[OPE-L:1996] Re: [MIKE WILLIAMS] electronic money

Duncan K Foley (dkf2@columbia.edu)
Sat, 27 Apr 1996 08:48:02 -0700

[ show plain text ]

On Fri, 26 Apr 1996, Chai-on Lee wrote:

> On Fri, 26 Apr 1996, Paul Cockshott wrote:
> -----------------------------------------
> What I mean is that the state has, in the absence of a gold
> standard, no obligation to redeem its money. In what sense
> then is the money state debt?
> Formally, the finance of state expenditure by the issue of
> currency may be borrowing, but in practice, given the non
> redeemable nature of the currency, it is a tax on holders
> of existing money balances.
> Duncan wrote in [1980]:
> ----------------------
> First of all, in an accounting sense. But the state also has to redeem
> the money when it is offered in payment of someone's tax liability. I
> think we need to be careful in distinguishing "redemption" in the sense
> of accepting the currency to extinguish a debt, and "convertibility" in
> the sense of guaranteeing the exchange of the currency for some other
> asset (say, gold, or foreign exchange) at a fixed rate.
> Chai-on:
> --------
> I disagree with Duncan because the tax payment in cash by the public is
> not the redemption of a state debt but just another tax. If the state debt

The payment of the tax with state issued currency is the payment of a
tax, I agree. The tax liability, however, is a liability of the taxpayer,
just like any other liability, so the ability to discharge it by the
presentation of currency is a reduction of the taxpayer's liability in
exchange for the asset (currency).

> is to be redeemed, the state has to give over some products in exchange
> for the debt slip (the previously issued money). When we pay a tax in
> cash, the state then purchases products from us with the money we paid
> as the tax. We pay the tax twice.

I really don't understand the reasoning that leads you to this
conclusion. When we accept state currency, say, in payment for work
performed, we are not paying a tax, but lending value to the state, a
loan of which the currency is the certification. When we use the currency
to pay taxes, we are discharging a liability (just as if we used it to
pay a private loan off.) I don't see where there is any double taxation.

First, when the state issue the money
> (we paid the tax in kind), Second, we pay another tax in money (then the
> state collect the tax in kind or in labor with the money).
> In conclusion, therefore, the tax payment in cash is no redemption. We of
> course have to distinguish between "convertibility" and "redemption". But
> they can differ only in the sense that one entails interests while the
> other
> does not. In this sense, Paul was also not so correct. The state money is
> no debt slip, and the redemption is not imaginable. The state BOND or the
> treasury bills are the proper debt slip. The redemption is made when the
> treasury bills are exchanged for the paper money.

I can't really accept this analytical distinction between currency and
bonds. Both are liabilities of the state in the same sense. The zero
interest rate on currency exists because of the legal prohibition on
other financial intermediaries issuing small-denomination
interest-bearing notes.

> In short, both Paul and Duncan were not correct.
> With regards,
> Chai-on