Re: Backed money (reply to Davidson)

[mike sproul <msproul@xxxxxxxx>]

>
> 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.

But every private bank backs its checking accounts in precisely this
way. They issue a $1 checking account that is convertible on demand
into a $1 bill. They can, of course, set the price of a checking
account dollar at $1.01 paper dollars--but they'd get no customers.
If they instead set it at $.99, they'd be killed by arbitragers. Banks
don't buy "all that is" and the market doesn't do likewise, but
nevertheless, checking account dollars are backed by their issuers.
The same reasoning applies to any kind of backing (gold, land, etc.)

>
> 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.
>
An old-fashioned banker that has issued $100 in checking account
dollars cannot back them unless he has assets worth at least $100.
If he has only $99 worth of backing he will face a run and will
collapse. It is also true that if the banker has no assets in his
vault, but nevertheless has the ability to take away (i.e., tax)
$100 from people, then his money is still fully backed. If, however,
he only has the ability to take away $99 from people, his money
must lose value. Your statement that money has to have "a use" is
not a strong enough condition. Money must be fully backed either
by explicit assets held by its issuer, or, what is the same thing,
obligations owed to its issuer.

Best,
Mike Sproul