Re: Mosler: seminar -Reply

[Edward Nell <NellE@xxxxxxxxxxxxx>]

It seems that some of the comments on the Mosler Seminar may have
been based on misunderstandings.  Let me try to restate the point, as I
see it:

--The question is why should members of the 'public' accept intrinsically
worthless tokens in exchange for useful and valuable goods.  Of course
it is understood that an individual does this because s/he knows s/he
can turn around and exchange the tokens again for a different set of
equally valuable goods/services.  But the issue is why the public will IN
GENERAL accept these tokens, why do the tokens become generally
acceptable, so that the public feels CONFIDENT that they can accept
them without the risk that will lose the quality of being generally
acceptable in exchange.

--The question (at least initially) DOES NOT concern coins or tokens
made of precious metals, that is, having intrinsic worth.  The acceptability
of such coins has traditionally been explained by the fact that they have
intrinsic value (based on their costs of production and costs of minting)
and are at the same time convenient.  There are weak spots in this
traditional story, and the historical record certainly does not support it
unambiguously.  The connection with the Quantity Theory of Money also
needs study - the interpretation depends on how the Quantity Equation is
read - the direction of causality.  Chartalism may well have a contribution
to make to the understanding of the circualtion and value of coins of
precious metal; but this is not the primary point of the argument.

--Last summer in the museum at Montsegur (the Castle of the Holy Grail)
in the south of France, there were displays of local coins, of tin and lead,
issued by the local seigneur, intrinsically worth substantially less than
the face value they bore.  But in the 13th C they circulated in the locality
for two reasons, because they could be presented at the Lord's granary
in exchange for a certain amount of grain, or they could be used to pay
rents and feudal dues.  That is, (even in an era in which money generally
had intrinsic value) these tokens only had FIDUCIARY value; they were
valuable because it had been promised that they could exchange for
something of value or could be used to discharge an obligation.

--Paper money backed by gold, for example, has fiduciary value.  It used
to say on dollar 'silver certificates' that they could be exchanged for
silver.  Pound notes still state "I promise to pay the bearer [one, five, etc}
pound[s]", with a picture of the Queen and the signature of the
comptroller.  But the development of modern banking has moved the
monetary system away from 'paper gold', that is, paper whose
acceptability is based on the promise that it can be converted into gold on
demand.   Gold has not circulated in the US since 1933, and US domestic
paper money has not had any kind of 'backing' since World War II.

--So paper money is no longer convertible.  It has shifted from having
fiduciary value to having FIAT value.  (The monetary system develops
over time; such development is an aspect of 'transformational growth'.)
The same with bank deposits- they have also evolved.  There are no
longer any metal reserves to 'back up' the deposits.  Reserves today are
simply deposits with the Fed; money created by the Fed (essemtially to
facilitate clearing).  Such money is valuable because the government
says it is.  The government is in a position to impose taxes - and collect
them.  So citizens had better have the wherewithal with which to pay
them - and that is the paper or bank deposits issued by the government.

--Not all governments can do this.  Russia today is not able reliably and
effectively to impose and collect taxes.  Dollars circulate in preference to
rubles in some areas of the Russian economy.    The same goes for
many other governments.  But where a government is not able to impose
and collect taxes, the currency will also be irregular.  Many different
media of circulation are likely to be present, and their exchange ratios are
likely to fluctuate.  The currency will not be uniform, nor will its value be
stable.  (A strong government is a necessary, but, of course, not a
sufficient condition for a stable currency.)

--It is a great merit of Mosler's approach that it highlights the absolutely
central importance of government in relation to the currency - and that
the feature of government which is crucial is not the Central Bank, but
the Treasury.  It is the state's FISCAL authority which underlies the
monetary system.

--It also provides an important perspective on how things work.  For
example, taxes don't 'fund' or 'finance' government spending.  We should
know this already just from the fact that most of the paper money paid in
taxes is burned.  Cheques which are sent in, however, also 'destroy
money' when they are cleared, for they reduce the liabilities of the
government, i.e. the money supply.  The government pays for its
spending by creating money.  It adjusts the amount of money in
circulation by collecting taxes and borrowing, where the latter also helps
to adjust the level of the interest rate.

Mosler goes on to develop an interesting and important analogy between
state issued money and other commodities.  But before this can be
discussed, I think we must try to get clear just what he is saying about
the nature of modern money and its connection to the modern state.  For
this is basic to political economy.

Edward Nell