Sunday, April 1, 2012

Jim Glass at Worthwhile Canadian


Over at Worthwhile Canadian Initiative, Nick Rowe asks Is money a liability?

Jim Glass responds:

Are coins debt? A $1 coin today serves exactly the same way as a $1 bill.

'Twas not always so. In the gold standard era a $1 bill was a liability *and* a debt because it was a promise to deliver a $1 gold coin. But with the elimination of the gold standard and that promise, the $1 bill became the "base" so to speak, and stepped into the role of the coin...

This means they would not be a "debt", as they do not represent a claim of any sort...

I shortened Jim Glass's response to focus on answering Rowe's question and the parts of his statement that I agree with totally.

I think the key concept is that when the gold standard was eliminated, and the promise to pay gold for paper was eliminated, paper money stopped being a promise to pay. It stopped being a debt at that point and became instead, as Glass says, a replacement for gold.

This is perfect, because it solves a big problem. It solves the problem that the quantity of gold did not always expand at a rate best suited to the economy's current growth potential. With paper money as a replacement for gold, insufficiency of money need no longer be a problem.

One problem remains, which is the expansion of private money beyond what the base money can comfortably support. But this problem is no different than it was under the gold standard or in the free banking era. No different, except when money was gold and private money was paper, it was easy to see the difference. Now it is harder to see the difference.

2 comments:

Nick Rowe said...

"No different, except when money was gold and private money was paper, it was easy to see the difference. Now it is harder to see the difference."

Yep. Gold mines were the central banks of the past. Central banks are today's gold mines. Today, it is much easier to increase or reduce the amount of gold mined depending on what's best.

Tschäff said...

The central bank's money does go on the liability side of the CB's balance sheet, and the federal government promises to discharge tax liabilities with the CB's liabilities.

Central bank policy now is to defend interest rate targets. This means they stand ready to supply or drain whatever quantity of reserves necessary to hit that target in response to banks' demand for reserves.