Securitization has provided banks with an alternative source of liquidity, different from central banks open-market operations. It has become a tool for spreading the illusion of savings-driven economic growth and for creating the
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=150d668d-5778-4f8d-9eea-6b7d8f9d8117)
Source link: http://blog.mises.org/11023/securitization-and-fractional-reserve-banking/
Securitization and Fractional-Reserve Banking
Previous post: How the Fed Helped Pay for World War I
Next post: JLS 21.4: On Rand and All That
{ 48 comments }
if 10 percent of all credits are securitized, credits that remain on the banks’ books amount now to 11,250, while their obligations to depositors decrease concomitantly to 10,750. At this stage, total deposits of 10,750 are backed by reserves of 240, while total equity of 1,000 guarantees credits of 11,250.
===================
doesn’t this excess liquidity obtained through securitization become part of bank’s equity? You get $1250 in cash on asset side, what happens on the liabilities side?
When a bank issues a new dollar, it normally gets $1 worth of new assets in exchange. Thus the bank is always able to buy back all of its money at par, and the bank’s money holds its value even though there is more money. The bank’s customers, meanwhile, only get new money by paying in equal-valued assets. This is as it should be. The customers, not some central bank, decide by their own actions how much money is issued by the banks.
One shouldn’t minimize the importance of securitization as a means for banks to circumvent capital adequacy regulations. By replacing their mortgage portfolios with holdings of ABS derivative securities (especially securities in the allegedly lower risk tranches), banks under the Basel II regulations could reduce the capital required from something like 4% to less than half a percent.
The implementation of Basel II in recent years created a situation where banks (with a little help from the three SEC-approved credit ratings agencies) could now inflate more without having to raise new capital–all they needed to do was
securitize high risk mortgages and bribe the credit ratings agencies to overrate ABS derivative securities. Given that the reserve requirements on most deposits is zero, this regulation-driven distortion of the mortgage market effectively removed any remaining legal limits on bank credit expansion.
What the regulators didn’t seem to realize was that the historical experience of subprime default rates was irrelevant to the new, more inflationary credit environment in the mortgage market created by their own rule changes combined with the Fed’s incessant creation of new bank reserves. The result was a financial catastrophe.
As Mises frequently pointed out, there are no constants in human action; assessments of credit quality is no exception to this rule. Inflationary bubbles can never be regulated, they can only be prevented by requiring 100% reserves for deposits.
This article finally shed some light on some issues for me. For instance, from around 2005-2008, monetary base, AMS, TMS, and M1, show reduced growth rates, while general credit, securities, MZM, and M3 all accelerate in growth.
It seems the Fed’s raising rates actually made securities more attractive, allowing for even greater credit expansion. At the same time, the low growth rates of money supply made debts more likely to default.
Backing Federal Reserve Notes with “government debt” means backing them with the ability to steal the fruits of people’s labor, because that is the only way the government can pay the debt.
Securitization does not fundamentally change the ability of banks to raise their reserve ratio by selling assets. Banks could sell their “credits” at anytime without securitizing them. Selling a single loan worth 1250 would have the same effect as selling a securitized batch of loans worth 1250. Both actions reduce deposits by 1250 and credits by 1250.
However, as the article suggests, securitization has made it easier for banks to make these asset sales by making credit assets appear more valuable / less risky than they may actually be. This is unrelated to FRB.
Vincent Cook’s analysis is very close, what we are seeing today is the inter-working of two bugs in the regulations of the banking system
Securitisation allows Banks to completely circumvent the old fractional reserve relationship between loans and deposits. Once loans are sold outside of the banking system, they can be replaced with new loans, which increases the ratio of loans to deposits created by the banking system to greater than one. (Under fractional reserve banking, the total loan supply would always be slightly less than total deposits, the significance of which was pointed out by Mises). In and of itself, this bug does not effect the money supply in any way though.
The equity capital problem that Vincent is talking about, is a general issue with any and all forms of bank originated debt (not just ABS) being allowed as part of equity capital. Since equity capital is now the only thing that controls the money expansion process inherent in the system, reserve controls having been effectively removed, being able to move debt in there essentially allows the banks over time to create money.
Unfortunately, of the two mechanics, the ABS problem is creating debt faster than the equity capital bug can create money, and so the total supply of debt to the economy is growing faster than the money supply. This is what is doing so much damage, and the problem is continuing. ABS issuance has recovered to 2007 levels this year.
I don’t agree with the author’s comment though that ABS issuance is masking inflation. ABS’s are causing inflation, but only in those items that can be purchased by loans, and the proceeds of those loans. So asset inflation, and the current gyrations in the real estate markets can be regarded as a direct consequence of ABS issuance, as can the current valuations of the stock market, which are being supported by loan based speculation within the financial system.
Going forward, we will have to find mechanisms that remove the interdependence between loans and the money supply, and maintain a constant money supply, if only because the current system is being increasingly destabilised by deliberate exploitation of these bugs, never mind the accidental ones. But there is a huge chasm between proposing 100% reserve based lending say, and finding a practical way to implement it.
- cc
Mike Sproul wrote ‘Backing Federal Reserve Notes with “government debt” means backing them with the ability to steal the fruits of people’s labor, because that is the only way the government can pay the debt’.
That’s not quite true, although these days the exceptions are vestigial: sale of lands, royalties on mineral resource concessions, holdings of assets that yield revenues like rents and dividends etc. – although of course acquiring those resource bases in the first place may well have involved similar stealing, even if disguised by paying for them with fiat currency. Historically that has been quite significant though, e.g. the Dutch Culture System in the East Indies (although they boosted that with force as well).
PM Lawrence:
The posting by @Mike Sproul wasn’t done by me.
Federal Reserve Notes are backed by the gold and bonds owned by the Fed. The bonds, in turn, are backed by the assets of the Federal Government, which means, mainly, taxes receivable. Whether those taxes are legitimate is a separate issue.
Banks have a privileged legal status: they have an implied legal guarantee of liquidity in time of crisis (a guarantee which itself ironically makes recurring crises inevitable). Their legal privileges make it lucrative for banks to extend as much credit as possible, even where the credit is being used to fuel an asset bubble.
To constrain credit growth there are two regulations, both of which have been circumvented by the banks. They are the reserve requirements, which have been circumvented by overnight sweeps out of demand deposits, and the capital requirements of Basel II, which have been circumvented by securitization.
No matter how banks are regulated, their biggest profits will come from circumventing their regulations to exploit their privileged legal status. Even if they were required to hold 100% reserves against deposits, they could still lend long and borrow short using savings deposits and term deposits. A solvent bank could face a liquidity crisis in a week if there were a run on its savings deposits.
Their liquidity privileges also make it very difficult to measure the money supply. We can’t do it just by examining balance sheets formulated according to the rules of accrual accounting. Even ten-year CDs have the potential to provoke a liquidity squeeze if they are issued to fund 25-year loans. To get an accurate measure of a bank’s potential liquidity-requirements, we need projected cash-flow reports. We need to know the extent of a bank’s implied dependence on liquidity in time of crisis, in the worst case scenario of a run by its clients.
The only sane solution is to strip banks of their legal privileges, after giving them notice to iron out foreseeable liquidity shortfalls. Demand deposits should be given the same legal protection as other fungible commodities deposited in a warehouse, and ring-fenced from the lending business. And their lending business should be audited ruthlessly – not just for bad loans, but for capacity to survive mass withdrawals.
Mike Sproul says:
Federal Reserve Notes are backed by the gold and bonds owned by the Fed.
That appears to be nothing more than a statement that the Fed is bound by the rules of double-entry accounting.
It tells us nothing about the value of a dollar, unless perhaps the Fed were dissolved and its note-holders were given a pro-rated share of the equity. An attractive scenario, but a remote one.
Mike Sproul says:
When a bank issues a new dollar, it normally gets $1 worth of new assets in exchange. Thus the bank is always able to buy back all of its money at par, and the bank’s money holds its value even though there is more money.
Fine, if the bank’s shiny new asset is what it redeems its note for. But what if the asset which it receives when it issues its note is a loan, as it typically is? In order to buy back its money at par, the bank has to sell its loanbook. Good luck doing that in a crisis. I’ll deposit my money elsewhere, thank you. I’d rather forgo the interest than risk the principal.
Lysander:
If the fed issued $100 for 100 oz. of silver, then each dollar is worth 1 oz. If the Fed then issues another $200 for $200 worth of bonds, then the dollar is still worth 1 oz. As long as the Fed stands ready to use its bonds to buy back its dollars, the dollar will remain at 1 oz. Silver redemption only matters after all the bonds have been paid out. After all, only 100 of those dollars were issued for silver, so only 100 of them need be retired for silver. The rest can be retired with bonds.
If we say that the Federal Reserve Notes are backed by the bonds owned by the Fed,
and that the bonds are backed by the assets of the Federal Government, which means, mainly, taxes receivable,
and that those taxes are payable in Federal Reserve Notes,
then we can say that
the Federal Reserve Notes
are back by
the Federal Reserve Notes !
to mike sproul -
your comment about the fed owning gold is false. the fed owns no gold. it is true – i believe – that it owns gold certificates and certainly it reports gold holdings on the h.4.1 but that gold is only the certificates. and just in case you doubt my claims i am happy to supply an email from the frb answering my question on the subject. (of course there is always the blinder conundrum – i.e. the fed’s last obligation to the american people is to tell the truth.)
whether there is any practical distinction between owning gold vs gold certificates is another question.
it is also entirely unlikely that the treasury owns the gold it claims. massive amounts of tungsten were sent to ft knox during the 1990s to be gold plated. for what purpose i am not sure but i have my theories….
To tony bonn.
If you think that “there is any practical distinction between owning gold vs gold certificates”, why should it be different for mike sproul ?
Gerry Flaychy:
Consider a similar example: In 1690, Massachusetts paid its soldiers with paper shillings, each acceptable for taxes in lieu of one silver shilling. The paper shillings were backed by taxes receivable, but of course those taxes were payable in silver shillings, so the paper shillings were tied to silver.
Over time, however, Mass. and the other colonies had inflation, and the paper shillings were no longer anchored to silver. They were, however, still backed by taxes receivable. You could then say, as with dollars, that the shillings were backed by other shillings. But this is clearly false. The colony had only to change the denomination of its taxes to silver units and the tie to silver would have been restored. The truth is that the silver tie never mattered in the first place. What mattered then, as now, was the government’s ownership of valuable assets (including gold), and their ability to take valuable assets in the form of taxes.
Mike Sproul, in the beginning of your first paragraph you seems to say that the paper shillings where not exchangeable for shillings but where exchangeable for taxes, but in the end of it, you seems to say that the taxes could be paid only in shillings, not with paper shillings, so that something is not clear for me: was the taxes could be paid in paper shillings or not ?
I suppose too that those papers serve also as money to buy and sell goods on the market: was it the case ?
“If you think that “there is any practical distinction between owning gold vs gold certificates”….”
is this akin to having a title to a car, parking your car in a parkling lot leaving your car for awhile and carrying the title of the car with you?
Gerry Flaychy:
Taxes could be paid either in silver shillings or in paper shillings. I have a couple of references on colonial currency that you can find by clicking my name above.
Mike Sproul,
you write:
“If the fed issued $100 for 100 oz. of silver, then each dollar is worth 1 oz. If the Fed then issues another $200 for $200 worth of bonds, then the dollar is still worth 1 oz.”
What if the $200 worth of bonds is at some point then only worth $50 leaving $250 in Fed notes outsanding and only 100 oz. of silver to redeem them with?
Andrew E.
The loss of backing you describe will cause the dollar to lose value. Let E=the value of the dollar (oz./$). Setting assets (100 oz plus bonds worth 50E oz.) equal to liabilities ($300 worth E oz. each) yields:
100+50E=300E
Or 0.2 oz/$
Mike Sproul,
Okay. If that is the case, how is backing a currency with a financial asset such as a bond the same as backing the currency with a commodity such as silver, with which the central bank will always be able to fully redeem its reserve notes (unlike, say, with a bond)?
Mike Sproul wrote:“Taxes could be paid either in silver shillings or in paper shillings.”
Now, what I understand, is that instead of paying taxes in silver shillings you could pay them in paper shillings, but you could not go to the government and change that paper money for metal money. The paper shillings were not promissory notes, the same way that metal silver shillings were not promissory notes.
The paper shillings were exchanged by the government for services and not for gold or silver or goods or any other assets. So we can say that they were not back by assets. They were not either back by services because those services, once done, accomplished, they were no more existing.
Thus, we can say that the paper shillings were back by nothing !
Andrew E.
A bank that issues 100 paper dollars for 100 ounces of silver can use that silver to buy back the 100 paper dollars. If that bank issues another 200 paper dollars in exchange for a $200 bond, the bank can use that bond to buy back the $200.
Gerry Flaychy:
If a colonist had 1 shilling of taxes due, then he could pay it with 1 silver shilling. If he didn’t pay, the government would take a shilling’s worth of goods from him. Thus the shillings were backed by the government’s ability to take his goods. We normally think of money being backed by the issuer’s ability to pay us goods for the money, but money can also be backed by the issuer’s ability to take away our goods.
Intrinsically, money is a token of exchange. Nothing more, nothing less. I would suggest that at that level, it doesn’t matter what money is, or whether or not it is backed by precious metals.
What matters, in a market based economy, is how much of it there is, and what if anything allows that quantity to vary. If it is fixed, the distributed market mechanism can then sort out prices independent of variation in the supply of money, if it isn’t, then it can’t.
The problem then, with representing money as government debt, occurs if the government decides to either issue more of it, or pay it back, thereby changing the quantity of money.
Similarly, one of the problems with directly linking money to debt issuance within a reserve banking system, is that both debt and money then vary in quantity in very unpredictable ways, and in ways that can cause mathematically induced feedback and wave effects to dominate, which don’t have much if anything to do with useful economic activity.
I would gently suggest that these endless debates about what money is/should be in the physical sense, are something of a blind alley.
- cc
Mike Sproul, I agree with the part of your last post addressed to me. What I don’t agree with, it’s to say that the paper shillings are back by the government assets when they are back by the power to tax, the power to get assets. Having the power to get assets is not having those assets.
So there is two meanings of the word «back»: «back», in the sense of ‘back by assets’, means that the paper shillings can be exchanged for assets, which it is not the case when the government use its taxing power to get back (second sense) the paper shillings: there is no exchange with assets or goods.
There is also a third sense: a thief can ‘take back’ the paper shillings by stealing them. So we can also say that the paper shillings are back by the stealing power of people !
The word ‘back’ can also have the sense of redeemable: which makes four senses.
Thus, finally, we can say that money,
paper or metal or ‘account-money’,
is always backed ! ! !
Gerry Flaychy:
Suppose a landowner owns land worth 1000 oz. of silver. He collects rents of 50 oz./year. When he buys groceries, he pays with his own IOU, which promises 1 oz. of silver. He accepts these IOU’s in payment of rent, so people value them and they can be used as money. He might never pay out any silver for them. These IOU’s are backed by rents in the same sense that the paper shillings were backed by taxes.
If he lost the title to his land, his IOU’s would no longer be backed, and they would lose all value.
Mike Sproul,
you write:
“A bank that issues 100 paper dollars for 100 ounces of silver can use that silver to buy back the 100 paper dollars. If that bank issues another 200 paper dollars in exchange for a $200 bond, the bank can use that bond to buy back the $200.”
But what about the example given in an earlier post where the bank is only able to buy back $50 of the $200 issued with the bond (whereas it is still able to buy back the $100 issued with the 100 oz. silver)?
“If the fed issued $100 for 100 oz. of silver, then each dollar is worth 1 oz. If the Fed then issues another $200 for $200 worth of bonds, then the dollar is still worth 1 oz.”
i guess unless the bond isnt guaranteed in some way…but i dont hear of the us govt going under because the money for the bonds is hard to come up with.
but with 100 silver backed (silver sitting in lieu of paper) dollars and 200 ‘promise to pay’ silver backed dollars. wouldnt the actual silver backed dollars have arisen in the marketplace in a different manner….several people had to risk previous silver to get the new 100 oz of silver?
is this the ‘problem’ that some ‘austrians’ say bids prices up in a harmful way?
“What if the $200 worth of bonds is at some point then only worth $50 leaving $250 in Fed notes outsanding and only 100 oz. of silver to redeem them with?”
if the govt can only get back 50 dollars of the quickie issued 200 bond dollars? does that occur now?
would that be unbacked paper inflation?
Andrew and Scott:
If the money-issuing bank loses assets then each dollar has less backing and you get price inflation.
Mike Sproul,
What then would you say is better to back a currency with, to take our example, silver bullion or bonds issued? Or indifferent?
is the bank-issued paper silver certificate, the dollar, iow, then a false document….or partially false because only 100 silver dollars are in existence and there are numerous more paper dollars?
is that a proper description?
From Mike Sproul;
“If the money-issuing bank loses assets then each dollar has less backing and you get price inflation.”
Are these assets dissapearing into thin air?
Andrew E.
The form of backing matters relatively little. It’s the value that counts. Money can be backed with silver, bonds, land, buildings, taxes, etc. But it’s a bad idea to have the backing denominated in the same currency units that the bank issued, since a loss of assets will cause the money to lose value, which will cause the assets to fall more, which will cause the money to fall more, etc.
Scott T.
If a bank claims that a dollar will always be redeemable for 1 oz, then that promise becomes impossible with fractional reserves. But if the dollar limits its promise to “1 Ounce most of the time” then it’s not a false promise.
Mikey:
Banks get robbed, people default on IOU’s, land falls in value. In all cases the bank loses assets, and the money that is backed by those assets will lose value.
Mike Sproul
You are talking all around the issue here. Backing a currency by definition means being willing to exchange every single note for the promised amount of whatever is used for backing it, and that is all it means. In order to make that promise one must already own whatever it is that you are using for backing the currency. Future receipts of any kind cannot, by definition, count towards backing any currency. That governments have blurred this definition in order to fool people into accepting fiat currencies is regrettable, but irrelevant. Backing is completely independent from ‘value’, if whatever the currency is backed by changes in value, then the currency changes in value.
You are continually applying terms and definitions that have meaning only to fiat currencies to describe non-fiat currencies.
“But if the dollar limits its promise to “1 Ounce most of the time” then it’s not a false promise.”
i guess.
some of the time the dollar means not an ounce and most of the time it means an ounce.
what then is the dollar during some of the time?
i suppose the ‘dollar’, broadly, is not backed per se but is a way, (an accounting method) designed to trade values of assets?
be it land or numerous ‘highly rated promises’ to pay dollars or amounts metallic commodities?
i get confused when the word dollar gets used to mean a redeemable ounce of silver then it jumps to some basket of goods that cant be redeemed.
T Ralph Kays:
A bank might issue 100 currency units (dollars) against which it holds 100 oz. of silver, and those dollars might always be redeemable during business hours. But nights and weekends the silver might be lent at interest. On Saturday, the dollars are backed but inconvertible, and they will trade for 1 oz. Or convertibility might be suspended for 30 days or 30 years. As long as the bank’s assets are worth 100 oz, the dollars are still backed but inconvertible, and they will still have value.
If banks and their customers agree that the bank will hold fractional reserves, that is their business.
Mike Sproul
The definition of backing in relation to currency does not allow the lending of the assets used to back the currency, period. If they lend out the assets then it is no longer a backed currency. Try reading my last post again, you haven’t addressed anything I said in it.
“Future receipts of any kind cannot, by definition, count towards backing any currency.”
does the sproul currency say then that the future receipt, the communicated promise, can be an asset…the currency is backed the promises. but it may not redeemable backing?
“Securitization is a financial technique that permits the exchange of relatively nonmarketable credit claims for liquidities. ”
i guess the excerpt from the article is telling the truth.
if so…is this basically what mr sproul is describing?
does this activity not bode well for many us dollar users?
Scott and Ralph:
I’ll repeat my earlier post:
“Suppose a landowner owns land worth 1000 oz. of silver. He collects rents of 50 oz./year. When he buys groceries, he pays with his own IOU, which promises 1 oz. of silver. He accepts these IOU’s in payment of rent, so people value them and they can be used as money. He might never pay out any silver for them. These IOU’s are backed by rents in the same sense that the paper shillings were backed by taxes.
If he lost the title to his land, his IOU’s would no longer be backed, and they would lose all value.”
These IOU’s are backed by land, but denominated in silver, even though they are not backed by silver, and not convertible into silver in the normal sense.
Mike Sproul,
“But it’s a bad idea to have the backing denominated in the same currency units that the bank issued, since a loss of assets will cause the money to lose value, which will cause the assets to fall more, which will cause the money to fall more, etc.”
I agree, a bad idea. Some might even call it “theft” instead of “backing”.
“If a bank claims that a dollar will always be redeemable for 1 oz, then that promise becomes impossible with fractional reserves. But if the dollar limits its promise to “1 Ounce most of the time” then it’s not a false promise.”
I hear this often but I don’t get it. Has there ever been a depositer who didn’t expect to always be able to get his money out of the bank where he deposited it? Was there ever a bank run (pre-FDIC) where the losers who showed up too late went home, resigned calmly to the reality that the slight gamble they took in depositing their money went against them? I don’t think so.
Mike Sproul
Re: your repeated post
So long as you insist that words have no concrete meaning and that just because you say SOMETHING that you have communicated meaning of some kind, there is no point in listening to you.
In the case of the paper shillings, even if the government has no land at all, or even no asset at all including metal silver shillings, he is still able to take back all the paper shillings, due to its taxing power, and due too to the fact that those papers has the power to pay the taxes asked by the government. This is contrary to the landowner case where the landowner is not able to do that with his IOU’s: so there is no analogy betwen the two.
Also, the paper shillings will lose no value at all, contrary to the landowner case, because here, it is not the assets of the government that counts but its taxing power. The landowner cannot do that: he must have assets in the first place, and in sufficient amount. There is also no analogy between the two here.
Gerry Flaychy:
The analogy is that the government has the power to collect tax, while the landowner has the power to collect rent. The landowner is able to accept his own IOU’s in payment of rent.
If the landowner lost the ability to collect rent, his IOU’s would lose value, and if the government lost the ability to collect tax, the shillings would lose value.
“The analogy is that the government has the power to collect tax, while the landowner has the power to collect rent. The landowner is able to accept his own IOU’s in payment of rent.”_Mike Sproul
This is correct. If I am a merchant and go to another merchant to buy goods that I pay with an IOU issued by me, and the day after, he comes to buy goods to my store, he can pay me with my own IOU, for sure! We can even do that with others merchants and also with ordinary citizens. There is no need to be a bank to do that, and even no need of a bank at all. In any way, I have the power to collect my own IOU’s and accept my own IOU’s in payment.
“If the landowner lost the ability to collect rent, his IOU’s would lose value, …”_Mike Sproul
Only if he has also no more silver. He can have accumulated silver over the years, he can also sell his land for silver, find a silver mine on his land! To collect rent is not an absolute necessity for him to collect his IOU’s: the necessity for him is to have silver !
“… and if the government lost the ability to collect tax, the shillings would lose value.”_Mike Sproul
Only for the paper shillings gave to the soldiers, because if those paper shillings have value in the market, it is only due to the fact that the holders of those paper shillings can pay taxes with them. They have market value because they have the power to pay taxes at first.
The metal silver shillings, on the contrary, doesn’t need at all to have the power to pay taxes to this government to have value, because they can be exchange for themselves in the market, even outside of the territory of this government. What counts, it’s their weight in silver and the degree of purity of the silver. They will lose value only if they don’t have what they suppose to have in weight or purity. They are independant of governments and taxes.
Silver is ‘back’ by silver !
Gerry Flaychy
“To collect rent is not an absolute necessity for him to collect his IOU’s: the necessity for him is to have silver ! ”
Actually, the necessity is for him to have assets. Those assets can consist of rents receivable, silver, land, or anything else of value. My example assumed that the landowner’s only asset was land, for which he collected rent.
“Silver is ‘back’ by silver !”
Of course. And paper money is backed by the assets of its issuer. It doesn’t matter what those assets are, as long as they have adequate value. And it doesn’t matter where the money circulates, as long as it is a valid claim to the issuer’s assets.
“Mike Sproul”
Gerry Flaychy: “To collect rent is not an absolute necessity for him to collect his IOU’s: the necessity for him is to have silver ! ”
1- If he received silver and is able to save some, then this silver is also an asset. Also he must have some silver in hands in case some people come to redeem the IOU’s.
2- Your landowner did not made his IOU’s redeemable in land, less in rents, but in silver. Some of his IOU’s could happen to finish in the hands of his renters but it’s not everybody who will buy goods from the renters, and if those ones will accept the IOU’s, it is not because they think they will be able to pay rents with the IOU’s, they are not renters themseles, but because they think that the landowner’s has silver, coming from his renters or elsewhere, and if they go to see him with the IOU’s they could get silver in return, not land, less as a payment of rents. That’s what gives the value to the IOU’s. If the IOU’s were redeemable in land instead of silver, they could still have value but much less than in silver.
To say that the necessity is for him to have assets, in the ‘IOU silver’ case, is the same thing to say that the necessity is for him to have silver and other assets, except land, in the ‘land IOU’ case.
So, if the IOU’s are in silver, the necessity is to have silver: everything else is accessory; if they are in land, then the necessity is to have land: everything else is accessory.
1- «Paper money with power to pay taxes» is not an IOU, redeemable in silver, or gold, or land, or else, no more than a metal silver shillings or gold metal money is an IOU.
2- If the issuer of the «paper money with power to pay taxes» is a government, than, even if that government has no asset at all, this kind of paper will still has value. Thus we cannot say that it is backed by the assets of its issuer, because the issuer doesn’t need to have assets. This kind of paper just need to have the power to pay taxes: that suffice !
Comments on this entry are closed.