Re: Backed money/Mike Sproul

[mike sproul <msproul@xxxxxxxx>]

Warren:

Sorry to be a little late in responding.

Let me see if I can put our agreements/disagreements into a simple
example. A US government bank issues 100 paper dollars in exchange for
100 oz. of gold. It then issues 100 more paper dollars, which it
accepts for taxes in lieu of gold. At this point the bank's balance
sheet looks like this:

   ASSETS			LIABILITIES
1) 100 oz. gold			$100 notes
2) Ability to collect
   100 oz in taxes		$100 notes

I think we would both agree that these notes are fully backed, either
by gold or by taxes? and that each note will be worth 1 oz, regardless
of how many are issued (and backed) by the bank?

I think we differ regarding the effect of derivative moneys issued
by other banks. You would say, would you not, that if a French bank
started issuing eurodollars, and if the US tax man accepted those
eurodollars in payment of taxes, and if, furthermore, the French bank
held no reserves of US dollars, then that would reduce the value of
the paper dollars?
(The french bank could get away with holding no dollar reserves simply
by paying out a "dollar's worth" of francs every time someone presented
a eurodollar for payment.)
I would say that the issue of eurodollars would not affect the value
of the paper dollars. A stock market analogy explains why: If a french
stockbroker issues derivative shares of GM stock, then that issue
clearly does not affect the value of the base GM stock. The reason
is that GM stock is valued only because of its backing--not because
of how many derivative shares are issued (and backed) by other parties.
If the paper dollar is really backed--just like GM stock--then the
issue of eurodollars, or any other kind of derivative money, cannot
affect its value.

Best,
Mike Sproul


Warren Mosler wrote:
>
> Mike,
>
> I just started rereading your paper and much I had forgotten
> immediately came back to me.  For example, I think I now
> understand what you call 'backing' and I agree with its
> importance concerning the price level.
>
> In fact, I have always made the point myself that central bank
> lending is always secured, and, if the CB lent unsecured in unlimited
> quantities to member banks the currency would likely soon be
> worthless.  Likewise, the CB controls the definition of bank capital
> via its classification of bank assets, thereby regulating bank loans/deposit
>
> money creation.  I now recognize this as what you call 'backing.'
>
> It seems a lot like what I call 'exogenous pricing.'  I have
> stated the price level is a function of what the govt. demands in
> return for that which is necessary to pay taxes when it spends/lends.
> I think we may be saying the same thing?  In your terms, there is no
> market force that determines the 'backing.'  It is 'arbitrarily' determined
> by the government as issuer of the currency.  The non government sector
> needs the govt.'s spending/lending to comply with tax liabilities, and
> the govt. 'sets' the terms of exchange via that provision of the needed
> units
> of the currency, whether it knows it or not.  If it does not 'back'
> sufficient
> quantities of the units of currency it or its agents (including banks)
> provide by demanding collateral in exchange for spending/lending inflation
> is likely to follow.  This applies both to govt spending and lending by its
> banks whose deposits  can be used for tax payment.  Further, the govt.
> 'backs' its loans to member  banks via the collateral it demands in addition
> to its bank capital requirements. I think your 'backed' is my
> 'collateralized?'
>
> Given that, various non banks sell their liabilities such as commercial
> paper, notes, and bonds and may lend unsecured or with less than
> '100%' collateral.  In the short run, that could drive up the price level
> and spending/lending could migrate away from the banking system.
> But if the govt. 'sticks to its guns' and refuses to pay the higher prices
> or alter the collateral it demands prices will eventually be 'forced' to
> deflate to the point where the govt. is again spending/lending on its
> terms.
>
> And, to illustrate another point with a simple example, if the govt. had a
> head tax of a total of 100 units, and gave away more than that, the currency
> would have no value.  However, it could give away 99 and then demand
> something
> in exchange for that last unit which would determine the value of a unit
> of that currency.
>
> Warren