Chapter 2
"The Money Syndrome"  by Helmut Creutz

Money and Credit


»I believe that we have to find a consensus about definitions. Naturally, one can constantly mix things up, so that one will call money what the next sees as an assets and the third as credit.«

Werner Ehrlicher
(Money theoretician at the University of Freiburg, in a panel discussion "What is money?", Wangen/Allgäu 1991)


What Are Monetary Assets and How Do They Grow?

When a housewife lends her neighbor a pound of salt, it is not in her possession any more. But she has a claim to a pound of salt and her neighbor owes a pound of salt. When her neigbor returns the salt, her claim will be cancelled and so the debt. Nothing had changed in the amount of salt, neither during the deal nor after.

In lending out money the procedure is not any different. When you lend 1'000 DM to another person, you don't have the money anymore. But instead you have a claim to get the 1'000 DM back which is a monetary asset, and the borrower has a debt about the same amount. If he wants to repay the amount, he has to earn it first and then take it from his income. This means that he has to save it, just as the creditor had to do before he lent it out.

These dealings do not affect the amount of money nor do they change the amount of demand on the market. There is only an interim change of the persons who have the money in hand to use it as demand .

If somebody has a leftover of 1000 DM every month which he lends to his neighbor then his claim will amount to 12,000 DM after one year and to 120,000 DM after ten years.

Correspondingly, the debt of his neighbor went up to the same amount. There didn't necessarily have to be a change of output, income or the total of expenses of the persons involved. The same applies to monetary assets and debts within the economy as a whole. Both figures can increase or accelerate in growth even though the level of economic output remains the same. This means, that growing monetary assets and debts in a political economy have no influence on the amount of money and its purchasing power. They only mirror the size of the debts of some people and the monetary claims of others. The growing amount of these claims and the debts in exactly the same amounts depend alone on the participants in economy, the growing of the amount of money (and therefore the loss of purchasing power of the monetary unit) is solely the responsibility of the issuing banks.

Why Is It Wrong to Sum up Money and Monetary Assets?

An old saying tells us, that we cannot add up apples and pears. By no means can they be subsumed under one of their names. Somebody, who would mix a pound of apples with two pounds of pears and then pretend he had three pounds of apples, we would probably find a little bit beside normality

While apples and pears cannot be subsumed under the heading »apples«, even less can money and credit items be subsumed under the term »money«. Apples and pears are at least comparable real products, but with money and credit items we have on the one hand a concrete, on the other hand an abstract phenomenon. Money is something material which can be grasped and given away. A credit item is only some marks on a ledger, a proof of a claim to money. It is similar to a picture of apples, which one has given to somebody. These pictures have something to do with apples, but they are not apples even though you might call them »book-apples« - in analogy to »book-money«. A subsumption of apples and »book-apples« wouldn't make sense. Just as the assumption, that with every picture of an apple the amount of apples in the world would increase.

Nowaday's usage to subsume money and credit items under the term »money« or »amount of money« is contrary to logic as well as to actual facts. Hence, for the control of the actual amount of money, i.e. as a means and criterion for stabilizing the purchasing power, such a summing up would be irrelevant.

Is It Possible to Sum up Money and Monetary Assets?

Of course, one can put different things together under new names. One can add apples and pears under the heading of fruits, or fruits and vegetables as garden products and so on.

In this way you can also sum up money and credit items, namely, under the heading of monetary asset. Someone who has 1000 DM in his pocket and 8,000 DM in the bank has 9,000 DM worth of monetary assets. To talk about 9,000 DM »money« would be wrong. Moreover, such incorrect usage confuses the discussion about money, the consequences of which become immeasurable. This is especially the case when one uses the name of a primary phenomenon for the primary phenomenon as well as from there derived secondary phenomena.

The example of language and writing - as shown in the following table - makes it clear that it is necessary to keep primary and secondary phenomena apart .

The example can of course be extended by the corresponding technical mediums of transfer. Writing could comprise letters, newspapers and books and as for credit items checks, credit cards and transfer forms.

A. Arrangement of terms in language and writing

  subterms main term superimposed concept
primary phenomenon
secondary phenomenon

B. Arrangement of terms with money and monetary assets

  subterms main term superimposed concept
primary phenomenon
monetary asset
secondary phenomenon
credit items


What Are Checking Accounts and How Are They Created?

Bank accounts have different terms for the availability of cash as well as different time frames and interest rates. Normally the interest is lower when the time, the money is locked up, is shorter. There are some where the time is already fixed when money gets deposited. Others are open end but need a notice of withdrawal. Normal savings accounts in Germany are subject to a three months notice. Without notice, one can only withdraw 3000 DM within a 30 day period . Checking accounts have no such limits. Checking accounts - also called giro accounts or book-money - not only differ by lower interest rates and no withdrawal limits. They have (besides the credit to the bank) a second function. With their help one can transfer monetary assets. These accounts were even installed for this very reason. Of course, on can transfer assets like bank-books or other accounts also, but the transfer of any part sum is much easier with a checking account and the banks offer different easy ways to do so, such as checks, standing orders and transfers. The installing and the raising of those checking accounts by the public happens the same way as with all other bank accounts, namely by depositing money, and they can, overall, only be diminished by the withdrawal of money. Transfers from one account to another have no influence on the size of the total of all accounts and they only lead to changes between accounts. This means that when one account gets bigger another must get smaller by the same amount. How often the assets get transferred from one account to another does not make a difference in the overall amount just as the daily back and forth of cash does not make any difference in the amount of cash that was issued.

Can One Increase His Demand 
with the Help of a Checking Account?

Everybody can spend his income only once. Nobody could break this rule, unless he has a counterfeit printing press in his basement. It does not matter whether he gets his income as cash or as transfer to his account or whether he pays with cash or with checks and transfers - more demand as his income allows is impossible. If he overdraws his income with a bank credit some body else must have used less and must have given the surplus to the bank.
With a change from cash to cashless transfer nobody can increase his demand. Let us make this clear on an example: if somebody always got his income as cash and now wants to make half of his payments cashless, he has to open a checking account and deposit half of his cash there. On the other hand, if somebody got his income by transfer and always cashed it out to pay his expenses with cash, he then simply leaves half of his income on the account. In both cases he now needs only half the amount of cash while he needs the other half in form of a monetary asset on his account for purposes of transfer. If all market participants would change their payment habits in this way half of the cash would not be needed any more. And let us imagine that all people would pay only with check, credit card or transfer, the whole active cash would end up in the banks and would disappear. All the incomes and expenditures in the economy would not be changed by that as well as they would not be changed if  everybody would go back to cash. The only thing changed would be the amounts of cash or assets on the accounts.

With those today used transfers there is only a change to a second way of demand, which can be used instead of cash. The advantage seems to be clear: the payer saves the work of getting cash from the bank and brings it to the recipient and the recipient saves the work of bringing the cash to the bank.

What Are the Results of Increased Transfers 
in the Banking System?

The banks gain in different ways by increased transfers. First, they can reduce their interest costing debts to the central banks. Second, they also have lower costs for moving cash which usually are not paid by their customers. The usually even higher costs for transfers are easily covered by fees or interest differences and also through time-lags between transfers (which they cannot do with cash). Third - and this is the biggest advantage - it is possible for them to extend more credit based on bigger assets of customers, sitting in the accounts and they have therefore more interest income.

Although the use of transfer instead of cash does not give the recipient of income more purchasing power, yet in the total economy it results in a higher demand potential through credits. A bank note cannot be used between receiving and spending, but the bank can lend out the held assets. This means that these assets can be used more effectively than cash. A comparative use of cash would be, if every owner of a bank note would lend it out between receiving and spending it.

Because of these different grades of utilizing cash or cashless assets, this will also result in changes of the overall demand.

Let us imagine that everybody would reduce his cash by half. The total sum of cash now in the economy (200 billion DM) would be reduced by 100 billion DM and the deposits in the banks would be raised by the same amount. Compared to the total deposits of around 3500 billion DM, this would be only 3%. Compared to the total demand potential, it would be 15% against which the issuing bank could only counteract with difficulties.

Since the payment habits are pretty stable and change only slowly, the size of the changes are relatively minor, but they can lead to a loss of stability, especially if it comes to big speculative shifts though the asset owners. (Remark from the translator: here Creutz does not take into consideration the different speed of turnover for cash and for asset transfers)

What Was First - Assets or Debts, Money or Credit?

You can argue about this question just as you can argue about the question whether the hen war first or the egg. Yet, with monetary assets or debts the answer is simple: both are born at the same time whenever somebody borrows something and they disappear both from this world the same time the debt is paid. Assets are neither a precondition for a debt nor the other way around. But something has to happen before any of these two phenomena can come into being. Namely, the saving of the lender and his willingness to lend the saved money to someone else. And for the dissolving of these asset-debt-relations, too, something must be done beforehand. This is the saving of the debtor. He must be willing and able to save the money from his income in order to repay the debt.

This answers the second question about the priority of money or credit: you can only lend out what is there already. It goes for the lending out of a bicycle or a bag of salt as well as for money. That most of the money is put into circulation by the national banks through credits to the commercial banks makes no difference. The national bank must first print the money. But these credits only have the purpose to put money in circulation. The credits which the commercial banks grant to their customers do not come from the national bank but from the savings of other customers. This is also shown by the fact that in Germany the bank credits grow 20 times as much as the Bundesbank expands the amount of money.

The belief of some economists and historians, who see the origin of money not as a medium of exchange but as a debit mark born in the places of worship or temples does not change these facts. This theory might historically or sociologically be of high interest. For the function as medium of exchange and credit of our money and the problem which arise out of them, it is without significance.

What Is the Meaning of Saving, Lending or Paying?

Saving means: less consuming, using or employing. Saved money can be put under the mattress or in the safe behind the picture of aunt Nelly. One can also bring it to a bank which might even be called savings bank. Many people believe that their money is kept there like at home, only safer in a big safe, from which the money is taken again when somebody wants some back. Professional terminology enforces this belief by talking about depositing money in banks and in insurance companies. In reality these deposits do not exist. The banks are not depositories for money. They are intermediaries that hand the credit they have received from a saver over to a third person.

Principally nothing else happens in the banks as in the case, when somebody gives his money directly to a neighbor which he does not need himself. Because this is not called »saving«, one should not call that person a »saver« who brings his spare cash to the bank. Saving is only always the prerequisite, that one can lend money to the bank or to somebody else or keep (hoard) it at home.

Having concrete procedures in mind, the term »to pay« [in the German language to pay - ›bezahlen‹ is associated with ›zählen‹ - to count] should only be used in context with money. For cashless performed acts are not payments but transfers, i.e. accounted credit items from one account to another. These transfers, which the Bundesbank calls ›endorsed disposals‹ [girale Verfügungen], in general lead only to delayed settlement of claims, which anyone can see on his statements of account. Besides that they are done in several accounting steps and always depend on the help of a bank.

Surely is it possible to call a movement from one checking account to another a movement of »money«, but this would only make sense if these deposits on checking accounts were equal to money and their use as a credit item was not allowed. As long as this is not the case, the relation of terms like »money« and »payment« to procedures between checking accounts can only create confusion and complicates the understanding of money related procedures.

One should differentiate between the only real money, legal tender, and »book-money« which is only an entree on a ledger, the essential characteristics of which are once again made clear in the following table:

Deposits (»Book-Money«)
Functions legal tender means of transfer
Devices coins, bank bills checks, transfers
Specific differences emitted by the state 
immediate settlement 
help of third parties not needed 
no documentation 
only expanded by the state
private savings 
delayed settlement 
help of third parties and technical aids needed 
documentation of transaction 
expanded by anyone

It is essential to note that everyone who accepts a check or other asset transfer will only do so as long as he can be sure to get cash for it whenever he wants.

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