Re: Creditary Economics

On Thu, 09 Feb 2006 00:35:54 GMT, "Mark M." <markm@xxxxxxxxx> wrote:

William F Hummel wrote:

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.
----------------------------------
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.

Agreed. Note well this concept. First comes production, then the
producer extends credit. The introduction of money of itself does not
change this basic relation.

No, what Gardiner said is that divided labor automatically implies the
granting of credit to the producer, not that production precedes
credit. They are merely opposite sides of the same coin.

<snip>

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.

This is where you go off course. Remember the first principle: credit
is extended by producers. This means that every debt represents actual
production that has already taken place. As soon as banks are allowed
to create deposits that don't represent real existing goods, the money
supply is diluted and the persons doing the diluting are able to reap
where they have not sowed. Interest paid on a loan of bank-created
funny money is the same as interest paid on counterfeit money. In the
particular case, counterfeiting seems insignificant, but on a large
scale it becomes self apparent that the counterfeiter is stealing from
everybody else. This is fractional reserve banking.

Gardiner's point was that bank credit is not limited by the reserve
requirement, contrary to popular belief -- even among monetary
economists. And he is exactly correct. For example, several nations
impose no reserve requirement on their banks. A bank can borrow the
reserves it needs to meet the requirement. Its lending is limited by
the capital ratio requirement, which sets a minimum on the ratio of
capital to assets. Borrowing doesn't increase a bank's capital.

Credit is acquired by producers in a society with divided labor, but
the notion that the money supply can mirror the total production is
naive. Money has a life of its own, whether one likes it or not. For
example, during the California gold rush the amount of money grew far
faster than the supply of goods and services. That was not the result
of a fractional reserve banking system.

As Gardiner noted, money is simply a token representing anonymous
credit, or equivalently anonymous debt. The amount created, with or
without a fractional reserve banking system, is only roughly related
to the amount of goods and services produced at any given time. The
Fed monetizes tens of billions of dollars of Treasury securities every
year to satisfy the public's demand for notes and coins, and does so
without relation to the amount of bank credit issued.
.

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