On behalf of Eric Tymoigne (UMKC-Student) [mailto:[log in to unmask]]
In reply to Prof. Hoover.
Concerning the first question: The question would then become which definition is best. I
would argue that mine is inclusive of Prof. Hoover's definition and provides a better
understanding of what money is all about. When IOUs circulate and state (explicitly or
implicitly) "I owe you $10" this does not mean that someone promises to deliver cash or
any other specific form of money-things. It only means that someone promises to deliver 10
units of the unit of account named Dollar. This can be delivered in many forms:
- one essential way is by giving back to the new creditor an IOU he issued at a nominal
value of $10.
- or, if a debtor does not have his creditor's IOUs, any other money forms that credit the
account of the creditor would do, as long as both parties are satisfied (cash, transfer of
funds to an account, etc.)
- Payment in kind can also be a solution.
In all cases, you leverage your position in the sense that you promise to obtain (and
possibly deliver if a net claim exists after settlement: e.g. tax refund) some units of
the unit of account that you do not have now. But you do not NECESSARILY leverage (i.e.
become liable) in a higher form of IOUs (or a good). The settlement can even be done in a
lower form of IOUs as long as both parties are satisfied with it. Today tax payments by
non-bank institutions are paid with bank money not cash: the government accepts a lower
form of IOU in payment of taxes.
Legal tender laws are not necessary for the acceptance of IOUs of the government. The
Eurozone does not have any and in the US some shops refuse cash in payment even thought
legal tender laws apply. And I personally do not like the bootstrap argument.
What is necessary for any debt instrument (monetary or not) is an expected and actual
REFLUX MECHANISM so that there is an incentive for the creditor to accept an IOU of the
payer. Indeed, creditors need to be sure that debtors will be able to acquire credits from
(i.e. force cash-flows upon) others or the former. If there is no reflux mechanism (or if
it is insufficient), the debts created can never be destroyed (or destroyed at a pace high
enough) and this is a potential source of instability.
For the government, the reflux mechanism works by imposing a tax (i.e. imposing a debt on
some people) and taxing (or any other means of forcing cash flows: duties, religious
gifts, fines, etc.). Some countries may not have any tax system but they have other forms
of dues.
"If we want to stretch the language far enough, then I could regard the paper dollar as
the government's liability, but then the counterpart asset is a weirdly contingent one.
When I receive a dollar in trade, I have no idea what I am "owed" by the government for it
-- that depends on when, whether, and what to what degree it chooses to tax me." Yes, the
government imposes a tax liability on you and YOU KNOW IT before you get the cash because
you know (or at least you expect) that you will have to pay a tax in the future. Everybody
in the sphere of influence of a government knows this. This does not imply, of course,
that everybody needs to be liable to the government to accept cash. All that is needed is
that some people are liable, so that those who are not liable know that the former will
accept cash in payment.
If notes and coins were a pure asset it would be irrational for the central bank to
destroy any notes (as it does by truck loads each year). But if one understands that notes
are a debt of the government then, as for any private debtor who receives his IOUs back,
there is no point in the government keeping them.
Concerning the historical part. I agree that everybody could issue coins made of gold.
Actually one could be more general: at any point in history, all forms of monetary
instruments may have been issued by anybody. Only over time have some forms been
restricted to the government.
I also have to agree that gold bullion is not a liability. Again, actually, many (I would
say most of the) presupposed "commodity monies" were in fact never money-things. I will
not go further into this here. However, once transformed in coins, the stamped gold became
the liabilities of the government for the following reasons:
- Mints were under the control of the government and minting was subject to strict
regulations also imposed by the government (the rate of conversion of gold in coins
provided by Prof. Hoover is an example of this). For our purpose, however, the most
important regulations were the shape of coins and distinctive signs to put on coins. Those
were very specific and helped the holders of coins to recognize which king's IOUs they
were. If you went to stamp your gold you could not get any sign stamped on them (and so
you could not make the coins your debt). The importance of this characteristic is evident,
again, if one follows the definition of monetary debt that I took: it has to have the sign
or name of the issuer.
- The government accepted all the coins with the distinctive signs and shape, even those
it did not issue.
This latter characteristic was actually a great source of instability because the
government did not control the DIRECT supply process of its IOUs and could not match it to
its reflux mechanism. (Of course, like today, it could not control the quantity of IOUs
indirectly needed by the leveraging on its IOUs). In addition, widespread infractions by
mint masters and money changers led to great instability.
I agree with the following: "Britain could have abolished taxes or demanded that they be
paid in kind, and the coins would not have lost all value -- in part because gold has non-
monetary uses and in part because it was monetary in other nations and could be converted
into their coin (or, as frequently happened, circulate in its original dress)." In fact,
out of the space of influence of the issuing government, gold coins issued by the latter
may have circulated only at intrinsic value (the choice between melting down the coins or
keeping them depended then on which solution gave more of the unit of account desired). In
the case of paper money, this intrinsic value would be zero (or close to zero) and so
nobody would accept them.
Eric Tymoigne
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