[OPE-L:1998] Re: [MIKE WILLIAMS] electronic money

Duncan K Foley (dkf2@columbia.edu)
Sat, 27 Apr 1996 09:05:25 -0700

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On Sat, 27 Apr 1996, Allin Cottrell wrote:

> On Fri, 26 Apr 1996, Duncan K Foley 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?
> >
> > 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.
> Is the second point not also "in an accounting sense"? My tax liability
> represents a debt owed to the state; it is extinguished by my handing
> over money, i.e. by the cancellation of a debt owed me by the state --
> from an accounting point of view. But this doesn't represent a true
> constraint on the issue of state money, since if the state issues more
> money, and if this ends up reducing the exchange-value of money, my tax
> liability is simply adjusted upward accordingly.

I think this question goes to the heart of the problem of how speculative
markets value the debt of the state. If speculators stubbornly maintain
opinions as to the value of the currency, the state can issue a lot of it
without any reduction in its exchange-value, as happened during the Civil
War, and indeed during the 1980s in the U.S., when the money supply
expanded very rapidly without a corresponding increase in the rate of
inflation. If you really believe that the value of the state debt is
completely unanchored, then it is theoretically indeterminate in the
absence of convertibility. This is one logically consistent approach to
the problem; I think then one has to argue for an essentially historical
determination of the price and wage level. This doesn't fit in with my
gut feeling as to the dynamics of prices and money in contemporary
economies, though.


> Allin Cottrell