In the United States, money is created as credit and debt. The US Constitution1 allows the federal government to produce money directly, but that is not how the nation has chosen to operate for most of its money. In this post, we look at the various sources for issuing credit and debt that provide money to run the country.
From a photo by Giorgio Trovato on Unsplash.
Surely, there is a reason why, in writing the General Theory, Keynes was in search of “a theory of output as a whole.”1 Without it, one cannot understand money, banking, and the economic process.
re “Inflation is always and everywhere a monetary phenomenon.”
. – – Milton Friedman1
Note: An updated, expanded, and further edited version has been published here.
Nobel laureate Milton Friedman is considered to be the father of monetarism. This macroeconomic theory enjoyed popularity in the late 20th century but has come under increased criticism in the 21st century. Monetary theory is deeply linked to arguments about the causes of inflation. As shown here, there is little data to support Friedman’s theory that government spending generally causes inflation. The issue is not as simple as he made it seem.
Milton Friedman, 1989. Credit: Encyclopedia Britannica.
Since the Great Financial Crisis of 2008, there have been headlines such as Europe banks hoarding ECB cash, threatening credit crunch (2012), Banks across Europe are considering taking a drastic step to avoid negative rates (2016), and Bank of America Clients Hoard Cash at Highest Level in Two Decades (2022). This first became a problem in the US during the Dot.com Crash (2001) and the GFC – and then shifted to Europe. After all this time, we in America might have a more dispassionate view of the issue. But the third reference above shows the problem of hoarding money persists.
Image credit: Pixabay, Public Domain.