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Post by JP (admin) on Nov 15, 2017 5:55:37 GMT
Antti, I must be dense (or tired) but I don't know where you're going with your last comment.
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Post by Antti Jokinen on Nov 15, 2017 12:41:45 GMT
OK, maybe I have misunderstood you.
I didn't understand why you think we could call the receipt (of the delivery of that which was owed, sofa or other goods) an IOU of the entity which keeps records of debts. It doesn't have the characteristics of an IOU. There's a one-sided debt from me to Ikea, and then there's recordkeeping related to that debt. No mutual debts.
Of course a recordkeeper is liable to write off a debt when the goods in question are delivered. But that liability doesn't create a situation where there are mutual debts that cancel each other, like there would be if I owed you a horse and you owed me a horse.
Have I misunderstood you?
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Post by JP (admin) on Nov 15, 2017 19:13:50 GMT
I'm not really sure where we differ--I feel like I've lost track of the argument.
Going with your original example (you lost me on the Ikea one), say I pay my $50 in taxes to the horse trader. He tells me that later in the day he'll send the government a coded message via smoke signals (this is the 1700s after all) ordering it to erase the debt they have on their books.
If there's a storm and the smoke signal won't be able to go out for several days, he may instead offer to give me a $50 note which I myself can present to the government ordering it to erase the debt.
The $50 note does exactly what the smoke signal does--it submits an order to the government. If the note is an order, we can flip this around and say that it represents an obligation that the government has committed to meet when presented with the note. Likewise, we can say that the government has committed to act on the horse trader's coded smoke signals.
This commitment gives the notes their value. The last point is key, since without a genuine commitment, notes will trade for $0. But we agree on that since you said: "I can very well agree that there was some kind of contract embedded into the note, and that this contract gave the note real value." As I said, I'm not sure where we disagree.
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Post by Antti Jokinen on Nov 15, 2017 19:48:59 GMT
Correct, JP. The note is worth £5 to its holder, because the government takes the note as a proof that the holder has paid his taxes by delivering £5 worth of goods to others (directly or indirectly to the horse trader). If he doesn't have the note, he cannot prove he has delivered goods, and his taxes remain unpaid -- he still has to give up goods worth £5. I think we disagreed on what to call the note. You seemed to side with Wray, who calls it a government IOU. I side with Lonergan (whom I otherwise don't agree with) in that 'IOU' is a badly misleading label for the note. I argued that there are no mutual debts between the government and the taxpayer, as Wray suggests. I'm not saying one cannot make sense of the system thinking that it is like Wray says it is. I'm just saying that everything makes even more sense from the viewpoint I'm offering -- with no misleading language. The government acts much like a LETS operator in this case, and I think we agreed that a LETS operator doesn't owe, nor is owed to. It records goods transactions, debts and credits arising from those. If all this was done electronically, we could see the government first credit the horse trader's account and debit the Public General Account, both with £5,000. Then, when it imposes taxes, it would credit the PGA with £5,000 and debit 1000 taxpayers' accounts, each with £5. We could imagine a £5 debit balance on a taxpayer's account, and this taxpayer would return his balance to zero by selling £5 worth of goods to the horse trader. Once every taxpayer had done this, the horse trader's balance would have returned to zero, too. The LETS operator would have similarly committed to update the records when it receives an electronic signal telling it that Taxpayer A has delivered goods worth £5 to the Horse Trader (credit Taxpayer A's account, debit Horse Trader's account). The LETS operator would have committed to write off Taxpayer A's debt. Yet, you wouldn't call anything here a LETS operator IOU or debt, would you?
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Post by oliver on Nov 16, 2017 11:57:05 GMT
The $50 note does exactly what the smoke signal does--it submits an order to the government. If the note is an order, we can flip this around and say that it represents an obligation that the government has committed to meet when presented with the note. Likewise, we can say that the government has committed to act on the horse trader's coded smoke signals. This commitment gives the notes their value. The last point is key, since without a genuine commitment, notes will trade for $0. But we agree on that since you said: "I can very well agree that there was some kind of contract embedded into the note, and that this contract gave the note real value." As I said, I'm not sure where we disagree. How can a $50 note trade at $0? If there is only one medium to choose from (or one institution that issues all the media), then $50 will always be $50, no?
One question is, who defines what $50 is worth in real goods? The other question is, how does an institution get its 'media' accepted as transferable receipts in the first place? The latter is a binary issue: is it money or not? What is it that enables banks to turn bilateral IOUs into multilateral IOUs? The prior is the question: what is it that gives IOUs (whether bilateral or multilateral) their value in the first place?
Which of the two points are you addressing when you say:
? Which value are you taking about?
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Post by JP (admin) on Nov 16, 2017 17:00:53 GMT
"The LETS operator would have committed to write off Taxpayer A's debt. Yet, you wouldn't call anything here a LETS operator IOU or debt, would you?"
You're moving too fast for me by bringing LETS into the argument.
It sounds like your saying that (using our original example) the horse trader's smoke signal isn't a debt, at least not in the way that the original tax obligation was a debt. And so we should use some other word to describe it. And therefore the note--which is like the smoke signal--is not a debt.
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Post by JP (admin) on Nov 16, 2017 17:08:52 GMT
In the case of Virginia, people set prices in terms of coin. The notes were a promise of future coin, so they traded at a discount to their face value. If the notes weren't credible claims on the government for discharging a tax debt, they'd be worth zero.
I suppose there would be a market clearing price for things in terms of gold.
Why do they trade at a positive price instead of 0?
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Post by oliver on Nov 16, 2017 18:09:13 GMT
In the case of Virginia, people set prices in terms of coin. The notes were a promise of future coin, so they traded at a discount to their face value. If the notes weren't credible claims on the government for discharging a tax debt, they'd be worth zero. I suppose there would be a market clearing price for things in terms of gold. Why do they trade at a positive price instead of 0? Ok, sorry, my head is still in the other thread. The answer is obvious if there is some 'outside' system one can reference. Be it coin or any other promise of convertibility. I don't mean to hijack this thread, but what would your answer be if the banking system in question, say our fictional one bank world, or any modern, non-convertible 'fiat' currency, offered no such 'thing' to convert into? I say you end with having to answer those two questions separately. Because the bilateral IOUs that underpin the currency are already valued positively, because the promises they contain are considered credible by the counter party. In the case of money, the counter party just becomes 'everyone using the currency', as opposed to a specific person.
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Post by JP (admin) on Nov 17, 2017 17:04:48 GMT
Then you'd just get inflation. The entire price level takes on the brunt of adjustment. And as you say, a $50 would be worth $50. At some point people will just throw the money into the gutter, at which a $50 bill won't buy anything--it is worth $0.
Apologies. When I said: "Why do they trade at a positive price instead of 0?" I wasn't asking a question, I was just trying to answer your question "Which value are you taking about?" So let me put it differently, when I said "This commitment gives the notes their value", what I meant was that the commitment is what gives IOUs their value in the first place. It is very possible that even after IOUs have been provided with an initial value thanks to the commitment, they prove to be illiquid, i.e. not very money-like.
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Post by oliver on Nov 18, 2017 10:30:47 GMT
Then you'd just get inflation. The entire price level takes on the brunt of adjustment. And as you say, a $50 would be worth $50. At some point people will just throw the money into the gutter, at which a $50 bill won't buy anything--it is worth $0. I would say it's still worth $50 because that's what it has written on it. It's just that $50 itself are worthless because they won't buy you any real goods. So I suppose I would say $50 are worth 0 apples, or 0 goods, but $50 are always worth $50. But yes, in that case, no one would use them. What I was actually trying to say though is that if you walk into any modern central bank and hand over your CB or bank note, you will not receive anything in return from that central bank. No piece of gold, no foreign currency at any guaranteed price (OK, there are exceptions to that one) and certainly no frilly basket with fresh consumer goods. And still, there is no inflation. If, on the other hand, you went to the market or Amazon or the stock exchange and presented your $50 note and could not purchase anything, then the notes would indeed be worthless (in terms of goods). In all, I think we all agree on the puzzle pieces that it takes to create moneyness. There is something you might call liquidity, which Antti might call multilateral acceptance, which is what distinguishes money-like instruments from other, bilateral financial instruments (types of record keeping). And then there is the provision that some entity must be willing to give up goods in return for such a credit (note). I think what we disagree on, is the institutional setup and a separation of roles that best describe our current monetary system. We have the role of the record keeper that is analogous to a LETS operator. This is what Antti and I claim is an accurate description of what the service the banking system provides us with nowadays. And then we have the role of participants in delayed barter trades. These may be individuals, firms or governments. There are debtors and creditors in each trade. The credibility of the debtors' promises is what gives the notes (records) their value. Historically, one will have seen these roles united within one and the same institution, say a colonial government. So you have the role of record keeper and borrower on one side, and individual or corporate creditors on the other side. But the mere fact that banks nowadays do not owe their 'creditors' any goods begs the question of whether it is still accurate to call them 'creditors' of the banking system. We claim that those roles, creditors and debtors, have successfully been outsourced to the clients (that is, those people behind entries on both sides of bank balance sheets) of the incorporated banking system. Antti will now probably intervene and claim that it has always been so, the implied evolution is only apparent, but I think as long as the roles of the individuals involved are not legally separated, one can argue both views. Maybe my background in project management is showing here. We see similar phenomena in the separation of roles within a building process. In ancient times, and still in many simple projects, you will find the roles of owner, client, operator, architect, engineer, builder etc. performed by one and the same person. The division between the client, the architect and the builder are the oldest divisions of labour. Other, more specific roles have evolved over time. And the larger the project, the more specialised they tend to be. Yes, but my personal IOU to you is still worth $50 in goods, even if no one else recognises it. Otherwise you wouldn't accept it in the first place.
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Post by Antti Jokinen on Nov 21, 2017 18:58:41 GMT
It sounds like your saying that (using our original example) the horse trader's smoke signal isn't a debt, at least not in the way that the original tax obligation was a debt. And so we should use some other word to describe it. And therefore the note--which is like the smoke signal--is not a debt. Correct. Let me now try to bring in the LETS operator, hopefully in a less ambiguous way. Imagine we give the LETS operator the power to sue a debtor who is unwilling to provide goods to the participants of the LETS system, so that a court can order the debtor to give up goods to a participant of the debtor's, and not the LETS operator's, choosing. The LETS operator enforces debts. As far as I know, we have earlier agreed that the LETS operator doesn't owe the participants, nor do the participants owe the operator (the operator might be liable to keep the system stable, etc, but there is no $10 debt to a holder of a $10 credit balance). Is this correct? Do you agree that this LETS operator has a role comparable to the colonial government in our earlier example? I argue it has, and here's why: The government ordered taxpayers to deliver goods to a participant in the system, the horse trader. The taxpayers pay their taxes by delivering goods to the horse trader, as we seemed to agree. In this particular instance *, the government's role is to keep records, and write off a taxpayer's debt when it receives the smoke signal -- just like a LETS operator writes off a participant's debt when it receives a "smoke signal" that says debtor A has delivered goods of certain price to another participant in the system. Do you think the "smoke signal", or the message, going to the LETS operator is a liability/debt to the LETS operator? * It also imposes a tax on taxpayers; makes them debtors, we could say. But the horse trader is the creditor in this setting -- not the government.
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Post by Antti Jokinen on Nov 23, 2017 12:33:48 GMT
We claim that those roles, creditors and debtors, have successfully been outsourced to the clients (that is, those people behind entries on both sides of bank balance sheets) of the incorporated banking system. Antti will now probably intervene and claim that it has always been so, the implied evolution is only apparent, but I think as long as the roles of the individuals involved are not legally separated, one can argue both views. Oliver, I think you put things very well in your comment. I feel you and I are more aligned than ever before, also when it comes to the language used. I'd like to discuss the quoted part above. This is not really an intervention -- more like thinking out loud ;-) Take any company. Yes, it's a bunch of contracts, and so on, but if it is any specific group of people, I'd say it's the people who represent it: the managers, maybe the board of directors. These have in their possession / under their control real assets they have received from other people. They are liable to return the property, plant & equipment to the people on the RHS of the balance sheet should the company be wound up. They have a liability to give up goods (and also a liability to look after goods belonging to someone else). It is these people who prepare the financial statements, and they do it because they are accountable to other people. The financial statements are the management's report to various stakeholders, and the purpose of this report is to show how well the management is taking care of the business it doesn't own. A government is much like a company, with all citizens on the RHS of its balance sheet *. The government officials, much like a company's management, don't own the real assets under their control. The people communally do, but no person can demand "his assets" back, just like no individual shareholder without controlling rights can demand "his assets" back from the company. They are not his assets. The real assets are best understood as the government's liabilities, but no one's assets in particular (I won't mention "red money" here... oh, I did). In the colonies, the Treasury had specie in its possession. It was a government (officials') liability, as the government was liable to give it to noteholders (in the case of the "sinking fund"). Other real assets the government was liable to take care of on behalf of its citizens. There existed no specific rightful owner --think of real people now, not legal entities-- of these assets, just someone to whom they represented a liability. Noteholders could also receive goods from taxpayers, who had a liability recorded in the government ledger (taxes due). This is much like a bank today, isn't it? The bank (management) has under its control real assets, which the management is liable to give up in the case of a wind-up. But most liability accounts (debit balances) in its ledger belong to someone else: mortgagors and other debtors. These balances are comparable to taxpayers' tax obligations. In these cases it is not the government officials, nor the bank management, who are liable to give up goods, but the people whose name is written on, or above, the account. That's why you are the accountholder in the case of your mortgage account, while the bank itself is the accountholder in the case of property, plant & equipment. Conclusion: It has been like this from the start of the government and the start of the company. Some evolution there has been, but I'd say it's more about evolution in trust between people than evolution in the logic of the system. * I don't really like thinking about the government in terms of a balance sheet, but we can take that another day.
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Post by Antti Jokinen on Nov 23, 2017 13:45:38 GMT
All this ties quite neatly to the system in a so-called 'gift economy', which goes back thousands and thousands of years. There, too, people who had given more than they had taken were/are holding (mental) claims to goods, to be received from others, without a particular debtor they could walk to. Some of the people, having taken more than they had given, were liable to deliver goods to others, without there being a particular creditor. "Green money" (credits) and "red money" (debts) are as old as civilization.
The system is based on both free will and coercion. If people know their debts will be enforced should they not honor them, they will give up goods from their free will, at their convenience. (Of course someone might argue it's all based on coercion and any free will is an illusion.)
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Post by oliver on Nov 24, 2017 14:09:39 GMT
I was trying not to essentialize the 'building blocks' of the system when I said that there were different ways to argue the point. A dose of scepticism or post-modernism seems prudent in anything to do with the social realm.
I also wasn't strictly on topic with my comment. As I said, my head is still more in the other thread. But I'll try and summarise as follows. You say:
All this ties quite neatly to the system in a so-called 'gift economy', which goes back thousands and thousands of years. There, too, people who had given more than they had taken were/are holding (mental) claims to goods, to be received from others, without a particular debtor they could walk to. Some of the people, having taken more than they had given, were liable to deliver goods to others, without there being a particular creditor. "Green money" (credits) and "red money" (debts) are as old as civilization. The system is based on both free will and coercion. If people know their debts will be enforced should they not honor them, they will give up goods from their free will, at their convenience. (Of course someone might argue it's all based on coercion and any free will is an illusion.)
Step 1, the gift economy: In such a system we have no bank, no companies, no government. We have individuals and some common morality which might be backed up by various degrees of persuasion (right down to brute force).
(...intermediate steps)
Step 2, the colonial government: The functions of bank & debtor are now performed by an abstract agent that is, whether wilingly by divine intervention of just brute force, representative of its subjects / citizens.
Step 3: what are banks for? The role of record keeper is outsourced to an independent institution (bank).
Step 4, whose liability is it anyway? The function of handing over goods / specie to creditors on demand can be performed by a) the bank itself (bank notes are a promise to pay out gold), b) the government (bank notes promise to pay out government money / specie), c) bank notes promis to pay out governemnent notes ('fiat'). Government merely 'organises' debt repayment by individuals via its control of tax receipts. Importantly, in all three cases the formal act of hoarding and handing over goods / stuff can be traced back to individuals behind the balance sheets of the respective institutions. The argument is that the label 'liability' should not be used to describe the act of handling other people's goods.
This thread was about 4, especially the last part. My comments above were more generally about 3 and how that relates to 4.
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Post by Antti Jokinen on Nov 25, 2017 20:00:44 GMT
Step 2, the colonial government: The functions of bank & debtor are now performed by an abstract agent that is, whether wilingly by divine intervention of just brute force, representative of its subjects / citizens.
Step 3: what are banks for? The role of record keeper is outsourced to an independent institution (bank).
Step 4, whose liability is it anyway? The function of handing over goods / specie to creditors on demand can be performed by a) the bank itself (bank notes are a promise to pay out gold), b) the government (bank notes promise to pay out government money / specie), c) bank notes promis to pay out governemnent notes ('fiat'). Government merely 'organises' debt repayment by individuals via its control of tax receipts. Importantly, in all three cases the formal act of hoarding and handing over goods / stuff can be traced back to individuals behind the balance sheets of the respective institutions. The argument is that the label 'liability' should not be used to describe the act of handling other people's goods.
OK, let's focus on these. I'll start with 2, and leave 3 & 4 for tomorrow. When you say the government is a debtor, what do you mean? I'm saying that the government is a debtor only to the extent it receives as tax payments goods (specie, grain) it has promised to give to noteholders later. Receiving the horses from the horse trader (generally: a government supplier) doesn't make the government a debtor. It makes the public, the people as a whole, a debtor. This public debt is paid mainly by taxpayers who give up goods, either directly or indirectly to the horse trader, or to the government. If the latter, then public debt is paid but a government debt is incurred as the taxpayer hands over specie/grain to the government, but only if the government has promised to give this specie/grain to noteholders. If, instead, the government collects all taxes in specie (no note system), then it will hold specie while there will be no nominal claims against the government / no credit balances in its ledger. This makes it different from a company. And this is the reason why I don't like to think the government has a balance sheet. The government is like a big family, and a family doesn't really have a balance sheet. We can think of net worth and take it to be equity, but there are no shares, no contracts. A balance sheet was created for the purposes of a company, not for the purposes of a family or a government. This doesn't mean it's wrong to think in terms of a balance sheet when one thinks about a family, but one should recognize the difference. I don't feel I'm being that clear, so please let me know if there is anything you don't follow.
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