The Monetary Macroeconomics of Modern Economic Systems

What is money and how do banks issue it? How is it associated with physical output? Is it endowed with a positive value since its very creation, or does it acquire its purchasing power, and how? Is it necessary to distinguish between money proper and money income? If yes, what is their logical relationship? These are some of the questions dealt with in this chapter, where we endeavour to show that the specific nature of bank money remains, in part, a mystery and needs to be investigated starting from its bookkeeping origin. Too often identified with a commodity or an asset, money is mainly perceived as a stock that can circulate more or less rapidly within the economy and whose cost has a direct impact on production. Is this definition consistent with the way money enters those payments that banks carry out? A rigorous analysis based on double-entry bookkeeping shows that this is not the case, because money is intrinsically valueless and can only derive its value or purchasing power from production. The classical distinction between nominal and real money finds a new raison d’être in the distinction between money and income, where the latter is the result of a transaction through which money (a simple numerical form) integrates produced output as its real content. This new macroeconomic analysis of money and income leads to a fundamental dismissal of the old-fashioned idea that money creation is nothing less than a credit creation, or in other words that, by issuing money, banks originate credit, that is, a loan granted to the economy and financed by banks themselves. In fact, banks act as monetary as well as financial intermediaries, and credit is never financed through money creation.