Title: 3: Are Inconvertible Banknotes Really Claims Against the Central Bank?
What Can We Claim for Inconvertible Banknotes?
Although I understand that convertible banknotes are claims against the central bank, I'm not totally convinced that inconvertible banknotes are claims against the central bank, for, what can I get in exchange for a banknote?
Ah, I understand your question.
A typical explanation is that a banknote, which is just a trivial piece of paper, retains its value because people believe in the value. I understand that, and I don't deny the value. However, for an inconvertible banknote to be called a claim, I have to able to claim something in exchange for the banknote. What is that something? I don't accept an answer like "You can get another banknote of the same value for the banknote." Such an exchange is meaningless except when the banknote gets broken or something: I don't have banknotes for such rare cases.
I understand your question.
. . . And?
And what?
Don't you have an answer?
Well, as I have searched for an established theory for that question, I couldn't find any satisfactory one.
My theory is that we can claim a right to demand the central bank to do something for us to get a thing that amounts to the face value of the banknote.
Hmm, I understand a little, but am not fully convinced. Isn't that right too vague? What do you mean by 'do something'? What would the central bank do for us?
For example, if a shop refuses to give a bottle of tea in exchange for a one dollar banknote, the central bank would order the shop to give the bottle to us.
Really? Would a person of the central bank come to the shop and make the shop clerk to give the bottle to us?
Whether a person of the central bank would come in person to the shop or not, the central bank will cooperate with the government to prevent the spread of such refusals of banknotes.
Still, it's an unreliable right. As the central bank doesn't decide the price of the bottle, the shop can demand 100 dollars worth of banknotes for the small bottle of tea.
Although the central bank doesn't decide the price of each item of each shop, it can control the values of banknotes by its policies.
Ah, I understand that. I won't complain if the values of banknotes are retained. The price of each item won't be the central bank's responsibility.
Still, in fact, historically, hyper inflations have caused rapid devaluations of banknotes.
There is a room for interpretations there: whether we have the right to demand the central bank to prevent rapid devaluations of banknotes or we don't have such a right at all.
Don't hyper inflations happen because we don't have such a right?
It isn't necessarily so. Claims don't mean that they are to be answered without fail. The central bank may have just failed to fulfill the obligation.
Ah, thinking of it, that's is the same with other claims. We may not be able take back the money for our bank deposits if the bank gets broke.
If we don't have the right to demand the central bank to prevent rapid devaluations of banknotes, it follows that the central bank can just scatter banknotes and cause hyper inflations.
Still, the claim of banknotes seems too vague and too unreliable. Inflations, if not hyper inflations, really happen, or the central bank is trying to make them happen.
You can interpret the inflation target as the pledge by the central bank. If you don't agree with the inflation rate, or you don't believe that the central bank will keep the pledge, you should hold your assets in other forms such as lands and gold.
However, I agree that the claim of banknotes is quite vague and unreliable. Its vagueness and unreliability is represented in the fact that the central bank won't be legally punished for failing to fulfill its obligation.
