Currency and Credit

"It’s almost a descriptive, empirical, historical journalistic project. He’s looking at concrete banking practices. Something you see across time if you’re studying the history of money, and I think this holds true even today, if you want to know who really gets it, who really has some insight, talk to bankers. At the highest level, the smartest bankers see how money works. What Hawtrey is doing is looking at actual banking practices in late 19th and early 20th century Britain and talking about the way bankers expand and contract credit by creating bank loans and liquidity. Issuing and paying off loans is the creation and destruction of money, which doesn’t happen at the central bank—although the central bank plays a very important role today. The actual creation of money happens when commercial banks create loans, because the creation of a loan is this simultaneous creation of a deposit account, and a loan. That’s where new money comes into being. Hawtrey was one of the first to look at how the expansion and contraction of credit functioned. He poses the question ‘what is it that credit can do’? He doesn’t question the assumption that money and credit are different, but from the same starting place as an orthodox account he reaches radical conclusions: because when he looks at the actual high-level functioning of the banking system in Britain, which is the center of the banking system of the world at that time, and goes through all these cases, he shows that credit can do everything. And, in fact, credit is what’s doing everything most of the time."