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