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Promissory obligations to each other (d)

10–11 July 2013.

Introduction

Continued from previous article. Now listening to video no. 99. Mike Montagne on TNS Radio, 27 November 2010.

Barter and promissory obligations

In the next video in the series, number 99, from about the moment 2m02s (you may also wish to listen to the long and very slow introduction before it, which follows a discussion at the end of video no. 98), Mike Montagne talks about barter trade. He understands that with little or no currency (i.e., little or no money) trade is difficult.

His story is about someone who takes three goats and twenty chickens to the market, hoping to buy a good herding dog. He finds someone with a herding dog he is willing to sell, but only in exchange for a cow, not goats and hens.

In fact it’s quite similar to my own cow story. Not surprising, because anybody can easily imagine such a situation and tell the story about it.

So Mike and I agree about the difficulties of barter, we both rediscovered what William Stanley Jevons (1835–1882) called the Double coincidence of wants.

In Mike’s radio video, the story continues: the owner of the goats and chickens leaves the animals with the neighbour who accompanied him to the market, so he himself can move faster in search of someone wanting to sell a cow in exchange for goats and hens. He dashes about the market – (Wow, I learnt a new expression again! Thanks) – but doesn’t find one.

Several traders want to sell a cow that the herding dog’s owner might accept in return for it, but all the cow owners want something else than goats and chickens.

Then finally the goats’n’hens man finds someone who wants goats and chickens AND wants to sell something that the cow owner happens to want for the cow. They agree on the sale, but the goats&hens guy doesn’t currently have the goats and chickens with him, because he left these in the care of the neighbour.

How to solve this? I quote Mike Montagne from video 99 at 4m39s:

And, so, what do you do? You issue this person a promissory obligation that you will deliver your three goats and twenty chickens to this person, if this person will deliver whatever they have to the person who has the cow, who will deliver the cow to this person who has the dog, so that you can have the dog, and, then you go to the person who has the dog, and you, ehm, you inform them that you’ve arranged for this trade, should this cow, eh, be, meet their standards.
   
So as I see it, there would have been a regular inspiration to create the very kind of currency, which we still need to abide by, and that is, a mere promissory obligation.
   
In truth these things are not actually debts, either, a promissory obligation is simply a promise to give up something in
[re]turn for something else. [...] The obligation of a promissory obligation is to fulfill it.

(Time in video now 6m04s.)

Futures or accounts payable

From an earlier analysis it appeared that the promissory obligations that Mike Montagne proposes, to replace the existing type of money (which is bank money), is a promise to pay. How that actual payment then should take place, or if maybe the promise itself already is the payment, remained unclear.

Now however we see that a promissory obligation is not a promise to pay, but a promise to deliver goods in return for other goods. (Goods or services, probably. “Something”, anyway, in Mike’s own words.)

The first type of new money, MPE/CMF money, is comparable to what we already have in the existing economy: accounts payable. When a creditor sends an invoice to a debtor, for delivered goods or services, and the debtor doesn’t dispute the invoice, that could be seen as a tacit promise to pay. From the other side, the debtor’s invoice is a explicit claim to be paid. One could propose to use those accounts receivable as money too. But Mike doesn’t.

The second kind of promise, the promise to deliver specific goods or services, seems to be somewhat similar to something that also already exists in the present economic system: forward contracts, also known as forwards, or (rather different) futures contracts or simply futures.

Money should be universal

Be that as it may, whatever Mike Montagne exactly means by a promissory obligation, the problem I see with them, is that accounts payable, accounts receivable, forwards and futures are all useful and usable, but they are not suitable to be used as money. The reasons for that are as follows:

  1. Accounts payable and accounts receivable are not transferrable to some other party to serve as payment. (Factoring is a special case. The accounts are then exchanged for money, not themselves used as money.) Accounts payable and accounts receivable are tied to specific debtors and creditors.

    Compare that to money in the current economic system: any part of a bank balance can be transferred to a different account holder, and thus serve as payment.

  2. Forward contracts are not transferrable, not tradable.

  3. It seems futures contracts are tradable or transferrable, but I must admit I do not fully understand how that works. Ample explanations are available on the web. Anyway, obviously a futures contract won’t be welcomed as a means of payment at a supermarket checkout, because they wouldn’t know what to do with it.

  4. Promissory obligations, accounts payable, accounts receivable, forwards and futures are not universal and not generic. They are tied to specific commodities, qualities, quantities, invoices, goods, services, etc.

    With traditional money on the other hand, you can buy anything and you can receive money when selling anything. That is exactly why it works so well: in the above market example, even with promissory obligations, trading is complicated and difficult. Introducing real money as a medium of exchange makes it easy.

  5. Real money is divisible. If you have ten dollars, you can spend it as 5 times 2 dollars, or as 1, 3 and 6 dollars, or 4 times $2.50, or whatever other combination. Promissory obligations are not divisible. They are the promise to pay a specific amount of money or a specific quantity of specific products. That makes promissory obligations unsuitable for use as money.

Tied to specific value

As a further substantiation of the fact that under MPE/CMF, money is not generic and universal, but instead tied to specific goods, products, commodities etc., I quote from this page, written by Mike Montagne:

People of course may pay fully for assets with existent circulation.
   
A deficient circulation however is never imposed by mathematically perfected economy™, because the owner is always free to convert their remaining equity into the monetary obligation which would otherwise exist at that point of the lifespan of the asset.
   
In other words, we can always convert our equity into circulation as necessary; and thus under mathematically perfected economy™ the total effective circulation is always the unretired circulation plus remaining equity, which of course always equals the remaining value of represented wealth.

Convertible

Let me see if I understand this. Suppose I buy a house worth $100,000 and immediately pay those full hundred thousand dollar. (The question where I got that money from shall remain unanswered.) The lifespan is assumed to be a hundred years.

Now 5 years after my purchase, I decide to convert my equity into circulation. So then someone, something, the CMF perhaps, suddenly gives me $95,000. Where from? For what? Does the CMF (Common Monetary Foundry) become co-owner of my house? No, because the CMF only does registration of promissory obligations, it is not party in any financial transactions itself, because the CMF is not a bank.

Note that in the quote above, there is no mention on any sales transaction or buyer, nor of an appraisal to assess the value of this house. It is simply assumed that because I bought the house for $100,000 dollar five years ago, I can now convert it to $95,000 if I want, and receive that money. Where does that money come from? Out of thin air?

Perhaps the $95,000 comes from the $100,000 I took to the CMF when I bought the house? But the CMF already used that to pay the construction workers who built the house! No wait, they only paid $5,000 over the first five years. So they stored the other $95,000 dollars for me? The CMF is actually a bank, a savings bank in this case?

Representation

Mike’s text hyperlinks to this definition:

deficient circulation : a circulation which is insufficient to represent the whole of related wealth, repay respective monetary obligations, and/or to sustain all practical cases of the industry necessary to do so. A deficient circulation for instance is insufficient to trade or to represent all monetized wealth at once, either by the fault of insufficient volume, or by dedication of the volume to extrinsic purposes such as servicing artificial multiplication of debt.

So here we have this idea again, that money should represent value, or even all value. I noticed that before. And I think that this is not a good interpretation of the concept of money. Money has a value of its own: either the (actual or symbolic) metal value in coins, or the value represented by claims of the public on banks.

Money is the banks’ promise to pay the public. In that sense money is promissory obligation. The banks’ obligation, not that of the public (households and firms).

Money can be exchanged for goods and vice versa. But money is not the goods, does not represent them, does not symbolise them. In other words, money is not “tokenization of value”. To quote this Introduction to Mathematically Perfected Economy by Adriano (Brazil), Darren Rooke, Gavin Davidson (France, UK):

Only under MPE will the people have ‘immutable’ tokens of value.

In my opinion, people do not need such tokens. As explained in the above, such tokens are unusable as money. Real money is. Real money is claims.

Obligor

To work towards the end of this article, I quote Mike Montagne, still from radio video 99, from the point in time 6m28s:

So I don’t believe at all, and I don’t believe there is any historic record of such a thing, that banks in fact introduced the idea of credit. What I believe actually happened, was that, given that such a manner of trade would have arisen virtually anywhere and everywhere in the world as a natural [...] consequence of the shortcomings of not having a currency, i.e., a medium of exchange, which is an immutable tokenization of value, which serves to trade any wealth for any other wealth.
   
Lacking that, I can see that this would have been a prevalent manner of trading: the actual individual invention, if you will, of currency.
   
And what I think actually, probably happened, was that at later times, in different places, someone, ehm, took over the property that the market was held in, [...], and this person that owned the property decided [...], [...] they had a better idea, they would issue these promissory obligations on behalf of the person who’s the actual obligor of the arrangement.
   
So instead of you issuing an affidavit, or a receipt for the fact that you possess three goats and twenty chickens that you wish to trade for a dog, they instead issued that same obligation, and eventually sought to charge for it, and in the case of interest, sought to charge in a way which forced everyone to, ehm, to give up property at an ever escalating rate, merely to participate in the market. And when the profitability of that was discovered, however unwarranted it might have been, I think this would have been the beginnings of what we today call banking, which of course is not about banking at all. It exists merely to impose this obfuscation of the currency.
[...] [...] ”

(I learnt the word “obligor” no sooner than during my research of MPE. It means “one who is bound by a legal obligation”. The word obfuscation I already learnt much longer ago, probably around 1989. Obfuscation means “making things obscure, making them unclear”.)

There we have it. Mike Montagne totally misunderstands what banks are, what they do and how they do it.

He either misunderstands or deliberately obfuscates the true functions of banks. I really don’t know which of the two it is.

On whose behalf?

Mike said that “they” (what later became the banks) “would issue these promissory obligations on behalf of the person who’s the actual obligor of the arrangement.

That’s the whole point: they don’t. Well, they do, but not on my behalf.

When I go to the supermarket to arrange for buying food, and I use my debit card to pay for it, the bank does not promise to pay the supermarket on my behalf, but on its own behalf, on the bank’s behalf. To compensate for that, they decrease my claim on them. What’s more, the bank does not promise to pay the supermarket, they actually pay, viz. by increasing the supermarket’s claim on the bank.

So you could say the bank increases its promise to the supermarket. Its promise, not my promise.

In other words, after the payment has been processed, there’s a lower balance figure in the bank’s computer for my account, and an equally higher figure in the supermarket’s account.

Neither the supermarket nor I pay interest for that. (The bank does charge me a small yearly fee for using the debit card.) The supermarket may even receive a little bit of interest on their current business account, if it shows a credit balance.

And this is why this whole banking scheme is so smart and why it works in practice and has for so many years: the supermarket needs only trust its bank and I should trust mine. To accept my payment by debit card, the supermarket needs not trust me or even know me!

Misunderstanding or obfuscation

So what we see is that Mike Montagne, founder of PfMPE (People for Mathematically Perfected Economy) does not understand banking.

In fact the whole of MPE and CMF (Common Monetary Foundry) rests on such misunderstandings or obfuscations: of money creation, of interest, of banking, of money, of circulation, of credit and of accounting.



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