Backed money/reply to tomasson

[mike sproul <msproul@xxxxxxxx>]

GUNNAR:

I hope you didn't get the impression (though apparently you did)
that my "Backed Money" paper (http://www.csun.edu/~hceco008/rbd2000.doc)
had anything in common with Bentham's
ideas, or that the theory of backed money is in any way alligned
with the idea that there can be no such thing as involuntary
unemployment.


"The inconsistency creeps in, I suggest, as soon as it comes to be
generally
agreed that the increase in the quantity of money is capable of
increasing
employment. A strictly brought up classical economist would not, I
should
say, admit that. We used formerly to admit it without realizing how
inconsistent it was with our other premises." [56]


An example might clarify my view: In 1685? the French government
was late sending the payroll to their garrison in present-day
Canada. The intendant of the garrison dealt with the resulting
disaster by issuing the now-famous playing card money, promising
that the cards would be redeemable out of the first coin received
from France. The experiment immediately revived trade in the area.

Clearly, the card money was backed (by the promised French coin) and
clearly it revived trade. But there is nothing mysterious about the
 fact that an economy that has been deprived of money can be revived
by the issue of new money. I would not say, however, that an economy
that is NOT suffering from a money shortage can be revived or even
stimulated by a new issue of money.

"If the fresh money, on the occasion of the first employment or
expenditure
made of it, is employed in purchases, the immediate effect of which is
to
make an immediate addition to the mass of really productive capital, it
then
makes by the amount of such purchase a clear addition to the growing
mass of
real wealth, beyond what would have existed otherwise." [71]

"If the fresh money, on the occasion of the first employment or
expenditure
made of it, is employed in purchases, the immediate effect of which is
not
to make any immediate addition to the mass of really productive capital,
it
then makes no addition to the growing mass of real wealth." [72]

"No sooner, however, does it ["fresh money"] pass on from this its
primary
destination (that of adding to real capital) to the other, viz. that of
adding to unproductive consumption, than its power of producing an
addition
to the mass of the matter of real wealth is at an end: thenceforward and
for
ever it keeps on contributing by its whole amount to the encrease of
prices,
in the same manner as if from the mines it had come in the first
instance
into an unproductive hand without passing through any productive one."
[73]

This passage represents a point of view fairly close to monetarism, with
Smith's fallacious distinction between "productive" and "unproductive"
spending thrown in. It really doesn't relate to backed money.

Best,
Mike Sproul