Re: Backed money (reply to Mosler)

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Mike,
     It was only in the minds of the British public that
the writings by Ricardo, et al put the idea of fiat money
into during the suspension of convertibility.  China had
pure fiat paper money from the time of the Han dynasty
about 2000 years ago.  When Marco Polo brought it back
to Venice in the 1200s, people were astounded.
Barkley Rosser
-----Original Message-----
From: mike sproul <msproul@xxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Wednesday, March 08, 2000 7:24 PM
Subject: Re: Backed money (reply to Mosler)


>> > 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.
>>
>> Yes.  The key word being 'suspended' which promised future
convertibility,
>> presumably at the same conversion rate.
>>
>
>THERE IS NO SUCH THING AS A "PROMISE" OF FUTURE CONVERTIBILITY. THERE IS
>ONLY
>A PROBABILITY OF IT. WHEN A BANKER CLOSES FOR THE WEEKEND, I PUT THE
>PROBABILITY
>
>OF FUTURE CONVERTIBILITY AT 99.9%. WHEN A BANK (CENTRAL OR PRIVATE)
>SUSPENDS
>CONVERTIBILITY IN A CRISIS, I PUT IT AROUND 75%. IF THE BANK WAS ROBBED,
>AND THE
>ASSETS ACTUALLY LOST, I PUT THE PROBABILITY OF FUTURE CONVERTIBILITY
>AROUND 10%.
>> > 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.
>>
>> But that exchange rate was not floating.  It was fixed via promised
>> conversion at a future date.  Conversion is generally promised for the
>> future.  The terms are not usually 'convert today or risk losing the
>> conversion feature?'
>>
>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!
>> > 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)
>> >
>
>> 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.
>> >
>> >  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?
>> > >
>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.
>
> 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.
>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. 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.
>> > >
>
>> > 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.
>>
>> Demanding units of a currency with a floating exchange rate for payment
>> of taxes must be a source of value unless there are 'issuers' with
>> 'no cost of production' other than the government.  Yes, we say
>> banks create 'money,' yet we know they can not simply use ATM
>> machines that actually take a roll of paper and print it, and book
>> the 'sale' of $ customers take out as profit.  We know that would
>> mean instant hyperinflation.  So clearly there is a constraint of some
>> kind on the money creating activity of banks that preserves value?
>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--NOTHING INFLATIONARY ABOUT IT.
>
>>
>> The answer does include, as you mentioned, the idea that bank liabilites
are 'backed' by the bank's assets, which could be sold.  But this is still a
'non starter,'
>> as it can explain relative value but not 'absolute' nominal value.
>>
>> And, as you stated, government can function solely like the rest of us,
>> using only commercial bank accounts if it wished, as I believe Germany
>> has done for quite a while.  But even then, the act of taxing in the
>> unit of account and accepting 'inside' bank deposits 'works' only with
>> the government, at the end of the day, being the single supplier of that
>> which it demands for tax payment.
>>
>> First note that the origin of such a system has to be either convertible
>> currency or a system that began with 'outside' money from the government.
>> 'Inside' purely notional money has no way of 'springing up' without
outside
>> money, any more than there would be corn futures is there was no such
>> thing as corn.  How would banks develop using a particular notional
>> (floating exchange rate) currency purely on their own?
>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. 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.
>>
>
>> Let me again
>> bring in Innes' What is Money, 1913, from http://www.warrenmosler.com
>>
>> "But a government produces nothing for sale, and owns little or no
property;
>>         of what value, then, are these tallies to the creditors of the
government?
>>         They acquire their value in this way. The government by law
obliges certain
>>         selected persons to become its debtors. It declares that
so-and-so, who
>>         imports goods from abroad, shall owe the government so much on
all that her
>>         imports, or that so-and-so, who owns land, shall owe to the
government so
>>         much per acre. This procedure is called levying a tax, and the
persons thus
>>         forced into the position of debtors to the government must in
theory seek
>>         out the holders of the tallies or other instrument acknowledging
a debt due
>>         by the government, and acquire from them the tallies by selling
to them
>>         some commodity or in doing them some service, in exchange for
which they
>>         may be induced to part with their tallies. When these are
returned to the
>>         government treasury, the taxes are paid. How literally true this
is can be
>>         seen by examining the accounts of the sheriffs in England in
olden days.
>>         They were the collectors of inland taxes, and had to bring their
revenues
>>         to London periodically. The bulk of their collections always
consisted of
>>         exchequer tallies, and though, of course, there was often a
certain
>>         quantity of coin, just as often there was one at all, the whole
consisting
>>         of tallies."
>>
>> This makes perfect sense to me.  And the rest of the article make
>> fascinating reading as well.
>>
>PERFECTLY SENSIBLE TO ME TOO. 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. THE TALLIES INNES DESCRIBED WERE BACKED
>BY THE
>SHERIFF'S AGREEMENT TO TAKE TALLIES INSTEAD OF SILVER.
>
>BEST,
>MIKE SPROUL
>
>