Sent on behalf of Eric Tymoigne, Ph.D. candidate, University of Missouri, Kansas City  
   
In response to the remarks of Professor Hoover:  
   
There are two points to take into account when dealing with monetary instruments as
related to the Prof. Hoover's position:
1- the nature of gold coins; 2- how one defines a debt instrument.  
  
Starting with the second one, does a monetary debt instrument necessarily imply a promise
of conversion in a higher form of debt or a physical thing (like gold bullion)?
  
The answer is clearly no: a monetary debt instrument has the following three
characteristics:
  
1- It is issued by someone for a purpose: spending, borrowing or some other purpose  
  
2- The thing that is issued has a clear relationship to a unit of account: nominal value
is clearly defined. In addition the name, or sign of the issuer is always present.
  
3- The issuer (government or not) promises to take back the debt instrument issued as
means of payment from its debtors (either immediately or when the IOU matures).
  
  
  
Thus, clearly all monetary instruments (from coins to demand deposits and any other form
they could take) are a debt of someone. When the government issues notes and coins to buy
something, it also implicitly promises to accept those coins and notes in payment from its
debtors (either directly or via the banking system). And if, when required, the government
did not accept back the coins or notes (or any other form of debts) it issued, the reflux
mechanism that is so important for any debt instrument would be broken, and the acceptance
of government coins and notes would soon be reduced to zero.
  
The government does not count the coins and central bank notes it issues in the federal
debt--they are assumed to be "pure assets" because they do no promise to convert into
something of a higher form. This is precisely the point Prof. Hoover is making. However,
this is a misrepresentation of what a debt instrument is for two reasons. First, like any
debt instrument, coins and notes are an asset/liability relationship: notes are on the
liability-side of the balance sheet of the Federal Reserve (and as far I know the Federal
Reserve is part of the federal government). Coins are on the asset side of central bank
and the liability side of the Treasury. Second, say, for example that some T-Bonds are
maturing and that the government gives to their holders coins in exchange. Has the debt of
the government decreased? If one follows the definition of public debt, yes. But clearly,
from a logical point of view this is not the case: there has just been a substitution
between two forms of government debts; one that the government promises to accept back
immediately in payment, another that it will accept back only after a period of time. In
the end, therefore, the definition of public debt as it is, reflects a total confusion of
the government about what money is all about. The definition, like many arrangements at
the level of federal government, is a pure convention, totally ignoring the mechanisms at
work.
  
  
Let us now go back to the first point: are gold coins "pure assets"? Again the answer is
no; they are debt instruments of the government stamped on a thing that has a high
intrinsic value. However, the nominal and exchange value of coins in the past usually
greatly differed from the value of gold (or silver, etc.) content. Today, as in the past,
the changes in the exchange value depend both on the creditworthiness of the government
(that is its expected capacity to make the reflux mechanism work) and its actual capacity
to have the reflux mechanism work (capacity to levy taxes or any other dues). In the
latter case, the crying up or down of coins was also essential, to determine nominal
value, when coins did not have any nominal values printed or stamped on them.  There are
several reasons why the government may have issued its debts on things with high intrinsic
value: two of them are presented here. First, coins are thought by some numismatists to
derive from medals and so issuing debts on things with high intrinsic value gave a sense
of prestige to the King. Second, some of the people that were paid with the coins were not
debtors of the government, or would never meet any debtors of the government: mercenaries
are among those types of individuals. For those individuals, a promise that the government
will take back the coins in payment of dues is not a satisfactory promise because those
individuals will never be indebted to the government (or they will never, or rarely, meet
someone indebted to the government that issued the money-things). In this case, the
intrinsic value of the object used to issue a debt matters.
  
  
The main problem with a gold standard (or any other monetary system that has its highest
form of debt stamped on a rare material) is that the elasticity of the supply of the
material becomes of great importance, as well as the maintenance of a relatively fixed
value of the material in terms of the unit of account. The same is true for any fixed
exchange rate system for which a direct or indirect promise of the government to deliver
foreign currencies is established. In both systems, the government ties his hands by
promising to deliver a form of debt that it does not control.
  
  
Eric Tymoigne