Re: two currencies and Korean war

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

On Fri, 4 Jan 2002, William F Hummel wrote:
>   It would be nice if AI had the
> courtesy to address the other party directly, but perhaps that's
> too much to expect of some in this forum.

I'm sorry if it seemed like a discourtesy.  I was trying to quickly
reply to several simultaneous and related posts while distinguishing
between two Williams.

> The notion that legal tender ALONE is sufficient to give value to
> a national currency is unproven or unsupported by example because
> there is none.

This fails to respond to the example of US coinage.
It also fails to account for the use of foreign currency
in many countries both as a store of value and as a medium of
exchange.  It also fails to account for local currency examples.
And it continues to avoid taking seriously the opening example in this
conversation, as offered by Paul Davidson.

> But legal tender FOR PAYMENT OF TAXES is
> precisely what chartalism is all about.

Legal tender laws are more than that, as you are well aware.  But
legal tender laws are *also* just one institutional means to support the
expectation that currency will retain value.

> Remove the tax liability
> and try to imagine a viable monetary system.  Taxes are the
> mechanism that guarantees circulation of the currency in a way
> that permits the State to control its price.

This is pure assertion.  Furthermore, as you are well aware, there is
only a tenuous link between fiscal deficits and changes in base money
at any policy relevant horizon.

> The State cannot simply issue X amount of a fiat currency or
> increase the issue by some arbitrary function of time without
> losing control of its price, and ultimately endangering the
> economy and thus the viability of its currency.

Of course whole mountains of debate are hidden in your phrasing
of this claim, which hinges crucially on a stringent interpretation
of the term `arbitrary'.  Even Basil has conceded as much.

> It requires
> constant management to hold its price on target whatever that
> target may be.  Taxes are an essential part of that process.

More ungrounded assertion.  The only truth in it is a matter of
accounting, and that is a truth that is not very interesting over
policy relevant horizons.

> I hope it is understood I am not talking about some academic
> model, but rather a real world monetary system involving fiat
> money in a modern economy.

The good thing about academic models is that they force us to be
clearer about our claims about the ``real world''.

> I don't know who AI thinks is speaking for chartalism when he
> says "it does not explicitly acknowledge the role of
> expectations."

It does not explicitly acknowledge the *fundamental* role of
expectations. Money is held because it is expected to be accepted in
exchange.  That is fundamental.  Chartalism is a good story about one
way to provide institutional support to that expectation.  It goes
awry when it tries to treat this institutional aspect as
*fundamental*.

At least you here eschew the equation of expectations with ``just
guessing''.

Cheers,
Alan