moore on lending

[Greg Nowell <GN842@xxxxxxxxxxxxxxxxx>]

Moore wrote (commenting on s.o. else):

NO. YOU AND I CAN LEND, BUT CANNOT CREATE MONEY IN THE
PROCESS, AND SO
CANNOT INCREASE AD. I CAN ONLY LEND TO YOU MY SAVINGS,
INCOME THAT I DO NOT
CONSUME MYSELF.

Nowell:

I can also lend you my production.  I can lend you
inventory today and keep your debt on my books.  I can
have you sign an IOU and under a rather widespread
condition sell the IOU into a money market (bill of
exchange aka commercial paper).  These are all
contracts for forward delivery of goods and upon
falling due can be "paid" with yet another contract for
forward delivery, as in fact characterized the London
discount market.  Note that this is not "savings" in
the typical sense, but  it does lead directly to "cash"
in the dictionary sense:  "bank deposits and certain
readily negotiable paper (as checks, drafts, notes,
bearer bonds, coupons)" (Webster's 3rd s.v. "Cash").
More generally, in accounting, known as cash
equivalents; or in finance, as "the money market."

Note that the auto industry today adjusts clearance of
inventory by varying the interest rate which it demands
for payment tomorrow against delivery of an automobile
today.

In this kind of system physical goods can be thought of
as the "asset" that backs the paper circulation, which
serves as a liability contract that is more
exchangeable than the goods themselves.  It should be
noted that in Prussian and U.S. 19th c. lending the
"asset" deposited was title to take possession of land
in the even of non-payment; debtors "borrowed" bank
credit (ijn the form of a deposit in their name)
against the mortgage.

This is why List was correct to point out that the
solvency of the US banking system depended on land
values.

The money supply as such is a function of aggregate
demand, in such a system.  The banking system begins
when some specialist in the holding of discounted paper
(debt notes, his assets) issues, against these debt
notes, his own "liability" paper: a generic exhange
instrument.  Others issue paper against physical
assets; the banker issues paper against others' paper,
in merchant commerce, and proceeds from there to other
kinds of loans secured by other kinds of assets.

--
Gregory P. Nowell
Associate Professor
Department of Political Science, Milne 100
State University of New York
135 Western Ave.
Albany, New York 12222

Fax 518-442-5298