Much confusion comes to a head even among those who should be more articulate when there is talk of money outside micro-economics. Most recently with the Libra being touted by Facebook and Friends and with mini-BOTs in Italy.
My purpose here is to offer a neglected approach with the intention of enabling a better understanding of what is happening, not the detail. In particular, how mini-BOTs might be designed to defeat the objections of Gresham’s Law, which says that bad money drives out good.
Essential features of money are often overlooked:
1) Money is, first and foremost, for paying taxes, which are obligatory.
2) Money must circulate. The speed of circulation varies. For a century, following Schumpeter, many economists have taken it as a constant: it is not constant but has only been measurable by proxy, which is doubtless why it came to be neglected in the first place.
3) Money is – becomes – a tool for planning (obligations and claims).
4) Money, in the form of capital, becomes a means of mathematically modelling possessions (or wealth).
Everything else follows from these features.
Historically, but also conceptually, money serves to pay debts to the state. The state issues IOUs (acknowledges debt by issuing credit) in return for goods and services, which its payees can then use in order to obtain goods and services from other citizens (or subjects). The IOUs are accepted because they are needed to pay taxes. This is the most important – indeed, defining – feature of money.
Once in place, this circuit expands as it proves useful to replace barter and to replace relationships of reciprocity. In contrast to barter and reciprocity, money enables fine-tuning, precision, plus a vastly wider circle of exchange.
Relationships of reciprocity involve the implicit understanding that good turns will be returned some time in the future. It is here that the planning aspect comes to the fore.
Money must circulate. None the less, it inevitably also serves as a store of value. More precisely, as a temporary store of value. Money stored long-term deteriorates, eventually becoming dead money, like grain and precious metals or indeed, in bygone times, salt.
So it is better exchanged for farmland or a factory, which takes it back into circulation. Hence money (banknotes, coins, or fiat on a bank ledger) is converted into capital. Capital is not money, or rather, its relationship to money (cash) is complex.
Capital can be converted to such fungible money, but only at the margins and in accordance with due diligence and procedure. All the holders of “capital” might change or perish overnight, for example in a revolution, but only a marginal amount of capital can be converted into money (cash in hand, cash at bank) at any one time.
If, say, a state were to expropriate everyone but compensate them with money, the value of the currency would collapse.
This is one way in which money as a concept (rather than money to spend) becomes a tool for mathematical modelling. Another is the familiar creation of fiat money by non-state banks.
In order to purchase a tractor, one might mortgage the farmstead. That is, the bank accepts the farmstead as collateral and issues fiat money, confident that the tractor will increase productivity, which will generate money, that can be returned to the bank (with interest).
On its return, this “money” is removed from the ledger and is therefore destroyed. Hence money is being created and destroyed all the time, which is perplexing for many people. Neither the tractor nor the farmstead are destroyed but, without the intermediary, the tractor might never have been created.
The “money” here is an accounting device. What it maps is nonetheless real, or is a future which may be considered to be sufficiently certain.
Having set the conceptual scene, we can now proceed to reformulate matters. When the news media and politicians talk about debt, they are talking, abstractly, about plans and the commitments (obligations) which go hand-in-hand with planning.
Planning is always future-orientated. Think of an appointments diary. One for years ahead, with more and more time slots taken. As events unfurl, circumstances intervene necessitating some rescheduling. If the appointments diary is none too full, this is manageable. No longer so if every last time slot is taken.
As we cannot live day-by-day and do not relish hand-to-mouth, we provide for contingencies, create projects and make commitments. So some debt is good. That is, it is wise to use money to plan ahead, which means issuing credit or accepting debt. The problems arise when we overreach ourselves.
At a macro-economic level, they arise also from using one way of thinking, which works perfectly in a micro-economic setting, in a wider context where it breaks down.
When a Chancellor of the Exchequer puts a figure of a trillion on the cost of combatting climate change, this may be rhetorically clever, but it is conceptually meaningless.
Other figures, too, should be treated with great scepticism, for instance, when there is talk of global GDP. (Quite apart from GDP being contested as a modern measure of economic well-being.) In such cases, all that is happening is that a greater portion of the human world (present and projected) is being mapped mathematically. Thought is idling (Wittgenstein).
When money is seen as mapping possessions, it may be better described as locked-in capital. All maps involve abstraction, which is to say filtering out some aspects in order to achieve transparency or clarity elsewhere (for example, in order to make it easy to use, the map of the London Tube ignores distances. A map which modelled everything would have to be as big as what it was modelling.)
To recapitulate: The core feature of money is that it is legal tender for the payment of taxes. Taxes must be paid periodically, so taxpayers require a steady supply of money. This is what gives money credibility.
Subsequently, money proves useful as a replacement for barter and for implicit promises or reciprocity. Hence it circulates. Problems arise from the scope and speed of circulation. As its speed of circulation decreases, money comes to resemble a store of value, but long-term it is unreliable as that.
It is then wise to convert it into capital, which is illiquid except at the margins. Capital involves a (mathematical) modelling of possessions. Until such time as there are taxes (property taxes) to be paid, or debt to be repaid, the modelling is superfluous, at best an exercise in curiosity. Like assigning names to stars other than for purposes of navigation.
On the basis of this understanding of fundamentals it is possible to come to a judgement on new-fangled forms of money such as cryptocurrencies, but also what are misleadingly called parallel currencies such as that now proposed for Italy.
Readers will be aware of the plan to introduce mini-BOTs. This has been widely reported, for example.
It says that mini-BOTs would be short-term Treasury bills (non-interest-bearing, tradeable securities) issued to pay for government services or reimburse tax. In turn, citizens could use them to pay their taxes or even pay for services or goods provided by the state, including petrol.
The certificates would quickly become accepted more widely and used as a form of money to be spent anywhere, to buy anything.
Going this far, BOTs would indeed constitute a parallel currency and therefore violate EU law. It would be a first step towards possibly replacing the euro. In the eyes of many observers, the introduction of such BOTs would be a necessary and welcome step in the right direction, but that controversy is not the subject of these reflections.
Note that the mini-BOTs are clearly conceived not to constitute stores of value (and so not for trading on international markets) except very short-term. The store-of-value function is well-served by the euro.
It is in this sense that Gresham’s law of “bad” money driving out “good” would apply. Obviously, if you have a choice of whether to pay your taxes or something else in mini-BOTS or euros, you would (at present) use the former and save your euros for a rainy day.
But this need be no bad thing, at worst an inconvenience. In any case, many people with euros will not have mini-BOTs in abundance. All Gresham’s law says is that money with restrictions as a store of value (paper or base metal maybe) is spent in preference to money (like silver coinage) which enjoys credibility as a store of value. Hence “bad” money circulates more than “good”.
In 2015, in an essay in my German book Klasse Verantwortung, I made a proposal which deliberately stopped far short of the scheme currently under discussion (“Sich schleichen aus der Eurokrise”). This was for local authorities to issue similar certificates, but such that they would only become legal tender for payment of local (not national) taxes after a delay of, say, two years.
Hence there would be an incentive to use them in the local economy, it being understood that the local economy, to the extent that it is sustained by local consumers, was constituted mainly of services, many of them of a personal kind.
The thought was for this currency to facilitate trade between individuals or families such that people would always have money for the myriad small outgoings that make for zest for life and a vibrant local economy.
Nearly everyone would have money to pay hairdressers, restaurant and café personnel, gardeners, baby-sitters, tuition, et cetera. They would need euros for pay for coffee (imported), new (but not second-hand) coffee machines, electricity and petrol, in a word for tangibles such as those produced by industrial processes and typically imported from afar (the other end of the country or abroad).
My proposal was targeted at achieving a noticeable alleviation of poverty without imagining that it could solve the deeper problems of the wider economy.
One objection to my scheme from the viewpoint of the EU is that it would thwart the collection of VAT. I remind readers here that VAT is enshrined in Holy Writ in Leviticus Chapter Six, verse 66. Its purpose in being imposed EU-wide on services is to complicate the lives of small traders, discourage discretionary spending and promote deep grey markets.
But undermining VAT was not the primary purpose of my proposal. It was to accelerate the circulation of a form of money in a largely closed circuit and hence boost local well-being.
It is this aspect of semi-closed circuits that is too little articulated when big money is discussed. With the euro (but also with other major denominations) we have a single currency and its central management (via quantitative easing, interest rates, inflation targets etc.) to attend not only to geographically and economically disparate regions but also for the myriad mini-economies that constitute a whole society.
It is a matter of resource allocation, but resources are not interchangeable, or only so at the margins and then gradually. The notion of Austerity gives rise to the impression that spending can be switched substantially between the different grand areas of public or private concern (healthcare, education, defence, policing, courts, other welfare, etc.). It cannot.
Not because it would be publicly unacceptable (which it would), but because it confuses a means of measurement (money) with what the money is mapping.
There is therefore regularly a need to step back from the accounts and reflect on what the accounts are about. This change of focus puts things into perspective. Inflation targets can be seen as a clumsy attempt at controlling the speed of monetary circulation.
However, the best way to speed up circulation, if that is what is desired, is, of course, is to increase the money available to the poor since they will not use it as a store of value.
The worst way to speed up circulation is to hand the money created (via quantative easing) to those who risk using it not for consumption or even boosting the means of production, but for the purchase of assets.
Here the reminder that this is to convert money into capital, which means simply that more of the world is mapped, or more future time slots are filled, or that, in some semi-closed circuits, prices change (upward) while the prices in other semi-closed circuits stagnate.
One task of politics is to attend to those semi-closed circuits and ensure that they are provided with enough but not too much liquidity (or cash flow). When this task is left entirely to take care of itself other imbalances emerge. Think (medically, metaphorically) of the body, the circulation of the blood to very different organs, and trace elements.
To come to some conclusions about the core topics.
One scenario is that mini-BOTs might be implemented as a parallel currency and therefore possibly as a first step to exiting the euro but also, possibly, simply as a measure to boost the Italian economy, a measure that could be withdrawn a few years hence.
A quite different scenario is the one I proposed for revitalising a local economy, with its key elements being a delay before the currency could be used to pay taxes and a restriction on the type of tax payment it could be used for.
During the crisis in Greece, Yanis Varoufakis made a rather different proposal, rejected by the EU Commission which, logically, also involved the settlement and refund of taxes. I personally consider the approach at the time of the EU Commission to have been reprehensible in the extreme, but that is another topic.
Varoufakis is against the Italian mini-BOTs, for which he has his own reasons, which I do not concur with.
A few words on how, on the basis of the principles elucidated above, I see cryptocurrencies. They cannot be used to pay taxes, any more than taxes can be paid with tulip bulbs. They have become fashionable in some circles, but one year’s fashion of flared trousers may look stupid a decade hence.
What some would seem to be doing is providing vouchers for digital services, prepayments in other words. As governments have increasingly turned to taxing transactions rather than tangibles, cryptocurrencies enable transactions to be concealed, even if the underlying transaction is legal.
Without state endorsement, cryptocurrencies are a merry-go-round of jugglers: they are based on trusting participants (players), who vouch for each other anonymously (via distributed ledgers or blockchain), but who in the aggregate are surely untrustworthy.
Libra from Facebook is somewhat different since it is would aim, much as a bank, at being backed by a basket of holdings in different currencies. It too would conceal transactions from the tax authorities. It aims to be a means of payment only, without being a store of value.
It would undermine or replace local currencies, which may be a good or a bad thing depending on the jurisdiction concerned.