What Is Outside Money?

The concept of external currency is Stanford University s John G. Gurly and E. S. Shaw in Money in a Theory of Finance in 1960. Proposed in a book. According to their interpretation, the external currency refers to the currency issued by the government when it purchases or makes transfer payments (assuming that taxes are not considered here, the government has no income, and it relies on issuing currency to make purchases or transfer payments). The currency is government debt to the private sector and constitutes the private sector's net assets. In addition, since the government is assumed to have no tax revenue, the degree of freedom of government action is small, and all external monetary stocks are the result of the accumulation of government deficits.

External currency

Right!

The concept of external currency is Stanford University s John G. Gurly (JG Gurly) and Edward S. Shaw (ES Shaw) in 1960

After the introduction of Gerry and Shao's theory of internal and external money, it caused a lot of repercussions. Economists have disputed the connotation and extension of this pair of concepts.

First, is the government-sponsored public debt a net asset of society? Some scholars believe that since public debt is guaranteed by taxation power, it certainly constitutes private debt and should be offset from private assets. However, because such private tax liabilities are usually spread over several years in the future, individuals always consider them as assets when calculating wealth, but they are not included in tax liabilities, so they can still be regarded as a part of social net assets .

Second, according to Gree and Shaw, the net assets issued by financial institutions, such as demand deposits, savings deposits, certificates of deposit, etc., should not be regarded as the net assets of the society, because the assets and liabilities of financial institutions always offset each other. . For example, the demand deposits of banks are created by issuing loans to the private sector. For the private sector, these deposits, while being assets, are offset by the corresponding loan liabilities. For banks, these deposits are liabilities. But it was just offset by assets obtained in the form of loans to the private sector. Therefore, in Gree and Shaw's view, the creation of demand deposits and the like does not increase the net assets of any sector. However, scholars such as BP Pesek and TR Saving argue that the demand deposits of commercial banks should be regarded as part of the net assets of the society, which they call intrinsic currency. For example, if a bank's customer deposits 100 yuan, at a 10% legal reserve rate, the bank can issue a 90 yuan loan. If the lending rate is 10%, the bank earns 9 yuan more. If the stocks of the stock market also capitalize the bank's stock at the same discount rate as the interest rate level, the total value of the bank's stock will increase by 90 yuan, which is exactly the same as the increase in bank lending. Therefore, the rise in the bank's stock price of course It should be regarded as an increase in net social assets. According to Pesek and Savin, all currencies are net assets, and the distinction between internal and external currencies is meaningless.

The differences between the two concepts are as follows:

(A) whether the net assets of the private sector can be increased

The internal currency does not increase the private sector's net assets, because it is issued on the basis of government purchases of private sector bonds, and its claims as a private sector just offset the private sector's liabilities to the government. External currencies increase the net assets of the private sector.

(II) Different distribution channels (methods)

The internal currency is issued by the government (central bank) when purchasing private sector bonds, and the external currency is issued by the government when making purchases or transfer payments. It is actually a government financing act. Specifically, there are three types of external currency issuance. Situation: (1) Issuance by the government during daily purchases; (2) Issuance with foreign government bonds as a guarantee (that is, currency used to purchase foreign exchange); (3) Issuance with gold as a guarantee (that is, currency issued through acquisition of gold) .

(3) Will the change in the value of money cause different transfers of wealth between the private and government sectors?

The actual value of external currency depends on the price level. Under the condition of a certain amount of external currency, the actual value of external currency changes in the opposite direction to the price level, and each change in its actual value represents the wealth in the private sector. Transfers with government agencies will affect changes in investment and consumer demand as a function of the private sector's net wealth increase. For example, as the price level rises, the real balance of external currency decreases, and wealth is transferred from the private sector to the government sector of the external currency issuer. As a result, private sector investment and consumption and social demand are reduced.

Although the actual value of the intrinsic currency also depends on the price level and changes in the opposite direction to the price level, changes in the price level will not cause wealth to be transferred between the private sector and the government sector. For example, when the price level rises, the real balance of the internal currency, that is, the value of the private sector's claims on the government, decreases, but at the same time, the value of private sector bonds held by the government also decreases, so price changes have no wealth redistribution effect The demand function is also unaffected. Of course, price changes will cause the redistribution of wealth between lenders and borrowers of funds in the private sector. If this distribution effect is introduced into the model, the problem will be complicated, so it does not matter here.

External currency is an integral part of society's net wealth. As far as the expansion of the external currency is concerned, there are two things:

First, the government implements an expansionary fiscal policy to increase currency issuance and raise financial resources, which will inevitably increase the net wealth of the entire society;

Second, the central bank uses open market business to purchase government bonds from the private sector, which increases social cash assets and decreases bond assets, while net wealth remains unchanged, so there is no wealth effect.

Therefore, whether the change in external currency will change the amount of net wealth depends on the specific situation. It is not that the change in external currency will definitely change the total net wealth of society.