“Disclaimer: I am strongly AGAINST gold money”

Like others on this thread I’ve been wrestling with the concept of what the “real money” is that underpins the credit economy. With the Graziani definition that Steve proposes even that is smoke and mirrors when there is no 3rd party to trust. A few years ago it would have seemed to me that this point was not really worth detailed discussion, but given the crisis on the Libor market not long ago (when, if I understand it correctly, even the banks didn’t trust each other for a single night) the continued existence of a trusted 3rd party to underpin the values of “real money” becomes problematical.

So it seems to me that the “pure credit” economy has the capacity to reduce all non-material assets to zero, pretty much overnight. Surely something like gold, or real estate, would be a better (but imperfect) basis for monetary value than “trusted 3rd parties” when there is a crisis.

It’s recursive if anyone can be a bank. Graziani’s other point is that anyone can’t: a bank has to be a privileged role in a system and only its (singular or plural for multiple banks) promises to pay are accepted:

“A first conclusion may now be drawn. Since in a monetary economy money payments go necessarily through a third agent, the third agent being one that specialises in the activity of producing means of payment (in modern times a bank), banks and firms must be considered as two distinct kinds of agents. Firms are present in the market as sellers or buyers of commodities and make recourse to banks in order to perform their payments; banks on the other hand produce means of payment, and act as clearing houses among firms. In any model of a monetary economy, banks and firms cannot be aggregated into one single sector.”

Practically and historically yes it’s true that this has led to fiat currency being the common denominator: the temptation to seignorage has been too great for all private banking systems to date (the 19th century banking system in America had a number of such instances). But as a theoretical starting point Graziani’s key point–that trusting a very specific third agent’s promises to pay is the essence of credit money–remains valid.

Money as a promise to pay? So do I pay with a promise to pay? This is recursive. I know that I am twisting the definition a bit too much but the very existence of credit money (I do not dispute the fact that it is the predominant form of money in some Anglo-Saxon countries) is based on the existence of “tokens” of another kind which can be “paid” – the fiat money.

We can imagine a system without fiat money where everything is based on IOUs (e.g. payments are either electronic or by cheques). However in this case the Graziani’s definition is not applicable because we no longer have a promise to pay by a 3rd party (i.e. the bank). We need to have a promise to accept the transaction brokered by the 3rd party in the form of goods and services. But what if somebody doesn’t accept cheques issues by a dodgy bank? The presence of fiat money provides just another level of indirection (sorry for the IT jargon) but this is critically important for the functioning of the real system.

The fiat money is issued by the government and it is supposed to be honoured by all the agents – including the government. Of course there can be issues with fiat money as well and the system may malfunction.

One may build a fully functioning credit system based on gold money as well. The barrier mentioned in the definition is the prohibitive cost of obtaining the commodity (gold or silver) – what defines its value.

Disclaimer: I am strongly AGAINST gold money.

Yes commodities have on occasions functioned as a means of exchange. However Graziani’s point in providing that definition was to find a means of fundamentally distinguishing a monetary economy from a barter one, since neoclassical economics effectively treats capitalism as one huge barter system. In its various guises, it either abstracts from money completely, or treats money as the “n+1″th commodity in an n-commodity general equilibrium model, or it argues for the “neutrality” of money–i.e. that money and changes in the amount of have no impact on “real” variables (output, employment, etc.) in either the long or short run.

Keynes on the other hand in the General Theory argued that a monetary economy was “fundamentally different” to a barter economy. However his arguments as to why did not have a fundamental core proposition to them–something that compelled an economist who aims to model the economy to model a monetary exchange system in a fundamentally different way than he/she might model a barter exchange system.

Graziani’s definition provided that fundamental proposition. My previous comment gave his final definition of money as “promises to pay by a 3rd party”. Below is the prelude to that:

“(1) The starting point of the theory of the circuit, is that a true monetary economy is inconsistent with the presence of a commodity money.
A commodity money is by definition a kind of money that any producer can produce for himself. But an economy using as money a commodity coming out of a regular process of production, cannot be distinguished from a barter economy.

A true monetary economy must therefore be using a token money, which is nowadays a paper currency

(2) “money has to be accepted as a means of final settlement of the transaction (otherwise it would be credit and not money).”
(3) Money must not grant “rights of seignorage” [agents can’t create it indefinitely for their own use at negligible cost, as formally Governments can with fiat money]

Also two hundred years ago in New South Wales rum became a currency controlled by the military, the NSW corps AKA the “rum corps”. When the governor, William Bligh objected, he was ousted in this country’s only military coup.
cheers

Indeed, half-a-litre bottle of vodka (“pol litra”) was a kind of informal currency in Poland in the 1980-ties (a perfect gift or a bribe). I believe this was also common in the former Soviet Union.

http://news.bbc.co.uk/2/hi/uk_news/education/177421.stm

“In order for money to exist, three basic conditions must be met:

a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);”

A clever argument, but surely a bit too clever. It seems to depend too much on strictly theoretical definitions of things like “money” and “pure credit”. If a bottle of spirits is currently valued at about $20 (because people pay that amount) and a packet of cigarettes at about $10, the fact that for some people these have intrinsic value does not remove their general usefulness as an alternative to $20 and $10 notes. Surely the opposite. The fact that they have intrinsic value to some people means that you can have more confidence in a bottle of spirits retaining value than the corresponding note. And a bottle of spirits is harder to forge.

And it seems to me that exchange of a bottle of spirits could amount to a quite satisfactory settlement of an account without any need to trust a third party.

Re: #36

Thanks for your insights. Sometimes this stuff is like peeling an onion. Layer upon layer of assumptions with the facts hidden at the core.

Cheers

As I see it, Irvine might have been trying to sound light-hearted only, as that is the way she likes to write her pieces. And her statement of the facts is more or less accurate: we are not yet out of the woods, as the holy cows want us to believe.

In hindsight, though, you have been catching a lot of flack lately (very little of it addressed to your theory and a lot directed against you personally) and I should have expected your tolerance to jokes to be a bit low.

I know it is easier said than done, but try to take things easy. In the end, those words are sweet: “I told you so, holy cows”.