The Government recognises bank credit and Treasuries

The Government recognises bank credit and Treasuries... as forms of money. Credit is money because the Government thinks that it is.

Legal tender is valued because it is recognised by the courts as being suitable currency in the repayment of debts, particularly taxes. But so too are bank credit and Treasuries accepted in the payment of debts (by the courts) and in the payment of taxes.

Does this mean that to value either bank credit or Treasuries, an individual would need to be knowledgeable of the fact that its value is derived from such a promise? A person holding Treasuries might trust that the Government will repay the debt for irrational reasons, they might think that it will come from tax receipts or similar... but since new currency can be printed out of thin air it is always possible for the State to repay the debts (however worthless the money may eventually become).

If we are certain that the Treasury debt will be monetised the loss of purchasing power happens when the state issues more paper than it can repay through taxes, not at the point of eventual monetisation. The lottery ticket is valuable as soon as the numbers come up... you don't need to wait for it to be redeemed. In fact, a winning lottery ticket could be exchanged as currency alongside normal notes and coins. It would debase the value of other banknotes if the Government will need to print out extra currency to support it. People might not bother to redeem the note since they have no reason not to trust the Government to issue extra currency.

A person might value bank credit, not knowing the bank isn't holding a quantity of notes and coins on their behalf. Whether they are deceived in this way, or if they are aware of the realities of the situation and rely on the deposit guarantee, they will value their bank-account money. It would only be if they did not expect that the State would print the currency required in a bank run that there would be a reason to value cash more highly.

A bail-out of the banking system is not inflationary for someone who had been valuing credit (or Treasuries) equivalently to cash.


Credit and Treasuries are valuable if you trust the Government. And if enough people trust the Government, their value will never be tested because no one will redeem their deposits or sell Treasuries.

Although a sell-off in Treasuries could trigger a run on the banks? If the Government refuses to make good on customer deposits this would be deflationary in the extreme (for people who had valued credit equivalently to cash). It is unlikely any Government printing of money (for reasons other than to make good deposits) would exceed the amount that would have been required to bail-out the banking system.

Even a crack-up boom, for someone who values credit equivalently to cash wouldn't be inflationary because the Government would print less than would have been required to make good on deposits. To print more would be unjustifiable... Unless it is claimed that the needs of others are greater than those of the depositors and that the newly-printed money must go to the needy. It could be claimed that the safety net exists and so the Government could be justified in ignoring the pleas of depositors in favour of those who are in absolute (or relative) poverty.

It might be possible for the Government to argue that there are better things to spend "their" money on than helping depositors, such as social projects and similar.

19th February 2009