Re: Backed money/reply to tomasson

[Greg Nowell <GN842@xxxxxxxxxxxxxxxxx>]

Mike: at no time in the gold standard was all currency convertible into gold.
There was merely a probability that on any given day one could convert to gold,
provided that day was not a crisis day, i.e., precisely the day in which one
*would want* to convert to gold.

There was therefore under the gold standard a "probability estimate" of real
conversion likelihood that, I think, affected investors' percptions of the
desirability of being on the short end of the liquidity curve, viz, today we
associate it with low probability of loss, but in an era in which banks were not
backed by govt (formally) through deposit insurance and in which convertibility
was essentially a pleasing fiction to control (mas o meno) expansion of liquidity,
the real risk of "default" on the short end of the currency crisis was real.

This explains why in gold stnadard currency crises the long end of the interest
rate (govt bonds) would drop as investors crowded into the "safe" part of the
yield curve--the long end, in an effort to get "out" of the banks.

--gn.

mike sproul wrote:

> Gunnar:
>
> Without attempting anything like a full resolution of our views, I'd
> start by saying:
> 1) The assets held on the other side of the balance sheet from the
> money are not trivial. In the case of money that is convertible into
> an ounce of gold on demand, the assets are the only thing that matters.
> That is, if a banker has issued 100 units of money in exchange for
> assets worth 100 ounces of gold, and if the money is at all times
> convertible into an ounce of gold, then it must be worth an ounce
> of gold. In this limited case, spending by entrepreneurs on factor
> services has no effect on the money's value.
>
> 2) Convertibility can be delayed, suspended, or even uncertain, without
> affecting that basic argument. I'd say that the dollar is backed by
> the assets held by the Fed (gold and bonds), and I'd say that those
> assets are the only thing that matters to the value of the dollar,
> though I'm sure that this is where we'd part company.
>
> Best,
> Mike Sproul
>
> > Mike:
> >
> > The reason for my original comment:
> >
> > On a quick look through your paper, it seemed to me that you are well on the
> > way towards the Benthamite view of money...
> >
> > is this.
> >
> > (a)  ALL New Money comprises IOUs of the Issuer in exchange for IOUs of the
> > Customer, whence it follows that ALL Money is "backed" in the trivial sense
> > dictated by the logic of double-entry book-keeping.
> >
> > (b)  SOME New Money is also "backed" in the non-trivial sense that
> > Entrepreneurial Customers use it to acquire factor services for the
> > production process.
> >
> > (c)  The REMAINDER of New Money that is not so used remains "backed" ONLY in
> > the trivial sense under (a) above.
> >

--
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