Monday, December 31, 2012

Not a big fan of the metallist vs chartalist debate on the origins and nature of money


There is a century's old debate between metallists and chartalists on the origin of money. The metallist view is that the first spark of money emerged through barter and matured when the use of precious metals as money was discovered. The chartalists disagree. According to them, the use of credit preceded the use of precious metals as money.

At its core, the metallist/chartalist debate is a battle over the definition of the word money. In a moneyness world, there is no such thing as money. All we have are numerous media of exchange with varying ranges of liquidity. Whether moneyness first gets attached to credit or precious metals is really not important.

Imagine that a hunter encounters a trapper. The hunter has a deer. The trapper wants the deer but isn't sure what to offer. On the one hand, he can exchange the two rabbits in his belt for the deer. On the other he can offer his credit. In offering to exchange away his credit, the trapper is simply capitalizing his future earning power and bringing it forward for use in trade. Metallists and chartalists put tremendous importance on this first choice of credit versus rabbits, since one or the other will represent the so-called origins of money.

From a moneyness perspective, there are more interesting forces at play. Say that the trapper learns that the hunter will accept either his credit or his rabbits. The trapper next arrives at the realization that both items now have a degree of liquidity, or moneyness. He begins to attach a liquidity premium to both, for not only are the trapper's inventory of rabbits useful to him as food, but they can also be resold to the hunter, thereby providing the trapper with an extra range of liquidity services. The same goes for his credit. The trapper's future earning power is one of his key possessions. Now that it is tradeable, his future earnings power provides an extra margin of liquidity services. Over time the trapper will learn which one of his trade items is more liquid  and will favor that item with a larger liquidity premium. A monetary economy has now emerged in which traded goods are appraised according to their degree of liquidity and carry varying liquidity premiums.

If we split the world into money and non-money, then debates over the what items make it into the money category will often be heated. The origins debate gets especially intense because it tries to define modern money by looking back to its so-called debut. Taking inspiration from gold's barter origins, modern day metallists want a pure real/commodity based money. Modern day chartalist, who advocate state-issued inconvertible paper, look back to money's credit origins to support their view that the essential nature of money is credit.

From a moneyness perspective, the money-or-not debate is distracting. The origins of liquidity and liquidity premia is complex and probably not subject to study. There never was a single dominant instrument that could claim the mantle of money, only multiple goods and forms of credit, each with different degrees of moneyness. As for the metallists and chartalists, a pox on both their houses.

10 comments:

  1. JP,

    I partially agree and partially disagree. I agree because I think that the debate of what happened thousands of years ago is irrelevant for economics. I disagree in that the credit still requires a way of determining whether it is or isn't sufficient in a particular transaction, in other words exchange ratios. I would say that this if this unit is not a good itself (commodity money), it needs to refer to a good or at least a category of goods at the time of inception. So the difference in the two approaches is not really "metal or credit" but "spot or credit". A credit transaction is still an exchange of goods, or as the Austrians say, catallactic phenomenon. On the other hand, I don't think that the question of whether credit or spot transactions came first is important.

    Even one of the recently popularised books, "Debt" by David Graeber, in all the examples of credit he uses as the origin of money, the credit was not based on an undefined unit but referred to a good or service.

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    Replies
    1. Credit instruments and non-credit instruments (ie metal or any other item held for spot exchange) are ranked according to liquidity and awarded an appropriate liquidity premium. Neither the metallists or chartalists have a monopoly on money. I'm not really saying anything more complicated than that.

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    2. Yeah but the point of the regression theorem (in my opinion) is that the potential medium of exchange already needs to be liquid (have a liquidity premium) before it can be used as a medium of exchange. In your example, the deer and rabbits already were highly demanded before the indirect exchange occurred. That's the real issue with chartalism. Even in your blog post about McDonald's "money", the Big Mac is highly demanded before they can pull it off.

      So my point is that many people miss that liquidity must first emerge on the market and cannot be imputed ex nihilo. Only after a good is already liquid, this existing liquidity can be then leveraged by human actors to direct the evolution of money.

      On the other hand, based on my research, many of the people that describe themselves Austrians do not formulate the theorem the way that I do and use the more popular interpretation (a good must be a commodity before it can be a medium of exchange). So there is something in what you're saying.

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    3. "Yeah but the point of the regression theorem (in my opinion) is that the potential medium of exchange already needs to be liquid (have a liquidity premium) before it can be used as a medium of exchange."

      Mises never said that. It's pretty tough for me to keep track of "unique" definitions of the regression theorem, I'll stick with the original.

      To be liquid is to be a medium of exchange.

      The deer and rabbits in my example weren't in high demand. The trapper discovered that someone else, the hunter, also wanted rabbits, and for the first time he realized that rabbits were liquid ie. were mediums of exchange.

      "...to direct the evolution of money."

      I don't know what money is. Look at the title of my blog. ;)

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    4. Mises didn't formulate it that way, but this is, in my opinion, the correct interpretation of the theorem, and is hinted by other Austrians too. I realised this when watching this Walter Block's lecture: http://www.youtube.com/watch?v=m2690Fy0sM8

      Block explains that you could have paper "Rothbards", and "... if I really had 10 Rothbards, I could probably sell it for a lot of money, but it would not BE money." [emphasis added]

      Rothbard explains how commodity money is replaced by fiat money: first specie is replaced by money substitutes, and then either the commodity is confiscated, or the substitutes are replaced (price fixing/Gresham's Law) with fiat. But this only works because at the beginning, commodity money is already highly liquid.

      You have a certain point in claiming that to be liquid is to be a medium of exchange, however I put medium of exchange at a slightly higher level of liquidity than the emergence of liquidity premium.

      If you say that the rabbits weren't in high demand, then there cannot be a liquidity premium. It would be simple barter.

      Bitcoin on the other hand was traded against fiat before it could be said that it was liquid, and "organised markets" (see Menger) emerged before it was traded for anything else than fiat. If something is only traded against fiat, I would not call it a medium of exchange. So there you see the step between the emergence of a liquidity premium and a medium of exchange. But I admit my interpretation may be controversial.

      I get your last point about "money". My argument can be applied to moneyness in general, but since normally it makes little economic sense to exert control over less liquid goods, the example is best visible on the most liquid goods.

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    5. "Block explains that you could have paper "Rothbards", and "... if I really had 10 Rothbards, I could probably sell it for a lot of money, but it would not BE money." [emphasis added]"

      Again, I don't know what money is. See title of blog.

      "If you say that the rabbits weren't in high demand, then there cannot be a liquidity premium. It would be simple barter."

      Not even barter. Autarky. See What is a non-monetary economy?

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    6. If it was autarky there would be no trade. Also, I think you're too pendantic about moneyness. Money is simply the most liquid good. In a complex economy, for everyone there are only a small number of items (typically only one or two) that are the most liquid. This is due to the network effect. Some of the "softer" criteria that hint that a good probably is money rather than merely "secondary media of exchange" (Mises) or "quasi-monies" (Rothbard) are
      - you use money in an overwhelming majority of trades over a longer period of time
      - you are willing to accept it for any transaction at a price close to the market price
      - you use it as a unit of account

      If there is no such dominant medium of exchange, then the transaction costs of trade are suboptimal. I got this from Hoppe. However I would like to add that there are minor exceptions, for example when there are a small number of media of exchange that are very different in the way how they reduce transaction costs, a hypothetical system could be for example a combination of gold and Bitcoin, or if we colonise multiple solar system and have no FTL communication then different monies for each planets might be optimal.

      But in the case of Block's lecture, it is probably better to substitute "money" for "medium of exchange" so the objection makes no sense anyway.

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    7. I don't know what money is, and neither do you!

      "Money is simply the most liquid good. In a complex economy, for everyone there are only a small number of items (typically only one or two) that are the most liquid. "

      The most liquid good? A number of liquid goods? One or two of the most liquid goods? You sound confused. In any case, we've strayed from the main point of this post which is the metallist vs chartalist debate. I'll be writing a post later this week that will serve as a more appropriate location for this discussion. Unless you want to talk more about metallism/chartalism, let's save our debate till then.

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