Tuesday, June 4, 2013
How much are Warren Mosler's business cards worth?
While it somewhat lacked in structure, a good time was had by everyone in the live chat section of the big Warren Mosler vs Bob Murphy debate last night. You can see a replay of the debate here.
One of Mosler's running themes (and which Murphy turned into a running gag) was the idea that he (Mosler) could give his business card a positive price by requiring members of the audience to hand over said card to Mosler's bouncer should they wish to leave the room unmolested. Voilà, modern fiat money. In order to get his fiat cards out into the audience, presumably Mosler would have had to spend them into existence by purchasing stuff from the the audience. Only then would audience members be able to afford to leave the room without being subjected to the bouncer's whims.
In the MMT literature, this is called twintopt.* A state imposes an obligation on its citizenry to pay a tax, and then dictates what good or item (the "twintopt") will be sufficient to discharge that debt. Whatever is made into twintopt, be it US dollars, coupons, or business cards, they will now be valued and circulate. This is the tax-drives-money, or chartal theory of money.
I don't doubt that the theory could be true in practice. For instance, I describe in this post how McDonald's Corporation could give colourful bits of paper coupons a positive value by imposing an obligation on the burger-eating community to pay for all Big Macs with these coupons. No doubt Mosler's business cards could also earn a positive value if he required people to submit cards as an exit fee. Rather than chartalism, I prefer to call this the coupon theory of money in order to underscore that it has nothing to do with the state. Corporations and individuals can issue "chartal" coupon media of exchange just as easily as the State can.
But Mosler's business card analogy doesn't make it as far as US dollars. To see why, let's go the reverse direction and remove twinopt status.
Having been converted by Murphy, let's say that Mosler's bouncer becomes a libertarian and moves to New Hampshire. With twinopt no longer being enforced, audience members can now leave the room without having to post a business card as payment and the market value of Mosler's cards will quickly fall back to 0. So far the chartal tax-drives-money theory of money is borne out perfectly.
Next let's migrate this idea over to the modern US monetary system. Say that the US government announces that it will no longer accept US paper dollars or US dollar-denominated cheques/deposits as payment for taxes and instead will require Mosler-issued business cards. What happens to the value of the US dollar? According to the taxes-drives-money theory, the US dollar, which no longer serves as twintopt, should rapidly become valueless, just as Mosler's business cards became valueless after the desertion of his bouncer.
Here's what actually happens. Since US paper currency and US-denominated deposits & reserves are now useless for the set of transactions involving the US government, individuals, banks, and corporations will all seek to simultaneously reduce their inventories of these instruments. After all, they're a less effective medium of exchange.
This disinclination to hold dollars will in turn drive prices up. In order to ensure that prices don't rise above their inflation target, the Federal Reserve will suck up and destroy all unwanted currency and reserves. The Fed does so by selling assets. It has gold, bonds, foreign exchange, economics books, and other things in its vaults which it will continuously use to purchase dollars until the urge to divest dollars has been quenched. Thus the run on US dollars set off by their lack of tax acceptability is just as quickly matched by a decreased supply.
Mosler's business cards will probably be fairly liquid thanks to their government prop. The interesting thing is that despite no longer being required to pay taxes, the dollar will continue to have the same value as before. And while it will be useless in government transactions, the private sector will probably continue to use US paper currency and US dollar reserves among each other as a handy medium of exchange. Something other than taxes drives the value of US money, it would seem.
New-fangled metallism provides an explanation. I say new-fangled because it's not old-fashioned metallic backing per se that helps pin down the dollar. Rather, what does the pinning is the general financial assets that the central bank holds (MBS, bonds, stocks, gold, whatever), combined with the bank's threat to use those assets to ensure price stability. Taxes certainly contribute to the dynamic, but they're not in the driver's seat.
*Specifically, Understanding Modern Money by L. Randall Wray