Re: Argentina and Fiat money

["John B. O'Donnell" <jackodonnell@xxxxxxxx>]

Gregoire de Nowell (ci-devant) wrote:
>
> I note that the Argentinian and Brazilian cases
> described by Laura, as well as the russian example,
> are serious attacks on the notion that the govt can
> value money simply through the fact that it exacts
> taxes on same.

Distinguish "Make valuable by taxation" and "gov't can value money
simply through ... taxes." Government cannot establish how much value
will reside in a unit of currency simply by making taxes due in the form
of those units but it can make those units have value of some
indeterminate amount.

The amount of value is a function of the quantity of credits / money
available relative to that which is required to maintain a given value.
Control can be obtained by adjusting the supply of money / credits
relative to whatever amount is required to maintain its value as is
demonstrated by the measure of changes in that value. The process is
called feedback correction and is quite effective once the response
sensitivities are determined by empirical evidence.

> Actors in the economy do seek out subtitution
> possibilities, and the govts ability to set value
> is limited accordingly.  the notion that value
> resides in the coercive element of taxes seriously
> misrepresents the nature of economic transactions,
> which "in their essence" are cooperative (when
> efficient) and which tend to become seriously
> inefficient when coercion is used (even "at the
> margin").  that is not to say that some social
> systems do not opt for coercion, whether non-
> capitalist or imperialist.

The fact that actors can and often do seek out and use alternatives to
substitute for government issued currency helps explain why Friedman's
constant rate of increase in a measure of money supply does not hold
water. It does not alter the fact that the coercive element of taxes can
and does make government issued currency have value.

It is also why, supported by the correlation on my web page showing the
immediacy of changes in money value in response to whatever changes its
value, I propose that the value of the currency is the only rational
guide to monetary policy. The only open choice is the selection of a
value standard to guide that policy.

Although I still prefer the use of a domestic CPI as the standard of
value, Argentina's choice to use the U.S. dollar as its standard does,
as Laura has on several occasions pointed out, make  practical sense
given the political environment and their recent bout of hyperinflation.


			-- jbod
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