Inconvertible Banknotes Are Certainly Claims Against the Central Bank
I'm already fully convinced that banknotes are debts for the central bank. That's the essence of money. Money is IOUs. If someone thinks that printing banknotes directly increases the wealth of the central bank, I assure you, that's wrong. Banknotes held by the central bank are just pieces of paper.
Yes. That's a requisite, but somehow widely neglected piece of knowledge among Earthians.
When the central bank offers a banknote of 100 dollars as a IOU to a party, and the party accepts the IOU in exchange for an asset, a contract is concluded, and the central bank owes 100 dollars to the party. The banknote is the proof of the contract, and before the contract is concluded, the banknote is just a piece of paper.
In fact, in the central bank's balance sheet, banknotes handed to the public are counted as debts, which corresponds to that nature of banknotes.
So, if someone thinks that printing money directly creates wealth, I repeat, that's wrong.
Money is IOUs. Any IOU takes effects only when a contract is concluded between two parties and the IOU is accepted by the creditor. Writing IOUs by oneself without anyone accepting any contract is just practicing penmanship.
I heard someone compare printing a banknote with painting a picture, but there is a critical difference between the two. When a picture has been painted at a low cost, say 100 dollars, and is valued at, say 1 million dollars, the picture has the value for anyone.
Someone might not like the picture, and not value it at 1 million dollars.
Even if he or she doesn't like it personally, he or she will gladly accept it if he or she knows that it can be sold at markets at 1 million dollars.
That's true.
On the other hand, a IOU isn't something valuable for everybody. For the burrower, it's just a liability. If the borrower takes back the IOU by repaying the debt, it becomes just a piece of paper.
Possessing a IOU issued by oneself isn't an asset; it's zero.
That's the same with a bankbook. It isn't something valuable for everybody. It is valuable for the depositor, but is a liability for the bank. For other people, it's just a unentertaining, uninformative, worthless book.
Banknotes and deposits are both money, and share that essential characteristic of money as IOUs.
What Can We Claim for Inconvertible Banknotes?, Revisited
What I'm not fully convinced is what we can claim from the central bank for inconvertible banknotes.
A inconvertible banknote's being a IOU means that the acceptor of the IOU can claim something from the issuer. What's that something?
Our previous discussion wasn't satisfactory, and my better description is this.
A commercial bank accepts a inconvertible banknote as a IOU from the central bank. The commercial bank can claim assets from the central bank in exchange for the banknote.
Assets such as government bonds?
For example, yes, but they can be anything.
I see. The central bank stopped to guarantee to give gold in exchange for banknotes, but it didn't stop giving assets in exchange for banknotes.
However, gold or not, that 'guaranteeing' part is crucial for the execution of the obligations of issuers of IOUs, isn't it? The central bank doesn't guarantee to accept exchanges on demand.
. . . Yes, that's true. That's the special characteristic of inconvertible banknotes. But when the central bank is willing to sell assets, it certainly accepts banknotes as the payment. That is, the central bank won't accept an exchange not because it doesn't acknowledge banknotes, but because it doesn't want to sell assets right now.
Still, the central bank isn't guaranteeing anything. Guaranteeing is an essential part of the obligations of the issuer of IOUs, I presume?
Well, maybe, the central bank is guaranteeing to accept exchanges eventually, if not on demand or by fixed maturities.
Such concept as an obligation without time limit is a fraud, I say. An obligation that doesn't need to be fulfilled forever isn't any obligation.
Hmm. . . . From a practical point of view, it's important that the government guarantees to accept banknotes as tax payments. But banknotes are IOUs by the central bank, not by the government. I don't know how theoretically that explains the execution of the obligations of the central bank as the IOUs issuer.
I agree. That must be important, but I haven't met any satisfactory explanation of how that relates to the execution of the obligations of the central bank as the IOUs issuer.
After all, 'inconvertible banknote' doesn't seem to be a well-thought-out concept. . . . It's typical of Earthians to adopt such a phony thing as a staple of their lives. I say that the inconvertible banknote is phony not because it's just a piece of paper (IOUs are naturally pieces of paper) but because the issuer of the IOU doesn't clarify what it owes! Can such an IOU exist?
Well, . . . after all, it's a matter of whether the receiver accepts it as a IOU, although it's a bizarre phenomenon.
It's like, "I owe you." "Do you owe me what?" "Well, . . . I don't know." "OK. I will accept it."
. . .
Anyway, the commercial bank can claim assets from the central bank in exchange for banknotes, at least eventually, not if on demand. But what are inconvertible banknotes for ordinary people?
What do you mean by 'ordinary people'? Non-geniuses, non-capitalists, or non-foot-fetishists?
People who aren't banks. People who don't make transactions with the central bank, including companies. While they can't claim anything directly from the central bank, why are inconvertible banknotes valued by ordinary people? That's the question.
I see.
Banknotes can be passed around commercial banks, and they are valuable for any commercial bank.
That will be so.
When banknotes are passed to ordinary people, ordinary people can't directly claim anything from the central bank because the central bank doesn't deal with them. However, as banknotes are valuable for commercial banks, commercial banks will gladly take banknotes. So, knowing that, ordinary people will appreciate banknotes as something that can be used against commercial banks, and will begin to use banknotes as a means of transactions among them.
That will be the mechanism by which banknotes become appreciated in the public. That is, the appreciation of the value of inconvertible banknotes has propagated to the public from commercial banks.
Why Does the Banknote, Just a Piece of Paper, Have the Value?
There is a question, "Why does the banknote, just a piece of paper, have the value?" Usually, the answer is as "Because people believe in the value." However, let's try to give a different answer.
Which is?
The banknote is really just a piece of paper, objectively.
It's a IOU. It's 100 dollars for the creditor and -100 dollars for the burrower. The net worth for the whole is zero. It isn't variable for the whole, except as a piece of paper.
That corresponds to the fact that it's just a piece of paper.
As ordinary people usual don't see it from the central bank's viewpoint, they tend to think that it's objectively valuable. However, that isn't so. Objectively, it's no more valuable than a piece of paper.
