspective: the legal value of coins was determined by nominal value. For example, if one deposited coins with a bank one could expect only to receive on withdrawal currency of the same nominal value. In other words, even if the currency consisted of stamped gold coins, they were still “fiat” in the sense that their legal value would be set nominally.

The argument of Adam Smith, Knapp, Innes, Keynes, Grierson, and Lerner is that currency will be accepted if there is an enforceable obligation to make payments to its issuer in that same currency. Hence, MMT has adopted the phrase “taxes drive money” in the sense that the state can impose tax liabilities and issue the means of paying those liabilities in the form of its own liabilities.

Here there is an institution, or a set of institutions, that we can identify as “sovereignty”. As Keynes said, the sovereign has the power to declare what will be the unit of account—the Dollar, the Lira, the Pound, the Yen. The sovereign also has the power to impose fees, fines, and taxes, and to name what it will accept in payment. When the fees, fines, and taxes are paid, the currency is “redeemed”—accepted by the sovereign.

While sovereigns also sometimes agree to “redeem” their currency for precious metal or for foreign currency, that is not necessary. The agreement to “redeem” currency in payment of taxes, fees, tithes and fines is sufficient to “drive” the currency—that is to create a demand for it. I will say more about this other kind of redemption in Part Four. Note we also do not need an infinite regress argument. While it could be true that I am more willing to accept the state’s IOUs if I know I can dupe some dope, I will definitely accept it if I have a tax liability and know I must pay that liability with the state’s currency. This is the sense in which MMT claims “taxes are sufficient to create a demand for the currency”. It is not necessary for everyone to have such an obligation—so long as the tax base is broad, the currency will be widely accepted. There are other reasons to accept a currency—maybe I can exchange it for gold or foreign currency, maybe I can hold it as a store of value. These supplement taxes—or, better, derive from the obligations that need to be settled using currency (such as taxes, fees, tithes, and fines).

The Fundamental “Law” of Credit: Redeemability Innes posed a fundamental “law” of credit: the issuer of an IOU must accept it back for payment.

We can call this the principle of redeemability: the holder of an IOU can present it to the issuer for payment. Note that the holder need not be the person who originally received the IOU—it can be a third party. If that third party owes the issuer, the IOU can be returned to cancel the third party’s debt; indeed, the clearing cancels both debts (the issuer’s debt and the third party’s debt).

If one reasonably expects that she will need to make payments to some entity, she will want to obtain the IOUs of that entity. This goes part way to explaining why the IOUs of nonsovereign issuers can be widely accepted: as Minsky said, part of the reason that bank demand deposits are accepted is because we—at least, a lot of us—have liabilities to the banks, payable in bank deposits.

Background Extract #3. Creation and Redemption Source: http://neweconomicperspectives.org/2014/06/creationism-versus-redemptionism-money-issuer-really-lends-spends.html: Before the sovereign can issue tallies or coins, he must put taxpayers in sinful debt by imposing a tax obligation payable in his tally stick or coin. This creates a demand for his tally or coin.

When the central bank lends reserves to a private bank, it puts that bank in sinful debt, crediting its account at the central bank with reserves, but the bank simultaneously issues a liability to the central bank.

When the private bank lends demand deposits to the borrower, it credits the deposit account but the borrower records a liability to the bank.

So each “redemption” simultaneously wipes out the sinful debt of both parties. The slate is wiped clean. Hallelujah!

You see, folks, it’s all debits and credits. Keystrokes. That record bonds of indebtedness, with both parties united in the awful sinfulness.

Until Redemption Day, when the IOUs find their ways back to the issuers.

� Those who think a sovereign must first get tax revenue before spending; � Those who believe a central bank must first obtain reserves before lending them; � And those who believe a private bank must first obtain deposits before lending them � Have all confused Redemption with Creation.

Receipt of taxes, receipt of reserve deposits, and receipt of demand deposits are all Acts of Redemption.

Creation must precede Redemption.

Conclusion When the sovereign issues currency, she/he becomes a debtor. The sovereign’s currency is debt. The holder of the currency is the creditor. The most fundamental promise made by any debtor is the promise to redeem, by acknowledging his/her debt and accepting it. Those who themselves have debts to the sovereign can submit the sovereign’s debt in payment. Refusal by the sovereign to accept his/her own debt is a default. This will have implications for future acceptance of that sovereign’s debt.

Acceptance by the sovereign of his/her own debt is redemption. Airlines also redeem their frequent flyer miles by accepting them in payment for actual flights. Redemption “wipes the slate clean”. It eliminates the debt. Keystrokes take away the frequent flyer miles from the accounts of passengers. In the old days—as I’ll demonstrate in the next piece—sovereigns burned their debts on redemption. Homeowners commonly used to have mortgage burning parties when they redeemed themselves by paying off their homes. Probably no one lives long enough any more to do that.

We have argued that the sovereign imposes debts—tithes, fees, fines, and taxes—on the population. Those with tax debts can redeem themselves and wipe clean their tax debt by

delivering back to the sovereign her/his tallies, coins, or paper notes. Today it is actually done with keystrokes—debits to private bank deposits and the bank reserves at the central bank.

Note that tax payment redeems both taxpayer and sovereign. Isn’t that nice? The sovereign’s currency is burned, and the taxpayer can burn her tax bill. Hallelujah!

Arguing that we should not see the sovereign’s currency as debt, and arguing that the sovereign needn’t redeem her/his debt reflects a fundamental misunderstanding. I think it probably derives from the impulse to focus solely on the use of money as a medium of exchange. This was Friedman’s mistake, who used to argue we can just assume money falls from helicopters. Right! If it did, it would be debt-free and have a fair value of zero. It would be as valuable as the leaves that fall from trees.

Currency must be debt and it must be redeemed to have a determinant nominal value in terms of the domestic money of account.

The sovereign might make other promises when she/he issues debt. There could be a promise to pay interest over time. There could be a promise to redeem her/his debts for the debts of other sovereigns. While uncommon in history, the sovereign could also promise to redeem for precious metal bullion. I do agree that gold coins or paper notes redeemable for gold would have a fair value above zero, although their nominal value would be indeterminant. I’ll say more about this in Part Four.

8 RESPONSES TO THE VALUE OF REDEMPTION: DEBT-FREE MONEY

PART 3

1. aka | February 14, 2016 at 9:40 am | Reply They [monetarily sovereign governments] offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. LR Wray

How is receiving a risk-free positive nominal return earning anything? Except contempt for receiving welfare not proportional to need but proportional to how much fiat one has to buy sovereign debt with? Professor Bill Mitchell has noted this, btw.

This is a policy choice, not a necessity. LR Wray

So is limiting accounts at the central bank to commercial banks, credit unions and other institutions of usury instead of allowing individual citizen, business, etc. accounts at the central bank too. Then excess reserves would not be a problem, would they, since commercial banks, credit unions and other institutions of usury would have to honestly

borrow their fiat (aka reserves) from those other accounts instead of receiving them by default*? Then insufficient fiat might be the problem given a politically derived consensus on what interest rates in fiat should be. But that’s easily and justly solved with equal fiat distributions by the monetary sovereign to individual citizen accounts at the central bank, is it not? In addition to normal deficit spending by the monetary sovereign? Financed with trillion dollar coins?

Btw, thanks for explaining the money system so well that its moral defects are so obvious.

*Since the monetary sovereign has no other option but to deal through the commercial bank, etc. cartel since individual citizen, business, etc. accounts are not allowed at the central bank.

2. aka | February 14, 2016 at 10:35 am | Reply While uncommon in history, the sovereign could also promise to redeem for precious metal bullion. I do agree that gold coins or paper notes redeemable for gold would have a fair value above zero, LR Wray

What’s fair about putting the taxation authority and power of government behind someone’s favorite shiny metal? How can gold even have a fair value with such privilege?

Let’s hear no more about needlessly expensive fiat, except to discredit it, please.

3. roger erickson | February 14, 2016 at 12:09 pm | Reply Reciprocal altruism?

So a sovereign currency is a aggregate promise distributed to individual members. If all members do their parts as good citizens, then each member gets a credit voucher, to be used as inventively as that member may choose. It’s all about selection, yet on an increasingly distributed scale.

This works only as long as the aggregate is organized enough to keep growing and FAIRLY distribute the growing return on coordination.

Well duh! Why can’t we teach this to all 10 year olds?

The lesson is nearly completed by every director or coach of every sports team, dance team, band, orchestra, military or drama cast. Why not in math, language & literature … let alone political science, banking and finance?

Why is it “everyman for himself” in banking & accounting, but “there’s no I in team” in many other professions?

4. roger erickson | February 14, 2016 at 12:27 pm | Reply oops, meant to say ‘Why is it “every man for himself” in banking & accounting AND ECONOMICS, but “there’s no I in team” in many other professions?’

5. Chris Cook | February 14, 2016 at 1:08 pm | Reply I’m obliged to you, Randy, for such an interesting and stimulating post on a subject to which I have been giving a great deal of thought in recent years in my distinctly amateurish and un-academic way.

I remember a very shrewd Edinburgh lawyer once said to me that there were only two things to understand – rights and obligations – and that everything else is commentary.

Credit Instrument I define a ‘Credit Instrument’ as a promise issued in exchange for value received which the promissor will accept in exchange for value he provides in the future.

Essentially, his counter-party has prepaid him for future supply.

But note that the acceptor of a credit instrument as defined does NOT have the right to demand value from the promissor.

If the acceptor of the instrument has further rights then, depending on the obligation imposed on the promissor/issuer the instrument would be rather different:

Payment in money/currency – Debt Instrument Delivery of ‘money’s worth’ – Derivative (forward) instrument; or Dividend – eg from a share in a Joint Stock Company – Equity Instrument.

It’s worth pointing out here that Frequent Flyer Miles – while definitely a credit instrument – do not carry a debt obligation, because it is the airline and not the traveller who sets the terms on which they are acceptable in payment for air travel. ie the holder cannot demand

that the airline accepts the Miles for flights which the holder actually prefers to use. I had a similar experience with Bartercard Trade Pounds I had received, but could never find accommodation (or any other value I needed) from Bartercard members at the time I needed it.

Tallies As you will know, there were two types of tally record which recorded two different types of obligation. Firstly, the memorandum tally, which recorded a transfer of value – ie a receipt or proof of payment/past value transfer. This accounting object – like its close cousin the Bitcoin ‘Proof of Work’ – has a neutral or null value.

The other form of tally was a record of a promise of future value – prepayment.

Anyone whose credit was good – because he was trusted to provide goods and services or other value at a future point in time – could give his promise, recorded on the tally, and it would be accepted because he was trusted to perform.

Wealthy merchants and sovereigns were trusted (for different reasons) and it is my thesis that sovereigns became accustomed to asking their subjects to prepay rentals, duties or taxes (in money or money’s worth) which were due. Naturally such prepayment would only be forthcoming if a discount were offered, which the tax etc payer would realise when he paid his tax by returning his ‘stock’ portion of the tally to be matched against the counter-stock.

Return and Redemption This is where the word ‘return’ entered the financial lexicon. Firstly, because the ‘tax return’ was – literally – the physical return and accounting event of settlement of taxes, and secondly, because it gave rise to the expression ‘Rate of Return’ which is where it gets interesting.

Let us say a taxpayer agreed with the sovereign’s exchequer to prepay £8 for his £10 tax etc obligation. He would therefore make a 25% (£2/£8) profit when he paid his tax: if the tax was due in a year, he would make a 25% per annum rate of return; over two years, 12.5% pa, over five years 5% pa and so on. Simply take the discount and divide by time. It will be seen that there is no compound interest here, in terms of money for the use of money. What is occurring is a swap: the value of the sovereign’s services over time exchanged for the value of the currency or goods & services provided by the taxpayer.

So in a nutshell, the credit instrument (and the holder’s right of return) is a rather different instrument to the debt instrument and its right of redemption, because the holder has no right to demand payment or delivery and must therefore trust the promissor to perform at some point. This is why either currency (trust in the form of a credit object) or a framework of trust (trust intermediaries aka banks and states) came along.

Note here also that the tally ‘stock’ therefore recorded a form of investment (which of course stock remains to this day). In my view tallies – which necessarily bore the identity of promissor and acceptor – would therefore have been unlikely to be negotiable instruments. I believe negotiation of paper instruments – real bills – came along subsequently with the double entry book-keeping and registries necessary to keep track of their issuance, negotiation & acceptance, and eventual return & cancellation.

At this point we saw the evolution of bills of exchange, letters of credit and all the rest, as merchants evolved into merchant banks. Note here that it is possible to settle outstanding credit obligations A to B; B to C; C to D and D to A by identifying and then generating ‘chains’ – A>B>C>D>A which settle all obligations without the need for currency at all, but while still requiring a means of keeping score – aka unit of account or standard unit of measure for value.

(NB Such chain generation and ‘book-outs’ are precisely how the forward market in UK North Sea Brent crude oil frequently settles upon expiry.)

But I digress.

Currency Firstly, as above, it is not strictly necessary to settle credit obligations with generally acceptable credit instruments (aka currency), but of course such a decentralised and dis-intermediated P2P credit issuance & clearing system would lack liquidity.

As Minsky said anyone may issue currency – the difficulty is in having it accepted.

In my view, it is possible to imagine currencies consisting of credit instruments returnable in payment for value (money’s worth) which is generally acceptable.

Firstly, one can imagine a credit returnable in payment for (say) $1.00’s worth of location/land use. This would become generally acceptable if there were a local land use rental or levy. ie a currency local by definition. Secondly, one can imagine generally acceptable credits returnable in payment for (say) natural gas, or another for electricity of a standard amount.

Such credit instruments/currencies carry no debt obligation because the holder may not demand (or need) delivery of the underlying value, but the currency holder may of course sell them to someone who does utilise the underlying value, and this land or energy user will always buy such credits at the best price below the market price of the underlying land or energy use.

Finally, concerning the unit of account, this is in my view a purely nominal unit and a standard unit of measure of value in the same way that a metre is a standard unit of measure for length, and a kilogramme is a standard unit of measure for weight. One can never run out of kilogrammes or metres and one can never run out of units of account, However, it is completely possible to run out of the credit instruments which are exchanged by reference to the unit of account.

Good grief. Well over 1000 words and time to call it a day. Thanks again for such a thought-provoking post.

6. Charles3000 | February 14, 2016 at 1:19 pm | Reply Dr Wray makes an excellent and logical case that taxes are not used to run government operations. I only wish people and politicians would listen and learn. Next he defines money issued by the government as debt but he does it in terms of a method of counting and keeping records of money. His explanation is as clear and understandable as any I have ever read. However, I do not accept that the way you count something changes its nature and using an accounting method that requires calling issued money debt does not make it debt in the conventional sense of the word. The “debt free” money people talk about would be money spent into the economy in excess of the sum of taxes plus borrowing, money that does not have to be paid back to commercial banks. The government is prevented from doing that by the accounting process that requires spending to equal taxes plus borrowing.

7. aka | February 14, 2016 at 2:53 pm | Reply As for debt-free money in general it IS possible for a private money form, ie. common stock since Equity is debt-free by definition (Equity = Assets – Liabilities) and thus shares in Equity, common stock, are debt-free too, assuming non-negative Equity.

By why should those with equity share it when government subsidized private credit creation allows them to steal purchasing power from everyone but especially from the poor, the least so-called worthy of government-subsidized private credit?

For all their talk about equitable and sharing, it’s rather revealing that many ignore how our money system systematically loots the poor for the benefit of the rich. I guess the problem in their eyes is that they’re not in charge of the looting? Not that it takes place at all?

8. Blissex | February 14, 2016 at 4:01 pm | Reply «We can call this the principle of redeemability: the holder of an IOU can present it to the issuer for payment.»

But “payment” here is rather misleading, as it means really “return” of the thing or service borrowed.

Anyhow while I sort of agree with most of the above, and I really liked the historical details as to the specific case of the medieval british kingdoms in previous comment, but I strongly object as too narrow the use of “sovereign” here.

Because it is not sovereigns that create “money” or define its acceptability, except at sword/gun point.

It is is *sellers*. The essential property of “money” is that it has some kind of purchasing power, a specific kind of acceptability. Anything that has purchasing power is “money”.

What is money and the amount of credit/debt therefore both depend on *sellers*, not the sovereign. And without being accepted by sellers, “money” is not money.

There are plenty of examples of sovereign powers that have issued “money” that is not accepted by sellers, except perhaps sometimes for trivial purchases.

Also, I have come to the conclusion that Graeber’s book that explains the distinction between “war money” (commodity money) and “temple money (paper money) can be improved, and this is relevant to some of the comments above.

There are two similar and partially overlapping in operation, but distinct, forms of “paper money”:

* “temple money” properly defined, called “ledger money”, where the “temple” keeps a ledger and every transaction involves the parties updating the ledger. The major, and this is pretty big in practice, example of “ledger” money is “budget” money inside a company, which is used to pay for intracompany transactions.

* “instrument money”, where nobody keeps a central ledger, and purchases are paid by delivering IOUs of various creditability to the seller. This is a much more fluid system.

The overlap between the two is “cheques” drawn on the ledger at the “temple”.

Societies can move among all three systems in time, and they can even coexist.

For example ledger based systems can become instrument based systems when the temple starts issuing receipts against a ledger position, and eventually they lose the “pay the bearer” annotation, and viceversa instrument based systems can become ledger based

system when “settling” instruments through a “temple” become convenient (and of course a commodity money system can become a ledger based one).

An interesting related story:

http://bankunderground.co.uk/2016/01/20/the-cheque-republic-money-in-a-modern-economy-with-no-banks/ DEBT-FREE MONEY PART 4: AMERICAN COLONIAL CURRENCY Posted on February 15, 2016 by L. Randall Wray | Leave a comment By L. Randall Wray

In Part Three I argued that the government issues currency as its liability and imposes tax liabilities on its subjects/citizens that can be paid in that currency. When taxes are paid, both the government and its taxpayers are “redeemed”. I cited Innes’s argument that the universal law of credit is that the issuer of a debt must take it back. This is the fundamental notion behind redemption of debts.

To be sure, debt is much older than money. No human has ever escaped debt. At birth, you are indebted to your parents, your kin, and your gods. You spend your lifetime incurring new debts and repaying old debts and accumulating credits that are the debts of others. If you earn enough credits, you join the Redeemer and make it to the Promised Land after death; if you don’t you join Satan—the original tax collector–in hell.

Our modern rituals and accounting and terminology evolved from these ancient origins. Debts began to be monetized and recorded at least six millennia ago. The monetization probably grew out of the Tribal practice called Wergild–the assessment and collection of fines paid for transgressions—with the rise of class society and the emergence of authorities. Writing was apparently invented to keep track of debts; in other words, it was an accounting invention. Over time, the technology used for accounting changed—from scratches on rocks and bones, to chalk tallies on slate, to tokens pushed into clay balls, to clay shubati tablets, to notched tally sticks, to stamped and milled coins, to paper notes, and finally to entries on computer tapes. Part—but not all–of the impetus for technological evolution was to keep up with the counterfeiters.

What we call “money” (coins, tally sticks, paper notes, electronic entries on bank balance sheets) is simply the record of debt, “accounted for” in the money of account. The line between what we want to count as “money” debts or merely as “money denominated” debts is and always has been arbitrary. Most will include a checkable bank deposit in their definition of “money”; most will not include a non-checkable certificate of deposit in that definition.

Typically, people want to apply the term money to those money-denominated liabilities that can be used immediately as a medium of exchange—that is, to buy something, passing hand-to-hand. I am sympathetic. If we look at the modern economy, and focus only on transactions of households, it works pretty well. But going back through time and including transactions of private and public institutions, it gets quite messy.

As a simple example, private banks make payments to each other using central bank liabilities—reserves. No household can buy anything with reserves, yet reserves are in all other respects equivalent to central bank notes—both are liabilities of the central bank and instantly “redeemable” in payments to the central bank (more later). At the other end of the spectrum we have bills of exchange, which were used in market purchases even when made payable in the future, in distant markets, and in foreign currency. Are they “money”, then?

I try to avoid the confusion that arises from the arbitrariness by using more specific terms: currency (coins, central bank notes, treasury notes, central bank reserves), bank notes, bank deposits. In any case, it is clear that the non-checkable CD is a liability of the issuing bank, recorded in the money of account, whether or not it can be used as a medium of exchange. So what we are going to focus on is the nature of the liability behind the money-denominated debt—and leave to the side for now whether the record of the debt can be used as a medium of exchange.

I’m also going to stay focused on the sovereign’s debt, since the proposal for “debt-free money” is largely about sovereign currency. I will include the treasury and the central bank as under sovereign control, each of which issues sovereign debt. I realize there is a faction that denies that the Fed is a branch of Uncle Sam’s government, taking the supposed “independence” of the Fed literally and then carrying it to a ridiculous extreme. But that’s a topic I’ve already dealt with and will only assert here that it is nonsense.

Returning to the blog by Lonergan that I discussed in Part 3, he argues that: “Accounting convention, in this case an accident of history (and a mechanical transfer of commercial bank accounting), treats the bank deposits at the central bank as ‘liabilities’ of the central bank. Now let’s apply some simple ‘Buffett tests’. First, does the CB owe anything? No.” I won’t go into his defense of Buffett’s preference of putting his liabilities on the asset side of his balance sheet. Nice trick if the accountants, lawyers, regulators, creditors and IRS will let you do it. Accounting conventions are more than “accidents” of history. They follow a logic. Every financial asset held in a portfolio must be offset by a financial liability on another portfolio. The Fed’s reserve deposits are assets held by banks, offset by the Fed’s liability; the Fed’s notes are held as assets by banks, households, firms, and foreigners and are offset by the Fed’s liability. Trying to move the Fed’s reserves over to its asset side means that they’ve suddenly become liabilities of the holders. As I said, I don’t do philosophy but this just makes no sense.

What does the central bank owe? Redemption!

Lonergan goes on to quote from me:

Wray: Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal. […] Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money. As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal. If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it? A “debt-free money” would not be evidence of a debt. What would it be?”

His response to my argument runs as follows:

Lonergan: “Now Derrida tells us to look in the footnotes. There aren’t any. Fortunately, there is something close enough – a hidden definition slipped in between dashes. ‘Debt’ has been defined by L Randall Wray as “a promise to redeem yourself in tax payment”. What?! That is NOT the definition of ‘liability’. The ability to pay taxes is a feature of money issued by sovereigns – a very important feature and part of how the government establishes its monopoly in the creation of money, but just because the government accepts money in payment for taxes (what else would they accept?) does not make the money they issue their ‘liability’.” Note how he has taken my specific statement that refers to the exchequer’s refusal to make good on his promise to accept his debt when presented in tax payment (allowing you as taxpayer to redeem yourself), as a “hidden definition” of “liability”. Of course, I was not defining liability as a promise to redeem yourself in tax payment. I was referring to the exchequer’s specific promise to accept his own coins in tax payment. If he refuses to do so, you cannot redeem yourself.

Let us back up a bit. Our word “to pay” comes from “pacify”, reflecting payment of Wergild fines owed to victims in order to avoid blood feuds. When you “pay” taxes, you “pacify” the treasury so that Elliott Ness doesn’t come gunning for you. How do you pacify the treasury? Well, the treasury can name what it will accept in tax payment, but historically it has accepted its own liabilities. Today, tax payments take the form of debits to bank reserves and credits to the treasury’s deposit account at the Fed. The US treasury no longer issues its own liabilities when it spends, relying instead on its banker, the Fed.

It wasn’t always so, of course. The Fed was created in 1913. Many of our debt-free money folk want to return to the old days—when the treasury spent by issuing its own notes. Many of them refer to the era of Greenbacks. Fine and dandy. It would be quite inconvenient and inefficient. But it could be done. However, it would not change the fact that currency is still debt.

Whether the currency is issued by the central bank or the treasury, it is a debt that must be redeemed. Let’s look at a specific historical example.

Fortunately, Farley Grubb has just authored a very nice paper on American colonial currency. Farley is a, or perhaps the, expert on the topic. I’ll include some extended quotes from his paper. His exposition confirms my account, both in the details and in the terminology. Here’s the background. The colonies were prohibited by England from issuing coin, so as to protect the King’s monopoly of coinage. The colonies obtained coin from export, but of course as a major mercantilist power, England wanted to limit exports to the raw materials she needed. The colonies had to import finished goods, shipping the coins back to England. The King wanted to limit expenditures on its empire, so the colonies were largely responsible for funding their expenses, which included fighting wars with the French, the Canadians, and Native Americans. Colonial governments were chronically short of coins, obtained through taxes such as poll taxes and taxes on exports of slaves and tobacco.

To increase fiscal capacity, the colonial governments began to issue paper money. According to Grubb, “Virginia referred to its paper money as treasury notes. Other colonies referred to their paper monies as bills of credit…. [Virginia’s] treasury notes were the same as bills of credit..”

Virginia’s colonial government passed a number of acts to authorize the issue of treasury notes. The law would include the total value of notes (denominated in Virginia pounds) to be issued. It would also set a date for final “redemption” (the term used by Farley as well as by the lawmakers). And, interestingly, the law would impose a new set of taxes at the time of the note issue:

“Every paper money act included additional new taxes, typically a land tax and a poll tax, that were operative for a number of years. The number of years over which these new additional taxes were operative was chosen so as to generate enough funds to fully redeem the notes authorized by each respective paper money act. The date in each paper money act set for the final redemption of the notes authorized by that act closely matched the end to the taxing period set by that act…. From 1755 through 1769, the taxes imposed by the paper money acts included a poll tax, a land tax, a slave import duty, and a tobacco export duty.” Now hold on a minute. The Paper Money Acts that allowed the treasury to issue notes also imposed new taxes that would be of sufficient size and over a period long enough so that all the notes would be redeemed? Does it sound like maybe, just maybe, the colonial government understood that the purpose of the taxes was to “redeem” the currency, by accepting that paper money in payment of taxes?

Well, let us see. The answer will depend on the colonial government’s use of the term “redemption”.

Colonial paper money could be “redeemed” (remember, this is the term used by the Acts) in two ways: payment of taxes or presentation for payment in (British) coins. The treasury would spend the new issue paper money into the economy. Those receiving the treasury notes could use it to pay taxes, or spend it, or submit it to the Treasury in exchange for coin.

What did the Treasury do with the notes it received in tax payment? Grubb reports that the “notes were removed and burned.” Yep. Burned:

“Most redemption taxes were collected in the fall, and so notes reported in the Journals of the House of Burgesses as burned were likely removed via tax payments in the prior year.”

Grubb’s careful research shows that most taxes were paid using the paper money, and most paper money was “redeemed” in tax payment:

Were redemption taxes paid in notes or in specie? The treasury accounts provide some evidence to answer this question. The clearest statement in the treasury accounts was made on 15 June 1770: ‘It appears to your Committee, that the Balance in the Treasurer’s Hands of Cash received of the several Collectors for Taxes appropriated to the Redemption of the old Treasury Notes [those issued before 1769], amount to Ten Thousand Three Hundred and Twenty-six Pounds Eleven Shillings, of which they have burnt and destroyed Seven Thousand Eight hundred Pounds, and have left in the Treasury, on that Account, in Specie, a Balance of Two Thousand Five Hundred and Twenty-six Pounds Eleven Shillings to be exchanged for old Treasury Notes.’ From this evidence, Grubb concludes (emphasis added):

A redemption tax of 10,327£VA was collected, of which 2,527£VA was in specie that was

explicitly set aside in a dedicated account to be used to redeem notes brought to the

treasury. The rest of the tax payments were burnt, implying that those tax payments were

made in notes. Therefore, 76 percent of this tax was paid in notes, and 24 percent was

paid in specie. So, three-quarters of taxes were paid by “redeeming” the notes.

The specie (coins) received in tax payments could be used to “redeem” the notes that were not “redeemed” in tax payments. What about the notes that were not “redeemed” by either method? They continued to circulate. Grubb asks, “Were Virginia’s notes used as a circulating medium of exchange? The denominational structure is consistent with such usage. Virginia’s notes were issued in relatively small denominations, small enough to make paying yearly tax assessments easy with said notes, and small enough to make it an easy domestic circulating medium of exchange in terms of being able to make change with said notes.” He concludes:

The above analysis establishes that redemption taxes generated specie sums that were to be held in the treasury until the final redemption date legislated for each paper money act, at

which time holders of those notes could cash them in at face value for the specie held in the treasury for that purpose. However, at the final redemption date holders of the respective notes did not rush to the treasury to exchange them for specie. The notes continued in circulation and note holders could cash them in at the treasury at their leisure. Robert Nicholas Carter, Virginia treasurer after 1766, noted this behavior, Most of the Merchants as well as others, … preferred them [Virginia’s treasury notes] either to Gold or Silver, as being more convenient for transacting the internal Business of the Country.” (William and Mary College Quarterly Historical Magazine 1912, p. 235)

Adam Smith had argued that if the colonies were careful to ensure they did not create too much paper money relative to taxes, it would not depreciate in value (indeed it might even circulate at a premium, he argued). Redemption of the notes in tax payment would remove them from circulation—keeping them scarce. Grubb argues that this was well-recognized by the colonial government:

The Virginia legislature took note redemption and its effect on controlling the value of its paper money seriously. Such is illustrated in the March 1760 paper money act which stated, ‘And whereas it is of the greatest importance to preserve the credit of the paper currency of this colony, and nothing can contribute more to that end than a due care to satisfy the publick that the paper bills of credit, or treasury-notes, are properly sunk, according to the true intent and meaning of the several acts of assembly passed for emitting the same; and the establishing a regular method for this purpose may prevent difficulties and confusion in settling the publick accounts,… Be it therefore enacted, by the authority aforesaid, That Peyton Randolph, esquire, Robert Carter Nicholas, Benjamin Waller, Lewis Burwell and George Wythe, gentleman, or any three of them, be, and they are hereby appointed a committee, to examine at least twice in every year (and oftener, if thereto desired by the treasurer for the time being) all such bills of credit, or treasury-notes, redeemable on the first day of March, one thousand seven hundred and sixty five, as have been or shall be paid into the treasury, in discharge of the duties and taxes imposed by any former act of assembly; and upon receipt of the said bills or notes, the said committee shall give to the treasurer for the time being a certificate of the amount thereof, which shall avail the said treasurer in the settlements of his accounts as effectually, at all intents and purposes, as if he produced the said bills or notes themselves: And the said committee are hereby required and directed, so soon as they have given such certificate, to cause all such bills or notes to be burnt and destroyed.’ (Hening 1969, v. 7, p. 353) Yep, to protect the value of the government’s paper currency, you’ve got to redeem it in taxes and burn the revenues generated.

Conclusions Let us recap what we can learn from the early Colonial American experience. The government imposed taxes payable in its own paper notes (its liabilities) or “specie” coin (liabilities of the crown of England). It issued its paper notes in payments by the treasury. When it received its tax revenue in the form of its own paper notes, it burned them. When it

received coin in tax payments, it held them until an announced redemption day, to exchange for paper notes.

The paper notes were thus “redeemed” in two ways: payment of taxes, or exchanged for coin. A large majority of the notes were redeemed in tax payment; a small minority were redeemed for coin.

The government recognized that it spent the paper currency into existence. It recognized that the purpose of the taxes imposed (by the same Acts that authorized issuing paper notes) was to redeem as many notes as possible. The taxes were not to “raise revenue”, indeed, when the paper notes were received in tax payments, they were burnt, not spent.

The government also realized it needed to receive a portion of tax revenue in the form of coin. This was to ensure that it could meet its promise to redeem notes for coin.

Redemption of the tax obligations by returning paper notes to the treasury not only redeemed the colonial government, but it also redeemed the taxpayers who owed taxes. The Redemption is mutual and simultaneous. Hallelujah!

Creation of the notes preceded their redemption in tax payment. As I said, Creation always comes before Redemption. Indeed, it would have been literally impossible for the colonists to pay the new taxes given the chronic shortage of coin. They needed the treasury to spend the notes first before the taxes could be paid.

Nor would the governments have needed to impose the new taxes if they were not going to spend the notes! But if they were going to engage in an act of Creation, then they had to follow that with an act of Redemption.

My use of the word “redemption” conforms to use by monetary historians, as well as those who wrote the laws that authorized issuing paper money. It is not a “fantastic linguistic contortion”, a “pure semantic confusion”. It is an accurate description and is the correct use of the term.

The American Colonial experience with note issue verifies what MMT has been saying for the past quarter century. Careful study of other examples will confirm MMT’s approach.