Embedded Files
A true FIAT money (September 28, 2023)
It is reported that Kublai Khan issued passports that read “I am the emissary of the Khan. If you defy me, you die.”
I don't know the text on Kublai Khan's paper money, but according to Marco Polo it legally carried a similar message: "I am the money of the Khan. If you defy me, you die."
For Bastille Day (July 14, 2023)
A criminal law forcing inflated money on all sellers was enacted in the French Revolution.
How did this awful law find its way into the current criminal code of Israel and many other countries?
A sad story of "legal transplantation" is told in my 2016 article.
The next constitutional amendment (July 13, 2023)
Paraphrasing the Second Amendment: “A well-regulated money, being necessary to the economy of a free state, the right of the people to keep and bear cash, shall not be infringed.”
The point is that the US is more likely than any other country to keep physical cash for the sake of privacy and freedom, just as it grants the unusual right to keep and bear arms.
Of course it doesn't have to be well-regulated, and the point is not the people's right to hold physical cash but the government's obligation to produce it.
The Battle of Gettysburg at 160 (July 3, 2023)
How to pay soldiers, such as those on both sides of the Battle of Gettysburg, when you got only paper and no gold?
A government of the people, by the people, for the people (as Lincoln would later say there), should not impose paper money on all transactions. It is both more befitting, and usually sufficient, to impose paper money only on itself when collecting taxes.
This device was invented in the limited democracy of Massachusetts in 1690. Both sides in the Civil War used it.
Adam Smith at 300 (June 5, 2023)
Adam Smith, born exactly 300 years ago, knew why legal tender status was important.
When government declares only one currency to be legal tender for taxes, it controls taxpayers' exchange: They usually must obtain this currency in trade to pay taxes.
MMT: That's awesome! That's how the government gets taxpayers by the balls and can print as much as it wants.
Me: That's terrible. That's how we get high inflation.
Introducing "super exorbitant privilege" (May 26, 2023)
The dollar's dominance in international trade, a.k.a. "exorbitant privilege," is voluntary, based on custom and network.
It's nothing compared with its legal-tender-for-taxes privilege at home, based on the IRS and prison.
Sorry, bitcoin.
The welfare state and private money (May 11, 2023)
The bigger the government the smaller is the chance of bitcoin and any other purely private currency.
Because through the legal tender law the governemnt decides in which currency to accept taxes and spend back into the economy. When the government is as large as it is today - mostly because of the welfare state - this has a huge impact on the private economy's freedom to avoid the legal tender currency altogether.
From my book event at the Cato Institute, at 21:07.
Death for counterfeiters (April 27, 2023)
The death penalty for counterfeiting certain financial instruments in 17th century England is one way for us today to judge their intended level of "moneyness." Because that was the penalty for counterfeiting coins.
A real-life test of a legal tender law (April 24, 2023)
This excellent test is an opportunity to remind their positive and negative implications.
When only US currency is legal tender, the IRS:
cannot reject it;
does not have to accept any other object, such as bitcoin;
can choose to accept other objects like dollar-denoinated checks.
Legal Tender and the Jerusalem Temple: An Easter special (April 9, 2023)
A special Easter thread on the complicated relation between money and taxes, as exemplified by the money changers in the Temple.
According to the state theory of money / chartalism / cartalism / tax-foundation theory, a government can make an object circulate as money by accepting it for its own taxes.
The Jewish Temple in Jerusalem showed the limitations of this mechanism.
Jewish law required high-quality silver coins for the Temple tax. Coins of the Roman occupation didn't qualify. Only shekels from Tyre were.
Contrary to theory, shekels were not currency in Judea, so money changers in the Temple converted taxpayers' Roman coins to shekels just before the tax was paid.
Theory failed because:
A. The Temple tax was too small and infrequent.
B. Perhaps shekel supply was too low.
C. The economy was dominated by Roman taxes that required Roman coins ("render to Caesar" etc. was said in this exact context).
Did the Puritans of 1690 Massachusetts know about these limitations as they launched the first-ever currency to rely only on this tax mechanism? Probably. They were biblically hyperliterate. And they did experimented first with 1/6 of the amount they needed to print. Only when it worked they proceeded to printing the entire amount.
The great gold confiscation (April 5, 2023)
On this day 90 years ago FDR decreed: Bring me your gold! (and get paper money in return.)
Americans obeyed.
Assuming that most Americans were armed, how did this reverse convertibility not result in a revolt?
Were Americans too Greatly Depressed to resist?
The legal-tender survey (April 2, 2023)
What's "legal tender" and does it matter? A survey in history.
1. Milton Friedman and some economists: It's for debts and taxes; it doesn't affect currency's general acceptability.
2. Some other economists: It is [anything but what legal tender really means], therefore [irrelevant conclusion].
3. Bitcoiners: Legal what?
4. Adam Smith: If an object is legal tender for taxes then it has value.
5. Follow-up on Smith: If this object is the only legal tender for taxes, taxpayers must accept it in trade so it's the currency.
5a. MMT: It's awesome that the government thus gets taxpayers by the balls. These suckers will have to accept whatever amount of money we throw at them to pay for anything we want!
5b. Me: This is terrible because that's how you create high inflation. You can't get high inflation without this grip of legal tender money on taxpayers.
The legal tender cases (February 18, 2023)
The first Legal Tender Case on greenbacks was published on this day in 1870.
Chief Justice Salmon Chase, who had issued the greenbacks as Secretary of Treasury during the Civil War, wrote for the majority: To make currency circulate it is only needed that the government itself receive it.
Convertibility and legal tender for private debts not needed.
Mafia money (January 20, 2023)
The Italian lira, officially demonetized in 2002, is apparently still alive. At the hands of the mafia.
Is it forced on all intra-mafia transactions or debts by order of the capo di tutti i capi?
Or is it the voluntary, fixed-quantity, record-keeping device of some monetary models?
Forced money (December 27, 2022)
There is a troubling decline in the freedom of exchange around the world. Governments stick their noses into all transactions, dictating the most basic terms of payment, as discussed in this Forbes article.
I wrote about it in 2016 as a mostly historical phenomenon.
Pre-bitcoin mathematical monetary theory had a lot to say about bitcoin (September 27-29, 2022)
For 50 years before bitcoin, monetary theorists (myself included) have used math to study the simplest possible objects: no intrinsic value, not supported by laws, fixed supply, easy storage and transfer, no theft or counterfeiting.
The similarity to bitcoin is striking. We studied the monetary potential of such objects for simplicity (less parameters and variables in models) and hoped they resembled money in reality.
Our findings about such bitcoin-like objects:
A. Such objects could be money.
B. Competition from similar objects and state money is fatal for such objects.
A. Such objects could be money
Paul Samuelson, a brilliant mathematician but with a challenged view of reality, was the first to study such objects in 1958.
It took three more decades to show that such objects could be money within the solution concept known as Nash equilibrium: Kiyotaki and Wright (1989) proved there is a Nash equilibrium in which it is a best response to accept such an object as money if everyone else accepts it. But there is also a Nash equilibrium in which it is a best response not to accept such an object as money if everyone else rejects it.
Oddly, by that point, through sloppiness of earlier works by Keynes, Friedman, and others, this theoretical object acquired the misleading name "fiat money." There were no laws or government in these simplistic models to justify the term. Nobody was bothered by that. That was the terminology and anyone playing the game had to obey it. I worked with such models and the sorry terminology myself, as in this 2007 article in the Journal of Monetary Economics, later played by students in an experiment in this 2020 article published in the Journal of the European Economic Association.
B1. Competition with state money is fatal for such objects
I started graduate studies at the University of Rochester in 1997 and quickly got into this line of research. With a law degree at hand I thought it would be obvious to add a legal tender law to these simplistic models. If these objects are called "fiat money" let's make them real fiat money! So what is "fiat money" in English rather than in ivory-tower economics jargon? It means legal tender, as in the United States Code (Title 31, Section 5103):
"Legal tender" applies only to pre-existing monetary obligations denominated in the state's currency. It has nothing to say about spot transactions! Of all the obligations enumerated in the American legal tender law I chose to foucs on taxes. Taxes are not voluntary and the taxpayers cannot choose to avoid them or to denominate them in other units of account as they can with contracts. Taxes were mentioned by Adam smith in this exact context. Taxes were also mentioned by my father, a businessman, when I inquired why he did not abandon Israeli currency that suffered from 450% inflation.
So in 1998-2000 I worked, under the guidance of Per Krusell, on a mathematical model of money that included occasional tax payments that had to be paid in only one object and not others. It became chapter 1 of my 2002 dissertation.
This model evolved over time and eventually I reached the following findings:
By punishing those who don't have the legal tender object to pay taxes, the state can guarantee there is a Nash equilibrium with the legal tender object as money at the expense of all other objects.
The state can similarly eliminate all Nash equilibria in which the legal tender object is not money.
The mechanism is neutral with regard to the quantity of money: Doubling the quantity of money doubles the price level and therefore doubles the tax obligations, leaving the mechanism as strong as ever. This is how governments can create inflation without their currencies being abandoned.
Journals editors, referees, and other researchers in the field did not like this article. The most generous response was that this was irrelevant and not interesting. An editor in a leading journal said legal tender laws applied to all transactions, proving that he never read either the law or Friedman's classic works. A senior researcher in the field told me he could pay his taxes in chicken if he wanted to. I should have dared him to try it. More than anything I encountered animosity for polluting the pristine mathematical models with realistic assumptions.
Eventually, after 12 years, the article was published in 2012. This published version includes only competition between a legal tender object and barter. The editor took out of it the part in which the legal tender object competes with a bitcoin-like object and beats it. The full version is available here. It was eventually invited for publication, also in 2012, in this book. Editor Randall Wray and I agree that tax receivability maintains modern money but we totally disagree about policy implications. He is MMT. He celebrates state control of money for the effectiveness of proactive economic policies; I lament the state control of money because of its inflationary consequences.
The conclusion so far: In simplistic mathematical theory, the necessity to pay taxes in the state money is an enormous obstacle to competitors. It helps explaining why bitcoin can't beat the dollar or any other national currency that is not badly abused (inflated) by its government.
One caveat should be noted: the model is extremely simplistic. If taxpayers can better prepare for tax day (which in this model is random - for mathematical simplicity), results might change.
B2. Competition with similar bitcoin-like objects is fatal
Those mathematical models showing that bitcoin-like objects can function as money implicitly rely on an assumption that the object is simply there and people choose whether to hold it or not. But what if people can easily produce new types of bitcoin-like objects? Then every seller presented with such money by a buyer rejects it and says: “Thanks for the idea, I’ll issue my own!”
With none of these objects accepted in payment, we get tons of potential currencies, but no ACTUAL currency.
So said Nobelist Edward Prescott and Jose-Victor Rios-Rull in 2005.
Applying the same logic to bitcoin: Why should any programmer accept bitcoin rather than create his own bitcoin-like object?
And if I'm not a programmer, how do I choose which of the hundreds or thousands of bitcoin-like objects to use as money?
It's one more reason that bitcoin is not the global currency.
To summarize, before bitcoin was invented mathematical monetary theory predicted that a bitcoin-like object could function as money, but that competition from similar objects and state money is fatal. This are two possible reasons that in spite of all the hype, bitcoin is very very far from becoming the global currency that would crowd out all other types of money. There could be other reasons, mainly technical ones, but this is what mathematical theory has to say.
Why do people accept money? A 1948 insight (September 21, 2022)
Israel’s 1st central banker, Sigfried Eliezer Hoofien, wrote in February 1948:
Gold is dead. But a £5 note bearer in the UK knows this: “in any shop in the UK he will get £5 worth of goods, in any bank his account will be credited with £5, and any creditor will accept the note in payment. That is what he is concerned with."
Hoofien wrote this three months before Israel declared its independence. He was the chairman of the Anglo-Palestine Bank - the largest bank in the country and the official bank of the Zionist movement. He was in New York, among other purposes, to make an order there for the production of Israel's first currency. Hoofien wrote this a week after the UK unilaterally disconnected the currency of the British Mandate of Palestine from its sterling reserves in London, in a deliberate attempt to inflict chaos on the rebellious Jews.
It is telling that even right after such an unexpected, potentially fatal shock to the monetary system, during an existential War of Independence (that had already started three months earlier), Hoofien insisted only that the notes be made legal tender (see below). He did not require that the currency be forced under criminal penalties on each and every transaction. There was no need for it.
Bitcoiners, on the other hand, would have said: just commit to a finite amount of notes. Nothing else is needed! Everything will be fine.
Of course, there was no finite amount of notes, and there was some inflationary finance as in almost every war. But the currency was in fact accepted, the economy did not collapse, and the state survived. Mission accomplished.
Forced acceptance of money (August 23, 2022)
An Israeli buyer paid with small change and told the cashier she must accept it.
He was right. Section 489 of Israel's penal law still forces everyone to accept state currency under penalty.
Every enlightened country has a legal tender law that refers only to the payment of financial obligations, such as contractual debts and taxes. Creditors who refuse payment in the legal tender currency will get no aid from courts. But democracies usually have no criminal coercion regarding spot transactions. Because this land's past included dictatorships and socialism, it still has such a shameful totalitarian law, as I covered in this article. As incredible as it is, the law has its origins in the French Revolution.
A Hebrew, non-academic version is here.
This law has to go.
Money in law and in economics (August 18, 2022)
Economists and legal scholars sometimes don't agree on basic concepts such as "private money" or even what is "money" (example here).
Having formally studied both economics and law, I suggest a balanced approach in my book on the invention of modern money.
As an economist I view any general medium of exchange as money. To me, understanding this uniquely human, nearly universal social phenomenon requires that I not limit my research to government-issued or government-endorsed money; I even want to understand illegal money. History shows the importance of both private money and government money (see below).
But when a government issues paper money that can’t be redeemed in metal, I don’t want to call it “fiat money” and move on. As a legal scholar I ask: Is it legal tender for taxes? Legal tender for debts? Is it the unique legal tender? Is it forced on spot transactions?
If this balanced approach is accepted, peace and harmony among scholars of money may be advanced.
And if everyone denounces me for being "inconsistent," again a rare consensus will be reached.
Seems like a win-win situation.
End-of-gold anniversary (August 15, 2022)
Nixon nixed gold, on this day in 1971. Since that day, our currency is no longer backed by gold, or convertible on demand into gold. See here at 09:42
Why did it happen? And should gold return to anchor the global monetary system?
From 1944, according to the Bretton Woods Agreement, only the US maintained a formal relation to gold, promising to convert upon demand any paper dollar presented by a foreign central bank into a fixed amount of gold. This US discipline, with fixed exchange rates, was supposed to keep the entire world (minus communist countries) disciplined by the quantity of gold and thus free of the threat of inflation.
So why did Nixon do it?
It had happened countless times before that governments at war put gold aside and printed as much paper money as needed in order to pay soldiers and suppliers. In the decade preceding 1971 there was no major war, but there were three expensive wars, loosely defined: The Vietnam War, The War on Poverty (President Johnson’s extension of the welfare state), and the war on gravity (the space program). Too many dollars were printed, and the amount of gold backing them was clearly insufficient. Speculators and foreign central banks threatened to converge on the insufficient gold stored at Fort Knox, until Nixon changed the rules (“temporarily” — yeah, right), and threw gold into the dustbin of monetary history.
From a wider perspective, the Bretton Woods Agreement was bound to fail, and in fact it has sown the seeds of its own destruction. The agreement promoted US and worldwide economic growth so much (the fastest growth in history) that the latter outpaced gold discoveries. In such a situation, there is no good option:
1. Print as much money as needed for growth to continue and hope that nobody will call your bluff for claiming you have enough gold to cover it.
2. Print as much money as needed but revise the promise of gold convertibility accordingly. Instead of, say, $35 paper dollars per ounce, revise the promise to $50 paper dollars per ounce. But then the promise, easily revised at will, loses all credibility and thus its value.
3. Limit money printing to the increase in gold — slower than the economy’s growth rate. That would mean not enough currency going around, which would bring deflation. Deflation could have catastrophic consequences for the economy, as in the Great Depression.
The US chose Option 1, and those three wars, and in 1971 the game was over.
How about going back to gold? Unlikely, for the reason stated above. It would again be a failure waiting to happen.
Legal tender - a better term for our money (August 10, 2022)
"Fiat money" out, "legal tender" (back) in.
- It's written on US paper money.
- It's written in the US constitution.
- The legal battle over greenbacks is known as "the legal tender cases."
- It has a precise legal meaning.
- It describes every current government-issued currency.
"Fiat money" - why I don't like the term (August 9, 2022)
What is "fiat money"? A confusing term that should go.
Consider the potential properties of an object:
1. no intrinsic value.
2. no backing / convertibility.
3. legal tender for debts.
4. legal tender / receivability for taxes.
5. forced acceptance in all transactions.
"Fiat money" has had three important meanings:
A. Historical: First widely used for greenbacks (properties 1,3,4, and 2 in short term). Oxford Dictionary: #1-4. Greenbacks' opponents used the authoritarian "fiat" for political purposes, although the real authoritarian property 5 isn't there.
B. Academic economists, led by Keynes, Friedman, and Samuelson, use “fiat money” for anything with properties 1,2, ignoring any legal issue. Also in Merriam-Webster. Oddly, it’s actually a description of bitcoin! (before El Salvador added #3-5).
C. Popular current usage: Real-life current government money. Users know #1-2 for sure, but usually mistaken about #3-5.
It was a misleading term to begin with, and now it is confusing beyond repair. I say let’s drop it, and "fiduciary money" too. We should be more precise.
Anti-cash laws (July 31, 2022)
Is Israel a (monetary) light unto the nations (אור לגויים)?
Or is it darkness?
The scheduled tightening of Israel's anti-cash law got global attention.
I still can't quite get my head around the fact that the state fights an asset it issues itself as a monopoly.
Private money in the Bible (July 28, 2022)
Buying the Tomb of the Patriarchs: A story of money, archeology, and statistics.
Genesis 23:16 [King James Version]: “and Abraham weighed to Ephron the silver … four hundred shekels of silver, current money with the merchant.”
I'd end the translation with “, passing to the merchant” (but it has the same meaning).
Abraham’s stories are replete with petty kings, yet they are not mentioned as giving the force of currency to silver; merchants did.
Archeologists recently found that contemporary hoarded silver fragments in today's Syria statistically conformed to the shekel unit of weight.
This eased trade, at least 1000 years before states issued coins.
Therefore, at least the monetary part of the Tomb story is consistent with archeological science.
This increased credibility of the biblical story supports the view that the early history of money was dominated by the private sector and not by governments.
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