I don't think it serves any useful purpose to deny that modern paper   
currency (fiat money) is the liability of the central bank that issues it.   
=James C.W. Ahiakpor  
  
Dear James, please stick to the following example when you answer the   
questions. Suppose that Average Joe has sold the real good called cake to   
Ordinary Tom for 1 paper dollar. Now, tell me: has he lent anything to Mr.   
Greenspan, who has issued it? No. He has neither lent the food to customer   
Tom nor to the banker but sold it and received a payment. Next, is he going   
to Mr. Greenspan to ask for some milk worth one dollar? No. Suppose he goes   
to John Doe for 1 dollar of milk and gets it. Now, John Doe has apparently   
acted as if he was liable to redeem whatever liability was contained in the   
paper dollar.  But please look again. Has John Doe just discharged a debt   
obligation from the past, or just received a payment for milk? Suppose that   
John Doe goes to Ordinary Tom and buys 1 dollar of nails.  Where is Mr.   
Greenspan in the picture? Who lent him anything; what did he borrow?  
  
Mr. Greenspan is not in the picture unless you see that Ordinary Tom could   
not have printed the paper dollar. He borrowed it from Mr. Greenspan, yes,   
he borrowed it, not lent it. After he recovers the paper dollar by selling   
the nails, he must return it to Mr. Greenspan, who neither bought nor sold   
any of the three goods all of which were traded with the help of the paper   
dollar.  Now tell me: Who was Mr. Greenspan borrowing from? He lent it to   
Tom.  
  
Mr. Greenspan is providing a very important social service to permit   
transfer of value to facilitate indirect trade. It is as if Mr. Greenspan is   
the senior and everybody trusts him. Now, Average Joe does not trust   
Ordinary Tom to fulfill his obligation to deliver nails in payment for the   
cake, especially as the nails have to be delivered to John Doe and not to   
Average Joe. But he trusts Mr. Greenspan to arrange this such that anybody   
and everybody in God's Good Land will gladly take the paper dollar and   
deliver whatever real good he wants.  Yes, Mr. Greenspan is taking the   
responsibility of making sure that everybody gets a real good of his or her   
choice in exchange for whatever real good he or she delivers. The paper   
dollar in the interim is the certificate from the trusted Mr. Greenspan that   
it is going to be honored by all. And it is not the individual Mr.   
Greenspan, but the whole society behind him in the form of a government that   
carries the trust.  
  
Mr. Greenspan cannot fulfill his responsibility unless he refuses to be   
either a buyer or a seller of any real good. If Mr. Greenspan was to print   
one more paper dollar and with it buy up some cakes and eat them, the dollar   
would be counterfeit ab initio, because after circulating for a while, the   
dollar will be dishonored because there will be no cakes waiting to be   
delivered against it. The reason Tom cannot print a paper dollar is that if   
he does not deliver the nails John Doe ends up with a paper dollar which he   
cannot redeem in nails. The senior Mr. Greenspan imposes the necessary   
discipline on Ordinary Tom: you must deliver one dollar of nails when the   
paper dollar comes around to you, and then bring it back to me.  If Mr.   
Greenspan threw the paper dollar from Friedman's helicopter, it would   
certainly be counterfeit ab initio, because whoever would pick up the paper   
would get real goods without ever having to give real goods so that some   
people would be stuck with them and fail to get any real goods for them.  
  
Dear James, please distinguish between storage of value and transfer of   
value. Treating money as a store of value is absurd, and that is exactly   
what most economists have been doing. The outside issuer of money neither   
saves nor invests any real capital, and neither buys nor sells any real   
good. But he lends fiat money which must be recovered by him to fulfill the   
balancing requirement: every Ordinary Tom must ultimately deliver the real   
nails for the real cakes he gets with the paper dollar. There is no storage   
of value here, but a transfer. Tom gets the cake from Joe but delivers the   
nails to Doe. That is the transfer. Tell me where you see the storage?  
  
Dear James, I am amazed that you fall for the illusion of the Fed being   
liable for the issue of the dollar (except in purely legalistic sense that   
does not involve economics). In the Golden Days, the Fed would print some   
new paper bills say after acquiring a new load of gold. But this gold was   
not ever going to be given to the public, who did not want the gold at all,   
but was to be permanently kept in a manmade mine. This gold did not belong   
to the general public and the Fed did not borrow it. It was owned by the   
Fed. One should not mistake the legal idea that somehow the general public   
owned the gold as well as everything that the government controlled. No, the   
general public did not lend it: they just owned it in a constitutional   
sense. But as an agency, the Fed actually lent the gold to the individual   
Tom by giving him a claim on the gold that he did not own personally.  Let   
us suppose that John Doe could not find the nails to buy, and went to Mr.   
Greenspan to complain, who then gave him some grains of gold. If this   
happened, then Mr., Greenspan ought to have lost his job for failing to   
discipline the culprit Tom, who got the paper dollar out of the vault under   
the stipulation that he would deliver nails to recover the dollar bill.   
Apparently, in that case, Tom would not be repaying his debt, and that   
should enrage Mr. Greenspan rather furiously.  Mr. Greenspan never needed   
the gold if the principle of using paper money was followed strictly: first   
deliver your real good to get the dollar, then get the real good for the   
dollar, except for the one man who gets the dollar first and delivers the   
nails last to get back the same dollar, and to return the dollar to the   
banker.  
  
Even the fiction of the Treasury bill in inverted. Suppose the treasury   
borrows 1 freshly printed dollar bill from the Fed against a treasury bill.   
Even here, the Fed is the lender and not the borrower. The Treasury of   
course is a genuine borrower: it sells government service to earn tax   
revenue though in a sort of odd trading, and it must return the dollar to   
the Fed. How is the Fed liable here? As a general practice, central banks   
rarely lend directly to individual producers, but through the commercial   
banks under their control, and through the government, which has always been   
its number one borrower. I do not see how the Fed is liable to anybody   
except as an administrative duty. It would be ridiculous to suppose that the   
reserves kept in the Fed's custody are its liability: the Fed has not   
borrowed the reserves at all, and acts only as a paymaster since the   
reserves belong to he depositors. It is of course ready to give out what   
belongs to its depositors.  
  
So far as I know, nobody has ever described the circuit in which money   
circulates, though everybody talks breathlessly about velocity of   
circulation of money. Dear James, can you show me one example in the entire   
literature where anybody has shown how money circulates to complete a   
circuit, namely in which every ordinary agent sells one good to get money   
and then buys another good to spend it? I have never found such an example   
since my search began in 1969. If you ever find a payment circuit such that   
fiat money enters at a given point, and completes the circuit and exits   
through the same point back to the banker, you would find that classical,   
Marxist, Keynesian, Austrian, monetarist and Lucasian ideas about money are   
totally ridiculous.  
  
Dear James, dispute the moral of the following story if you would like   
please. In good old London Town, merchants bought and sold shiploads of   
stuff, and wasted valuable time going back and forth to the goldsmith who   
assayed the various sized coins for their fineness and true weight. It cost   
them dearly to have the coins assayed. They begged the goldsmith to keep the   
coins in his custody and to give them over to designated recipients, to save   
the cost of assaying every time the coin got out of the vault. And   
goldsmiths were rich people who had their own gold to lend. Fiat began when   
they could lend the gold that did not exist and did not belong to anybody,   
but it appeared as if they did exist and did belong to the goldsmith-banker.  
  
Everybody knows the myth of multiple credit creation. Dear James, suppose   
the banker had 100 coins and he lent it to a first borrower. But the   
borrower kept the coins with the lender because he was the common goldsmith   
of all merchants and hence was in a position to make the payments to the   
borrower's suppliers. It did not mater if the first borrower took the   
physical coins out and gave them to his suppliers who then deposited the   
same back to the banker. In the end, the coins stayed in the bank and the   
only thing that happened is that the claims were transferred: the coins were   
previously owned by the first borrower and now by the suppliers. The gold   
kept in custody still belonged to the depositor and not to the banker. It   
was still fully available to the depositor to spend. But as the depositor   
spent it, it went to others who in turn deposited them back to the same   
banker. Assuming that 10% of the coins were kept in the pockets of the   
merchants, we know that the original stock of 100 coins could finance a   
money supply of 1000 coins. 900 of those coins did not exist physically, and   
yet seemed to exist just the same. The banker lent the coins that did not   
exist, only because he was the common manager of payment who just   
transferred claims in book entries. Take away the payment management, and no   
multiple credit creation is possible, as in the next example.  
  
Now, the key is that in every instance of adding money supply, it was the   
banker who lent it, and not borrowed it.  To show that no real capital was   
involved, suppose that General Motors makes some trucks and taxicabs as real   
capital and lends them out. Once lent, they are out on the street and not   
deposited back to GM for further lending. GM cannot become a truck bank to   
do multiple credit creation: it cannot lend 1000 trucks if there are only   
100 of them in physical existence. The gold coins, despite being real, are   
not used as real capital at all, but are treated just like fiat: people give   
them away to their suppliers. A real borrower of a truck does not lend the   
truck again: he uses it to generate income. But the merchant does not use   
the gold coin to make dental caps or other real usages: he pays it out.   
Paper money serves exactly the same purpose.  
  
Now, can you still argue that the banker was a borrower rather than a lender   
when the banker's money was first put into circulation?  The true   
responsibility of the central banker is that of the senior of society:   
enforce the equivalence obligation in trade. Stated simply, it says that you   
can get real goods for money if and only if you are ready to give real goods   
for money. The banker has a duty to enforce the liability of the borrower   
who takes the money out from the bank's vault and puts it in circulation.   
But the banker is not a borrower.  
  
Dear James, please refute me and make me salute you.  
  
Mohammad Gani