Yap stones and chartalism

Rai at the Bank of Canada - part of Canada's foreign reserves

As I pointed out in my previous post, all sorts of economists have incorporated the example of Yap stones into their monetary discourse. One of the more peculiar uses of these stones can be found in neo-chartalist L. Randall Wray's Understanding Modern Money (1998).

In Chapter 4 of his book, Wray claims that an economy becomes monetized by the introduction of state-issued tokens (what I call coupon instruments). To provide empirical support for his claim, Wray repeats the story about German administrators marking all Yap stones with paint (see previous post, #9). The Germans did so in order to motivate the Yapese to build roads. After all, in order to get the state to remove these markings from their valuable stones, the Yapese were required to provide their labour. The implications of Wray's chapter are that instead of requiring labour, the German government could just as easily have required payment in government-issued paper coupons. Thus Yap, which up till then had never been a monetary economy, would have suddenly become monetized.

Wray is in some difficulty here since Yap stones already circulated as media of exchange (see Goldberg in previous post). Thus the emergence of a monetized economy came prior to any German state-inspired monetization. This possibility is particularly harmful to Wray since he has adopted throughout his book an extreme, or "vulgar", version of chartalism in which the only way to monetize an economy is to introduce a state-issued coupon instrument. In a note, Wray tries to wriggle out of his predicament, claiming that:

Furness, almost certainly in error, called these 'stone currency' and imagined that they were used as some sort of primitive 'medium of exchange'; however, his description uncovers no evidence that there were any markets. (73)

Wray is contradicted by the anthropological evidence provided by Gillilland and Furness, who list all sorts of examples of rai acting as media of exchange. Rai were used to purchase fish, housing materials, yams, labour, women, coconuts, and many other valuable items. Yap stones original circulation as commodity media-of-exchange therefore prove Wray wrong  in his extreme view that an economy can only be monetized via state-issued coupons.

Federal Reserve Bank of Cleveland's Michael Bryan wrote a paper called Island Money (2004) in which he adopts the chartalist idea that "money" is a marker, or a credit/debit, in order to explain rai. Owning a stone meant that one possessed a credit on the rest of the Yapese or, put differently, that Yap was in debt to the stone's owner. In this way rai functioned as "memory", a means by which to tabulate who owes whom. This is an old idea going back centuries but most popularly reincarnated in Narayana Kocherlakota's Money as Memory.

Now it is certainly true that credit IOUs have and continue to serve as some of society's most liquid instruments. Bank deposits are a great example. But to assume that only credit can qualify as "money" is to commit the same sin of monetary extremism that Wray commits. Bryan maintains that

rai are not known to have any particular use other than as a representation of value. The stones were not functional, nor were they spiritually significant to their owners, and by most accounts, the stones have no obvious ornamental value to the Yapese. If it is true that Yap stones have no nonmonetary usefulness, they would be different from most “primitive” forms of money... Usually an item becomes a medium of exchange after its commodity value—sometimes called intrinsic worth—has been widely established. Lacking intrinsic worth, Yap stones may be an especially useful object of study for students wishing to understand the significance of U.S. dollars, which, after all, have no value other than as a monetary unit; they’re what economists call an “fiat” money.

But as Goldberg has pointed out, Yap stones did have significant intrinsic value. There is no need, therefore, to accept Bryan's fallback view that within the so-called vacuum of intrinsic worthlessness, money could only earn value from its status as an IOU, or as so-called "memory".

The other problem with the Bryan's rai-as-credit story is their sheer size. Why choose something so awkward as a three meter wide stone to record an IOU? Any small token can be used to represent either smaller or larger debts. Casinos issue chips of the same size and shape representing amounts from $1 to $1000 — no casino deems it necessary to issue human-sized intrinsically valuable (gold plated?) $1000 casino chips. Rather than using huge stones as IOUs, the Yapese could have easily used verbal promises to record debts (see #8, previous post), or coconut shells emblazoned with markings. The simpler explanation for rai's value is Goldberg's: rai were intrinsically valuable for religious and aesthetic purposes.

I'm not saying that chartalism is wrong. I've pointed out before that I think the idea of coupon "money" makes some sense—even McDonald's could create chartal coupon instruments. So while you can count me in as a soft chartalist (I'm also a soft metallist, a soft monetarist, a soft Keynesian, a soft Austrian, etc), I'm not persuaded by the extreme versions of chartalism. The contortions its advocates are forced to undertake in order to explain monetary phenomena like Yap stones lead them astray.

Yap stones and the myth of fiat money

At first glance, the large circular discs that circulated on the island of Yap in the South Pacific certainly seem quite odd. Too big to be easily transported, the stones are often seen in photos resting against their owner's houses. So much for velocity. Yap stones have been considered significant enough that they have become a recurring motif in monetary economics. Macroeconomics textbooks, including Baumol & Blinder, Miles & Scott (pdf), Stonecash/Gans/King/Mankiw, Williamson, and Taylor all have stories about Yap stone money.

Why this fascination? Part of it is probably due to the profession's obsession with the categorical divide between "money" and "non-money". In dividing the universe of goods into these two bins, only a few select goods end up in the money bin. That an object so odd and unwieldy as a three meter wide stone could join slim US dollar bills and easily portable silver coins in the category of money is pleasantly counterintuitive  – and economists love the counterintuitive. I'll talk about this divide and on which side to place Yap stones later (see part 3 below).

Another reason that Yap stones attract attention is their seeming "fiat" nature. In serving no useful purpose other than money, Yap stones seem to be historic ancestors to our modern "fiat" central bank money. I'll be discussing this idea in the current post.

The discussion on Yap stones will be split into three parts:

1. Yap stones and the myth of fiat money
2. Yap stones and chartalism
3. Yap stones and moneyness

I recently finished reading The Stone Money of Yap: A Numismatic Survey (pdf) by Cora Lee Gillilland (1975), which provides a historical summarization of all appearances of Yap stone money in the accounts of travelers, administrators, and anthropologists over the centuries. Having little to do over Christmas, I also picked up The island of stone money: Uap of the Carolines (1910) by W.H. Furness. Furness spent a year living on Yap and recorded his observations.

Here are some interesting facts gleaned from Gillilland and Furness which will be useful for all three parts:

1. Yap is an Island in the South Pacific. Denizens of Yap, the Yapese, valued circular stones called rai, or fei. A certain type of mineral called aragonite was prized by the Yapese in making rai. Aragonite, a white limestone that glistens, was only found on the island of Palau some 250 miles away, necessitating a long and arduous journey by canoe with a heavy rock in tow (see map below). The stones were quarried in the mountains of Palau and shaped into discs with holes in the centre. The holes allowed the stones to be carried on long poles, facilitating transportation. The poles can be seen in the photo above.

2. One of the earliest European accounts of these stones (in Gillilland) refers to a trader named Andrew Cheyne, who in 1843 wrote this about his arrival at Yap from Palau with a delegation of Palua traders.

At 9 A.M., the premier and chiefs of Tomal [Yap] came on board to receive their present, sent by Abba Thule [one of the chiefs of Palau], for their king, which consisted of nothing more or less than a round stone, with a hole in the centre, similar to a small upper millstone. These stones are very rare, and consequently highly prized, being only found in the mountains of the Pallou Islands. 

This particular stone was sent to the king of Yap to secure permission for Palau traders to barter with the Yapese for bêche-de-mer, otherwise known as sea cucumber.

3. We know from Gillilland that Yap exchanged not only bêche-de-mer with Palau traders, but also turmeric root. Nor was this the only exchange good. Accounts in the late 1800s describe Yapese traders traveling to Palau and exchanging their labour for the right to quarry stones. They gathered firewood for the Palau, carried, water, and according to one account, constructed the paved streets of the island of Koror in Palau.

4. Early rai were small, usually no more than eight hand spans across according to Gillilland. They were also rare. The difficulty of transporting stones by raft from distant Palau was certainly a limiting factor. The appearance of European traders allowed the Yapese to transport larger stones back from Palau and in greater quantities. There are accounts of stones weighing a ton and spanning over three metres in diameter. The stereotypical Yap stone we are accustomed to seeing in photos like the above are probably post-European stones. Cheyne described the stones as "very rare" in the 1840s, but they numbered 13,281 in 1929 according to a Japanese survey.

5. Other forms of "money" were used on Yap, including pearl shells (yar), pearl shell bead necklaces (gau), ceremonial pestles (ma), and woven mats (mbul).

6. David Sean O'Keefe, an Irish American adventure, cornered the market in Yap stone transportation from 1872 to 1901. The Yapese were allowed to transport the stones they'd mined on Palau on O'Keefe's schooner. Upon arrival at Yap, they were required to pay O'Keepe in copra to have the stones released. Copra is the dried meat of coconuts, and it was useful in lamp oil. Because most Yapese didn't have a copra supply, they could also pay by working on O'Keefe's coconut plantations.

7. Rai had exchange value on Yap. Furness reports that a rai spanning a length of three hands and

of good whiteness and shape ought to purchase fifty 'baskets'; of food - a basket is about eighteen inches long and ten inches deep, and the food is taro roots, husked coconuts, yams, and bananas;- or, it is worth an eighty or a hundred pound pig, or a thousand coconuts, or a pearl shell measuring the length of the hand plus the width of three fingers up the wrist. I exchanged a small short handled axe for a good white rai, fifty centimeters in diameter. For another rai, a little larger, I gave a fifty pound bag of rise... I was told that a well-finished rai, about four feet in diameter, is the price usually paid either to the parents or to the headman of the village as a compensation of the theft of a mispil [a woman].

Gillilland lists rai as capable of purchasing fishing equipment, canoes, and housing materials. There is record of a dance group being paid in rai for their performance. War indemnities and funeral expenses of chiefs were paid in rai, as was the assistance in war of a neutral tribe. Normally a family was self-sufficient in food, but when necessary rai could be used to purchase fish, yams, or taro.

8. Rai needn't be exchanged directly, especially the larger variety. Rather, Yapese were often content to transfer mental ownership of a Yap stone, leaving the stone sitting in place. Wrote Furness:

it is not necessary for its owner to reduce it to possession. After concluding a bargain which involves the price of a rai too large to be conveniently moved, its new owner is quite content to accept the bare acknowledgment of ownership and without so much as a mark to indicate the exchange, the coin remains undisturbed on the former owner's premises.

9. An extreme example of this is provided by Furness. According to local legend, two or three generations before Furness's arrival a large stone in transit was lost at sea during a storm. The claim to this stone continued to have value, even though the stone itself was unrecoverable.

10. According to Furness, the Germans bought control of Yap from the Spanish in 1899. In order to motivate Yapese to work on improving the island's road system, the Germans marked a certain number of rai with black crosses, indicating that the government now claimed these stones. To regain control of their rai, people had to labour on the road system. It was in this way that Yap got its first roads. Gillilland confirms this account, noting only that the intials B.A. (Berzirks-Amt or District Office) was painted on the stones, not a cross.

There are many more facts and anecdotes worth reading about in Gillilland and Furness, as well as this shorter article from the Smithsonian. I'm going to turn away from the anthropological evidence and investigate how economists have used Yap money in their theorizing.

Yap stones used by economists as examples of fiat money

One of the earliest expositions of Yap stones is in Volume II of J.M. Keynes's Treatise on Money (1930). When he mentions the stones, Keynes is in the process of writing about the emergence of "representative" money from commodity money. According to Keynes, a representative money can be either fiat or "managed". Representative money has "relatively little or no intrinsic value apart from the law or practice of the State." As gold had ceased to be used privately in the west, it was increasingly concentrated in the vaults of central banks. Keynes noted that even central banks had ceased transferring gold to each other's vaults, preferring instead to have their gold "ear-marked" – have its ownership changed without changing location. In this context, Keynes mused that money was on the verge of becoming fiat, which he felt was comparable to the status of Yap stones:

The earliest example of "ear-marking" is in the case of the stone money of Rossel Island, which, being too heavy to move without difficulty, could be conveniently dealt with in no other way. One of the largest and most valuable of these stones lay at the bottom of the sea, the boat which was importing it having capsized. But there being no doubt that the stone was there, these civilized islands saw no objection to including it as part of their stock of currency—its lawful owner at any time being, in fact, thereby established as the richest man in the island—or to changing its ownership by "ear-marking". (Pg 292, Vol II)

Note that Keynes's facts are wrong, since it was Yap Island, and not Rossel Island, thousands of miles to the southeast of Yap, that used stone money.

In an article called Money for the New Palgrave, James Tobin also provides an account of Yap Stones, closely mirroring Keynes by comparing the stones to gold:

On the island of Yap debts were settled by changing the ownership of large immovable stone wheels. The practice continued after the sea flooded their site and the stones were invisible at the bottom of a lagoon. (Similarly when gold was international money in the twentieth century title to it often changed while the gold itself, safe in underground vaults, never moved.) (Pg 3)

Tobin either makes an error or an embellishment, since neither Furness nor Gillilland mention the sea flooding the site where stones were held, only that one stone was lost at sea during a storm.

Milton Friedman also jumped into the Yap stone fray in the first two chapters of his book Money Mischief. Like Keynes and Tobin, Friedman compares the earmarking of gold among central banks to the use of transferable claim on the famous submerged Yap stone. In the second chapter of the same book, Friedman goes on to question whether the stones had any nonmonetary value whatsoever:

When most money consisted of silver or gold or some other item that had a nonmonetary use, or of an enforceable promise to pay a specified amount of such an item, the "metallist" fallacy arose that "it is logically essential for money to consist of, or be 'covered' by, some commodity so that the logical source of the exchange value or purchasing power of money is the exchange value or purchasing power of that commodity, considered independently of its monetary role" (Schumpeter 1954, p. 288). The examples of the stone money of Yap, of cigarettes in Germany after World War II, and of paper money currently make clear that this "metallist" view is a fallacy. The usefulness of items for consumption or other nonmonetary purposes may have played a role in their acquiring the status of money (though the example of the stone money of Yap indicates that this has not always been the case). [My emphasis]

Greg Mankiw invokes Keynes's line between commodity and representative money when he writes in his textbook Macroeconomics that "Yap, a small island in the Pacific, once had a type of money that was something between commodity and fiat money."  Yap therefore illustrated an economy with circulating paper redeemable in a commodity on the threshold of becoming an economy in which the circulating paper's claim to the original commodity has been lost. Mankiw also repeats the famous story of the lost Yap stone:

Eventually, it became common practice for the new owner of the fei not to bother to take physical possession of the stone. Instead, the new owner accepted a claim to the fei without moving it. In future bargains, he traded this claim for goods that he wanted. Having physical possession of the stone became less important than having legal claim to it. This practice was put to a test when a valuable stone was lost at sea during a storm. Because the owner lost his money by accident rather than through negligence, everyone agreed that his claim to the fei remained valid. Even generations later, when no one alive had ever seen this stone, the claim to this fei was still valued in exchange.

Gary Smith's textbook Money and Banking (1984) goes even further than Mankiw in attributing to Yap stones not merely intermediate status between fiat and commodity money, but status as a purely fiat money:

The stone money of Yap is superficially a commodity money. And yet is has no real value as a commodity. A Yap stone is eagerly accepted in exchange for useful goods and services solely because its recipients are confident that they will also be able to exchange the stone for goods and services. Its acceptance as a medium of exchange rests on simple faith, nothing more. This is an example of fiat money, something that has little value as a commodity but, because of law or tradition, is accepted as a medium of exchange.

We see modern use of the motif in Willem Buiter in Helicopter Money (2004, pdf). Like Smith, Buiter doesn't bother with the idea that Yap money might be somewhat intermediate between commodity and fiat money:

Some commodity monies have intrinsic, that is, non-monetary, value as a consumption, intermediate or capital good. Gold, salt, cattle and cigarettes are historical examples. I do not consider this kind of intrinsically valuable strong outside money. There is, however, a partial resemblance between the government-issued fiat base money considered in this paper and commodity money that does not have any intrinsic value. Pet rocks, the candy wrappers that are part of many first expositions of Samuelson’s pure consumption loans model (Samuelson (1958)), or the stone money used on the Micronesian island state of Yap are examples.

On the blogosphere, Nick Rowe had this to say about Yap stones a few years ago:

My point is that both Yap stones and cowrie shells (the Yap stones especially) look totally useless except as money. Even if they did have some value apart from their use as money, that "industrial value" would be a small proportion of their value as money.

So as you can see, there is a long line of economists who have attributed a pure fiat nature to Yap stones.

Yap stones not fiat - Dror Goldberg's response

Dror Goldberg penned an interesting paper in 2005 called Famous Myths of Fiat Money. I'm in debt to him for providing some clues to the whereabouts of the above references to Yap stones.

Goldberg defines fiat money as an object that has no intrinsic value and is not convertible into anything. It is neither legal tender, not is its use forced on anyone. Insofar as money can be thought of as having a kernel of fundamental value plus some extra marginal use as a medium of exchange, a fiat money is something without any fundamental value whatsoever. It is a purely speculative object valued only for its exchangeability.

Goldberg points out that most monetary economists believe that their concept of fiat money is not merely fictional but exists in reality. One justification for their belief is the supposed existence of fiat monies in primitive societies. However, in investigating the phenomenon of Yap stones, Goldberg finds that scholars have ignored laws, customs, and religion in according to rai the label "fiat". To begin with, the stones were valued for their aesthetic value:

For Pacific islanders who knew no metals or precious stones, it was reasonable to attach high value to semi-precious stones. Another proof for the high esthetic value is that the largest stones were “entirely beyond price” (Einzig 1966, p.40). Small specimens may have been used in jewelry, but the stones became more popular as big statues in the shape of a full moon (Gillilland 1975, pp.19-20). In fact, these stones were Yap’s version of gold. Just as gold could barely be used for any practical purpose (it is too soft), and one of the few things one could do with it was sit on a throne made of it, the Yap stones were also used as thrones (Gillilland 1975, p.3)

Goldberg also points out that Yap stones had religious value:

One local legend says that the bodies of the islanders’ ancestors, which were half-human and half-divine, have become the oldest stones (Gillilland 1975, p.19). Another legend says that the Fairy Godmother of Yap chose which stones would become money, and the stones’ shape was also approved by her (Christian 1899, p.300). Regardless of the latter legend, it is known that the full moon shape had a religious significance.

Thus to ascribe to Yap stones intrinsic uselessness is to ignore the very real value ascribed to them by the Yapese . While from the perspective of outsiders these stones may seem useless, within the context of the society in which they are used they have a very particular meaning and history.

As for the famous story of the lost stone that Keynes and Mankiw invoke in favor of fiat money, Goldberg points out that the stone in question remained in the possession of an ancestor of the family that had first brought it over from Palau. Thus Keynes, Tobin, and Mankiw are wrong to assume the claim to the lost stone continued to have exchange value, for there is no evidence that it was ever traded outside of the family who originally lost the stone. If the claim had been marked-to-market, would its so-called value have survived? We simply don't know. I suppose a graduate student could fly to Yap and try to locate the claim to the famous missing stone — after all, it should still be valuable if Keynes/Mankiw/Tobin are right. But until then, the story remains dubious.

This leads into the final question in this post.

So why is the existence of theoretical and/or actual fiat money so important to economists?

I suspect the answer to this is because fiat money makes theorizing easier. Goldberg, for instance, points out that the fiat money concept is "useful". He invokes Wallace and Zhu (2004), a quote worth providing in full:

The conception of money as fiat money, an intrinsically useless object, has been used in models for a long time. It was used in the classical-dichotomy model, even though that model was developed and used at a time when actual money was gold or silver. Ignoring the commodity aspect of money was convenient because it produced a simple and strong prediction: allocations are independent of the amount of money.

In other words, in assuming the existence of a fiat money, the analyst can neutralize the monetary sector and work purely with a real economy. This removes a number of thorny issues.

The great economist Alfred Marshall, for instance, noted in his example of an economy that used "shells of some certain extinct fish" as currency, that the simultaneous demand for those shells as useful ornaments would break the proportional relationship between the quantity of the shells and their value. This was the famous quantity theory of money. If it was the case that shells were desired as ornamentation, then an increase in demand for shells as ornaments would have monetary effects while an increase in demand for shells as money would have non-monetary effects. Gone is the useful dichotomy between the real and monetary economies.

Another reason that the myth continues to be sustained is the idea that fiat money saves resources. One of the oldest expressions of this idea comes from David Ricardo in The Principles of Political Economy and Taxation:

A currency is in its most perfect state when it consists wholly of paper money, but of paper money of an equal value with the gold which it professes to represent. The use of paper instead of gold substitutes the cheapest in place of the most expensive medium, and enables the country, without loss to any individual, to exchange all the gold which it before used for this purpose for raw materials, utensils, and food; by the use of which both its wealth and its enjoyments are increased.

This idea rings true in modern general equilibrium economics. Ostroy and Starr (1988) note that in a sequence economy (one which opens and closes, rather than an all-at-one-point-in-time Arrow Debreu economy)

goods are desired as objects of consumption and as carriers of value between trading opportunities. The second demand may interfere with the first. When it does so, the introduction of a fiduciary or fiat money with negligible transactions and storage costs can change the equilibrium allocation to one that is Pareto efficient... Since the opportunity cost of holding real goods in inventory will generally be non-negligible, there is an efficiency gain through the use of fiduciary (bank) or fiat money in place of commodity money. 

In other words, since intrinsically useful goods serving as money also have consumption value, the opportunity cost of using said goods as money is the lost consumption. Replacing these commodity monies with a non-real money good, something inherently valueless like a fiat token, will return a commodity money’s “lost consumption” to the economy, while ensuring that something still exists to perform the function of money. Fiat money is the most efficient solution. Given that in theory fiat money is the theoretically ideal money, it is no doubt tempting to assume the actual existence of such an object, even when the evidence is lacking. Otherwise we would be living in a world with a massive market failure.

Lastly, in observing the rise of central bank money, monetary economists going back to the days of David Ricardo have felt it their duty to create theories of fiat money. But central bank money is not necessarily fiat money. If there is no actual fiat money in the real world, why have economists spent so much time modeling a world as if it contained such an item? There needs to be fiat money to justify the effort.

Not a big fan of the metallist vs chartalist debate on the origins and nature of money

There is a century's old debate between metallists and chartalists on the origin of money. The metallist view is that the first spark of money emerged through barter and matured when the use of precious metals as money was discovered. The chartalists disagree. According to them, the use of credit preceded the use of precious metals as money.

At its core, the metallist/chartalist debate is a battle over the definition of the word money. In a moneyness world, there is no such thing as money. All we have are numerous media of exchange with varying ranges of liquidity. Whether moneyness first gets attached to credit or precious metals is really not important.

Imagine that a hunter encounters a trapper. The hunter has a deer. The trapper wants the deer but isn't sure what to offer. On the one hand, he can exchange the two rabbits in his belt for the deer. On the other he can offer his credit. In offering to exchange away his credit, the trapper is simply capitalizing his future earning power and bringing it forward for use in trade. Metallists and chartalists put tremendous importance on this first choice of credit versus rabbits, since one or the other will represent the so-called origins of money.

From a moneyness perspective, there are more interesting forces at play. Say that the trapper learns that the hunter will accept either his credit or his rabbits. The trapper next arrives at the realization that both items now have a degree of liquidity, or moneyness. He begins to attach a liquidity premium to both, for not only are the trapper's inventory of rabbits useful to him as food, but they can also be resold to the hunter, thereby providing the trapper with an extra range of liquidity services. The same goes for his credit. The trapper's future earning power is one of his key possessions. Now that it is tradeable, his future earnings power provides an extra margin of liquidity services. Over time the trapper will learn which one of his trade items is more liquid  and will favor that item with a larger liquidity premium. A monetary economy has now emerged in which traded goods are appraised according to their degree of liquidity and carry varying liquidity premiums.

If we split the world into money and non-money, then debates over the what items make it into the money category will often be heated. The origins debate gets especially intense because it tries to define modern money by looking back to its so-called debut. Taking inspiration from gold's barter origins, modern day metallists want a pure real/commodity based money. Modern day chartalist, who advocate state-issued inconvertible paper, look back to money's credit origins to support their view that the essential nature of money is credit.

From a moneyness perspective, the money-or-not debate is distracting. The origins of liquidity and liquidity premia is complex and probably not subject to study. There never was a single dominant instrument that could claim the mantle of money, only multiple goods and forms of credit, each with different degrees of moneyness. As for the metallists and chartalists, a pox on both their houses.

The final draft on Fed-Treasury overdrafts

Marriner Eccles

There is an idea floating around on the internet that the US Treasury can finance itself indefinitely by borrowing directly from the Federal Reserve. All the President need do, goes the story, is order the Fed to credit the Treasury's account with fresh money, and voilà – the Treasury can spend willy-nilly. This is called the Treasury's overdraft facility.

In actuality, the above operations are impossible since the Treasury is legally prevented from borrowing directly from the Fed. The result is that the Treasury can only spend by ensuring that it has already obtained funding through the collection of taxes or the issuance of securities in the open market. The overdraft facility is a myth.

But this wasn't always the case. Marriner Eccles's March 1947 hearing before the House of Representative's Committee on Banking and Currency is a great source of US monetary history. In it we learn that from 1914 to 1935, the Federal Reserve had the power to lend directly to the Treasury by purchasing newly created government debt. This was called direct-purchase authority, and it amounted to a Treasury overdraft privilege with the Federal Reserve. This overdraft facility found legal expression in section 14(b) of the act, which permitted the Fed to "buy and sell, at home or abroad, bonds and notes of the United States, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months." The interpretation of this bit of legalese was that the Fed needn't limit purchases of government debt to the open market, it could buy directly from the government.

As I pointed out in an earlier post, section 16 of the Federal Reserve Act prohibited the Fed from using government securities as collateral for note backing until the passage of the first Glass Steagall Act in 1932. So even though the Fed could lend directly to the Treasury during this early period, its ability to do so was significantly crimped by the ineligibility of government bonds as backing.

We learn from the Eccles document that in 1935, the Federal Reserve Act was modified to prevent the Fed from making direct purchases of Treasury-issued securities. This was done by inserting a provision into section 14(b) of the Act requiring all purchases of government debt to be carried out in the open market. As a result, the overdraft privilege ceased to exist.

The overdraft facility was re-instituted in March 27, 1942, only a few months after the US entered World War II. The War Powers Act provided the Fed with the temporary authority to directly buy up to $5 billion of government securities from the Treasury. Specifically, the new wording of section 14(b) allowed the Fed to purchase

any bond, note, or other obligation which are obligations of the United States, or which are fully guaranteed by the United States as to principal and interest, may be bought and sold without regard to maturities either in the open market or directly from or to the United States, but all such purchases and sales shall be made in accordance with the provisions of section 12 (a) of this Act and the aggregate amount of such obligations acquired directly from the United States which is held at any one time by the 12 Reserve banks shall not exceed $5,000,000,000.

This was only a temporary power, which is why we find Fed Chairman Marriner Eccles visiting Congress in 1947. He was lobbying Washington to make the overdraft facility a permanent part of the Fed's arsenal. Eccles justified the overdraft by pointing out that it might save the taxpayer money. After all, overdrafts provided the Treasury with cheaper temporary funding than the open-market did. We know he was unsuccessful in his efforts to make the authority permanent, since this 2006 Government Accountability Office (GAO) document notes that:

Intermittently between 1942 and 1981, Treasury was able to directly sell (and purchase) certain short-term obligations to (and from) the Federal Reserve in exchange for cash. Congress first granted this cash draw authority temporarily in 1942, allowed it to lapse several times, and extended it 22 times until 1979, when it modified some of the terms and added controls.

We also learn from the GAO document that in 1981 Congress allowed the overdraft authority – referred to as "draw authority" – to permanently expire. Thus ended 39 years of Treasury overdrafts. The GAO report provides some interesting statistics on this period. Between 1942 and 1981, the Federal Reserve held Treasury certificates purchased directly from the Treasury on just 228 days, mostly during times of war. So while overdrafts were permitted, they weren't used often, and not for long periods of time. The largest amount  of certificates issued by the Treasury to the Fed on a single day was $2.6 billion in 1979. By 1979, $2.6 billion didn't amount to much, but in 1942, with the Fed's liabilities amounting to $25 billion, an extension of a $5 billion overdraft would have dramatically increased the Fed's balance sheet.

Below is a handy chart I've pinched from the GAO report which illustrates the use of the overdraft facility over time.

Note the large interwar gaps when draw authority was never used.

Section 14(b) of the modern Federal Reserve Act, amended in 1981, includes a strict "open market" provision that limits Fed purchases to "any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market". This change is indicative of the broader trend to independent central banking. In a 1978 subcomittee meeting on the Fed's draw authority, Congressman George Hansen expressed this sentiment quite well:

This authority is a leftover from the days of explicit Fed support for Treasury financing, when monetary policy was clearly subordinated to the Treasury's aim of cheap deficit financing. I hope we are all agreed that monetary policy should not be thus subordinated, and that we can do without the mechanisms through which the Treasury called the shots for Federal Reserve open market operations.

And that's where we are today. The Treasury can't finance itself directly via the Fed. Yes, there may be indirect routes, but that's another post. Anyone who operates under the assumption that the direct route exists are assuming a monetary structure that became extinct in 1981.

Corporations are currency issuers, governments are not

Corporate stock: a perpetually inconvertible currency

In this post I play around with the distinction between a currency user and a currency issuer.

Modern Monetary Theory (MMT) draws a line between currency issuer and currency user. Households and businesses are currency users. They can "run out of money" and become insolvent. Central banks, on the other hand, are currency issuers. Issuers can never run out of money and, as such, face no solvency constraint. As long as the government is not legally separated from the nation's central bank, it too enjoys the benefits of being a currency issuer. After all, the government can always have the central bank issue liabilities to pay for all governmental obligations. The only constraint on a currency issuer is inflation, not solvency. For if a central bank's liabilities inflate to worthlessness, they can no longer be used to meet either the government's or the central bank's obligations.

While MMT associates currency issuance with the state and currency use with the private sector, this needn't be the case. Private businesses can be thought of as currency issuers facing an inflation constraint, whereas governments are almost always currency users facing a solvency constraint.

My translation of these MMT ideas is that the key to escaping the solvency constraint is this: can the institution under consideration issue perpetual inconvertible liabilities? If so, the institution can never become insolvent and qualifies as a currency issuer. The beauty of perpetually inconvertible liabilities is that they never expire, nor can their holder take the initiative and force the issuer to redeem them for some underlying asset. Lacking any revenues whatsoever, an institution can function indefinitely as long as its perpetually inconvertible liabilities have some positive value and can be sold to obtain resources. If these liabilities inflate to nothing, the issuer loses its ability to function.

Consider central banks first. Say that a central bank issues perpetual liabilities convertible into gold. This central bank is not a currency issuer, for if the gold is not forthcoming, the central bank will be rendered insolvent. Modern central banks, on the other hand, are safe from the solvency constraint because they no longer issue perpetual liabilities convertible into gold. Rather, modern central bank liabilities are inconvertible. The central bank can simply spend these liabilities into the economy, thereby financing its continued existence. Only when these liabilities are worth zero will the bank have breathed its last.

Modern corporation can also issue perpetual inconvertible liabilities. This is called equity. Much like a central bank, modern corporations face no solvency constraint because they can always meet their obligations with new equity issuance. Only when a corporation's equity has inflated away to nothing i.e. the price of the stock they issue is worth zero, have corporations finally hit the wall. Fledgling companies with no revenues and large expenses can function for many years by constantly issuing perpetual inconvertible equity.

Unlike businesses, individuals can't issue equity in themselves. Society has rendered it taboo to alienate shares in one's self, even if this is done in a voluntary manner. People can only issue personal IOUs that must be paid back at some point in time, or debt. Because individuals can't issue perpetual inconvertible liabilities they face a solvency constraint and therefore qualify as currency users.

Modern governments are very much like individuals. They can't issue equity. Nor can modern governments rely on their central bank to meet governmental obligations. The practice of independent central banking puts a strict divide between state and central bank, rendering it illegal for the central bank to use its perpetual inconvertible liabilities to finance the government and shelter it from the solvency constraint.

In sum, the line between a user facing a solvency constraint and an issuer facing an inflation constraint is defined by the ability to "print" perpetual inconvertible liabilities. Both corporations and modern central banks have the ability to issue these instruments and therefore face only an inflation constraint. Governments and households, on the other hand, are prohibited from issuing these instruments and therefore qualify as currency users that face solvency constraints.

Merry Cashmas

Christmas is upon us, and so is the seasonal spike in the demand for cash. This Christmas bump relates to the previous post on liquidity and uncertainty. Christmas isn't just about buying presents – it's also about traveling to distant places to meet up with family and friends. We realize that we can't anticipate all eventualities along the way. To insure ourselves against these uncertainties we carry a bigger wad of cash. This liquid wad provides a very real service by comforting us, even if we never end up having to use it.

It's illuminating to plot the Christmas spike in cash in order to compare it over decades. See below. The data I'm using is the weekly currency component of M1 from the Federal Reserve.

We can eyeball a few trends from the chart. First, we see a consistent seasonal spike in currency in circulation in December and climaxing around New Year's Day. Cash falls heavily in January as people and businesses redeposit it at the bank.

While the Christmas bump was very pronounced in the 1970s and 80s, it appears to have grown more muted over time. In recent Christmases, say 2011, it is difficult to pick out the spike at all, although if you look carefully you'll spot it. It's not just the Christmas bump that has declined, the general rate of increase in cash outstanding over each period has slowed. This is evident in the gradually flattening slope of each line. People don't need cash as much as they used to. Credit cards and direct payments provide good alternative forms of liquidity.

It's also interesting to see a monthly saw-toothed pattern in the data, particularly in the older periods. Around the middle of each month cash outstanding peaks, falling until the beginning of the next month. My guess is that this is some sort of paycheck effect. People deposit paychecks at the beginning of the month, then build up a buffer of cash to pay for that month's necessities and incidentals, this buffer steadily being drawn down over the latter half of the month. This saw-toothed pattern has all but disappeared in the data. Cash just isn't as important as it once was for payments.

It's worthwhile noting that come Christmas the Fed doesn't "blow" this cash out into the economy. Rather, people "suck" it out of the Fed. In anticipation of a spike in the demand for cash by consumers and businesses, private banks decide to hold more cash in their vaults. Banks build this buffer by converting reserves in their bank account held at the Fed into cash, with Brinks trucks moving this paper from Fed to bank. Before the credit crisis of 2008, a general withdrawal of cash would have required the banking system to rebuild their reserves in order to meet statutory minimum reserve requirements. The Fed would have offered to buy treasury bills from the banking system in order to provide those reserves. Nowadays banks hold so many excess reserves that if they convert some of these into cash, they don't need to buy more reserves in order to meet statutory requirements.

Uncertainty and the demand for liquidity

In between my more practical posts, once every week or so I'll do something on the idea of moneyness. Economists have known for a long time that the concepts of uncertainty and money are intimately intertwined. George Costanza knows this too. He holds a bunch of cash to deal with all eventualities... until his wallet blows up. I'll show how we can just as easily replace money with moneyness in this two-step with uncertainty.

Uncertainty is an uncomfortable feeling one endures when thinking about an unforeseeable future. One of the ways to shield oneself from uncertainty is to devote a certain portion of one's portfolio to "money" – dollar bills, bank deposits, and such. Because these money items are liquid, it will be relatively easy for their holder to offload them in the future should some unanticipated eventuality arise. Holding money therefore alleviates discomfort about the future. This is the same sort of service that a fire extinguisher provides. Though someone may never need their extinguisher, it comforts its owner by its mere presence. On the margin, individuals are always comparing the present value of the stream of "security and comfort" that money provides to the consumption goods or durable assets that money can buy.

The link between uncertainty and the demand for money has a long heritage. We can find this idea early on in the Marshallian tradition, for instance. In 1917 Arthur Pigou, a student of Marshall, wrote that any person would be anxious to hold money "to secure him against unexpected demands, due to a sudden need, or to a rise in the price of something that he cannot easily dispense with." On the margin, people could either hold money, spend it on consumption, or exchange it for a capital asset. "These three uses," wrote Pigou, "the production of convenience and security, the production of commodities, and direct consumption, are rival to one another." (The Value of Money, 1917)

In 1921, Fred Lavington explicitly described this very same link between uncertainty and money.

the stock of money held by a business man serves not only to effect his current payments but also as a first line of defence against the uncertain events of the future. (The English Capital Market, 1921)

More explicitly, said Lavington, money provides its owner with a

return of convenience and security. His stock [of money] yields him an income of convenience, for it reduces the cost and trouble of effecting his current payments ; and it yields him an income of security, for it reduces his risks of not being able readily to make payments arising from contingencies which he cannot fully foresee. The investment of resources in the form of a stock of money which facilitates the making of payments is then in no way peculiar; it corresponds to the investment by a merchant in the office furniture which facilitates the dispatch of business, to the investment of the farmer in agricultural implements which facilitate the cultivation of his land, and indeed to investment generally. 

Like Pigou, Lavington emphasized the marginal choice between holding money, spending it on consumption, and investing it.

Resources devoted to consumption supply an income of immediate satisfaction; those held as a stock of currency yield a return of convenience and security; those devoted to investment in the narrower sense of the term yield a return in the form of interest. In so far therefore as his judgment gives effect to his self-interest, the quantity of resources which he holds in the form of money will be such that the unit of resources which is just and only just worth while holding in this form yields him a return of convenience and security equal to the yield of satisfaction derived from the marginal unit spent on consumables, and equal also to the net rate of interest.

The most famous adopter of this idea was Keynes, a friend of Pigou's and, oddly enough, Lavington's teacher.

Because, partly on reasonable and partly on instinctive grounds, our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future... The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude. (The General Theory of Unemployment, 1937)

The link between uncertainty and money isn't confined to the Marshallian and Keynesian traditions. Erich Streisler (1973) quotes Carl Menger in Geld:

The amount of money which is used in actual payments constitutes only a part, and indeed a relatively small part, of the cash necessary to a people, and . . . another part is held (in order that the economy may function without friction) in the form of various reserves as a security against uncertain payments, which in many cases in fact are never realized.

William Hutt, an Austrian "fellow traveler", described the prospective yield from money in a 1952 paper called the Yield from Money Held. According to Hutt, the value of money assets was "affected by reason of their being demanded for their 'liquidity,' i.e. for the medium of exchange services that they can perform." These monetary services that money assets provide are prospective – even though money isn't being used, much like a fire engine when there were no fires, it isn't lying idle. "The essence of all these services is availability," wrote Hutt.

Modern Austrian Hans Herman Hoppe provides a very sharp linkage between uncertainty and money holdings.

the investment in money balances must be conceived of as an investment in certainty or an investment in the reduction of subjectively felt uneasiness about uncertainty. ('The Yield from Money Held' Reconsidered, 2009)

Nor is the Auburn side of the Austrian school the only to note linkage. Steve Horwitz, a free-banking Austrian, also gives expression to the link between money and uncertainty:

The connection between Hutt and Menger lies in recognizing that the availability services that money provides flow from it being the most saleable good. To be available to be exchanged for anything at any time requires that the good have the degree of saleability that Menger describes. The nature of Hutt's availability services is that they are a subjective return to holding an item that others also subjectively value a great deal, thus permitting the item to be easily exchangeable. When one chooses to hold wealth in the form of money, one is simply purchasing these availability services. (A Subjectvist Approach to the Demand for Money, 1990)

We also find the link between uncertainty and money among monetarists. In their 1971 paper The Uses of Money, Brunner and Meltzer noted that in a world of perfect certainty, information is available for free. This effectively eliminates the main reasons for the existence of money. However, by relaxing the assumption of certainty, “transactors possess very incomplete information about the location and identity of other transactors, about the quality of the goods offered or demanded, or about the range of prices at which exchanges can be made.” Rather, they must acquire information about these characteristics. Because knowledge acquisition takes time and energy, individuals may alternatively:

search for those sequences of transactions, called transaction chains, that minimize the cost of acquiring information and transacting. The use of assets with peculiar technical properties and low marginal cost of acquiring information reduces these costs. Money is such an asset.

David Laidler, also a monetarist, describes the money as a "buffer against costly consequences of market uncertainty and inflexibility".

If money holding is a cheap and reliable buffer, then agents will find that it pays to remain relatively uninformed about the processes affecting the variability of their net receipts, and will be relativley unwilling to undertake any costly measures that might render them either more predictable or controllable. If, on the other hand, money holding itself is a costly or unreliable source of insulation from such uncertainty, then the expenditure necessary to acquire and utilise extra information is more likely to be made. (Taking Money Seriously, 1990)

It's clear from this wide variety of quotes that many economists have considered money holdings to be uncertainty-alleviating. It's not a big step to replace the concept of "money" with "moneyness". The idea here is that by selling less-liquid items for more-liquid items, individuals can increase their protection from uncertainty. All assets can be ranked on a scale according to their liquidity/moneyness, and as a corollary, by their ability to "lull our disquietude".

On the margin, people are constantly comparing the package of services provided by each asset in an economy, where each package consists of the real services the asset provides, its pecuniary returns (interest, capital gains, or dividends), and finally the extent to which that asset's moneyness shields the holder from uncertainty. This means that in trying to defray their worries about a cloudy future, people seek out the quality of moneyness rather than a specific instrument called money. This quality, or property, is never fully concentrated in one hypothetical asset called "money" but can be found unevenly distributed over the economy's entire range of goods.

To get up to speed, here are two previous posts dealing with the idea of moneyness
1. Why moneyness?
2. What is a non-monetary economy?

How to stop a hyperinflation

Hjalmar Schact and Montague Norman

If you were in charge of a central bank during hyperinflation, what would you do to stop it? Here's a brief but detailed account of how the German hyperinflation was halted in November 1923.

What is so unusual about the end to the German hyperinflation was its suddenness. Within days of a series of monetary reforms implemented in mid November 1923, price rises came to a dead stop. You have to put this into context to properly appreciate it. A loaf of bread, which cost 30,000 marks on August 30, 1923, rose to 300,000 by mid-September, fifteen million marks by mid-October, and 165 billion marks by early November. And suddenly it stabilized.

There were two not-entirely unrelated reforms implemented that month that halted the inflation:

1. the creation of a new unit of account called the rentenmark.
2. the stabilization of the existing unit of account, the paper mark.

The Rentenmark

With the Reichsbank's paper marks having lost all credibility, in August 1923 legislation was introduced in the German parliament to open a new bank of issue. After some discussion, on October 17 the Rentenbank was created. The Rentenbank was to institute a brand new unit-of-account called the rentenmark. A rentenmark unit was to be defined as one gold mark, or 1⁄2790 kg pure gold. The gold mark was the country's old unit-of-account which had been forsaken during the war. The bank would issue notes called rentenmarks which were to trade at their defined gold amount.

The catch was this. Historically when a nation's unit-of-account (like pounds or dollars) was defined in terms of certain quantity of gold, the currency issued by that nation's central bank was made convertible into gold. If inconvertible, then the currency risked floating away from its defined gold value. But the rentenmark was not convertible into gold.

How then was the definition of the rentenmark as 1⁄2790 kg pure gold to be enforced in the marketplace? It's a complex but interesting mechanism. Four percent of the value of all German private agricultural land and industrial property was to be mortgaged, these "forced" mortages handed over to the Rentenbank as capital. The name given to these mortages was Rentenbriefe. Rentenbriefe represented a first lien on property owners, and each bond paid a 6% coupon stated in gold marks ie. interest and principle payments were indexed to gold. Furthermore, all rentenmarks were convertible into rentenbriefe at a rate of 500 to 1. Rentenbriefe, it should be noted, were not convertible into gold.

To sum up this unusual structure, circulating rentenmarks were to be convertible into rentenbriefe, which in turn represented a quantity of German land and property expressed in gold ounces. Rentenmarks, it seems, were a land-backed currency.

Horace Greely Hjalmar Schact, who many of us have read about in the excellent book Lords of Finance, was appointed to run the new Rentenbank. The notes debuted on November 16 and were immediately embraced by the German populace, trading for goods and services at their defined gold value. In his book The Economics of Inflation, Constantino Bresciani Turroni called this "miracle of the Rentenmark".  A currency defined in terms of gold with no actual gold-backing and only land-backing had been successfully floated. The solidity of the rentenmark need only be remarked upon by the fact that by Jan 1924, only 1,600 rentenmarks had been presented to the bank for conversion into rentenbriefe.

The stabilization of the paper mark

The German state now had two units of account, each with a related media of exchange. The rentenmark, defined in terms of gold, was stable, but the paper mark continued to hyperinflate, even after the rentenmark's debut. On November 13 one dollar bought 3.9 trillion paper marks, 6.7 trillion marks on the November 17, and 13 trillion by the end of the month.

To help stabilize the paper mark, that November the government was officially banned from funding itself through the Reichsbank, restoring to the central bank a much-needed degree of independence from the government.

At the same time, the Reichbank changed its commercial lending policy. It had been incredibly profitable to borrow from the Reichsbank during the hyperinflation because its lending rate was kept artificially low. Businesses and speculators borrowed marks to buy stocks, goods, or dollars, and after the mark had lost much of its value, bought them back to cover their loans several weeks later. Even though the lending rate was eventually increased to 90% in September 1923, businesses and speculators were in no way dissuaded from borrowing from the Reichsbank since – at the speed at which depreciation was occurring – only a rate in the thousands would prevent them from profitably borrowing, shorting, and later buying back marks to repay their loan.

As part of its new lending policy, all new advances were now to be indexed to the value of the mark in forex markets. Thus, should a business borrow a million paper marks from the Reichsbank, and the mark depreciated vis-à-vis the dollar, come maturity three weeks later the business would be required to pay back the million marks plus some penalty for depreciation. This dramatically increased the cost of borrowing from the bank.

Lastly, the Reichsbank's policy of accepting privately-created "notgeld" at par was ended. During the hyperinflation, severe currency shortages had encouraged corporations, towns, and municipalities to issue private currency alternatives, or notgeld. The Reichsbank gave these currencies legitimacy by accepting them at the bank's clearinghouse at the same rate as all other paper marks. By ceasing to accept notgeld, these alternative media suddenly lost a large part of their moneyness.

On November 20, Schact formally defined the paper mark against the US dollar. One dollar was to be equal to 4.2 trillion marks. The market simply didn't believe the Reichsbank could defend this definition. A few days later the mark's value had fallen so that it required 13 trillion marks to buy one dollar. To return the paper mark to its defined value, Schact and the Reichsbank proceeded to pull the rug out from under the market. Schact can explain it best:

The speculators, however, did not believe that the Reichsbank would be able to hold this rate of exchange rate for any length of time, and bought dollar after dollar on time bargains at a much higher rate of exchange... This speculation was not only hostile to the country's economic interests, it was also stupid. In previous years such speculation had been carried on either with loans which the Reichsbank granted lavishly, or with emergency money which one printed oneself, and then exchanged for Reichsmarks.

Now, however, three things had happened. The emergency money had lost its value. It was no longer possible to exchange it for Reichsmarks. The loans formerly easily obtainable from the Reichsbank were no longer granted, and the Rentenmark could not be used abroad. For amongst the stipulations governing the issue of the Rentenmark, there was one which forbade the surrender of Rentenmarks to foreigners. For these reasons the speculators were unable to pay for the Dollars they had bought when payment became due. They were forced to sell the Dollars back, and the Reichsbank was not prepared to pay more than the official rate of 4.2 billion Marks to the Dollar. The speculators made considerable losses. A bare ten days later the rate of exchange of 4.2 billion fixed by the Reichsbank had re-established itself. (The Magic of Money)

To sum up, short sellers needed to buy back paper marks to cover their shorts, but there were no sellers except for the Reichsbank. According to Adam Fergusson in When Money Dies (pdf), speculators lost up to 60% of their capital and “took off for Paris and went to work on the franc.” The upshot is that by the end of November, just fifteen days after the initial reforms were floated, Germany had two stable units of account, the rentenmark and paper mark. 

And that, folks, is how you end a hyperinflation.

Chartalism = the McDonald's coupon theory of money

While chartalism is usually associated with the state and its ability to tax, there's no reason that this must be so. In fact, I like to think of chartalism as stateless. I call this the McDonald's coupon theory of money.

What I'm specifically addressing here is the chartalist idea that paper notes issued by the state have value because the state imposes a liability on its citizens that can only be discharged by the use of this paper.

McDonald's Corporation can do the same thing if it imposes an obligation on the burger-eating community to pay for all Big Macs with McDonald's-issued coupons. One coupon buys one Big Mac, say. In order to pay their "tax" and get a burger, Big Mac fans have to somehow acquire these coupons ahead of time.

McDonald's pays for a portion of its supplies by printing and issuing these coupons as payment. So one way that Big Mac fans can get their hands on coupons is by providing services to McDonald's... say cleaning floors or selling them pickles. Another way fans can get coupons is by approaching someone else who is already a supplier to McDonald's and offering them gold, silver, or some other media in exchange for coupons. An active secondary market would probably develop for these coupons.

McDonald's is required to spend enough coupons into existence so as to meet the very real demand people have to settle their obligation to buy Big Mac's with coupons.

Because McDonald's and Big Mac fans are everywhere, it's likely that these coupons will begin to circulate broadly. For instance, corner stores may begin to accept McDonald's coupons in payment for stuff, as will hotels and other merchants. They'll be willing to do so because they know they can pass the coupon off as change to a Big Mac fan at some later point in time. If not, they themselves may want to use it to buy a Big Mac. McDonald's coupon become ever more liquid, their degree of moneyness increases, and they emerge as a globally-useful medium-of-exchange.

Now burger lovers needn't submit to the McDonald's "tax". Burger King still allows customers to buy a Whopper without having to secure a coupon ahead of time. But if Burger King, Wendy's, A&W, and other burger joints institute a similar coupon-mechanism, then burger lovers will have to submit to some sort of coupon-tax.

In any case, I hope you can see why chartalism needn't be explicitly intertwined with the state. We can imagine worlds without states that have circulating chartal media-of-exchange. This is a world of private coupon monies. Theorizing in this way makes monetary discussion easier since it removes the political aspect of the debate, rendering it purely technical.

While I can imagine chartal worlds, I don't think the real world is particularly chartal. Coupons exist, but they rarely circulate outside of a very proscribed range. Here is one example of a circulating chartal money, in which Zimbabweans started to widely use gasoline coupons during the Zim$ hyperinflation. Chartal monies certainly become more prevalent during times of monetary stress.

Nor do I think modern central bank liabilities are chartal coupon monies. In my hypothetical example, McDonald's spent coupons into existence. Modern governments can't fund themselves by issuing coupons, they can only spend after having taxed or issued bonds. Nor are people obligated to use central bank notes or deposits to discharge government obligations – they can, and typically do, use other media. The upshot of this is that if governments announced that they'd only accept gold in payment of taxes from here on in, central bank liabilities would continue to be a valuable and popular medium of exchange. Not so our hypothetical McDonald's coupons. If McDonald's ceased accepting coupons for Big Macs, they'd be worthless.

PS. Just because I am saying that modern central bank money is not chartal doesn't mean that I think we can ignore the state in understanding how modern money gets valued in the marketplace. I think that acceptance of particular media of exchange by the state helps drive the liquidity premia of those media. See this old post.