Debt-free money: A brief reply to Randall Wray

L. Randall Wray is exercised by my suggestion that he has engaged in semantic sleight-of-hand. To summarise my argument: it is an obvious fact that a ten dollar bill is not a debt – because the issuer owes the holder nothing. In fact, we do not hold dollar bills in order to be repaid, we use them, primarily, to buy things.

Debts have a different function and source of value to physical cash. Debts are used to provide streams of cashflows to their holders, and their value resides in the debtors ability to meet payments. By contrast, money is used to pay for things, and its value resides in a network externality – it has value to me because it is accepted by others. And the more widely accepted the money is, the more valuable it becomes (a point completely ignored in Wray’s discussion of bitcoin, airmiles etc). Debts have nothing to do with network externalities. So the properties, uses, and value of physical cash are completely different to those of debts. That is almost certainly one of the reasons why we have two different words: “money” and “debt”.

For some reason Randall Wray, like many others, is resistant to the uniqueness of money and wants everything to be a debt.

To make two different things seem equivalent one must give the same word two different meanings.

He correctly observes that debts carry an obligation to be repayed or redeemed. I don’t know why he thinks I disagree with this. Far from it – that is very close to the definition of debt or liability that I provide. The point is that a ten dollar bill carries no obligation to be repaid – in fact, it is not even meaningful to ask if you will be repaid for your ten dollar bill.

Now if the issuer of a ten dollar bill owes you nothing, how can Randall Wray imply otherwise? By changing the meaning of ‘debt’, ‘redeem’ and ‘repay’. A false equivalence is presenting two things as being the same when they are different. One way to do this is to attribute two different meanings to the same word. Which is precisely what he does. He changes the meaning of ‘debt’ ‘repay’ and ‘redeem’. Helpfully, we can identify this because he uses inverted commas to signal a change in meaning and he refers to his “sense of the term”:

‘[Lonergan] goes on to argue that we’d still use the government’s currency even if it could not be “redeemed” (in my sense of the term)’.

Precisely! Randall Wray needs to put the word ‘redeem’ in inverted commas when he talks about “redeeming” “promises to accept currency in payment for taxes”, because he does not actually mean ‘redeem’. Also, he should make it clear that it is his “sense of the term”, because he is clearly not describing repayment, he is describing something else. You can decide yourself what he is describing – when I quote him directly he seems displeased.

I think Randall Wray is simply providing a description of the payment of taxes – a liability of the taxpayer, but something which in no way changes the distinct properties of money and debt. This is not to say that the requirement to pay taxes in money issued by the state is not an important means by which the state establishes its monopoly – it is (and it is wonderfully described by Mitchell Innes). State directive is an effective way to establish a dominant standard – and a dominant standard with network externalities is extremely difficult to break.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

26 Responses

  1. Brian Romanchuk

    A ten dollar bill is a perpetual claim on $10 in reserves (balances at the central bank, which is a subsidiary of the Federal Government) which is in bearer form. The fact that it is typically used to buy things is not that remarkable; people quite often exchange other debt instruments to make transactions. The fact that the bearer can exchange that bill for reserves makes it a debt.

    • Eric Lonergan

      Thanks for the comment Brian. The fact that banks can request to convert reserves to physical cash and vice versa looks a bit like a gold standard. But think about it, this makes neither a liability. Reserves are really just physical cash in electronic form. The fact that debts are used as money does not make money = debt, a logical confusion repeated endlessly! See the reply to Oliver, and my latest post & the discussion with Nick Rowe. If you want chapter and verse, it is also the case that money is not a cigarette.

      • mjk1093

        The $10 bill might not be a debt to you, but it is a debt to someone. You are using the bill as a tradable commodity, just as a corporation might use bonds that it owns, but which were issued by a different entity. But no one would argue that bonds are not debt.

        Every dollar in existence today is owed to someone, somewhere, for more than it’s worth.

  2. Oliver

    All money is a type of debt, not all debt is a type of money. All that means, is that debt is the broader term, not that he is using the same term to describe two different things. By your definition, money under a gold standard is not actually money, because it can be redeemed (by your definition) for gold.

    • Oliver

      What you call redeemable MMT calls convertible. And there is nothing MMTers love more than going on about how important a non-convertible, floating rate fiat currency is for achieving full employment. That’s their core message – their only message, some would say.

    • Eric Lonergan

      Oliver, nowhere am I saying debt cannot be used as money. It can, and then it stops simply being debt, and acquires a dual purpose. Money under a gold standard is a liability of the issuer, and also money. So the liability almost certainly is lower than the book value of the liability – ie the probability of redemption is actually low. Read my latest post – it is very clear than money is not a debt (ever!) – although sometimes debts can be used as money.

      • Oliver

        Thanks for your reply. Yes, I think your latest post captures the difference between the two of you. Personally, I’m afraid I side more with Wray on this issue.
        I see no purpose in separating the concept of money from its constituting components. Constructing money in accounting terms, namely as a hierarchical, tripartite arrangement between debtor, issuer and creditor, as opposed to ‘normal’, bilateral debt contract (or merely as an ethereal network), delivers a very precise distinction between money and non-monetary financial claims. At the same time, that doesn’t preclude any further forays into network externalities or philosophy, but it does prevent one committing the fallacy of treating money as an ordinary commodity. Each unit of money is established as a relationship between entities that enter into an asymmetric, hierarchical relationship over time – a network, one might even say. In any case, nothing is lost but much precision is gained.

      • Oliver

        I hope not, but I may well be stating the bleedingly obvious.

        I’ll give it one last shot:
        After a money creation act, you have debtor (+goods, -money), creditor (+money, -goods), bank (+loan, -deposit).
        The money creditor now owns will be expected to command a roughly equal amount of goods as debtor originally acquired with his loan. And those goods will have to be forthcoming on demand for money’s value to remain stable. Hence the value of money in terms of goods.
        What the bank does is guarantee that its IOUs can be used to pay back debt owed to it. This also creates demand for it to be used as means of payment in bilateral trades because debtors must earn money to service and pay down debt to the bank. The bank itself cannot, however, pay back its own debt with its own IOUs (the hierarchy).
        This setup distinguishes money from ordinary IOUs. And yes, the more people join in, the bigger the market, the more acceptable and stable in value it will become. If there are many banks within a jurisdiction, for example, it makes perfect sense for them to join together and create a super bank wich does the same with their IOUs as they do with your’s – homogenise them. Voila, the central bank.

        Now, you cannot construct above story, which is probably pretty straight forward (?), if you treat money as a thing / commodity with no obligation / liability / debt (take your pick) attached to it. You need all components.
        But instead of saying that money is debt, which I agree is a bit confusing, I find it makes sense to see it as an asset / liability couple and regard that as a sort of micro foundation of monetary economics. Everything else can be spun from there, including theories about network effects, but must comply with it or else you be cheatin’. (That doesn’t mean I believe you were cheating, though. It may just be a matter of focus, as is so often the case.)

  3. Min

    I agree (I think) that the dispute between you and Wray is linguistic. I agree with Wray that there are standard senses of the term, “debt”, under which what he says is so. I agree with you that there are senses of “debt” under which what you say is so.

    Whether you call it debt or not, nearly all sovereign issuers of money take on the obligation of accepting it for taxes. The main reason that the Continental Dollar crashed is that neither the Continental Congress nor the states agreed to accept it for taxes. Benjamin Franklin warned Congress against not supporting the Continental via taxation.

    • Eric Lonergan

      To be clear, I am saying that Randall Wray is making a false equivalence by giving two separate meanings to the same word. He is not using ‘debt’ in a standard way – he is using it in two ways: the standard way, and an idiosyncratic, convoluted, metaphorical way. If you are in any doubt, ask the next cab driver you meet if he is worried about the government defaulting on your $10 bill? The ‘standard’ meaning of words resides in use – because the question ‘are you worried about the government defaulting on your debt?’ is meaningless, it is a non-standard use of the term.

  4. John Hermann

    Three points:
    1. Brian says “A ten dollar bill is a perpetual claim on $10 in reserves (balances at the central bank … “. Such a claim can be made by commercial banks but not by others who hold currency. A non-bank private sector entity cannot make such a claim – because it is not permitted to hold an account with the central bank.
    2. The status of currency held by banks is different from currency held by the general public. The former may be thought of as currency reserves (and therefore part of the greater entity called banking reserves = bank-held currency plus bank deposits at the central bank), while the latter is unquestionably part of the money supply (i.e. as measured by the monetary aggregate M1).
    3. Bank credit money is not simply a form of debt. Bank credit money is created in a variety of ways other than by bank lending. Thus banks create credit money whenever they spend into the real economy (i.e. in order to accommodate their many costs). Bank credit money is also created when the central bank purchases securities from the non-bank private sector, and when the central bank spends into the real economy.

  5. joe bongiovanni

    ummm, agreeing here that money and debt are two different things in a legal sense especially (having read The Legal Aspect of Money by H.A. Mann)
    Can’t agree that debt IS money however, although fractional-reserve banking REQUIRES a debt in order to increase the money supply as presently constituted.
    As indicated more than once, perhaps not clearly enough, all debt is denominated in money ‘terms’,,,, must pay back $100 US by 1 March at location .
    Money is what denominates legal debt, and what is, therefore, required for repayment (balancing to ‘zero – the debt.)
    Money is used to repay debt (again, as legally defined), and thus money and debt cannot be the same thing, despite the original gyrations of Mitchell-Innes, and learned by Wray, on this subject.
    For the Money System Common


      To Joe Bonjiovanni: Wray does not say that debt is money, but rather he says that money is debt. The MMT economists on the whole agree that not all debt is money. However I think a case can be made that all money is a liability, and in this regard my point is that not all liabilities are debts. I am mindful of the fact that most of the cash (or its equivalent) held by a member of the public, also known as the money supply, ultimately is paid back to the state in order to settle tax obligations. So in this sense most of the money supply is a liability of its holders to pay the state in fulfilment of tax obligations, but it is a contingent liability because not all who possess cash have tax obligations at the same time. Similarly, money held by a member of the public in a demand account at a bank is also a contingent liability because there is no established timeline for payment of that money to the depositor. Money held as a term deposit is different because there is a fixed timeline for the payment of principal and interest, so in this sense it is a financial debt. I would therefore make the general claim that all debts are liabilities, but not all liabilities are debts.

  6. David Pich

    I agree with Wray that all money is debt. But I disagree with Wray, because I believe it doesn’t have to be debt, while he believes it does. Many years ago we sent a 10 dollar bill to the Federal Reserve Bank and asked them to please send us the 10 dollars. On the bill it stated ” pay to the barrier ten dollars.” We just wanted our 10 dollars. And they just sent us the 10 dollar bill back. So we sued them in court. The judge didn’t know how to handle the situation, and the attorney for the FED agreed that our claim was correct. We had a “promise to pay” and we were payed with another “promise to pay”. Can you imagine what would happen if you had a mortgage or car payment due, and you gave the lender a piece of paper stating you would ” promise to pay” them at a later time?
    The case made it up the appeals court, where a judgement was handed down against us, because the FED was incapable of rendering satisfaction. Not at any time during any of the proceedings could the judge or the FED representatives, give any kind of definition as to what exactly a “dollar” is.
    Many years ago, the treasury put out a notice that a new 100 dollar bills cost them 10 cents a piece, to print. (currently it’s 24 cents) So we sent the Treasury Department a one dollar bill ( to cover the cost of printing) and asked them to please send us ten of the new 100 dollar bills. They told us that they sell all the bills to the FED for the cost of printing. So we sent the FED the dollar bill and ask for 10 of the new 100 dollar bills. They refused, and told us, we could only get them from a commercial bank. Now the commercial banks pay the FED full face value for all the bills. So they wouldn’t sell them to us for 10 cents a piece. However, they would sell them to us at face value, if we were to give them the same amount of checkbook (debt) money.

    All money is created though loans. All money is debt. Someone out there, please show me an example of debt free money.

    • Eric Lonergan

      That’s a fascinating story, David. Thanks. You prove the point that money is not a debt (a debt is when you owe something). No one owes you anything for your 10 dollar bill – so asking them for something is a futile act, which the court process proves.

    • Nishad

      All fiat money is debt. A fiat note is essentially a highly collateralised I.O.U. Psychologically, we treat fiat money (coins and notes and their corresponding digital record), as valuable entities in themselves. We have fetishized fiat money, we desire it more that the value of the goods and services it was created to facillitate the exchange of.
      There is money that is not created via leveraging debt as an asset. Its called Bitcoin.

  7. Jussi

    “And the more widely accepted the money is, the more valuable it becomes”

    That is certainly a one thing money can get value from but not the only one. I doubt only this can give stable value for the money (wrt. bitcoin).

    I think money originally and still represents wealth. There is a promise to deliver assets / goods against it. That is why central bank needs OMOs in their toolbox. This is the main source of value. Money is usually not widely accepted if it is not clearly backed by the assets. The right to collect taxes is also an (implicit) asset.

    Debt is also backed by assets. So both money and debt are liabilities against assets, just like they are recorded on any balance sheet.

  8. mike

    Surely the point is that the government owes a debt to accept its currency in payment for taxes? That is its liability.
    So Eric is not wholly incorrect, the type of actual debt is different in kind but it is still a debt and in this case the final step in the money-debt process. Once the government has paid its debt by accepting the payment in tax the money is effectively destroyed.

    • Eric Lonergan

      Thanks Mike – you have pretty much identified the main point. Frankly, Randall Wray is using the word ‘debt’ to mean two separate things: the standard meaning – ‘I owe you money’ – and an idiosyncratic definition – ‘accepts money as payment’. I think for clarity we should stick to standard English usage because these are totally different economic phenomena. Why would you want to conflate them?

  9. Toku Sessai

    Re: “it is an obvious fact that a ten dollar bill is not a debt – because the issuer owes the holder nothing.”
    There is a liability is attached to the ten dollar bill as explained on : “The liability underlying the government’s money is to redeem that money via taxation, and to accept said money in payment of taxes. ”
    Whether this liability can be called debt or not – now that is a matter of semantics.

  10. Nicholas

    The government that issues the ten dollars is saying that it owes you ten dollars’ worth of tax liability extinguishment if you present the money to the government in payment of taxes.

    The government is promising to give you that amount of tax liability extinguishment if you hand over the money.

    Money is indeed an IOU of the government that issued it. Randall Wray is correct.

    • Eric Lonergan

      Tax is your liability, not the government’s. The government is in fact saying ‘here’s $10, spend it on whatever you want’ – which is what you do with money.


Leave a Reply

Your email address will not be published.

* Checkbox GDPR is required


I agree