"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?
All you say here is correct. Relevant to money creation, the question is, what is money? Von Mises defines money (and I agree) that money is a commonly accepted medium of exchange. He distinguishes two kinds: standard money, which constitutes full and final payment, and fiduciary media, which is a promise to pay standard money on demand, but for which standard money does not exist. Both meet the definition, and both are money. There is no reason a credit instrument (like a bank deposit) cannot function in everyday exchange as money as long as (nearly) everyone has confidence it can be exchanged for standard money. So you are right, a bank deposit is a form of credit, but it is also money. Some economists call it credit money or bank money. As to the question of "payment," if I am satisfied with the kind of money I receive from a sale, I consider that to be payment; it's just that as long as I hold that money, I have not received "full and final payment."
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?
Hi Renee.
All you say here is correct. Relevant to money creation, the question is, what is money? Von Mises defines money (and I agree) that money is a commonly accepted medium of exchange. He distinguishes two kinds: standard money, which constitutes full and final payment, and fiduciary media, which is a promise to pay standard money on demand, but for which standard money does not exist. Both meet the definition, and both are money. There is no reason a credit instrument (like a bank deposit) cannot function in everyday exchange as money as long as (nearly) everyone has confidence it can be exchanged for standard money. So you are right, a bank deposit is a form of credit, but it is also money. Some economists call it credit money or bank money. As to the question of "payment," if I am satisfied with the kind of money I receive from a sale, I consider that to be payment; it's just that as long as I hold that money, I have not received "full and final payment."
Thanks for the discussion!