In a fiat currency system , which system is now used by almost all money-creating jurisdictions in the world (including the UK, USA and eurozone) all that money represents is a promise to pay, which is otherwise called debt. All money creation must, as a result, recognise the creation of new debt between the parties who give rise to that new money creation.
This process is not as complicated as it sounds. Only two types of organisation can be involved in transactions that create money.
We’ve just defined money as debt. Therefore anyone who creates a debt is creating money.
Standing in a pub in Downham Market – for those legally able to do so – with two friends. Not a full session, but a throat washer. Say, three pints each. Accountant number 1 buys three pints, one for each person present.
We all know that in British social circles this has just created a debt. May not really be callable but it is societally enforced – try not standing your round for a week or two and you’ll not be part of either rounds or even the conversation any more.
15 minutes later, accountant number 2 buys three pints. That creates more debt. The money supply has increased. But also reduced, for he has stood his part of his round to accountant 1 (no, they’re accountants, they do not have names, just numbers). And then the final round of the round – as it were – and our money supply collapses down to where it was at the start. There are no outstanding debts between our three accountants as each has stood his round.
Now, yes, this is trivial in one sense. Rounds aren’t really tradeable but they are those socially and societally enforced debts. Increasing the number of them is indeed increasing our money supply given that we’ve defined money creation as debt creation.
Which is the point that the ‘Tatercounant has got wrong. If indeed it is true that the creation of debt creates money, that money creation is debt creation – and as a useful manner of viewing the world we’re fine with that definition – then anyone who creates debt is creating money.
We don’t only have two people creating debt in our society. Therefore we don’t only have two people creating money.
We could tighten up our definition of course. We could, say, insist that only governments or banks create the right sort of debt which is money, or money which is debt. But then our insistence that only two people do create money is driven purely by our definition, it’s not an outcome of the logic of the situation at all.
Don’t like that pubs and rounds explanation? Running a tab anywhere increases the money supply for the length of time of the tab. Your restaurant bill increases the money supply as you munch through the starters, grapple with the Sancerre, move onto the claret and the beef and then collapses back down again as you settle up. Or the 17th century habit of private money as Charles II and so on were too cheap to mint copper coinage. Or the reason for the Truck Acts and corporate/employer money used to pay wages. Or paying your electricity bill 45 days in arrears as opposed to prepayment on a meter?
Yes, this is important. A high trust society where it’s possible to say “Catch you later on that” has a vastly different money supply from a low trust one where it’s cash on delivery or prepayment.
What matters in this form of money creation is whether people believe the promise to pay of course. We’ve even got an entire system of evaluating such claims – discounting a bill is exactly that.
And that’s only one of the problems with the ‘Tater’s ideas. His definitions are entirely circular. If indeed it is true that debt ios money, money is debt – which as I say is a useful view to illuminate certain parts of the economy – then anyone who creates debt, any act which creates debt, is also creating money. So, we cannot say that only banks and government create money because they are not the only two people who create debt.
If we do want to say that only banks and government create money then we have to accept that debt equals money, money equals debt, is not a usefully true definition within the insistence that we ourselves are making.
We can indeed say that only banks create bank money, only governments create government money. But that’s about as useful as insisting that only cats piss cat piss. Well, yes, and? We can’t mix and match our definitions so that micturation is the evacuation of urine and then go on, at the same time, that only cats piss piss. We must stick with the one or other definition within our same argument.
If money is debt then anyone creating debt is creating money, we do not have only two issuers. If we’ve only two issuers then we’re not talking about the equality of debt and money. Cat piss is indeed cat piss, but urine is produced by many other creatures as well.
