In my previous post I concluded:
Our new monetary system is about keeping records of gifts given and gifts received by each person. Betty gives a gift and this (transaction) is recorded by making a credit/positive entry – the nominal value of which reflects the value of the gift expressed in terms of the abstract unit-of-account – on her account. Andy receives a gift and this (transaction) is recorded by making a debit/negative entry on his account. Nothing moves from Andy's account to Betty's account, or vice versa. There's only a real-world 'banana flow' from Betty to Andy.
One assumption I left unspoken here is that the banana gift doesn't establish an on-going relationship between Andy and Betty. Andy is not expected to give a counter-gift to Betty. The system I have in mind was made explicit in the quotes from Ostroy & Starr (1990) and Kocherlakota (1996) in the previous post. Kocherlakota talks about an "interlocking network of gifts", which could perhaps be called a "multilateral gift economy". A very, very simplified version of this could look like this:
Six friends each agree to buy an item worth $20 (~market price/nominal value; going forward, when the word 'worth' is followed by a sum, it will always carry this meaning), to be given to someone else as a Christmas present. Later they put all six gift-wrapped items in a pot and each person, taking turns, draws randomly one item from the pot. The drawer has to keep the item she drew, unless it's the item she had bought, in which case she must put it back into the pot and draw a new one.
I'm not implying that trade in our economy is based on the box-of-chocolates idea emanated by Forrest Gump's mother. The principles I wanted to highlight with this example are:
- Each individual gives an item worth $20 and receives an item worth $20 ("overall net trade with zero market value", in words of Ostroy & Starr – see quote in my previous post)
- The gift Eric bought can go to Wendy, while the gift Wendy bought can go to Stan (bilateral balance not required)
In a gift economy, the recipient of the gift doesn't usually have a passive role. More likely, in a gift economy without explicit record-keeping, Andy might have met Betty with a cart full of bananas and told her that he was actually looking for bananas, to which Betty might have replied: "I have plenty of bananas, please take some! How many were you looking for?". Andy, knowing that Betty trusts he will return the gift, if not to her then to someone else – if he hadn't already done so – would accept Betty's gift of bananas without hesitation.
This kind of setup relies, of course, on multilateral trust. Full (utopistic) multilateral trust would mean that there would be no talk about previous gifts given or taken; instead, everyone could trust that everyone else balances his or her budget over time. More likely, there would be some kind of "budget balance enforcement" system at least partly based on rumors. "Free riders" would risk being exposed.
But our economy is a gift economy with explicit record-keeping. There, budget balance enforcement doesn't need to rely on rumors and the risk of reputation loss (leading to diminished trading opportunities, perhaps even to autarky, on the part of the individual).
In his paper "Informational Efficiency of Monetary Exchange" from 1973 – a paper which Kocherlakota builds on in his afore-mentioned paper – Joseph Ostroy writes (p. 607-608; italics in original):
How to enforce BUB [budget balance] without imposing BB [bilateral balance]?
As a monetary version of the model of a trading economy, introduce a central receiving station called a monetary authority. Its function is to collect and collate the bits of information individuals have about each others' trading histories. Each will require his trading partner to write a signed statement, a check, indicating the amount by which the partner's purchases exceed his sales. This record is forwarded to the monetary authority who revises individual accounts on the basis of this new information. Sellers, by requiring payment in money, are guaranteeing a steady flow of information such that the monetary authority, and it alone, is able to monitor trading behavior. Of course, there is every incentive to require and deposit this information with the monetary authority; otherwise, one would not receive credit for sales and so have to cut back on purchases.
If the monetary authority is to be able to make trades between different individuals commensurable... we require a common unit of account. While this convention is essential to the operation of the recordkeeping system, it is not identical to it. Money is not simply a unit of account.
As I mentioned earlier, I'm not going to use terminology like "payments in money"; I don't even use the word 'money'. The word 'payment' implies a quid pro quo: the seller received something in return for her goods (this, in turn, sounds much like bilateral balance). Using the word 'payment', in Ostroy's sense, in the economy under study would lead to a paradox:
Betty received a payment (for her bananas) in the form of a record which states that she has given bananas worth SK100 without receiving anything in return.
The record tells us that there was no quid pro quo. Remember that Betty hasn't even heard about money. Her vocabulary most likely includes the word 'payment', but only in the sense "payment in kind" (that is, in the form of goods).
If we overlook what Ostroy says about payments and money, he could as well be describing our economy and its new monetary system. Ostroy's 'monetary authority' is our record-keeper, who we could call the central bank (like Nick does; it's so far the only bank in the economy). Andy and Betty inform the central bank about their trade where Andy's gifts received (SK100) exceeded his gifts given (none) by SK100, and vice versa for Betty. The central bank, like Ostroy's monetary authority, revises individual accounts on the basis of this information. Had Betty not required that the central bank be informed about the trade, she would not have received credit for her banana gift to Andy and would have to cut back on receiving gifts from others (assuming an overall budget balance).
The decisive thing when it comes to the completion of a transaction is the credit entry on the giver's (seller's) account. The giver doesn't know the account balance of the taker (buyer), neither does she care about it. Of course, the taker has to make sure that his account (or at least some account) can be debited, regardless of its balance, because credits must equal debits. But to suggest that the buyer transfers something to the seller would make no sense. In our minds we can build an impenetrable wall between the two accounts. The central bank accountant follows two simple rules which he applies on a person-by-person basis: (1) if a person sells something, then credit her account, and (2) if a person buys something, then debit her account.
What is being recorded is how much each person has given or taken, without paying attention to who happened to be the counterparty in any particular trade. We know that Andy has taken goods worth SK100; from whom, it doesn't matter. We also know that Betty has given goods worth SK100; to whom, it doesn't matter. If we could trust that all transactions are legitimate, we could severe the link between a particular credit (entry) and a particular debit (entry), as long as the total credits equaled total debits on a given day (assuming records were updated only once, in the end of the day).
I hope that in this post I have managed to shed some further light on our new monetary system. (I have certainly managed to create some confusion as well. I believe it is unavoidable, although I could always do better in minimizing the amount of confusion.) In my next post I'm going to look into the central bank ledger and present you some T-accounts and the balance sheet. That's what you have been eagerly waiting for, right?
Part 4: Nick on a Trip
 We could simplify our terminology by substituting 'purchases' for 'gifts received' and 'sales' for 'gifts given', as long as we manage to keep in mind that there is no money involved. Thus, Andy bought and Betty sold bananas. The seller never gets anything in return (and this fact is recorded), unless she is at the same time a buyer (as is the case in a basic barter transaction).
 'to buy', Latin 'emere' ; “Emere is to take, to accept something from someone” (Marcel Mauss: ”The Gift”, p. 68)
 The reason why it seems to make sense to us – it used to make sense to me as well – is probably because we have learned, starting when we were very young, to think primarily in terms of transactions involving currency (to us, money often is currency, a thing). This means that we mentally project an image of a currency transfer "onto the ledger page". We fail to notice that currency is only a physical "counter", and when we use a ledger we do not need "counters". To me, accounting is primary and currency is secondary; currency can be interpreted in terms of accounting, but not vice versa – although Nick tries hard to achieve the impossible by introducing "red money". For a more detailed argument about "counters", see this and this comment of mine on Nick's blog.