Danby seminar

["Gregoire de Nowell (ci-devant)" <GN842@xxxxxxxxxxxxxxxxx>]

The Danby paper, which I read last night after ten days or so off the net,
is a very fine piece of work which I hope will be published but which
I would also use as and cite as is.  I particularly like the implications
that similar kinds of financial regulatory structures have profoundly
different significance because of the asymmetries in the power relationships.
This is the kind of international relations work I would like to see
more of.

A few points, call them comments or questions.

--I think the paper may overemphasize the stability of the "core" countries'
economies.  In other words the problems of the periphery may not be a
separate etiology but simply what happens to capitalist economies under
a greater degree of pressure.  Under certain circumstances, the core
economies can also falter.  In such circumstances the fiat currency
can come under attack, both in FX markets but also domestically.  I'm
wondering what kind of substitution possibilities exist outside using
the currency of a strong foreign country.  It would seem to me that
certain commodities would probably emerge as barter elements commanding
a special position because of their ready exchange value (like
cigarettes in prisons).

I see I'm not being very clear.   Depending on how you look at it we've had
a pure fiat currency for over fifty years (restrictions on redemptions against
gold by individuals but not by countries) or about 23 (the "float").  In
either case, it does seem possible that a devaluation of the currency relative
to goods is possible because of loss-of-confidence or other kinds of
mismanagement.  The core countries "work" not because they have hit upon
a magic set of institutions which makes the fiat currency bulletproof but
rather because the power prerogatives of being at the core are conducive to
making the fiat currency "believable."  So at the "core" of the analysis
of the "logical workings" of the core countries' currencies is the belief
that they, like the once great Empire of Rome was once thought to be, are
immutable historical structures.  But they are not.  Consequently we must
wonder what underlies the "success" of fiat currencies in the countries
which are currently at the top of the heap.

I don't know if that helps but it's all I can do for now.

--Second point.  My reading makes me more and more skeptical of the
use of the term commodity money.  The fact of the matter is that
the development of paper exchange mechanisms, where debt is backed by
debt, seems to be very ancient.  Yes, there was convertibility to
gold.  But, I would argue, such convertibility was in fact reserved
for the "periophery" of individuals who were not "with it" enough
to be either credit worthy or part of the circuit in which debt was
backed by debt.

Consider for example the British gold standard.  In that time the true
gold "cover" for the pound was about 5%, given the leveraging.  Moreover,
threre were no explicit govt guarantees for bank deposits.  Depositors--
at least the smart ones--KNEW that to be the case.  The safe banks
were the ones which could arrange fresh good debt to cover their
bad ones (successfully resolving a "crisis") whereas the bad banks
could not.  Raising the interest rate to "protect" the pound could
also signal that the pound was in crisis.  Because of budget balancing
the consol base was very limited.  Investors worried about "
govt backing" had two alternatives--bidding for the limited supply
of consols, which tended to drive down the long rate (often below
the short rate) or investing in physical assets guaranteed
by "reliable" governments: the U.S., the British colonies.  The
"backing" of such investments was the underlying physical asset
(i.e. a RR bond is "backed" by the railroad control of which
canin theory be gained by legal proceedings, i.e. govt "backing").
More cumbersome than a guaranteed debit entry in a bank, but
better than a non-guaranteed debit in a bank.

Whaet I'm driving at is that the money supply has pretty much
ALWAYS been "endogenous" in the sense that demand conditions
spurred the creation of monetary instruments to facilitate capitalist
development.  So called "backing" and gold standard arrangements
were crisis prone precisely because endogenous money creation
outflanked restrictions designed, rather cartelistically, to keep
credit available to the worthy and make it more difficult to
obtain for the unworthy.  Not necessarily anything wrong with
that except the failsafes of the system made it crisis prone and
slowed rather than truly contained credit expansion.   When
I say "ALWAYS" endogenous I mean back to the 14th or 15th century
which the most always I care to get.  At this time, the dimensions
of market activity were considerably smaller, but in any event
credit conditions had a highly modern flavor, as the etymology
of the word "check" will attest (derived from chessboards
which spread to Europe from Persia 7th-8th c A.D., the boards'
columnar arrangements provided a handy "spreadsheet" for
medieval accounting.  More complicated finance led to
bigger spreadsheets or chessboards.  The "Exchequer" of
England had large tables covered with checkerboard patterns. The
process of "checking" debits against deposits is pretty old.)

In any case these meanderings do not detract from an
informative discussion of the modern circumstances, a discussion
which highlights the limitations governments face in controlling
citizen preference with regard to exchange instrument preference
and the power relationships that undergird exchange driven
monetary economies.

Greg Nowell