This piece is intended to orient the reader and
frame the discussion presented in “A New Look at Prices and Money” by Norman G.
Kurland. “Prices and Money” was first
published in The Journal of
Socio-Economics (Vol. 30, pp 495-515), and is available online from the CESJ website.
This piece is not intended to be comprehensive or
in-depth, present all possible ramifications, or answer objections. Its purpose is only to outline the “banking
principle” paradigm on which binary economics is based, and within which Norman
Kurland’s paper is written.
The banking principle is based on both “past
savings” and “future savings.” Past
savings is the present value of past reductions in consumption. Future savings is the present value of future
increases in production.
The banking principle is in contrast to the
prevalent “currency principle” that underpins today’s “mainstream” schools of
economics. The currency principle is based
on “past savings.”
What is “Banking”?
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| Jean-Baptiste Say |
The Federal Reserve System is the central bank of
the United States. Understanding its
function and role is sometimes difficult due to the preponderance of what can
only be called “myth-information”
about money and credit, finance, commercial banking, and central banking.
There are two basic types of institutions that we
call “banks.” These are “banks of
deposit,” and “banks of issue,” also called “banks of circulation.”
A bank of deposit is a financial institution that
takes deposits and makes loans. The most
common types of deposit banks are investment banks, savings and loans, and
credit unions.
A bank of issue is a financial institution that
takes deposits, makes loans, and issues promissory notes. The most common types of issue banks are
commercial banks and central banks.
Our concern is commercial and central banks.
Commercial banks are in the business of turning
the present value of existing and future marketable goods and services into
media of exchange to facilitate commerce and industry. They do this by accepting mortgages and bills
of exchange offered by businesses and private individuals, and issuing
promissory notes to purchase mortgages and discount bills of exchange.
A mortgage is a financial instrument representing
the present value of an existing marketable good or service (“past savings”). Most people today think of mortgages as
referring only to personal home mortgages.
In this discussion the meaning is restricted to financial instruments
representing existing marketable goods and services, i.e., “existing inventories.”
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| Adam Smith |
A bill of exchange is a financial instrument
representing the present value of a future marketable good or service (“future
savings”). A promissory note is a
financial instrument conveying the promise of the issuer to pay a certain sum
on demand or on maturity of the note.
A central bank is, essentially, a bank of issue
for banks of issue. It is analogous to
reinsurance. A central bank issues
promissory notes to rediscount bills of exchange offered by its member banks
and purchase bills of exchange and mortgages on the open market.
Commercial and central banking are based on the
principle stated by Adam Smith in The
Wealth of Nations (1776): “Consumption is the sole end and purpose of all
production.” (“Part III, Ch. 8, “Conclusion of the Mercantile System.”) Smith was not the first to make this
observation, of course. It is the basis
of “Say’s Law of Markets.”