Contradicting Richard Duncan

Looking for something on credit and economic growth, I found Credit Growth Drives Economic Growth, Until It Doesn’t by Richard Duncan, from 2011.

The title is perfect.

The article is pretty good. But I have to look at his opening paragraph. I have problems with his opening paragraph. Here's the whole of it:

The single most important thing to understand about economics in the age of paper money is that credit growth drives economic growth. Before the breakdown of the Bretton Woods international monetary system in 1971, there was a difference between money and credit. There no longer is. Paper dollars and US treasury bonds denominated in paper dollars are just different types of government IOUs. When gold was money, the increase in the Money Supply (M1 and M2) had an extraordinary impact on the economy. Today, what matters is the increase in the total supply of credit.

I'll take it a piece at a time.

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The single most important thing to understand about economics in the age of paper money is that credit growth drives economic growth.

It is important to understand that credit growth drives economic growth. Not to quibble, but "The single most important thing"?? You can get into trouble if you understand credit growth without understanding the accumulation of debt. For example, Duncan writes

The total amount of debt is equal to the total amount of credit.

which is certainly correct. Immediately following, he writes

Debt and credit are two sides of the same coin.

which is a meaningless generalization.

The "same coin" metaphor is good. But not good enough. When you borrow a dollar, two dollars are created: a dollar of new money, and a dollar of new debt. The dollar of new money looks and acts just like a dollar of money. The dollar of new debt has a minus sign before the "$1", and you cannot spend it.

You can spend the dollar of new money. It goes into circulation, and no one ever has to know that it was a dollar you borrowed. But you know, because you still have the negative-money that you cannot spend: You still have the debt.

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Before the breakdown of the Bretton Woods international monetary system in 1971, there was a difference between money and credit. There no longer is.

That is incorrect. There is a difference between money and credit. Money is issued by the government now, instead of by the people who find gold. Credit is issued by private sector banks, as always.

Come to think of it, the people who find gold never issued money, not for centuries anyway. People who found gold would turn it in to the government, to the mint or something, and get coined money in exchange. It was the government that issued the money, even then.

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Paper dollars and US treasury bonds denominated in paper dollars are just different types of government IOUs.

Whenever I see the word "just" used like that, in place of facts, I have a problem.

Paper dollars and Treasury bonds are not "just" different types of government IOUs. The people who have Treasuries collect interest on them. The people who use paper dollars pay interest on them.

More accurately, unless I seriously misunderstand something, the U.S Treasury collects interest on Federal Reserve Notes from the Fed, the Fed gets it from the people (private banks, mostly) they deal with, and private banks get it from the people who bank with them, which is us.

The US Treasury pays interest on bonds, and receives interest on notes. Bonds and notes are nothing like each other, far as I can see.

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When gold was money, the increase in the Money Supply (M1 and M2) had an extraordinary impact on the economy. Today, what matters is the increase in the total supply of credit.

No. Duncan has two puzzle pieces in hand that don't go together, and he is forcing them together by putting the one sentence after the other.

When gold was money, the increase in M1 and M2 money had an extraordinary impact on the economy because in those days there was much less credit per dollar of money. It is true that what matters today is the total supply of credit. But it was not going off gold that made it true. The growing use of credit relative to money made it true.

It was also the growing use of credit relative to money that forced the dollar off gold.

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Nick Rowe says:

Gold mines were the central banks of the past. Central banks are today's gold mines.

I agree with Nick. It was not going off gold that changed things. And just as the expansion of private credit beyond what gold could support created problems for gold-based money, it is the expansion of private credit beyond what central banks can support that creates problems for central-bank-based money today.