Re: two currencies and Korean war

[William F Hummel <wfhummel@xxxxxxxxxxxx>]

Per,

You have raised a troublesome point regarding the seigniorage
gap, at least for some types of commodity money.  While I don't
have an immediate answer to this dilemma, I am not yet satisfied
that the distinction between commodity money and fiat money is
simply measured by the gap.  As far as I can judge, the problem
applies to precious metals but not for example to bushels of
wheat.  It seems evident to me that certificates of ownership of
bushels of wheat are "full bodied", and do not depend on
government  involvement.  The value of a certificate would appear
to depend only on the barter value of a bushel of wheat in the
open market.

In our modern day fiat money system, paper notes truly have no
intrinsic value.  They cost the government something to produce,
but that cost is not seen as intrinsic value within the private
sector.  Clearly such money must acquire its value through the
promise behind it.  I gather we both agree the most compelling
promise is that the government will accept it in payment of one's
tax liability, the chartalist view.  I would go further and
insist that a viable modern day system requires the government to
respond to the demand for its fiat money according to the demand
within the private sector for cash and for banking system
reserves in support lending.  Further that the only mechanism the
government has for controlling the value of its fiat money, even
though indirectly, is through its price in the interbank lending
market.

Early on (1792), the US defined the dollar to be equivalent to so
many grains of gold (also silver).  Private enterprise mined the
ore and reaped the monetary reward of doing so.  A seigniorage
gap exists by definition whenever the cost of producing the gold
differs from its face value in dollars.  That could be either a
positive or negative gap.  If negative, there would of course be
no incentive for private enterprise to continue its production.
Now it would seem that even though the seigniorage gap could
change sign on occasion, the producer of gold owned an asset
without a corresponding liability.  It is my belief (at present)
that chartalist theory only applies to a pure fiat money system,
that it does work well in a commodity money system.  Also it's
not clear to me that the question of liability or not is central
to the issue.  I very much respect your views and would be
interested in any further thoughts you have on this issue.

William

>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
>CEPA    80 Fifth Avenue, 5th floor    New York, NY 10011
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