Money and Credit

1. Money is an asset with characteristics that make it useful for trade and storing value
2. Credit arises from an obligation to repay as agreed between parties, and depends on remittances in goods, services, or money at some later time
3. Developments in the use of money and credit as in, for example, modern banking has allowed for the global expansion of capitalist economies by permitting more complex financial relationships between potential partners to an exchange
4. Monetary policy influences inflation and interest rates, which both determine, in large part, the economic welfare of citizens by influencing their purchasing power and ability to borrow

Money is a medium which people use to buy and sell goods. For some asset to function as money, it must generally adhere to four criteria. These are: (1) people must be able to sell goods and services in exchange for it and then use it to buy goods and services they want. In other words, two parties to an exchange need not rely on the coincidence of wanting what the other has, as would occur in pre-monetary barter societies. (2) The asset must serve as a unit of account, meaning that people can put a price on all goods in terms of units of the asset. This requires the fungibility of the asset, meaning that all money is the same in the sense that it is recognizably uniform. (3) The asset must serve as a store of value, meaning that the asset must have some durability allowing people to accumulate it as savings, as in a bank account. (4) The assets must have the capacity to serve as a standard of deferred payment. This means that in a contract or agreement to pay at some later date, parties must be capable of agreeing to be paid in the asset rather than being paid directly in goods.¹

This fourth quality of money indicates its relationship to credit. In the interim period between an agreement to make a deferred payment, in either money, goods, or services, one party (the creditor) holds an obligation on another (the debtor) which may include an additional payment for the time lapsed in the meantime (interest) during which the creditor relinquished the use of their resources. The emergence of capitalist societies has historically depended on the expansion of trade and commerce. The global expansion of trade, and the advanced financial practices necessary for the transfer and accumulation of capital, depend on the employment of both money and credit.² Without recognizable mediums of exchange, parties to an exchange would be inhibited by their inability to make trades based on the others’ wants, to agree on prices, and to save profits to reinvest in their firms. Furthermore, the inability to borrow would limit the expansion of firms, as they would need to own all necessary capital prior to operation, rather than having the opportunity to employ the capital on loan with the promise of repaying the lender with revenue earned afterward.

The use of money has historically led to regulatory procedures and cultural norms meant to control the ways people spend, lend, and borrow. Early examples of such practices included stipulation against “usury,” or the belief in the immorality of lending at excessive rates of interest. Such proscriptions have precedents in existence for centuries. For example, many communities in medieval and early modern Europe sought to ban lending at interest altogether. The regulation of the market price of money has also proved a way that societies, and especially imperial/national states, have sought to govern economic life and culture.³ For example, prior to the global emergence of paper money after the eighteenth century, this was most often accomplished by the debasement of coinage, whereby a government would set the legal price of coined money above the rate at which its content, like silver, for example, would trade for. They could also maintain the coins price but reduce the quantity of valuable content within the coin.⁴

Another tool of a money-issuing government would be to increase the money supply, which allows for the interjection of currency into an economy, thus increasing availability of currency while also decreasing the price of money. Again, the connection between money and credit is critical here as decreasing prices of money, either through monetary expansion or debasement, proves advantageous to debtors, who can repay a contracted price with money worth less per unit even though the quantity of units owed stays the same. Likewise, the opposite case in which the price of money increases serves the creditor. This relationship between credit relations and the price of money holds to the current day. Today, the monetary system practiced in most nations has become increasingly complicated as most money exists only on ledgers, and the value, rather than backed by some commodity, is assured by government fiat or a public trust that the issuer will enforce the acceptance of the currency as legal tender. The quantity of money and its price emerge from interactions between banks which react to lending practices initiated by a chartered central bank like the Federal Reserve in the United States. The main job of the Federal Reserve is to control the supply of bills through policy set by its Board of Governors which sets the rates at which private banks borrow from the Federal Reserve in addition to selling government bonds. Setting discount rates and managing the sales of bonds allows the Federal Reserve to regulate money supply and interest rates for those within the United States and wherever people prove dependent on the value of the U.S. dollar.⁵ Other central banking institutions like the European Central Bank and the Bank of Japan perform similar roles in determining the money supply and lending practices in other nations.

The relationship between monetary policy and democracy is complicated, but as a generalization, popular political movements have often opposed “hard money” standards that limit the expansion of the money supply. This is often because many citizens find themselves holding debt obligations to wealthy creditors and would benefit from monetary expansion, or debasement as occurred in the Populist Party’s “free silver” movement advocating for flexible bimetallism rather than a strict gold standard, which gained great traction in the late-nineteenth-century United States, especially among indebted farmers. Popular political movements and mass political participation also may emphasize monetary expansion and low interest rates as contributing to upward economic mobility arising from access to loans and general economic dynamism arising from easy access to money. However, neither democratic support, nor popular interest, always correlates exactly with these easy money policies. For example, high inflation, and the dovish monetary policies that allow for it, have disproportionately negative effects on those with below-average incomes. This is because (1) many people tend not to hold assets like bonds and securities that appreciate, and thus offset the loss of purchasing power resulting from inflation, and (2) they are more dependent on small transactions using cash, or small amounts of credit, rather than cheaper-per-unit bulk payments on credit favored by those with more expendable income. Consequently, the lower one’s income, the more likely one is to hold depreciating money. This cash-dependence often occurs because banks and other firms may refuse credit to those with lower incomes because of skepticism of their ability to pay debts.⁶ Monetary policy can further exacerbate wealth disparity by incentivizing borrowing by wealthy firms and private individuals. While deflationary policy can aid wealthy lenders, by increasing the real value of the money owed to them, inflationary policy can also aid wealthy borrowers who can fund the growth of their businesses and assets while repaying less in terms of real value. The social cost of incentivizing such borrowing is inflation, which, as we have seen, falls hardest on those with lower incomes. Because of these ramifications of monetary policy and lending practices, the fiscal decisions of policymakers and chartered central bankers have great implications for all citizens and, therefore, checks against their influence may depend on democratic political participation.

1. The value, and price, of money depends on policy determined by fiscal states. This has proved especially true after shifts toward fiat currency and central banking in the twentieth century. Perhaps more than ever, political checks are necessary given modern political authority over the use of money and credit.
2. Monetary policy determines the real value of money and lending practices with ramifications that often disproportionately effect those with average or below-average incomes. This necessitates some popular political check on fiscal policies, as may occur in democracies. Such checks would depend on dispersed knowledge of how financial institutions and fiscal policy operate.