James Ahiakpor doubts that banks can create credit to finance real 
production because their assets never exceed their liabilities.  His 
response totally misses the point.  Consider:  The Bank of Scotland begins 
with =A3100 in cash (gold), =A3900 in loans, =A3900 in notes outstanding, 
an= 
d 
=A3100 in capital (previously saved by the shareholders).  It then moves 
int= 
o 
the Highlands, as described by Macleod.  On the security of tenant leases, 
the Bank issues another =A3100 in small notes on loan.  Of course, since a 
balance sheet must balance, both assets (loans) and liabilities (notes 
outstanding) increase by =A3100.  The Bank's reserve ratio falls from 1/9 
to 
1/10. 
 
Now, suppose, as Macleod did and as Cameron agrees was the case, that the 
newly issued notes are not returned back upon the issuing bank.  (The law 
of reflux states that unwanted notes would be so returned, for no one need 
hold a depreciating convertible note.)  The notes are used to employ 
underemployed workers to dig and till and haul manure.  The workers spend 
the notes on food and clothing.  Now, I believe, the crux of Professor 
Ahiakpor's point lies here.  Where do the real goods consumed by the 
workers come from if not from savings?  Only two possibilities exist: 
Either the goods are newly produced with underutilized resources (a sort of 
rational expectations reaction); or they come from savings previously used 
elsewhere.  The first is not wholly unreasonable, but the second is quite 
possible.  However, Macleod's point - that the extension of credit by the 
banks leads to increased production in future - remains intact whether the 
credit merely prompted new production (of clothing and food) or whether it 
engendered the more efficient use of savings already accumulated.  (I admit 
these are two different things.) 
 
Macleod understood, as did Smith, that a limit to note creation exists. 
Smith's rule was, notes extended replace coins pound for pound, with the 
coin going abroad to purchase real capital.  Macleod's limit was not so 
tight; banks can continue to issue notes on good security so long as the 
market price of gold does not rise above the mint price.  Macleod was no 
mad inflationist - and Scotland DID grow at an amazing rate. 
 
--Neil Skaggs