"To pay for this asset, the bank gives the borrower a contractual promise to pay out bank reserves on demand."
Could you explain to me why it should be a payment if the buyer initially only promises to pay. Even though this promise must be honored on demand at any time, it is still a PROMISE to pay the agreed purchase price. Actually it is so that a promise must be still fulfilled, because as promise it refers to a payment, which will take place only in the future. In contrast, a payment is the immediate delivery of the consideration in money, e.g., if I buy a newspaper in exchange for the delivery of $1. If I buy a car from a car dealer and promise payment for later, then I have not paid but bought on credit without having paid. Therefore, the bank also buys on credit and even without collateral because it is believed that the bank will be able to pay no matter what. (A belief that has often been disappointed!).
In my opinion, for a payment to be a payment, it must be immediate. A promise to pay later is not a payment, but a loan, i.e., the acknowledgment of a debt - which, strictly speaking, is what deposits are. What do you think?
Great post, thank you!
Hi Jim,
thanks for following.
In the post you write:
"To pay for this asset, the bank gives the borrower a contractual promise to pay out bank reserves on demand."
Could you explain to me why it should be a payment if the buyer initially only promises to pay. Even though this promise must be honored on demand at any time, it is still a PROMISE to pay the agreed purchase price. Actually it is so that a promise must be still fulfilled, because as promise it refers to a payment, which will take place only in the future. In contrast, a payment is the immediate delivery of the consideration in money, e.g., if I buy a newspaper in exchange for the delivery of $1. If I buy a car from a car dealer and promise payment for later, then I have not paid but bought on credit without having paid. Therefore, the bank also buys on credit and even without collateral because it is believed that the bank will be able to pay no matter what. (A belief that has often been disappointed!).
In my opinion, for a payment to be a payment, it must be immediate. A promise to pay later is not a payment, but a loan, i.e., the acknowledgment of a debt - which, strictly speaking, is what deposits are. What do you think?