One of the basic claims made by Positive Money is that government and central bank should create and spend money into the economy as required. Francis Coppola claims that idea is “fundamentally flawed” because of the existence of various forms of unofficial or quasi-money. These include Bitcoin, Payal, Airmiles, supermarket reward points, local currencies and government debt. Frances has an MBA and has worked in banking, so I take her views seriously. Plus I follow her blog.
I’ll argue below that some of these quasi-monies certainly need watching. But the claim that they render Positive Money’s ideas “fundamentally flawed” over-states the case.
There are numerous reasons why these types of quasi-money are not too much of a problem. I’ll begin by running thru these. But not every one of these reasons is applicable to each type of quasi-money. So I’ll then consider each type of quasi-money in turn.
Reasons why quasi-money is not a problem
1. The turnover of some forms of quasi-money is minute compared to the turnover of central and commercial bank created money.
2. Some types of quasi-money do not fit the standard definition of money, which in turn is very much the definition given by Frances. She defines money as “Any good which is widely accepted as payment for goods and services…”. I.e. some forms of quasi-money are nowhere near as “widely accepted” as £10 notes.
3. In that quasi-money IS A THREAT to Positive Money’s ideas, it is probably also a threat to the entire conventional money creation system and the existing systems used to regulate the economy. To illustrate, central banks control interest rates by adjusting the size of the monetary base, which in turn is supposed to influence rates charged by commercial banks. Now if some quasi-money producer gets away with printing serious quantities of “home made money”, that rather messes up the central bank’s ability to control things.
4. Despite appearances, no money creation actually takes place with some types of quasi-money.
Money creation DOES TAKE PLACE with for example Airmiles and other forms of loyalty points, e.g. as issued by some supermarkets. And I’ll now explain why.
To simplify matters, let’s assume zero inflation and that all employers always make a standard return on capital, or make “normal profits” to use a phrase widely used in economics.
Assume a vendor starts a reward point scheme, and customers get points worth 1% of their purchases. That just means that goods that would previously have cost £100 will now cost £101 with the customer getting £1 of points. Note that if the vendor DOES NOT raise prices then profits will be below normal after the scheme starts.
In effect the vendor is simply handing out tokens in exchange for central bank or commercial bank created money (which I’ll call “official” money henceforth). So, to illustrate, if a vendor hands out £100 of tokens in exchange for £100 worth of official money, the money supply rises by £100: the £100 of official money is still in existence, meanwhile the person accepting the tokens has £100 of tokens.
But the vendor has a problem: sooner or later the customer in possession of the quasi money will present it to a retailer in payment or part payment for goods or services. And that retailer will present the quasi money to the original vendor and demand some real money in return.
So setting up or expanding one of these reward point schemes WILL HAVE a stimulatory effect. But once the scheme has reached it’s maximum feasible size, the stimulatory effect stops (assuming absolutely constant GDP).
Of course GDP is not absolutely constant. The effect of these schemes will wax and wane in line with expansions and contractions that take place ANYWAY in most economies. I.e. in a boom, no doubt there will be an expansion in air travel. (Incidentally, the above process whereby the setting up of reward schemes is stimulatory is similar the phenomenon pointed out by George Selgin, namely that if fractional reserve is introduced to a full reserve economy, there is a temporary stimulatory and inflationary effect)
So if and when an economy expands as a result of stimulus done Positive Money style, Airmiles etc will simply amplify the effect. Thus Airmiles and supermarket loyalty points do not pose a threat the way Positive Money advocates controlling the economy.
5. Creators of quasi-money cannot spend it willy-nilly.
Those issuing quasi money don’t just “print” the money and hand it out to all comers, or spend it themselves. They actually sell their home made money in exchange for official money and that DOES INCREASE the money supply. But those issuers cannot just spend their ill-gotten gains willy-nilly. Reason is that for every unit of quasi money issued, there is probably another one being cashed in. So quasi money producers have to keep a stock cash to deal with this problem (in much the same way as commercial banks have to keep a stock of central bank money to pay those who don’t want commercial banks’ “home made” money.
Now that is a very different to money creation Positive Money style. The latter involves having central bank create money and government spend it into the economy. There, the government can spend it as government sees fit – on education, health, or whatever. To misuse the phrase “willy-nilly”, government can spend the money willy-nilly.
Let’s now look at various specific types of quasi-money:
As Frances points out, government debt - particularly short term debt – is accepted in lieu of official money in the world’s financial centres (Wall Street, etc). However, government debt has been around for centuries: long before Positive Money came on the scene. Government debt is no more of a threat to Positive Money’s ideas than it is to other or conventional methods of controlling the money supply or controlling the economy. And it does not seem to have actually been a threat over the last two hundred years or so.
And one of the reasons for government debt’s failure to threaten conventional money is that it is useless for the vast bulk of transactions: buying a house or a car or doing the weekly shopping in the supermarket. Indeed, this is reflected in the the fact that no country I know of includes government debt in any of its measures or categories of money
The turnover of Paypal is certainly significant, but it does not actually produce money: it simply facilitates debit and credit card transactions that would take place anyway.
Bitcoin and e-credit and local currencies
These are the same as Airmiles and loyalty points in that those organising Bitcoin and e-credit sell their units in exchange for national currencies. And that DOES INCREASE the money supply, but those issuing this money cannot spend it willy-nilly.
Also the fact that these types of money are international is not of any great significance. That is, a UK resident who wants to do business in the UK using Bitcoin will sacrifice official money to obtain Bitcoin money. That resident won’t have ANY MORE MONEY to spend in consequence. So there is no effect there.
Also, the fact that there are millions of people worldwide with Bitcoin money who COULD SPEND IT in Britain is not of much significance: they are free, and always have been, to turn their own currency into Sterling and spend it in Britain.
Examples of these include Bristol pounds, Lewis pounds and in the U.S., Ithaca hours.
I have no objection to these types of money, but they just don’t meet the standard definition of money. I.e. not only are Lewis pounds less popular than official money in Lewis, they are completely useless outside the Lewis area.
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