76. National Loans are as Paper as Money.

National Loans are as Paper as Money.
Bob Komives
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Under popular balanced-budget policy the alternative to raising enough money in taxes is to borrow money. Conventional wisdom says that if a national government wishes to spend more than it has taxed, it must borrow. Otherwise it would have to print and spend worthless money. But where is the wisdom in that conventional thinking? When I lend money to the government I get a money-market certificate (or other such paper) in return. My money-market certificate is written on much less expensive paper than my money is. Both are printed on government presses and backed by the full faith and credit of the U.S. American government.
Why is one piece of paper better than the other? If the national economy goes sour and inflation soars, the certificate will be no more valuable to me than money. After all, I'm going to collect my earnings in money. If the money has no value the certificate has no value. Despite these obvious facts, the Federal Reserve System appears responsible and businesslike when it issues paper obligations backed only by paper money, yet congress and president appear irresponsible and unbusinesslike when they issue paper money backed by paper obligations of the Federal Reserve. This makes no sense.
A central bank can be an important issuer of money, but this need not be disguised as helping the national government finance its budget. The expanding marketplace needs money. A central bank, sitting at the apex of a banking system, can provide money when the government expenditures do not match growth in the marketplace. That is a deficit of a different kind. When the productivity of the economy is such that the government does not put enough new money into circulation directly through expenditures there is a monetary deficit. The central bank can give money to local banks who invest it where the marketplace needs it. We can call this gift a loan and administer it accordingly so local banks act prudently. More money is needed. If not provided, the monetary deficit in the marketplace could cripple underlying economic growth. A banking system headed by a central bank can fill that deficit.
Banks specialize in the promises-for-promises part of the marketplace. While many promises can remain in IOUs, bank books, travelers checks, and sundry paper forms, we need  real money from time to time. Local banks must be able to cash in on their pyramid of deposits and loans. For that they turn to the central bank (and, if the local bank is going broke, to the insurer of banks). If decisions of local bankers accurately reflect the economy, the central bank can safely help them turn their diverse paper fortunes into simpler fortunes by providing them the money their accounting-sheet assets would merit.

So funny.
That bank must issue
this certain paper obligation for its government
so that its government will not issue
this certain paper obligation for itself.
So certain,
so paper,
so, money!

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:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 76. National Loans are as Paper as Money.  ::
With attribution these words may be freely shared, but permission
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