[OPE-L:1941] Re: [MIKE WILLIAMS] electronic money

Duncan K Foley (dkf2@columbia.edu)
Wed, 24 Apr 1996 13:23:54 -0700

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On Wed, 24 Apr 1996, riccardo bellofiore wrote:

> You are quite right. However, this follows from the fact that, as you quite
> explicitely put forward, here you are looking at how national central banks
> behave in an open economy setting, i.e. within the international payment
> network. I think that when discussing how the monetary system works, we
> must start from a *closed* economy (or, if you prefer, a world economy)
> institutional framework. Here, the credit-money issued the banking system
> as a whole (and hence, also State's liabilities towards the banking system)
> is quite independent by definition on the holding of reserves.

I'm not sure what you're thinking of here. Even in a closed economy, when
the central bank (or the state) issues currency, it functions as a
liability of the state (or the bank), and represents a loan from the
public to the central bank or the state. It is true that in this case the
issue of currency is not limited by an external drain of reserves (which
is what I suppose you have in mind). On the other hand, if the state
maintains convertibility into gold, issue of currency could lead to an
internal drain of gold reserve to the public. It seems to me the issue
have to do with the forces determining the valuation of the state debt in
terms of commodities.