The Evolution of Creditary Structures and Controls.(Book review)

The Evolution of Creditary Structures and Controls, by Geoffrey W. Gardiner. New York: Palgrave Macmillan, 2006. Hardcover: ISBN 1 4039 8753 X, price US$ 90.00. 304 pages.

This book is part of a growing literature on what is known as the "Creditary" approach to economics; a contemporary application of Michael Innes' (1913) "credit theory of money" and Friedrich Knapp's (1905) "state theory of money." It starts from the premise that credit relations are central to understanding economies. Economic systems founded on the division of labor require that firms and households are willing to wait for others' products while already producing and delivering theirs. This is equivalent to the acceptance of an IOU, often accounted for in some physical form such as by tally or in coin. The book documents the historical evidence--from ancient Babylonia to late medieval Europe--that the use of IOUs preceded money; that credit tokens were monetized so that a currency became the common vehicle to keep track of IOUs; and that states have always aimed at controlling the creation of credit-money. This contradicts the standard transaction-costs account of money origins, which lacks such archaeological support. The key message from this book is that this is still the situation today: the whole stock of money; at some point, has been created as loans, and increases in the money supply will only come about through new bank credit creation, in which the state's policy in regulating banks and setting interest rates is central.

The Evolution of Creditary Structures and Controls (a revised update of the author's "Towards True Monetarism" of 1998) sketches this historical development from credit to money, analyzes the contemporary institutions used to control and direct credit creation, and indicates its decisive importance to growth, inflation and unemployment. Gardiner is well qualified to write this book: he is a former manager in Financial Services of the Barclays Group, one of the UK's large banks, and knows the importance of institutional detail to sensible economic analysis. The principal value of the book, to this reviewer, is its explanation of the mechanisms of banking and monetary policy, the impact of which is often contrary to scenarios discussed in mainstream literature--as with the "over-funding" experiments in the early 1980s and the use of damagingly high interest rates to control inflation from 1979 onward. In this respect, this is an alternative, fact-based, institutionally minded textbook on Money and Banking, for the British economy. Wray (1998) would be the U.S. counterpart.

Central points in the book include the following. Money is fungible with other types of credit, and monetary analysis must be the study of the whole credit supply, including trade credit, stocks and bonds. Interest is primarily a cost to firms, and high interest rates cause inflation rather than curing it (as the mainstream "cost channel of inflation" literature also argues). Contrary to the current consensus, credit creation by private banks cannot be controlled by interest rate policy, nor by reserve assets, special deposits, or over-funding, but only through policies ...