Re: Backed money/Mike Sproul

[Warren Mosler <mosler@xxxxxxxx>]

>

>  I would explain both inflations the
> same way: There was a loss of backing--meaning, in this case, that
> the colony had spent more shillings than it could collect in taxes.

I would explain it by saying the colony was willing to pay higher prices
for what it bought.  That is, it demanded less collateral (backing, as you
would say) at the point of exchange.

>
> Note that a money shortage is not deflationary on the backing theory.
> If there was less money, and also less backing, the money would keep the
> same value, even though there wasn't enough to conduct the normal
> business of the community.

Again, as above.

>
>

> > 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.
>
> MS: I'm not sure what you mean when you say that a colony "agreed" to
> pay higher prices. They didn't have much choice. Say a banker that has
> issued paper bills has lost some of his assets. He used to be willing
> and able to pay 1 ounce of gold for each bill. Now he is only willing
> and able to pay .5 oz. because of the loss of backing, so the money
> falls. A colony that has tried to back its money with taxes, and then
> spends more than it can cover in taxes, is in the same position.

If the colony refused to pay higher prices it of course would thereby
spend less until prices came down to its 'bid.'  As long as there are
ongoing tax liabilities prices sooner or later *must* come down to
the issuer's bid, or there will be tax defaults?

w

> This
> doesn't seem consistent with your view.
>
> Best,
> Mike Sproul

--
Warren Mosler
Director of Economic Analysis
III Finance

http://www.warrenmosler.com