It's fine to say that all new money should be restricted to financing new capital formation — but what about people who need money now for non-capital expenditures? Even non-owners have to eat, have a place to live, clothe themselves, get educated, and obtain health care. Are people who need financing for things that do not generate their own repayment to be left out in the cold?
No. In the opening passages of Adam Smith's The Wealth of Nations, it is obvious that the purpose of production is consumption. That being the case, we cut consumption now and save only to consume in the future, not to reinvest the savings. The financing for investment should, as Dr. Moulton explained in The Formation of Capital, come only from discounting and rediscounting bills of exchange ("discounting" and "rediscounting" being the special terms for drawing bills of exchange and using them as money).
A student or prospective homeowner who has not accumulated sufficient savings to "consume" by going to school or purchasing a home has to find the money somewhere. If not given as a gift or charity, the only recourse is to borrow somebody else's accumulated savings — the special purpose for which banks of deposit were invented: they aggregate savings from savers, and lend them to borrowers, charging a fee for the service.
Since the purpose of such loans is to consume unconsumed production (expend savings), this can be considered good credit or debt to the extent that it is socially or politically expedient and serves a useful purpose. Economically and financially, however, it must be classified as bad credit because what the money is spent on does not directly generate its own repayment.
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