Re: two currencies and Korean war

["Per Gunnar Berglund" <pgberglund@xxxxxxxxxxx>]

Barkley, William:

Barkley wrote (in response to William Hummel):
>       But even in a commodity money system,
> a commodity that has become a money will
> generally have a higher value than it would
> have if it were not a money because of the
> extra demand for it as money.  The long
> decline in the value of gold is a sign of the long
> working out of its de facto demonetization.

Per says:
Yes, and the problems central banks have recently faced in attempting to
'unload' their gold reserves provides more evidence.

Barkley wrote:
>       Keynes' original chartalism dealt with
> metal monies issued in Babylon.

Keynes was by no means the first or 'orginial' Chartalist, in fact he drew
heavily on Knapp's State Theory of Money, particularly in the Treatise.
Chartalism dates back to (at least) the 17th century and late Mercantilist
writers like Nicholas Barbon. (I guess some would say it goes all the way
back to Aristotle!) John Locke, who should be credited with the invention of
the modern Metallist doctrine (as propagated by e.g. Carl Menger), wrote his
pamphlets on the issue largely in response to the Chartalists of the time.
The matter under discussion was the recoinage that took place in the 1690s,
under William and Mary's reign. I made the point before that Locke sought to
establish a parallel between his Liberal theory of the State and his theory
of money, basing both on 'common consent'.

Another aspect of Keynes' Chartalism that one must not overlook is that he
also said 'the rupee is a note printed on silver'. This accords with the
accounting view I expressed in a previous post on this list, namely that one
should be careful to distinguish between the material value of the object
(token) that serves as a certificate of deposit on the one hand, and the
deposit itself on the other.

This point involves a critique of the sharp distinction drawn by William
Hummel (as well as many others) between 'commodity money' and 'fiat money'.
The Chartalist view, on my interpretation, involves looking at 'commodity
money' as two things: (1) a material object or token, and (2) a financial
asset with an offsetting liability. It is well known that the 'face value'
of a coin may exceed its material value, indeed this was usually the case in
the days of 'commodity money'. I find William Hummel's proposition that
commodity money is an asset to the bearer but nobody's liability difficult
to reconcile with this seignorage gap between face value and material value.

Again, I think the reconciliation lies in viewing the face value as an asset
to the bearer and a liability to the State that sets the face value and
accepts it at that value for payment of taxes, etc. (It may be noted,
parenthetically, that in olden times, most coins did not have any explicit
denomination, but only the King's head or some similar symbol, in order to
facilitate changes in denomination by the practice of 'crying down the
coin'). The material value of the coin would then be treated as an asset to
the State.

When the State vows to accept a certain type of assets for payment of taxes,
etc., it assumes a liability corresponding to the outstanding stock of such
objects. Simultaneously, it establishes a financial claim by accrediting the
producers and holders of such assets. The two sides offset one another so
that no net transfer of wealth occurs in the process. This decision creates
'financial assets' and the corresponding 'liabilities', which may then be
leveraged and invested as 'capital'.

Barkley again:
>       I would, however, fully agree that chartalism
> is more defensible if it is limited to pure fiat
> currencies in the modern world economy.

Per says:
This sounds like a workable principle on the face of it, yet on closer
inspection one faces the problem of where to draw the line between 'fiat'
and 'commodity' money. I gather 'fiat' money is characterised by a big gap
between the value of the token (e.g., banknotes generally cost a few cents
each to produce), while 'commodity money' refers to more or less
'full-bodied' coin? The question is at what percentage of seignorage we
should deem money to be 'fiat'? At 20 percent? 50 percent? 90 percent?
Moreover, we may very well have co-existing monies of widely varying
seignorage mark-ups? Does that mean that small change is 'fiat' while bigger
denominations are 'commodity'?

Finally, cowrie shells, bedouins, military scrips and Ithaca hours in all
honour - I conclude that these examples are insignificant and add little to
the understanding of modern monetary systems.

Best,
Per

_____________________________________________
Per Gunnar Berglund
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