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Tally Sticks

February 1, 2012

One of the greatest sources of confusion, when it comes to discussing economics, is the failure to understand the nature of money.

Money is defined as a thing that is used as a unit of account, a store of value, and a medium of exchange. The problem with the definition is that it’s overly broad: a bicycle and a train are both means of transportation, but you might still want to know the difference.

Over the course of history, all kinds of things have been used as money: gold, silver, copper, shells, feathers, paper, cows, and women. All these things share an important attribute: they exist in the real world.

There is another kind of money, however, which doesn’t share that attribute. An early example is the use of tally sticks in England. A tally stick was a stick with a series of lines marked on it. The lines represented a sum of money. The stick was broken in half, lengthwise, and one half went to each party in the transaction. One half was made shorter than the other, and that half – the short end of the stick – went to the debtor. The long end – also called the “stock” – went to the creditor.Image

When the government wanted to buy something – say, wheat from a landowner – it might issue a tally stick to the seller. When tax time came around, it would accept the tally stick as payment for taxes. The system continued for about 700 years. (When the tally sticks were finally burned, in 1834, they started a fire which burned down Parliment.)

In addition to its value as a tax credit, the sticks had value as currency as well. They could be used to purchase things in the marketplace. Because some people needed them to pay their taxes, others were willing to accept them as well.

What’s interesting about the tally sticks is that they illuminate some things about the modern financial system that are otherwise obscure. For example:

  • Taxes don’t fund spending. The reverse is true: spending funds tax payments. Without the government having first spent the tally sticks into the marketplace, no one could use them to pay their taxes.
  • The government can’t “run out” of money. In theory, it could run out of sticks. But since money is now recorded electronically, even that’s not an issue.
  • Government spending is constrained by inflation. If the government creates far more tally sticks than what it collects as payment for taxes, the value of the sticks will fall. Taxes are important not because they fund government, but because they prevent inflation.
  • Government has no actual need of tax payments for its own benefit. When Parliament got tired of storing its tally sticks, it burned them. If you show up at a tax office in California with stacks of hundred-dollar bills, the IRS official may send them on to Washington. Or he may toss them in the shredder.
  • Government debt is the record of private sector savings. If the government spends one million in tally stick marks, and collects half of as much in taxes, the net increase in tally sticks accumulated by the public is the same as the deficit of the government – .5 million.
  • If the public wishes to save tally sticks, the government must net-spend tally sticks into the marketplace, so that the public can save them. The same thing applies to foreigners – if foreigners, including foreign governments – wish to be net savers, we must be net spenders in order to accommodate them.
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