Backed and unbacked central bank money


  • Romar Correa University of Mumbai





Fiat money, by connotation of the term, does not require the backing of goods or assets. At the same time, chartalists and others argue that government money comes into existence along with government taxation. A corollary must be that if, in keeping with the zeitgeist, direct taxes converge to zero, Central Bank money must vanish. Put differently, if the budget is balanced, the government, along with its monopoly of note issue, ceases to be of interest.

The case for competitive currencies lies here. Add to it the demise of banking in the traditional sense and the ascendance of financial institutions with universal functions. In a competitive economy buzzing with current activity and plans for future activity, the intrusion of government in the senses above cannot be welfare-enhancing.

The press for free banking becomes muted in times of crisis. Indeed, in the aftermath of the financial-real meltdown in America, the Federal Reserve began to operate on the long end of the term structure of interest rates, the portion of the yield curve believed to be determined by private investment plans.

We examine these different institutional arrangements along a causal dimension. For the purpose, we build up consistent accounting structures. The objective is to appraise the systemic stability of various monetary arrangements.

Keywords: Private Money; Government Money.


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