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credibility. 1 Just so, Ralph Hawtrey’s Currency and Credit (1923).
National currency is not in general a “cloakroom ticket” representing ownership of gold that is being held
somewhere on behalf of the currency holder. This is true even in the extreme case of 100% reserves (or a currency
board arrangement). Even in such an extreme case, there is still a promise to pay, a promise that can be broken. 2 Mehrling 9/14/2009 2 In this hierarchy, where is the dividing line between money and credit? It is tempting to draw
the line between currency (and everything above it) as money, and deposits (and everything
below it) as credit. The source of this temptation is the institutional fact that currency is the final
means of settlement for domestic payments. Just so, for a bank settling its accounts at the end of
the day, currency or “high-powered money” is certainly the means of settlement.
But things look different farther down the hierarchy. For ordinary people like ourselves, bank
deposits are the means of settlement. Hence we might be inclined to view deposits (and
everything above them) as money, and securities as credit. This is more or less what most
modern textbooks mean when they speak of the money supply, although even here there is some
ambiguity which is reflected in the various definitions of money: M1, M2, M3 and so forth.
And things look different farther up the hierarchy as well. For a country settling its accounts at
the end of the day, national currency is of limited value. What other countries want is their own
currency, or the international means of settlement, which means gold in the case of a gold
standard, perhaps SDRs (Special Drawing Rights at the IMF) in the modern case. (The US is an
exception because of the international role of the dollar.)
The point to hold on to here is that what counts as money and what counts as credit depends on
your point of view, which is to say it depends on where in the hierarchy you are standing. Are
you thinking of the problem of international settlement, of bank settlement, of reta...
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This document was uploaded on 02/16/2014.
- Fall '14