Re: Bank Credit

["William B. Ryan" <william_b_ryan@xxxxxxxxxxx>]

University of Ottawa economist Mario Seccareccia wrote:
http://csf.colorado.edu/mail/pkt/dec97/0168.html

"...Would Basil [Moore}, Bernard [Vallageas], Louis-Philippe [Rochon] or
anyone else on the PKnet agree with the view that I had also taken in
the above-mentioned paper [presented in Paris in 1996] that interest
payments must necessarily be advanced in the form of bank credit in
essentially the same way as wages are to firms?  If this is a logical
(and practical) necessity in a credit-money economy (as I believe it
is), what would be the possible mechanisms through which banks go about
in advancing interest to the non-financial business sector?  I had tried
to provide some elements of a solution in an earlier paper that was
published in the Deleplace/Nell (1966) [~Money in Motion~] volume but,
needless to say, I'm not fully satisfied with it!"

In follow-up, Seccareccia wrote:
http://csf.colorado.edu/mail/pkt/dec97/0181.html

"...To understand this point, I shall assume for the sake of
simplification that we have a closed system with no government and
foreign trade and, moreover, that consumer credit to households is zero.
Hence, all credit money is exclusively advanced to firms to finance
production.  This is obviously unrealistic, but it will allow me to
focus on the main concern that I had in my previous post."

"The problem that has concerned monetary economists a la Schumpeter and
numerous monetary 'cranks' a la Major [C. H.] Douglas is the following:
If, in a credit-money world, all advances are made to firms to finance
production, where do firms get the money to pay principal plus interest.
Needless to say, no problem would arise if some other sector (say,
government would perpetually run deficits).  However, in the case where
you only have business firms and banks, the outcome appears to be one of
growing indebtedness of private firms vis-a-vis banks.  That is to say
that, structurally, there would be a growing claim of banks on the
nonfinancial business sector even in an otherwise stationary
environment!"

This misconstrues Douglas' rudimentary hypothesis, which I will briefly
summarize:

1.  Though definitely symptomatic, debt per se nor is interest the
problem; the problem is that firms in the aggregate cannot recover the
totality of their costs of production in reflux from the salaries, wages
and dividends paid out during the course of production.

2.  The phenomenon would obtain even if the rate of interest could
somehow be reduced to zero.

3.  It relates to naturally occurring growth vectors in population and
technology; it does not occur in the imagined stationary economy.

4.  The result is endemic hypercompetition, indicated by excessive
bankruptcy and maldistribution, suppressing the realization of
productive efficiency by distorting the information fedback from
consumers to producers.

5.  Perpetual deficit spending or favorable balance of trade is
irrational and cannot be sustained.

6.  In the terminology of Post Keynesianism, endogenous credit must be
supplemented exogenously.

http://www.geocities.com/CapitolHill/Senate/7018

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