Re: Backed money (reply to Davidson)

[Greg Nowell <GN842@xxxxxxxxxxxxxxxxx>]

Actually, Mike, in many instances, the fee structure of banks amounts to
charging $1.01, or even more, for every dollar on deposit.

The Bank of Amsterdam, which Smith wrote about in W of N, made its money
on transaction and deposit charges, w/o paying interest to depositors.  In
essence, the banks were charging $1.03 or something like that per annum
for every $1 left on deposit (negative interest).  This points to the
strength of the *transaction motive*, strongly linked to the essence of
credit, as the principle "backer" of money.   -gn.

mike sproul wrote:

> >
> > 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

--
Gregory P. Nowell
Associate Professor
Department of Political Science, Milne 100
State University of New York
135 Western Ave.
Albany, New York 12222

Fax 518-442-5298