Debt-Free Money: A Non-Sequitur in Search of a Policy

ECONOMICS, 8 Jul 2019

L Randall Wray | New Economic Perspectives – TRANSCEND Media Service

The Cloakroom Debt Token

In discussing money, G.F. Knapp (one of the developers of the State Money Approach, adopted by Keynes and by Modern Money Theory) made a useful analogy with the cloakroom token. When you drop off your coat at the cloakroom, the attendant offers you a token, usually with an identification number. The token is evidence of the debt of the cloakroom, which owes you a coat.

Some hours later you return with the token. The attendant returns your coat. If you feel generous, you tip the attendant for the service.

By accepting the token and meeting the obligation to return your coat, the attendant has “redeemed” herself or himself. The slate is wiped clean. The debt is destroyed.

At this point the token is simply warehoused, put back on an empty coat-hanger, waiting to be reused.

When the token is in the cloakroom, it is not a debt. It is a circular piece of cardboard, perhaps enclosed in a metal ring.

Or maybe it is a square chunk of plastic.

Or a shiny brass coin.

Some cloakrooms instead use paper tickets, split into stock and stub at the time a coat is deposited. On your return to the cloakroom, the stock and stub are matched, the coat is returned to the rightful owner, and the stock and stub are thrown away.

It makes no difference what form the token takes—it is just evidence of a debt, a “coat debt” that is redeemed by return of the coat.

Note that you could pass the token to your spouse or even to a stranger, with instruction to fetch your coat from the cloakroom.

If coats were homogenous, the tokens would be valuable to anyone who might want your coat. They could become a sort of currency passing from hand-to-hand at the value of a coat debt, so Knapp’s analogy is not so far-fetched as it might first appear.

However, coats are not uniform, and the attendant cannot simply return “a coat”, but must return “your coat” in redemption for the token.

Dry cleaners also use tokens, but they make an additional promise. Not only will they return your coat, but they also will clean it. They cannot redeem their debts simply by returning your dirty coat.

Ditto the seamstress, who redeems her token debt by returning your coat with sleeves shortened.

The point here is that the token is representative of debt, with the specific obligation spelled out by custom or contract and enforced if necessary in the courts.

Money as a Token of Debt

Let us begin with the closest analogue to the cloakroom token: the tally stick. Tally sticks were commonly issued for hundreds of years in Western Europe—by Kings but also by others (my 2004 book cover shows a photo I took of tallies that were used on private estates in Agrigento, Sicily in 1905) as records of debt. The sticks were split into stock and stub, matched at the time of redemption and then destroyed.

In the case of the King’s tallies, Redemption Day was tax day when the King’s representative (the exchequer) arrived in the village, spread cloth on the ground, and matched stock and stub. Hallelujah, the tax was paid.

The tally stick had value because it could be used to “redeem” oneself on Redemption Day. You owed the king his taxes, and he owed you the right to deliver evidence of his debt (recorded on the stick) to pay your taxes. The sticks circulated because this debt was “homogenous”, unlike the debt redeemed by the cloakroom that took the form of your specific coat. Anyone with a debt to the King needed a tally stick (any tally stick so long as it was issued by that King) to pay taxes.

A.M. Innes explained the significance of tallies, quoted in my 2004 book:

For many centuries, how many we do not know, the principal instrument of commerce was neither the coin nor the private token, but the tally, (Lat. talea. Fr. taille. Ger. Kerbholz), a stick of squared hazel-wood, notched in a certain manner to indicate the amount of the purchase or debt. The name of the debtor and the date of the transaction were written on two opposite sides of the stick, which was then split down the middle in such a way that the notches were cut in half, and the name and date appeared on both pieces of the tally. The split was stopped by a cross-cut about an inch from the base of the stick, so that one of the pieces was shorter than the other. One piece, called the ‘stock,’ was issued to the seller or creditor, while the other, called the ‘stub’ or ‘counter-stock,’ was kept by the buyer or debtor.

Both halves were thus a complete record of the credit and debt and the debtor was protected by his stub from the fraudulent imitation of or tampering with his tally.

The labours of modern archaeologists have brought to light numbers of objects of extreme antiquity, which may with confidence be pronounced to be ancient tallies, or instruments of a precisely similar nature; so that we can hardly doubt that commerce from the most primitive times was carried on by means of credit, and not with any ‘medium of exchange.’ (See Wray, “Credit and State Theories of Money”, Edward Elgar, 2004.)

Now, what were coins? As Innes emphasizes, coins were never very important—in spite of all the ink spilled in writing about them. They are bright shiny tallies that can last a long time and still garner interest when discovered centuries after being lost and forgotten. Collectors love them. By contrast, tally sticks are burned or simply rot away; ditto papyrus or paper evidences of debts. But coins were typically a nearly insignificant part of the “money supply”, and most tax collections brought in far more hazelwood tally sticks than coins.

Economists focus on coins only because they outlasted the sovereigns that issued them and many of them contained bright shiny metal that blinds reason. If bovine droppings had been stamped, instead, they would have served perfectly well as coins but no one would be interested in them after the demise of the empires that issued them.

Coins were evidence of debt that solved the problem of counterfeiting not through splitting a notched stick but rather through the technology of stamping or, later, milling coins. High quality craftwork and then milling the edges made “fraudulent imitation” more difficult. In addition, the use of precious metals (which were more easily monopolized by the sovereign) made counterfeiting more difficult and more expensive. (I won’t go further into the history of coinage here—and all the myths about value being determined by embodied precious metal—as I already did that in my 2012 book, Modern Money Theory.)

The sovereign spent coins into circulation, then accepted them alongside tallies in tax payment. Coins circulated more freely than tally stocks because the coin by itself contained all the evidence of the crown’s debt (in the case of a tally stick one needed both the stock and the stub).

In addition to promising to take back coin token debts, the sovereign issuer could also promise to exchange them for foreign currency or for precious metal on demand. This is an additional promise added to the promise to accept the coin in payment of taxes. It is similar to the additional promise made by the dry cleaner or seamstress: not only do you get your coat back, but you also get it cleaned and stitched. In the case of the coin, the sovereign not only promises to accept in taxes, but also might promise to exchange it for gold, and might also impose a legal tender law that proclaims the coin is good for private payments, too.

Paper Money Token Debts

Paper money has been around for a long time, but became common in the west only in the past few centuries. Most of it was issued by private banks, in the form of bank notes. You did not owe your bank taxes. So what debt was evidenced by the bank note?

The bank issued notes when it made loans. It held your “note” (the IOU you signed; we still use the term to refer to the documents associated with loans) as evidence of your debt to the bank. It issued its own “note” as evidence of the debt of the bank. You could spend the note, passing it to a third party. That third party could present it to the issuing bank to pay down debts owed to that bank.

With a clearing system, you could repay your debt to Bank A by presenting for “Redemption” notes issued by Bank B. The bank notes were circulating private “tallies”. The system clearer would return notes to the issuers as banks cleared debts with one another.

Like the cloakroom tickets, the notes might be destroyed by their issuers when they were returned. Or they could be stockpiled in bank warehouses for use later (just as the cloakroom’s token might be warehoused on empty coat hangers).

Eventually government central banks would do much of the clearing, originally issuing their own notes. The first central banks were explicitly created to issue notes to finance government spending, with the notes collected in tax payment.

Not liking competition, governments taxed private bank notes out of existence. Banks moved to deposit-based banking (rather than note-based banking). And, eventually, we got to the present day when it is mostly keystroke entries of debits and credits.

But, folks, it is all “debt money”.

“Bank Money” is an electronic entry on the liability side of the bank’s balance sheet, and an electronic entry on the asset side of the depositor’s balance sheet. (Called double entry book-keeping, the “keystroking” of deposits when a bank makes a loan means there will be four entries—the “note” of the borrower is the bank’s asset, and the bank’s “deposit” is its liability; the deposit is the borrower’s asset, and the note is the borrower’s liability.) Depositors can write checks on these deposits to pay down their own debts, including debts to banks.

“Central Bank Money” is generally comprised of two forms: paper notes and electronic reserves. The paper notes are the central bank’s liability and the asset of the holder. FRNotes are mostly used outside the USA, and are mostly used for illegal activities. (To increase the circulation of FRNotes, we need to raise the denomination of the largest denomination notes—the almighty dollar is being replaced by larger denomination Euro notes as the preferred medium of exchange by global drug dealers, although Bitcoins are making a dent—see below.)

FRReserves are keystroke entries, representing the Fed’s liability and the asset of depositors. Unless you are a bank, a foreign central bank, or some other special entity, you cannot hold these. In theory, the government should accept its central bank notes in tax payment. In practice, US taxpayers make tax payments using their banks—either with checks or direct withdrawal. The Fed then debits the private bank’s reserve deposits. So whether taxes are paid with FRNotes or FRReserves, in either case, the Fed’s liabilities to the US private sector are reduced. (There is also internal accounting involving the Fed’s and the Treasury’s balance sheets—the Fed credit’s the Treasury’s deposit account at the Fed. As I’ve said, this is like the husband owing the wife some dishwashing.)

“Treasury Money” is now mostly coins; in the past treasuries issued notes (and some still do). What is a coin? Stamped evidence of the Treasury’s debt. Some have pointed out that the US Treasury records coins as “equity”. Equity, of course, is on the liability side of the balance sheet. In theory, one should be able to pay taxes by returning the King’s coins. In practice, hardly anyone does that. I used to think that the IRS would not accept coins in payment of taxes, but apparently Tea Baggers are doing just that. According to a news report one of them delivers, each year, a bag full of coins in payment of taxes, with the stated intention of wrecking the day of some IRS agent, who presumably has to spend a few hours stacking and counting (tallying?) the coins.

So it is apparently possible to push a wheelbarrow to the IRS steps to pay your taxes in coins. In any event, most US taxes are paid as described above. You can certainly deposit coins (and FRNotes) at your bank and write a check to the IRS—Redeeming yourself in the eyes of Uncle Sam without pissing off IRS agents.

Debt-Free Tokens?

Now, with that background let us try to make sense of the call for “debt-free money”.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the tokens discussed above, but they are not debts. You can return them to the cloakroom, but you don’t get a coat.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper.

Imagine a sovereign that issues “debt-free” tallies. They look like the tallies discussed above, but when you return them to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt, but rather as a stick—perhaps fuel for a fire, but not a means of Redemption.

What is a debt-free tally? It is a hazelwood stick.

Why would you want the debt-free cloakroom token? Why would you want the debt-free tally stock?

As MMT says, “taxes drive money”.

(I’m not going through that again here. See the series that begins with this post.  Note, however, that “TDM” is short-hand for “obligations to the sovereign drive money”. You can pay fees, fines, tribute, tithes and taxes owed to the sovereign by delivering back his debt tokens (tallies, notes, coins, electronic records of liabilities). Note also that we claim that taxes are sufficient to drive a currency; we do not say they are necessary. Some commentators note that there are a few sovereigns (typically noted are oil-producing nations in which the sovereign monopolizes ownership of oil) that don’t impose taxes but still issue currency. But as we have long pointed out, if the sovereign can monopolize necessities of life, the sovereign can name what must be delivered to get the necessities. The Chicago water monopolist can designate what you must pay to quench your thirst; the heroin pusher can dictate what you need to get your fix. Maybe Bitcoins?)

If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk.

I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money.

I don’t think our debt-free money cranks want government to “issue” bananas. I think they want a “money” that is a record. But a record of what?

From what I gather, they want government to issue notes (many love to refer to Lincoln’s Greenbacks) or electronic “money”. But what are notes or electronic entries? They are records of indebtedness—debts that can be redeemed in payments to the issuers. They are debt tokens.

A Non Sequitur in Search of a Policy

When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks seem to hate payment of interest by government.

I’m not sure, but I think what they really want to do is to prohibit government payment of interest.

That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds.

We don’t need a non sequitur in search of a policy.

Debt-free money advocates also hate debt. Fine, in many religions, debt is sinful—for both creditor and debtor. Monetary cranks (rightly) attribute our current economic predicament to excessive private sector debt. I agree.

Some also fear public debt—which has no basis if we are talking about sovereign currency-issuing government.

However, there are some advocates of debt-free money who understand MMT’s point about sovereign government. Some of these even recognize that the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our net financial (dollar) wealth.

But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding.

Hence the idea is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat.

While I’m sympathetic to the view of political realities, the operational realities are quite different from what is imagined.

Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds, we will have already achieved what our “debt-free money” champions want.

However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins).

There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.

For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds. I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent.

Again, we don’t need a non sequitur in search of a policy.


L Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri-Kansas City. His current research focuses on providing a critique of orthodox monetary policy, and the development of an alternative approach. Wray is the author of Money and Credit in Capitalist Economies, 1990, and Understanding Modern Money: The Key to Full Employment and Price Stability, 1998. He is also coeditor of, and a contributor to, Money, Financial Instability, and Stabilization Policy, 2006, and Keynes for the 21st Century: The Continuing Relevance of The General Theory, 2008. He taught for more than a decade at the University of Denver and has been a visiting professor at Bard College, the University of Bologna, and the University of Rome (La Sapienza).

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