[OPE-L:2029] Re: [MIKE WILLIAMS] electronic money

Duncan K Foley (dkf2@columbia.edu)
Mon, 29 Apr 1996 08:58:33 -0700

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On Mon, 29 Apr 1996, Chai-on Lee wrote:

> Chai-on:
> --------
> >
> >If the state debt 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.
> Duncan:
> --------
> 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.
> Chai-on (rejoinder):
> ------------------
> Well. When we accept state currency (let us assume it to be $100) in
> payment
> for the work we performed, we of course are not paying a tax on the
> surface.
> We can use the money, $100, to buy goods from other producers. So we did
> not pay any tax on this occasion. And the other producer can use the same
> money, $100, in turn, to purchase other goods from different producers and
> so on. So, Duncan argued that we did not pay any tax when we received the
> paper money from the state in payment for our work. But, nevertheless, if
> we analyse this further, we can realize that our commodity producers have
> paid
> collectively a tax upto the amount of $100 to the state. In return for the
> worth
> of $100, however, the state paid nothing but a mere slip acknowledging that
> I
> owed you $100. Because we used the slip the moment we received it to buy
> goods from other producers, the liability, as far as we are personally
> concerned, was already dissolved. Noone paid a tax when we receive the
> slip but because somebody must have paid a work upto the worth of $100 to
> the state, we received the slip. So, I argue, we paid a tax indirectly and
> collectively to the state, I argue.

I don't disagree with your analysis, but I don't think it supports the
conclusion that a tax is being paid as opposed to the public lending the
State $100 by holding the issue of currency. The difference is that when
the public holds the $100 as circulating currency, it has an asset as a
counterpart to the real resources the state has purchased; when the
public pays a tax, on the other hand, it has no such counterpart asset.

> Chai-on:
> >
> > 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. The state money is
> > no debt slip, and a redemption for it is not imaginable. Instead, the
> state BOND or the
> > treasury bills are a proper debt slip. Their redemption is made when the
> > treasury bills are exchanged for the paper money.
> Duncan:
> --------
> 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.
> Chai-on (rejoinder):
> ------------------
> If currency and bond are both liabilities of the state, then the liability
> must
> be in a double account. The central bank issues the state money upto
> the amount corresponding to the nominal units of bond. So, the debt
> acknowledgement is seen on the face of bonds. In the exchange for the
> bonds, the central banks issues the money.

When the central bank issues currency by buying bonds (an open market
purchase), the bonds are no longer in the hands of the public, but back
in the central bank's assets. There isn't any double counting. You can
choose to regard the central bank and the state as one unit for
accounting purposes, or you can separate them. If you separate them, the
central bank holds the bond as an asset, and the state has the bond as a
liability; the central bank has the currency as a libability, and the
public has it as an asset.

In either system of accounting the net indebtedness of the state/central
bank to the public remains the same, and there is no double counting.


If both are equally a liability
> of the state, then the amount of the state liability cannot but be
> doubled.
> My argument in the above is very important in undrerstanding the nature of
> the state money.