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Post by Mike Sproul on Nov 2, 2017 17:21:09 GMT
"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."
I'd argue against that, for two reasons:
1) Most colonies never did have any significant amount of silver and never did offer silver convertibility, yet their notes served well as money. 2) Every colonist knows that the tax man will demand 5 shillings in coin from him once a year, and the governor announces that the tax man will accept 5 paper shillings instead. Seems to me that is enough for the paper shillings to be worth a shilling coin. The only question is whether the tax man really has the ability to take that 5 shillings from you. A tax man that loses the ability to take away 5 shillings from you is like a paper-money-ussuing banker that loses the ability to pay out 5 shillings in coin to you. In both cases the paper shillings would lose some or all of their value.
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Post by Antti Jokinen on Nov 2, 2017 19:58:15 GMT
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. Let's say that tax receivability wasn't part of the deal. On the tax day, I would walk into the Treasury with a £5 note and silver coins worth £5. I would hand over the coins to the treasurer-taxman. Then I'd hand over the note and ask to get back my coins. The treasurer would refuse, telling me that I'm welcome to pick up my coins in, say, two months' or two years' time. He tells me I shouldn't worry, because they will keep the coins in a safe place, without even touching them (some governments did invest the sinking fund in other safe instruments, while others left the coins untouched). The next day in The Virginia Gazette there would be an anonymous comment about the stupid tax authorities who demand that I hand over my coins to them for safekeeping. So it seems to me that the tax authorities do gain credibility by stating that it is enough if I show up with my notes, so that I can leave my coins in the safe at home. That's why I talk about the logic of the system. It seems you misunderstood me (the fault probably lies with me): I didn't question the importance of having the notes be redeemable in coin. I questioned the suggestion that the redeemability was something that was done only, or mainly, for practical reasons. I argue that whatever made the officials end up with both redeemability and acceptance at the tax office, anything less would have been illogical. I feel my theoretical point fits quite well with the history, too. But arguing about monetary history is problematic, as our interpretation is always colored by the lens, or theory, through which we are viewing the history. I think it looks like history doesn't really refute my point. Perhaps it allows both of our interpretations? In my eyes both you and Wray revealed something about your respective 'lenses' when you seemed to suggest that the tax office acceptance and redeemability in coin, respectively, were somehow bonus features. The main goal of taxation in a monetary economy (without 'transfer payments') -- whether all people realize it or not -- is to get the goods to the horse trader so that he's comfortable with giving up the horses. Keeping that goal in mind, removing either the tax office acceptance of notes or redeemability in coin would lead to inefficiency in the economy under study. How did you find my theoretical point? Do you agree that taxes are not paid in notes but in goods (incl. specie)? You might see that this is directly linked to the Lonergan-Wray disagreement I've mentioned earlier (somewhere in this thread). I escape Lonergan's accusation of 'semantic sleight-of-hand' as I don't talk about government IOUs being redeem at the tax office, yet I show that Wray is ultimately right about the notes having something to do with public debt.
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Post by Antti Jokinen on Nov 2, 2017 20:33:53 GMT
1) Most colonies never did have any significant amount of silver and never did offer silver convertibility, yet their notes served well as money. Interesting. Did they use "ear-marked" notes, so that they tried to "sink" a certain issue of notes? Was there a sinking fund connected to these notes, and what did it consist of? I didn't mean that it has to be silver which the notes are convertible into. It could be basically any good -- and even bills of exchange drawn on London. But in this particular case of Virginia, where taxes were traditionally collected in coins, or tobacco sold for coins by the Treasury, it was natural that the notes are convertible into coins.
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Post by Mike Sproul on Nov 2, 2017 22:20:06 GMT
www.csun.edu/~hceco008/realbills.htmThe link above goes to a list of readings that includes "Colonial Currency and Finance", and leads to Eric Newman's brief but thorough explanation of colonial paper money. Note especially p. 15, where he discusses interest and redemption of the paper notes. "Do you agree that taxes are not paid in notes but in goods (incl. specie)?" Taxes (and loan repayments to the colony) would normally have been paid in the paper notes themselves. This is why complaints of "monetary stringency" were so widespread. People would pay their 5 shilling of taxes with 5 paper shillings, and the colony would burn the shillings as they came in. If the money supply had previously been about the right amount for people to conveniently conduct their business, then the burning of paper shillings would have created a tight money condition (which I called 'cash starvation' before) , which would force some to revert to barter, which would slow economic activity significantly.
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Post by JP (admin) on Nov 3, 2017 14:17:53 GMT
I just skimmed through another paper by Grubb: lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2015/2015wp07.pdfIt provides a much more general take on American colonial money. Interest payments were rare, but it appears that some did incorporate this feature. Only one colony ever used a sinking fund--New Hampshire. And unless they paid interest, notes traded at a discount to face value, that discount disappearing as redemption neared. So they were very much like bills of exchange, a private form of debt that circulated as money. Antti, you'll be happy to see that the paper supports the point you made to Wray: Here is Grubb: He goes on to say that: There is something missing here, though. He doesn't say if subjects who have excess paper money can cash-in their balances for grain/specie after each year's tax redemption period is over, or only at the end of the bill's life. This would have huge implications for the market value of those bills. My guess is that the answer is that redemption into specie/wheat could only occur at the end of the bill's life.
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Post by Mike Sproul on Nov 3, 2017 16:55:32 GMT
My earlier example didn't mention notes trading at a discount, but of course as redemption (in taxes, loan repayments, or goods) was delayed, the notes would trade at a discount. Usually a delay in redemption resulted from the fact that the colony was currently living beyond its means, so the discount would be partly a result of delayed redemption, and partly a result of the colony's liabilities outrunning its assets.
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Post by Antti Jokinen on Nov 3, 2017 19:01:09 GMT
Mike, thanks for the link! I read some Newman now. Makes sense. I'll come back later regarding the question about whether payments were made in goods or notes. We're used to say that taxes were paid in notes, but I'm questioning that language, and trying to show that taxes were actually paid in goods even when a tax subject delivered a note to the taxman. I'll elaborate this later.
JP, that Grubb paper seems to be a great find -- and not only because it supports the point I tried to make to Wray :-) Grubb's observation that this is monetary experimentation, trial & error, is an important one. It seems that with the theoretical/logical point I made to Wray, I anticipated the practical problems faced by lawmakers, apparent in your quotes from Grubb. Or is this wishful thinking on my part? I think Wray was rather blind to my point because he focuses on his "taxes drive money" thesis*. He might even see convertibility into specie as something that should be downplayed, because the view that money is a claim on specie is in many ways a rival of his "taxes drive money" description. That's my interpretation anyway.
I think you must be right when you guess that the notes were only redeemable in grain/tobacco/specie at the Treasury at the end of the their life. Logically it has to be so, I dare say. If there was an experiment where it wasn't so, I'm sure they would have in the end concluded that they cannot control who gets to present their notes for redemption and who doesn't, and so the system would not have been fair. They had to wait until they could promise to redeem all the notes -- that is, until taxation was completed. (A "fractional reserve" system would have required that people were not that interested in redeeming their notes, right? But "fractional reserve" is definitely an argument you could use against what I say here.)
* Edit: Here, too, I think Wray goes way too far in his attempt to prove his point:
As we have already learnt, the authorities allowed tax payments in various commodities, like grain and tobacco. Further, taxpayers typically acquired the notes from their fellow citizens by selling them commodities, or goods (incl. services) they could have exchanged for the commodities accepted at the tax office. So I find it rather self-serving from Wray to suggest that notes needed to be issued so that people could pay their taxes. Had Wray suggested that the note system made it easier and more efficient to achieve the goal of taxation, then I would agree.
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Post by Antti Jokinen on Nov 4, 2017 10:15:31 GMT
Grubb says (p. 15 in the paper mentioned by JP):
I want to make it clear that this didn't necessarily mean that notes in circulation would be reduced by an equal amount per year. Remember that the government didn't know whether it would receive notes or specie/commodities from individual taxpayers. This meant that the amount of notes in circulation didn't equal the budget deficit. It equaled the budget deficit + funds belonging to the note-holders kept at the Treasury. Once taxation was complete, so that any outstanding amount of notes equaled funds at the Treasury, the budget deficit was closed and there was strictly speaking no public debt (defined as 'cumulative budget deficits'; here I of course assume that there were no other emissions outstanding*). Instead, there was Treasury debt to the note-holders.
* This doesn't mean that I don't agree with Mike on negative consequences of 'cash starvation'. It seems historical facts, too, support that argument. It was beneficial to have notes in circulation at all times.
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Post by Antti Jokinen on Nov 5, 2017 12:37:38 GMT
OK, here comes the first part of a challenge to all those who say that taxes were often paid in treasury notes, or bills of credit, in colonial America. I'm going to question the language you use, which is more or less the same thing as questioning the theory you use to make sense of phenomena related to colonial "paper money". I said earlier: This is, of course, the goal of taxation in any economy (again, assuming no "transfer payments"). But in a monetary economy this goal might become blurred. Money is not a veil, but it does make it harder to see that which is important. Here are two of the options I presented earlier for getting the goods to the horse trader: 2. The government could give the trader goods worth £5,000 in return for the horses. (It had received the goods from taxpayers before it bought the horses.) 3. The government could promise to give the trader £5,250 worth of tobacco and silver one year hence. Both options require that taxpayers take the goods to the Treasury, and the Treasury, acting as a middleman, forwards the goods to the horse trader. Can we all agree that a tax payment takes place when a taxpayer hands over goods (grain/tobacco/specie) to the Treasury?
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Post by JP (admin) on Nov 5, 2017 16:32:47 GMT
* Edit: Here, too, I think Wray goes way too far in his attempt to prove his point: As we have already learnt, the authorities allowed tax payments in various commodities, like grain and tobacco. Further, taxpayers typically acquired the notes from their fellow citizens by selling them commodities, or goods (incl. services) they could have exchanged for the commodities accepted at the tax office. So I find it rather self-serving from Wray to suggest that notes needed to be issued so that people could pay their taxes. Had Wray suggested that the note system made it easier and more efficient to achieve the goal of taxation, then I would agree. I agree. When I read Wray I am always worried that his thoughts on money are being deployed to serve an overall view or architecture, and so I always need to be on my guard, especially when it comes to his sometimes peculiar reconstructions of monetary history. Which is why I'm surprised he wasn't more amenable to your email, since it emphasizes tax receivability as the driver of the value of colonial notes, and not convertibility into specie... and tax receivabiliy is at the core of the overall architecture that MMTers have in mind.
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Post by Antti Jokinen on Nov 5, 2017 18:54:56 GMT
Well said, JP.
To be honest, I find MMT a straitjacket. I have found it nearly impossible to have a thoughtful conversation with ("low-ranking") MMTers, although I know there are exceptions. If you try to politely question any of their views, or try to make them see things from a different perspective, you just get a repeat of their mantras*.
To me it looks like Wray's straitjacket makes him unable to admit that the notes' convertibility into specie was more or less a logical necessity in colonial America. "Taxes drive money" is what the theory says, so convertibility into coin was only added so that people, unaware of MMT theory, would feel more comfortable with accepting the notes. There could be another MMT factor complicating this further: MMT doesn't say that all the notes should be "properly sunken", does it? It says that taxes will create a demand for money, but it also stresses that the government should run a cumulative deficit, perhaps even a rather big one, so that only a portion of the notes will ever be sunken.
I've learnt a lot of useful stuff reading MMT material, especially 3-4 years ago. So I do respect Wray et al. But I think they are mistaken on many important issues, and do not possess an overall theory that will, or should, become mainstream one day (this is not to say that their views on some fronts shouldn't be mainstream; they do get many things right).
(I didn't mean to create a thread for MMT bashing, though. If there are any MMTers reading this, we can discuss my critique in another thread.)
* "Taxes drive money", "private sector cannot save if the public sector doesn't run a deficit", etc. For instance, I have tried to ask them why the private sector in aggregate actually should, or must, save. Connected to this, at least some high-ranking MMTers suggest that the government just has to run a deficit because the private sector engages in net saving (their 'government deficit = net saving by the private sector' is an identity, which says nothing about how the causation runs). I've also questioned the division into public and private sector in the first place; I see public debt as a liability of the taxpayer, a member of the "private sector". And what about MBSs on the Fed balance sheet? "Mortgages drive money"?
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Post by Antti Jokinen on Nov 5, 2017 19:30:46 GMT
The challenge continues!
I assume that we all agree that in my previous example a tax payment takes place when a taxpayer hands over goods (grain/tobacco/specie) to the Treasury.
Let’s now assume the government doesn’t have any goods to give to the horse trader, but instead of following option #3, it decides to cut itself out as a middleman, and orders the taxpayers to pay directly to the horse trader at their leisure, but within the next twelve months. The trader can demand payment in specie or tobacco notes, but he is of course free to accept any other goods or services he deems to be worth £5.
How to achieve this in practice?
3a. The government might ask the trader to write down the names of all the people who during the next twelve months deliver him goods worth £5 as tax payments. After 12 months have passed, a government representative will visit the trader and ask for the list of names. He will cross-check it against the list of all 1000 taxpayers and the tax authorities will pursue any persons who haven’t yet delivered goods to the horse trader, and will make the trader whole in one way or another.
To make this simple, let's assume that all the 1000 taxpayers deliver goods worth £5 to the horse trader.
Can we all agree that a tax payment takes place when a taxpayer hands over the goods to the horse trader? Is there any other moment we could define as the moment when a tax payment takes place?
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Post by JP (admin) on Nov 6, 2017 2:23:51 GMT
Can we all agree that a tax payment takes place when a taxpayer hands over the goods to the horse trader? Is there any other moment we could define as the moment when a tax payment takes place? I suppose we can agree that taxes are paid when the horse trader gets the goods. It doesn't seem unreasonable. Why don't you just go ahead and pull the rabbit out of the hat?
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Post by Antti Jokinen on Nov 6, 2017 8:18:34 GMT
:-) Fair enough, JP.
3a. The horse trader writes down names and tax authorities cross-check his list against a list of taxpayers. They write off the tax obligations of people found on the trader's list. They will collect taxes due from anyone not on his list and forward the goods to the trader.
3b. The trader receives 1000 notes from the government. Each note bears a name of one taxpayer. When a taxpayer gives the trader goods worth £5, he receives a note bearing his name from the trader. He must take, or send, this note to the tax office to prove that he has given goods to the trader. Once he does this, the taxman writes off his tax obligation.
3c. The trader writes a receipt for £5 worth of goods received and writes down the name of the taxpayer on the receipt (non-negotiable). The tax authorities accept this as a proof of goods delivered and write off the taxpayer's tax obligation once he presents this receipt at the tax office.
3d. Same as 3c, but without name on the £5 receipt, so that the receipt might become a negotiable instrument. For instance, a taxpayer might deliver goods worth £10 to the trader and get two receipts. The trader cannot issue more than 1000 receipts.
3e. Due to a problem with counterfeiting in 3d, the government prints 1000 receipts, with anti-forgery details and "£5" printed on them, and gives them to the trader.
Question:
At which point (3b to 3e) does the taxpayer stop paying his taxes by giving goods to the trader*, and starts instead paying his taxes by handing over a receipt to the tax authorities?
* Or to someone who has given goods to the trader, or to someone who has given goods to someone who has given goods to the trader, ...., .......
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Post by JP (admin) on Nov 6, 2017 14:29:42 GMT
I think in steps 2 and 3 the payment of the tax and final settlement of the tax are atomic i.e. they occur at the same moment.
Once you get to 3a and 3b, a lag is introduced between tax payment and final settlement. While goods are passing from hand-to-hand such that a payment has been made, the actual tax has not been settled, not until the taxpayer brings the note to the tax office, or the tax collector comes to the horse trader's office and consults the trader's list.
To put it differently, I pay my landlord $1000 in rent each month. If I pay in cash, the payment and settlement are atomic. But if I pay with a cheque, although the rent payment has been made the rent won't be settled until the cheque clears. A lag has been introduced, it is non-atomic.
So to your question:
Here's what I would say... the taxpayer never stops paying his taxes by giving goods either directly to the government or to the trader. As we progress through the various scenarios you described, an uncoupling of payment and settlement has occurred. This uncoupling occurred between 3 and 3a. At that moment, the tax payment is no longer atomic. I'm not sure that anything interesting happened between 3b and 3e---each contains different details about how ultimate settlement is to proceed.
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