Re: two currencies and Korean war

[William F Hummel <wfhummel@xxxxxxxxxxxx>]

David Gleicher wrote:

>Message text written by INTERNET:pkt@xxxxxxxxxxxxxxxx
>>Taxes are much larger than government borrowing to avoid or minimize
>deficits (which are considered a very bad thing).  What does it have to do
>with limiting the growth of the monetary base?  Central bank purchases and
>sales of government debt can be used to change the base but this has no
>necessary relation to the deficit or to taxes, does it?  Collecting no taxes
>would leave the monetary base unchanged if no part of the spending was
>financed by borrowing from the central bank.
><
>This statement of Ted's is inarguably correct, and I think gets to what has
>made the chartalist position  so confusing to me, at least.  Credit money
>is issued by a central bank through its lending to the public (purchases of
>financial instruments and so forth), so that there is nothing on the face
>of it that I can see that privileges tax payments as a basis of the
>currency.  One might more convincingly say it is the willingness of the
>public to borrow and accept  payment in the form of such bank credit that
>legitimizes the currency.

The confusion here relates to terminology.  The term "monetary
base" was used by Winslow but he appeared to use it in some novel
context.  It properly refers to the zero maturity government debt
held by private agents.
>
>I believe it was Henry Liu who at some point stated that chartalism as it
>is expressed on this list anyway is really the advocacy of a policy rather
>than being a coherent theoretical position about money and the existing
>monetary system.

Aside from Liu's strange remarks, I haven't seen "chartalism"
used on this list as a policy prescription.  In my view it is
simply a description of the key mechanism by which a modern fiat
money system operates

>The chartalists seem to wish to eliminate central banks
>and to unify in the Federal govenmnet the roles of budget-making and
>creation of money.

Only in your imagination.  It is sometimes useful to consolidate
the functions of the central bank and the Treasury, but at other
times it masks relevant details.

>Hence Per, even though he knows better, makes the slip
>of claiming that if there were no taxes government spending would cause
>huge increases in the money supply;   i.e., all government spending is
>viewed as what is commonly known as 'monetizing the debt.'   This is not
>the case because, as Ted points out, the government can borrow existing
>cenrtral bank credit from the public.

Again, this is a confusion in terms.  The base money supply, i.e.
the monetary base, increases when the government (Treasury)
spends.  It decreases when the Treasury debt securities.  The
Treasury makes a conscious effort to balance its inflows against
outflows so the central bank can control the price (own rate) of
its base money.
>
>The ironly of the chartalists adopting as reality what they wish would
>become reality is that reality in fact seems to be moving in the opposite
>direction.  Hence, the feeling I've had reading a lot of this discussion
>that it lacks relevancy.  Pioneered by the US, which has always been
>ambivalent about the status of the Federal Reserve vis a vis being a
>private versus public institution, the functioning of the central bank is
>becoming if anything  increasingly more independent of the budget-making
>institutions of the nation-state.  One example is the uncontested move of
>Greenspan to prop up the Mexican peso even as Clinton administration was
>refusing to do so, on the basis that the Federal Reserve was free to use
>its assets as it wished.  The other example is the creation of the Euro, a
>credit money issued by a central bank of the EU that is not associated with
>any particular nation-state at all.   Clearly it is not the budget making
>institutions of the various EU countries(i.e., there ability to raise
>taxes) that legitimizes the Euro.

What do you mean by "legitimize" a currency?  If you mean
maintaining the exchange value (for goods and service), that
ultimately depends on controlling the abundance of the currency,
though it is done indirectly through control of its price.  The
central bank cannot control its price without the cooperation of
the government (Treasury) in balancing its inflows against
outflows.  But there must also be something that makes citizens
need to acquire that currency.  Taxes are sufficient to do that.
I think chartalists believe that without taxes, nothing else will
suffice to create that need on a continuing basis.  Legal tender
status is simply an aspect of tax liability.  There are many
other conditions necessary for a viable monetary system, one of
the more obvious is reliable contract enforcement.
>
>Comments?
>
>DG

William F Hummel