Paper on Chartalism, additional know how into monetary theory.

[Sapiens]

The Nature, Origins, and Role of Money: Broad and Specific Propositions and Their Implications for Policy

by

Pavlina R. Tcherneva
http://www.cfeps.org/pubs/wp/wp46.htm

pdf version here:

http://www.cfeps.org/pubs/wp-pdf/WP46-Tcherneva.pdf

[grapejelly]

Re: Paper on Chartalism, additional know how into monetary theory.

I wrote a paper about this that I presented recently. Excerpts follow:

Alternatives to debt-backed currencies

With the disadvantages of debt-backed currencies evident, let’s look at alternatives.

Many people think that we should go back to using money that is redeemable in gold or silver. Yes, this does throttle the ability to depreciate the currency.

But gold or silver redeemability presents other problems. Few people have much gold or silver. How practical is it that we could issue a new currency backed by something most people have little or none of?

Also, remember that gold or silver, combined with fractional reserve banking, was a recipe for bank runs and frequent financial panics. We don’t want to go back to those days.

But why does money have to be redeemable in gold or silver? And why does money have to be a government granted monopoly?

A better form of money will have the following advantages:

• Fully redeemable by something that exists when it is issued.
• Not backed by debt.
• Can be lawfully issued by almost anyone.
• Easily used as a medium of exchange and a unit of account.

Let me explain #4. Money is classically supposed to meet three requirements. It is supposed to be a medium of exchange. It is supposed to be a unit of account, so that different items of different value can be exchanged at different times, and compared with one another. And it is supposed to be a store of value.

The function of money as a store of value is not necessary today. People can store their unused wealth in a money market fund, or in bonds, or in gold coin. With online brokerages, there is no need to have money sitting around storing our value. So new money does not have to be a store of value.

The keys are that any new money must be a medium of exchange, a unit of account, and fully, 100% redeemable.

Money is redeemable when you can trade your money at will for actual goods and services.

Let us imagine that Walmart issues a gift card. That is Walmart money. If you have a Walmart gift card, you can go and buy stuff at Walmart. The Walmart money is backed by Walmart merchandise that exists in their stores when the money is issued.

Let’s call this Walmart money WalmartPoints to avoid confusion with US dollars.

If Walmart pays their suppliers and employees in WalmartPoints, those suppliers and employees can buy things at Walmart. They can trade the WalmartPoints for goods and services from other people or other companies who know that WalmartPoints have value.

Walmart must be able to deliver the goods or services for all WalmartPoints it issues.

In other words, the gift cards, the WalmartPoints, must be 100% redeemable.

Let’s say you aren’t Walmart. You are a tire store. You can issue TirePoints good on tires that you have in stock. You must have the tires in stock or reasonably close to your physical possession so that all TirePoints you issue are backed by tires.

You could pay your suppliers and your employees in TirePoints. They could buy your tires with the TirePoints, or more likely they could trade the TirePoints to others who might want to buy tires. As long as the TirePoints are 100% redeemable, they can function as money.

Let’s turn to public entities to see how non-US government, 100% redeemable money can work for public entities.

If you are the City of Fairfax, you can assess the citizens taxes of $1 million for the upcoming year. And then you can pay your employees and suppliers with tax certificates “City of Fairfax points” up to the $1 million.

These City of Fairfax points are good for paying any tax or fee to the City of Fairfax.

Those vendors and suppliers and employees of the City of Fairfax can use the certificates they’ve received to pay their own taxes and fees to the City of Fairfax. Or they can trade them to other people for goods and services.

So long as you, the City of Fairfax, have levied $1 million in taxes on the citizens, this $1 million in tax certificates is 100% redeemable.

100% redeemable privately issued money is not debt money. It’s fully redeemable. And anyone can issue such money so long as they have the goods or services to back up their money.

A common clearing mechanism must be in place for recipients to exchange this money. Privately issued money can be electronic, and can be exchanged using encryption techniques that are widely available. Private firms can run the clearing exchanges and broker the money.

For example, EBay could issue eBayPoints to its merchants. Each merchant can then spend eBayPoints and receive eBayPoints for what that merchant sells or buys. EbayPoints are fully redeemable into anything eBay sells. And eBayPoints can be exchanged for WalMartPoints, TirePoints or City of Fairfax tax certificates. All in real time and all online.

Surprisingly, real 100% redeemable money has a steady rate of depreciation that compensates the issuer for carrying costs. Redeemable money has an expiration date.

This intentional depreciation is called demurrage. Demurrage applies to real 100% redeemable money and is compensation for the storage and depreciation of the real goods that back the money. It is the reason that money really is not a good store of value, and shouldn’t be used as such.


The end of banks?

We know that fractional reserve banking creates new money out of thin air. Is there a way to have a productive society with the booms and busts and inflation?

Banks exist because they are highly profitable to their shareholders and to their borrowers.

The Internet and web-based brokerages can easily take up the role of allocating savings and could completely replace banks. Brokerages could invest your savings but would not create any money out of thin air.

If you want to loan money at interest, you could select pools of capital to invest in, and these pools would be professionally managed and would own a portfolio of loans. Rather than creating money out of thin air, a brokerage puts your savings to productive work.

There is no reason why, absent laws that allow fractional reserve banking, there would be any further need of banks as they exist today.

Without banks there would be no more inflation and no more enrichment of wealthy asset holders at the expense of wage-earners, savers and pensioners.


The lessons of irredeemable currency and how we can apply those lessons

The present system of an irredeemable dollar and fractional reserve banking causes inevitable inflation. It penalizes some people while unjustly enriching others. Money created out of thin air finances wars.

The result is a parabolic increase in debt levels. The dollar along with all currencies will become valueless at some point in the not-to-distant future.

The future of privately issued, 100% redeemable currency is bright. It is real money, money that is redeemable. If we understand the disadvantages of our current system we can use private 100% redeemable money. The world can enter a new, exciting and peaceful era of prosperity and happiness never seen before.

[Tet]

Re: Paper on Chartalism, additional know how into monetary theory.

The Nature, Origins, and Role of Money: Broad and Specific Propositions and Their Implications for Policy

by

Pavlina R. Tcherneva
http://www.cfeps.org/pubs/wp/wp46.htm

pdf version here:

http://www.cfeps.org/pubs/wp-pdf/WP46-Tcherneva.pdf

Another article by Pavlina Tcherneva

Money: A Comparison of the Post Keynesian and Orthodox Approaches

PDF
http://cas.umkc.edu/econ/Oeconomicus.../Tcherneva.pdf

[Tet]

Re: Paper on Chartalism, additional know how into monetary theory.

The present system of an irredeemable dollar and fractional reserve banking causes inevitable inflation.

The US has had several periods where the treasury has issued script, or non-redeemable currency if I understand what you're referring to. Colonial Script was inflationary, not from the issuing of the script but from the Bank of Englands counterfeiting of that script. When Lincoln issued Greenbacks it was not the issuing of Greenbacks that was inflationary, but the fact the the Bank of England once again counterfeited every other Greenback that was in circulation. The inflationary threat that you refer to is due to counterfeiting of script, not the issue of the script itself. French notes during the French Revolution ran into the same problem of British counterfeiting. Stop the counterfeiting and you've stopped the inflationary impact of irredeemable currency.

[spunky]

Re: Paper on Chartalism, additional know how into monetary theory.

Thank you for posting this TET . Nice, very nice

[grapejelly]

Re: Paper on Chartalism, additional know how into monetary theory.

The US has had several periods where the treasury has issued script, or non-redeemable currency if I understand what you're referring to. Colonial Script was inflationary, not from the issuing of the script but from the Bank of Englands counterfeiting of that script. When Lincoln issued Greenbacks it was not the issuing of Greenbacks that was inflationary, but the fact the the Bank of England once again counterfeited every other Greenback that was in circulation. The inflationary threat that you refer to is due to counterfeiting of script, not the issue of the script itself. French notes during the French Revolution ran into the same problem of British counterfeiting. Stop the counterfeiting and you've stopped the inflationary impact of irredeemable currency.

Inflation is created when money is borrowed into existence, at a rate in excess of the existing economy's growth rate.

If money is backed by goods or services, it isn't borrowed into existence, and it isn't inflationary.

The ideas I promulgate in the paper I wrote are privately issued money, backed by goods and services, and valued by a competitive marketplace.

This in conjunction with the end of fractional reserve banking which isn't possible anymore, because the money the bank creates isn't backed by anything.

It is popular in some anti-fiat quarters to assume that the issue today with fiat currencies is that they are issued by central banks and therefore, if only the government issued them directly, no interest would be paid on the money and the government would no longer be beholden to the banking interests.

But money should NOT be a political tool. What government in existence is able to issue precisely the right amount of money?

The chartalists are a version of this, with money being a government monopoly but backed by the government's prospective tax collection. This is great. It's one version of money but it should be one of many.

Private parties should be issuing the bulk of the money. The competition of the marketplace would along with legal constraints prevent the government from responding to political pressures and over-issuing currency.

[Pervilis Spurius]

Re: Paper on Chartalism, additional know how into monetary theory.

GJ, your paper seems to have very strong echoes of "The Natural Economic Order".

Are you the reincarnation of Silvio Gesell?;)

[Tet]

Re: Paper on Chartalism, additional know how into monetary theory.

Inflation is created when money is borrowed into existence, at a rate in excess of the existing economy's growth rate.

If money is backed by goods or services, it isn't borrowed into existence, and it isn't inflationary.

The ideas I promulgate in the paper I wrote are privately issued money, backed by goods and services, and valued by a competitive marketplace.

This in conjunction with the end of fractional reserve banking which isn't possible anymore, because the money the bank creates isn't backed by anything.

It is popular in some anti-fiat quarters to assume that the issue today with fiat currencies is that they are issued by central banks and therefore, if only the government issued them directly, no interest would be paid on the money and the government would no longer be beholden to the banking interests.

But money should NOT be a political tool. What government in existence is able to issue precisely the right amount of money?

The chartalists are a version of this, with money being a government monopoly but backed by the government's prospective tax collection. This is great. It's one version of money but it should be one of many.

Private parties should be issuing the bulk of the money. The competition of the marketplace would along with legal constraints prevent the government from responding to political pressures and over-issuing currency.

Chartalists don't deny the creation of other money, it's just state services that they are funding through Chartalism not the entire economy. Private parties are invited to provide other products and or services that the government is not in the business of providing. Should the public borrow in order to provide a defense of your borders, seems a basic need that society would have to insure you're not invaded by foreign forces. Should the public borrow in order to have electricity and water? That seems pretty silly to me. What products and or services that are provided by the government for society is decided by the society. Maybe it's healthcare, maybe it's retirement, maybe it's basic infrastructure, roads and bridges. This is up to the people to decide.

After the basic needs of the society are decided upon, the rest of the economy is left up to the people living there to decide how other goods and services are provided and funded. Wal-Mart could issue their own script in a chartalist environment, though for Wal-Mart to use products and services provided by the state those products and services would need to be paid for using the currency of the state. Certainly taxes would need to be paid using the state currency. If Wal-Mart currency had enough demand they could trade their currency for state currency to pay for taxes and state services.

China will be bringing on line 50 nuclear power plants in the next 12-years, I certainly don't view this as inflationary, quite the opposite. China started work on another Chartalist hydro project in December that will rival the one they just completed at Three Gorges, hydro power certainly isn't inflationary. China just announced their own homegrown jetfighter that rivals the Eurojet complete with homegrown air-to-air missiles, this certainly isn't inflationary, quite the opposite once again. This allowed China to announce yesterday that they are funding their own commercial jet design to rival Boeing and Airbus. Instead of importing commecial jets China will be building their own in the next 8 years. China will have a blue water fleet in the next five years, I can't imagine Chinese influence expanding across the globe to be anything but in their own best interest. Protecting trading partners and allies so they can become Chartalists as well is in their best interest.

China moves forward, meanwhile in the fractional reserve, debt based, militarily enforced gangster currency of the Federal Reserve we continue to fall behind. Cheaper to buy a home than a car in Detroit, apparently flippin a burger doesn't pay as well as building a car.

[grapejelly]

Re: Paper on Chartalism, additional know how into monetary theory.

GJ, your paper seems to have very strong echoes of "The Natural Economic Order".

Are you the reincarnation of Silvio Gesell?;)

I have a Gesell paper that I started to read but I couldn't get into it. It seems that a lot of alternative monetarists would replace one set of problems with another.

I have *no* faith in government's ability to do anything except serve at the hands of anti-democratic masters. The choice is occasional tyranny of the majority through populism, or more often tyranny of a monied controlling minority and often both at the same time.

Government is yucky. It is antithetical to individual liberties.

So I don't believe in money theories that call for government doing anything except perhaps making certain practices illegal, or letting private parties enforce contracts against, say, suspension of redemption privileges.

I think government + money is the problem. We need to take money away from the government and put it in the hands of private people, and take away the ability of fractional reserve banks to issue irredeemable currency.

This will happen, I am confident, because the existing system will collapse and the collapse will be so horrific that it will usher in a much improved and better era that will reverse the increasing share of government in our private lives because government will finally achieve the credibility it deserves, which is about zero.

[Pervilis Spurius]

Re: Paper on Chartalism, additional know how into monetary theory.

My comparison to Gesell was perhaps an unfair one, it's just that whenever I hear talk of taking away the "store of value" aspect of money and imbuing it with a predetermined expiration date, I always think of Gesell's stamped money system.

Not that our current bonar, Pe$o, whatever is a very good store of value either.

In a sense though, Gesell's "Free Money Theory" is a different twist on the Chartalist system that is the topic of this thread.

Re: private money

A common clearing mechanism must be in place for recipients to exchange this money. Privately issued money can be electronic, and can be exchanged using encryption techniques that are widely available. Private firms can run the clearing exchanges and broker the money.

Do you have ideas on the details of this?

I've looked into some of the private money systems out there currently i.e egold, _____-points systems, etc. and the biggest issue with these is 1) lack of transparent auditing to prove they have the goods to back the currency and 2) the ease of counterfeiting. I guess I should also add that I fear that, in the case of e-gold and some of the also rans in this area, is that the US Govt. tries to put the kabosh on these under the guise of "preventing money laundering".

[grapejelly]

Re: Paper on Chartalism, additional know how into monetary theory.

I've looked into some of the private money systems out there currently i.e egold, _____-points systems, etc. and the biggest issue with these is 1) lack of transparent auditing to prove they have the goods to back the currency and 2) the ease of counterfeiting.

I think it boils down to ensuring performance. That is no different now. When I use an American Express traveler's check, or my Barnes & Noble gift card, I *know* they will honor those. I do not doubt their performance.

Someone has to issue a performance bond. Someone who is not corruptible. Someone whose business is selling their own credibility. Accounting firms currently do audits. Insurance companies issue fidelity bonds.

Alternatively, some issuers can use a social review system such as eBay uses.

The free market, faced with all these different types of money, will sort it out by discounting money differently. Just like in the old days, bank notes were discounted differently based upon who issued them, how far away they were, etc.

I guess I should also add that I fear that, in the case of e-gold and some of the also rans in this area, is that the US Govt. tries to put the kabosh on these under the guise of "preventing money laundering".

Yes. Of course. They will do that. But someday, the US$ will be gone, the US won't be a superpower anymore, and there will be free competition between countries for people's money. Many countries sell their legal system, their banking system, their system of confidentiality and secrecy. This will only increase in scope as sophistication increases.

[Pervilis Spurius]

Re: Paper on Chartalism, additional know how into monetary theory.

The part in that last post about the private money was also an expression of frustration at the lack of alternatives TODAY to the bonar system. I mean, you can't really get a Lloyds policy on an egold account. Or can you? I haven't checked. Not to mention the fees to convert to/from the bonar.