Post by Antti Jokinen on Sept 10, 2017 11:49:32 GMT
From my post:
First, some historical background: I remember reading about an old Egyptian monetary system where the UoA was a 'sack of wheat'. Except that it wasn't really a sack of wheat; an actual sack of wheat would cost anything between, say, 5-7 'sacks of wheat'. Two years later the same sack might cost 11-13 'sacks', so it was clear that the UoA didn't refer to some standard (mini-)sack of wheat. Perhaps you've heard similar stories?
As I explained, what I meant when I wrote "the new price of a kilogram of salt is 0.50 skilos" was not that there was a new official price for a kg of salt, but that the market price of a kg of salt, expressed in skilos, was SK0.5 (prices tend to be sticky, though, in this type of economy). The link between salt and the UoA was removed. Yet, there was no chaos, but people continued to price their goods the same way as before (they found very few reasons to change the price of other goods than salt).
If we try to get into the heads of these people, we could imagine that having priced goods in salt-kilos for many years, they would not need to think of an actual kilogram of salt when pricing, say, milk; instead, they would think of the price of a cow and the price of fodder. If these prices had gone up, they'd like to increase the price they ask for milk, but only as long as milk's price elasticity of demand allowed them to do it.
Once we start keeping records of the trades (see my second post), it is obvious that the price of an apple, say SK1.00, exists before any credit entries are made. So the price, SK1.00, does not refer to some credits demanded for it. The credits are not 'skilos'; just like the prices of goods, the credits are only denominated, or expressed, in skilos. If we later create a token coin, with a face value of SK1, it will represent a credit balance worth SK1. It will not be a 'skilo', or "that which is demanded in exchange for an apple".
Edit: Allow me to paste here a lengthy comment by Mitchell-Innes, now that I remembered that he has been talking about exactly the same subject (apologies for sounding like Randall Wray; we both start from Innes but arrive at different places):
Imagine a closed economy where the numeraire is a kilogram of salt; the price of a watermelon might be 1.50 salt-kilos – "s-kilos" in short. All goods are priced in s-kilos, which is the unit of account (notice the subtle difference between the numeraire and the unit of account). By definition, the price of the "numeraire good", a kilogram of salt, is 1 s-kilo. Goods are exchanged against other goods, and salt doesn't need to appear as one of the goods in a transaction (because of this, salt is not 'money' as Clower[3] defined it). When we have established (sticky) market prices expressed in s-kilos for most of the traded goods, it becomes feasible to denominate bilateral debts in s-kilos; this arguably makes the prices even more sticky. In most cases these debts didn't arise because the debtor bought salt "on credit", neither do debts need to be paid in salt. The debtor can deliver to his creditor a sack of flour, for instance. (The parties can sue each other if they don't agree on the price, but usually they come to an agreement as trade is seen as mutually beneficial.)
The system works as long as the real cost of procuring salt remains more or less stable, so that prices of other goods don't need to be constantly changed or the nominal value of outstanding debts (usually short-term; < 1 year) adjusted. But let us now imagine that one day – well, abruptly anyway – the real cost of procuring salt, due to a technological shock, is reduced by 50 %. The community faces a choice: Should they adjust prices of all goods (except salt) and nominal values of all debts – a formidable task including menu costs and mental costs –, or should they only adjust the price of a kilogram of salt? The majority of our agents are flexible thinkers, so they choose the latter option: the new price of a kilogram of salt is 0.50 skilos. What is a 'skilo'? It's nothing you can touch, nothing you can point at. It's an abstract unit of account. It cannot be a numeraire, because there isn't any supply of, or demand for, it.
The system works as long as the real cost of procuring salt remains more or less stable, so that prices of other goods don't need to be constantly changed or the nominal value of outstanding debts (usually short-term; < 1 year) adjusted. But let us now imagine that one day – well, abruptly anyway – the real cost of procuring salt, due to a technological shock, is reduced by 50 %. The community faces a choice: Should they adjust prices of all goods (except salt) and nominal values of all debts – a formidable task including menu costs and mental costs –, or should they only adjust the price of a kilogram of salt? The majority of our agents are flexible thinkers, so they choose the latter option: the new price of a kilogram of salt is 0.50 skilos. What is a 'skilo'? It's nothing you can touch, nothing you can point at. It's an abstract unit of account. It cannot be a numeraire, because there isn't any supply of, or demand for, it.
First, some historical background: I remember reading about an old Egyptian monetary system where the UoA was a 'sack of wheat'. Except that it wasn't really a sack of wheat; an actual sack of wheat would cost anything between, say, 5-7 'sacks of wheat'. Two years later the same sack might cost 11-13 'sacks', so it was clear that the UoA didn't refer to some standard (mini-)sack of wheat. Perhaps you've heard similar stories?
As I explained, what I meant when I wrote "the new price of a kilogram of salt is 0.50 skilos" was not that there was a new official price for a kg of salt, but that the market price of a kg of salt, expressed in skilos, was SK0.5 (prices tend to be sticky, though, in this type of economy). The link between salt and the UoA was removed. Yet, there was no chaos, but people continued to price their goods the same way as before (they found very few reasons to change the price of other goods than salt).
If we try to get into the heads of these people, we could imagine that having priced goods in salt-kilos for many years, they would not need to think of an actual kilogram of salt when pricing, say, milk; instead, they would think of the price of a cow and the price of fodder. If these prices had gone up, they'd like to increase the price they ask for milk, but only as long as milk's price elasticity of demand allowed them to do it.
Once we start keeping records of the trades (see my second post), it is obvious that the price of an apple, say SK1.00, exists before any credit entries are made. So the price, SK1.00, does not refer to some credits demanded for it. The credits are not 'skilos'; just like the prices of goods, the credits are only denominated, or expressed, in skilos. If we later create a token coin, with a face value of SK1, it will represent a credit balance worth SK1. It will not be a 'skilo', or "that which is demanded in exchange for an apple".
Edit: Allow me to paste here a lengthy comment by Mitchell-Innes, now that I remembered that he has been talking about exactly the same subject (apologies for sounding like Randall Wray; we both start from Innes but arrive at different places):
The main obstacle to the adoption of a truer view of the nature of money is the difficulty of persuading the public that "things are not the way they seem," that what appears to be the simple and obvious explanation of every-day phenomenon is incompatible with ascertainable, demonstrable facts – to make the public realize, as it were, that while they believe themselves to be watching the sun's progress round the earth, they are really watching the progress of the earth round the sun. It is hard to disbelieve the evidence of our senses.
We see a law which establishes in the United States a "standard dollar" of a definite weight of gold of a certain fineness; we see a law making the acceptance of these coins in payment of debt obligatory on the creditor – a law which is cheerfully obeyed without question; we see all commercial transactions carried on in dollars; and finally we everywhere see coins (or equivalent notes) called dollars or multiples or fractions thereof, by means of which innumerable purchases are made and debts settled. Seeing all these things, what more natural than to believe that, when the Law declared a certain coin to be the Standard Dollar, it really became so: that when we pronounce the word "dollar" we refer to a standard coin, that when we do our commercial transactions we do them, theoretically at least, in these coins with which we are so familiar. What more obvious that when we give or take a "promise to pay" so many dollars, we mean thereby a promise to pay golden coins or their equivalent.
Suddenly we are told that our cherished beliefs are erroneous, that the Law has no power to create a standard dollar, that, when we buy and sell, the standard which we use is not a piece of gold, but something abstract and intangible, that when we "promise to pay" we do not undertake to pay gold coins, but that we merely undertake to cancel our debt by an equivalent credit expressed in terms of our abstract, intangible standard; that a government coin is a "promise to pay," just like a private bill or note. What wonder if the teacher of the novel doctrine is view[ed] with suspicion? What wonder if the public refuses to be at once convinced that the earth revolves around the sun?
So it is, however. The eye has never seen, nor the hand touched a dollar. All that we can touch or see is a promise to pay or satisfy a debt due for an amount called a dollar. That which we handle may be called a dollar certificate or a dollar note or a dollar coin; it may bear words promising to pay a dollar or promising to exchange it for a dollar coin of gold or silver, or it may merely bear the word dollar, or, in the case of the English sovereign, worth a pound, it may bear no inscription at all, but merely a king's head. What is stamped on the face of a coin or printed on the face of a note matters not at all; what does matter, and this is the only thing that matters is: What is the obligation which the issuer of that coin or note really undertakes, and is he able to fulfill that promise, whatever it may be?
We see a law which establishes in the United States a "standard dollar" of a definite weight of gold of a certain fineness; we see a law making the acceptance of these coins in payment of debt obligatory on the creditor – a law which is cheerfully obeyed without question; we see all commercial transactions carried on in dollars; and finally we everywhere see coins (or equivalent notes) called dollars or multiples or fractions thereof, by means of which innumerable purchases are made and debts settled. Seeing all these things, what more natural than to believe that, when the Law declared a certain coin to be the Standard Dollar, it really became so: that when we pronounce the word "dollar" we refer to a standard coin, that when we do our commercial transactions we do them, theoretically at least, in these coins with which we are so familiar. What more obvious that when we give or take a "promise to pay" so many dollars, we mean thereby a promise to pay golden coins or their equivalent.
Suddenly we are told that our cherished beliefs are erroneous, that the Law has no power to create a standard dollar, that, when we buy and sell, the standard which we use is not a piece of gold, but something abstract and intangible, that when we "promise to pay" we do not undertake to pay gold coins, but that we merely undertake to cancel our debt by an equivalent credit expressed in terms of our abstract, intangible standard; that a government coin is a "promise to pay," just like a private bill or note. What wonder if the teacher of the novel doctrine is view[ed] with suspicion? What wonder if the public refuses to be at once convinced that the earth revolves around the sun?
So it is, however. The eye has never seen, nor the hand touched a dollar. All that we can touch or see is a promise to pay or satisfy a debt due for an amount called a dollar. That which we handle may be called a dollar certificate or a dollar note or a dollar coin; it may bear words promising to pay a dollar or promising to exchange it for a dollar coin of gold or silver, or it may merely bear the word dollar, or, in the case of the English sovereign, worth a pound, it may bear no inscription at all, but merely a king's head. What is stamped on the face of a coin or printed on the face of a note matters not at all; what does matter, and this is the only thing that matters is: What is the obligation which the issuer of that coin or note really undertakes, and is he able to fulfill that promise, whatever it may be?