Theories of money credit (also called the theory of money debt ) are theories relating to 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 perspectives. Proponents claim that the essential nature of money is credit (debt), at least in an era where money is not supported by commodities like gold. Two common lines of thought in these theories are the notion that money originates as a unit of debt accounts, and the position of money creation involves the simultaneous creation of debt. Some proponents of the credit theory of money argue that money is best understood as debt even in systems often understood as using commodity money. Others argue that money equals credit only in systems based on banknotes, in which they argue that all forms of money including cash can be considered as forms of credit money.
The first formal money theory Credit appeared in the 19th century. Anthropologist David Graeber argues that for much of human history, money has been widely understood to represent debt, although he admits that even before the modern era, there have been periods where rival theories such as Metallism have held power.
Video Credit theory of money
Scholarships
According to Joseph Schumpeter, the first known lawyer of the credit theory of money is Plato. Schumpeter describes Metallism as another "two fundamentals of money", saying that the first known metallic proponent was Aristotle. The earliest modern thinker to formulate the credit theory of money was Henry Dunning Macleod, with his work in the 19th century, especially with his Theory of Credit (1889). Macleod's work is expanded by Alfred Mitchell-Innes in his paper What is Money? (1913) and Money Credit Theory (1914), in which he opposes his conventional view of money emerging as a means to improve barter practice. In view of these alternatives, trade and taxation create obligations between parties constituting credit and debt. Devices such as rod counting are used to record these obligations and this then becomes a negotiating instrument that can serve as money. As Innes put it in his 1914 article:
Theory of Credit is this: that sales and purchases are commodity exchange for credit. From this theoretical theory emerges the sub-theory that the value of credit or money does not depend on the value of any metal or metal, but on the right side the creditor obtains "payment", that is, for satisfaction for credit, and on the debtor's liability to "pay" and vice versa to the right of the debtor to release himself from his debt by an equal debt tender owed by the creditor, and the creditor's obligation to accept this gentle in his credit satisfaction.
Innes goes on to note that a major problem in getting the public to understand the extent to which a debt-based monetary system is a challenge in persuading them that "things are not as they appear" A Quantity Theory of Credit was proposed in 1992 by Richard Werner, loans are categorized into loans for GDP and non-GDP (financial circulation). This approach was empirically tested in the general-to-specific econometric time series model and found to be superior to traditional and alternative theories. Werner found that the creation of bank credit for Granger's GDP transactions led to nominal GDP growth, while the creation of credits for financial transactions explained asset prices and banking crises.
Book of 2005 The New Paradigm in Macroeconomics (Palgrave Macmillan) by Richard Werner presents a comprehensive and empirically tested empirical money theory, including Credit Quantity Theory, and policy proposals on how to avoid the 'repetitive banking crisis' and how to stimulate economics after a severe banking crisis (using Werner's policy concept of quantitative easing, which he proposed in Japan in 1994, and which is defined in the actual money theory of money as an extension of credit creation for GDP transactions). Werner's historical analysis presents a historical review of credit money, tracing back to ancient Mesopotamia.
In his 2011 Debt: 5000 First Year , anthropologist David Graeber confirms that the best available evidence shows that the original debt-based monetary system, and that most subsequent systems also exist. Exceptions to which the relationship between money and debt are less apparent during the period in which money has been supported by gold bars, as is the case with the gold standard. Graeber echoes earlier theorists like Innes by saying that during this era of population perception was that money earned its value from the precious metals from which coins were made, but even in this period money was more accurately understood as debt. Graeber states that the three main functions of money are to act as: a means of exchange; one account unit; and store value. Graeber writes that since the time of Adam Smith, economists tend to emphasize money as a medium of exchange. . For Graeber, when money first arises its primary purpose is to act as an account unit , to symbolize debt. He writes that coins were originally created as tokens that represent account units rather than being a number of exchangable noble metals.
Economic commentator Philip Coggan argues that the current world monetary system becomes debt based after President Nixon suspended the relationship between money and gold in 1971. He wrote that "Modern money is debt and debt is money". Since 1971 Nixon Shock , the creation of debt and the creation of money is increasingly happening at once. This simultaneous creation of money and debt occurs as a feature of Fractional's backup banking. After the commercial bank approves the loan, it is able to create an appropriate amount of money, which is then acquired by the borrower along with the same amount of debt. Coggan went on to say that debtors often prefer monetary systems based on debt such as Fiat money over commodity-based systems such as the gold standard, since the former tend to allow higher volume of money to circulate in the economy, and tend to be wider. This makes their debt easier to pay back. Coggan refers to Bryan's Cross of Gold speech in the 19th century as one of the first major efforts to undermine the relationship between gold and money; He said the former US presidential candidate was trying to expand the monetary base in favor of the debt-ridden farmers, who at that time were often forced into bankruptcy. But Coggan also said that excessive debt that could be built under a debt-based monetary system could end up hurting all sections of society, including debtors.
In a 2012 paper, economic theorist Perry Mehrling notes that what is generally regarded as money can often be viewed as debt. He assumes a hierarchy of assets with gold on top, then currency, then deposits and then securities. The lower the hierarchy, the easier it is to see assets as reflecting the debts of others. A 2012 paper from Claudio Borio from BIS makes a counter-intuitive case that it is a loan that raises deposits, not vice versa.
In a book published in June 2013, Felix Martin argues that credit-based money theories are true, citing earlier work by Macleod: "currency... is a transferable debt, and nothing else". Martin writes that it is difficult for people to understand the nature of money, because money is a central part of society, and alludes to the Chinese proverb that "If you want to know what water is like, do not ask the fish."
Maps Credit theory of money
Advocacy
The conception that money is essentially equivalent to credit or debt has long been used by those advocating a special reform of the monetary system, and by commentators calling for monetary policy responses to events such as the 2007-08 financial crisis. The view shared by the latest supporters, of all the nuances of political opinion, is that money can be equated with debt in the context of a contemporary monetary system. The view that money equals debt even in systems based on commodity money tends to be owned only by those on the left of the political spectrum. Despite the similarities in their understanding of the theory of money credits, the actual reforms proposed by proponents of different political orientations are sometimes diametrically diametrically opposed.
Advocacy to return to a gold standard or similar commodity-based system.
Advocates of an Austrian school or Libertarian perspective often argue that money equals the debt in our current monetary system, but it does not need to be where money has inherent value, like the gold standard. They often use this point of view to support the argument that it would be better to return to the gold standard, to other forms of commodity money, or at least to a monetary system where money has a positive value. A similar view is sometimes expressed by the Conservatives. As an example of the latter, former British state minister The Earl of Caithness made a 1997 speech at The House of Lords in which he stated that since 1971 Nixon Shock , the British money supply has grown in 2145.% and debt personal has increased by almost 3000%. He argues that Britain must move from a current "debt-based monetary system" to one based on equities:
It's also a good time to step back, to reassess whether our economy is truly based. I would argue that it is not... because debt-based... a system that by its own actions causes the value of money to decline is dishonest and has in it its own destructive seed. We did not choose it. It grew on us gradually but markedly since 1971 when commodity based systems were abandoned... We all want our business to succeed, but under the existing system of irony is that the better our banks, the building of communities and lending institutions, more debt created... There are different ways: it is an equity-based system and one where the business can play a responsible role. The next government must understand the nettles, accept their responsibility to control the money supply and change our debt-based monetary system. My lord, will they? Otherwise our monetary system will destroy us and the sorry legacy we left behind our children will be disastrous.
In the early to mid 1970s, back to the golden dock system was advocated by gold-rich creditors including France and Germany. The return has been repeatedly supported by Libertarians, as they tend to see commodity money much more favorable than paper money. Since 2008 Crisis and the rapid rise in gold prices that soon followed, back to the gold standard is often advocated by goldbugs.
Advocacy against the gold standard
From a centrist and left-wing perspective, the money credit theory has been used against the current Gold Standard, and rejects the argument for re-instatement. The 1914 Innes Paper is an early example of this.
Advocacy for expansive monetary policy
From a moderate mainstream perspective, Martin Wolf argues that since most of the money in our contemporary system has become dual-created with debt by private banks, there is no reason to oppose the monetary creation by the Central Bank to support monetary policy such as Quantitative easing. In Wolf's view, the argument against Q.E. arguing that it creates debt offset by potential benefits for economic growth and employment, and because the increase in debt will be temporary and easy to reverse.
Advocacy for debt cancellation
The argument for debt forgiveness has long been drawn from people of all political orientations; for example, in 2010 hedge fund manager Hugh Hendry, a believer in the free market, argues that some Greek debt cancellations as part of the Euro crisis solution. But generally the supporters of debt forgiveness only show that debt is too high in relation to the ability of debtors to repay, they do not refer to the theory of money based on debt. Exceptions include David Graeber, who from a radical perspective, has used the theory of money credits to argue against recent trends to strengthen enforcement of debt collection, such as the use of greater prison sentences against debtors in the US. He also opposes the overuse of the view that debt repayment is essential to morality, and has proposed the adoption of a biblical style in which debt will be canceled for all.
Relationship with other money theory
The theory of money debt goes into the broader category of work which postulates that monetary creation is endogenous.
Historically, the theory of money debt has overlapped with chartalism and against metalism. This is largely still happening today, especially in the form commonly held by those on the left of the political spectrum. In contrast, in the form held by twentieth-century and twenty-first-century supporters with a conservative libertarian perspective, the theory of money debt is often compatible with quantity theory of money and with metallism, at least when the latter is widely understood.
See also
- Request Note
- Fractional backup banking
- Jubilee Debt Coalition
- Creation of money
- Trillion dollar coins
Notes and references
Further reading
-
Jackson, Andrew; Greenham, Tony; Ryan-Collins, Josh (2014). Where Money Came?: Guide for UK Monetary & amp; Banking System . New Economic Foundation. ISBN: 1908506547.
External links
- What is Money, Innes 1913 paper, now hosted on the Community Exchange System
- The Credit Theory of Money, Innes 1914 paper, is also hosted at CES
- The lost age in economics: Three banking theories and conclusive proof, Werner 2015 paper in the International Financial Analysis Review
Source of the article : Wikipedia
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