Credit theories of money (also called debt theories of money) are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt)...The relationship between credit and money is an important topic, I'll give you that. But understanding is one thing, and blurring together is something else entirely. The Wikipedia article goes for the big blur:
"money and credit/debt are the same thing"It's not bad enough that "credit" and "debt" are blurred together by a slash, as if the writer couldn't decide which word/term to use because his/her understanding of the pair/the two is so poor that he/she cannot distinguish between them. No: They find it necessary to take a third term -- "money" -- and assert that it also is "the same thing". This leaves us with the new compound term "credit/debt/money", which combines three conceptually different terms without providing so much as a hint of what they mean.
Worse than the failure to provide meanings for these terms is the fact that they are being equated; that's just plain wrong.
Money is not "the same" as debt. One is an asset, dammit, and the other is a liability! One's a plus, and the other, a minus. You might say money and debt are "two sides of the same coin" -- but that's just a metaphor. And anyway, if money and debt are two different sides of the coin, they are different.
Money is money. Credit is money you borrow. And debt is money that you owe.
8 comments:
"Credit is money you borrow"
That's one point of view. Another point of view is credit is money you lend. If you have a bank account, the money in your bank account is credit you have extended to the bank.
"debt is money that you owe"
That's one point of view. The other point of view is debt is money owed to you. If there is currency in your wallet, those are IOUs from a govt.
All fiat money is questionable depending on the creditworthiness of the entity that owes the debt. The money you owe is not as sound as the money owed to you by banks or govt. That allows you to doubt the validity of money that you owe while not expressing the same doubts about the money owed to you by banks or govt.
"That's one point of view. Another point of view is credit is money you lend" ... "That's one point of view. The other point of view is debt is money owed to you."
Yeah, and I don't mean to disagree. But the lending and the borrowing is ONE transaction. So I don't think I've left anything out when I say "Credit is money you borrow", because there cannot be borrowing without lending. In fact, even the lender can say "Credit is money you borrow [from me]".
Ditto debt. And I should add that thinking of the debt we owe as a problem, while thinking of the debt we own as wealth, is the kind of confusion that leads to a troubled economy.
Bankers tend to think of debt as wealth. That's why I don't trust writers like Andrew Haldane.
"That allows you to doubt the validity of money that you owe while not expressing the same doubts about the money owed to you by banks or govt."
Interesting!
you said
"Bankers tend to think of debt as wealth."
Bankers think the bank's financial wealth is the debt it owns minus the debt it owes.
You seem to argue that any sum a bank owes to you is not debt
I'm saying there is no doubt that what most people call money is really debt. But you are correct, that what *you* owe in debt would not generally be accepted as money.
Whether the people regard debt as money depends on who owes the debt
The only real function of the Fed is to ensure that the public accepts the debts of the deposit institutions as money. Should they ever fail in that one task its all over but the shouting ( and other mayhem )
I said
"Bankers tend to think of debt as wealth. That's why I don't trust writers like Andrew Haldane."
Jim, you said
"Bankers think the bank's financial wealth is the debt it owns minus the debt it owes. You seem to argue that any sum a bank owes to you is not debt."
No. I'm saying that as a general rule and apart from times of crisis, bankers always encourage people to go deeper into debt. Bankers like Haldane never reach the conclusion that there is too much debt in the economy. They never reach the conclusion that there should be less debt. They are always trying to tweak the system so that the economy can support more debt. This is the wrong approach to the problem of debt.
Anyway, financial sector debt is typically excluded from economic analysis except by monetary cranks like me. I'm not the one who ignores "any sum a bank owes to you". It is the experts who ignore it.
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You said
"I'm saying there is no doubt that what most people call money is really debt."
Why do you say "what most people call money is really debt"? Is it because most of our money comes into existence by the creation of debt? If not, then what?
Surely you know I am aware that most of our money comes into existence by the creation of debt. Clearly I am looking at something other than how the money comes into existence.
I am looking at the cost of the money, based on whether the money is earned or borrowed. The cost difference is significant, and grows in significance as the financial sector grows.
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Keynes:
"... the rate of interest is, in itself, nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt for a stated period of time... Without disturbance to this definition, we can draw the line between “money” and “debts” at whatever period [of time] is most convenient for handling a particular problem."
Keynes does not hesitate to draw a line between money and debt.
Schumpeter:
"The distinction is, in a sense, quite unrealistic. But if we do not make it, we shall never be able to say more than that everything depends upon everything."
I draw a line between money earned and money borrowed. Because I make this distinction, I can for example show my "Debt per Dollar" graph. (You may say that "money earned" is income, not money. Sure, but much of that income arises as someone's debt, making the "debt-to-income" calculation circular and invalid. So I imagine the economy paused, and I look at stocks rather than flows: money stock rather than income.)
When you say
"there is no doubt that what most people call money is really debt"
you are refusing to draw a line between money and debt. If you refuse to make this distinction it's all a blur, and you cannot say more than that everything depends upon everything. I don't find that particularly useful.
Money is debt. That doesn't mean all debt is money. You can still draw a distinction between debt that is widely accepted as money and debt that is not. The failure to recognize that money is debt is likely to blur the distinction. If you just start discarding facts you don't like that's not going to help develop a clear picture of reality.
Before the 2008 financial crises there was an ever growing amount of debt that was being accepted as money. And then suddenly the perception of what is money changed and that in a nutshell describes the cause of the crises. The Federal Reserve and Treasury had to come up with guarantees for 100's billions of dollars to backstop Money Market Mutual Fund to prevent investors from withdrawing the money that was owed. Up until that point the money status of MMMFs was regarded to be the as good as deposits. The difference was they weren't insured so the govt provided the insurance retroactively to any bank that wanted to have their MMMF insured and collected $1.4 billion in insurance fees and never paid out a dime in losses. Not knowing where the line is between debts that are money and debts that are not can be costly
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Why do you say "what most people call money is really debt"? Is it because most of our money comes into existence by the creation of debt?
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Its got nothing to do with how the money is created. Bank deposits can be created without the public borrowing them into existence. But that doesn't change the fact that the depositor's account is not a stored
cache of objects called 'money'. Its a debt of the deposit institution to the depositor.
The creation of bank deposits without the public borrowing it into existence can be seen on this graph after 2008
https://fred.stlouisfed.org/graph/fredgraph.png?g=mzyD
The straight lines show what would have happened if deposit creation and deposit destruction depended on loan creation and destruction
Jim, you say "the depositor's account is not a stored cache of objects called 'money'. Its a debt of the deposit institution to the depositor."
I say the depositor's account is both the bank's debt and a stored cache of objects called money. Bank deposits are "debt" to the bank and "money" to the depositor. So I suppose you might say: "See? Money is debt!"
But I don't think so. If I withdraw my money from the bank, the bank's debt to me ceases to exist. And yet I still have my money! If there ever was a connection between that money and debt, the connection exists no longer. For the money still exists, even though the debt does not. I think this shoots a big hole in the "money is debt" argument.
If I put money in the bank, then I have money in the bank. If the bank owes it to me, that's fine: That's the bank's debt, not my debt. It is my money. Debt is an obligation to repay. The bank has that obligation; I do not. Therefore, for me, it is money and not debt.
My money does not suddenly turn into debt when I put it in the bank. Rather, new debt is created and the bank now has an obligation to repay me. Yeah, the bank has my money, but it is still my money. And the structure of the banking system assures that when I put my money in a "demand deposit" account, it still functions as "my" money. I can spend it at any time, just like money. And I don't pay interest on it, so it is definitely not debt.
Yes, there are many types of bank deposits on which interest *is* paid, but that makes these types of deposits more like debt and less like money. Also, the fact that many of these are time deposits rather than demand deposits makes them unlike money. You get into "narrow" money and "broad" money and "near" money. These are different places where Keynes might "draw a line" between money and debt.
As you say, Jim: "Not knowing where the line is between debts that are money and debts that are not can be costly". Because "suddenly the perception of what is money" can change. So I'd say it is not only that we need to know where the line is. We also need to make sure the line stays close to "narrow" money and far from "broad".
So I'd say it is not only that we need to know where the line is. We also need to make sure the line stays close to "narrow" money and far from "broad".
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The problem I see with that is its a free market and the participants have the right to use whatever they want as a medium of exchange as long as there are no fraudulent representations. So its the market that draws the line.
My personal hunch is that since 2008 the Fed has embraced your debt to dollar theory (or something very similar). The idea being that the impact to Main Street when the Wall Street phony money blew up was so devastating because there was too little narrow money to sustain the real economy. And there was no way for the Fed to get narrow money directly to main street. Bernanke testified to Congress that the law didn't allow him to toss money out of a helicopters or even send a check to every household like Australia did.
Look at debt/dollar graph ( using Narrow money )
https://fred.stlouisfed.org/graph/fredgraph.png?g=mBsB
The ratio is back down to 1987 levels and I'm guessing its going to go a lot lower.
That may mean that in the future Wall Street can blow itself up without the people on Main street losing their jobs.
"That may mean that in the future Wall Street can blow itself up without the people on Main street losing their jobs."
Sounds good to me, Jim.
"the impact to Main Street ... was so devastating because there was too little narrow money to sustain the real economy."
Exactly.
"its a free market and the participants have the right to use whatever they want as a medium of exchange..."
Yeah, but I think policy influences this. There are tax advantages for using debt that you can't take advantage of when you use your own money. There are policies designed to encourage saving, intended to make credit more readily available. And financial innovation is encouraged, right up to the point where policymakers have to say they are 'helpless' to deal with it.
If policy didn't want the broad-to-narrow ratio to increase, it would surely increase less.
Interesting chat. Thanks.
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