Reply To: Credit


Dr. Herbener,
I’ve been taking an online class on money and banking with Columbia’s Perry Mehrling. I relayed your response above (not the most recent one but the one before) and here is what he says. I think I know what you’ll say but am curious if you have any thoughts I could chew on. Below is his response:

The “credit from thin air” that Herbener emphasizes is, in my view, the essence of banking, but I think of it differently. As I say repeatedly in the course, all banking is a swap of IOUs. The bank makes a loan to me, which concretely means creating an asset (the loan) and a deposit at the same time, these entries then being booked for me as an asset (the deposit) and a liability (the loan). No real resources change hands, just a swap of IOUs. But at the end of the day I have purchasing power that I did not have before, which I can then spend.

When I spend, and only when I spend, income is created for the person receiving the deposit, as well as saving at that very instant. If my spending was for an investment good, then both investment and saving go up in the aggregate. If my spending was for a consumption good, then my dis-saving wipes out my counterparts saving. Consumption goes up but not saving.

I don’t think 100% reserve banking is possible; indeed, according to my way of thinking, it is not really banking. I think central banking is a natural organic development that arises in all banking systems, it is nothing more than banking for bankers. I don’t think it is possible to eliminate central banking.