To "sharply distinguish" between money and credit

It took quite some time, but I finally have a response to David Glasner's Price of Money post.

In his post, Glasner quotes Milton Friedman:

the interest rate is not the price of money .... The interest rate is the price of credit.

And right up top, in the title of his post, Glasner says Friedman Says the Rate of Interest Is NOT the Price of Money: Don’t Listen to Him!

I had been taking Glasner to mean The rate of interest is the price of money, NOT the price of credit. That was wrong. Glasner doesn't say the interest rate is not the price of credit. What he says is the interest rate is the price of credit and the price of money, too. At least, that's how I read him now.

The word "credit" appears seven times in the quote Glasner takes from Friedman, but only once in Glasner's response, in this sentence:

So although the interest rate is in some sense the price of credit, it is, indeed, also the price that one has to pay (or of which to bear the opportunity cost) in order to derive the liquidity services provided by that unit of currency.

The phrase "in some sense" threw me. But now I see Glasner is saying that the interest rate is the price of credit and "indeed, also" the price of money. He's NOT saying that the interest rate is NOT the price of credit. So I can live with it.

I did think Glasner should have said "indeed, also the price of holding money", not "the price of money". But I now see this is what he says, though not all in the one sentence. Glasner opens the paragraph by saying

there is also a rental price for money, and that rental price represents what you have to give up in order to hold a unit of currency...¹

Everything is there. Glasner's view is that the interest rate is [in some sense] the price of credit, and is also [in the holding money sense] the price of money. I get it now.

That said, however, I still find Glasner's post troubling.

It's not all bad

Parts of Glasner's post are great. For the longest time, I had trouble understanding what "holding money" means. Glasner has cleared this up for me. He describes the "rental price" of money as "what you have to give up in order to hold a unit of currency". And what you give up is "the interest you forego by not lending that unit of currency to someone else".

I understand: If you're "holding" money you keep it where you have immediate access to it. You don't put it in a CD, say, because you would have to wait for the CD to mature before you can access the money. When you "hold" money, you keep it "in your pocket or in your bank account" as Glasner puts it. In your pocket or in your demand deposit account, immediately accessible. Or under the mattress. Or in a box buried under the apple tree.

If you're holding money, as Glasner makes clear, you're NOT lending the money to someone else. And if you're lending it, you're not holding it.

Also, spending. It doesn't come up in Glasner's post, but if you're holding money you're not spending it, and if you're spending it you're not holding it.

So, I get that now. // Almost 70 friggin years old, he mumbled under his breath, before I learnt what "holding money" means.


Some parts of Glasner's post are great. Some are not. The thing is too wordy to suit me. His sentences are often too long to fit between my ears. For example, the sentence where he describes what you have to give up in order to hold money:

What you sacrifice is the interest you pay to the one who lends you the unit of currency, or if you already own the unit of currency, it is the interest you forego by not lending that unit of currency to someone else who would be willing to pay to have that additional unit of currency in his pocket or in his bank account instead of in yours.²

In fewer words: What you sacrifice is the interest you pay to the lender or, if you didn't borrow the money, the interest you could earn by being a lender. That's what he says. My way is a little shorter. I have to shorten and restate sentences sometimes, to get the meaning. And now that I get Glasner's meaning, it troubles me.

If I want to hold the money, he says, I have to pay interest on it, or not earn interest on it, one or the other. He says this again later in the post, and makes it explicitly "either/or":

anyone holding deposits is either by  paying interest ... to the bank or is foregoing interest that could have been earned by exchanging the money for an interest-bearing instrument.³

To hold money, Glasner says, either you pay interest or you forgo interest. Either/or. But this is not correct. The two costs are not mutually exclusive. They can combine in various ways: If I earn a dollar, I can lend it or hold it. If I borrow a dollar, I can lend it or hold it. The decision to lend or hold is independent of the decision to earn or borrow.

If I choose to hold money, I choose not to lend it, so I cannot earn interest on it. Take that as a given. But if I choose to hold borrowed money, I'm paying interest on it AND I cannot earn interest on it. That's not either/or. It's both. It doesn't work as Glasner describes.

If I borrow money, I pay interest.⁴ If I hold money, I forgo interest. Those are the options. It's not an "either/or" situation. Glasner mixes up the options and confuses them together.

I can earn money, or borrow to get it. Once I have the money, I can hold it, or not. If I choose to hold the money, I forgo interest income from it no matter how I got the money. And if I borrow money, I pay interest on it whether or not I choose to hold it. Glasner's "either/or" plays no role at all in this.

There are four possibilities: I can earn and hold, or earn and not, or borrow and hold, or borrow and not. Four possibilities do not make an "either/or" choice.


The part where you pay interest if you borrow the money, that's Milton Friedman's "price of credit" view. The part where you forgo interest if you hold the money, that's Glasner's "price of holding money". Broken out this way it makes good sense to me.

I should say, though, that foregoing interest is not the same as paying interest. Paying interest is a contractual obligation between you and someone else. Foregoing interest is a personal choice. Beyond that, paying interest is an actual expense; foregoing interest is an opportunity cost. The two are simply not the same.

Let's go round again. Either you earn money, or you borrow it. If you borrow, you pay interest on it. Borrowed money has an extra cost that earned money does not have. Borrowed money and earned money are different. That is why I distinguish between earned and borrowed money, calling one money and the other, credit.⁵

There is no distinction between money and credit that arises from holding them.

Let me take these thoughts a step further. The opportunity cost which arises from choosing to hold money or credit exists for you only as long as you hold the stuff. If you lend it, the opportunity cost passes to the borrower. If you spend it, the opportunity cost passes to the recipient. The recipient (or the borrower) becomes the one who must decide whether or not to hold the money. The opportunity cost travels with the money.

This is not true for the actual cost, the interest on money borrowed. The cost of interest remains with the borrower until the loan is repaid, no matter whether the money is held or spent. The price of credit is therefore different from the price of holding money. The economic consequences differ.

The cost of interest remains with the borrower until the loan is repaid, no matter whether the money is held or spent or lent again. The opportunity cost, by contrast, stays with the money, and moves from hand to hand with the money.

The burden of interest remains with the borrower. The burden of choosing what to do with the money remains with the money.


Apart from the length of Glasner's sentences and his erroneous treatment of "borrowing" and "holding", I have a few other specific problems with his "Price of Money" post.

The Omission of Spending

It troubles me that Glasner never considers spending. He talks about holding money. He talks about lending money. But he never mentions that people sometimes actually spend the stuff. He never mentions that spending is sometimes necessary: in order to eat, for example.

Nor does Glasner seem to notice the opportunity cost of not eating. He does not consider the need to eat as something which could more than offset the opportunity cost associated with holding money. It is as if the real economy no longer exists for Glasner, but only the financial economy. He writes from the perspective of someone who has so much money he does not even notice the cost of food; from the perspective of the men of immense wealth. This troubles me.

Liquidity Services

I'm troubled by Glasner's understanding of "liquidity services". Glasner says the rental price is the price you pay, or bear, "to derive the liquidity services provided by" money.

He evidently thinks money comes without liquidity services, and that to get those services you have to pay something extra.

My thinking is just the opposite: Money comes with liquidity services. On this, I think as Keynes thought. Liquidity is a property of money:

... the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period.

Liquidity travels with the money, from spender to recipient. Liquidity travels with the money from lender to borrower, and then from borrower to lender. If you have the money, you have the liquidity. Glasner does not see it this way, and that troubles me.

Money Borrowed

I am troubled that Glasner sees borrowed money as money, not credit. When you borrow money you get both the money and a debt; the two, created together and joined at the hip, are credit. When you spend the borrowed money, the connection to debt is broken. The money (and its liquidity) move on, but the debt remains with you.

Money becomes credit when you borrow it, because it comes with debt attached.

If you spend the credit, the recipient does not receive credit. He receives money, because he didn't borrow it. But for you the money was credit, and you still have the debt to prove it.

Credit becomes money when you spend it, because spending breaks the link to debt.

If you lend the credit, the borrower receives credit because the money comes to him with debt attached. You still have a debt for that money, and now your borrower has a debt for that money, too.

Glasner seems not to see things this way. That troubles me. How can he not see it as I describe? I'm not making things up. I only look at the economy and describe what I see.

Money Lent

I am troubled that Glasner seems to see money on which you receive interest as money and not debt.

In a comment below his Price of Money post, David Glasner writes

To say flatly that the interest rate is not the price of money is to deny the basic proposition that the (nominal) interest rate is the opportunity cost of holding money

He adds

(under the assumption that money is non-interest-bearing which was a standard assumption back in 1968).

1968, because that is the date of Friedman's remarks; so the "standard assumption back in 1968" would have been Friedman's assumption. Evaluating Friedman's 1968 remarks, Glasner keeps the old standard assumption in mind.

On the assumption, then, that money is non-interest-bearing, Glasner says if you take money out of an interest-bearing account in order to "hold" it, you are sacrificing the interest you could have earned. This is the opportunity cost of holding money. I get it.

For me, though, the standard assumption of 1968 remains the standard assumption today: I assume that money is non-interest-bearing. This is more than an assumption; for me it's a definition. It's how I distinguish money from debt.

Glasner's remark helps me understand why no one around me thinks as I do. Why they say things like "money is debt". And why my thinking (which is simple and obvious to me) never seems to "click" with anyone else.

Glasner's remark calls to mind a comment on my old blog, where Jim said the fact that demand deposits being non-interest-bearing was policy established in the wake of the Great Depression. I'm going from memory here, but Jim's comment tells me that making demand deposits "non-interest-bearing" was at the time thought to be part of a solution to the problem that created the Great Depression.

Glasner's comment tells me that in 1968 this solution was still standing, but it has since fallen. And that reminds me of something Minsky said:

The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

I am troubled by Glasner's view because he considers "the assumption that money is non-interest-bearing" to be a mistake, and he considers "the basic proposition that the (nominal) interest rate is the opportunity cost of holding money" to be correct -- and not only correct, but "basic". Glasner is living proof of the transit Minsky describes. Glasner and the Great Recession, proof of the Minsky transit from stability to instability.

Glasner says that holding money costs you money because, in his view, the normal and natural state of money is to be earning interest. As if the real economy no longer exists, but only the financial economy.

Me, I still think that if money is earning interest, then someone is paying the interest, so the money is not even money. Really, it is somebody's debt.

Glasner as Financialist

I am troubled by the financialism evident in Glasner's post. He believes that the normal and natural use of money is to be lent at interest, not treated as a medium of exchange. He believes this even though 78% of US workers live paycheck to paycheck and "many workers aren’t able to put anything significant into savings" and collect little or no interest.

The troubles in our world today are largely economic, or have economic roots. Those troubles have arisen because finance is predominant and excessive and costly. But rather than recognizing this fact and addressing it, economists like Glasner consider the world as it is, bloated by finance, to be the normal and natural condition, not a problem to be solved.

Glasner's views show him to be a financialist. He thinks like a banker.

For most people, to afford food, clothing, and shelter is a juggle and a struggle. For Glasner this is so inconsequential that he doesn't even bring up spending. His concern is the struggle of those who have plenty, to decide between lending their money at interest and giving up interest income in order to hold their money close.

It must be nice.

The Glasner view tends to arise when finance is excessive, as part of the transit to instability. These days, Glasner's view is widely shared. I'm convinced this is why people think I'm nuts when I talk about differences between credit and money. And why they have no use for my Debt-per-Dollar graph.


It troubles me that Glasner quotes Milton Friedman, focusing on "Friedman’s repeated claims that the rate of interest is not the price of money", and completely missing Friedman's point.

Friedman's point:

You must sharply distinguish between money in the sense of the money or credit market, and money in the sense of the quantity of money.

Friedman's "money in the sense of the quantity of money" is money. Friedman's "money in the sense of the money or credit market" is credit. Friedman's point is that you must sharply distinguish between money and credit. It troubles me that Glasner fails to distinguish between money and credit, and chooses instead to focus on the words "the rate of interest is not the price of money".


Why distinguish between money and credit? Because credit is money that comes at an extra cost, the cost of interest. Only if we distinguish between money and credit can we evaluate the extent of this cost. Only then can we see to what extent interest cost interferes with the real, productive, nonfinancial economy.

If we distinguish between money and credit, we can watch the transit of finance. We can compare the credit-to-money ratio with the economy's performance. We can look at the credit-to-GDP ratio and see the growth of financial cost, a cost that competes with the cost of labor and capital.

But we can only do these things if we distinguish between money and credit. Glasner does not distinguish. These days, almost no one distinguishes. That's not good, because if almost no one makes the distinction between money and credit, almost no one can see the problem of excessive finance.

As Milton Friedman said,

You must sharply distinguish between money in the sense of the money or credit market, and money in the sense of the quantity of money.

I couldn't agree more.

NOTES:

1. When Glasner writes of what you have to give up in order to hold money, he is saying that you already had this thing and now must give it up. What you have to give up, he tells us, is the interest you could have earned: "the interest you forego by not lending that unit of currency to someone else". The implication is that, for Glasner, the normal and natural primary function of money is to gather interest. Not to be held close. And not, apparently, to be spent.

2. In order to hold money, Glasner says, you must either pay interest (because you borrowed the money) or forgo interest income (because you choose to hold the money rather than lend it out). I don't think that's right. Even if you borrowed the money, to hold it you must forgo interest income: You can't lend the money out and hold it at the same time. So really, it is interest foregone that is the price of holding money. Not the interest you pay for borrowing money. Much as Glasner tries to deny it, interest you pay the lender is the price of credit.

3. Depositors, Glasner says, are either paying interest (for having borrowed the money) or foregoing interest (by not making better arrangements for their money). But again, the interest we pay on borrowed money is the price of credit. It has nothing to do with holding money. The cost of holding money is foregone interest income, an opportunity cost as Glasner says, but this has nothing to do with whether the money you're holding was borrowed. Glasner's analysis here is horrible.

4. If I borrow money, I pay interest and, again, the borrowed money is credit (because it comes to me with debt attached), and the interest is the price of this credit.

5. Credit is money that comes to you with debt attached. When you borrow, you receive money with debt attached: You receive credit. When you spend it, you put the money into circulation, but not the debt: Your debt is a measure of how much money you have put into circulation, that still remains in circulation as far as you know.⁶ (As you pay down the debt, the money comes out of circulation.)

6. If you spend a dollar into circulation, there is a chance that a recipient of that dollar will choose to hold it or save it. When that happens, the dollar is technically out of circulation. But from your perspective (and as far as you know) it remains in circulation.