Time to say goodbye: To slipshod definitions of "money" in economics! (Schluss mit schlamperten Gelddefinitionen in der Volkswirtschaftslehre!)

 

Vorbemerkung für deutschsprachige Besucher (Preface for German-language visitors):

Weil der vorliegende Text aus einem Mailwechsel mit dem US-Soziologen Prof. John Bradford, Ph.D., (Assistant Professor and Coordinator of Sociology, Mississippi Valley State University) hervorgegangen ist (wie stellenweise noch sichtbar), habe ich ihn im Original in Englisch verfasst.
Vielleicht werde ich später eine deutsche Übersetzung dranhängen. Im Moment fehlt mir dafür die Zeit. Die spannende Debatte mit meinem Mailpartner dauert noch an, und ich muss noch Berge von Literatur lesen, um tiefer in die Materie einzudringen.
"Übersetzung" heißt für mich auch nicht einfach eine mehr oder weniger mechanische Übertragung. Nicht überraschend fallen mir in meiner eigenen Sprache gelegentlich elegantere Formulierungen ein als im englischen Text, mit dessen Formulierung ich mich naturgemäß schwerer tue. Zudem erzeugen die fortdauernde Beschäftigung mit der Materie und neue Assoziationsketten in der Muttersprache völlig neue Gedankengänge. Wie schon in meinem zweisprachigen "EBaKeBa"-Blott (s. u.) geschehen, wäre daher meine deutsche "Übersetzung" zugleich eine teilweise Neubearbeitung. Vom Zeitaufwand her kann ich das derzeit zumindest nicht leisten.

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The subject of money, or, more precisely, the relationship between money and the real economy has interested me for some time.

I have written two blog posts about the creation of money

1.    "Einen Kredit gibt es nicht. 100 Jahre "Kredittheorie des Geldes" (Credit Theory of Money) von Alfred Mitchell Innes" (March 2013, in German only) and

2.    "Das EBaKeBa-Modell von Geldschöpfung, Zinsen und Realwirtschaft" (Jan. 2014, there the German text is followed by my - original - version "The OBaNoCa model of money creation and interest in the real economy" in English.

Meanwhile, my interest in the subject hast been freshly fuelled by a highly stimulating email-correspondence with John Bradford, Ph.D., Assistant Professor and Coordinator of Sociology, Mississippi Valley State University. Besides drawing my attention to some informative literature on the subject which I had not known before, he sent me a list of definitions on money which he had gleaned from the writings of various economists.

Reading this and remembering what I myself had previously seen in many articles, blog posts and comments, but also in scientific papers, I came to the conclusion that there is definitely room for improvement in those definitions of money presently out on the market.

The following suggestions to define money are an adapted version of two of my emails in the abovementioned correspondence. I very much hope that these definitions will update our understanding of how money works, and thereby our research into what money does.

Much as Alfred Mitchell Innes deserves credit for his credit theory of money ("WHAT IS MONEY?", 1913), you might expect that even in economics 100 years later human knowledge did advance to some extent and should today be able to present a much clearer and more detailed picture of what money "is".

For one thing, we should be able to separate the analysis of how money is USUALLY being created (modern money at any rate) from the question of how it CAN be created. And discriminate both from the analysis of what money does (how it works).

Even more important is to differentiate between the legal-financial sphere (terminology, regulations and mechanisms) on the one hand and the realm of real economy (real life effects and rationale of legal-financial institutions and mechanisms) on the other.

Making these distinctions is imperative if you dig for knowledge instead of an endorsement for ideological preconceptions. And carefully clarifying (to oneself and to the readers) which sphere the author is referring to and how the structures in the one field "translate" into effects or structures in the other is in my eyes prerequisite to any sophisticated discourse about "what money is".

Let me expound at the outset that for me "definition" is an operation to clarify what I am (and, actually, what anybody is) talking about. Plus maybe an effort to reach a consensus on what the exact object of the debate should be. I conceive of "definition" of nothing more than a particular aspect of communication. Example: "Money is what is commonly called "money", and what we (or at least I) call "money" has the following properties .....".

Therefore, I'm not trying to determine the "true nature" etc. of a term. Any kind of "platonic cave dweller approach" would appear futile to me. In my opinion, there is no "real" meaning of words, their significance being nothing but a - preconceived or ad hoc - convention.

Since definition for me never is (nor can be) anything but an element of communication (namely an explanation or even, when trying to reach consensus, of negotiation), I think it may also be helpful if I unfold the implicit assumptions (insofar as I'm aware of them myself) underlying my definition. Not infrequently participants in a debate depart from different tacit assumptions which they are not aware of with themselves and/or with their partner.

Also, because I am considering a definition to be an explanation, any "definition" of money (or other human institutions) can only be a description of functions: "Money is, what money does". (Nevertheless, as Germany has experienced in the hyperinflation of 1923, and, though to a lesser extent, again after WWII, the way money is created certainly is of importance in what it does or can do to us.)

At a closer scrutiny all definitions phrased in the essentialist "money is"-style turn out to be functional definitions anyway. Examples:

- "Money is a means of exchange" = "Money is used to allow (indirect) exchange"

- "Money is a claim to ..." = "With money, one can claim ..."

etc.

  

My definition of money (just like many or most others) starts from (is based upon) the assumption that the essence (the raison d'être) of any economy is barter: "I will give you something that I own (typically: have produced), but only if you (promise to) give me some of what YOU own (of equal value) in return (but not necessarily right away)."

L. Randall Wray is of a different opinion claiming (in his paper "Money" from 2010):
"We cannot begin with the barter paradigm. We cannot remove money from the analysis as if it were some veil hiding the true nature of production."
While I agree with him that money cannot be removed from any meaningful analysis of the real economy, this doesn't mean that the barter paradigm is irrelevant for the definition. On the contrary: it is vital to understand that there are two dimensions to the term "debt": The legal definition being a completely different thing from the one in real economic terms (which Wray calls "Schumpeterian"). By mixing and mixing up those two spheres Wray and many others (e. g. Alain Parguez and Mario Seccareccia in their "The credit theory of money: the monetary circuit approach") fail to understand (or maybe, at least in the case of Wray and the MMT school, deliberately blur) the fact that money creation by credit is from a real economy point of view an utterly different thing from governments simply "printing + spending" the stuff.

Barter is clumsy. In order to make it more flexible, an instrument is needed to transcend the level of individual transactions, restricted in participants, time and place, into more or less unrestricted transactions that can take place anywhere anytime in an economy (and, in a globalized world, in any economy).

This is achieved by money and therefore my definition tries to capture what changes (improvements) money introduces to an economy without money:

Money is an economic institution which permits a highly indirect "barter".

It generates this effect by allowing for an uncomplicated decoupling of concrete participants and places of any individual "exchange", and by largely removing restrictions for any individual "exchanges" imposed by time.

In short: Money morphs barter into markets.

This definition does not mean to imply that money is perfect and may not pose economic problems of its own ("have a life of its own"). At least until now, however, mankind has not come up with anything better suited to fulfill the above functions.

Also, this definition is not claiming to make any statements about the concrete historical origin or original social functions of what most likely only at a later date turned into "money".

Saying that money effects a paradigm change from barter to markets is equivalent to saying that money makes wholly new properties emerge in the economic system.

Unveiling its property as an agent of systemic emergence debunks the concept of money as "barter in disguise". (Putting it differently: If money is an agent of emergence (phil.), it cannot be simply a veil for 'barter in disguise' ".) But basically the logic of barter is operative behind it; when money cannot be traded in for goods, people will tend to go back to real barter, or find a substitute currency. (Both of which happened in post WWII Germany: Farmers allegedly had traded in so many Persian carpets for their food products that they could decorate their barns with them. And the currency accepted on the black markets was not Reichsmark but cigarettes.)

A different approach to the job of defining money might start from the widespread (but misconceived and misused) concept of money as an "IOU".

The idea of money as an IOU (in a real economic sense; for others, see below) is derived from the notion of deferred barter: "A" gets potatoes from "B" in summer for apples which he promises to deliver in autumn. As a security for B, A signs an IOU saying "I promise to supply xxx amount of apples by the end of October". This IOU becomes "money" when B can use it to buy from C.

But in this transaction it is confusing to speak, without further specification, of an IOU: Who owes whom what? Does B owe anything to C when he pays him with A's IOU? Obviously not (when we are talking about "genuine" money; a bill of exchange is quite another thing, even though it, too, shares some important characteristics with "real" money). B does not incur any debt himself when he pays his purchases from C with "money". B has given A a credit, and what he uses to pay C is A's pledge of redemption (without obliging himself, in case A should default in the meantime). So from a legal (abstract) point of view B pays C with A's debt; from a technical (concrete) perspective B pays with A's IOU(-note).

And so on: when C purchases from D, D from E etc. they all become, in turn, creditors of A. The last holder before the IOU matures can only hope to get his money's worth from A.

This (imaginary) system, which we might call "deferred and indirect barter" would be like a hot potato scheme where the last holder is at risk.

Obviously such a risky "money" would be inacceptable for most people and, as we all know, this is not the way money nowadays works.

(However, there was a time in history when paper money actually did show similarities to this scheme: Banknotes issued by London goldsmiths bankers were redeemable by any holder in gold deposited in the goldsmiths' vaults. For a detailed description see the paper "How Modern Bank Originated: The London Goldsmith-Bankers’ Institutionalization of Trust" by Jongchul Kim, which my email partner has kindly brought to my attention - and which I recommend to anybody interested in "the money thing" as highly instructive literature! But even long after that, way into the 20th century, banknotes were in principle redeemable with the central bank in gold.)

The difference between the aforementioned "deferred and indirect barter" system and modern money (and a modern economy) is that today society has differentiated the roles of sellers of goods and creditors. (Existing exceptions like trade credit are by no means unimportant and have to be included when analyzing or trying to forecast the status of any concrete economy. But the existence of these instruments will not enhance our fundamental understanding of money mechanics.)

Credits are handed out by (central and commercial) banks.

The borrowers are the "first receivers" of this money, which, if it were not lent out, would either not exist at all or lie idle in the bank vaults. (I do not want to open a debate here on whether or to what extent commercial banks lend out - base - money deposited with them, because this is of no relevance to my present argument).

It is hopefully undisputed that people who take credit from banks do this because they want to spend the money. So the "first receivers" are also the "first shoppers".

Again the term "first shopper" is derived from the idea that any economy is essentially a barter: "I work for you only if (or because) you work (now or later, or have been working) for me." ("Parguez/Seccareccia acknowledge this nexus when they say: "accepting bank debt as payment is to acquire a right on the existing as future output that will be created by ... [other] agents ...")

Within this framework, the "first shopper" is one who enjoys the fruit of other people's labor without having given his own in exchange. He has given money all right, but none of the subsequent holders of his money can hold him liable for it: money is NOT an IOU from a buyer to a vendor.

And of course it is not an IOU at all for the vendor (the "2nd, 3rd etc. receiver"). "These new holders owe nothing to the banks" as Parguez/Seccareccia correctly note - p. 104/419.

Which also means that definitions of the "money is credit"-type clearly misfire.

Obviously, a system like this can only work if there is a built-in mechanism that coerces the first shopper to give back the advance that he was granted (in terms of the real economy, i. e. not "money" from the bank, but "stuff" from the economy as a whole). There must be a quasi-automatic mechanism which constrains (or induces) the "first money receiver" = "first shopper" to kind of "put back in the common pot something of equal value as what he was permitted to take out". (As you can see, I'm talking here about the economic rationale behind the financing mechanism, i. e. what has made our present system of money creation a comparative success and therefore survive in the selection of human institutions in the course of history.)

This "return-mechanism" is the credit creation of money itself. Since the first receiver has to pay his credit back, the "whole circle" is not complete unless he himself has sold something in order to get hold of money in order to amortize his credit.

Parguez/Seccareccia describe this "monetary circuit" in their aforementioned paper on p. 104/419.

But they omit the deposits in their presentation (I mean the "real" deposits created by depositors bringing or transferring base money to the banks, not "accounting 'deposits' " created only on the books by bank credit creation). [Base money is also called high powered money (HPM) and can by law be created exclusively by the central bank. From a banker's perspective HPM is also called "reserves", because payments between banks or in cash can be effected with this money only and so the bank has to hold in store - or be able to procure at short notice - a sufficient amount of these "reserves".] Omitting the (real) depositors is logical for the authors, because they conceive of credit as a debt of banks issued on themselves. However, since a bank's self-created money cannot be used for anything but in-house transactions, base money obviously does play a more important role than Parguez/Seccareccia are willing to concede.

Plus there is another blurring in step 1 of their 3-step circuit: "In the initial phase when banks grant credit, they issue new debts upon themselves, which the lend to non-bank agents. ... these debts appear as an increase in banks' liabilities ...". The description is correct for a traditional 2-step credit procedure, where first a borrowers account is credited with the credit granted, and then the customer withdraws the money in cash or remits it to another economic agent. But in modern banking overdraft facilities play a large role, and in these cases credit does not appear in the debtors account (only temporarily anyway, and typically for a very short time span) as a deposit. Instead, the acts of executing a payment to or by order of the debtor and granting the credit fall in one. So the borrower's account never shows a plus, but is debited immediately.

So what is really important (and potentially a problem for the bank) is not the "credit creation" as such. This is only an accounting procedure and in itself and from a purely technical perspective (it's simply "writing numbers on a sheet") not subject to any restrictions. What does matter (for both the customer and the bank) is (only) the act of payment. This is what the borrower came for, and at this point the bank has to come up with base money (except for remittances to other in-house customers). The phrase (quote above) "accepting bank debt as payment is to acquire a right on the existing as future output" is therefore incorrect. "Bank debt" does NOT (except between customers of the same bank) buy anything. The sole carrier of purchasing power is base money (HPM, reserves).

Banks can make their supply of HPM go a long way, because they constantly give and receive base money. So they amongst themselves banks only transfer the NET amount that they owe each other (clearing). And maybe not even that: If the credit bank lacks HPM, it can usually borrow it from the receiving bank, or from any other one (interbank lending). Eventually, if all else fails, the credit bank can ask the central bank for credit. Usually the central bank will "accommodate" such requests (that is what the - convincing - theory of "endogenous money" is all about). However, the commercial bank may not like the price - interest - it has to pay, so there still are - highly elastic - limits to credit creation even on the supply side. (Plus, of course, on the demand side the demand itself and the creditworthiness of potential borrowers.)

Whenever a central bank lends money to a commercial bank, this increases the amount of HPM in the system. Which, as the term "high powered" (money) implies, can therewith create a lot more purchasing power than the face value.

Let us retain here, though, that eventually it is NOT the bank money that is invested with purchasing power (or only for a small fraction, namely for in-house transactions), but the money coming from the central bank.

Anyway, back to our definition job.

What a central or commercial bank does when it issues any credit must be dissected on TWO levels:

·         The legal-financial micro level of business management and

·         The macro level of what economic rationale is behind this principle of operation. Why did banking and credit, and the credit creation of money originate and survive as a social institution?

What we see here is another "invisible hand", where micro rationality fits perfectly into macro rationale. By pursuing its own self-interest of making their debtors pay, banks render a service to the whole economy through forcing "first purchasers" to return the "advance" which they had received from (some economic agent within) "the economy".

But how do we explain, within this framework of economic rationale (i. e. not in legal terms or with reference to everyday knowledge), that B accepts (intrinsically worthless) money from A as payment for (more or less) valuable goods etc.?

The (real economy) reason is that the banks' credit creation and credit collection carry two faces (and that I don't mean negative):

·         For the bank itself, they are a normal profit-seeking activity as in any other company.

·         But for the economy as a whole, the bank acts in effect (though not on paper) as a proxy:

o    When it grants credit, the bank may "issue debt on itself" from a legal point of view (not sure). But from a real economy perspective that is an utterly meaningless statement. For one thing, because what matters is not any possible crediting of the borrowers account (which does not even take place in a overdraft credit), but the act of payment. And for another, because what counts for the borrower is not the money or credit as such, but the purchasing power on the market.
Therefore it is appropriate to conceive of  a bank (national or commercial), when it creates credit, as a proxy acting on behalf the respective national economy. The national economy is the agent proper (again: not in legal terms, but in an adequate description of real economy effects). Acting as proxy to the economy as a whole, a credit bank grants a debtor an advance on a share of the common output available in the market.

o    When it collects the credit, the bank, while on the micro level pursuing nothing but its own interest, on the macro level once more acts as proxy to the whole economy. By collecting the outstanding debts (and, if needs, by forcing the debtor with legal coercion to pay), the bank constrains him to sell something on the market. So in and by the process of getting ready to pay off his credit, the debtor automatically "puts his advance (in goods etc.) back in the common pot".

To repeat (starting at the other end):
A bank does not only act (implicitly) as an agent to the whole economy whenever it collects the debt, but also when it issues the credit (= new money, or at least new money on the market).
For the first receiver (but equally for all of the following receivers) money is a voucher issued by a banking Institution on behalf of the whole economy. Money embodies the promise of a whole economy that it can be redeemed anywhere on the market.

This being so, it is utterly wrong to call money an "IOU": Once the bank has paid, it owes nothing to the creditor. *

Instead, for whoever holds money it's a "TOM": "They owe me"!

This holds true also for the first receiver of the money. While he has received the money only after signing an IOU to the bank, his IOU is the credit contract, NOT THE MONEY. And after the credit bank has paid to (the order of) the borrower (typically in base money and not with its own bank money - and therefore not with its own IOU either!), the credit bank is not indebted to the debtor any longer.
* [On second thought, this statement does not deliver a complete description of reality. For a correction see my amendment of Febr. 19, 2015, below.]

Today, fiat Money in general is issued as debt. Coins are an exception: They are usually issued by the government, not by a central bank, and at any rate not by way of credit, but simply by spending. (Which makes a nice profit for governments, because the production value is mostly much lower than the purchasing power of coins.)

However, credit creation is not a feature without which money would not be money.

Economically it may wreak havoc on an economy (hyperinflation), but from a pure technical point of view (regulation aside) Governments CAN simply print money and spend it.

So whenever someone (like Modern Monetary Theory - MMT) claims that "governments create money" they better explain what they mean: The "print & spend"-variety, or the central bank creating money by credit. In my opinion, saying that "governments create money" only makes sense when central banks act like self-service ATMs for governments, as happened lately in Zimbabwe, and, historically, in many instances. Particularly so in wartimes and in the aftermaths of - lost - wars, e. g. in the early 1920ies for the German government.

Actually, the question of whether or not any government deficit spending is financed "with the printing press" is a lot more complicated than MMT-texts and others (at least the ones I have seen) suggest.

Basically, just like individual private budget deficits those of the government can come from one of two sources:

·         Money (i. e. purchasing power) that is already "out there" (in the financial system). In this case, net financial assets in the private sector are unchanged.

·         Freshly created money. This can be bank money - an expansion of credit from commercial banks - and/or base money. (My guess is that it would be, just like private credit, mostly bank money, backed by a fractional expansion of the base money supply.) Obviously, any expansion of credit (commercial and/or central bank) does increase the net financial assets in the private sector.

When private customers or insurance companies buy government bonds, the funds probably come from deposits, i. e. from money already in the system. So the net financial assets in the PS remain unchanged.

Funding for that portion of bonds which is bought by banks may be taken from their customer's deposits, and/or the banks may refinance their bond purchases by borrowing against or (if the central bank agrees) selling the bonds to the central bank. Either way, involving the central bank is equivalent to the creation of fresh base money and an increase in net financial assets in the private sector. However, eventually the government has to pay back this debt, and then the extra HPM is taken out of the system again.

And (no matter here whether or to what extent this is legally permissible or not) from a purely technical point of view the central bank can also buy government bonds (more or less) directly (as the Fed has done in "quantitative easing"), or simply grant overdraft facilities to government. This too is a creation of fresh base money (and an increase of net financial assets in the private sector).

Finally, and that's when things sooner or later get really bad (hyperinflation), a central bank can technically simply "print" (which in today's reality of course has been replaced by entering figures in a computer) and hand the money over to the government to "pay" with.

Interesting question is what happens when a government revolves its debts, paying interest only out of the tax revenue and rolling over the principal ("speculative borrowing" in Hyman Minsky's terminology). Or, worse, when the government acts as a "Ponzi borrower", i. e. keeps steadily increasing its debt, continuously paying back old debt with new debt plus "taking an extra mouthful from the bottle". This seems to be what's going on, at least since the financial crisis (and maybe before), in the Western world (and probably elsewhere too, for sure in Japan).

My 5 cents are that we're all in for a big surprise. And not a nice one.

Anyway: Contrary to what L. Randall Wray claims ("Money", e.g. p. 17), money can NEVER be an IOU of any government (or, for that matter, anybody else). The concept of money as an IOU derives, as we have seen above, from the notion of deferred barter. Within this model, IOU stands for "real stuff", i. e. commodities (and services): When buying potatoes from B. in summer, A was not promising to give him "money" in autumn, but to deliver apples (and this - not worthless paper - is what B wanted and why he did deliver the potatoes in the first place).

Without this in mind the (misguided, but basically understandable) theory of "money is an IOU" is wholly meaningless, nothing more than an empty shell. But, alas, a highly seductive one, because its seeming clarity and simplicity makes people easily believe that there must be something behind it.

Like I said before, MONEY IS A TOM: THEY OWE ME: The whole economy owes the holder whatever is being sold (at the respective nominal value of course) on the market.

There are exactly TWO ways how money (currency) can originate:

·         By credit or

·         By forgery.

Any government that simply "prints and spends" is, in an economic apprehension (as opposed to a legal one) forging money, i. e. "print + spend" unavoidably has the same effect as counterfeiting money. In both cases, the "first receiver" (government or forger) takes from the common pot (economy) without putting any production of their own in.

The state can, just like anybody else, redeem IOUs from income only. And since state income comes from taxation, "putting stuff back in" can only be effected by taxation on the level of finance. On the level of the real economy this means that the state is using taxpayers products to put back in what he has previously taken out by way of credit.

Because money is a TOM instead of an IOU, whenever government (or a counterfeiter) "prints & spends" they are producing and presenting "They owe mes". The "IOU"-part of "putting back in" is missing, because this is quality is only imparted on credit created money.

Obviously, the government creation of coins also is a "forgery" in this economic sense.

It is only due to the fact that the relative amounts can be neglected in comparison with allover transactions that this "forgery" (and also private counterfeiting) is not felt as inflation.

But once government starts to "print & spend" TOMs in a big way, inflation is at hand. (Germany 1923 and 1940 ff., Zimbabwe in our days and so many other countries in history.)

"IOU" stands, in the real world, for "I will give back what I have taken out".

And this promise can only be imposed and enforced through the credit creation of money.

In the field of monetary theories, the fact that money NEVER is, nor can be, an IOU (but instead is a TOM) confounds pie in the sky systems like "Modern Monetary Theory". This is simply based on the faulty assumption of money being an IOU and therefore government issuing (or being able to issue) money as an IOU. They simply can't, because it's not in the nature of money. When a government DOES issue an IOU, it must necessarily take on the form of a loan or at any rate: of state debt.

To cut a lengthy explanation short:

·         Money is a TOM.

·         When issued against an IOU (i. e. through a credit contract) it is covered.

·         When not, it is not covered.

·         Economically, issuing uncovered money is counterfeiting money.

·         Legally, when the government does that ("prints + spends"), it is taxation (inflation tax).

My mail partner has drawn my attention to the fact that my understanding of IOU is not identical with the use of the term "IOU" by MMT. Actually, in Wray's paper on "Money" he juggles with (at least) THREE (!) different meanings of "IOU":

1.    The common-sense understanding of 'owing someone an object or a payment',

2.    What he calls the "Schumpeterian" (i. e. my "real economy") meaning, that "the producer commands some of society’s means of production at the beginning of the production process before actually contributing to society. The producer’s IOU (held by the bank) represents a social promise that she will temporarily remove commodities on the condition that she will later supply commodities to society."

3.    And finally, he comes up with a very special meaning of "IOU" that hardly any sensible person out on the street would ever guess: Government graciously conceding that it is willing to deign its citizens the great favor of accepting "government" money for payment of their tax dues!

So with Wray and presumably in the MMT-discourse in general an "IOU" is also (and probably mainly) a promise by the issuer that whatever any holder of the IOU owes to the issuer can be paid with the issuers IOUs.

This to me sounds just as weird as it looks on paper, namely like a self-referential definition. Which very much gives the impression of deliberately striving to confound two different meanings and invent a completely novel 3rd one in order to make people swallow the message: "Just let government print + spend, that's an absolutely normal thing, even a must if you want the economy to work properly."

To me, such a "scientific" operation looks more like political indoctrination than sound economics (even though, of course, economics is hardly ever free from political implications, and probably also intentions).

At any rate, true or false: A definition that describes money as a government IOU is one that examines money from a purely legal-financial view. It does not (in itself) tell us anything about why money is a good thing to have in the real economy, or as to what happens in real life if too much or too little money is issued.
All it does tell us is that basically government deficit spending is a good thing for everybody.
Of that, I'm not really sure. Guess I'd rather see the rich pay adequate taxes than be spoon-fed with interest by government.


Amendment, Febr. 15, 2015 concerning the "IOU"-subject:

Taking a second look, I feel I must rectify my previous statement that
"..... it is utterly wrong to call money an 'IOU': Once the bank has paid, it owes nothing to the creditor."
While it does hold true for any central bank, deposits with commercial banks actually ARE an 'IOU': namely one for base money (= high powered money). Bank money IS an IOU - for base money .
But again this finding does not completely mirror the economic reality. 

It is fully correct only in the legal dimension: Obviously, when I want to take out money from my bank account, I may do so in cash. Or I may transfer (part of) my deposit to an account (my own or someone else's) with another bank. In both cases, my bank can carry out those transactions with base money only. 
However, due to netting, interbank-lending and reverse actions of other customers (depositing cash while I withdraw mine), the banking system as a whole only needs, say, 10% high powered money in order to fulfill any claims for "real" money. (Of course things might look very different if there was a - General - bank run.)

To sum up our results:
Juridically (though not legally!) commercial banks owe their depositors 100% base money.
Economically (technically, in reality) the banking system as a whole only "owes" its depositors (say) 10% high powered money.
One way or the other, it does make sense to say that bank money (i. e. the book money in the commercial part of the 2-tier-banking system) is an IOU of the banks to their depositors.

Of course, once it has been withdrawn from the borrower's account it is not an IOU of the money creating bank any longer.
But it does shapeshift into an IOU again if it gets deposited with another (or the same) commercial bank.

 Textstand vom 16.06.2023