Sunday, 20 December 2015

Prof Randall Wray considers debt free money.

That’s in this article. Essentially the article criticises the concept of debt free money. He says for example “Money is always and everywhere else an IOU”, and IOUs are of course a form of debt.

Another couple of sentences of his along similar lines to the latter quote runs as follows: “Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.”

That’s not a bad point. What Wray is saying is as follows. When the tax authorities demand $X from you, that’s obviously a debt owed by you to government. And it’s widely accepted that one debt can be cancelled out by an equal and opposite debt. So if you give the tax authorities $X worth of $100 bills, then those bills perform the function of an “equal and opposite debt”.

However, in other respects, state issued money is genuinely debt free. To illustrate, Bank of England £10 notes say something like “I, governor of the Bank of England, promise to pay the bearer on demand the sum of £10”. So it seems those notes REALLY ARE a debt owed by the BoE to the holders of £10 notes.

But of course if you turn up at the BoE and demand £10 worth of gold or anything else in return for your £10 note, you’ll be told to shove off. So in that sense, state issued money is NOT A DEBT.

In contrast, debt is very much part and parcel of COMMERCIAL BANK created money. To illustrate, when you get a loan from a bank (perhaps after depositing security / collateral), the bank sets up two equal and opposite debts. First there is a debt owed by the bank to you, commonly known as “money”. And the bank undertakes to transfer that debt to others when instructed by you to do so when you use your cheque book, debit card or whatever. The equal and opposite debt is the undertaking by you to repay that money to the bank at some point in the future.

And just to muddy the picture still further, there is another sense in which money created by commercial banks is NOT a form of debt. I set out the details here.



The concepts “debt based” and “debt free” money are complicated. There is certainly SOMETHING in the claim that commercial bank issued money is debt based, and in the claim that central bank money is debt free. But there are lots of iffs and buts to be attached to those claims.

P.S. (Same day). There's a discussion about Wray's article on Mike Norman's site.

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