Sunday, October 3, 2010

From an Email

In The Wealth of Nations (Book Two, Chapter II, "Of Money Considered...") Adam Smith writes of a "channel of circulation." Smith assumes that "the whole circulating money of some particular country" (at a particular time) amounts to "one million sterling" and talks about what might happen if bank notes came into circulation in addition to the sterling.

He says that one million pounds is sufficient to support current production -- it fills the channel of circulation -- and so on. I really like the "channel of circulation" image: A particular amount of money is required to support a given level of economic activity.

If you look at our "channel of circulation" the money that fills it is almost all red, almost all credit-money. I want to drain out about half that red and then fill the channel with green, with non-debt money. After this has been done, there will be just as much money as before, and just as much economic activity. But the money itself will be less costly, and therefore (says I) the economy will perform better.

The thing is, we don't need to punish anybody for using credit. We just need to fix the imbalance in the money.

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