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