I generally agree with what Harris said in The Moral Landscape. I thought a lot of the bad press he got over it wasn’t deserved simply because his book was largely a set of thought experiments; interesting as academic pursuits. As far as applying them to the real world goes not much was given. It’s defensible that what’s moral is an empirical, and therefor scientific, question, but what tools does that give us in the real world? I don’t know. 

So it’s interesting to look at how Harris himself approaches real-world issues just to see how it links back to his book. I’m not really sure how it does and what he has said gives the impression that if his position is based on his moral theorising it has left him unable to see an invasion as an invasion. In this blog post he starts out by arguing something like “in wars all bets are off, people do bad shit”. Maybe, but applying that to what’s happening in Gaza is extra-ordinarily misleading. He made this point in response to Israel’s record of war crimes. The vast detail he doesn’t mention is that all the terrorism and crimes against Israel that are given as pretexts to murder are the result of it’s invasion, blockade and siege of Palestine. Even the existence of Hamas itself is arguably the result of Israel’s war crimes. According to the Nuremberg Military Tribunal a war of aggression “is the supreme international crime, differing only from other war crimes in that it contains within itself the accumulated evil of the whole.” 

You have to ask yourself, given Harris’ recent history as a champion of reason: what is the reasonable response to terrorism? Is it murdering people who had nothing to do with it? If there is a way to stop it without killing people should that be the first option open to a reasonable mind? International law is clear on this. Another detail Harris ignores. Israel has the right to defend itself and everyone with any understanding of terrorism or security or the situation in Palestine understands exactly how Israel can stop all the terrorism right now: call off their invasion, blockades and sieges and go home inside Israel’s borders. They accidentally did this already. Hamas agreed to a cease-fire, which Israel totally violated by implementing blockades, another war crime, during which Hamas completely stopped rocket fire into Israel. So they could just do that, forever this time. Even if Israel was justified in using aggression, which it’s not, it would still be guilty of breaching the Geneva Convention, which explicitly forbids transfer of population into occupied land. You have to understand that war is declared against states, not people or land. The threat is the state and once the state is pacified the threat is gone. Even declaring war doesn’t give a state de facto right to take any region over.

Harris’ entire thesis in The Moral Landscape is that morality comes down to suffering versus well-being. With that in mind read the following:

Consider how we behaved in World War II: We did things that would now constitute the worst war crimes imaginable—the firebombing of Dresden, the nuclear weapons dropped on Hiroshima and Nagasaki. We literally burned hundreds of thousands of noncombatants alive. Was all that carnage strategically necessary? I don’t know—probably not. And we certainly couldn’t behave this way today without invoking the wrath of billions of people. However, the crucial question is, what sort of world were we trying to create? What were the real intentions of the U.S. and Britain with respect to Germany and Japan? Well, you saw our intentions after the war: We helped rebuild these countries. Out of the ashes of this war, we created the allies we deserved. The truth is that we wanted to live in a peaceful world with thriving economies on all sides.

He seems to have stopped slightly short of saying burning people to death is OK so long as you have a nice idea in mind, OK so long as we “create the allies we deserved.” I’ll give him the benefit of the doubt and assume he didn’t mean that. Even to argue that intention is the crucial question seems to be a total deviation from his moral theoretics. It’s not the issue of killing people nor the issue of whether any of it was strategically necessary that’s central, we should look away from that, it’s the issue of intention that is crucial. 

So let’s talk about intentions. The current escalation in Gaza started with the abduction of some teenagers from Israel. Actually, not exactly… they were abducted form the occupied West Bank, not Israel. Netanyahu immediately blamed Hamas and ordered a search in Gaza. Israeli soldiers started arresting people in Gaza, something like 800, no-one has since mentioned this, the biggest kidnapping ring in history. Not surprisingly this investigation pissed people off. You can imagine what would happen if foreign soldiers showed up in New York and arrested 800 people. Shortly after it was discovered that he knew that they were dead before starting the investigation. It was then revealed that his own people thought that the culprits probably weren’t receiving orders from Hamas; which was later confirmed. People get kidnapped and murdered all the time, do countries usually go to war over it? Why does Harris, a self defined supporter of reason, have nothing to say about such unreasonable behaviour? And if we are supposed to be interested in intentions: what are the intentions powering Israel’s actions? It seems murderous irrational belligerence. 

My last post argued that the thing that issues money, whatever it is, necessarily runs a deficit (given the normal definition of ‘deficit’.) Some will disagree with what I posted on the grounds that I misrepresented how money is created. The will argue that banks create money, and lend it to us and the government.

It could be argued, given a narrow view, that banks create money in the sense that if you go to a bank and ask them to lend you a grand, you get a grand to spend. It’s more accurate, however, to say that banks create spending power, or what economists call demand, not money. The create promises to provide pounds, not pounds. In order to see why you just have to look at any bank’s accounting system.

Firstly, banks can create money. Anyone can. That’s why I’m talking about Pounds, not money in general. There is a key difference. Pounds are issued by, and can only be issued by, the British Government. That’s really what a Pound Sterling is. So why do some people believe that the thing that issues pounds has to borrow them? Who knows. I suspect, mostly, propaganda. Anyway, what happens when you borrow a grand?

The bank creates a deposit account with a grand balance. To the bank this is a liability, because you can demand it at any time. The transaction also creates a debt, of a grand, issued by you. The bank now has a liability and an asset, each worth exactly the same. The bank’s balance sheet total is unchanged. You, if you are keeping standard accounting records, now have an asset in the form of a deposit account and a liability in the form of the debt you owe the bank, both worth the same, so your balance sheet total stands unchanged. 

The situation has created no money. Neither yours nor the bank’s balance sheet has changed. Further, if we add interest in then not only has the bank not created any money but it’s also absorbing money from you. This shows up on the bank’s cash-flow account in the form of interest payments over time. So balance sheets are unaffected while the bank’s cash-flow is net increased while yours is net decreased. So how can this create money? It can’t. You have to pay more money back, where do you get the money? Other bank loans? Pay from employers? Where do they get it? People like you? Other banks? There is no part of this in which banks create pounds because they simple can’t. Of course this is obvious when you realise banks are businesses. If they could issue pounds why do they bother doing anything? They could just issue themselves profits. They could open themselves huge deposit accounts, but if you look at the above that would result in net zero on both balance and cash-flow accounts. Ultimately banks are interested in making useful money, like Pounds, which they can’t create. 

What if you go to the bank and withdraw your grand? Simple, the bank gives you some of the cash it had lying around. Where did it get that cash? It bought it off the Royal Mint, paid for out of their reserve account at the Bank of England. Similarly, if you want to send your pounds to another bank (for example if you bought something of someone that has a bank account in that bank) your banks sends reserves to the other bank. In both cases the banks loses both an asset (reserves) and a liability (part of your deposit balance), worth the same amount: the amount you withdrew or transfered. Net zero to the balance sheets, but your bank retains your interest cash-flow. Banks can’t issue themselves reserves. They get reserves, ultimately, from the Treasury. Usually this is achieved by the bank buying bonds off the Treasury that pay interest.

Many have a bizarre interpretation of banking by looking at the fact that the treasury issues bonds and conclude that the treasury is ‘borrowing’ and running a deficit to fund spending, while the money creator is really the Bank of England (funnily also a branch of the government anyway), which runs no deficit, and that the treasure simply prints cash and mints coins. The BoE runs no deficit because it is funded by the Treasuries deficit, issued via bond sales. The treasure creates the pounds that the BoE puts in commercial banks’ reserve accounts. The process of creation takes the form of bonds, that’s all. 

This is why the talk of ‘government debt’ is misleading. A large chunk of the government’s deficit takes the form of debt in accounting terms because that’s how the Treasury choses to control the reserve level in the banking sector, it’s not even funding spending, the Treasure can just spend pounds out of nothing, this is how it pays for… everything. If the government wants to pay benefits, build a hospital or a road or a train track or a tank, it just puts money directly into a bank account: no borrowing. The ‘debt’ part of the deficit is just the sum total of treasury bonds issued by the Treasury. The interest that the Treasury pays on those bonds is just the total cash flow of new money creation (minus money created through real government spending), and is entirely optional*. The government could pay zero if it wanted to, and it can pay whatever it wants because it can just create the pounds to pay for it. There is no funding / debt servicing problem. It’s just a matter of choosing the rate at which to create new money.

*in fact the Treasury only pays interest on these bonds to limit interest rates. If you take out a saving account your bank funds that with a Treasury bond. The bank wants to make a profit so it takes a chunk of the interest it earns and gives the rest to you. If the bank took no cut at all, then you would get what the Treasury is paying, so that is effectively the limit your savings account will pay (unless the bank decides to run a loss).

The key to understanding how our economic systems work is really to realise that most of what is said about it is irrelevant bullshit. The more I learn about our money systems the more I realise that it is, as a high-level system, not very complicated and easy to understand. That isn’t the same as saying it isn’t complex or that it’s easy to predict. You shouldn’t confuse complicatedness with complexity. Take, as analogy, the weather. Weather systems are complex but despite that you can still take it for granted that it’s colder when it rains. There’s no hidden property of weather systems that messes up that simple rule, and you don’t need to model precise rainfall to come to that conclusion (except, perhaps, rain falling through a volcano eruption).

Which is why, to me, the title of this post isn’t controversial. It fact it’s about as insightful as saying “circles lack corners.” It’s really just a deductive statement about what the words in it mean:

The thing that issues money, whatever it is, is running a deficit.

This throws a spanner in the cogs of those who take the position in favor of what is called either monetarism or austerity, depending on your memory span. Everyone aggress that we need money. It seems a pretty effective means of resource management. No-one has had a better idea. But, many are ideologically apposed to state spending. At the extreme end there are those who want a metal standard implemented in order to make it impossible for the government to run deficits over the long term, requiring them to fund deficits with surpluses.

Imagine: The gold standard is in effect. You go into your garden, stick a shovel in the ground, and pull a pound’s worth of gold out of the earth. Let’s say you have a magic machine that turns it into a pound coin for free. Now, it’s not in circulation until you circulate it. You have two options: spend it or give it away. Pick one. You just ran a £1 deficit.

I think the first instinct, for most, would be to point out that you bought a pound’s worth of stuff. That is true, but that would be a real asset. Real assets aren’t part of a deficit, which makes sense given that they have no price until they flow. A deficit is negative cash flow. Money in minus money out. Of course the word ‘deficit’ can be used to mean anything, but it has a technical definition, and that is the definition used when people refer to the government’s deficit. If you don’t believe me go and check your government’s treasury FAQ.

The eagle eye might be drawn to the point that, although you lost £1, you gained £1 to start with, so your cash-flow is zero. This is shady given that the pound doesn’t sit anywhere on a cash-flow account, you didn’t gain it through a transaction, you just issued yourself it. Anyone can issue themselves money whenever they want, it doesn’t usually show up on a cash-flow account. But even if that argument holds then you’ve just proved that the government isn’t running a deficit, because it creates the pounds that fund it, else how could it spend them?

 

I recently, finally, got an analogue synth after only ever using digital ones. I have always been a bit suspicious of digital synths. There was always something off about them. Now that I have had the chance to use an analogue synth first hand I have had my suspicions confirmed: analogue synths sound better by far.

Now, some digital synths are designed to do things that only digital synths can do, so comparing those to analogue synths is a bit unfair. It is true that digital synths have a wider range of timbres and easily do arbitrary control routing; limited only by software architecture, CPU and UI/EX, but digital synths all suffer from the same artifacts.

If you hunt around online you will find people raving about how particular digital synths so well recreate the classic analogue sounds. To some extent this is true, analogue model synths do a good job of recreating the overall tonal characteristics of analogue synths but they also suffer from some of the following:

  • Aliasing – they all have some amount of nasty harmonic distortion caused by sample aliasing. Some do reduce this to a minimum bit it’s always there.
  • Scratchy transients – they just can’t seem to handle situations involving high/short envelope settings in which you get nasty split, crackly distortion in onset transients. You often want a spike at the onset of a sound to give it a snap that your ear can catch hold of, so you might have a short envelope opening a filter momentarily, but this often introduces some scratchy high frequencies or crackly transients.
  • Gritty high end – By far my most serious complaint. The thing that always puts me off. The high frequency component in every digital synth I have ever used always has a kind of brittle, rough texture. The sound is like subtle bit-depth reduction all over the top end. Digital synths never fizz cleanly and I always find it distracting.
  • Bad aliasing during even subtle pitch modulation – one of the main characteristics of analogue synths is looseness. Pitched oscillators will slide around, if only very slightly. Many will recreate this via slight pitch modulation, say settings an LFO to wobble oscillator pitch or using some pitch shift plug-in, but these, even very subtle, variations immediately incur aliasing with a lot of digital synths.
  • Break down at all extremes – digital synths always break apart with extreme settings. You can’t have LFOs going too fast, fast attack envelopes crackle and spit, high resonance sounds aliased, high register notes sound scratchy.
  • Unstable low end – I have noticed that, to my memory, every digital synth I have used unravels on very low frequencies depending on settings. The low end seems to be detached from the rest of the signal. Maybe something to do with phase coherence of digital filters. Dunno.

It took me about 5 seconds using an analogue synth to hear that none of these problems exist in the analogue world. You can get an analogue synth to play a note at very high pitches and while the sound is whiny and difficult to listen to it sounds pure and intact. The high end is generally exactly as you would want to hear it.

On a subjective note analogue synths also have a kind of unruly quality that not many digital synths really have. With digital synths you set something and the synth hits it bang on every time. Analogue synths (and in fact gear in general) seem to be a bit more squirmy and springy. The sound also has more depth than many, but perhaps not all, digital synths. You can somehow tell that you are listening into a mechanical device, which you are. The sound is coming from a real thing and exists. Digital synths often have a flat, two dimensional quality, as if you are listening to cardboard cut-out impression of a sound.

Analogue synths probably aren’t for everyone. Sound is very subjective and I am only following my own taste. They are also kind of a pain in the arse to use compared to a VSTi. I now have ground loop issues for a start, but I have already had a quick test using the synth in a track and found it just added something great, processed beautifully and joined right in with the rest of the track. It recorded in one take and the result was just… perfect.

One way to measure a civilisation’s developmental progress is to look at the extent to which people’s lives are at the mercy of the environment. We can establish perfectly comfortable living standards in places that at one time would have been inhabitable only with extraordinary effort, or perhaps not inhabitable at all. It’s debatable about how far along that process we are, given that we are facing an imminent existential threat caused by how we have chosen to interact with the environment, but it is easy to see that technological and sociological development, at least in principal, gives rise to the possibility of completely abstracting our survival from environmental variables.

This line of thought is what, to me, uncovers how ridiculous our idea of alien invasion is.

Stephen Hawking recently said “If aliens visit us, the outcome would be much as when Columbus landed in America, which didn’t turn out well for the Native Americans”, which is almost an exact quote from The Day The Earth Stood Still. Alien invasion would involve traveling a vast distance through space, either requiring a lot of time or a lot of energy, or both. Doing that would require a level of technology so advanced it can produce the required energy and provide such a level of abstraction from environmental threats that survival in space is not a problem. Why would a civilisation capable of that invade us?

Imagine this: You live in a comfortable home in a developed country with a nice job. You don’t need to worry about anything except getting to work on time. You decide to get on a plane, fly to the other side of the planet, taking a piece of wood with a nail in it with you, so you can bludgen a few natives on some desert island somewhere and steal their huts. And you do that because you like the fruit that grows on the few dozen trees outside. Why would you do that? Do you want that fruit that much?

This is the basic premise behind the vast majority of alien invasion narratives, including Hawking’s. The narrative hangs together with a piece of story telling proclamation: they want something we have; either oil, slaves, human brains, water or some vague idea of our ‘resources’. They have the technology to get here and destroy a whole planet but they are still dependent on plundering these basic things out of the ground?

The comparison to the West Indies, and my metaphor, break down for even more fundamental reasons. In those narratives the invader and the victim are both the same type of being. They have the same biology and therefor the same basic requirements. Alien planets are … alien. We have evolved to live in our world, we would almost certainly not find alien planets particularly comfortable, to say the least. What makes those planets beautiful and welcoming to the aliens would make them biologically terrifying to us. So imagine flying to the other side of the earth to live near a sea of acid breathing carbon monoxide near trees of poisonous fruit saturated with germs that can stroll past your immune system unnoticed… that invasion seems less appealing.

There’s also a much more philosophical objection to the idea of comparing our interactions with aliens to our past: aliens may well not think like us at all. The dynamics of human thought that give rise to our patterns of history might not even exist in alien minds. It could be that those patterns are purged from the cosmos by galactic darwinian selection: those races obsessed with imperialism at all costs may well always remove themselves from the universe before ever getting the opportunity victimise other planets. We are almost a case study in that. It could be that getting to the stage to be able to tackle interstellar travel requires a level of social cohesion that would-be invaders just don’t possess.

In my opinion there are only a few simple examples of alien invasion stories that hold any water: those in which the aliens invade not for any economic reason but because it is intrinsic in their nature. One example is the Borg. Another is from Babylon 5 in which the Vorlons find a way to travel to another universe and find a race that considers all other sentient life to be an insult. The Day The Earth Stood Still is a bit of a deviation in that the aliens invade because they see humans as a potential threat. In the original they saw our development of nuclear weapons as an indication of our destructiveness, which just raises the question: why would this be a significant problem to these advanced aliens? In the recent remake the producers reverted to a more standard alien invasion premise: we are are destroying a resource, our planet, and they have to intervene to stop us in order to secure that resource. This just raises the usual questions and further, why did the aliens see their only option to be killing us all with a magic black cloud? Why not get it to wipe out all of our polluting machinery? What’s the worst that would happen? People dying?

There could be realistic examples that are far more complex. A keen reader will have noticed that I could turn this whole argument on its head. If it is more realistic to imagine the alien’s motives to be simply some ingrained and irresistible psychotic behaviour, then it could be argued that that is exactly how humans behaved in the past and so drawing analogies to those events is a valid observation. Sure we can cast our history of conquest into terms of resource and economy, but ultimately we could have found alternatives, we didn’t need to do what we did in order to get what we needed. We chose the psychotic solution from a multitude of possibilities. Perhaps alien invaders would do the same. Perhaps they would hold to an economic model that resonates with their psychotic nature because its the only one that would allow them to act on that nature. And perhaps it would raise obvious questions like: “why did you come all the way here to kill us to steal something you don’t need?” This idea doesn’t quite hold because our invader ancestors conquered places to make someone somewhere rich by gaining control of the sole supply of something (initially land, then fossil fuels). Consumption of oil, and indeed, our need for land can’t exactly be explained in terms of psychotic motivations: we really do need land to live and oil is on first sight a good source of energy. It’s more accurate to say that a small section of society was in a position to act in a psychotic manner to get more of what they like at the cost of the rest, and the rest fit into this system by having valid needs for things like land and energy. The option to gain a fair share of land and enough energy by non-psychotic means we usually kept off the table. The motivation was always economic, by which I mean it was some people getting what they want by exploiting control of the supply of what all people need. Psychosis wasn’t the only fundamental factor, it was more a choice of strategy in response to an economic reality. If you took away that economic reality would the psychotic choice still be on the table?

Is it plausible to imagine a civilization advanced enough to have the technology to travel between stars to murder aliens and plunder their worlds either for some economic reasons that persist despite their advancements or for economic reasons that some of those aliens have developed (by infliction upon themselves without wiping themselves out) in order to engineer a situation in which they can murder aliens and plunder their worlds? When they take our land what will they do with it? Sell it to each other? To do what? Grow food they can’t eat? Set up factories? Why not set them up in space? What would those factories produce? The Roman Empire plundered gold but they only did that because gold what what they made coins out of and they did that because it was a good material to make coins out of. Again, it’s just a substance that is needed for some reason. What substance and what reason would the aliens be captive to? Why? Because they’ve, by some insane marketing scheme, tricked themselves into thinking they need to invade Earth? When the US invaded Iraq they secured oil that Americans bought. What would the aliens secure? Who would buy it and why? Have the aliens sustained a price bubble in the Earth property market? How? Why?

This is why alien invasion stories are always so nonsensical to me. There is never even a partial explanation for why the invasion is happening. It’s surprising that Hawking would enter into such a discussion and make such a simple claim as to assert a similarity to human history.

 

This may seem like a bold claim, perhaps too bold even for critics of austerity, but if you give me a chance I can provide what I think is a sound argument for it.

I will take ‘austerity’ to mean a systematic policy aimed at reduction of the deficit.  One thing to keep in mind is that I am going to invoke no laws of nature, no physics or geological plate-tectonics, no models of human nature or culture and no philosophical ideas of value. Everything I will talk about is based on basic principals of finance and is all derivable from observations of how our financial systems actually work and that they make sense mathematically (that is that the equation 1 – 1 = 0 holds true).

There are a few ideas that I need to establish to piece together my argument:

Closed financial systems add up to zero. The balances of a closed financial system, denominated in any one currency, must add up to zero. One entity’s liability is another’s asset.

The UK’s money system is a financially closed system. Our economy is split into three parts: the government sector, the domestic private sector and the rest-of-the-world sector. The UK currency balances of these three sectors always and can only add up to zero.

The UK Treasury is the only thing that issues Pounds Sterling. I think most people would accept this but at the same time somehow forget it’s a reality. Perhaps we believe it’s too simple to think this is all there is to it, but this is all there is to it. We all pay our taxes with pounds issued by the treasury. We, as a group, got those pounds when the public sector bought something. This is just a simple matter of fact.

For the non-government sector to run a surplus the government sector must run a deficit.  This is simply an extension of the above point. The government constantly takes money out of the non-government sector through taxation (and other non-discretionary charges, like fines and duties) and injects money into the non-government sector through government spending. If the government ‘balances it’s books’ then no new money is being injected into the non-government sector. In this case the non-government sector on the whole cannot save; it has to run a surplus in order to save. This also means that any saving done by any firm or individual must come at the cost of at least one other firm or individual making an equivalent loss.

The government can refuse to issue enough currency to finance the non-government sector’s surplus. When the government issues more currency than it taxes the excess gathers in the non-government sector. This is collectively called saving. Investment is also financed by savings in the sense that the money you invest had to have been saved first. In a budget-balanced utopia if a firm is to invest in new activity it must either deplete it’s own savings or get money gained by some other firm or individual making a loss. That loss would have to be funded, ultimately, with money that that person or firm had saved, depleting their savings, or by them taking a profit cut reducing their flow of savings. Long story short: in this situation all investment is simply consuming savings. Investment, obviously, stops when the savings run out. You should also note that those savings would be made up of currency issued by a government deficit in the past, so this fiscally balanced economy is only investing because of left over’s from a time when it wasn’t fiscally balanced.

New jobs require investment. For a group of unemployed people to get jobs (without those jobs to be funded by losses elsewhere) the government must run a deficit.

Individuals and firms have varying power over their own savings. This is a side point but it is worth keeping in mind. As stated a balanced budget means that the non-government sector as a whole cannot be gaining money and therefor cannot be saving, but individuals and firms within non-government sector are free to create a situation in which they can individually save at the expense of others. And doing so will be beneficial for the same reasons saving is ever beneficial. Further, some firms and people are positioned, by virtue of distribution of control, to effectively resist reduction of their own saving. The flip side of this is that some individuals and firms will be powerless to resist running a loss and/or spending their own savings. This all means that in a balanced budget world any particular unemployment target can only be sustained under very weird and unimaginable circumstances. Firstly, unemployment can only be reduced so far as other people are willing to reduce their own savings (which they got from a historic deficit). The government would have to hope that people will sacrifice their savings to fund other peoples jobs. As mentioned, some people will resist and continue to save. Every pound saved is a pound that can’t be used to finance a new job. Secondly, even if everyone was ultra-generous and always willing to sacrifice their savings to achieve higher employment, those savings would necessarily be finite, once spent there can be no further new investment, growth would have to stop. Any particular level of employment, full or otherwise, would require that neither population nor economic activity grow, so everyone would have to agree to that too. It should be obvious that this would also be in incredibly brittle economy because no-one would have any savings. A small natural disaster, like the recent floods, would be devastating.

Austerity is the refusal to meet the non-government sector’s demand for new money. The non-government sector demands enough money to pay it’s government bills (tax, fines, duties etc.) and to finance it’s saving (from which it can invest). Trying to push the government budget to balance is the systematic attempt to refuse to meet the non-government sectors saving demand.

If this is all new to you you might be wondering: if this is all so obvious and based on a basic understanding of how things actually work why am I reading about it in an article by a random blogger? Everything I have talked about is part of a branch of marco-economic research called Modern Money Theory. It is well developed and has good researchers pursuing it. It is, however, not part of the mainstream of economic theory. Why is that? Well… why did some civilisations sacrifice people? Sometimes bad ideas are popular and nothing significant has changed in the human brain in 100 000 years that would mitigate that.

Is Austerity Really Always Unemployment?

You might be thinking that I am talking about a more vicious type of austerity and that it could take a more socially responsible form. I agree that there are many things the government could spend money on, some good some bad, and there are changes that could be made to what money is spent on. Some spending plans will give rise to an economy that is capable of doing more things but you have to recognise an inescapable truism: When the government spends it buys something produced by doing a job. What the government choses to buy dictates what jobs are to be done to get the money needed to pay the tax bills. Let’s say that the government choses to buy one thing that can only be produced by a tenth of the population. If the government agreed to buy unlimited amounts then a tenth of the population suddenly has a job (if they want it). If the government runs a balanced budget via income tax then, by pure laws of mathematics, nine tenths of the population must be unemployed. This is because whatever that tenth is doing only earns exactly what is needed to pay the tax bill. If, on the other hand, the government chose to tax everyone, rather than just workers, then the unemployed would need to find some way to get those with pounds to give some up. This is, essentially, the historic basis of taxation: the government bought military service. If the government choses to tax less than it spends, that tenth will have money left over to spend. A private sector would come into existence based on the demand characteristics of the public serving tenth. Is this an optimal economy? Probably not. Can austerity fix it? No. The government can rethink what it spends it’s money on, but there is no way to improve the economy’s employment levels through austerity. Reducing the budget isn’t just a thing that causes unemployment, it is literally the act of doing unemployment.

When talking about money, and more specifically about why we use certain things as money, the idea of legal tender often comes up. We all tend to use pieces of worthless metal, paper or cloth, or even entries in electronic databases as money worth far more than the things themselves. An intuitive explanation for this, and one I would have gone with in the past, is that it has something to do with the government designating certain things legal tender. I think people often have the idea that we all get payed in pounds because “pounds are legal tender.”

So I decided to find out what this phrase, legal tender, actually means. As it turns out it doesn’t mean very much and it has little baring in why we use and accept pounds.

In using the idea of legal tender in a country’s legal system authors of the legal system have to do the following:

1) Define what “legal tender” means

2) Establish which things are legal tender

3) Define how much those things are worth in the sovereign currency

The phrase “legal tender” is just that, a phrase. Any group of people can establish a legal framework that uses the phrase “legal tender” and then define it to mean whatever they want. Generally, however, it’s pragmatic to use the term to refer to the same basic idea. Usually “legal tender” means: “A thing that can never be refused as settlement of a debt in court”. Because “debt” is a legally defined concept debts are denominated in the legal system’s chosen currency, so by entering the court system you have established that the debt is measurable in that currency. So, if you are in court in the UK it is implicit that the debts being settled are measured in pounds. Things that are considered legal tender (according to 3) will also have a legally defined value in that currency.

You should also realise that this only refers to coins and banknotes, i.e. things, not pounds. You can have pounds in a bank account, and use those to settle debts in or out of court, that has nothing to do with legal tender because you never used any. Pounds aren’t legal tender, pound coins are. Pounds are what our legal system choses to denominate debts in, and by entering the legal system it seems a person implicitly agrees too that. I guess another way of looking at it is that within our legal system a debt is defined as a thing denominated in pounds. You could, of course, argue that there are other forms of debt, but you can’t usually take someone to court for owing you gratitude or a hug, and if you did it would map onto a case of damages or compensation in which the court would decide on a currency value, again, in pounds.

Putting this in an example: You are taken to court for not paying a debt of £100. The court demands you pay the debt. You pay by cheque. This has nothing to do with legal tender laws. You have payed a debt denominated in pounds in pounds. No things were exchanged. The banks just moved some numbers around in their accounts (and perhaps moved reserves between banks). Had you chosen to pay the debt with 100 pound coins, the court would have to accept that as payment as would the person to whom you owe the money. The debt would be settled. If the creditor agreed to accept payment in hugs, and you provided them, the case would be settled; no tender laws invoked.

In reality things are made complicated by there being many types of things that are legal tender, so the tender laws usually look more like this:

1) Define what “legal tender” means

2) Establish which things are legal tender for specific sized transactions.

A is legal tender for debts not exceeding x. B is legal tender for debts not exceeding y. C is legal tender for debts of any amount.

3) Define how much those things are worth in the sovereign currency

For example: In the UK 5p coins are only legal tender for debts not exceeding £5, while pound coins are legal tender for any amount.

Now, here’s the important point: None of this requires you to actually use legal tender. It just means that, in court, you can always use it to settle. Obviously, as mentioned, legal systems can define whatever rules they want, but we can look at actual examples of tender laws:

UK

From the Royal Mint’s website:

Legal tender has a very narrow and technical meaning in the settlement of debts. It means that a debtor cannot successfully be sued for non-payment if he pays into court in legal tender. It does not mean that any ordinary transaction has to take place in legal tender or only within the amount denominated by the legislation. Both parties are free to agree to accept any form of payment whether legal tender or otherwise according to their wishes. In order to comply with the very strict rules governing an actual legal tender it is necessary, for example, actually to offer the exact amount due because no change can be demanded.

US

From the US Treasury FAQ:

This statute [Coinage Act of 1965, Section 31 U.S.C. 5103] means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. 

Australia

For the Reserve Bank of Australia FAQ:

However although transactions are to be in Australian currency unless otherwise agreed or specified, and Australian currency has legal tender status, Australian banknotes and coins do not necessarily have to be used in transactions and refusal to accept payment in legal tender banknotes and coins is not unlawful.

Canada

From the Bank of Canada‘s website:

“Legal tender” refers to the money approved for paying debts. [...] This does not force anyone to accept cash because both parties must agree on the payment method. The fact that bank notes are legal tender does not mean that there is a legal obligation to accept them.

Japan

From the Bank of Japan‘s website:

Banknotes are a widely used payment instrument, especially for small-sized payments. The Law stipulates that banknotes shall be used for payment as legal tender, in other words, they are a legally defined payment instrument that should not be refused by any creditor in satisfaction of any debt.

If you open a shop in any of the above countries you can refuse business to anyone you want. The only grounds people have to complain is perhaps human rights (for example on the grounds of discrimination or something). You could simply refuse to accept payment in the sovereign currency. No transaction means no debt, no debt means that the tender laws are irrelevant. If I agree to ‘sell’ you a car, and we agree that you will ‘pay’ for it in gold, so long as the transaction happens as agreed then there is no debt, no basis for legal action and so tender laws just don’t apply.

Imagine for a second that the government wanted to use tender laws to make everyone use pounds, how exactly would they do that? If you and I swap a pencil for a pen, that is a transaction… would we have breached tender laws? What about payment-in-kind? Some people are payed less in salary because they get perks, those are non-legal-tender transactions, right? The point is it’s incomprehensible to think that the government could mandate use of sovereign currency because it’s not clear what transactions that would apply to and policing it would be impossible. Which probably is why they don’t.

In summary, when it comes to why people use pounds or dollars or yen, tender laws don’t give us much insight. You could argue they have increased usefulness because you can always use pounds to resolve debts in a legal setting… but that has nothing to do with tender laws, that’s simply the result of the particular legal system choosing what it defines debt to mean and how it is measured.

What about taxes?

Someone might argue that we have no choice but pay our tax bills in pounds. They might imagine it would be better if the government accepted gold or bitcoins or anything as payment of tax… the thing is, they kind of already do accept payment of tax in things other than legal tender. How? Public spending. The pounds you use to pay your taxes were issued by the government when it spent them into existence. It spent them by buying something, which was sold by someone in the private sector (or possibly by someone abroad). So you can sell products or services to the public sector, gain pounds, and then use those pounds to pay taxes. We all do this as a group all of the time. It’s just done at a macroscopic level. The government accepting X in payment of tax is financially exactly the same as the government buying X with pounds. In fact, this is literally the basis of our money system, it’s how all pounds come to be. The only reason the government doesn’t buy bitcoins is that they’re useless and there is no reason to.

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