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From:
[log in to unmask] (Laurence Moss)
Date:
Fri Mar 31 17:18:50 2006
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William Coleman wrote:  
> About the Federal Reserve's notes being a liability or not of the Fed:  
> I think James Ahiakpor has exagerated the significance of his  
> observation that a defective US note may be returned to the Fed,  and a  
> good one obtained in its place  
> If I buy a bucket and discover it has a hole, then by both common law  
> and consumer law I have the right to a refund or exchange from the  
> retailer.  
  
> Does that make the the value of sold buckets a   
> liability of the retailer?   
  
May I answer William Coleman's question.  Under the common law of most   
states, goods come with an implied warranty of merchantibility for their intended purpose
especially when sold to consumers by sellers such as Wal-Mart or K-Mart.  A bucket with a
hole is clearly "defective" and the seller must make good.
  
These warranties that come with the goods sold are, in essence, "promises"   
made by the sellers to the buyers.  They are "implicit promises" that the law   
requires and also may have existed at common law.    
  
I have no idea what modern accounting practice does with "implied warranties"   
but in reality they are genuine liabilities of the sellers and constitute   
claims against the assets of the business.  I think James Ahiakpor was onto an   
important idea.  
  
There is an exception to the rule I set out above.  When a laymen sells a   
bucket in the open air market (I think of the flea markets around town) then the   
implied warranty can be disclaimed and the buyer takes it without recourse.    
St. Thomas's discussion makes this point about horses with defective eyes that   
are clearly visible to the buyer in  the open market.  The buyer must beware   
and will not have recourse against the seller.  
  
In fact, we all disclaim any warranty when we sell our used cars, since most   
states do not require that we disclose the defects to the potential buyers.    
The common practice is Massachusetts is to allow the potential buyer to "have   
his or her mechanic take a look."  Such a denial would not be allowed for most   
professional full-time car dealers.  
  
I see no reason why banks of issue shouldn't be held to these same rules.  Of   
course, the close linkages between the banking community and the political   
authorities have permitted banks to operate under different rules (special   
privileges) than most businesses operate under but that is a horse of a different color!
Sorry.
  
I think that with the exception of these exceptions, James Ahiakpor had the   
better argument.  
  
Laurence Moss  
 

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