CONCLUSION: AN INTEGRATION OF THE CREDITARY AND STATE MONEY APPROACHES

CONCLUSION: AN INTEGRATION OF THE CREDITARY AND STATE MONEY APPROACHES

Innes offered an unusually insightful analysis of money and credit. He not only provided the clearest exposition of the nature of credit, but he also anticipated Knapp's 'state money' approach (or, what Lerner much later called the 'money as a creature of the state' approach). To put it as simply as possible, the state chooses the unit of account in which the various money things will be denominated. In all modern economies, it does this when it chooses the unit in which taxes will be denominated. It then names what will be accepted in payment of taxes, thus 'monetizing' those things. Imposition of the tax liability is what makes these money things desirable in the first place. And those things will then become what Knapp called the 'valuta money', or, the money thing at the top of the 'money pyramid' used for ultimate or net clearing in the non-government sector. Of course, most transactions that do not involve the government take place on the basis of credits and debits, that is, in terms of privately issued money things.

This can be thought of as leveraging activity - a leveraging of the money things accepted by government, or, what we have called high-powered money. However, this should not be taken the wrong way - we are not hypothesizing some fixed leverage ratio (as in the orthodox deposit multiplier story). Further, as explained above, we fully recognise that in all modern monetary systems the central bank targets an overnight interest rate. This means that it stands by ready to supply HPM on demand to the banking sector (or to withdraw it from the banking sector) to hit its target. However, this comes at a cost - the central bank never drops HPM from helicopters. It either buys assets or requires collateral against its lending, and it may well impose other 'frown' or supervisory costs on borrowing banks. Hence, while central bank provision of HPM provides a degree of 'slop' to the system, the domestic value of the HPM is ultimately determined by what the population must do to obtain it from government. This mostly involves provision of goods and services to government in exchange for the HPM that can be used to pay taxes. As Innes makes clear, HPM is a government liability, hence, issuing HPM
260

puts the government in debt: 'A government dollar is a promise to "pay", a promise to "satisfy,", a promise to "redeem," just as all other money is' (op. cit., p. 154). For what is the government liable? It is liable to accept its HPM in payments made to itself. '[T]he government, the greatest buyer of commodities and services in the land, issues in payment of its purchases vast quantities of small tokens which are called coins or notes, and which are redeemable by the mechanism of taxes ...' (op. cit., p. 152).

Likewise, the privately supplied credit money is never dropped from helicopters. Its issue simultaneously puts the issuer in a credit and debit situation, and does the same for the party accepting the credit money. For example, a bank creates an asset (the borrower's IOU) and a liability (the borrower's deposit) when it makes a loan; the borrower becomes a debtor and a creditor. Banks then operate to match credits and debits while net clearing in HPM: banks are 'the clearing houses of commerce, the debts and credits of the whole community are centralised and set off against each other' (op. cit., p. 152). Borrowers operate in the economy to obtain bank liabilities to cancel their own IOUs to banks. There is thus a constant circulation in markets that takes on the character of credits and debits chasing one another. 'This is the primitive law of commerce. The constant creation of credits and debts, and their extinction by being cancelled against one another, forms the whole mechanism of commerce . ..'(Innes 1913, p. 393).

It is hoped that the contributions in this collection, together with the original articles by Innes, offer an alternative to the 'veil of money' offered in most economic analyses of'monetary arithmetic'.

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