Sproul, Michael (2010): The Law of Reflux.
Download (191Kb) | Preview
The law of reflux is explained using an example of backed money. In the example, government-issued money is backed by the government’s assets (mainly taxes receivable) while bank-issued money is backed by the bank’s assets. The value of both kinds of money is determined by the amount of backing held per unit of money issued. The example shows that reflux maintains money’s value, not by assuring that excessive issues of money reflux to their issuers, but by providing people with access to the assets backing their money. Conventional metallic convertibility is only one channel of many through which money can reflux to its issuer. The suspension of metallic convertibility still leaves many other open channels of reflux, but can create the illusion that money is unbacked fiat money that was somehow forced into circulation. Backed money will hold its value as long as its issuer remains solvent. One way for an issuer to stay solvent is to issue money in exchange for short-term real bills of adequate value, but as long as the bills are of adequate value, it is largely unnecessary for the bills to be real or short-term.
|Item Type:||MPRA Paper|
|Original Title:||The Law of Reflux|
|Keywords:||reflux real bills doctrine backing theory|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General|
|Depositing User:||Michael Sproul|
|Date Deposited:||07. Sep 2010 04:58|
|Last Modified:||11. Feb 2013 23:51|
Blaug, Mark, Economic Theory In Retrospect, 3/e. Cambridge : Cambridge University Press, 1978 Davis, Andrew McFarland, Colonial Currency Reprints, Boston Prince Society, 1911.
Fullarton, John, Regulation of Currencies of the Bank of England, London: J. Murray, 1844.
David Glasner: The Real-Bills Doctrine in the Light of the Law of Reflux, History of Political Economy 1992, p867.
Knapp, George Friedrich, The State Theory of Money, Macmillan and Company, 1924.
Mankiw, Gregory, Principles of Macroeconomics, 2008, South-Western Cengage Learning.
Mints, Lloyd, A History of Banking theory, Chicago: University of Chicago Press, 1945, p. 89.
Arthur J. Rolnick Bruce D. Smith Warren E. Weber, “The Suffolk Bank and the Panic of 1837”, Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 24, No. 2, Spring 2000, pp. 3–13.
Skaggs, “John Fullarton's Law of Reflux and Central Bank Policy," History of Political Economy 23, Fall 1991.
Smith, Adam (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, P. F. Collier, New York, 1909.
Sproul, Michael F., There’s No Such Thing as Fiat Money, UCLA Working Paper #830, 2003.
Varian, Hal, “Why is that Dollar Bill in Your Pocket Worth Anything?”, New York Times, January 15, 2004.