You are in competition with the Federal Reserve.

Years before the internet -- probably in the mid-80s -- I wrote to Milton Friedman and happened to describe interest rates as "the price of money".

No, Friedman replied: The interest rate is the price of credit, not the price of money.

I thought about that for probably ten years, and then one day it made sense: Money and credit are different things. "Credit" is the money that you pay interest on. "Money" is the money you don't pay interest on.

That understanding is the foundation of all my work. Money and credit are not the same. The difference? The cost of interest.


I've got near ten years in econ blogging. In ten years I don't know if anyone ever agreed with me, with Milton Friedman and me, on the difference between money and credit.

Nobody gets what I'm saying, because these days credit is money. Or at least, we use credit for money all the time. So everybody thinks credit is money, and everybody thinks I have it wrong. Like David Glasner thinks Milton Friedman had it wrong.

If you cannot see the difference between paying interest and not paying interest, you cannot see the problem I see. In order to describe the problem, I need different words for "money that has no interest cost" and "money that does have interest cost". I use the words money and credit.

If the two are different, it is surely confusing to call them both "money".


Anyway, this comes to me from Milton Friedman, this idea that interest is the price of credit. Also the basis for the idea, which is that money and credit are different, the difference being whether or not you pay interest on the money. Once again: If you pay interest on the money, the money is credit. If you don't, it's money.

Now most of us I guess don't really "have" money that we pay interest on. Maybe for an hour after you walk out of your bank with a new loan. But after an hour you've spent the money, and you don't "have" it any more.

Yeah. But that's micro, econ from the point of view of the individual and what's in his pocket. Look at it as macro, econ from the point of view of the economic system as a whole. It's not that you borrowed the money and spent it. It's that you created new money and put it into circulation. In this sense, you are just like the central bank. When you borrow and spend, you are putting money into circulation. When you receive income and pay down a debt, you are taking money out of circulation. You do the same things the Federal Reserve does. You are in competition with the Fed.

All during the time that your money is in circulation -- after you borrow and spend it, and until you pay it back -- you "have" money on which you pay interest. You don't have it in your pocket. You have it in circulation.

The least expensive way to add money to circulation is for the public sector do it. Least expensive for the private sector, and therefore most favorable to growth.