Congratulations, you have independently rediscovered Knut Wicksell's pure credit economy, which he expounded in his 1906 Lectures on Political Economy, volume 2. Probably they didn't teach it or even talk about it when you attended MIT because it was "too old."
Until the 19th century, in sparsely settled areas, the account books of a general store functioned as a kind of central ledger, with cash, such as silver coins, rarely used. Credit rather than cash predominated in agricultural regions; payments were settled quarterly, semiannually, or annually at market days.
There's no rule in Monopoly that limits players to only using mortgages to obtain cash. Dealing between players is allowed so the only thing stopping Monopoly repos is player creativity.
But transactions between players don't increase net wealth or cash, because one gains and the other loses. Only the bank can make a net change for the players.
Shining your light of expertise on my ignorance using Monopoly™️ was brilliant. Thank you. (Now let’s hope Parker Bros. doesn’t rip you off with a rules change)
This is a wonderful, practical description of the Fiscal Theory of the Price Level. All the sentences correlate with the equations in John H Cochrane's latest book. One concept, though, needs to be added. It's not only the total net private financial wealth (which arises from the total federal debt) that predicts inflation, but more importantly, the extent to which we expect the federal government to tax vs inflate to honor that debt.
A rose by any other name is still....... In Arnold's previous post on this topic he questioned whether we would have such a thing as Monetary Theory if we had a cashless society. I think we would have something like "Monetary Theory" except it would have a different name. When looing at access to the payment system we usually examine only the asset side of the balance sheet. The assets in the balance sheet have various characteristics. Some of those assets consist of things wanted by everyone. Assets Wanted by Everyone (AWE) means one can exchange an AWE for anything else which would include AWE as well as non-AWE. I'm sure one can see pretty quickly that the amount of AWE in existence will influence people's behavior and economists would develop theories about the impact of changing the level of AWE. Probably we would begin to describe what would amount to Monetary Policy as Shock and AWE.
This is basically my understanding of the way money and monetary policy works. I'm trying to see exactly why or in what way it differs substantially from Kling's view of the world.
I am trying to understand your conception of a cashless society in which there is no money (no deposits or currency) and in which the central bank has no influence on the economy.
If you add up everyone's balance of dollars at a point in time, what would it sum to? A positive number? I think your answer is zero. If so, I don't see how this system gets started in the first place.
At the dawn of time in a cashless society, someone wants to buy something and they must pay by telling the computer to deduct a dollar from their balance and ading it to someone else's balance. But this person has a zero balance. So they borrow dollars using a real asset as collateral. Who lends? How did they get dollars to lend? How is the dollar value of their collateral determined?
Think of buying and selling as barter processed by a computerized exchange, with dollars used to measure relative value but without anything representing a "dollar." A butcher offers meat to a baker for bread. If the baker does not want to eat meat right now, the baker can provide the bread on credit, using the meat as collateral. Or the computerized exchange can find someone who wants meat. Suppose that is the candlestick maker. Now the butcher has to be willing to sell meat to the candlestick maker on credit, with candlesticks as collateral. Or the computerized exchange can find someone who wants candlesticks. This process continues until trading is complete.
Presumably the Baker A has a really good idea of what Butcher A's meat is worth in order to sell bread on credit. Setting that aside, I'll presume that the computer is something like a Walrasian auctioneer that can identify a dollar price for all goods that will clear markets. Call that vector of prices P. Your view is that we end up with P instead of 2P or 0.5P purely by chance/habit and it has nothing to do with the limited quantity of money in circulation?
The system gets started with government debt. That is where all money comes from. The government buys things with money it creates. Money is just government debt. Money in existence (whether M1, M2, M3, or M4, paper or electronic) is government IOUs that it exchanged for real assets or private financial assets.
While it might not be directly relevant, it seems worth noting that total wealth tends to increase as the game of monopoly progresses. That certainly seems real world. What isn't real world is that in monopoly, most players wealth does not increase. Unless the players collude, it won't. In monopoly there can only be one winner but in real world free market capitalism that's not what happens.
Yes, the haircut in Monopoly is larger. My memory is the "interest charge" to unmortgage is also rather large, though it doesn't increase each turn so there's no time factor.
Beyond that monopoly seems nothing like finance. When a bank loans out money, most of it eventually comes back to that bank or another bank as a new deposit and they lend most of it out again, unless they deposit it with the Fed instead. (Increased deposits with Fed is one reason the Fed's new money and quantitative easing did not create inflation after the great recession). They create more money. Cash or cashless system does nothing to change this. I'm not sure if it is the same issue as I just described or another but I'm baffled why you think a CD would exist in a cashless system but not a checking account. Other than the length of the deposit (checking is a series of one day deposits) they seem the same to me.
That all said, I remain clueless why you think a cashless system is different in the ways you suggest.
although Mr. Kling didn't delineate, it is evident to me that he equates checks and cash. He just means that we don’t need M1 balances, but we can just net out all the amounts paid by people and entities to each other each day. The important principle he is stating is that people don’t need money and checking balance to the extent they did in the past, and money for transactions is becoming less important. That’s a very important point, because in MV=PY no longer applies to predicting prices, because money supply and money demand don’t drive things. And velocity is now an endogenous, not an exogenous measurable number. In fact, the Fed, having them given up on controlling or even knowing the money supply, now simply sets interest rates.
"That’s a very important point, because in MV=PY no longer applies to predicting prices, because money supply and money demand don’t drive things. "
I have no clue why you would think or write that. While it is true that it has become increasingly more difficult to measure M, that in no way means MV=PY is no longer relevant nor that money supply and demand aren't important variables.
Whether in a cash or cashless system, it remains true that the Fed can create new money and that financial institutions can also create new money by making loans or they can decrease it by making deposits with the Fed. The resulting total M, regardless of the difficulty measuring it, remains relevant to predicting prices, inflation, and GDP growth. Likewise, the other three are relevant to the Fed's decisions to increase M.
The Fed might have to develop new instruments to deal with a cashless society, but a policy trying to keep inflation at a rate that facilitates relative price changes, would not need to change at all.
Congratulations, you have independently rediscovered Knut Wicksell's pure credit economy, which he expounded in his 1906 Lectures on Political Economy, volume 2. Probably they didn't teach it or even talk about it when you attended MIT because it was "too old."
Until the 19th century, in sparsely settled areas, the account books of a general store functioned as a kind of central ledger, with cash, such as silver coins, rarely used. Credit rather than cash predominated in agricultural regions; payments were settled quarterly, semiannually, or annually at market days.
There's no rule in Monopoly that limits players to only using mortgages to obtain cash. Dealing between players is allowed so the only thing stopping Monopoly repos is player creativity.
But transactions between players don't increase net wealth or cash, because one gains and the other loses. Only the bank can make a net change for the players.
Shining your light of expertise on my ignorance using Monopoly™️ was brilliant. Thank you. (Now let’s hope Parker Bros. doesn’t rip you off with a rules change)
This is a wonderful, practical description of the Fiscal Theory of the Price Level. All the sentences correlate with the equations in John H Cochrane's latest book. One concept, though, needs to be added. It's not only the total net private financial wealth (which arises from the total federal debt) that predicts inflation, but more importantly, the extent to which we expect the federal government to tax vs inflate to honor that debt.
A rose by any other name is still....... In Arnold's previous post on this topic he questioned whether we would have such a thing as Monetary Theory if we had a cashless society. I think we would have something like "Monetary Theory" except it would have a different name. When looing at access to the payment system we usually examine only the asset side of the balance sheet. The assets in the balance sheet have various characteristics. Some of those assets consist of things wanted by everyone. Assets Wanted by Everyone (AWE) means one can exchange an AWE for anything else which would include AWE as well as non-AWE. I'm sure one can see pretty quickly that the amount of AWE in existence will influence people's behavior and economists would develop theories about the impact of changing the level of AWE. Probably we would begin to describe what would amount to Monetary Policy as Shock and AWE.
This is basically my understanding of the way money and monetary policy works. I'm trying to see exactly why or in what way it differs substantially from Kling's view of the world.
I am trying to understand your conception of a cashless society in which there is no money (no deposits or currency) and in which the central bank has no influence on the economy.
If you add up everyone's balance of dollars at a point in time, what would it sum to? A positive number? I think your answer is zero. If so, I don't see how this system gets started in the first place.
At the dawn of time in a cashless society, someone wants to buy something and they must pay by telling the computer to deduct a dollar from their balance and ading it to someone else's balance. But this person has a zero balance. So they borrow dollars using a real asset as collateral. Who lends? How did they get dollars to lend? How is the dollar value of their collateral determined?
Think of buying and selling as barter processed by a computerized exchange, with dollars used to measure relative value but without anything representing a "dollar." A butcher offers meat to a baker for bread. If the baker does not want to eat meat right now, the baker can provide the bread on credit, using the meat as collateral. Or the computerized exchange can find someone who wants meat. Suppose that is the candlestick maker. Now the butcher has to be willing to sell meat to the candlestick maker on credit, with candlesticks as collateral. Or the computerized exchange can find someone who wants candlesticks. This process continues until trading is complete.
Presumably the Baker A has a really good idea of what Butcher A's meat is worth in order to sell bread on credit. Setting that aside, I'll presume that the computer is something like a Walrasian auctioneer that can identify a dollar price for all goods that will clear markets. Call that vector of prices P. Your view is that we end up with P instead of 2P or 0.5P purely by chance/habit and it has nothing to do with the limited quantity of money in circulation?
See the other post. https://arnoldkling.substack.com/p/monetary-theory-for-a-cashless-society
The system gets started with government debt. That is where all money comes from. The government buys things with money it creates. Money is just government debt. Money in existence (whether M1, M2, M3, or M4, paper or electronic) is government IOUs that it exchanged for real assets or private financial assets.
While it might not be directly relevant, it seems worth noting that total wealth tends to increase as the game of monopoly progresses. That certainly seems real world. What isn't real world is that in monopoly, most players wealth does not increase. Unless the players collude, it won't. In monopoly there can only be one winner but in real world free market capitalism that's not what happens.
Yes, the haircut in Monopoly is larger. My memory is the "interest charge" to unmortgage is also rather large, though it doesn't increase each turn so there's no time factor.
Beyond that monopoly seems nothing like finance. When a bank loans out money, most of it eventually comes back to that bank or another bank as a new deposit and they lend most of it out again, unless they deposit it with the Fed instead. (Increased deposits with Fed is one reason the Fed's new money and quantitative easing did not create inflation after the great recession). They create more money. Cash or cashless system does nothing to change this. I'm not sure if it is the same issue as I just described or another but I'm baffled why you think a CD would exist in a cashless system but not a checking account. Other than the length of the deposit (checking is a series of one day deposits) they seem the same to me.
That all said, I remain clueless why you think a cashless system is different in the ways you suggest.
although Mr. Kling didn't delineate, it is evident to me that he equates checks and cash. He just means that we don’t need M1 balances, but we can just net out all the amounts paid by people and entities to each other each day. The important principle he is stating is that people don’t need money and checking balance to the extent they did in the past, and money for transactions is becoming less important. That’s a very important point, because in MV=PY no longer applies to predicting prices, because money supply and money demand don’t drive things. And velocity is now an endogenous, not an exogenous measurable number. In fact, the Fed, having them given up on controlling or even knowing the money supply, now simply sets interest rates.
"He just means that we don’t need M1 balances, but we can just net out all the amounts paid by people and entities to each other each day. "
First, the Fed hasn't used M1 as a primary measure since at least the 80s. They switched to M2 and soon abandoned that as a primary measure.
https://www.federalreserve.gov/newsevents/speech/bernanke20061110a.htm
"That’s a very important point, because in MV=PY no longer applies to predicting prices, because money supply and money demand don’t drive things. "
I have no clue why you would think or write that. While it is true that it has become increasingly more difficult to measure M, that in no way means MV=PY is no longer relevant nor that money supply and demand aren't important variables.
Whether in a cash or cashless system, it remains true that the Fed can create new money and that financial institutions can also create new money by making loans or they can decrease it by making deposits with the Fed. The resulting total M, regardless of the difficulty measuring it, remains relevant to predicting prices, inflation, and GDP growth. Likewise, the other three are relevant to the Fed's decisions to increase M.
The Fed might have to develop new instruments to deal with a cashless society, but a policy trying to keep inflation at a rate that facilitates relative price changes, would not need to change at all.