Re: Another View on Money and Credit

["John O'Donnell" <jackodonnell@xxxxxxxx>]

"William F. Hummel" wrote:
>
> Money and credit do not exist in a _pure_ barter economy.  The
> buyer must present real goods of the same value as the goods
> purchased, and at the time of the transaction.

A transaction at "equality of value" is a rarity indeed,
particularly for both parties to perceive equal value of both
items involved in an exchange. More likely is an agreement on a
price that grants each participant a "profit" from the exchange.
Such profits are simply that each participant values the other's
holding greater than his own. It is the degree to which each has
preference that is the very impetus for an exchange to occur and
it is the availability of profit to both that provides room to
negotiate a price.

>  If the seller
> agrees to deliver the goods in exchange for a promise to receive
> equivalent value later, he has issued credit in exchange for an
> IOU.  In a broad sense, that IOU is money, and the first evidence
> of a monetary system.

No, that IOU could be a money substitute or it could be evidence
of credit in either a monetary or barter system. It is not
"money."

> A developed monetary economy is one in which transactions are
> normally intermediated with IOUs called money.

A monetary economy is one in which money is used as a medium of
exchange. An economy where exchanges are predominately
intermediated with credit would be a credit economy which could
also be a monetary economy if both money and credit are common.

> An IOU is a debt
> of its issuer and a credit for its holder.  Debt and credit are
> opposite sides of the same coin.  For every dollar of debt there
> must be an equal amount of credit.

No. If one party "buys" something from another in exchange for a
promise to pay, no item "credit" has to be created. The thing
bought may at the time of exchange been considered by one or
both of the parties as of equal value to the debt offered in
exchange but, because there are many possible value sets for
each of the items involved and only a very much smaller set of
possibilities for maintaining equality, subsequent deviations in
the value of each are more likely to occur than a maintenance of
the value of each. Credits may equal may equal debts, but such
an occurrence would be an unlikely coincidence.

>  The term _money_ usually
> refers to the IOUs of creditworthy institutions like banks.

It is only the foolishness of economists to count some money
substitutes {i.e. -- Bank deposits.] as part of the money supply
that the appellation of "money" is applied to some such IOU's.
Real "money" is still the cash held by people and non bank
institutions and the reserves that are transferred between banks
and within banks among the banks' customers.

<<SNIP>>

--
			-- jbod

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