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What’s money? Wrong question. The right question: ‘which kinds of monies do we use for which purposes?’ as there are different kinds of money which are used for different purposes. Here, I want to stress that ‘receivables’ are: money. And are, at the moment, mainly used for inter-company purchases. The quarterly balance sheets (below) of Alphabet (formerly Google) show that, as of September 2020, Accounts Receivable had a value of almost 35 billion dollar. Accounts receivable are privately issued money. They are backed by the law but not created by banks or governments. They are created when a buyer promises to pay and a seller accepts this promise, a promise which can be legally enforced. But it’s not the payment by the debtor which defines the moment of the sale. The actual sale is legally finalized when the seller accepts the promise of the buyer. That’s the moment when ownership changes hands. Receivables are stated in a unit of account, they are a legal means of exchange and they surely are a store of value (that’s why they are included on the balance sheet).

‘Accounts receivable’ and ‘Accounts payable’ (on the liability side of the balance sheet) are important. On every balance sheet of every company you will find a considerable amount of payables and receivables and, as there is a flow of them, the value of the quarterly flow might be quite a bit larger than the value on the quarterly balance sheet. It’s tempting to state that this idea of privately issued money is heterodox but it isn’t. It’s a common and universally accepted, albeit not neoclassical, idea. You will see them on every balance sheet but also in the macro statistics (graph below), notably the Flow of Funds. Fact: Marcus Goldman, the founder of Goldman Sachs, started his career in the 1870‘s by buying receivables (promises to pay by specified customers) owned by local craftsmen in New York at a discount and collecting the money. Anthropologists and historians state that there are different kinds of money, used in different spheres of life. At this moment in time, deposit money is used for groceries, rents and taxes while ‘payables/receivables’ are used between companies (even when credit card transactions, a spin off of the ‘payables/receivables’ system and the work of Goldman, do resemble the ‘payables/receivables’ system a little). Hundred dollar bills are used by criminals (the 500 Euro note, while still legal tender, is not issued anymore for comparable reasons). Money has many faces and a certain kind of money will be less of a universal means of payment than generally assumed. So, which monies are issued by which kinds of institution and used for what purpose? Think about this when reading stuff about Digital central bank currencies.

  1. November 13, 2022 at 12:42 am

    A promise is not *store* of value, it has no substance and cannot be eaten or used. It is a *token* of value. It stands in the place of something of value.

    • November 13, 2022 at 8:33 am

      Value is a belief, not a substance.

      • merijntknibbe
        November 13, 2022 at 8:55 am

        That’s an individualistic approach. Money however is, to borrow the phrase of (ahem) Samuelson, a ‘social contrivance’. In the eighteenth and seventeenth century, which were characterized by an economy totally dependent on payables and receivables (deposit money was a rare exception (https://en.wikipedia.org/wiki/Bank_of_Amsterdam)and only used for a limited number of transactions and coins often were in short supply as we know from probate inventories. Commercial and loan debts were often only paid when people died (which is one reason why these probate inventories were written down). As women were (in the Netherlands) entitled to their own property, larger commercial debts had to be signed by the wife, too (generally, the man was seen as the initiator), as this meant that her property was collateral, too. Nowadays, when you do not pay your outstanding bills (payables), ultimately the bailiff/summoner/debt collector (I’m not sure about the best name, Dutch: ‘duerwaarder’, old english ‘dureweard’, etymology door + ‘waren’, or ‘roaming’, must be something as ‘the guy who roams from door to door) will come and take and sell your stuff. Monetary value is not just in the individual mind.

      • merijntknibbe
        November 13, 2022 at 9:16 am

        Let me put this more bluntly: if you don’t pay your ‘payables’, you can lose your house. The full power and might of the state guarantees such well described procedures. That’s what makes payables a ‘store of value’, too.

        This can be privatized, as we see in scores of movies which show illegal debt collectors collecting drug trade related debts – that’s a ‘social contrivance’, too.

      • November 13, 2022 at 10:07 am

        It is not an individualistic approach. Perhaps, it is better to go back to the basics. Humans cooperate on a large scale with the help of collective imaginations, for instance, nation states, gods, laws, and also money. We believe there is a law, and therefore, the law works. The same is true for money and corporations. I can tell a dog about the benefits of using cash to pay a corporation to produce dog food, but a dog does not care. And, you cannot make dogs work together in a corporation to produce dog food by paying them money.

        People are willing to work for money and sell their stuff for money. And because others do this, you do the same. You may think that euro notes have an appalling design as well as an unpleasant odour, but nevertheless you want them because others want them too. The value of the euro is based on the belief that other people accept euros for payment. This is based on a belief [in the European Union] as the following example demonstrates. Suppose that you wake up one day to hear on the news that the European Union has been dissolved overnight. Suddenly you may have second thoughts about your precious stockpile of foul smelling unstylish euro bank notes. Suddenly you may ask yourself in distress whether or not your precious bank notes still have any value. What is the value of the euro without the European Union? Then you may find yourself hurrying to the nearest phone shop in an effort to exchange this pile of bank notes for the latest model mobile phone.

        To prove this point even further, suppose that the phone shop gladly accepts your euros. Suddenly they become desirable again and you may start to have second thoughts about that latest model you are about to buy.

        See: https://naturalmoney.org/explanation.html#tvom

  2. merijntknibbe
    November 13, 2022 at 6:03 am

    The entire community of business economists disagrees.

    Mind that these promises can be legally enforced and almost always based on written contracts. There are however what’s called ‘dubieuze debiteuren’ (that’s Dutch, might translate as ‘dubious debtors’) which have to be written down. But in an accounting sense this will lead to lower profit or a higher loss, the change having the same size as the write down. It’s money… (or at least treated as such, by business economists and accountants).

  3. November 13, 2022 at 8:36 am

    What is money, is a matter of definition. For instance, it being legal tender could make it money. And then you have money substitutes (liquid assets) like government bonds, crypto perhaps, or gold. You can easily exchange these assets for money with minimal cost. Accounts receivables are less liquid and are a bit more dubious in this respect.

  4. rsm
    November 14, 2022 at 2:48 am

    “Let me put this more bluntly: if you don’t pay your ‘payables’, you can lose your house.”

    What if the Fed buys your IOUs?

  5. November 14, 2022 at 4:00 am

    A promise is still only a token. Its value depends on the world proceeding as we hope it will. If your debtor goes broke, dies, has a crop failure, etc etc, then you won’t get the value promised.

    And yes, value is not a substance, and it can have a large subjective component. That doesn’t change what I’ve just said.

    • Laurent Leduc
      November 14, 2022 at 4:54 pm

      A large subjective component? Please explain.

      • November 14, 2022 at 11:45 pm

        The value of a diamond depends on whether you, and others, like diamonds. Some people want a large house so the price of large houses goes up. An axe has a more utilitarian value, and so more objective, but even that depends on context: if you have a chain saw then an axe is less needed.

        More generally, ‘preference’, beloved of neoclassicals, is ephemeral and fickle, affected by marketing, fashion and so on.

    • rsm
      November 15, 2022 at 9:01 am

      《If your debtor goes broke, dies, has a crop failure, etc etc, then you won’t get the value promised.》

      What does that value matter to the central bank, since it easily creates value to replace (insure) the purported lost value?

  6. November 14, 2022 at 9:28 am

    Thanks a lot for the post;)


  7. Romar Correa
    November 14, 2022 at 12:28 pm

    “Different kinds of money” sticks in the craw, merijntknibbe! With a sentence or two and your last sentence you might be making the case for competitive monies. In that case, your morsel can be swallowed but digestion would be hard. Your piece reminded me that the word ‘universal’ or ‘general’ should sometimes be tagged to the familiar ‘functions of money’. Money is a universal medium of exchange, a general store of value. There cannot be more than one unit of account. By definition, it cannot yoyo in value. In this case, it is the US dollar. The value of ‘receivables” does not extend beyond the counterparties. Your counter view that “Money has many faces … generally assumed” is unfortunate. I am at a loss to understand “Accounts receivable are privately issued money”.
    I am sure that both neoclassical and heterodox, along with anthropologists and historians, will shudder at the mention of “Alphabet (formerly Google)”, Goldman Sachs, in the same company as money. As Geoff Davies seems to suggest, the items in your accounts are ephemeral. They can/do vanish in a trice, not leaving a trace. ‘Accounts receivable’ and ‘Accounts payable’ in the accounts of manufacturing firms are incomparable.
    The difference with the monetary circuit is illuminating. Business approaches banks to underwrite projects producing goods and services and employing workers. Money is emitted as deposits. These accounts are drawn upon to demand those goods and services. Profits accrue to firms who honor their commitments to banks and the money is extinguished. We can hold to competitive banking and call the items in the circuit ‘privately-issued money’.

  8. November 15, 2022 at 12:27 am

    I gather most economists are taught to recite ‘medium of exchange, store of value, unit of account’. Still, great confusion about money prevails.

    I have argued in ‘Economy, Society, Nature’ (right-hand-column) that ‘medium of exchange’ is the fundamental property. ‘Unit of account’ is trivial, a matter of definition, though important.

    If you use pigs as a medium of exchange then they are a store of value. But that is equivalent to barter.

    Modern token money (notes, accounting entries) has no intrinsic value, so it cannot be a store of value. It is a promise of value, as I have noted in comments above.

    Modern token money is ‘backed’ by the issuing government’s promise – to reduce your tax debt.

    Backing money with gold, silver, etc is just using commodity money, like pigs. But the values (prices) of gold and silver are fickle, depending on arbitrary supply, market conditions, etc. So they are less secure than token ‘fiat’ money issued by governments, but nothing is certain in this world.

    Token money, being a promise, carries risk: that the promise might not be fulfilled, because the world does not proceed as we had hoped. A promise thus involves the uncertain future, as Keynes appreciated. So the use of token money radically changes the dynamics of an economy, as Steve Keen’s modelling demonstrates. A simple example in my book illustrates the principle.

    The great gyrations of modern economies are mainly due to our poor management of debt and risk. Too much debt, too much risk, a cascade of defaults and a financial market crash.

    If more economists appreciated the basic nature and role of money they might begin to make some serious progress, instead of (sorry) endlessly whining about neoclassical stupidity.

    • merijntknibbe
      November 15, 2022 at 5:54 am

      Geoff, your totally right about what you’re stating above. But… when I sign a contract to buy solar cells and I sign the contract and the supplier signs the contract this contract is binding, even when it might stipulate that I will only pay after three months or so. I’ve bought something, the supplier has sold something. The promise is a legal binding way to ‘pay’ for the transactions (when both parties consent). This promise is valuable (it’s on the balance sheet of the supplier), it’s liquid (within three months payment makes it belong to short term debts and the supplier can, at a discount, even sell it to a factoring business. The promise is a means of payment… The solar panels will be mine, I can sell them after I signed the contract.

      • November 16, 2022 at 5:10 am

        Yes to everything except “this promise is valuable”. Yes it is *legally* binding. Still it is only words on paper. You don’t receive full value until the solar cells are delivered. Until then you can call it ‘virtual wealth’, as Frederick Soddy did, or ‘potential value’, or a token of value.

        Unfortunately nature is not legally bound by our agreements, and may intervene. Or the collective idiots in the financial markets may crash the system. Until you have the solar cells, there is a risk you will receive nothing.

        Your agreement, like all token money, is a claim on the future. That profoundly alters the dynamics of an economy.

  9. rsm
    November 17, 2022 at 1:37 am

    《Until you have the solar cells, there is a risk you will receive nothing.》

    When banks thought the risk of receiving nothing from mortgages was high in 2008, did the Fed assume the risk without needing any savings? Did banks get dollars for risks they thought would not pay off, and were those dollars simply created? Why does Geoff’s model ignore trillions of dollars in created value through quantitative easing?

    • November 17, 2022 at 2:04 am

      Well, I’m talking about basic properties of money. What central banks choose to do with it is not incompatible with what I wrote.

      • rsm
        November 20, 2022 at 8:25 pm

        If central banks can turn “virtual money” or private promises into Federal Reserve bank notes that you can use to buy real things, would that be incompatible with what you wrote?

        In other words, can the Fed insure against counterparty default brought on (say) by crop failure, by expending no more energy than is required to record a key press on a computer?

  1. November 12, 2022 at 10:03 pm

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