The Theory of Money and Credit

It should be sufficiently clear from what has been said that the traditional way of looking at the matter is but little in harmony with the peculiarities of fiduciary media. To regard notes and current accounts, whether they are covered by money or not, as constituting the same phenomenon, is to bar the way to an adequate conception of the nature of these peculiarities. To regard noteholders or owners of current accounts as granters of credit is to fail to recognize the meaning of a credit transaction. To treat both notes and bills of exchange in general (that is, not merely sight bills) as “credit instruments” alike is to renounce all hope of getting to the heart of the matter.

On the other hand, it is a complete mistake to assert that the nature of an act of exchange is altered by the employment of fiduciary media. Not only those exchanges that are carried through by the cession of notes or current-account balances covered by money, but also those exchanges that are carried through by the employment of fiduciary media, are indirect exchanges involving the use of money. Although from the juristic point of view it may be significant whether a liability incurred in an act of exchange is discharged by physical transference of pieces of money or by cession of a claim to the immediate delivery of pieces of money, that is, by cession of a money substitute, this has no bearing upon the economic nature of the act of exchange. It would be incorrect to assert, for instance, that when payment is made by check, commodities are really exchanged against commodities, only without any of the crude clumsiness of primitive barter.11  Here, just as in every other indirect exchange made possible by money, and in contrast to direct exchange, money plays the part of an intermediary between commodity and commodity. But money is an economic good with its own fluctuations in value. A person who acquires money or money substitutes will be affected by all the variations in their objective exchange value. This is just as true of payment by notes or checks as of the physical transference of pieces of money. But this is the only point that matters, and not the accidental circumstance whether money physically “enters into” the transaction as a whole. Anybody who sells commodities and is paid by means of a check and then immediately uses either the check itself or the balance that it puts at his disposal to pay for commodities that he has purchased in another transaction, has by no means exchanged commodities directly for commodities. He has undertaken two independent acts of exchange, which are connected no more intimately than any other two purchases.

It is possible that the terminology proposed is not the most suitable that could be found. This must be freely admitted. But it may at least be claimed for it that it opens the way to a better comprehension of the nature of the phenomena under discussion than those that have been previously employed. For if it is not quite true to say that inexact and superficial terminology has been chiefly responsible for the frequently unsatisfactory nature of the results of investigations into the theory of banking, still a good deal of the ill success of such investigations is to be laid to that account.

That economic theory puts questions of law and banking technique in the background and draws its boundaries differently from those drawn by jurisprudence or business administration is or should be self-evident. Reference to discrepancies between the above theory and the legal or technical nature of particular procedures is therefore no more relevant as an argument against the theory than economic considerations would be in the settlement of controversial juristic questions.

• 11Thus Lexis, Allegemeine Volkswirtschaftslehre (Berlin, 1910) (Hinnenberg, Die Kultur der Gegenwart, section II, vol. 10, Part 1), p. 122; Lexis, Geld und Preise (Riesser-Festgabe, Berlin, 1913), pp. 83 f. Similarly, with regard to the clearinghouse business, Schumacher, Weltwirtschaftliche Studien (Leipzig, 1911), pp. 53 f. and the writings there referred to.