Re: two currencies and Korean war

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

     Per has raised a difficult problem, and I
do not have an answer to it.
     However, it is clear that whether a currency
is "commodity" in the sense of being defined as
redeemable in some quantity of that commodity
(thus being "backed" by that commodity) or is a
fiat currency that uses tokens/items for that have
some commodity value, however small, the face
value of the money must exceed the non-money
market value of whatever its medium of exchange
tokens are made out of.  When the money is "not
worth the paper it is printed on," it disappears to
become wallpaper.  When the face value of a coin
fails to exceed the market value of the metal in it,
then it is melted down and disappears.
      I have an amusing anecdote regarding the latter
phenomenon.  I and my wife, Marina, visited Moscow
for the IEA meetings in August, 1992, a time of hyperinflation.
Copper kopecks, worth one hundredth of a ruble, were
rapidly disappearing because the copper in them was
worth more than their face value.  Old pay phones in Moscow
used to cost two kopecks to use, with no change available.
Had to have the actual kopecks.  At that time in 1992,
pay phones in the streets were still of the old two kopeck
variety (they have since been replaced).  Marina needed
to make a phone call from the street.   She had to pay
three rubles to obtain two kopecks to do so.
Barkley Rosser
----- Original Message -----
From: "William F Hummel" <wfhummel@xxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, January 14, 2002 11:08 PM
Subject: Re: two currencies and Korean war


> 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
> >Tel: (212)229-5901, ext.327    Fax: (212)229-5903
>
>