Comment on National Gift Certificates as a Money Analog

Antti Jokinen and I continued to exchange comments for a short time on Nick Rowe's blog. The comments resulted in what I thought were some good guidance for future development. I will re-post the comments here in an effort to consolidate the record.

The comments repeated here follow the original posting of my article "National-Gift-Certificates as an Analog to Money".

Antti begins:
Roger: First, thanks for all the acknowledgements! Very kind of you. I might be repeating myself, but here are some comments on your post:

From the point-of-view of the HOLDER of a NGC, the USBS metaphor works quite well. But from the point-of-view of the ISSUER, I can't make it work. To start with, you should define what kind of money you are talking about: only fiat money, or also "bank money"? Then, you must decide how a NGC can be redeemed: say, by buying goods for sale in any store in the US, or just by paying taxes (latter is what Randall Wray suggests, having in mind fiat money). "(private) Bank money", deposit, can disappear when you use it to buy something from any store in the US. Fiat money doesn't, so in that case you'd only trade the (fiat-money-as-a) NGC with a non-issuer (This begs a question: How can a commercial bank deposit disappear when you buy something from a non-issuer?).

If we only talk about fiat money, and by this we mean "central bank IOUs" (not my terminology), then we face a problem Wray/MMT seem to face, too: If fiat money is a "CB/government IOU", then why does it disappear when a private entity behind the MBSs on Fed's balance sheet makes a mortgage payment? Does the government not only allow its IOUs to be used in tax payments, but in mortgage payments too?

As you see, I see problems on the "issuer side" both when it comes to your NGC interpretation and when it comes to interpretation of money as an IOU. I think those problems are very, very hard to solve if we stay within those frameworks.

Posted by: Antti Jokinen | November 03, 2016 at 04:09 PM

Antti (Nov. 3, 04:09 PM);

Thanks for reading my post and commenting.

You will be surprised when I say that all of these issues are easily incorporated into the analogy. The difficult part is to explain in a comprehensive way. I begin with a brief background:

Fiat money is nothing more than circulating paper printed by the government. Period. It is given legitimacy by taking care that a bond is issued at the same time circulating paper (or electronic equivalent in every case) is printed. Therefore, it is possible for the central bank to meet with the Treasure (two people from two departments) and exchange products: The CB delivers currency and the Treasure issues a promise to pay it back. Period.

The duration of this distributed paper will depend upon the tax rate charged. Assume that a tax is charged at each transaction (income tax, sales tax, VAT tax). After each tax, less currency remains in circulation.

If there is no tax on a transaction (such as on the expense side for income-tax-on-business-profits), there is no reduction in outstanding currency. This enables the duration of any issued paper to be VERY long.

Banks do not issue money. They only have the character of increasing the amount in measured circulation. Take gold as the example. If gold is the money in use, it is very difficult to increase the amount of gold in-hand. It is easy to write a gold certificate and lend it (as if it were gold in-hand) without telling the owner of the original gold. If this is done repeatedly, the amount of gold on deposit will remain unchanged but the amount of gold CLAIMED will increase. The role of central bank reserves comes into play here to control this process.

With this background complete (in a very sketchy fashion), we need to deal with each of your gaps from the issuers standpoint. We group concerns:

1. Money disappears that can be identified as originating with a bank. This occurs when a loan is paid away. Until the loan is paid, the money issued can circulate between users including government (both as a user and destroyer of money).

2. Money disappears that can be identified as originating with government. Taxes are the mechanism already described.

3. I don't understand the MBS mortgage question so I will skip that (perhaps to my peril).

4. It remains to tie fiat money to NGCs.

It is easy to see that government can allow everything-mentioned-so-far to occur. Not everyone will agree with me but I think everything described already occurs on a routine basis. The question then, is whether a private store that issued gift certificates could put in place each of these processes and procedures? I think this has happened already, visible and embodied in the form of company stores and company towns. The early development of America had several examples of small communities that were basically owned by one entity. In come cases, the community used company money which was the equivalent of paying bills with gift certificates.

This was not a good deal for the workers. The company had control of the interaction of company currency and the greater currency of the central government.

There is no question that private stores can issue gift certificates. It certainly seems possible for the private use of gift certificates to expand to include borrowing, banking and complete use in trade exchange. This expanded use of gift-certificates creates what I would like to call "A National Gift Certificate Economy", even if is limited in size to be no more than a company town.

I have attempted to tie fiat money to NGCs. Is the analogy making more sense now?

Posted by: Roger Sparks | November 03, 2016 at 06:34 PM

Antti: I should revise one line to introduce the actual issuance of fiat money. Issuance does not occur when the money is created (creation is all within the confines of government). Issuance occurs when government spends the newly created money.

The line "The duration of this distributed paper will depend upon the tax rate charged." would be much more informative if it read " After issuance (by government paying it's obligations), the duration of this newly distributed paper will depend upon the tax rate charged. "

Posted by: Roger Sparks | November 03, 2016 at 11:52 PM

Roger: The example of a company town is a good one. There the issuer of the money/LGC (Local Gift Certificate) owns the store(s) where the money/LGC can be presented for redemption; it is redeemed for GOODS by the issuer. Almost everyone has to regularly buy something from the issuer's store, which makes the money also acceptable in transactions where the issuer is not one of the parties. What bugs me is how to explain that you get something from the government for your NGC when you use it to pay taxes? In that case its more like a Stay-out-of-jail card than a gift-certificate. This is where Lonergan and Wray disagreed, and I'm arguing Lonergan's case which I believe has some merits. The big question is: If you hold money (or NGC), who owes you and what?

About your definition of "fiat money": You talk only about paper, but we have to include bank reserves, right? All "high-powered money".

Posted by: Antti Jokinen | November 04, 2016 at 10:52 AM

Antti (Nov. 4 10:52 AM): Antti writes "What bugs me is how to explain that you get something from the government for your NGC when you use it to pay taxes?".

I can't argue an explanation here. The best I can do is to suggest a philosophy. I would suggest that tax on land (we pay annual property taxes in America) and trying to get something from government in exchange for my NGC are the same. One rational philosophy is that both are a payment of "rent". Using land as the example, the American land owner is more-accurately sub-leasing the ground from the government who is the REAL OWNER. This basic philosophy underlays the entire NGC-USBS framework.

Following this philosophy, we could claim that a tax on each exchange of money is a payment of rent for the privilege of using money. Wild?!

Now I would like to change the focus to fiat money, banks, and government.

As I thought about my previous reply, particularly about the timing of issuance, I began to place more importance on this observation: both banks and government create money in a private fashion, which means "behind closed doors". Let me elaborate: Both banks and in the CB-Treasury-trade create money in a "back-room", low visibility, event where they prepare to issue money.

Using the NGC example, the issuing store prepares to sell a gift certificate by printing the certificate. Then the store has a choice: recognize the increase in inventory and expense of production immediately OR wait until actual sale and then recognize the event. The first choice makes sense if the intended use of the gift-certificates is to pay for goods and services; the second choice makes sense if the intended use is to sell the gift-certificate for money in the future.

In either case, the actual creation of money or NGC is not visible to the usual measuring tools available to the public. The actual issuance of new money is more visible but identical to using old money; issuance is just another exchange of goods and services for money/NGC.

Turning now to central bank reserves, I think this FED maintenance manual is helpful:
https://www.federalreserve.gov/monetarypolicy/reservereq-reserve-maintenance-manual.htm

I understand the manual to require a reserve deposit at the central bank that increases proportionately to the increase in bank deposits. In other words, it acts like a tax paid in positive money. What is positive money? I think it is money issued by the government but how do you separate it from bank issued money? Well, if positive money is taxed at each reissue/new-loan, the positive money will eventually all be back at the CB. This gives the CB a lot of control.

Posted by: Roger Sparks | November 04, 2016 at 12:28 PM

These comments, while they seem somewhat disjointed, contain some very important insight. Particularly important is the thought that the store issuing a gift-certificate has two choices of when to "book" the process. Which choice is picked would likely depend upon the purpose to which the gift-certificate placed.

Thanks to both Nick and Antti for their roles in advancing the theory of macroeconomics.

National-Gift-Certificates as an Analog to Money

I will begin this post by thanking Antti Jokinen for engaging in a very thoughtful discussion about the merits of comparing money to a gift certificate. While at first glance, the two instruments seem very different, upon closer inspection and appropriate scaling, the two instruments compare very well. Antti's skepticism coupled (with encouragement) helped bring the parallels and differences into focus.

This post is a response to Antti's comment "The problem I see with your approach is how to explain why we would call a piece of paper a "gift-certificate", when it entitles the holder of it to nothing else than being relieved of his tax obligation (or fines or other charges collected by the government). I do see some sense behind that kind of thinking, but there are many people who don't."

Yes, we need an explanation. We think we know what money is (or do we?) and a gift-certificate seems to have many differences from money.

I first wrote about the similarity of money and gift-certificates in my post "Money is Like a National Gift Certificate". That post was prompted by my observation that a hardware store gift certificate was a lot like money in many ways.

When I walked into that hardware store with my gift-certificate in hand, I wondered why I just didn't go over the the clerk and request she change it into money. It certainly would have been easier than walking around the store, looking for something that I wanted only marginally. Of course, the store wanted the sale, not the possibility that they would retire the certificate and I leave the store with THEIR money. (There might be a clue here)

Paper money is harder to characterize than a gift-certificate but let's look for some DIFFERENCES and characterize them:

1. The size of the acceptability footprint is hugely different. Money is nation wide but a gift-certificate is only store wide; but both have boundaries of acceptance.

2. The denomination is hugely different. Money can be any value if a check, a fixed value if a gift-certificate; but both have EXACT values on the traded instrument.

3. The source of the instruments is hugely different. Money can be created legally only by government, a gift-certificate is created by private entity; but both are created by unique human entities.

4. The range of items available for purchase is HUGELY HUGELY different. Money can buy anything, a gift-certificate can only buy things in the store;  but both can only buy things identified as being for sale.

The ownership of items for sale is hugely, hugely different. The issuer of money does not own the items that might be purchased using money while the issuer of a gift-certificate owns/controls the items that can be traded in exchange; but exchange is observed to occur. (This ownership difference may be related to government's ability to collect tax at each exchange (sales tax or VAT tax).

Now let's look at the many identical features of money and gift-certificates:

Both disappear (retired, or if you prefer, "recycled") when they are received by the issuing entity.
Both can be traded before being presented to the issuing entity.
Both have unlimited durability while (at the same time) both can be lost or destroyed by intentional action.
Both can (or could) be borrowed by either the issuing entity or third parties.
Both are usually created (issued) AFTER the issuer has received some physical good or service.
Both can be created (issued) as a gift without exchange of any physical good or service.

We began this post with the challenge of explaining how money could be considered as being a National-Gift-Certificate (NGC). While the differences between money and a gift-certificate are several, the differences disappear when the differences are scaled and adjusted for character of ownership. We need to scale the gift-certificate up and into a "National-gift certificate". After the scale-up is done, it is reasonable to argue that a National-Gift-Certificate is an analog for money.

In an early comment, Antti suggested that the footprint for a United States monetary system could be described as the "United States as a Big Store (USBS)". This is an excellent description that I have used several times since.

If we think of the United States as a Big Store, we can compare the value of money to the contents of that store. Of course only the items on sale could be purchased but the same condition is a restriction in a store issuing a gift-certificates. The value of USBS money would be dependent upon the ability of money holders to buy freely what ever they wanted and their desire to purchase.

We conclude by opining that we can not call money a "gift-certificate", the differences are too great. We need to call money a "National-gift-certificate" which is a scaled up, souped-up version of the familiar gift-certificate.

Thanks again to Antti. Your participation in this discussion is much appreciated.

Money is Like a National Gift Certificate

For my birthday, my son and daughter-in-law gave me a hardware store gift card. They could not have thought of a more welcome gift for this mechanically tuned writer. A hardware store is a trove of fascinating gadgets crying for exploration. Usually though, my pocket book is a throttle on my enthusiasm. Their gift gave me a chance to have a tool usually out of reach due to budget discipline.

As I searched the store looking for a digital caliper*, I could not help but think that the gift card was so very much like the green money we use every day. Of course, being a gift card, it was also very much like my credit card except that the bill was prepaid. My goodness, I could think of many parallels between gift cards and money!

Let's explore some of  the parallels.

Money is a store of value. That was the first parallel that came to mind. My gift card had been prepaid with money for a fixed amount. It could be used at any time. It was certainly nice that I could carefully decide what to get. (I wanted to get something that would last so that I could remember their generosity every time I used the gift.) There was no need to hurry the purchase.

Green money has that same character. There is no need to spend it quickly. The ability to store value by building one's monetary inventory is a great feature of a stable monetary environment. You know, it's even possible that a nice little nest-egg could be a great help in buying something like a house when a down payment is needed.

A I continued to think on this, I could't help but think that green money is limited to use in a single store just like my gift card was limited to use in just one store. Another parallel! Of course the accepting store for green money is the entire United States, not a single small hardware store--but the principal is the same. Green money has limited use in non-dollar economies just like my hardware store gift card would have limited value in a grocery store. There would be a discount applied to either if I used them in a less-than-hospitable environment.

The more I thought about it, the more I realized that money really is nothing more than a super-charged gift certificate. It can be exchanged for anything that is for sale in the currency zone. Nice! Money has a huge exchange footprint!

And there are more parallels.  A gift certificate is paper like money. A gift card  is more like a debit card and linked bank deposit--electronic in accounting but limited in size.

How about the relationship between gift cards, debit cards, and a credit card? Well, gift cards and debit cards are prepaid while the credit card is a pre-qualified loan.

With all of these parallels, I began looking for differences. The first difference found was in the way a gift certificate is created and the way that money is created. A gift certificate is created when someone uses money to purchase it. Someone must first acquire that money and then purchase the certificate from a store willing to promise future delivery of store merchandise in exchange for the return of the certificate. No one seems to even consider the possibility of borrowing or lending a gift certificate but I guess it could be done if the gift certificate lender was willing to accept the risk of failure to repay.

Turning to the creation of money, modern money is created when banks lend. The process is simple. In exchange for a promise to repay, a bank will create a limited deposit in a transferable account. This may be a case of a bank lending to itself as when a central bank creates a loan to a sponsoring government, or it may be a case of a bank lending to a customer without deducting or limiting any other accounts existing in the bank. Either way, a tally of all the bank deposit accounts will show an increase directly equal to the amount of new loans created. New money has been created.

But here we see a striking difference between gift certificates and money. The person spending money on a gift certificate has first earned the money used to buy the certificate. On the other hand, during the creation of money, the first spender does not first earn the new green money he is spending. This is a HUGE difference between the two monetary instruments. The difference has profound effects on the long term psychology of the persons creating either of the two instruments.

First, consider the psychology of the store owner creating a gift certificate. He would be very reluctant to create the certificate unless he received something in return. After all, if he created a lot of gift certificates and gave them away, it would be equivalent to giving away the merchandise in his store. Good advertising but a sure path to business ruin.

The creation of money is far less personal. The creation of money by bank lending is a mechanical decision by an administrator. Lending by private banks is generally based on construction of goods of offsetting value. This would generally be viewed as a reasonable exchange that would preserve or improve the financial condition of the transacting parties. The lending of money by central banks to their sponsoring governments is not so easily characterized.

If we think of a central bank as creating a national gift certificate, the creation of money by a central bank lending to the sponsoring government is an act of giving away the merchandise in the store.

Walking out of the store with my new digital calipers in hand, I came back to the day-to-day world. I would use this digital tool and remember the source of the gift. That has happened many times.

The insights into money are just beginning. The clear parallels between money and gift certificates are striking, the sharp differences in work-required-before-spending sobering. I fully expect to explore these parallels further in future posts.

* A digital caliper is a tool long desired. It approaches being a luxury item.