Re: Backed Money/reply to Mike Sproul

[Warren Mosler <mosler@xxxxxxxx>]

mike sproul wrote:

Warren:

If you haven't already read up on American colonial currency, it
gives a fascinating illustration of a currency whose value was
undeniably created by tax acceptability. Bruce Smith gives a lot
of citations in the Journal of Political Economy, Dec. 1985. The
best works are by Leslie Brock, John McCusker, and Eric Newman. I
have a brief (and sorry to say, fragmented) explanation of it at

http://www.csun.edu/~hceco008/colonial.pdf

Randy Wray, I believe in Modern Money, reviews some of Adam Smith's
commentary on colonial currencies which also makes the point.

Will read the above.

w

 

I think your application of the tax acceptability argument to the
dollar is deniable, but baby-induced sleep deprivation is forcing me
to wait until next week to give a detailed reply.

Best,
Mike Sproul

Warren Mosler wrote:
>
> MS: Not correct. If the treasury security is the Fed's asset then I have
>
> no claim to it. Bank of America has a true "account" at the Fed, in the
> form of reserves. It is just like B of A having a checking account at
> the
>  fed. B of A might have deposited a $100 T-bill at the fed and gotten a
> $100 account at the fed, but the account is the account and the T-bill
> is
>  the T-bill, and it is the fed's asset.
>
> >Legally of course you are correct.
>
> Since neither of us seems to have budged an inch, let's see what we
> agree on:
> 1. IF money is backed and convertible, then its value is determined
> purely
> by backing and convertibility. The quantity of both base money and
> derivative money can rise and fall without affecting the value of money.
>
> >That being said, let me complicate it a bit by introducing a tax
> >liability that exceeds the available supply of the 'gold' or whatever
> >the 'backing' is.  In this case tax liabilities, for all practical
> purposes,
> >due to finite supply in private sector hands, can not be met by
> presenting the >'gold' to the Fed for that which is needed to pay
> taxes.  I think you
> >see what I am getting at?  Taxes denominated in the govt's 'unique'
> creation
> >are the ultimate in 'imperfect competition.'  For the govt to be able
> >to buy what it wants it has to be able to offer something (like units
> >of its currency) that is 'needed.'  By offering 'gold' it can
> accomplish
> >that to some extent, but that can be enhanced by a tax large enough
> >to insure that the government will be able to buy more than just gold.
>
> 2. "Convertible" can mean "convertible now", "convertible in the
> future",
> or "convertible with a probability of less than 1", and the only change
> in the argument would be that delays and uncertainty would reduce the
> value of the money.
>
> >As above.
>
> 3. Backing can be "negative" in nature. One piece of paper can have
> value because it allows me to claim an ounce of gold. Another can have
> value because if I give it to the tax man, he won't break my door down.
> If my
> door is worth an ounce of gold, and if breaking it down is all the tax
> man can do, then that piece of paper will be worth one ounce. (By the
> way,
> if the tax man loses the ability to break down my door, the paper
> becomes worthless.)
>
> >yes to all the above.
>
> As for disagreement:
>
> 1. You would say that the suspension of convertibility of the dollar
> was a "termination". Isn't it more reasonable to call it a "reduction
> in the probability of future convertibility"?
> >ok
>
> And if so, don't you have
> to fall back on saying that backing matters?
>
> >If you can find someone who holds $US in the hope that
> >someday he will get an oz of gold for $35 again you are
> >correct.  And as I'm sure in this country of 300 million
> >and an even larger world population who may think the same
> >there probably is at least one person accumulating $ for that reason.
> >So that would make you technically correct.  I concede the point.
>
> 2. Since derivative dollars can be created costlessly and without limit,
>
> and since the tax man accepts those derivative dollars, I don't see the
> validity of your 'tax acceptability' argument. Also, if the tax man said
>
> "give me an ounce of gold OR a dollar bill", then it's easy to see where
>
> value arises. If he just says "Give me 30% of the dollar bills that you
>  have", how does the dollar bill acquire value?
>
> >Taxes paid with bank deposit money debit a bank's clearing account
> >forcing it to sell something to the Fed or borrow and post collateral
> >to the Fed.  So the Fed is always getting 'value' in return for payment
>
> >of taxes.
>
> >True, if the taxes were paid to an account the Fed kept at a commercial
>
> >bank, this is not the case.  But I think I worked this through again
> recently
> >in a previous post?  You come out with pretty much the same answer.
> >Yes, with the current system private sector agents have the option
> >of paying taxes via collateralized borrowing.  But they soon become
> >uncreditworthy and are forced to sell assets.  Prices go into a
> downward
> >spiral until the govt buys something and clears the net indebtedness.
> >That could be happening now in the US economy.
>
> Best,
>
> Warren
>
> Best regards,
> Mike Sproul