≡ Menu

A Misleading Claim

It is often said that “money is a claim” on goods and services.  (See, for example, here.)  I myself have said and written this, or a very similar, statement many times – and I’ll likely continue to do so.  This statement about money is typically offered to dispel the mercantilist myth that money itself is wealth.  (“No,” says the economist, “money is not wealth.  Money is a claim on wealth.”)

As with all language and its familiar phrases, if the context in which this statement about money is understood, then the statement is correct and useful.  But also as with all language and its familiar phrases, it can potentially mislead in significant ways.

In strict fact, money is not a claim on anything except whatever its issuer is contractually obliged to redeem it for.  A U.S. Federal Reserve Note today is, strictly speaking, a claim only on another U.S. Federal Reserve Note of the same face value.  A U.S. Federal Reserve Note does not, strictly speaking, give its owner a claim on anything else.  Importantly – and, again, strictly speaking – it does not give its owner a legally or ethically enforceable claim to goods, services, or assets (other than other Federal Reserve Notes from the Fed).

The ten U.S. dollars now in my wallet give me an especially convenient and high-likelihood-of-success opportunity to make an offer to purchase goods, services, or assets.  But no one is obliged to accept my offer.  A person to whom I offer my ten dollars in exchange for whatever it is that I wish to buy from him or her can refuse my offer.  My ten dollars, therefore, do not entitle me to any of that person’s property.  (Note carefully the italicized word in the previous sentence.)  And what’s true for that particular person is true for every other person on earth.  My ten dollars are not a title to any other person’s property.  I may not use my ten dollars to lay claim to any person’s goods, services, or assets that that person does not voluntarily choose to transfer to me in exchange for my ten dollars.

Of course, because U.S. dollars are a widely accepted medium of exchange, in practice I’ll have no trouble convincing someone to transfer to me some goods, services, or assets in exchange for my ten dollars.  But any such exchange is not – and should not be reckoned as – someone (here me, the buyer) cashing in a legal claim to the property of another (the seller).  While highly unlikely in practice, in principle it’s possible that I discover that I’m able to exchange my ten dollars for absolutely nothing.

My dollars give me no legally enforceable claim on anyone’s property.

The above is a way to emphasize the fact that a unit of money (say, a U.S. dollar) is not a debt claim against the economy at large.  A unit of money is a debt claim against its issuer – here, the U.S. Federal Reserve Bank – with the terms of the debt contract specifying just what obligations the issuer has to holders of its notes.  But the ten dollars now in my wallet are, strictly speaking, no claim – debt or otherwise – that I have against American producers, American households, or American asset owners.  No American in these capacities is my debtor who is obliged to redeem my ten dollars if I submit those ten dollars to him or her.  (In contrast, a genuine debt claim is a real claim.  If I borrow $1,000 from Chase and refuse to pay, Chase can haul me into court and get a judgment against me requiring that I pay.  In this example, Chase has a genuine, legally enforceable debt claim against me.)

The relevance of this little epistle is negligible for discussions about the domestic economy.  But its relevance becomes real when we talk about international trade.  It is standard practice to describe dollars held by foreigners as “claims” on American goods, services, or assets.  The implication (which I encounter in far too many discussions of trade) is that Americans are obliged to transfer to foreigners an amount of goods, services, or assets equal in value to the U.S. dollars held by foreigners.  But no such obligation exists.  Dollars held by foreigners give to foreigners no more than what dollars held by Americans give to Americans – namely, the especially convenient and high-likelihood-of-success opportunity to make offers to others to buy some of their property in exchange for the dollars.  The dollars do not oblige any of the offerees, either individually or as a group, to accept the offers.

In turn, recognition and understanding of this reality should go a long way toward easing Americans’ anxieties about the U.S. trade deficit.  Except for that portion of the U.S. trade deficit that explicitly becomes American debt held by foreigners – such as when non-Americans buy U.S. treasuries – an expanding U.S. trade deficit does not result in non-Americans having greater claims on Americans’ goods, services, or assets.  When foreigners offer their dollars to Americans, Americans will accept only if they believe that their net welfare will be improved by accepting such offers.  Foreigners’ spending of those dollars in America does not make Americans less-well-off; it makes the American sellers more-well-off (typically in the form of the American sellers each now having a greater number of dollars for use in making their own offers to buy goods, services, or assets).