Re: Backed money (reply to Mosler)

[mike sproul <msproul@xxxxxxxx>]

Warren:
> > If we view money as being backed,
>
> What does 'backed' mean with a floating exchange rate/ non convertible currency?
> Doesn't 'backing' imply convertibility at 'fixed terms' by the issuer?
>

There is a non-trivial distinction between "backed money" and
"convertible money". If a banker has issued paper notes and promised
to convert them on demand into one ounce of gold, then during
business hours those notes are both backed and convertible. Over
the weekend, the notes are inconvertible, but still backed. When the
Bank of England suspended convertibility from 1797 to 1821, it still
recognized paper pounds as its liability, and still held gold and
bonds as assets against those paper pounds. During the suspension
period, the paper pound was backed but inconvertible. The bank was able
to restore convertibility in 1821 because it had kept its assets--in
other words, because the pound had been backed all along. The paper
pound was simply valued in the same way as any inconvertible
financial security is valued--according to its backing. That is what it
means for money to be 'backed' in a world of floating exchange rates.
If you can think of a meaningful difference between the Bank of
England's suspension (24 years) and the fed's suspension (38 years
and counting) I'd like to hear it.



> > then money issued by the fed has value because of the backing (t-securities, gold, etc.) held by the fed.
>
> Gold?  Yes, there is gold, but there is no conversion feature to the $US.   And let's look closely at
> the 'money.'  Reserves and Tsy secs are accounts at the Federal reserve bank.

We must have some kind of language barrier here. Treasury securities
are not an account at the fed. You must mean in some non-standard sense.


 Checking accounts
> and certificates of deposit are accounts at commercial banks.   As a point of logic, being able to exchange one account for another account has value only if at least one of those accounts has further value?
>

As above, convertibility is not necessary in order for backing to have
meaning and to give real value to something.

> But I suppose we are too far apart on this issue to really connect. Just to clarify my original assertion: Money issued by the fed has value because of the backing held by the fed.
>
> This would be true if there was legal convertibility at the fed- that is, backed by something with intrinsic value.
>
> Derivative money issued by private banks  (and individuals) has value because of the backing (mortgages, cash, etc.) held by those banks.
>
> Or federal deposit insurance.  But again, only if there is some further value to the unit of account.
>
> This at least agrees with your statement that the quantity of (base plus derivative) money does not affect its value.
> Not exactly my statement.
>
> > > The issuer of the currency (government) is the single supplier of that which
> > > it demands for payment of taxes and other debts to the government.  Single
> > > suppliers are 'price setters.'
> > >
> > > >
> > Are you actually saying that money has value because the government
> > accepts it for taxes?
>
> Yes.  With a floating exchange rate this is the case.

Well, I can see where tax acceptability can give value in particular
cases; for example, when the colony of New York issued paper shillings
and declared them acceptable for taxes at the rate of 8 NY shillings
per ounce of silver, but I don't see the validity of this point for the
modern dollar, especially when the government rarely takes actual
currency in payment of taxes. It prefers private bank liabilities.

Best,
Mike Sproul