We call such things as dollar bills and demand deposits "money". But existing "money" is not Money at all. It is credit.
The term Money in this article means real money, not "money" that is actually credit.
Governments everywhere have driven Money - an economic good that serves as a final means of payment in the present - out of the world's monetary systems and replaced it by credit. To think about Money less abstractly, think of Money as gold and silver coins. They used to be part of our Money. The U.S. government stole the people's gold in 1933. It kept it and used it for international payments. In 1971, it stopped using gold in international payments. It removed silver from the coinage and retired silver certificates. It eliminated Money from the monetary system. "Money" today is bank credit.
Let's call existing "money" credit and stop calling it Money. Let's be truthful. Let's stop obscuring and confusing the meaning of financial and economic events.
Those currencies that are media of exchange all over the world, be they paper notes or bank deposits passed by check, be they M1, M2, M3 or MZM, be they bank reserves, be they the Austrian money supply, are all, without exception, liabilities. They are debts. They are credits. They are credit. What we call paper money, in all its forms, is credit. What we call fiat money is credit. What we call thin air money is credit.
The reason we mislabel credits like Federal Reserve Notes and demand deposits and mistakenly call them Money is that they are media of exchange. If Money is defined as any medium of exchange, credit will mistakenly be called Money. This is wrong. Money is a medium of exchange, but not all media of exchange are Money.
In a free market, certain forms of highly trustworthy credit may become media of exchange. They are still not Money. A stagecoach can transport people like a car does. That doesn't mean it's a car.
In an unfree market, which we have, the government forces some credit instruments to be a medium of exchange by making them legal tender and inflicting penalties on those who refuse to accept them. Calling these credits Money is wrong. It obscures the economic reality.
Credit instruments that become media of exchange are a form of Currency. Currency is the set of all goods being currently used in exchanges as media of exchange. Currency has two subsets: Money and credit instruments. Money is an asset and only an asset. A credit instrument is someone's liability (and someone else's asset). To both parties taken together, debtor and creditor, there is no net asset.
The debtor has received a good in the present from the creditor in return for promising to pay goods in the future to the creditor. A credit transaction is an exchange of present goods for future goods. An outstanding credit implies an uncompleted transaction.
Money differs. Money appears on balance sheets as an asset, never as a liability. No one else carries that same good as a liability on their balance sheet. If you own Money, no one owes you. The Money does not represent a promise of something to be paid to you. It has no strings attached.
In the days of gold and silver money, credits were expressed in terms of Money. If one had a debt, one owed Money (gold or silver). It was payable in the future. The obligation appeared on a balance sheet as a liability. Money settled credit transactions. Nowadays, credits are paid off with still more credits of a different term to maturity. Debt burdens mount up endlessly, growing faster than income and becoming unsustainable. The economy goes into a permanent credit crisis with economic dislocations of all sorts.
In an economy with (real) Money, credits involve receiving Money now and paying Money later. This might lead the nondiscriminating observer to think that a credit transaction is a Money transaction. They differ categorically. Buying a car with Money is not the same as buying a car on credit. Credit transactions may be in Money, or made in terms of Money, or stipulate Money payments; but in all cases, they will be exchanges now that call for completion in the future. A payment (not a down payment) of Money for a good now (in the present) completes the exchange and involves no such future obligation. Money transactions are in the present and only in the present. The transaction comes to an end in the present.
The form but not the substance of this process occurs today. Credits are expressed in terms of "money" that is also credit. Credits are paid off in more credits in the form of today's dollars.
When a credit, such as present-day "money" is first issued and accepted by someone in exchange for their goods and services, either by paying by check or with cash notes, the "money" issuer has gotten economic goods. The "money" recipient has gotten a note or a bank deposit convertible into notes. These are promises to pay something of value to the holder in the future. This is a credit transaction because it involves an exchange of present for future goods.
A person who receives existing "money" receives a credit instrument. It is an IOU. It is a liability of its issuer. It is credit. Whoever holds this is a creditor. There has been no final settling up for this "money" holder. Any finality is temporary. He or she will seek to pass the credit on to someone else. Only when the credit is transferred back to its issuer, if ever, does the chain end. Only then is the life of the credit ended. A person who receives Money - real Money - holds an asset, not a liability manufactured by a bank or government, not a liability whose supply can be increased enormously by a banking system or government.
Whoever holds dollars is a creditor of the U.S. government. Finality only occur when the note finds it way back to the government and the government pays it off. This only happens when the government cancels a fine or tax liability of yours when you send it the note. The tax liability is a negative. The negative of a negative is a positive. The positive from holding a dollar is that in the future the government cancels out a tax liability upon receiving the note. This process again shows that "money" is credit. A note holder also can pass on dollars to anyone else since the dollar is legal tender. The new holder becomes the creditor. The legal tender law assures that the dollar remains a medium of exchange. It doesn't alter the fact that the dollars are credit instruments.
All of today's financial instruments that are called "money" are accounted for as credit or liabilities on the books of their issuers. The monetary base is paper notes plus bank reserves. The central banks all over the world account for these as liabilities. Bank reserves are deposit liabilities created by the central banks when they buy anything. These bank reserves may be withdrawn as paper notes or transferred as accounting entries. The FED currently pays banks interest on these deposits.
Whenever any ordinary bank creates a bank deposit, it carries it on its books as a liability issued by the bank. The bank is a debtor. The owner or holder of that liability is the depositor who is a creditor. If the deposit is converted into bank notes, whoever holds these notes becomes the creditor. The creditor is entitled to return them to the bank in return for a bank deposit or to pay off a debt. This is an exchange of one credit for another, analogous to paying one's taxes with dollars. No Money is involved, that is, no asset that is not an IOU.
The bank deposits that go into M1 and M2 are all bank liabilities. They are all forms of credit. Time deposits, for example, pay interest like any debt instrument. MZM includes money market funds. These are liabilities of the fund that are invested in credit instruments like treasury bills, bank certificates of deposit, and commercial paper. All these things that are termed "money" are credit.
It is difficult to change one's thinking. It is difficult to think that when one receives or deposits cash, this is not Money but a credit. The habit of thinking of credit as Money is hard to break. It is a dangerous habit. Dollars depreciate in worth whenever the banks create more credit. Wouldn't you rather have Money?
Federal Reserve notes are credit, not Money.
When the FED buys bonds, it pays for them by increasing its credits. These credits are the bank reserves that form the base of further credit expansion in the fractional reserve banking system.
Bank "money" is not Money. Bank "money" is credit.
The central bank supplies emergency credit, not Money, to member banks and other financial institutions. It takes on their credits in exchange for its credits. The existing "money" system constantly creates and reshuffles credit. What is called Money are those credits that seem to have no maturity and are supposed to be available on demand. By making them legal tender, they are fashioned into a medium of exchange that mimics Money, but they are not Money.
Modern day inflation is not too much Money chasing too few goods. It's too much credit chasing too few goods.
Most economists who believe in the central planning and control of "money" really believe in the central planning and control of credit. John Maynard Keynes is a prime example. He writes
"Money...cannot be readily produced...In the case of an inconvertible managed currency this condition is strictly satisfied."
It's true that Money cannot be readily produced. Keynes is wrong to say that an inconvertible managed currency cannot be readily produced. Credit can be and has been readily produced by central banks and a fractional reserve banking system. Credit, therefore, cannot be Money, and Money cannot be credit.
Modern "money" all over the world is credit. Therefore, the world's "money" is not Money.
