Author Topic: Full value and sponsoring  (Read 1827 times)

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Offline Figleaf

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Full value and sponsoring
« on: January 01, 2015, 01:09:52 PM »
I sent a mail to another group a month or so back – criticising a philosophy Prof who wrote about the intrinsic metal system championed by John Locke.  It gets into the nitty gritty of the propaganda surrounding economic systems.  My fear is that professionalisation, specialisation and elite funding via modern academia is undermining the modern understanding of the history of economics, and my frail hope is that independent numismatist might be an antidote to what is going on.

Its a bit complicated (economics always is I think) - I am happy to explain further

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I wrote:

The null response to my last here seems to corroborate my claim that in recent times attention has been too focussed up arcane and fantastical philosophical aspects of metrology at the expense of its real history in social contexts.  Thus I will push on to illustrate what seem to me troubling consequences of that turn.

In 2013 the journal ‘Annals of Science’  published a paper by Daniel Carey concerning Locke on Money, much concerned with Locke’s philosophy of language. 

https://www.academia.edu/4868422

I like the paper in general, but point up a misleading point at the heart of it.  I do not view this as a criticism of the author, his referees, or the editor of the journal in question.  I view it as a criticism of  the direction of 21st century professional academic output in the social sciences in general.  I would be delighted to get details of any authors or relevant journals against whom this claim would seem unfair.

Carey suggests that around 1696  :  ‘Locke was defending silver according to its current legal weight against efforts to introduce an alteration’

Whilst true in a strict sense – this statement is very misleading.  According to the last (1967) traditional grand narrative on weight metrology, English silver coin had carried a seigniorage charge for around 900 years prior to 1666.  In 1666 seigniorage was legally abolished.  But by 1696 still only a small proportion of the circulating coinage had actually been restruck under the new system.  Most of the coinage had been struck under the earlier traditional system, that is to say, overvalued against bullion.  Thus Locke was involved in a massive alteration, the belated application, in practice, of the legal alteration of 1666 to the greater part of the national currency

The heavy cost of the recoining exercise fell on the tax payer, short term beneficiaries being the king seeking cheap bullion to finance a French war, and wealthy merchant houses, exporting coin whilst building trading empires in the East.  Longer term problems however may have been much greater.   Markets and thus market prices seem to have been undermined domestically as the greater bulk of the coinage disappeared over the eighteenth century, exported or hoarded, and the general population was pushed towards trucking and buying on credit in shops at monopoly prices.  Arguably Britain’s global reach in the 18th century was in good part financed by widespread domestic quasi-serfdom, as England became “a nation of shopkeepers”.  The roots of this transformation seem to me to lie directly in Locke’s ‘philosophy of language’.

Some economists are aware of this seigniorage matter today.  The Nobel Laureate Thomas Sargent wrote on it recently, but perhaps others may share my fear that his suggestion, that Locke was perhaps “an idiot”, really gets to the bottom of this matter?  Back in the 19th century a sophisticated independent amateur readership still existed, and Del Mar could popularise the view that Locke was a party to “a monetary crime”.  Addressing the more mannered independent amateur readership of the 18th century, Adam Smith called this abolition of seigniorage a “vulgar prejudice” of “the mercantile system”.   Was he really differing from Del Mar?

My fear is this.  Professional academic monetary history in modern times has become heavily funded by potentially interested parties.  The rest of the social sciences (including “heterodox economists”)  should have offered focused criticism, but have not.  They too have become intellectually hobbled, but by a philosophical turn.  A minority did loudly oppose that turn – Marwick, Stove, Sokal etc - but it is a minority which seems to be, quite literally, dying out.

The above quote's original is here.

Analytically, you are dealing with two subjects here: full value coins and sponsoring. I'll leave the philosophical aspects to others and concentrate on the political and economic aspects.

First, a question of terminology. Seigniorage in a metallic system has two senses: there is the difference between the denomination and the value of the metal in the coin. Second, there is the "free loan" aspect. The money in circulation attracts no interest, therefore is a source of income.

The Locke approach is philosophical. It amounts to "the state has no right to profit from issuing coinage". This lead Newton to believe coins should be full value in the sense of "no difference between denomination and metal value". The cartwheel pennies and halfpennies ceased to function (except as weight) when the price of copper went up. That doesn't make them idiots. Neither Newton nor Locke were economists. They would have been idiots if they systematically acted irrationally. For an economist, the state and the people are the same, financially speaking. Whatever income the state has does not have to be paid in taxes. Whatever loss the state has is ultimately borne by the tax payers. That makes profiting from or suffering from the currency a matter of political choice.

This is where the second aspect of seigniorage comes in. The real issue of a currency is its global market share. To put that in practical terms, if today, Russians are fleeing RUB and buying USD and EUR, that amounts to a free loan from Russia to Euroland and the US as far as the Russians are holding coins and banknotes. This was well understood in previous centuries. It is the only way to understand pillar dollars, gold ducats, Maria Theresa thalers and trade dollars. These coins are all about global market share.

I suspect the whole discussion you refer to was based on the American ultra-right contention that the gummint should only issue silver and gold coins and that would stop inflation (btw, what inflation?) and that same gummint from doing stuff because the gummint is bad. Let us agree that they are the real idiots.

That leads me to sponsorships. One extreme is to reject it completely. In the current political climate (see the BM discussion here) that would be suicidal. The other extreme is to accept it without any reservations. That's way too trusting. In economic terms, it is - as so often - a question of finding and maintaining an equilibrium, where overlapping interests lead to fruitful co-operation and scientific progress. Easy in the abstract, not easy in practice. Certainly not a one-sided affair either. It is not a case of evil commercialism against value-free science. Here is an example.

I was once involved in a case where a professor had won a big money prize for his research in pensions. He wanted to build a pension institute with the money and realised quickly enough his prize wasn't enough. The pension fund I worked for was concerned that politics was undermining pension quality for dogmatic and bureaucratic reasons. They liked his research and decided to support him, hoping that his research would support pension beneficiaries against bureaucrats and simplistic dogmas.

The story gets complicated here, so this is a simplified version. The institute came about. It was populated by people. Some of these people did research and did not get noticed. Others wanted to go into politics and started repeating simplistic dogma. Others yet wanted a nobel prize or at least name recognition and started attacking the system for the sake of attacking the system. The institute is no longer considered an asset, but removing support would destroy it, which would cause scientific outrage at the "biased pension sector." There is no good solution.

Peter
« Last Edit: January 01, 2015, 01:54:52 PM by Figleaf »
An unidentified coin is a piece of metal. An identified coin is a piece of history.

Offline bgriff99

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Re: Full value and sponsoring
« Reply #1 on: January 02, 2015, 08:22:00 AM »
The above quote's original is here.

 The real issue of a currency is its global market share. To put that in practical terms, if today, Russians are fleeing RUB and buying USD and EUR, that amounts to a free loan from Russia to Euroland and the US as far as the Russians are holding coins and banknotes. This was well understood in previous centuries. It is the only way to understand pillar dollars, gold ducats, Maria Theresa thalers and trade dollars. These coins are all about global market share.



Peter
Global market share of fiat currencies is a different animal from injecting gold, silver and copper into the world supply.   Those may not be created out of thin air.
Since all world money became completely unbacked 40 odd years ago, it has evolved into something akin to a stocks.   A quasi-equity unit in the national entity which issues it.    It is certainly an evolutionary vestige of its old form, carried forward partly on faith, partly on momentum and custom.   In the US we keep all the money looking exactly the same lest anyone notice it is based on just faith and other people wanting it.

Global market share is a balance of how much is issued, and how much other people will bid one currency up, in terms of another.   NOBODY is in control of this, except to the extent of trying to keep it running indefinitely with a minimum of annual degradation.   I defy anyone to describe physically what money is now.    Eventually there will be calamities, and threats to trust which begin taking out one nation's money after another.    Stringing things along as they are forever is going to hit a wall someday.   National economies as we know them would collapse on just having no stable currency.   It was pretty rough in the early '80's with 25% annual inflation.   We may live to see the next phase.

Offline EWC

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Re: Full value and sponsoring
« Reply #2 on: January 02, 2015, 10:08:43 AM »
The institute came about. It was populated by people. Some of these people did research and did not get noticed. Others wanted to go into politics and started repeating simplistic dogma. Others yet wanted a nobel prize or at least name recognition and started attacking the system for the sake of attacking the system. The institute is no longer considered an asset, but removing support would destroy it, which would cause scientific outrage at the "biased pension sector." There is no good solution.

Thanks Peter.  Yep - typically history is that complicated.  Regarding the people who "wanted to go into politics and started repeating simplistic dogma."   Would you judge them honest but deluded  - or just dishonest? 

That I think is the big question about Locke.  I suspect he was dishonest, but of course its very impossible to prove that.  Newton has been slandered greatly in the 20th century - he did not side with Locke on currency as I understand it - so the criticism of him seems incorrect.

Its hard to make the case that Locke did not understand the economics.  The problems he caused were solved in 1816 by re-imposing seigniorage.  That solution was put forward in 1776 or so by Adam Smith.  But it was also put directly to Locke by Barbon in 1694.  So he was clearly warned even at the time about his error




Offline Figleaf

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Re: Full value and sponsoring
« Reply #3 on: January 02, 2015, 12:25:25 PM »
@Bruce - there is a thing of importance here: money IS created out of thin air and it has been created like that for at least two millenniums. Consider this scenario. Around 1700, the son of a wealthy Venetian merchant goes to London to set up a trading house there. He brings 100 (the unit of account is not important) in cash, 100 in letters of credit. As he arrives, he draws on his father's account at the Amsterdam exchange bank, getting a bill of exchange of 200. He buys a house/office in London for 500 and finances the purchase with the letters of credit, the bill of exchange and a mortgage of 200. At the end of the day, he still has 100 cash.

Now, an economist starts making stats of the money supply. The cash counts for 100. The house and mortgage don't count, because they are illiquid. The letters of credit and the bill of exchange, now in the hands of the seller, are negotiable, so they count. Check out this table, knowing that our statistician was thinking in terms of M1, while modern statisticians will rather think in terms of M3. In our scenario, English money was created out of thin air with the import of the letters of credit. Money was destroyed by the purchase of the office/house and created again because the seller got 200 in cash from the mortgage. All that was done by individuals, not the state.

If money is created and destroyed so easily, the money supply is uncontrolled. Around 1700, there was no central bank. At this time, people described the financial situation in contemporary documents as "silver hunger". There wasn't enough silver around to finance the growing European economies. Another term from this period is liquidity. Money was likened to a river. Anything that would flow would be part of the river, even if it wasn't water. Some smart bankers realised you could use that Bill of Exchange as money, without ever cashing it in Amsterdam. If our protagonist's father was rich and well known enough, even his letters of credit could be used as liquidity by those in the know.

What happened around 1700 was a monumental event in financial history. European economies had finally grown to the point where they could no longer be backed by metal. By holding on to metal, economic growth would have been strangled. That would have stopped technological progress and created unimaginable poverty.

Since 1700, M1 has diminished to the point of irrelevance. Short-term finance is based on M3. Long term finance is based on myriad instruments. Most money is just bits in computers. You may think of that what you want, but the main point is that a politician who wants to set the clock back to around 1700 is either too ignorant to govern or a dangerous populist, who belongs in the extremist fringe. The money supply has long outgrown the metal supply by many, many multiples. Check out the global population in 1700 and today and you know how many people will have to die one way or the other to regain financial equilibrium. Think of poverty around 1700 and you have an idea of the misery the survivors would have to live in, even if somehow, we could achieve a better distribution of income. Think of the wars and hunger around 1700 to know what it would take at the minimum to maintain equilibrium.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

Offline bgriff99

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Re: Full value and sponsoring
« Reply #4 on: January 06, 2015, 07:40:54 AM »
Peter, I have no argument about monetary systems needing to expand beyond gold and silver.   In the US that was a political issue for a long time, and closely bound up with the coinage and paper money.   My seeming attachment to silver coin in circulation is just nostalgic whimsy, of no more import that missing trilobites.

We do however subscribe to different accounting systems.    I accord any coin issuing government the right to call token and paper issues in excess of the metal backing them, "money."    I do not allow that a kited personal check is money.   A letter of credit may be as good as cash, but it is till a device of leverage, so that someone may have their gold and spend it too.   When the time comes to settle accounts in specie, they did not create money.   

Nowadays that gets obfuscated when national governments pass "quantitative easing" through the hands of banks instead of into national treasuries.   Direct deposit is the next evolutionary phase.

Offline Figleaf

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Re: Full value and sponsoring
« Reply #5 on: January 06, 2015, 01:19:44 PM »
Thank you for your thoughtful reply, Bruce. This is getting a bit technical, but I enjoy it, so you'll suffer for it. >:D

The issue you describe is usually referred to as risk. There are many kinds of risk. This particular one is called counterparty risk. That risk exists with every financial transaction, even with an instant cash payment, as the money offered may be fake. (If you are foolish enough to change money on the streets of Romania, you check your banknotes one by one; when you get change in your local supermarket you don't.) A financial economy floats on risk.

The government is not excluded. Sharply falling trust in the government is why Russians dump RUB, though it is fiat money issued with the full force and guarantee of the Russian government, to paraphrase a phrase used by the US government. Trust in the government of Zimbabwe is so low that Zimbabweans actively oppose that they issue banknotes.

What I am saying is that the difference between a letter of credit and a banknote is a degree of risk. In fact, in circumstances, the L/C may be the better risk. Once an instrument has defaulted (think of old RBS stock, Lehman investment funds or your kited check), the risk is known and 100%, so the money it once represented is destroyed. In macro-economic terms, that money destruction is no different from paying off a loan: money that was, is no longer there.

As for QE, the normal procedure is that the Central Bank issues bonds and buys bonds. The issued bonds are of a better quality than the bought bonds, so the required reserves of the bank goes down and the bank can (in theory) issue fresh loans. If the bank has a solvency or even a liquidity problem, it will sell the bonds acquired for cash instead. This was a problem in 2008. Today, European banks are much more de-leveraged (except in Italy, almost all passed the stress tests run a while back), so you may expect that QE is more effective now.

The only way I can think of for the state bypassing banks for QE is to buy back government bonds, stipulating that only individuals (not banks) qualify. That would depress the value of the bonds as banks try to unload them on the public in order to get liquidity and therefore have an effect on the value of pension capital. Can you imagine the outcry? Also, in view of most government budgets (Singapore would be the exception, but I am not sure they have govvies outstanding), they would have to re-issue the bonds immediately.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.