Credit theory of money

Anthropologist David Graeber has argued that for most of human history, money has been widely understood to represent debt, though he concedes that even prior to the modern era, there have been several periods where rival theories like metallism have held sway.

Innes goes on to note that a major problem in getting the public to understand the extent to which monetary systems are debt based is the challenge in persuading them that "things are not the way they seem".

Graeber states that the three main functions of money are to act as: a medium of exchange; a unit of account; and a store of value.

He writes that coins were originally created as tokens which represented a unit of account rather than being an amount of precious metal which could be bartered.

However Coggan also says that the excessive debt which can be built up under a debt-based monetary system can end up hurting all sections of society, including debtors.

[18] A later 2012 paper from Claudio Borio of the BIS made the contrary case that it is loans that give rise to deposits, rather than the other way round.

[19] In a book published in June 2013, Felix Martin argued that credit based theories of money are correct, citing earlier work by Macleod: "currency ... represents transferable debt, and nothing else".

The money supply is created as ‘fairy dust’ produced by the banks out of thin air.The conception that money is essentially equivalent to credit or debt has long been used by those advocating particular reforms of the monetary system, and by commentators calling for various monetary policy responses to events such as the financial crisis of 2007–2008.

A view held in common by most recent advocates, from all shades of political opinion, is that money can be equated with debt in the context of the contemporary monetary system.

Regardless of any commonality in their understanding of credit theories of money, the actual reforms proposed by advocates of different political orientations are sometimes diametrically opposed.

The next government must grasp the nettle, accept their responsibility for controlling the money supply and change from our debt-based monetary system.

[16][26] In 1934, Thomas Alan Goldsborough introduced bills and held hearings on establishing an independent Federal Monetary Authority.

The Monetary Authority alone would issue legal tender currency under Article I, Section 8, in the Enumerated Powers, to coin money and regulate the value thereof.

[29] Franklin D. Roosevelt's economic advisor Lauchlin Currie had a Federal Monetary Authority plan with 5 directors.

[31] From centrist[32] and left-wing perspectives, credit theories of money have been used to oppose the gold standard while it was still in effect, and to reject arguments for its reinstatement.

Exceptions include David Graeber who has used credit theories of money to argue against recent trends to strengthen the enforcement of debt collection, such as greater use of custodial sentences against debtors in the US.

[14] Debt theories of money fall into a broader category of work which postulates that monetary creation is endogenous.