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The first formal Credit theory of money arose in the 19th century. Anthropologist David Graeber has argued that for most of human history, money has been widely understood to represent debt, though he concedes that even prior to the modern era, there have been several periods where rival theories like Metallism have held sway.
ScholarshipThe earliest modern thinker to formulate a credit theory of money was Henry Dunning Macleod, with his work in the 19th century, most especially with his The Theory of Credit (1889). Macleod's work was expanded on by Alfred Mitchell-Innes in his papers What is Money? (1913) and The Credit Theory of Money (1914), where he argued against the then conventional view of money arising as a means to improve the practice of barter. In this alternative view, commerce and taxation created obligations between parties which were forms of credit and debt. Devices such as tally sticks were used to record these obligations and these then became negotiable instruments which could function as money. As Innes puts it in his 1914 article :
Innes goes on to note that a major problem in getting the public to understand the extent to which monetary systems are debt based is the challenge in persuading them that "things are not the way they seem" The Credit Theory is this: that a sale and purchase is the exchange of a commodity for credit. From this main theory springs the sub-theory that the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to "payment," that is to say, to satisfaction for the credit, and on the obligation of the debtor to "pay" his debt and conversely on the right of the debtor to release himself from his debt by the tender of an equivalent debt owed by the creditor, and the obligation of the creditor to accept this tender in satisfaction of his credit.
In his 2011 book Debt: The First 5000 Years, the anthropologist David Graeber asserted that the best available evidence suggests the original monetary systems were debt based, and that most subsequent systems have been too. Exceptions where the relationship between money and debt was less clear occurred during periods where money has been backed by bullion, as happens with a gold standard. Graeber echoes earlier theorists such as Innes by saying that during these eras population perception was that money derived its value from the precious metals of which the coins were made, but that even in these periods money is more accurately understood as debt. Graeber states that the three main functions of money are to act as: a medium of exchange; a unit of account; and a store of value. Graeber writes that since Adam Smith's time, economists have tended to emphasise money as a medium of exchange. For Graeber, when money first appeared its primary purpose was to act as a unit of account, to denominate debt. He writes that coins were originally created as tokens which represented a unit of account rather than being an amount of precious metal which could be bartered.
Economics commentator Philip Coggan holds that the world's current monetary system became debt based after President Nixon suspended the link between money and gold in 1971. He writes that "Modern money is debt and debt is money". Since the 1971 Nixon Shock, debt creation and the creation of money increasingly took place at once. This simultaneous creation of money and debt occurs as a feature of Fractional reserve banking. After a commercial bank approves a loan, it is able to create the corresponding amount of money, which is then acquired by the borrower along with a similar amount of debt. Coggan goes on to say that debtors often prefer debt based monetary systems such as Fiat money over commodity based systems like the gold standard, because the former tend to allow much higher volumes of money to circulate in the economy, and tend to be more expansive. This makes their debts easier to repay. Coggan refers to Bryan's 19th century Cross of Gold speech as one of the first great attempts to weaken the link between gold and money; he says the former US presidential candidate was trying to expand the monetary base in the interests of indebted farmers, who at the time were often being forced into bankruptcy. However Coggan also says that the excessive debt which can be built up under a debt based monetary system can end up hurting all sections of society, including debtors.
In a 2012 paper, economic theorist Perry Mehrling notes that what is commonly regarded as money can often be viewed as debt. He posits a hierarchy of assets with gold  at the top, then currency, then deposits and then securities. The lower down the hierarchy, the easier it is to view the asset as reflecting someone else's debt. A later 2012 paper from Claudio Borio of the BIS made the counter-intuitive case that it's loans that give rise to deposits, rather than the other way round.
AdvocacyThe conception that money is essentially equivalent to credit or debt has long been used by those advocating particular reforms of the monetary system, and by commentators calling for various monetary policy responses to events such as the Financial crisis which began in 2008. A view held in common by most recent advocates, from all shades of political opinion, is that money can be equated with debt in the context of the contemporary monetary system. The view that money is equivalent to debt even in systems based on commodity money tends to be held only by those to the left of the political spectrum. Regardless of any commonality in their understanding of credit theories of money, the actual reforms proposed by advocates of different political orientations are sometimes diametrically opposed.
Advocacy for a return to a gold standard or similar commodity based system.Austrian School or Libertarian perspective often hold that money is equivalent to debt in our current monetary system, but that it need not be in one where money has inherent value, such as a gold standard. They have frequently used this view point to support arguments that it would be best to return to a gold standard, to other forms of commodity money, or at least to a monetary system where money has positive value. Similar views are also occasionally expressed by Conservatives. As an example of the latter, former British minister of state The Earl of Caithness made a 1997 speech in The House of Lords where he stated that since the 1971 Nixon Shock, the British money supply had grown by 2145% and personal debt had risen by almost 3000%. He argued that Britain ought to move from its current "debt based monetary system" to one based on equity. In the early to mid 1970s, a return to a gold anchored system was advocated by gold rich creditor countries including France and Germany. A return has repeatedly been advocated by Libertarians, as they tend to see commodity money as far preferable to fiat money. Since the 2008 Crisis and the rapid rise in the price of gold that soon followed it, a return to a gold standard has frequently been advocated by goldbugs.
Advocacy against the gold standardFrom centrist  and left wing perspectives, credit theories of money have been used to oppose the Gold Standard while it was still in effect, and to reject arguments for its re-instatement. Innes's 1914 paper is an early example of this.
Advocacy for expansionary monetary policyFrom a moderate mainstream perspective, Martin Wolf has argued that since most money in our contemporary system is already being dual-created with debt by private banks, there is no reason to oppose monetary creation by Central Banks in order to support monetary policy such as Quantative easing. In Wolf's view, the argument against Q.E. on the grounds that it creates debt is offset by potential benefits to economic growth and employment, and because the increase in debt would be temporary and easy to reverse.
Advocacy for debt cancellationArguments for Debt forgiveness have long been made from people of all political orientations; as an example, in 2010 hedge fund manager Hugh Hendry, a strong believer in free markets, argued for a partial cancellation of Greece's debt as part of the solution to the Euro crisis. But generally advocates of debt forgiveness simply point out that debts are too high in relation to the debtors ability to repay, they don't make reference to a debt based theory of money. Exceptions include David Graeber, who from a radical perspective, has used credit theories of money to argue against recent trends to strengthen the enforcement of debt collection, such as greater use of custodial sentences against debtors in the US. He also argued against the over zealous application of the view that paying ones debts is central to morality, and has proposed the enactment of a biblical style Jubilee where debts will be cancelled for all.
Relationship with other theories of moneyDebt theories of money fall into a broader category of work which postulates that monetary creation is endogenous.
In the forms commonly held by those to the left of the political spectrum, Debt theories have some overlap with Chartalism and are opposed to Metallism and often to the Quantity theory of money. Conversely, in the forms held by those with a Libertarian or Conservative perspective, debt theories of money are often compatible with the Quantity theory, and with Metalism at least when the latter is broadly understood.
Notes and references
- Credit is understood as the mirror image of debt. As Innes mentions in What is money? (1913), whenever he uses the word credit or debt, "the thing spoken of is precisely the same in both cases, the one or the other word being used according as the situation is being looked at from the point of view of the creditor or of the debtor."
- Originally published in The Banking Law Journal, since reprinted in books such as Wray (2004) and made available online by the CES
- Randy Wray, ed. (2004). "See esp Chpt 1 7". Credit & State Theories of Money. Edward Elgar. ISBN 1843765136.
- This is the classic Metallist view.
- Polanyi goes as far as to say Ricardo "indoctrinated" economists into viewing money just as a medium of exchange - see chapter 16 of The Great Transformation
- David Graeber (2011), "passim, see esp Chpt 2: The Myth of Barter", Debt: The First 5000 Years, ISBN 978-1-61219-181-2
- The new debt will generally soon exceed the newly created money due to added interest.
- Philip Coggan (2011). "passim, see esp Introduction". Paper Promises: Money, Debt and the New World Order. Allen Lane. ISBN 1846145104.
- In the Financial sector, gold is often said to be the only financial asset that does not represent someone else's liability to pay.
- Perry Mehrling (2012-01-25). "The Inherent Hierarchy of Money" (PDF). Columbia University. Retrieved 2012-07-10.
- "The financial cycle and macroeconomics: What have we learnt?", by Claudio Borio, Bank for International Settlements December 2012
- Ron Paul (12 Sept. 2003). "Fiat Paper Money". LewRockwell.com. Retrieved 16 July 2012.
- Malcolm Sinclair, 20th Earl of Caithness (1997-03-05). "Our Debt-Based Money System Will Break Us". Prosperity UK. Retrieved 2012-07-12.
- Helleiner,, Eric (1995). States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. Cornell University Press. ISBN 0-8014-8333-6.
- Izabella Kaminska (31 May 2012). "Debunking goldbugs". The Financial Times. Retrieved 16 July 2012.
- During the two centuries leading up to WWII, it was mostly only those who leaned towards the left who opposed the Gold Standard, but this has since became a centrist position.
- Martin Wolf (9 Nov 2010). "The Fed is right to turn on the tap". The Financial Times. Retrieved 16 July 2012.
- Courtney Comstock (2010-02-10). "Watch Hedge Funder Hugh Hendry Fight WIth Joe Stiglitz". Business Insider. Retrieved 2012-07-18.
- Simply put, this contrasts with exogenous creation where money is created by events such as new finds of gold occurring outside of a narrowly conceived economy.
- Chartalists will sometimes say money derives it value by virtue of being the legal way to pay ones debt to the State as taxes. Debt theories can be broader in scope - Graeber, Innes and others have argued that organic debt based monetary systems that did not involve the state continued to operate well into the 19th century.
- Stephanie A. Bell and Edward J. Nell, ed. (2003). "Passim". The State, the Market, and the Euro: Chartalism Versus Metallism in the theory of money. Edward Elgar. ISBN 1843761564.