Randall Wray is on fine form criticising a ‘Debt Free Money’ advocate who claims
When a commercial bank makes a loan, the principal is created, but not the interest.
Money is always and everywhere else an IOU. As my prof, Hyman Minsky, always said, discipline the analysis with balance sheets. Show me the balance sheets in which government creates and spends money that is not its liability, vs the balance sheets in which government borrows its own currency from banks…
But he doesn”t really answer the objection re banks not crearting the money for interest. I note that the supposed ‘Gap’in demand re interest is exactly the same as promulgated by Major Douglas and Social Credit theorists for years.
It is a fallacy.
The fallacy is due to
- their being no rational reason for taking out a loan for business purposes unless the investment yields a profit. The entrepreneur calculates this before seeking a loan. This however opens up the potential that the economy cannot grow because interest swallows up profits. This is also a fallacy because:
- The proportion of profits retained is respent circulating throughout the economy until – in a process of geometrical contraction – the limnit is reached on it being paid as interest
- The intermediate goods bought by an entrepreneur are subject to value added and profit by suppliers
- Bank profits are either returned to shareholders to be spent or retained as bank capital to expand the ability of the bank to loan further.
In all four ways the money recirculates to enable payment of interest and supplying the additional demand to pay for the new product, the loan and the interest on it..