Re: Backed money/Mike Sproul

[Warren Mosler <mosler@xxxxxxxx>]

>

>
>
> You asked what I meant by 'issue': spent or lent.
>
> Roughly speaking, I mean lent, but to be precise, I mean that the issued
> money ends up on the liability side of the balance sheet of the issuer.
> For example, American colonial currency was commonly issued in two ways:
> 1) The colony printed 10,000 shilling notes and spent them to pay
> soldiers. At the same time, the colony levied 10,000 worth of future
> taxes. As the notes were paid in for taxes, they were to be destroyed.
> Thus, the notes were 'spent', but the colony was actually borrowing the
> money, and repaying it with future taxes.

OK, but I would simply say the colony spent first, and collected later.
That's what all issuers of floating fx currency do from inception.
An notice that the colonies did not levy the tax becauses they needed
their notes per se.  They taxed so the private sector would need their
notes and therefore be willing to trade real goods and services to get
them.  And that is still true today with the $, yen, and any floating fx
currency.


> (Our current practice of
> issuing dollar bills in exchange for government bonds is just a
> refinement of this. The money is issued for bonds, and the bonds are
> paid off with future tax receipts. The colonists just left out the step
> of issuing the bonds.)

More precisely, again with a floating fx rate, units of currency (mostly
checks which when cleared result in credits to member bank clearing
accounts) are, at inception, first spent, before any can be borrowed.
And the underlying function of borrowing by the issuer is to give
non interest bearing clearing balances an interest bearing alternative
which supports the issuers interest rate target.

>
> 2) The colony printed 10,000 shilling notes and lent them to colonists,
> taking land worth 20,000 shillings as collateral. As the colonists
> paid off their loans, the notes were to be destroyed. In this case, the
> notes were explicitly lent, and backed by the IOU's of the borrowers.
>

Yes, that is different.  There are no 'taxes' in this example.  And it doesn't
move goods and services or land from private domain to public domain.

>
> In this case, my 'backing' corresponds exactly to your
> 'collateralization'.
>

Yes.  We agree 'money' must be 'scarce.'  Demanding collateral in exchange
for units of the currency defines the 'magnitude' of the scarcity.

>
> An interesting thing about the colonial paper money was the effect it
> had on business activity. Before paper money, the colonies suffered from
> an acute shortage of money.

Must have been a deflation?  Also, they probably didn't 'trust' private
sector 'notes' as they must not have been creditworthy?


When the paper was issued, business activity

> flourished because they now had the circulating medium they had lacked.
>

Also, they were 'compelled' to transfer real resources to the issuing
govt to get what they needed to pay taxes.  Much of this and related
activity is reported as 'business activity.'

> As notes were paid off, either thru taxes or by loan repayments, the
> money shortages reappeared and business suffered. Hence the pressure
> not to destroy the notes as they were paid in to the treasury. If notes
> were just re-spent after they were paid in to the treasury, the economy
> would revive, but when the colony failed to back the re-issue with
> future taxes, or when they issued and spent more notes than they could
> possibly retire, they suffered inflation.

Yes.  And the colony also only suffered inflation when they themselves
agreed to pay higher prices.  If they somehow had constrained the prices
they were willing to pay 'across the board' that would have limited spending
to what the private sector was willing to sell at those prices and prevented
'inflation.'  And we know the private sector would have been willing
to sell at least enough to get the units of currency necessary to pay
its taxes.  With a tax liability 'out there' and a 'money shortage' the colony
'held all the cards' and price was a function of what 'collateral' the colony demanded
in return for its 'needed to pay taxes' currency.

w