The Perils of Base Money

Leland B Yeager

The Review of Austrian Economics, 2001, vol. 14, issue 4, 66 pages

Abstract: Insecure linkage of ordinary money to fractional reserves of a distinct base money can sometimes endanger the smooth working of modern monetary systems. This danger applies most obviously to the analogous insecure pegging of domestic to foreign currency. Worry would better focus, however, not on the size of reserve ratios but on the very existence of something distinct to which ordinary money is linked. In the modern world money is a device for monitoring transactions, keeping records, calculating economic benefits and costs, and accomplishing multilateral clearing. Money enables people conveniently to use the entitlements acquired by delivering goods and services and securities to some trading partners to obtain others of these from other trading partners. The tickets and memoranda employed in these operations need not take the form of little disks of precious metal or even of certificates convertible into them or some other kind of ultimate base money. It would be economically advantageous and feasible to make all money "inside money" (in the sense of Gurley and Shaw), with the value of the money unit determined and maintained otherwise than through convertibility into a distinct base money, which would have been abolished. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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