Credit, Broad Money and the Economy

Abstract

Academic monetary economists often squabble with bankers and business economists about the precise meaning of credit and money, and about their implications for the economy. The aim of the present chapter is to clarify and resolve the key issues in these debates. It has two main themes. The first is that, in modern circumstances, the growth of money is driven by the growth of credit. Money and credit are nevertheless distinct and separate categories, and should not be confused. The second is that, in any economy, the amount of money has a strong and definite link with the amount of spending. As a result, when the amount of money changes sharply, there are profound short-run effects on the way people and companies behave, and so on the level of economic activity. In the long run, however, money cannot alter the economy’s ability to produce real output and changes in the quantity of money mainly affect the price level.