Money and Cryptocurrencies

From J W Mason’s blog:

In the quantity view, “money” is something special. The legal monopoly of governments on printing currency is very important, because that is money in a way that other assets aren’t. Credit created by banks is something different. Digital currencies are a threat or opportunity, as the case may be, because they seem to also go in this exclusive “outside money” box.

The starting point, from this point of view, is a network of money payments and commitments. Some of these commitments structure real activity (I show up for work because I expect to receive a wage). Others are free-standing. (I pay you interest because I owe you a debt.) In either case money is simply a unit of account. I have made a promise to you, you have a made a promise to someone else; these promises are in some cases commitments to specific concrete activities (to show up for work and do what you’re told), but in other cases they are quantitative, measured as a certain quantity of “money.”

Good summary. It’s what I’ve always said. Things like gold or the metal in coins have an intrinsic value, but they aren’t “money” in the true sense. True “money” is just a measure of indebtedness. I go to work, my employer owes me my wages. For every hour I work, he owes me a bit more. This accrued debt is formally settled at the end of each month when the balance in his account goes down and the balance in mine goes up. If – coincidentally – I use the same bank as they do, then as regards the outside world, absolutely nothing has happened. It’s just a ledger entry.

Thought experiment #1. I am free to agree with my employer that he will pay part of my salary in Tesco vouchers. In which case Tesco’s bank balance goes up by the amount he paid for the vouchers. Those vouchers are “money” in the narrow sense (no intrinsic value). I can take them to Tesco and exchange them for food.

Tesco is now indebted to me – they owe me some food. The outstanding vouchers which I haven’t used yet show up as liabilities on Tesco’s balance sheet and are assets from my point of view, I tuck them into my wallet alongside a few fivers or tenners. Tesco and I are both heartily indifferent whether I pay for my shopping with their own vouchers or with fivers and tenners. If I don’t use them this week, I’ll use them next week instead.

Or instead of giving me vouchers, my employer could pay Tesco to deliver me certain staple food items each week (and cut the salary payment into my bank account). My employer’s bank balance goes down and Tesco’s goes up – they now owe me some food, exactly the same as if my employer gave me Tesco vouchers. Once delivered, that debt has been paid (in kind rather than in “money”) and we are back to where we would have been.

Thought experiment #2. All bank balances and debts (including govermnent bonds) are simply cancelled, bank notes in circulation are declared invalid. Every adult is given a small amount of the new notes in cash and we all start again. A modified version of this actually happened in Germany in 1948, and it did them their economy the world of good. As unfair as it might seem, did the total real wealth of that country plummet or even change in 1948 (ignoring balances held or owed by foreigners)? Clearly not. One man’s loss is another man’s debt relief and it cancels out to zero.

It would be quite a different thing if the German government had confiscated all gold in the country and dumped it in the Marianas Trench. Gold has intrinsic value and Germany as a whole would have clearly been a lot poorer afterwards.