Christopher Kent — Money – Born of Credit?

As I mentioned earlier, the vast bulk of broad money consists of bank deposits. These banking liabilities are created when an Australian household or business has funds credited to their deposit account at an Australian bank. One way this can occur, for example, is when a business deposits currency it has earned with its bank. Again, such transactions add to deposits but do not create money because the bank customer is simply exchanging one type of money (currency) for another (a deposit).

Money can be created, however, when financial intermediaries make loans. Accordingly, the concepts of money and credit are closely linked in a modern economy, albeit not one for one. When a bank extends a loan, it makes money available to the borrower, for example, to buy a car, a house or equipment for a business. The bank may credit the deposit account of the borrower, who withdraws the funds to make their purchase. Alternatively, the bank may directly credit the deposit account of the seller on behalf of the borrower. In either case, the loaned funds will tend to find their way into a deposit somewhere in the banking system. This process adds to the supply of money.

If I stopped here, you might be left with the impression that the process of lending allows the banking system to create endless quantities of money at no cost. However, the process of money creation is constrained in numerous ways and depends on the behaviour of borrowers, banks and regulators, as well as the stance of monetary policy....

His accounting gets somewhat funky.

A single bank may make loans by drawing on its liquid assets, yet not receive the corresponding deposits created in return. Before extending further loans, that bank would need to raise funds in other ways – for example, by issuing debt or equity securities or by waiting for its deposits and liquid assets to rise via other means.

Customer deposits are bank liabilities, not assets.

Reserve Bank of Australia

Money – Born of Credit?

Christopher Kent | Assistant Governor (Financial Markets)
Remarks at the Reserve Bank's Topical Talks Event for Educators
Sydney – 19 September 2018

Bruce Bower — Conflict reigns over the history and origins of money

Thousands of years ago, money was a means of debt payment, archaeologists and anthropologists say.

Useful summary of the history.

Science News
Conflict reigns over the history and origins of money
Bruce Bower

Lars P. Syll — Schumpeter — an early champion of MMT

Superb Schumpeter quote on credit as money. He gets it right. Keeper.

BTW, Hyman Minksy was Schumpeter's student and MMT economist Randy Wray was a student of Minsky.

Lars P. Syll’s Blog
Schumpeter — an early champion of MMT
Lars P. Syll | Professor, Malmo University

Martin Armstrong — The First Representative Form of Money

Egypt’s monetary system began with barter. It was primarily based on agriculture – grain. This evolved into official Graineries and a farmer would then take his crop to the Grainery and receive a receipt. With time, the monetary system evolved where people would then accept these receipts (paper money) in payment.

The receipt  would have been a credit slip representing the liability of the granary.

Armstrong Economics
The First Representative Form of Money

Martin Armstrong

Lars P. Syll — MMT — the Wicksell connection

Most mainstream economists seem to think the idea behind Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with.

New? Cranks? How about reading one of the great founders of neoclassical economics — Knut Wicksell. This is what Wicksell wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise):

Lars P. Syll’s Blog
MMT — the Wicksell connection
Lars P. Syll | Professor, Malmo University

Michael Hudson — Origins of Money and Interest: Palatial Credit, not Barter

Neolithic and Bronze Age economies operated mainly on credit. Because of the time gap between planting and harvesting, few payments were made at the time of purchase. When Babylonians went to the local alehouse, they did not pay by carrying grain around in their pockets. They ran up a tab to be settled at harvest time on the threshing floor. The ale women who ran these “pubs” would then pay most of this grain to the palace for consignments advanced to them during the crop year. These payments were financial in character, not on-the-spot barter-type exchange.

As a means of payment, the early use of monetized grain and silver was mainly to settle such debts. This monetization was not physical; it was administrative and fiscal. The paradigmatic payments involved the palace or temples, which regulated the weights, measures and purity standards necessary for money to be accepted. Their accountants that developed money as an administrative tool for forward planning and resource allocation, and for transactions with the rest of the economy to collect land rent and assign values to trade consignments, which were paid in silver at the end of each seafaring or caravan cycle....

Naked Capitalism
Michael Hudson: Origins of Money and Interest: Palatial Credit, not Barter

See also

Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
High Cost Economy

There’s an idea – deregulate the banks!

Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University

Peter Cooper — Short & Simple 11 – Money as an IOU

Gresham's law states that the bad drives out the good. This was true of coinage, when the metal value of coins was diluted or pared.

However, the opposite occurs in the case of money as an IOU. The higher the trustworthiness of the debtor, greater the demand of creditors for the debt. The greater the demand, the lower the interest rate needed to induce saving. 

This is demonstrated by the position of the US dollar as the global currency, that is, the preferred currency in which to save. This also spills over into US government debt denominated in the US dollar as the nation's unit of the account.

heteconomist
Short & Simple 11 – Money as an IOU
Peter Cooper

Brian Romanchuk — Money As Debt: A Visual Post-Script

Bond Economics
Money As Debt: A Visual Post-Script
Brian Romanchuk

Brian Romanchuk — Money As Debt

Continuation of debate in progress.

Bond Economics
Money As Debt
Brian Romanchuk

Ed Lonergan — Debt-free money: A brief reply to Randall Wray

Seems he missed the point.

Philosophy of Money
Debt-free money: A brief reply to Randall Wray

Ed Lonergan

ht Ralph Musgrave

Randy Wray — Debt-Free Money Part 4: American Colonial Currency

Nest installment in the series.

New Economic Perspectives

Debt-Free Money Part 4: American Colonial Currency

L. Randall Wray | Professor of Economics, Bard College

Randy Wray — THE VALUE OF REDEMPTION: DEBT-FREE MONEY PART 3

Sorry that it has taken me a while to get back to my multi-part series on debt-free money. This is the third part of the current series, although I had previously written several other blogs on the related topics of debt-free money, positive money, and 100% money. See links at the bottom.

New Economic Perspectives
THE VALUE OF REDEMPTION: DEBT-FREE MONEY PART 3

L. Randall Wray | Professor of Economics, Bard College

Steve Keen — Our Dysfunctional Monetary System

Steve Keen sums it all up on one sentence:

The great tragedy of the global eco­nomic malaise is that it is caused by a short­age of some­thing that is essen­tially cost­less to pro­duce: money.

It's beyond inane, especially post Keynes and post Lerner. Not that this was unknown or overlooked before. But Keynes and Lerner elaborated economic policy based on a theory that disproves the conventional approach.

Steve Keen's Debtwatch
Our Dysfunctional Monetary System
Steve Keen | Professor and Head Of School Of Economics, History & Politics, Kingston University, London

Geoffrey Gardiner — Guest Post: POSITIVE MONEY IN ACTION

How to make Positive Money work and the implications of doing this.

New Economic Perspectives
Guest Post: POSITIVE MONEY IN ACTION
Geoffrey Gardiner, formerly director of the Financial Services Division of Barclays Bank

circuit — Stiglitz on credit creation by banks

For those who think that Joseph Stiglitz doesn't know that banks actually create credit…. 

Fictional Reserve Barking

Stiglitz on credit creation by banks
circuit

Peter Cooper — Money Interpreted as an IOU

Chartalism for dummies. Endogenous money, too. Covers the bases in simple terms. Pass it on to your friends.

heteconomist
Money Interpreted as an IOU
Peter Cooper

Andrew Lainton — Is State (outside) money a liability, and if so to whom?

Readers of this blog will now that I have strongly argued that economics must be rebuilt around the accounting constraints of capitalism- balance sheet economics -, that these constraints are underlying laws of the economics system not legal conventions. Whether or not conventions align with them is just contingent however if account don’t match them that are likely to lead to false economic decisions with real consequences. From this perspective the resolution to such theoretical debates is straightforward in method but not always easy in practice, it is to determine what the accounting mistake is. 

From the balance sheet perspective a liability will be held by an economic agent if it readers an economic service. So what is the nature of that service?

Decisions, Decisions, Decisions
Is State (outside) money a liability, and if so to whom?
Andrew Lainton

Richard A. Werner — Can banks individually create money out of nothing? — The theories and the empirical evidence

Abstract
This paper presents the first empirical evidence in the history of banking on the question of whether banks can create money out of nothing. The banking crisis has revived interest in this issue, but it had remained unsettled. Three hypotheses are recognised in the literature. According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out. According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking). The question which of the theories is correct has far-reaching implications for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories. This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created. This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, "out of thin air".

International Review of Financial Analysis — December 2014
Can banks individually create money out of nothing? — The theories and the empirical evidence
Richard A. Werner

George Cooper — Money and the magical mathematics of Brahmagupta

What do the Indian mathematician that discover zero, John Maynard Keynes and Hyman Minsky have in common. Explaining money as credit and debt.

Money and the magical mathematics of Brahmagupta

George Cooper

Clint Balinger — Towards A Pure State Theory Of Money

MODERN MONETARY THEORY (MMT) notes correctly that money is a creature of the state, and that important macroeconomic and policy conclusions follow from this understanding, e.g., sovereign states are not revenue constrained and spending is primarily limited by inflation. Taxes give value to state money and maintain its value (i.e., inflation can be controlled through taxes).

One (among many) key policy insight is that a job guarantee is possible. A job guarantee not only achieves what many think should for myriad social reasons be a primary goal of macroeconomics but also further creates a buffer stock that achieves an additional primary macroeconomic policy goal – stability.

However, most of the world does not operate under pure state systems of money. Most of what serves as money in most banking systems in the world is privately created credit money.

We can compare the current most common banking system with a pure state system of money:....

Clint Balinger
Towards A Pure State Theory Of Money