Making Money Work for Us E-Book

L. Randall Wray

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2022

Seitenzahl: 304

Beschreibung

Is money precious and scarce, necessitating iron fiscal discipline? Must the government always balance the books or risk ruin? Or is money, in fact, a flexible tool that can be used to mobilize our collective resources to serve those who need them? In this book, leading Modern Money Theory (MMT) advocate Randy Wray explains that the only real constraints on public policy are physical resources, technological capacity and political will: but never money. He shows how modern sovereign governments spend by keystroking money to bank accounts. While taxes serve other important purposes, they do not - contrary to popular belief - fund spending. If we recognize this, and totally reframe how we think about money and debt, we can marshal our national wealth to make us all richer, eliminate unemployment and "look after our own." We can make money work for us - the US. This book's account shows how MMT can become a new American political and economic orthodoxy, replacing the dominant conservative framework forever. It is essential reading for all progressives.

Leseprobe

CONTENTS

Cover

Title Page

Copyright

Acknowledgments

Preface

Notes

An Introduction to Modern Money Theory

A. MMT’s Shocking Conclusions

B. Themes to Be Covered

1 What Is Money?

A. Money Is What Money Does?

B. I Owe You, You Owe Me

C. Redemption

D. Record-Keeping in Money

E. The Nature of Money

F. Conclusion

Notes

2 Where Does Money Come From?

A. Money Creation Simplified: The State’s Money

B. How the Central Bank Creates “Money”

C. How Modern Treasuries Spend through their Central Banks

D. How Are Taxes Paid?

E. Do Treasury Checks Bounce due to Insufficient Funds?

F. How Banks Create Money

G. Why Does Government Sell Bonds?

Notes

3 Can We Have Too Much Money?

A. What Determines the Value of the Currency?

B. Real-World Constraints

C. Can We Ever Have Too Much Money?

D. Private Money Creation and Financial Instability

E. Conclusions

Notes

4 Balances Balance

A. Time, Money, and Balance

B. Debt Cancellation and the Soddy Principle

C. Government Debt and Balance

D. Money and Sovereign Power

E. Sovereignty and Exchange Rates

F. Conclusion: A World Out of Balance

Notes

5 Life Is Full of Trade-Offs

A. Private Trade-Offs

B. Public Trade-Offs

C. Is Policy a Zero-Sum Game?

D. What is MMT’s View on All This?

E. Why We Should Take Advantage of the Free Lunches

F. The Inflation–Unemployment Trade-off

Notes

6 The MMT Alternative Framework for Policy

A. Framing

B. MMT’s Framework on Money

C. The MMT View of Taxes

D. MMT’s Approach to Spending

E. MMT’s Alternative Framing on Inflation

F. MMT’s View of Government Deficits

G. Why Is Money So Difficult to Discuss?

Notes

7 MMT and Policy

A. What Is MMT’s State of Play in Policy-Making Circles?

B. MMT’s Approach and Pay-Fors

C. MMT’s Policy Agenda

D. Conclusion

Notes

Index

End User License Agreement

List of Illustrations

Chapter 4

Figure 1

Government and nongovernment sector balances (% of GDP) 1960–2020

Figure 2

Government surpluses mean private deficits

Guide

Cover

Table of Contents

Title Page

Copyright

Acknowledgments

Preface

An Introduction to Modern Money Theory

Begin Reading

Index

End User License Agreement

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Making Money Work for Us

How MMT Can Save America

L. Randall Wray

polity

Copyright © L. Randall Wray 2022

The right of L. Randall Wray to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.

First published in 2022 by Polity Press

Polity Press65 Bridge StreetCambridge CB2 1UR, UK

Polity Press111 River StreetHoboken, NJ 07030, USA

All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

ISBN-13: 978-1-5095-5427-0

A catalogue record for this book is available from the British Library.

Library of Congress Control Number: 2022933265

The publisher has used its best endeavors to ensure that the URLs for external websites referred to in this book are correct and active at the time of going to press. However, the publisher has no responsibility for the websites and can make no guarantee that a site will remain live or that the content is or will remain appropriate.

Every effort has been made to trace all copyright holders, but if any have been overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.

For further information on Polity, visit our website:politybooks.com

Acknowledgments

I would like to thank Dimitri Papadimitriou and the Levy Economics Institute for support over the past three decades; my current colleagues at Bard College, especially Pavlina Tcherneva; my former colleagues and students at the University of Missouri–Kansas City, including Mat Forstater, Stephanie Kelton, Jim Sturgeon, Bill Black, Yeva Nersisyan, and Eric Tymoigne; my wife, Xinhua, and kids Shane, Alina, and Allison; and – finally – my comrades in arms, Bill Mitchell and Warren Mosler. Above all, I want to recognize my indebtedness to my mentor for forty years, the late John Henry, and to Hyman Minsky, the greatest American economist of the second half of the twentieth century – on whose shoulders I stand.

Preface

I studied with Hyman Minsky in the early 1980s when he was writing his famous 1986 book (Stabilizing an Unstable Economy1). There are two phrases in that book that I remember him saying in class:

Everyone can create money; the problem is to get it accepted.

The need to pay taxes means that people work and produce in order to get that in which taxes can be paid.

The first of these has to do with the creation of money – by anyone – while the second concerns why anyone would want it.

Most of my work on money for the first decade after my PhD studies concerned the first statement. It is largely about the private money system; government enters primarily as a regulator of banks and through its central bank as the provider of bank reserves. We can call that the credit money system – how private money is created when banks make loans. My first book, Money and Credit in Capitalist Economies (19902), went through all of that, and I’ve continued work in that area as I examined the causes of the 1980s thrift crisis and later the 2007 collapse of the global financial system – what Minsky called money manager capitalism, analyzed in my later book, Why Minsky Matters (20153).

However, I never forgot the other point he made: we work hard to get the government’s money because we have to pay taxes. That had led me to the J. M. Keynes of the Treatise on Money4 and to G. F. Knapp’s State Theory of Money5 when I was writing my PhD dissertation in Bologna, Italy, in 1986.

I included a section on chartalism or the state money approach in the 1990 book, but it was brief since I was focusing on the role of credit money in the private sector. However, in the mid-1990s I returned to the role of the state in our monetary system, and discovered what I believe to be the best two articles ever written on money, by A. Mitchell Innes in 1913 and 1914. Keynes had reviewed the first one and aside from some quibbles he declared it to be correct. Unfortunately, these articles were largely forgotten until I republished them in my 2004 book, Credit and State Theories of Money.6

What struck me is that Innes was able to integrate a state money approach and a credit money approach. To understand our money, what Keynes called “modern money,” you must have both. Otherwise, to borrow a metaphor, you’ve got Hamlet without the Prince.

A group of us first at the Levy Institute in New York and then at the University of Missouri–Kansas City (but also including others, especially Warren Mosler, Bill Mitchell, and Charles Goodhart) dug deeper into this and gradually developed what is now called Modern Money Theory (MMT). My 1998 book, Understanding Modern Money,7 was the first academic exposition of the approach, which was simplified in my “primer” of 2012.8

MMT has been in the news constantly since 2019 – at first derided as dangerous “crazy talk,” and then embraced as governments ramped up spending to deal with the global COVID-19 pandemic.

Many think we claim to have invented some stand-alone, entirely new, approach to money. That is false. We stand on the shoulders of giants (the third phrase I recall from Minsky) – there is really no completely new theory in Modern Money Theory; MMT is an integration, one that integrates those two phrases from Minsky. We argue that this integration provides a new framework for analyzing monetary and fiscal policy in what we call sovereign currency nations. That framework is developed in detail in our MMT-based textbook, Macroeconomics.9

Over the past twenty-five years we have investigated all the details important to answering the question: “How does the sovereign government really spend?” While I’m sure there were economists in both the Federal Reserve Bank (Fed) and the US Treasury who understood all the operational details, these were not understood in academia or policy circles.

They mostly still are not.

But MMT has taken off; indeed, it has taken on a life of its own in the blogosphere. It is loved by many and perhaps hated by more. This current book is positioned in between the primer and an academic text, for those who already know the basics of MMT but who want to dig a bit deeper.

One of my graduate students in my class on money, who happened to be much older than the others, had to make a presentation at the end of the semester. He brought in a bag of those funny glasses that distort your vision. He asked everyone to don a pair and then began his talk. He discussed how the world had looked to him before he started the class on money – it looked just like the world looked to us now, with those funny glasses on: distorted. We looked at a fuzzy and barely comprehensible world with our impaired vision. He then proclaimed that we should take them off and look at the world anew! As we did, he told us we’d never see the world in the same way again – and that is precisely the way he felt after discovering Modern Money Theory. All those old cobwebs that had distorted his vision had been cleared away and he was ready to see the monetary world as it actually exists.

Your results may be similar.

Notes

1.

Hyman P. Minsky,

Stabilizing an Unstable Economy

, Yale University Press, New Haven and London, 1986, pp. 228 and 231.

2.

L. Randall Wray,

Money and Credit in Capitalist Economies: The Endogenous Money Approach

, Edward Elgar, Aldershot, 1990.

3.

L. Randall Wray,

Why Minsky Matters: An Introduction to the Work of a Maverick Economist

, Princeton University Press, Princeton and Oxford, 2015.

4.

John Maynard Keynes,

A Treatise on Money

, Volumes I and II, Harcourt, Brace, New York, 1930.

5.

Georg Friedrich Knapp,

The State Theory of Money

, Clifton, NY, Augustus M. Kelly, 1924 (1973).

6.

L. Randall Wray (ed.),

Credit and State Theories of Money: The Contributions of A. Mitchell Innes

, Edward Elgar, Cheltenham, 2004.

7.

L. Randall Wray,

Understanding Modern Money: The Key to Full Employment and Price Stability

, Edward Elgar, Cheltenham, 1998.

8.

That was updated in the second edition: L. Randall Wray,

Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

, Palgrave Macmillan, Basingstoke, 2015.

9.

William Mitchell, L. Randall Wray, and Martin Watts,

Macroeconomics

, Red Globe Press, London, 2019.

An Introduction to Modern Money Theory

Modern Money Theory (MMT) provides a description of the way money actually works in our modern world. Money is a scary topic. It is also rather complex. So bear with me.

We will begin with a discussion of what we might call the “nature” of money – what is this thing we call money? When we use the term, most people will think of a shiny coin or a paper “note” or “bill” – something they can get their hands on to buy something they want. But today the vast majority of payments do not involve use of coins or notes.

Some will also think of an idealized past, when money was “backed up” by “hard” gold or silver, giving it a “real” value. They bemoan our modern money that appears to have no real or permanent value – what many call a “fiat currency.” Some even heed the call of the Ron Pauls of the world to bring back the gold standard.

And since the global economy nearly collapsed in the late “aughts” of the beginning of the twenty-first century, many – rightly – think there is something wrong with money. They want to reform our monetary system.

But if we are going to reform it, we really need to understand it.

This book will help you to understand both our private money and our government money: what money really is, where it comes from, and how it works. Along the way, we’ll see how this alternative perspective sheds light on reform – how we could change the monetary system to make it work better for us. This requires sweeping away mountains of misunderstanding about money.

A. MMT’s Shocking Conclusions

MMT reaches conclusions that are shocking to many who’ve been taught the conventional wisdom. Most importantly, it challenges the orthodox views about government finance, monetary policy, the so-called inflation–unemployment trade-off, the wisdom of fixed exchange rates, and the folly of striving for current account surpluses. (If you don’t know about any of those things, don’t worry – indeed that might make it easier to follow what comes!)

For most people, the greatest challenge is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the federal government runs its budget, I’d go broke,” followed by the claim “therefore, we need to get the government deficit under control,” MMT argues this is a false analogy.

Of course, households and firms can and do become insolvent when they issue too much debt. But a sovereign, currency-issuing government is nothing like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Governments spend first, then tax. That means tax revenue is not needed for spending. That does not mean taxes are unimportant – they serve other useful purposes. But the national government does not need to receive its own currency before it can spend – indeed, it cannot receive currency until after it spends.

Another conclusion is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent!

This is why MMT sees the sale of government bonds by the sovereign as something quite different from borrowing: bond sales are part of monetary policy and help the central bank to manage interest rates. Governments don’t need to borrow their own currency! As we will explain, governments spend their currency first and then receive it back in tax payment.

We’ll revisit this argument later. What is important for now is MMT’s recognition that government’s spending is never constrained by taxes or by “bond market vigilantes” who might refuse to lend. To put it as simply as possible, governments today spend by “keystrokes” that they cannot ever run out of.

It surprises most people to hear that banks operate in a similar manner. They lend their own deposits into existence and accept them in payments on loans they hold. Strange, but true!

A century ago, a bank would issue its own bank notes when it made a loan. The debtor would repay loans by redeeming bank notes. Obviously, banks had to create the notes before debtors could pay down debts using the bank notes.

However, banks gradually got out of the business of issuing notes and instead turned to deposit banking. In the US today, only the Federal Reserve Bank (the government’s bank) issues notes – our green paper currency. Private banks only issue deposits.

Banks now create deposits (not notes) when they make loans; debtors repay those loans using bank deposits (and the deposits of any US bank can be used to pay down loans at any other US bank). Almost all bank loans are repaid this way – by debiting bank deposits. And what this means is that banks need to create the deposits first before borrowers can repay their loans.

Hence, there is a symmetry: the sovereign spends currency (or central bank reserves – explained later) into existence first, and then taxpayers use the currency (or central bank reserves) to pay taxes; and banks lend their deposits into existence, then the bank’s debtors use bank deposits to pay down loans.

The money is always created “out of thin air” – when the government spends or the banks lend. There’s no theoretical limit to the government’s ability to create its money (currency and reserves) and no limit to banks’ ability to create bank money (deposits). You may find that shocking, and maybe even scary. This book will explain how money creation works and how we can use that knowledge to improve the functioning of our economy.

We will argue that the true constraints we face are real resource constraints and the limits of our knowledge. If we know how to do something, and we have the real resources (labor, natural resources, and productive capacity) required, we can find a way to afford to do it. If we have unemployed resources (most importantly labor), we can find a way to pay that labor to work. If we have idle plant and equipment, we can find the finances to put it to work, too. Importantly, if we have the resources and technology required to save the planet from climate catastrophe, we can financially afford to do it.

This does not mean government faces no constraints – it faces political constraints as well as real resource constraints. Even if politicians did not worry about “where will the money come from,” they do care what money is spent on – that is, they have preferences regarding what the government should do. Further, policy often would lead to competition between the government and the private sector over use of resources. Even if there are a lot of unemployed workers and machines, it can be difficult to ensure that a new policy would not also demand resources that are already in use. In that case, the government would bid against private use of those resources. In other words, there could be a real trade-off: less private use and more public use. Since government doesn’t face a financial constraint similar to that faced by the private sector (and the private sector needs to make a profit, the government doesn’t), the government can win a bidding war. Not only does the government end up with the resources, the bidding war causes prices to rise. The result could be inflation.

Still, the usual situation (outside major wars) is that there are unemployed resources that could be mobilized for public programs. And if the government can surmount the political constraints, it can always afford to mobilize the unemployed resources in the public interest. Money is not the problem.

Ultimately, this should be comforting, not scary. Understanding how money really works lets us focus on the real barriers – politics, real resources, technical know-how, and inflation. In coming years we face a number of challenges – one might even claim we face existential threats perhaps greater than humans have had to deal with since they first came out of Africa. Survival of anything like organized human civilization may be in question. But the scientists claim that we have most of the know-how to tackle the challenges. MMT claims that we have the financial ability – we can finance what it takes to rise to the challenge. If we can clear away the misunderstandings, align the politics, and mobilize the resources, we can win.

We hope that this book will motivate you to pressure those with the power to take action to do what is necessary to make the world a safer and better place for humanity.

B. Themes to Be Covered

This book will provide an overview of several themes that are important to Modern Money Theory:

What is the nature of money?

How does private money get into the economy?

How does the government’s own money get into the economy?

How does the government really spend?

Can a government be forced into bankruptcy by the weight of its own debt?

What are the true constraints we face?

What are the trade-offs?

Is it true that economics is a zero-sum game?

What role does money creation play in creating financial crises?

What can we do to promote economic and financial stability?

These issues will be developed in more detail throughout the first four chapters of the book. In chapter 1 we examine what we mean by the term “money”; in chapter 2 we look at how money gets into the economy. Chapter 3 examines whether we can have “too much money” – that is, so much that prices rise rapidly. In chapter 4 we develop an understanding of monetary “balance.”

In the second half of the book, we tackle policy issues. Chapter 5 looks at the trade-offs, zero-sum economics, and potential free lunches available to policy makers. Chapter 6 looks at how we can frame issues surrounding money. Money can be a scary topic for both policy makers and the public. We need to provide a proper framing to support our desire for policy that serves the public interest.

Chapter 7 details the MMT approach to a variety of policy issues: government spending and taxing, inflation, and budget deficits. It examines the three policies that are fundamental to the MMT approach: the job guarantee to anchor the domestic value of the currency; interest rate targeting as the main tool for monetary policy; and a floating exchange rate to support domestic policy space. We close with a discussion of the state of play of MMT in Washington policy-making circles.

1What Is Money?

A. Money Is What Money Does?

What is money? You will probably answer: “money is what I use to buy stuff.”

That is a perfectly sensible answer, defining money by its function. We call this function “medium of exchange” – you exchange money for the stuff you want to buy.

After a few moments of thought, you will add: “I also use money to store value – so that I can buy stuff later.” This refers to money as something you can hoard, although unlike Scrooge, you do plan to spend it, eventually – even if you are not sure what you’ll buy. Holding money lets you postpone spending.

You also might offer that you use money to pay off your debts. We can call this function the “means of payment.” Money can help you get out of debt.

You can also mention that we use money as a measuring unit, to calculate money (or “nominal”1) values: “I think that painting is worth a thousand dollars” or “I don’t think it is worth it to pay $350 for a Taylor Swift concert.” This is money functioning as a unit of account – sort of like using the yard or meter to measure length or the quart or liter to measure weight.

But let us go deeper. What is money? Can you describe what it is that you use to buy things, hoard value, and make payments on debts?

Your first thought will probably turn to paper money – the green dollar bill if you are in America, with George Washington on the front, signed by the US Treasurer and the Secretary of the Treasury. On the back it says “IN GOD WE TRUST” over the word ONE, and there’s a curious picture of a pyramid with an eye at the top and some unintelligible (Latin) language.

After further inspection you find the words “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE,” apparently confirming what you said earlier – you can pay your own (private) debts with it. (And also public debts – whatever that might mean! We’ll investigate later.)

So, is money just paper? Well, certainly most paper is not money! And you will quickly add that not all money is paper. You’ve got a quarter in your pocket (interestingly, the US is unusual in that the largest denomination coin in common use – the quarter – has such a small value relative to that in most other developed nations). It is made of metal with a milled edge, has a picture of dear old George on the front, also trusts in God, and on the reverse side has either an eagle or, if of more recent vintage, a symbol from one of the fifty states. Is money metal? No, of course not – only these special stamped coins qualify as money – most metal, even valuable precious metal, is not money.

But what do you actually spend – just special pieces of paper or metal? After reflection, you note that most payments you make do not involve paper notes or metal. You use checks for many of your payments, writing a name (of a person or business entity) on the line that says “pay to the order of,” then an amount, and finish with your signature. The recipient deposits your check in her bank, and your bank account is debited and hers is credited. Is that money? You can make purchases, store value, and pay down debt using checks – so checks certainly fulfill the functions of money.

Maybe the bank keeps a drawer with your name on it, filled with George Washington paper notes and metal quarters? When you write a check, maybe the bank takes money out of your drawer and puts it in the drawer of the recipient? Hmmm. That must be a lot of work. Hundreds of millions of bank account drawers full of cash and perhaps trillions of transactions weekly – those bank gnomes must be very busy! No, it doesn’t work that way. You’ve probably had a peek inside your bank’s vault – not nearly big enough to hold cash in an amount equal to all of the deposits of the bank’s customers.

Increasingly you make payments online through electronic transfers, by providing long strings of mysterious numbers. Do banks take notes and coins out of your account and stuff them into the fiber-optic cables that link up all the computers so that they can flow to the right bank accounts? Obviously not – your computer keystrokes send instructions to the bank to make “electronic” payments for you. Are those photons that travel at the speed of light through the internet money? Is that what money is? A mere photon?

On final reflection you remember that many – maybe most – of your payments are made by submitting a (credit or debit) card to the merchant’s card reader. Is money plastic? Or is there money somehow stored on your card and sucked out by the machine when you make a purchase? Not likely. But is this really money? You object that if you use a credit card, you still have to pay for the purchase later – usually through a debit to your bank account or by writing a check. But you do not pay the store – you make a payment to the bank that issued your card. That bank paid the merchant for you, and your bank makes a payment to the bank issuing the credit card when your account is debited or your check is presented for payment.

Not only is money scary but it is complicated, too! It is paper, it is metal, it is plastic, or … it is nothing but an ephemeral and quirky photon! Maybe approaching money from the perspective of the functions it serves is not the best way to do it, after all. It seems that lots of different “moneys” can be used to serve money’s functions.

B. I Owe You, You Owe Me

Let’s try to answer the question more directly: what is money? What do all these things (if we can call them such?) that function as money have in common? Those George Washington notes are issued by the central bank of the US, the Federal Reserve (Fed). Technically, they are “liabilities,” or I Owe You’s (IOUs), of the Fed. The demand deposits are liabilities of the banks. The credit card debt accepted by the merchant is an IOU of the bank that issued the card (and the merchant pays a fee – two or three percent of the purchase price for the “convenience” of letting you walk off with your purchases). And you, of course, owe the credit card issuer – your promise to pay is the asset of the bank that issued your card. You are likely to meet that promise using a debit from your demand deposit account at your bank – your asset, your bank’s liability.

All of these entities are tied together through a network of IOUs. We don’t want to get into complicated accounting now, but every economic entity (individual, household, firm, charitable organization, financial institution, and government) has a balance sheet (whether they know it or not!). We can think of this as a table with two columns that looks like a T (rather brilliantly, called a “T account”). We can label the left-hand side “assets” and the right-hand side “liabilities.” The T accounts here just show the changes to balance sheets involved in a house purchase.

For example, let’s say you buy a house using a mortgage from your bank. We show your assets increasing by “+House” and your liability increasing by “+Mortgage.” This is because you owe the mortgage debt and will make monthly payments. The bank’s assets increase by the value of your mortgage (they loaned you the money to buy the house – since you owe them, that is their asset) and their liability has increased by the amount of the check used to purchase the house. Deposits are always the liability of the bank – the bank owes the depositor. What does the bank owe? The right of the depositor to make a withdrawal or to write a check against the deposit.

This deposit is now owned by the seller, so it shows up as “+Deposit” as an asset of the seller; however, the seller has lost a house so that is a negative entry – a deduction from assets (−House). Note we have kept this as simple as possible, ignoring other items on the balance sheets, ignoring the fact that you probably made a down payment (we assumed you obtained a mortgage loan for the full sales price), and assuming the house seller uses the same bank. All of these simplifying assumptions can be relaxed – but that merely complicates the exposition without changing anything important.

Since World War II, the standard US mortgage has had a fixed interest rate with a term of thirty years.2 You sign a “note” promising that every month you will make a payment of $1,000, which includes interest and principal. On your balance sheet, the house is your asset and your note is your liability (your bank holds your note as its asset). Thirty years later, the Day of Redemption finally arrives when you make your last house payment. The bank returns your note and you invite all your neighbors over for a “note burning party.”3 Hallelujah!

The Fed’s George Washington “note” is its liability. When it receives its own note back in payment, it might, too, have a “note burning party” (actually, the Fed shreds the notes and if you take a tour of one of the District banks, you can receive a bag of shredded notes as a souvenir). Or, if the note is in good shape, the Fed might store it for reissue later. However, when the note is in the Fed’s storehouse it is not counted as a liability – it is just a scrap of paper.4

What about metallic coins? These are usually issued by the national treasury. In the US today, the Treasury only issues coins, although in the past it also issued paper notes. Like paper notes, coins are the liabilities of the issuer.5 Treasuries also issue bills (very short-term debt, usually thirty days; we still call the green paper notes “dollar bills,” indicating they are IOUs with a short term to maturity – in fact a maturity equal to zero) and issue bonds of various longer maturities (perhaps up to thirty years or even longer). These are also liabilities of the treasury but, unlike coins and paper notes, they promise to pay interest (like your mortgage note).

Earlier we discussed the use of bank accounts to make purchases. Your checking and savings accounts are your assets, but they are the liabilities of your bank. Banks typically issue two main types of deposit accounts: demand deposits (with funds available “on demand”) and time deposits (banks can require notice before funds are withdrawn). Today banks pay interest on deposits (usually higher interest on time deposits than on demand deposits).6 When you make payments by writing a check, by using a debit card, or through an electronic funds transfer, you are using bank liabilities. Your account is debited and the recipient of your payment gets a credit to her account, probably held at a different bank, and the Fed “clears” the accounts of the two banks. As mentioned, when you make payments using “plastic” (a credit card), the card-issuing bank makes the payment for you. You will then pay down your credit card debt by using your bank deposit (often held at a different bank). (Things are simpler if you use a debit card. Your bank simply debits your account and makes a payment for you – e.g. to the grocery store at which you shopped.)