Re: Backed money (reply to Davidson)

["John O'Donnell" <jackodonnell@xxxxxxxx>]

Gunnar Tomasson wrote:
>
> Mike:
>
> Thanks for posting your paper.
>
> On the basis of my own thinking through related issues in the 1970s, I agree
> with the thrust of the view which you express, inter alia, as follows:
>
>  "Two views of money can clearly be set apart at this point: The first is
> that money's value is determined by supply and demand--by how much money is
> chasing a given quantity of goods. This is the quantity theory view. The
> other view, which I am advocating, is that the value of money is determined
> by its backing. This is the real bills view or, perhaps more accurately, the
> backing theory view. On this view, token money is valued according to the
> same principles as any other financial security."

Valuing money on the basis of its backing has a very
significant flaw. That is the ability, and it most cases
actuality, of the issuer to buy or sell the backing
commodity at will. That is, because the "price" of the
backing commodity can be set by the money issuer at any
amount between that which results in the issuer buying all
that is and the market doing likewise the actual value being
set is the price of the commodity, not that of the money.
The price of money remains its value in purchasing all the
goods and services relevant to a market.

However, it is also true that simply calling the issue of a
government "money" does not make it so. To have value the
issue must have a use. It does not matter if that use is
purchase of a commodity or the payment of obligations
dictated by government or both. But only one such ultimate
use is needed to give the "money" value. If the payments of
obligations to government as in present day organization of
society are unavoidable, the use of backing for money
becomes superfluous.

The choice of a market to avoid a poorly managed money stock
by resort to barter or standardized barter [i.e. -- A single
commodity such as gold as an intermediate trading
substance.] is just as likely to occur with a "backed" money
as with a fiat currency.

--
			-- jbod

		Tax Privilege, Not People
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