The Macroeconomics of Credit Money

From: William F Hummel (wfhummel_at_comcast.net)
Date: 10/08/04 

Date: Fri, 08 Oct 2004 18:28:07 GMT

Following are selected quotes from a book titled "Horizontalists and
Verticalists, The Macroeconomics of Credit Money" by Professor
(emeritus) Basil J Moore of Wesleyan University. Page references are
shown in parentheses.

Five false propositions: (xv)

1. Government deficits are responsible for high interest rates.

2. Real interest rates are determined in the long run by real forces
of productivity and thrift.

3. Inflation is caused by an excess supply of money.

4. Savings determines investment and so governs the rate of capital
accumulation.

5. Inflation serves primarily to redistribute wealth between debtors
and creditors.

Members of the economics profession, all the way from professors to
students, are currently operating with a basically incorrect paradigm
of the way modern banking systems operate and the causal connection
between wages and prices, on the one hand, and monetary development on
the other. (3)

Central banks cannot choose whether to control interest rates or
monetary aggregates directly. Quantity controls over the supply of
credit money are simply not feasible. (xi)

In general the central bank is unable unilaterally to initiate
decreases in the total high-powered base, even though the base
consists of the central bank’s own liabilities. Were it to attempt to
do so, the liquidity of the banking system would be imperiled. (17)

Banks do not wait for excess reserves before providing new loans to
the public. Nor are new loans made at the initiative of the banks
themselves. Banks are essentially in the business of selling credit.
As with all firms the amount of goods and services they can sell
depends ultimately on the demand for their product. (46)

The Fed supplies reserves on demand so that any reduction or increase
in the required reserve ratios will be accompanied by a completely
offsetting fall or rise in the Federal Reserve security holdings so as
to maintain interest rates unchanged and the money stock
demand-determined. (96)

Central banks do not, as the money-multiplier analysis presumes,
control the rate of growth of monetary aggregates by increasing or
reducing the size of the high-powered base through open market
purchases or sales at their discretion. Central bank open-market
transactions are overwhelmingly defensive. (109)

Long-term interest rates will reflect financial market participant’s
expectations of future short term rates over the life of the financial
instrument. Since short term rates are exogenously administered by
central banks, long-term rates will reflect the capital markets’
collective expectations of future short-term rates that the central
bank will establish. (259)

The quantity of credit demanded expands as ex ante real borrowing
costs are reduced. It follows that nominal interest rates should not
be administered by central banks substantially below the expected
inflation rate, in order to prevent excessive credit-driven monetary
growth and the possibility of hyperinflation. (264)

Central banks are always able to buy unlimited quantities of assets
for their portfolios. They finance these purchases simply by issuing
their own liabilities, which are domestic money. Consequently they
are generally able to reduce interest rates and exchange rates to any
desired level. But they are faced with an asymmetry in their ability
to raise these rates. After they have sold all their existing
holdings they will be unable to depress further the prices of their
assets. (275)

Commodity money is a physical asset, not a financial claim. It is an
asset to its holder and is a liability to no one. Commodity money is
distinct from all other assets: It is perfectly liquid and so
represents immediately available purchasing power, carries no credit
risk, pays no interest, and carries no price risks. (371)

Credit money, in contrast, is that set of financial claims making up
the total liabilities of all institutions issuing transactions
deposits. (372)

Macroeconomics is in a state of chronic disarray. As its mathematical
sophistication has intensified, its contribution to our understanding
of the real world has diminished. Increasing rigor has been
accompanied by increasing mortis. Nevertheless, one can see signs of
positive counter currents, as more and more economists incrementally
reject the general equilibrium price-auction paradigm. (392)

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