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Post by Antti Jokinen on Oct 27, 2017 20:49:00 GMT
In a blog post, JP writes: Randall Wray has written a very good post on the subject, too. I suggest you read the whole post. Some 18 months ago, when I was reading Wray's post, I got stuck on what might seem like a minor detail. Wray says in his conclusion: I thought the opposite was more likely to be true: The government realized it will receive a portion of tax revenue in the form of coin, so it promised to redeem notes for coin.So I wrote to Wray, who was kind enough to answer (I'm not sure how much time he had to read what I wrote, though -- I'll let you judge). Here's an excerpt from my second e-mail to him: Here's what Wray wrote back: It might be that I just didn't manage to make myself understood (wouldn't be the first, nor the last, time). Looking at what I wrote to him, I could have done better. Let me try to be more clear here: First, a government cannot issue notes for $100,000 and collect back all those notes through taxation within, say, 12 months' time or some other exact timeframe (I assume it aimed to collect $100,000 in tax, not less). At least not without causing unnecessary pain to taxpayers, some of whom would need to find the holders of the remaining few notes if they happened to be the last ones due to appear at the tax office (remember, there was no Craig's List or similar). In other words, there would be considerable logistical issues. Second, people must have been used to pay their taxes in gold coin, even before this note issuance. That's another reason why the government would have stated that the taxes can be paid in coin. I cannot find any reason why it wouldn't want to collect taxes in coin, too. So, the government must have known that it will receive coins -- not that it needs to receive coins in order to be able to redeem notes, as Wray suggested. And receiving coins as a portion of tax payments means that should it collect $100,000 taxes for every $100,000 of notes spent, there would remain notes in circulation. Of course it had to make the notes redeemable in coin! Otherwise it wouldn't have been liable to provide any value for the remaining notes. Does anyone follow my thought? This is just a start. We'll get to some interesting stuff later, I believe; something more along the lines of JP's post.
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Post by JP (admin) on Oct 29, 2017 1:44:56 GMT
Let me give Wray's post a read, will get back to you.
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Post by JP (admin) on Oct 30, 2017 15:07:55 GMT
So I wrote to Wray, who was kind enough to answer (I'm not sure how much time he had to read what I wrote, though -- I'll let you judge). Here's an excerpt from my second e-mail to him: Here's what Wray wrote back: It might be that I just didn't manage to make myself understood (wouldn't be the first, nor the last, time). Looking at what I wrote to him, I could have done better. Let me try to be more clear here: First, a government cannot issue notes for $100,000 and collect back all those notes through taxation within, say, 12 months' time or some other exact timeframe (I assume it aimed to collect $100,000 in tax, not less). At least not without causing unnecessary pain to taxpayers, some of whom would need to find the holders of the remaining few notes if they happened to be the last ones due to appear at the tax office (remember, there was no Craig's List or similar). In other words, there would be considerable logistical issues. Second, people must have been used to pay their taxes in gold coin, even before this note issuance. That's another reason why the government would have stated that the taxes can be paid in coin. I cannot find any reason why it wouldn't want to collect taxes in coin, too. So, the government must have known that it will receive coins -- not that it needs to receive coins in order to be able to redeem notes, as Wray suggested. And receiving coins as a portion of tax payments means that should it collect $100,000 taxes for every $100,000 of notes spent, there would remain notes in circulation. Of course it had to make the notes redeemable in coin! Otherwise it wouldn't have been liable to provide any value for the remaining notes. Does anyone follow my thought? This is just a start. We'll get to some interesting stuff later, I believe; something more along the lines of JP's post. Yes, I follow what you're saying. In theory that makes sense. To settle the debate, I think you'd really need to comb through old legislative documents to see why those old notes were structured the way they were. Perhaps the Grubb paper that Wray mentions would shed light on the matter. You are arguing about what the "government must have known." And in the 1700s, all anyone knew was that if notes were directly convertible into specie, then they would trade at par. People were simply not used to incontrovertible paper. So the gold redemption feature would have probably been what government officials believed would drive the acceptance and ensuing value of notes, tax receivability only being a bell & whistle attached after the fact to help promote use. Now of course it was possible that the government was ahead of its time and realized that if it issued inconvertible paper, and it made it tax receivable, and it kept the supply small relative to tax demand, then the notes would trade at par too. And it might even go further and conclude that if the supply wasn't going to be small, maybe it should add a convertibility feature to sop up any excess, as you describe. But I don't think that was the state of monetary knowledge back in the 1700s. Again, this seems to be an argument about what "governments must have known"---you'd have to provide some examples of government officials actually making the calculation you ascribe to them.
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Post by Antti Jokinen on Oct 30, 2017 21:06:28 GMT
JP, you're right about the need for some forensic evidence (although I'm mainly arguing from a theoretical point of view).
I'm combing through some material now. I've already finished Grubb's paper, read some general stuff on Virginia's economy and I'm now looking at Ernst's (one of Grubb's sources) "Money and Politics in America, 1755-1775".
I have to, tentatively, disagree with you on at least one thing. I don't think their "monetary knowledge" was necessarily inferior when compared to ours.
They don't refer to the treasury notes, or bills of credit as they were known in other colonies, as money. Here's one of the acts:
'Money' was specie coins (or even "tobacco money", I think) but not treasury notes. And the notes were actually interest-bearing -- that's one thing that separates them from the typical "paper money". They also say that these notes should be "properly sunk" -- not language one would use if one was aiming for notes remaining in circulation thanks to convertibility into specie.
Grubb talks about "paper money acts". I've tried to find out what the acts really were called, as I suspect that these notes were not called "paper money" by contemporaries (I might be wrong, of course). I haven't found it yet.
When it comes to what the government must have known, all I said it must have known was the plain obvious: that many taxes, and other duties, will be paid in specie coins and tobacco (money). That was the typical way to pay a tax, so taxes not being paid in (real) money, or tobacco, at all would have meant that the government explicitly had ordered all taxes to be paid in notes only (a practical impossibility, as I explained). So they knew they will receive specie coins, which they knew meant that there will be notes outstanding and not "properly sunk" after all the taxes have been collected (on a 1:1 basis with notes issued), unless they state that the notes are redeemable in coin. Not convertible into coin at any moment in time, as we usually understand the workings of a gold standard, but redeemable in coin only when all the planned taxes had been most likely collected (for all the remaining notes there will be money/coin at 1:1 ratio waiting at the treasury for redemption). Depending on the particular issue of notes, one had to wait 1-10 years before one could redeem the notes in coin.
As you see, the notes were in many ways bond-like. There was interest paid on the notes (later there were zero-interest notes, too), and the notes had set maturity dates, at which point in time they could be converted to coin at the Treasury.
Let this be my interim report -- I'll get back to you later on my full findings. Until then, I'd like to see more support for these claims of yours (the evidence I've found so far doesn't support them, as you might have already seen):
Remember that there were no paper money issuing banks in Virginia, nor in the whole colonial America (as far as I know). People were used to transact using barter (tobacco and tobacco notes played an important part), book credit and -- to a smaller extent in local commerce -- specie coin.
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Post by JP (admin) on Oct 31, 2017 13:53:58 GMT
Many people in the U.S. were immigrants and, if they had any familiarity at all with paper money, it would have been with convertible paper money that they had experienced in Europe.
"there will be notes outstanding and not "properly sunk" after all the taxes have been collected"
I'm going to assume that to be 'properly sunk' meant that the notes had to have an associated 'sinking fund'. A sinking fund is a segregated account that has a certain amount of cash in it reserved exclusively for buying back the issue. In my experience it's always associated with bond issues.
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Post by Antti Jokinen on Oct 31, 2017 14:46:14 GMT
Well, the notes would be properly sunken when they had been redeemed with the money in the sinking fund? But yes, the existence of that fund would guarantee that the notes will be sunken.
If the size of the fund matched the amount of notes in circulation, it meant that taxation had been successful. Budget deficit was closed and the Treasury acted at this point in a way resembling the famous London goldsmiths, safekeeping specie. Right? I'll write an example on this later.
Yes, there were many immigrants. But I can't see they made any direct comparison to paper money. Otherwise, would the notes have been called bills of credit? I don't know. edit: Well, B. Franklin wrote about Paper Currency, and paper money, already in 1729, so perhaps I'm wrong.
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Post by Mike Sproul on Oct 31, 2017 23:41:20 GMT
Here's a link to my paper on colonial paper money: econpapers.repec.org/RePEc:cla:uclawp:775bThe best sources are by Curtis Nettels, Andrew McFarland Davis, John McCusker, and a few others that are mentioned in the working paper above. The first thing to notice is that people like Wray speak of taxes as "creating a demand for money", while the backing theory view is that "taxes receivable" is a government asset, and like any asset, it serves as backing for the money issued by the government in question. So if I were explaining Wray's view of money, I'd be drawing money demand and money demand curves, while if I were explaining the backing view, I'd be writing T-accounts. So here's a T account: ......ASSETS.............................................LIABILITIES 1) Taxes Receivable (TR) worth 100 oz of silver..........100 oz. Net Worth (NW) 2) ......................................................+20 oz. wages payable (WP) .........................................................-20 oz. NW 3).......................................................+20 paper shillings (1s=1oz) paid .........................................................-20s WP 4)......................................................+80s paper given away .........................................................-80s NW 5) +Farmers' IOU's worth 200s............................+200s paper lent to farmers 6) +25 oz of silver......................................+25s paper spent on silver 7) -25 oz silver paid out................................-25s paper retired 8) -15s farmers' IOU's...................................-15s paper repaid and retired 9) -12s TR...............................................-12s paper received for taxes Line-by-line Explanation: 1) The colony’s only asset is 100 oz of taxes receivable. This would be the Present Value of all future taxes. There are no other claims against the colony, so its net worth is 100 oz. 2) Soldiers return from a failed raid (happened in Massachusetts, 1690) demanding to be paid 20 oz of wages. The colony has no silver to pay them, but if they fail to pay, the soldiers will riot, the colony will fail, and they will all die. 3) In the legislature, the easy money faction favors printing paper shillings. (Assume 1s=1 oz. of silver.) The tight faction opposes paper shillings, as it is just a way of going into debt. The easy faction barely prevails, and the soldiers are paid. This has an unexpected benefit. The colony had been starved for cash, and people had to revert to barter. Suddenly this efficient new paper money is introduced, and the economy perks up dramatically. (really happened) 4) With the easy faction riding high and the tight faction silenced, they do something crazy and print another 80s of paper and give it away to people in the street (didn’t really happen). This reduces net worth to 0, but surprisingly causes no inflation, because the colony has taxes receivable of 100 oz as backing for 100s of paper, The shillings are adequately backed (barely) so they hold their value. But if the colony did something like that again, then the quantity of paper money would outrun the colony’s assets and inflation would happen. One more thing: assuming the colony is still cash-starved, the additional 80s of paper money will be stimulative, just like the 20s of paper was. 5) Farmers ask the governor to print up 200s of paper and lend it to them, offering their land as (adequate) collateral. Surprisingly, this causes no inflation, since even though there iis 3x as much money, there is also 3x as much backing. Might even be stimulative, assuming people are still cash-starved, and the extra cash relieves them of having to barter. 6) The governor prints another 25s of paper and buys 25 oz. of silver. This allows him to maintain convertibility of the paper shillings into silver, but nobody really cares, since 1 shillings was worth 1 oz from the get-go. Incidentally, most of my sources say that colonies rarely if ever paid out silver for their paper, because they rarely had any silver. 7) The governor pays out 25 oz in exchange for 25s of paper. He can no longer maintain silver convertibility. Nobody cares. 8) Some farmers pay off part of their loan. They pay the governor is paper shillings, and the governor retires (burns) the paper shillings he received. 9) People pay 12s of taxes. The paper shillings are again retired. These retirements regularly caused cash starvation, which was a prolific source of argument among the tight and easy factions.
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Post by Antti Jokinen on Nov 1, 2017 6:16:18 GMT
Thanks, Mike! Great explanation.
I was secretly hoping you would chip in, as I knew I'm not far apart from you in my thinking, but that still there's some difference (I think). (Not that I'm that far from Wray either.)
I'll get back a bit later, once I've read your paper (I'm quite sure I've read it before, but it's well worth a second read).
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Post by JP (admin) on Nov 1, 2017 14:17:58 GMT
Welcome, Mike! This stuff is right up your alley.
Antti, it sounds like so-called colonial currency were more like bonds, as you say. I've only just now had the chance to read through Farley Grubb's paper. In Virginia's case, notes were only redeemable in gold after a few years had passed, and they paid interest in the interim. I had mistakenly assumed they were payable on demand.
Grubb never goes into the coupon rate, which is too bad since that seems to me to be an important piece of data. If the notes paid a coupon rate of, say, 6%, and market interest rates fell to 5%, then the notes would be worth more than par, or their face value. At which point no one would use them to pay taxes (presumably notes could only be used to discharge their face value in taxes), since their economic value as an investment exceeded their value as a medium for discharging taxes. If interest rates rose to 7%, however, then the implied market value of notes would fall below face value. However, since a significant quantity of notes could be used to pay taxes at their face value each year, the actual market price would stay pretty close to par--if it didn't, arbitrageurs would buy notes up on the cheap and use them to pay taxes. Unfortunately Grubb never gets into this.
Mind you, this doesn't have anything to do with the points you bought up in your first comment. Just wandering.
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Post by Mike Sproul on Nov 1, 2017 14:36:35 GMT
I remember reading that some of the earliest issues of colonial paper money bore interest, but the practice was soon halted, and subsequent issues bore no interest.
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Post by Antti Jokinen on Nov 1, 2017 19:21:46 GMT
In Virginia's case, notes were only redeemable in gold after a few years had passed, and they paid interest in the interim. I had mistakenly assumed they were payable on demand. I don't blame you. I wasn't sure about that either when I had read Wray's post -- his wording was ambiguous, if I remember correctly. Well observed! I hadn't thought that far. Regarding Grubb's Table 2, I think I read somewhere that Acts/emissions #2, #3 and #4, issued in the spring of 1756, paid 5 % interest and were due in 1760. As Grubb explained, these notes were redeemed already in April 1757 with a portion of Act #6 notes, which -- again, something I read elsewhere -- bore no interest at all, and were due only in 1765. This was a big win for the "easy faction", as Mike calls it. As you say, would be interesting to have some kind of idea of other interest rates at the time. Mike, I assume whether notes bore interest was colony-specific? I understood that Virginia was one of the last ones to issue notes, decades after some other colonies, and still the first notes in Virginia bore interest. Or could it be that the early issues bore interest because they had found out that it helped with the adoption of the notes? Once people got used to the notes, and saw them more and more as money substitutes, paying interest wasn't anymore necessary.
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Post by Antti Jokinen on Nov 1, 2017 20:58:31 GMT
OK, here comes the example I promised.
I look at the phenomena from a different angle when compared to Mike's backing theory or Wray's description of what is going on. I don't necessarily disagree with Mike or Wray, but I believe we can do even better, and eventually get everyone on board (this debate has been going on for centuries?).
I focus more on the real side, and less on money, but I don't abstract from the accounting. It's all there.
I view the government ideally as a representative of the people (this fits very well with the colonial governments; less well with despotic governments). If it on paper owns something, it's the people as a group, the society, who really own that something. And the same goes for owing. Instead of government debt, or IOUs, I prefer to talk about public debt.
That's hopefully enough for background, for now.
Let's consider the following situation and different options for achieving more or less the same outcome:
The government wants to buy 100 horses for the army. It finds a horse trader who offers to sell 100 horses at £50 each, £5,000 total. This is the best deal the government can find. How does the government get the horses?
1. The government could outright confiscate the horses.
Taxation is confiscation (not necessarily in any negative way). But people should share the burden in a way considered fair by most. Like 1000 people giving 1/10 of a horse each. Taking all 100 horses from one trader would probably not be fair.
2. The government could give the trader goods worth £5,000 in return for the horses.
Where did it get the goods? From the people, through taxes and other duties -- or as donations, but most of them it has no doubt confiscated. The goods could be tobacco or specie coin, say Spanish silver dollars (I assume these coins trade at their bullion value; that’s why I call them goods).
This would be the typical case imagined by a monetarist, where taxation precedes government spending. This was also how it worked in Virginia until 1755, I think. But then came some unanticipated, urgent needs, just when the Treasury’s coffers were empty. Which takes us to the next option:
3. The government could promise to give the trader £5,250 worth of tobacco and silver one year hence.
As a record of its promise, it would give the trader a non-negotiable note with £5,000 face value, bearing 5 % interest (or £5,250 face value bearing no interest?) and maturing in 12 months. Then it would proceed to impose a £5,250 tax on the population, payable within, say, 10 months.
Note how the trader got nothing from the government at the time of the trade. No goods, no money. Well, he got a promise of goods in the future, so it’s wrong to say he got nothing, isn’t it? But there are empty promises (which by definition are ‘nothing’), and we cannot tell an empty promise from a non-empty one before it’s time for payment, so… Let me put it this way: The trader got nothing, but there is a public acknowledgement, in the form a note, that he should get something later.
Again, the goods the horse trader receives will come from the people (they always do), via the government. Could the people give the trader the goods directly?
4. The government could give the trader one thousand negotiable notes, each with £5 face value, the notes being redeemable in tobacco and silver at the Treasury, in 12 months’ time.
The government would then impose a £5,000 tax on the population, payable within 10 months. The population conveniently consists of 1000 taxpayers, each liable to deliver $5 worth of tobacco or silver to the Treasury -- but now there’s an alternative.
A taxpayer, having sold goods and received a £5 treasury note originating from the horse trader, could walk into the Treasury and, by handing over the note, prove that he has already delivered the £5 worth of goods he owed as taxes. Directly or indirectly, he has given the goods to the trader (same outcome as in #2 and #3, with slightly different timing and a much wider variety of goods directly available to the trader). So the taxpayer paid his taxes by giving up goods, and the note was there only to prove and record this repayment of public debt (the people owed goods to the trader).
Taxes are paid in goods, not in treasury notes. The notes are just a recordkeeping device.
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Post by Antti Jokinen on Nov 2, 2017 7:48:33 GMT
A taxpayer, having sold goods and received a £5 treasury note originating from the horse trader, could walk into the Treasury and, by handing over the note, prove that he has already delivered the £5 worth of goods he owed as taxes. Directly or indirectly, he has given the goods to the trader (same outcome as in #2 and #3, with slightly different timing and a much wider variety of goods directly available to the trader). So the taxpayer paid his taxes by giving up goods, and the note was there only to prove and record this repayment of public debt (the people owed goods to the trader). Of course, the horse trader would still have the option to redeem (some of) the notes in coin himself at the Treasury. Perhaps he didn't have time to buy goods from others for the full amount. Or perhaps not all sellers wanted to accept the notes (here I assume they weren't legal tender from the get-go). If the trader did get rid of all his notes before the taxes came due, there would no doubt be someone who had sold goods worth more than £5 to the trader (or to anyone) and acquired notes worth more than £5. As I explained earlier, some people would pay their taxes by handing over coins * to the Treasury, and these coins belong to the horse trader, as in options #2 and #3, or to anyone holding the remaining notes (the amount of which will match the sinking fund 1-to-1). Note that it is not only so that someone would choose to pay his taxes by handing over coins to the Treasury, but some would also have to do so because they couldn't get their hands on a £5 note (due to 'spatial separation' or someone else 'hoarding' the notes). Conclusion: The acceptance of notes in lieu of tax payments (in coin/tobacco) at the Treasury is not any "bell & whistle" as suggested by JP. Likewise, redeemability in coin is not something that is needed to boost the acceptance of the notes, as Wray suggests. The logic of the recordkeeping system demands both these features.* One could also pay his taxes in tobacco/tobacco notes, which the Treasury would sell for coin. I've understood this is how it worked in Virginia. The 'tobacco notes' were warehouse receipts, backed 100 % by tobacco.
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Post by oliver on Nov 2, 2017 12:01:06 GMT
Thanks Antti, Ifinally understand what you're getting at, I think.
Let me postulate a 5. and 6. to your above.
5. The government could give the trader one thousand negotiable notes, each with £5 face value, the notes are explicitly NOT redeemable in tobacco and silver at the Treasury at any time.
The rest of the procedure is the same as in your No.4 but the nature of government's obligation towards its citizens has change. I say it has become more like that of a modern central bank, namely to ensure some type of mix of full employment and stabilty in value of the currency.
6. The same procedure as in 4 & 5 is launched, this time not by government but by a private bank and the tax obligation is replaced by a legal obligation to repay debt (produce proof to the bank that real debt has been payed).
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Post by JP (admin) on Nov 2, 2017 16:15:33 GMT
Conclusion: The acceptance of notes in lieu of tax payments (in coin/tobacco) at the Treasury is not any "bell & whistle" as suggested by JP. Likewise, redeemability in coin is not something that is needed to boost the acceptance of the notes, as Wray suggests. The logic of the recordkeeping system demands both these features.You're arguing a theoretical point and I'm making a historical point. People in the 1700s would have been uncomfortable buying bonds that were not redeemable in coin after a few years. The first British consols, or perpetual bonds, were not issued until the 1750s, for instance--and these were issued by a major world power, not a rinky dink state government. So while redeemability-in-gold after a few years would have been sufficient to gain Virginian's approval, a bond that inherited all its value from tax-receivability would have been seen as quite bizarre, even if it was theoretically sound (as the 1861 demand notes example illustrate). A bond issue that was redeemable several years hence would have gained credibility by having tax receivability tacked on as a bonus. That's why I say tax receivability was a bell and whistle, or a sweetener. And I think that's where Wray is coming from too: "I'd guess that since it was experimenting with paper notes, it was uncertain of acceptability based solely on taxes."
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