Joined: 09 Nov 2008
Location: Croydon Surrey U.K.
|Posted: Wed Apr 23, 2014 6:56 pm Post subject: Credit
|Credit is given by one person to another and in economics it is given in the normal course of serving one another in the creation of goods and services (wealth). In the present day, beyond the family circle, the value of wealth given is weighed against the value of wealth received in a process of exchange. Exchange is never instantaneous and the constantly changing balance between wealth given and wealth received is credit, now recorded by money. A unit of money is a token, generally accepted as representing a claim on a a unit of wealth.
Some wealth production (for example Crossrail) needs the work of many people for a long time before there is a product to put into exchange. The wealth is given on credit and as it grows additional money is needed to record its value and therefore also the value of the wealth to be produced in exchange, in this case a completed railway.
Banks act as agents of the community to create the necessary money and have come to be regarded as the suppliers of credit. Their responsibility as agents is to ensure that the additional money they create is used for the production of wealth to a value equal to the credit given so that the exchange can be completed and the token money destroyed by repayment. This process naturally fixes the limit of the money supply as the value of the wealth needed to complete the uncompleted exchanges. After repayment the ideal economic system will ensure that the continuing benefit is then shared by the whole community.
Money created by banks for other purposes unnaturally distorts the money supply and most of the money now created by banks is for non-productive, distortionary use, including:-
1) Credit for purchase of land, including in particular the land element of homes. Money created to buy land gives a claim on wealth to the vendor for which the vendor produces no wealth in exchange.
2) Money creation for the huge and non-productive finance industry is generally destructive and should be stopped. Credit should relate only to specific transactions in the productive economy.
3) Bank interest on credit should be replaced by service charges and risk premium.
Money created as credit would then relate only to genuine wealth production in accordance with the real interests of the community as a whole. It would remain in circulation until the value of wealth produced in exchange was finally consumed, when the exchange would be complete and the money repaid and destroyed. This might take many years in the case of a major capital project.
It is evident that the subject of money creation by banks is vitally important. It may be argued that the creation of money as credit should be the direct responsibility of government, but it requires professional knowledge and a widely distributed network if it is to meet the need. Banks are well able to provide this, but they need guidance in assessing the real needs of the community for whom they are the agents.
Who is to provide the guidance and how is it to be given? The immediate responsibility must be with the central bank. The central bank has the expertise and can demand all the information it needs from the commercial banks. This is the usual way and was used with great success by the Japanese banks during a period of growth after the war when credit was directed to wealth production. Success was followed by failure when the Japanese central bank caused credit to be extended for property speculation. There must be control over the actions of the central bank and the ultimate responsibility must rest with government. It is the elected representatives of the people who must maintain the integrity of their money supply.
If the Treasury laid down the principles on which banks were to create money and instructed the governor of the central bank accordingly, the central bank could give the necessary guidance to the commercial banks. In japan this was known as “window guidance” and was highly organised and authoritative.
All this is more easily said than done, but without control of credit financing in accordance with these principles, money accumulates in pools as claims on wealth to be produced by others – the debtors. This growing burden of debt can only be brought back to the balance of uncompleted exchanges by eliminating these unjust claims. There is an urgent need to solve this problem before it causes civil strife.
Only when this debt has been cleared in one way or another can credit in a developed economy function naturally as it does in a small community that acts like a family.