Credit mechanics – a precursor to the current money supply debate

Charles Goodhart and Frank Decker

No 13233, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper 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 behavior 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 established.

Keywords: Credit creation; Bank credit; Money supply theory; Credit mechanics; Balances mechanics (search for similar items in EconPapers)
JEL-codes: E40 E41 E50 E51 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-cba, nep-his, nep-hpe, nep-mac, nep-mon, nep-pay and nep-pke
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Citations: View citations in EconPapers (9)

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