Creditary Economics

The following was excerpted, with minor editing, from an article
written by the British economist Geoffrey Gardiner. It offers a
valuable insight into the nature of money and credit.
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The first principle of creditary economics is that the division of
labor and the practice of granting credit were born as Siamese twins.
Once division takes place, the worker inevitably finds himself
producing and supplying not for immediate reward, but in expectation
of something in the future. He grants trade credit willy-nilly, even
if he is part of a command economy. The word credit is Latin for "he
trusts" or "he believes," and that is precisely what the producer does
when he is a member of a society that has divided labor up. He
produces, and he trusts he will get something back. There is an
implied promise either by individuals or by the group that he will get
something adequate.

A promise to supply in the future some specified thing is of necessity
a store of value, and a store of value can serve as a medium of
exchange. Debts can be monetized, which means their use as a means of
exchange is facilitated. The oldest way of doing this was the tally
stick, replaced by the Bill of Exchange when paper became cheap. All
media of exchange are debts, but not all debts can be used as media of
exchange. For that purpose they have to be assignable without
consent.

Government debts are a very popular means of exchange, and they gave
rise to the state theory of money. That theory is broadly true, but
like all good rules it has exceptions. If the state does not provide
a money system, the public will do it for itself, and for much of
history the Bill of Exchange has fulfilled that purpose.

Although coins and notes are government debts, they are debts the
government has no wish, indeed no intention, of honoring. The British
£20 note actually has written on it "I promise to pay the bearer the
sum of twenty pounds," and is signed by the chief cashier of the Bank
of England. But if you take the note to the chief cashier and demand
payment you only receive another twenty-pound note in exchange. Adam
Smith noted this phenomenon. He remarked that the man with a
sovereign was like a man who held a Bill of Exchange on every trader
in his locality.

Coins can be described as anonymous debt tokens or equivalently as
anonymous credit tokens. Originally a debt had a named creditor and a
named debtor. With the invention of coins, both the creditor and the
debtor became anonymous. The holder of a coin is a person who has
provided goods and services greater than he has consumed, and the coin
represents the difference between the two. So he is a creditor of
society. The debtor is anyone who recognizes the debt by supplying
goods in return for the coin.

Nowadays the bank note is in the same category. It too is an
anonymous debt token even though it looks like a state debt, and even
though the Bank of England religiously keeps assets to the same value
as the note issue to back them.

Since any debt can be monetized, it follows that monetary economists
are remiss in concentrating their attention only on the debts, which
have been monetized in the form of bank deposits. Creditary
economists teach that all credit is important. We call bank deposits
the intermediated credit supply, and the rest is the non-intermediated
credit supply.

The ability of banks to allow borrowers to create new credit is
limited by the capital base of the bank. The belief that it is
limited by reserve requirements is a popular myth. The Basel Accord's
requirements regarding capital adequacy ratios are vital. But they
are not all powerful in view of the ease with which debts can be
switched out of the intermediated category. In the modern jargon,
they can be securitized.

A failure to pay a debt can have a multiplier effect, causing more
failures. The granting of new credit can have a multiplier effect, as
the new debt can be used to create secondary debt. That is, the money
created can be lent again and again until it is destroyed by being
used to reduce debt.

Every act of lending by a bank automatically creates the deposits that
will balance it. Therefore every act of real investment that is
financed by newly created credit automatically creates the savings to
fund it. The way to encourage real investment is to create a
favorable environment for it, not by encouraging saving.
.

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