Backed Money (reply to Sproul)

[Warren Mosler <mosler@xxxxxxxx>]

(snip)

THERE IS NO SUCH THING AS A "PROMISE" OF FUTURE CONVERTIBILITY. THERE IS

ONLY
A PROBABILITY OF IT.

I can use that language if you wish.  Nothing really changes, as below.




DAVID RICARDO, HENRY THORNTON, AND THEIR FELLOW BULLIONISTS, WRITING
DURING THE SUSPENSION, CLAIMED THAT THE POUND WAS UNBACKED--A TRUE FIAT
MONEY.
THEY DIDN'T BELIEVE THE VALUE RESULTED FROM A PROMISE OF FUTURE
CONVERTIBILITY,
AND IT WAS THEIR WRITINGS ABOUT THE POUND THAT SET THE IDEA OF FIAT
MONEY FIRMLY
IN THE PUBLIC MIND IN THE FIRST PLACE!

Fine.  I don't know anything about what happened during
that period.  I was only commenting on the language you gave me.
If convertibility was terminated without any premise of resumption
the exchange rate was floating.  In either case the value was a function

of 'prices paid' by the issuer.  Convertibility itself is an
announcement
of 'prices paid' for the thing it is convertible into.  More below.

> > 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.
> >
>
> The US policy was permanent termination.  There was no explicit or
>implicit promise to offer conversion at some future time at $35 per
> oz or any other rate that I know of.
>
DITTO FOR THE BANK OF ENGLAND IN 1797. (BY THE WAY, I MEANT TO SAY THAT
THE FED'S SUSPENSION
IS 28 YEARS AND COUNTING--SINCE 1971)

Fine.  Then both went to floating exchange rates, during which time the
nominal value of the currency units was a function of prices paid by the

government.  And during which time I would say there was no actual
'backing.'
Again, more below.
> >

> Last I knew tsy sec were all 'book entry' at the Fed which means they
> merely account for them.  Isn't that what an 'account' is?  They are
> accounting data.  That's all.  An interest bearing time deposit
(Federal
> Reserve) bank account, to be more precise.
>
A MATTER OF SEMANTICS. MY 'ACCOUNT' AT MY BANK IS MY BANK'S LIABILITY.
TREASURY
SECURITIES ARE ON THE ASSET SIDE OF THE FED'S BALANCE SHEET, AND ARE
THEREFORE OF
A DIFFERENT NATURE FROM WHAT I THINK OF AS AN 'ACCOUNT' AT THE FED.

You can look at it as either Treasury securities are the Treasury's
liability and your asset or you can view the Fed as intermediary with
the Tsy sec an asset
of the Fed and your claim to it as a Fed liability.  Either way your Tsy

security is functionally an account *at* the Fed.

(snip)
> > >
YES--A BANK DEPOSIT ENABLES ME TO CLAIM A FED-ISSUED DOLLAR BILL. OUR
POINT OF DISPUTE IS WHETHER
THE FED'S DOLLAR BILL GIVES A GENUINE CLAIM AGAINST THE FED.
I say it does in the sense that it can satisfy tax liabilities.
Math-wise
that is the same as being able to claim an asset with it, but starting
'in the hole' as you will lose your assets if you don't pay the tax.
Think of a tax liability as a negative asset?  Does that connect things
for you?


THIS GETS INTO THE REALM WHERE ONLY CLEVER EMPIRICAL TESTING CAN
CONVINCE PEOPLE. YOU SAY THAT
WITHOUT CONVERTIBILITY THERE IS NO BACKING. I SAY THAT AS LONG AS THE
GOLD AND THE BONDS
ARE THERE IN THE FED, AND AS LONG AS THE FED'S OWN BALANCE SHEET
IDENTIFIES THOSE THINGS
AS "COLLATERAL HELD AGAINST FEDERAL RESERVE NOTES", THEN THE DOLLAR IS
BACKED.

I might be rich in assets, but if I am a teacher and give 10 gold stars
for
extra credit toward your grades, should you need it,
would you say those are backed by my assets?  Depends on what I am
obligated to give you for those stars,  doesn't it?  The govt is not
obligated
legally or morally nor is it expected to give anyone gold for $ on
demand,
or anything else for that matter.
What it does do is accept those $ for
satisfaction of debt owed to the govt. denominated in $, such as
tax liabilities.


BACK WHEN I WAS
A QUANTITY THEORIST, I HAD A HARD TIME EXPLAINING WHY EVERY CENTRAL BANK

THAT HAS EVER
EXISTED HELD ASSETS AGAINST ITS CURRENCY. WHY BOTHER WHEN BACKING
DOESN'T MATTER? BUT IF BACKING
DOES MATTER, THERE'S NOTHING TO EXPLAIN.

If they are trying to maintain a fixed exchange rate a bufferstock
gives the policy credibility.  Also, during emergencies, it is possible
that assets such as gold could come in handy should they need to resort
to barter.

> > >
(snip)
OLD FASHIONED NOTE-ISSUING BANKS USED TO TAKE A ROLL OF PAPER AND PRINT
IT, AND
MODERN BANKS (AND CREDIT CARD COMPANIES, ETC., ETC.) CREATE BOOKKEEPING
ENTRIES
WITHOUT LIMIT. IT ISN'T PROFIT. THE BANK SIMPLY CREATES A LIABILITY (THE

NOTE OR
DEPOSIT) AND ACQUIRES AN ASSET IN EXCHANGE. THE SUPPLY OF BANK
LIABILITIES
MOVES IN STEP WITH BANK ASSETS

Yes, that's the point I was making.  They can monetize assets as
controlled
by govt regulatory authorities.  They can't simply print $ and spend
them.

--NOTHING INFLATIONARY ABOUT IT.
Not necessarily, but there could easily be upward pressure on prices
for quite a while from relaxed credit standards, for example.


AGREED. EVERY MONEY THAT I KNOW OF STARTED OUT BEING CONVERTIBLE INTO
SOMETHING.
EVERY MONEY STARTED OUT BEING BACKED. ON YOUR THEORY, THE PRINCIPLES
GOVERNING
THE VALUE OF MONEY CHANGE COMPLETELY ON THE DAY THAT CONVERTIBILITY IS
SUSPENDED.

Yes, though I would say 'terminated.'


ON MY THEORY, IT WAS BACKING THAT MATTERED BEFORE SUSPENSION,
BACKING THAT MATTERED DURING THE SUSPENSION, AND BACKING THAT MATTERS
AFTER RESUMPTION. IT SEEMS TO ME THAT I HAVE THE SIMPLER THEORY HERE.

With convertibility and a market economy, the government is announcing
that conversion rate and letting other prices be set through relative
value.  When convertibility is considered terminated, the price
previously
fixed (such as gold) is free to float along with the prices of other
goods and services.  Those are two very different sets of dynamics.

For example, if we had gone on the gold standard in early 1980 with gold

at $850 per oz, and relative prices behaved as they actually did during
the
next 15-20 years, the same changes in relative value that brought gold
down to under 300/oz would instead have been realized with gold
fixed at 850 and relative value expressed as other prices rising
accordingly.
That is, gold losing that much value would have been expressed as
a severe inflation.  Instead, of course, the drop in gold prices is
considered
deflationary by most.

(snip)

 TOKEN MONEY (A PAPER BILL, TALLY, CLAD
COIN, ETC.) CAN
BE BACKED EITHER BY SOMEONE'S ABILITY TO PAY OUT SOME REAL COMMODITY IN
EXCHANGE FOR
THE TOKEN MONEY, OR BY SOMEONE'S AGREEMENT NOT TO TAKE AWAY SOMETHING
WHEN THE
TOKEN MONEY IS OFFERED INSTEAD.

Yes.  That last phrase is the key.  With a flexible exchange rate that's
all'
that's left, and it is sufficient to do the job.

THE TALLIES INNES DESCRIBED WERE BACKED
BY THE
SHERIFF'S AGREEMENT TO TAKE TALLIES INSTEAD OF SILVER.

And the total debt to the crown exceed the total float of silver,
so for all practical purposes one had to accept the crown's tallies
as payment to be able to meet the tax liabilities?


BEST,
MIKE SPROUL

Best,

Warren