Re: Bank Credit

[Chas Anderson <chasna@xxxxxxxxxxx>]

The credit-money model as discussed below is so restrictive in its
assumptions and definitions, one has to question its value as an
economic model. For example, the concept of money is confined
to the stratum of the liability-side of a commercial-loan banks
balance-sheet. This is necessary for building the "hypothetical"
circuit between commercial loan banks and entrepreneurs. Not
mentioned below, but also necessary would be a further confining
of the monetary function to that of unit of account.

Does all this leave us with a model which can be logically extended to
approximate with any degree of accuracy the workings of a
modern monetary economy. I find the hypothetical circuit to be
an abstraction of such restriction that relaxing its definition of currency
to allow for any lower stratum of money produces such a tension
of overwhelming magnitude that the model's circuit,  as a starting
point, is reduced to a mere chimera.

The circuit again appears as the starting point for the Debt-Virus
syndrome. Here, the confining of the monetary system to our
circular "chimera" leads to an ultimately fatal bankruptcy of the
economy. Once again, allowing for other stratum's of currency
completely destroys our starting hypothesis rendering the exercise
fruitless in terms of economic importance.

Chas






At 01:29 PM 8/14/98 -0700, you wrote:
>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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