Bank money

Bank money is a liability issued by banks and is sometimes also referred to as credit-money. According to Keynes (1930 [1971], p. 5) bank money "is simply an acknowledgment of private debt, expressed in the money of account, which is used by passing from one hand to another, alternatively with money proper, to settle a transaction".

Chartalists such as Wray (1998) distinguish between state money and bank money. In this view, state money is exogenously created by the state in the form of central bank and treasury liabilities. Bank money is a multiple of state money, recorded on the liabilities side of commercial banks' balance sheets. Chartalists assume that the treasury and the central bank can be considered as one entity from an economic point of view (Wray, 2003, p. 87). Gnos and Rochon (2002, p. 48) disagree, pointing out that "if the Fed is the treasury's bank, then the Fed becomes a central bank vis-à-vis the treasury as well as vis-à-vis private banks, the latter role consisting in converting monies into one another and thus allowing banks to meet their reciprocal liabilities". Additionally, chartalists believe "the [US] government can buy anything that is for sale for dollars merely by issuing dollars" (Wray, 1998, p. ix). But neither central banks nor treasury departments can finally purchase anything by incurring a debt. Instead, every final pur- chase of the treasury or the central bank must be financed with income sooner or later. It is therefore more realistic to suggest that all modern money is (central or commercial) bank money.

We may follow Keynes by restating that bank money is a bank's acknowledgment of debt (AoD). How can a bank's AoD serve as an instrument to discharge debt between non-banks? We can depict the payment mechanism by referring to Rossi's (2007, p. 37) graphic illustration of a payment on the labour market.

Through the use of double-entry bookkeeping, a bank extends to a firm its AoD (+£x) once it carries out the firm's payment order. The firm instantaneously passes on the bank's AoD (−£x) to the benefit of the worker (+£x), thereby discharging the outstanding debt between firm and worker. The bank's AoD immediately flows back (−£x) to the bank as the worker purchases a financial asset in the form of the bank deposit that makes up his wage bill. As a result of this flow of bank money, the worker becomes the owner of an income deposited in the bank, and the firm is indebted to the bank (see Cencini, 2010, p. 48).

Accordingly, we can make the following four observations. First, we notice the means- of-payment function of bank money. The debt between the firm and the worker could not have been discharged with the firm's own AoD, in which case the payment would simply have been postponed. Precisely because the issuing bank is neither a seller nor a purchaser in this transaction, its AoD can serve as a means of payment between payer and payee. Second, owing to its numerical nature, bank money acts as a unit of account. By issuing a number of money units every time a payment is carried out, bank money measures and thereby homogenizes economic output. Third, Figure 1 also allows a distinction between production and emission. While economic production is a time- intensive process involving the employment of the factors of production, the emission of bank money is an accounting operation that lasts an instant from a logical point of view. Production gives rise to new output and the corresponding purchasing power in the form of income. The emission of nominal bank money, however, simply gives rise to a double entry in banks' books. Therefore, bank money measures output, but is itself a valueless and numerical vehicle. Finally, Figure 1 illustrates that bank money is neither a net asset nor a net liability. When a payment is carried out, both the payer and the payee are credited (+£x) and debited (−£x) by the bank within the same impulse. "Being a unit of account, money is neither a net asset nor a net liability, but simultaneously an asset and a liability whose function is that of 'counting' the object of economic transactions" (Cencini, 1995, p. 13, italics in the original). This means that money cannot be considered an asset at a macroeconomic level, as it is both an asset and a liability at the same time (see Schmitt, 1975, p. 13).

See also:

Bank deposits; Central bank money; Chartalism; Money and credit; Quantum macro- economics; State money.