Re: Inflation and Deflation

From: William F Hummel (wfhummel_at_comcast.net)
Date: 06/21/04 

Date: Mon, 21 Jun 2004 21:12:16 GMT

On 21 Jun 2004 16:03:54 GMT, human@planet.earth (oops) wrote:

>Money is backed by something very real and very powerful. Taxes.
>Money is not "worthless paper" at all, as some would have it. A note
>of money is a card to stay out of prison for a lot of people and
>businesses. There are a lot of taxes for a lot of things, from petrol,
>to income-tax, tax for using sewage systems, tax for owning a home
>(at least here). These taxes cannot be payed for by bags of rice,
>by singing a good song, or giving the government a free tarot-card
>reading. The governments wants /money/, not just any money but the
>local official money. Not movie-money. As a result, there is a steady
>demand for money, to pay the government and to escape the sanctions
>the government puts on someone who is not paying its taxes. These
>sanctions include breaking into your home and confiscating all goods
>there, and throwing you on the street.
>
>Think of a dollar as a "1 credit point for staying out of jail" card.
>
>Because many and enough people need such cards, they have intrinsic
>value to all, even though you may not need to pay taxes. If a company
>creating bread must pay taxes, that company will ask at least some
>money for its bread to get the government off its back. And because
>other companies will do the same (ask some money), the bread-company
>will have a use for the "stay out of jail" cards, because it could
>swap them for the goods/services these other companies provide.
>
>That is my theory anyway, nobody yet has been able to reason me out
>of it.

Your theory is right on target. There are actually two types of
money: (1) base money issued by the central bank, and (2) credit
money issued by private banks.

Base money exists in the form of cash or bank-owned deposits at the
central bank. All payments to and from the government involve the
transfer of base money. Even though one usually writes a check to pay
his taxes, the issuing bank must cover the check by a debit against
its deposit at the central bank in favor of the taxing authority.

Base money is a credit against future taxes. Even those who don't
have tax liabilities will readily accept base money because it is of
value to so many others. Taxes together with government spending
cause base money to circulate which helps ensure its broad acceptance.
Without the enforcement of taxes, base money could not retain its
value. Neither custom nor legal tender status are sufficient because
they guarantee nothing about real value.

Credit money exists only as deposits in private banks. Most of the
money we use is credit money. When one writes a check to buy
something, he is authorizing his bank to debit his account and
transfer that amount to the bank of the seller who then receives a new
credit in his account.

Credit money retains value because banks are required to convert
credit money into base money on demand, even though the conversion
seldom occurs. Only when one withdraws cash from his bank deposit, he
is exercising that right.

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