Commodity and non-commodity money - is it just the same?

I write this to suugest that a few new words and notions might perhaps encourage a better and broader grasp on the limits and opportunities that seem to be inside money’s real nature.

Between them, Graeber and Hudson surely have described the history of money comprehensively, in its many different forms. Yet I’d say there’s still widespread misunderstanding and confusion about the nature of modern money among politicians, the public and especially (quite strangely, I feel) within finance journalism. The flexibility of money, and its enduringly-universal use, seem to discourage any awareness that something fundamental and highly consequential has changed.

Unlike earlier times, modern money is neither based upon nor backed by any concrete or physical commodity at all. Doesn’t that sound like a chalk-and-cheese kind of difference - something that ought to have rapidly revised and reset popular understanding? But no. It seems this dramatic shift has passed largely unnoticed. The old fashioned implications and consequences of money-as-commodity nor only linger but seem to dominate, except within a relatively small MMT-aware community. Of course in everyday transactions the behaviour of money is unchanged for the typical money user. But I think it has changed a lot for the money creators inside governments with their own currency. Therefore, politicians and finance journalists ought to be the most up to date and in the know about this transformation, I feel.

Yet the opposite situation seems to be the case. Those folk are the ones who seem deepest in ignorance, firmly attached to ideas and mechanisms long gone by. Admittedly, several features of the modern money system appear to cloud the difference, since they occur in both schemes. For example, tokenisation in the form of cash and the use of ledger-money, as a third-party promise or liability of a bank, can both function independently of whether money is backed by something or (seemingly) by nothing.

I think it might be useful, rather than talk of commodity-based money, to think instead of a money system that possess positive total financial equity. That’s one ’new notion’. (Oddly, the acronym for that expression is PTFE, which is why I doubt it will stick). The total of all financial instruments, both assets and liabilities, in such a money system surely equals the financial value of the total quantity of the money commodity in the system - typically precious metal held in secure vaults. In this way, money is a proxy for the value of one specific physical and non-financial asset. This kind of money behaves as an intermediate barter good., In a PTFE money system the public, the banks and the government can potentially all be in positive financial equity simultaneously. All that needs to happen is for everyone to own enough of that special non-financial asset over which money is a mere veil. This seems to be world of the orthodox-economics textbook, in which the money supply is largely fixed, banks lend out of their reserves and the money multiplier works It also looks like the happy, sunlit world of positive financial equity for almost all, a world that luminaries like a recent Fed chairman and the current Chancellor of the UK Exchequer seem firmly to believe is within reach using today’s money.

What a shame it is that MMT has explained how, and Steve has demonstrated why, they’re wrong. Or rather, to set politeness aside, it ought to be a shame on them that they don’t know how and why they’re wrong. And perhaps an even greater shame falls on their shoulders for not seeming to know there’s a quick and effective way to set all that shame aside. They could reach a different kind of happier and maybe more brightly-lit world, simply by embracing the positivity that can be stimulated by the recognition, and suitable deployment, of government assets of negative financial value. That’s my second ’new notion’ - that negatively-valued financial assets are a meaningful concept. I think it would be useful to regard the National Deficit as such stuff, existing only within the walls of a sovereign money authority (SMA). Fiat creation of modern money therefore doesn’t mean borrowing or a debt burden upon future generations. It means the SMA is in negative financial equity because of the negatively-valued financial assets they previously created and now hold. This is what Stephanie Kelton surely meant in saying “Their red ink is our black ink”.

A long while back in Skool, I wrote a playful fantasy about ’The First Coins’. I didn’t intend any connection with reality. But now I think I stumbled by accident upon a valid idea - that there are places in the modern money system where negative ‘money’ is created and safely stored, beyond reach. Because the modern money system has zero total financial equity (ZTFE), over the sum of all assets and liabilities, the existence of negatively-valued State financial assets seems inescapably to be the only way of creating positively-valued State money by fiat. And since banks must be in positive financial equity to be able to operate under licence, positive financial equity must come from somewhere to permit those banks to exist. So bank-credit-based money, of temporarily-positive equity, requires State fiat money to exist. Therefore I think that a non-commodity money system, or as I’d now rather think of it, a ZTFE system mandates the existence of negatively-valued financial assets somewhere within that system.

Such assets typically seem to exist as the counterparts of Treasury bonds, recorded as a liability of the Treasury. I think it’s useful to treat ‘liability’ and debt’ as non-synonymous. All debts seem to be liabilities, but surely not all liabilities are debts. For example, a debilitating but not non-progressive and non-life-threatening disease is a liability of its owner, but not a debt of its owner to anyone else. Accounting seems to prefer to use the term liability rather than negative asset - maybe because the insides of SMAs are such rare and rarified places. I feel that such use is unfortunate and unhelpful. In my mind, I’d extend the ‘accounting equation’ for exclusive use within an SMA to be Assets - Negative Assets - Liabilities - Equity = 0. Maybe recording Treasury bond counterparts under ’Negative Assets’ and not under ‘Liabilities’ might clarify the situation and help to reduce or remove the handicap of the illusion that fiat money creation involves borrowing from others and results in government debt.

But is a ZTFE money system really entirely devoid of reference to any value in solid, concrete or physical form? No, of course not because money’s numeraire is defined through the use of the value of a large aggregate of non-financial assets. It’s surely true than under a ‘pure blood’ PTFE money system you could, at least in principle, take a banknote to the Central Bank (CB), ask for its redemption and get some amount of the money commodity in return. Is that same note therefore irredeemable under a ZTFE system? Yes, if you present it at the CB, I think. But it is surely is easily redeemable at a whole host of other places, for any commodity of your choice. Just go shopping. So as Steve has said, Henry Ford and Thomas Edison were right to talk of the US dollar being backed not by gold but by the ‘land and people of America’. The value of the non-financial assets of a Nation is what ‘replaces’ the money commodity, but that replacement occurs outside the financial system. In that respect I feel that some accepted terminology in this area is in a tangle and misleads. Rather than talk about non-commodity money, it strikes me it would be better to speak of all-commodity money. That’s one more ’new notion’.

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