The following was
excerpted, with minor editing,
from an article written by the British economist Geoffrey Gardiner for
the Post-Keynesian discussion group. 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.
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
is part of a command economy. The word credit is Latin
"he trusts" or "he believes," and that is precisely what the producer
when he is a member of a society that has divided labor up. He
and he trusts he will get something back. There is an implied
either by individuals or by the group that he will get something
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
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,
by the Bill of Exchange when paper became cheap. All media of
are debts, but not all debts can be used as media of exchange.
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,
like all good rules it has exceptions. If the state does not
a money system, the public will do it for itself, and for much of
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
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
But if you take the note to the chief cashier and demand payment you
receive another twenty-pound note in exchange. Adam Smith noted
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
as anonymous credit tokens. Originally a debt had a named
creditor and a named debtor. With the invention of coins, both
creditor and the debtor became anonymous. The holder of a coin is
a person who has provided goods and services greater than he has
and the coin represents the difference between the two. So he is
a creditor of society. The debtor is anyone who recognizes the
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
are remiss in concentrating their attention only on the debts that
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
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
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
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
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
Every act of lending by a bank automatically creates the
will balance it. Therefore every act of real investment that is
by newly created credit automatically creates the savings to fund
The way to encourage real investment is to create a favorable
for it, not by encouraging saving.