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Wilhelm Lautenbach’s credit mechanics – a precursor to the current money supply debate

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  • Decker, Frank
  • Goodhart, Charles A. E.

Abstract

This article assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behaviour of non-banks and non-borrowing bank creditors. With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be re-established.

Suggested Citation

  • Decker, Frank & Goodhart, Charles A. E., 2022. "Wilhelm Lautenbach’s credit mechanics – a precursor to the current money supply debate," LSE Research Online Documents on Economics 111819, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:111819
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    File URL: http://eprints.lse.ac.uk/111819/
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    References listed on IDEAS

    as
    1. Frank Decker, 2015. "Property Ownership and Money: A New Synthesis," Journal of Economic Issues, Taylor & Francis Journals, vol. 49(4), pages 922-946, October.
    2. Johannes Schmidt, 2017. "Reforming the undergraduate macroeconomics curriculum: the case for a thorough treatment of accounting relationships," International Journal of Pluralism and Economics Education, Inderscience Enterprises Ltd, vol. 8(1), pages 42-67.
    3. Frank Decker, 2017. "Central Bank or Monetary Authority? Three Views on Money and Monetary Reform," Economic Affairs, Wiley Blackwell, vol. 37(3), pages 343-356, October.
    4. Fabian Lindner, 2015. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," World Economic Review, World Economics Association, vol. 2015(4), pages 1-1, February.
    5. Werner, Richard A., 2016. "A lost century in economics: Three theories of banking and the conclusive evidence," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 361-379.
    6. Johannes Schmidt, 2019. "Balance Mechanics and Business Cycles," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 26(6), pages 1310-1340, November.
    7. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
    8. Hahn, L. Albert, 2015. "Economic Theory of Bank Credit," OUP Catalogue, Oxford University Press, number 9780198723073.
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    More about this item

    Keywords

    bank credit creation; money supply theory; credit and balances mechanics; borrowers' collateral;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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