I think it takes someone very comfortable with his or her own standing 
to admit to having changed their mind in a debate in public.  Most 
people do that in private.  I applaud Tom for his admission of having 
changed his mind on crediting Wicksell with the cumulative process 
idea.  As J.M. Keynes once told a reporter querying him over his 
notoriety for changing his mind, (paraphrasing): When I encounter new 
evidence I change my mind, "what do you do sir?"

I have already noted (responding to Roger) why I would consider Tom's 
complete agreement with Roger Sandilands regarding the distinction 
between money and credit to be premature.  Tom is incorrect with his 
claim that "Today demand deposits as well as cash constitute money of 
final settlement."  No, interbank claims have to be settled with the 
transfer of reserves (cash) through the Federal Reserve clearing 
system.  And checks are not a unit of account.

Tom says: "Lauchlin Currie was right. Use of the unfortunate and 
ambiguous word "credit" has been the cause of much needless controversy, 
confusion, and misunderstanding. Matters might improve considerably if 
the word were stricken from economics discourse."  This is similar to 
the Austrians' problem with the concept of "capital".  They, including 
Mises and Hayek, called for the elimination of the word "capital" from 
all scientific discourse.  But that is not the proper thing to do.  When 
one has a problem with a word, one needs to try hard(er) to understand it.

Credit is a facility to make a purchase without the use of income.  
Money is the particular commodity that is the unit of account and 
settles all debts immediately.  A check on the other hand is a promise 
to pay money.  Until the promise is fulfilled (the check clears), the 
issuer of a check is still owing the recipient.  In fact, that is why a 
driver's license is recorded (besides some other particulars, like phone 
number) when one issues a check in payment.  If checks cleared 
immediately they are issues, there would be no room for the "float" in 
the Fed's constituents of the "money supply."

Tom says, "I thought everybody understood as much nowadays. But 
apparently confusion persists. One explanation for this state of affairs 
may be that college courses in Money and Banking (in which the 
distinction between money and credit is correctly identified) are no 
longer required, or even offered, in the undergraduate economics 
curriculum any more. If so, this is a pity."  I teach both monetary 
theory (one of my fields of doctoral specialization) -- graduate and 
undergraduate-- and money and banking.  Tom's speculation here 
completely misses the mark.

James Ahiakpor

Thomas Humphrey wrote:
> I completely agree with Roger Sandilands.
>
> 1. Bank demand deposits are money not credit. Credit consists of loans 
> and discounts on the asset side of bank balance sheets. Money consists 
> of cash plus demand deposits on the liability side of bank balance 
> sheets.
>
> 2. Professor Ahiakpor may be right in claiming that cash and only cash 
> (that is, gold and silver coin) constituted money of final settlement 
> -- true money strictly speaking -- in the first decades of the 19th 
> century and earlier. But that no longer is the case. Today demand 
> deposits as well as cash constitute money of final settlement.
>
> 3. Goods' prices are expressed as dollars-worth of money (demand 
> deposits plus cash) paid or exchanged for each good. Such prices and 
> their aggregate, the general price level, would exist even in a 
> Wicksellian pure credit economy in which money consists entirely of 
> demand deposits.
>
> I thought everybody understood as much nowadays. But apparently 
> confusion persists. One explanation for this state of affairs may be 
> that college courses in Money and Banking (in which the distinction 
> between money and credit is correctly identified)  are no longer 
> required, or even offered, in the undergraduate economics curriculum 
> any more. If so, this is a pity.
>
> Lauchlin Currie was right. Use of the unfortunate and ambiguous word 
> "credit" has been the cause of much needless controversy, confusion, 
> and misunderstanding. Matters might improve considerably if the word 
> were stricken from economics discourse.
>
>
> On Feb 19, 2014, at 4:17 AM, Roger Sandilands wrote:
>
>> James Akiakpor writes:
>>
>>
>>
>> < Somewhere along the line in the late nineteenth century economists 
>> began to cite the medium of exchange function as the first identifier 
>> of what money is.  They thus started to include instruments of 
>> credit, like checks or checkable deposits, in their definition of 
>> money.  As Francis A. Walker (1878) writes in objection to that 
>> practice, "Money is that which passes from hand to hand in final 
>> discharge of debts and full payment for goods... [D]eposits, like 
>> every other form of credit, save the use of money; they do not 
>> perform the functions of money. Money is what money does." >
>>
>>
>>
>> James concludes that "A pure credit system thus does not have money, 
>> properly so called."
>>
>>
>>
>> But Francis Walker can hardly be held up as the ultimate arbiter of 
>> the definition of money as that which is used in hand-to-hand 
>> settlement of debts. In a pure credit economy (i.e., one in which 
>> debts are settled through transfers of chequable deposit accounts, as 
>> in Wicksell's definition of "credit") this "credit" is money just as 
>> much as cash would be. (Many "time" deposits are highly liquid, but 
>> are not strictly "money" in this sense if they must first be 
>> converted into demand deposits before the actual settlement of debts 
>> can be made.)
>>
>> Demand deposits are book-keeping entries expressed in terms of the 
>> unit of account such as the dollar. So, as Tom Humphrey rightly 
>> implies, they comprise a unit of account every bit as easily and 
>> logically as James's hand-to-hand cash money. And they can equally be 
>> the means of exchange and aggregated to give us a measure of the 
>> money supply.
>>
>> If the banks extend credit - by making a book-keeping entry in the 
>> name of a borrower - unconstrained by any reserve requirement and in 
>> excess of any increase in the demand for money (in chequing accounts) 
>> as a proportion of real GDP, there will - as in Tom's logic - be 
>> inflation. The central bank can then either increase the discount 
>> rate or can insist on a positive reserve ratio that would act as a 
>> constraint on inflationary credit (money). However, maybe this 
>> violates the assumption of a _pure_ credit economy. In reality, 
>> however, a bank would presumably be constrained by its capital even 
>> if not by mandatory reserve ratios.
>>
>>
>>
>> James is correct that a check is an _instrument_ rather than money 
>> itself. We know that. But the deposit being transferred by check is 
>> money. It is the means of payment and medium of exchange. No cash is 
>> being used. And only as and when savings and time deposits (or other 
>> financial assets) are actually drawn down and transferred into 
>> chequable deposits or cash can purchases be settled. It is in this 
>> sense that the quantity theory makes sense. To claim otherwise is to 
>> say that an increase in the savings rate is inflationary. An increase 
>> in the money supply (cash plus bank deposits actually used to make 
>> payments) relative to the demand for money is inflationary. An 
>> increase in savings with no increase in the money supply is not.
>>
>>
>>
>> This is why there has been so much confusion over whether the central 
>> bank should control the supply of money or control "credit" - when 
>> "credit" is taken to mean the supply of loans regardless whether this 
>> is via newly created money or via an increase in the savings rate 
>> [whereby one person refrains from spending as much as before in order 
>> to allow someone else potentially to spend her income instead].
>>
>>
>>
>> I haven't read Leland Yeager (SEJ 1978) to which James refers re the 
>> confusion of money and credit. But if memory serves, Yeager (Atlantic 
>> Economic Journal, Dec 1978) on "What are Banks?" insisted that cash 
>> plus demand deposits are money and that banks can create a "momentous 
>> roundabout process" whereby the quantity theory works through to prices.
>>
>>
>>
>> Tom reminds us that Wicksell defined "credit" as chequable demand 
>> deposits. Lauchlin Currie, in "The Treatment of Credit in 
>> Contemporary Monetary Theory" (JPE 1933) urged that we abandon the 
>> word "credit" because it has been defined and used in so many 
>> different ways, with sometimes catastrophic policy implications. He 
>> showed why the Fed's focus on the control of "credit" in the form of 
>> loans (following the real bills doctrine) led it to ignore what was 
>> happening to the money supply (cash plus demand deposits), bringing 
>> on and then exacerbating the Great Depression. James's posts show why 
>> we need to revisit Currie's injunctions and insights - as well as 
>> those of Wicksell (whom Currie admired).
>>
>>
>>
>> - Roger Sandilands


-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
(510) 885-7175 Fax (Not Private)