Nature of Money & Credit

Schumpeter
Contrasts the Credit Theory of Money with the Monetary theory of Credit.

Monetary Theory of Credi t- private “credit money” is only a temporary substitute for money


 * "Final settlement must take place in real money, which is the ultimate unit of account, store of value, and means of payment. Exchanges might take place based on credit, but credit expansion is strictly constrained by the quantity of real money. Ultimately, only the quantity of real money matters so far as economic activity is concerned. Most modern macroeconomic theory is based on the concept of a deposit multiplier that links the quantity of privately created money (mostly, bank deposits) to the quantity of high powered money, HPM. This is the modern equivalent to what Schumpeter called the monetary theory of credit, and Friedman (or Karl Brunner) is the best representative." -[Wray, "The Credit Money and State Money Approaches"  (Source)]

Credit Theory of Money - credit normally expands to allow economic activity to grow, and most economic activity can occur independent of the quantity of High Powered Money.


 * "This new credit creates new claims on HPM [High Powered Money] even as it leads to new production. However, because there is a clearing system that cancels claims and debits without use of HPM, credit is not merely a temporary substitute for HPM. Schumpeter does not deny the role played by HPM as an ultimate means of settlement, he simply denies that it is required for most final settlements." [Wray, ibid]

History of Money
There are 3 main heterodox hypotheses regarding the origin of Money.

Hypothesis: Money evolved as a unit of Trust

 * Pettifor notes on page 54 of "Just Money" that as "David Graeber, the anthropologist shows convincingly, this system of trust existed long before barter.   (Graeber, David., 2011, Debt, the first 5,000 years. New York: Melville House Publishing)
 * Graeber asserts " the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other human beings"  [Graeber 2011, p. 47]

Hypothesis: Money evolved as a unit of Penal compensation

 * Innes (1932)
 * Wray (2001)
 * Tcherneva (2005)



Hypothesis: Money evolved as a unit of Accounting

 * Hudson (2004)
 * (Henry, 2004) synthesis of accounting explanations with Penal/ debt obligation hypotheses.