Re: Nell's point w/r to Mosler on money -Reply

[Edward Nell <NellE@xxxxxxxxxxxxx>]

Chris Niggle notes that many of these points are explained early on in
most M & B texts.  Yes, indeed, but as the recent postings on "intrinsic
worth" show, the message isn't getting through!  "Intrinsic worth" or
"value" doesn't refer to repairing teeth, etc.  That is use-value, or utility;
the "intrinsic value" in question is EXCHANGE VALUE.  According to
Ricardian - and neo-Ricardian - theory that arises from production, which
is to say from the expenditure of labor in conjunction with the
time-structure of capital.  In this sense, arising from mining and minting,
gold and silver have intrinsic exchange value, in contrast to paper (or as
in my example, token coins of leather, wood, tin, lead, sometimes copper
etc.)

Money possessing intrinsic value will be acceptable even in the absence
of motivation based on taxes and other obligations.  Even in this case,
however, uniformity and orderliness in the valuation of the coinage may
require state proclamations as to the rates at which they will accept
various coins.  It is instructive to read Isaac Newton's annual Reports as
Master of the Mint.  The Great Recoinage of 1695, brainchild of Locke,
was a disaster; the lesser recoinages presided over by Newton and
consolidated in 1717, were successful, arguably because the powers of
the state were brought to bear on the issue in a carefully designed plan
(which drained Ireland of silver, to the dismay of Swift and his
followers).

Even as late as the 1930s US money had and - 'greenbacks' apart - was
required to have "backing".  Silver certificates were exchangeable for
silver, although the intrinsic value of the silver was below the face value
of the note.  Federal Reserve Notes were backed by gold cedrtificates,
and - upt to 60% - by self-liquidating commercial paper.  Federal Reserve
Bank Notes (different from Federal Reserve Notes) were backed by US
Government Bonds.  National Bank Notes were partially backed by gold
and Government bonds and other currencies.  (Benjamin Graham
classifies these different kinds of backing under three headings: intrinsic
value, self-liquidating and fiduciary.)

After World War II US currency had no backing.  And that is the kind of
currency Mosler is talking about.  To repeat, the question is why,
fundamantally, at bottom, do we or perhaps must we, accept an
intrinsically worthless currency in exchange for costly and useful goods
and services?  The problem with the M & B texts is that they answer this
question with stories about gold and silver, and then go on to convertible
paper money, and from paper money to "bank deposits", which are
somehow "backed" by reserves.  But bank deposits are NOT backed by
reserves today.  'Backing' used to mean gold or silver, or something of
intrinsic value.  Reserves are just another bank deposit, this time at the
Fed - and usually created by the Fed.  A bank deposit at the Fed is
valuable only because the Government says it is.   Reserves today are
clearing balances, not holdings of liquid assets of intrinsic worth into
which mere tokens are convertible.  This latter is what reserves once
were.

The significance of this can be seen by considering the 'money multiplier'
story.  For that story to make sense reserves must have their original
meaning; they must CONSTRAIN the activities of banks.  If reserves are
just created as we go along, the money multiplier story doesn't make
sense.  (The 'transformational growth' point, of course, is that at one time
the money multiplier story did make sense, but that it no longer does, and
indeed, hasn't for quite a long time.)

One final point:  Mosler is talking primarily about why we accept a
currency for use, for transactions.  That is different from why we hold
money as an asset.  Of course, they are related, but as I understand him,
he is concerned first and foremost with money as it circulates.  Once
this is clear, then we can move on to money in portfolios.  But as this
discussion shows there are quite a lot of problems to deal with in regard
to this preliminary issue

Edward Nell
Malcolm B. Smith Professor
Graduate Fcaulty
New School