***/ I was referring to the situation which would exist if AMI proposals were adopted, not what happens now. \***
An important clarification. The greenbacks were indeed "weak" against bank credit and traded at a substantial discount in terms of specie. Banks would not accept them for deposit. Speculators purchased them with the expectation that they would eventually be redeemed with specie, which eventually did happen with the Specie Resumption Act of 1875.
It was obvious who was boss from the git-go. They were declared to be legal tender for all debts "except...interest on the public debt." --
***/ Some extremists ("greenbackers") envisage all
gov expenditure being financed by unredeemable
treasury notes. \***It was not such an extremist position in the context of the times immediately following the Civil War. Government was a much smaller percentage of the total economy than it is now. It was thought that all money was government issued specie. There was little conception of the role of credit. Bank credit was thought to merely consist of banknotes backed one hundred percent by specie so it was thought to be merely proxy for specie, which of course we know it wasn't.
The greenbacks could have substituted for specie if the banks had cooperated. What has happened within the division of labor of finance is that government has become excluded from that division--contrary to the assertions of the Moslerites.
It didn't necessarily have to have happened that way. What we have now is central bank credit functioning as the monopoly source of quasi-specie within the division of labor of banking. It is what we call "reserves" which are required for inter-bank and inter-central bank account-settlement in the case of the U.S. dollar.
It is spent into circulation by the central bank not for goods and services but for securities, therefore it does nothing to close the "gap" between "prices" and "purchasing power" resulting from the displacement of labor.
There is no theoretical reason why government spending for goods and services needed by government could not serve the purpose of supplying reserves. It could not however be for all government spending; it would have to be limited to the amount needed for reserves.
There is a third possibility: Instead of introducing reserves through the purchase of securities, the central bank could introduce reserves in the form of dividends directly to consumers.
***/ Whether as notes or deposits with the BofE, the (weak) money earns nothing. So everyone, including banks, tries to get rid of it by spending it. But it just bounces back, and inflation accelerates. \***
I disagree with this. It is the old "velocity of circulation" fallacy. The rate of inflation (ceteris paribus in the theoretically ideal economy) is directly proportional to the rate of injection of reserves in excess of the demand for reserves. There is no add-on effect whatever.
There is no "acceleration" beyond the rate of injection. That is to say, the rate of inflation accelerates only if the rate of injection of reserves accelerates. Simply through the injection of reserves--through the right channels--you could engineer a constant inflation rate without fear of "acceleration." Or, it could be zero inflation with "full employment." There doesn't have to be a "Phillips' Curve" trade-off.
Orthodox theory is that you have to err on the side of restraint--keeping the economy in the permanent state of underperformance--due to the fear that inflation would quickly accelerate out of control destroying the economy.
There are more complete explanations for the historical examples of accelerating inflation.
----original message---- Date: Mon, 29 Sep 2003 08:35:29 +0100 From: "Geoffrey Gardiner" <[EMAIL PROTECTED]> Subject: Re: [gang8] Re: Cartalism weak money and HPM
Chris,
I was referring to the situation which would exist if
AMI proposals were adopted, not what happens now.
Some extremists ("greenbackers") envisage all gov
expenditure being financed by unredeemable treasury
notes.Whether as notes or deposits with the BofE, the (weak) money earns nothing. So everyone, including banks, tries to get rid of it by spending it. But it just bounces back, and inflation accelerates. I said the notes would exist for ever because Zarlenga does not approve the mopping up with bond issues, the normal practice, though you will recall that in TTM I doubted if the "sterilising" effect was as strong as thought by monetarists
I know this is standard Friedmanite doctrine, but not all monetarist theory is wrong.
Geoff
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